-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, H9IqIwlQhyfIMi6vTRGWPR3RYjLXEbQ6l9qqII4VUmxfwsmbDiFj8lNGQtJYBQhG r6U1B0LrAfNFspY1SfNi0g== 0000950144-94-000695.txt : 19940328 0000950144-94-000695.hdr.sgml : 19940328 ACCESSION NUMBER: 0000950144-94-000695 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19931231 FILED AS OF DATE: 19940325 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SONAT INC CENTRAL INDEX KEY: 0000092236 STANDARD INDUSTRIAL CLASSIFICATION: 4922 IRS NUMBER: 630647939 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 34 SEC FILE NUMBER: 001-07179 FILM NUMBER: 94517951 BUSINESS ADDRESS: STREET 1: 1900 FIFTH AVENUE NORTH CITY: BIRMINGHAM STATE: AL ZIP: 35203 BUSINESS PHONE: 2053253800 MAIL ADDRESS: STREET 1: PO BOX 2563 CITY: BIRMINGHAM STATE: AL ZIP: 35202 FORMER COMPANY: FORMER CONFORMED NAME: SOUTHERN NATURAL RESOURCES INC DATE OF NAME CHANGE: 19820305 10-K 1 SONAT FORM 10-K 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM TO Commission file number 1-7179 ------------------------- SONAT INC. (Exact name of registrant as specified in its charter) DELAWARE 63-0647939 (State or other jurisdiction of incorporation (I.R.S. Employer Identification No.) or organization)
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:
NAME OF EACH EXCHANGE ON TITLE OF EACH CLASS WHICH REGISTERED - -------------------------------------------- ---------------------------------------------- Common Stock, $1.00 par value New York Stock Exchange, Inc. Pacific Stock Exchange, Inc.
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 files 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 FEBRUARY 1, 1994 -- $2,779,383,680. NUMBER OF SHARES OF COMMON STOCK, $1.00 PAR VALUE, OUTSTANDING ON FEBRUARY 1, 1994 -- 87,172,087 DOCUMENTS INCORPORATED BY REFERENCE PORTIONS OF THE PROXY STATEMENT OF THE REGISTRANT DATED AS OF MARCH 16, 1994 ARE INCORPORATED BY REFERENCE INTO PART III OF THIS REPORT ON FORM 10-K. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 SONAT INC. INDEX TO REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1993
ITEM PAGE - --------- ------ PART I Item 1. Business.................................................................... I-1 Exploration and Production................................................ I-2 Consolidated Net Production............................................ I-6 Consolidated Wells and Acreage......................................... I-6 Consolidated Exploratory and Development Wells......................... I-6 Competition and Current Business Conditions............................ I-7 Transmission, Sale, and Marketing of Natural Gas.......................... I-8 Sonat Natural Gas Group: Southern Natural Gas Company......................................... I-8 Order No. 636 Restructuring....................................... I-8 Markets -- Transportation and Sales............................... I-10 Gas Supplies...................................................... I-12 Potential Royalty Claims.......................................... I-12 Southern Energy Company........................................... I-13 Sea Robin Pipeline Company........................................ I-13 Sonat Energy Services Company........................................ I-14 Sonat Marketing Company........................................... I-14 Sonat Intrastate-Alabama Inc...................................... I-14 Sonat Ventures Inc................................................ I-14 AES/Sonat Power, L.L.C............................................ I-14 Citrus Corp.......................................................... I-15 Florida Gas Transmission Company.................................. I-15 Competition and Current Business Conditions............................ I-16 Investment in Sonat Offshore Drilling Inc................................. I-18 Drilling Units and Equipment........................................... I-18 Drilling Contracts..................................................... I-19 Sales of Marine Units.................................................. I-20 Operational Hazards and Insurance...................................... I-20 Competition and Current Business Conditions............................ I-20 Foreign Operations..................................................... I-21 Governmental Regulation................................................... I-21 Exploration and Production............................................. I-21 Transmission, Sale, and Marketing of Natural Gas....................... I-22 Rate and Regulatory Proceedings...................................... I-22 Contract Drilling...................................................... I-22 Environmental Matters..................................................... I-24
3 SONAT INC. INDEX TO REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1993 (CONTINUED)
ITEM PAGE - --------- ------ Stock Sale by Subsidiary.................................................. I-26 Discontinued Operations................................................... I-26 Item 2. Properties.................................................................. I-26 Item 3. Legal Proceedings........................................................... I-26 Item 4. Submission of Matters to a Vote of Security Holders......................... I-27 Executive Officers of the Registrant.................................................. I-27 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters... II-1 Item 6. Selected Financial Data..................................................... II-1 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................................. II-1 Item 8. Financial Statements and Supplementary Data................................. II-1 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................................................. II-1 PART III Item 10. Directors and Executive Officers of the Registrant.......................... III-1 Item 11. Executive Compensation...................................................... III-1 Item 12. Security Ownership of Certain Beneficial Owners and Management.............. III-1 Item 13. Certain Relationships and Related Transactions.............................. III-1 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............ IV-1
4 PART I ITEM 1. BUSINESS Sonat Inc. ("Sonat") is a diversified energy holding company. It is engaged through Sonat Exploration Company ("Exploration") in domestic oil and natural gas exploration and production; through Southern Natural Gas Company ("Southern") and Citrus Corp. ("Citrus") in the transmission, storage, and sale of natural gas; through Sonat Energy Services Company ("Energy Services") in natural gas marketing, intrastate transportation, and other nonregulated natural gas ventures; and through its investment in Sonat Offshore Drilling Inc. ("Offshore") in contract drilling. Exploration, which is one of the largest independent natural gas producers in the United States, operates primarily in Texas, Oklahoma, Louisiana, Arkansas, and the Gulf of Mexico. Oil and gas exploration and production activities contributed approximately 11 percent of Sonat's consolidated revenues and approximately 37 percent of Sonat's consolidated operating profit for 1993. Southern, which has been in the interstate natural gas pipeline business since the early 1930s, is a major transporter of natural gas to the southeastern United States. Its natural gas transmission system extends primarily from gas producing areas of Texas and Louisiana, both onshore and offshore, to markets in a seven-state area of the Southeast. Sonat and Enron Corp. each owns a one-half interest in Citrus, a holding company that owns 100 percent of Florida Gas Transmission Company ("Florida Gas"). Florida Gas is an interstate natural gas pipeline that serves electric generation, resale, and industrial markets in Florida. Energy Services was formed in late 1989 to coordinate the activities of Sonat's subsidiary companies engaged in marketing natural gas, intrastate transportation, and other activities that are not regulated by the U.S. Federal Energy Regulatory Commission (the "FERC"). Its largest subsidiary, Sonat Marketing Company ("Marketing"), sells natural gas throughout much of the United States. In 1993 Marketing assumed responsibility for the sale of almost all of Exploration's production. Natural gas operations, excluding Citrus, contributed approximately 83 percent of Sonat's consolidated revenues and approximately 61 percent of Sonat's consolidated operating profit for 1993. Sonat's share of Citrus' earnings are reflected in Equity in Earnings of Unconsolidated Affiliates. As a result of the initial public offering of Offshore's common stock, which was completed on June 4, 1993, Sonat currently retains ownership of 39.9 percent of Offshore's outstanding shares. Offshore, which was formed in the early 1950s and had formerly been a wholly owned subsidiary of Sonat, was one of the world's first marine drilling contractors and is recognized as a world leader in offshore drilling technology. It is engaged in exploration and development contract drilling for major international, government-controlled, and independent oil companies in offshore areas throughout the world. Contract drilling activities for the period prior to the public offering contributed approximately six percent of Sonat's consolidated revenues and approximately one percent of Sonat's consolidated operating profit for 1993. Beginning on June 5, 1993, Offshore has been accounted for on the equity method and Sonat's share of Offshore's earnings during that part of 1993 are reflected in Equity in Earnings of Unconsolidated Affiliates. Sonat was incorporated under the laws of Delaware in 1973 in connection with a restructuring of Southern. At January 1, 1994, Sonat and its subsidiaries employed approximately 2,230 persons. 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 hereby incorporated herein by reference. Reference is made to Note 12 of the Notes to Consolidated Financial Statements contained in Part II of this report for further information with respect to the portions of Sonat's revenues, operating profit, and identifiable assets attributable to each of its business segments and geographic areas of operations. I-1 5 EXPLORATION AND PRODUCTION Sonat is engaged in the exploration for and the acquisition, development, and production of oil and natural gas through its wholly owned subsidiary, Sonat Exploration Company, and its subsidiary companies (collectively referred to as "Exploration" unless the context indicates otherwise). Exploration's principal office is located in Houston, Texas. Exploration has regional offices in Tyler, Texas, Oklahoma City, Oklahoma, and Houston, Texas. The oil and gas properties of Exploration are principally located onshore in the Southern coastal states, in various states in the Southwest and Midwest, and in federal waters offshore Louisiana and Texas. As of December 31, 1993, Exploration had operations or properties in 14 states. Exploration had working interests in approximately 2.4 million gross acres or 1.4 million net acres onshore as of December 31, 1993. Of this onshore acreage, approximately 1.2 million gross or 633,165 net acres were producing oil or gas. In addition, as of such date, Exploration had a working interest in 74 federal offshore blocks in the Gulf of Mexico and one state offshore block, totaling 330,311 gross acres or 155,200 net acres. Of these blocks, 60 were producing oil or gas. Exploration has a 50-percent interest in a coal seam degasification project near Brookwood, Alabama. Most of the gas from this project is sold to Southern under a long-term contract. The other 50-percent interest in the Brookwood project is owned by Jim Walter Resources, Inc. Beginning in 1988 Exploration implemented a strategy to acquire gas properties with significant development potential. As a result of this strategy, Exploration has more than quintupled its proved reserves since that time. At the end of 1993 Exploration had total proved reserves of approximately 1.35 trillion cubic feet of natural gas equivalent. Approximately 88 percent of Exploration's proved reserves are natural gas. In 1993 Exploration continued its strategy of acquiring producing oil and gas properties with potential for additional reserves and production development. Exploration's acquisition activity is being directed generally toward areas in which Exploration currently operates, although it may make investments in other domestic basins. During 1993 Exploration acquired approximately 313 billion cubic feet ("Bcf") of proved natural gas equivalent reserves in 21 separate transactions totaling $266 million, for an average acquisition cost of $.85 per thousand cubic feet equivalent. The largest single acquisition was from Mobil Exploration and Producing U.S., Inc. in September 1993 of several offshore Gulf of Mexico gas producing lease blocks for which Exploration paid approximately $126 million for 106 Bcf of proved natural gas equivalent reserves. Other significant 1993 acquisitions included a January 1993 purchase of all of Grace Petroleum Corporation's oil and gas assets in East Texas and North Louisiana for approximately $38 million, which added approximately 60 Bcf of proved natural gas equivalent reserves and 171 wells. Exploration also acquired the limited partnership interest of Prudential Insurance Company of America in the Sonat/P Anadarko Limited Partnership ("Sonat/P") for $11.5 million cash and the assumption of $4.1 million of debt pertaining to Prudential's interest in the partnership. This acquisition added approximately 14 Bcf of proved natural gas equivalent reserves. After closing, the partnership was dissolved. Sonat/P, which was created in 1992, owned oil and gas properties acquired in that year from Louisiana Land and Exploration Company in the Anadarko Basin in Oklahoma. Exploration significantly increased its presence in south Texas with the acquisition of leasehold interests from Tri-C Resources, Inc. for approximately $66 million. These properties added about 94 Bcf proved natural gas equivalent reserves to Exploration's reserve base and greatly enhanced Exploration's drilling operations in that area. The remaining 1993 acquisitions of Exploration totalled approximately $20 million, with proved reserves of approximately 39 Bcf of natural gas equivalent. Many of these interests were within fields and wells already operated by Exploration. From January 1, 1994, through February 28, 1994, Exploration acquired additional oil and gas interests and properties for a total of approximately $1.4 million, with proved reserves of approximately 2.2 Bcf of natural gas equivalent. I-2 6 In 1993 Exploration continued its aggressive drilling program, participating in the drilling of 301 development wells, of which approximately 88 percent were successful. In addition to the large development drilling program, Exploration is continuing to develop its substantial acreage position in the eastern extension of the Austin Chalk trend in Texas and Louisiana. Exploration participated in the drilling of 15 horizontal wells in this trend during 1993, all of which were successful. Exploration's natural gas production from 344 tight-sand and coal-seam formation wells generated $19 million of Section 29 tax credits for Sonat in 1993, a $5 million increase from 1992. Production from wells that qualify for these credits will begin to decline in 1994 as these wells follow their normal decline pattern. As of December 31, 1993, Exploration's net proved reserves totaled 27 million barrels of crude oil, condensate, and natural gas liquids and 1,187 Bcf of natural gas. As of December 31, 1992, Exploration's net proved reserves amounted to 20 million barrels of crude oil, condensate, and natural gas liquids and 1,028 Bcf of natural gas. For additional information concerning reserves, see Note 13 of the Notes to Consolidated Financial Statements in Part II of this report. Exploration's total exploration and production capital expenditures in 1993 were $441 million (including its share of Sonat/P's capital expenditures) compared with $194 million in 1992. Exploration will continue to emphasize producing property acquisitions and development drilling in 1994, when capital spending is expected to be approximately $390 million, including participation in a 328-well development program. While maintaining an active program, Exploration has also continued its cost control and productivity improvement efforts. 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 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. There are no material differences in the reserves reflected in such reports and the estimated reserves as reflected in Note 13 of the Notes to Consolidated Financial Statements in Part II of this report, except for differences resulting from actual production, acquisitions, property sales, and necessary reserve revisions and additions to reflect actual experience. Exploration 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 through a competitive bidding process from the federal or state governments. Exploration has, and may in the future, bid for leases on prospective offshore acreage with other companies from time to time. Onshore leases are acquired by Exploration's staff and by independent lease brokers at the direction of Exploration's staff, through farmouts, through participation in prospects developed by others, or by acquisition. Exploration may, as it has in the past, enter into joint venture arrangements where exploration and development activity is performed on behalf of the joint venture by whichever company is designated as operator. Exploration participated in the drilling of a total of 305 wells in 1993 (including four exploratory wells, all of which were successful), of which it operated 177. Drilling for Exploration is conducted by independent drilling contractors. I-3 7 The following tables detail the gross lease acreage of both producing and non-producing onshore properties and offshore lease blocks in which Exploration had an interest at December 31, 1993. The following map generally depicts the areas in which Exploration had significant lease interests as of that date. SONAT EXPLORATION COMPANY ONSHORE GROSS LEASE ACREAGE
STATE PRODUCING NON-PRODUCING TOTAL - --------------------------------------------------- --------- ------------- --------- Alabama............................................ 80,584 -0- 80,584 Arkansas........................................... 330,041 57,764 387,805 Colorado........................................... 320 320 640 Kansas............................................. 4,626 80 4,706 Louisiana.......................................... 188,754 563,964 752,718 Michigan........................................... 40 190 230 Mississippi........................................ 834 2,429 3,263 Montana............................................ 9,264 8,928 18,192 New Mexico......................................... 480 3,473 3,953 North Dakota....................................... -0- 13,860 13,860 Oklahoma........................................... 297,825 154,444 452,269 Texas.............................................. 283,334 340,663 623,997 West Virginia...................................... -0- 178 178 Wyoming............................................ 5,720 3,032 8,752 --------- ------------- --------- Total.................................... 1,201,822 1,149,325 2,351,147 ========= ============= =========
OFFSHORE GROSS LEASE BLOCKS
AREA PRODUCING NON-PRODUCING TOTAL - ---------------------------------------------------------------- --------- ------------- ----- Mustang Island.................................................. 4 2 6 High Island..................................................... 6 0 6 Sabine Pass..................................................... 5 0 5 West Cameron(1)................................................. 15 0 15 East Cameron.................................................... 9 5 14 South Marsh Island.............................................. 1 0 1 Eugene Island(2)................................................ 5 1 6 Ship Shoal...................................................... 11 2 13 Grand Isle...................................................... 1 0 1 Main Pass....................................................... 1 5 6 Mississippi Canyon(3)........................................... 4 0 4 -- -- -- Total................................................. 62 15 77
- --------------- (1) Exploration has a 12.5 percent interest below 9,500 feet in West Cameron 290, which is one of the 15 producing blocks. (2) Exploration only has an overriding interest in one of the producing blocks, Eugene Island 10. (3) Exploration is not a lessee of one of the four producing blocks (Mississippi Canyon 150), but this block has been unitized with the three producing lease blocks in the area in which Exploration has working interests. I-4 8 SONAT EXPLORATION COMPANY MAP I-5 9 In order to focus its exploration and production efforts and to minimize administrative and other costs, Exploration disposed of certain minor, non-strategic oil and gas interests in 1993 in the states of Louisiana, Texas, Oklahoma, and Arkansas. These properties were sold for a total of approximately $20 million and included approximately 61,517 net developed acres of oil and gas leases with interests in approximately 355 gross productive wells. The decrease in Exploration's net proved reserves of approximately 22 Bcf natural gas equivalent resulting from the sale of all of these properties was more than offset by the reserves acquired in 1993. Exploration expects that it will continue to dispose of non-strategic oil and gas interests in the future. Consolidated Net Production Exploration had interests in production from 3,423 producing wells onshore and 173 producing wells offshore as of December 31, 1993. 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 1991 to 1993 and the average sales prices for those years (including transfers). The average production (lifting) costs per unit of oil and gas for each of those years was $.38 in 1993, $.38 in 1992, and $.45 in 1991. The average production cost is calculated by converting all units of production to equivalent Mcf of gas using the relative energy content method. Exploration sells its crude oil production generally at posted prices, subject to adjustments for gravity and transportation. Exploration sells its natural gas primarily to Marketing at spot-market prices. Exploration also sells some of its gas under long-term contracts directly to pipelines, distribution companies, and end-users. Exploration sells natural gas liquids at market prices under monthly or long-term contracts. During 1993 Marketing assumed responsibility for the marketing of almost all of Exploration's natural gas, natural gas liquids, and oil production. Marketing purchases most of Exploration's natural gas production directly and markets, pursuant to an agency agreement, almost all of the rest of Exploration's natural gas production as well as its natural gas liquids and crude oil production. Marketing hedges a portion of Exploration's production on behalf of Exploration through the use of oil and gas futures transactions and price swaps in order to decrease the volatility of the revenues received from the sale of oil and natural gas. Consolidated Wells and Acreage The following table sets forth information concerning Exploration's consolidated working interests in oil and gas properties as of December 31, 1993.
NO. OF TOTAL NO. OF WELLS PRODUCTIVE DEVELOPED UNDEVELOPED BEING WELLS ACRES ACRES DRILLED ------------- --------- ----------- -------- OIL GAS --- ----- Gross........................................... 582(1) 3,014(2) 1,456,829 1,224,629 63 Net............................................. 244 1,396 755,559 839,322 38
- --------------- (1) One of these wells is a multiple completion. (2) 225 of these wells are multiple completions. Consolidated Exploratory and Development Wells The following table sets forth certain consolidated information regarding exploratory and development wells drilled during the years 1991 through 1993.
NET EXPLORATORY NET DEVELOPMENT WELLS DRILLED WELLS DRILLED ------------------- ------------------------ 1993 1992 1991 1993 1992 1991 ---- ---- ----- ------ ------ ------ Productive.......................................... 1.71 .50 3.47 147.22 125.10 119.25 Dry................................................. -0- .50 .82 26.15 12.35 6.45
I-6 10 For information concerning Exploration's (i) capitalized costs of oil and gas producing activities, (ii) costs incurred in oil and gas producing activities, (iii) net revenues from oil and gas production, (iv) estimated proved oil and gas reserves, (v) estimated future oil and gas net revenues, and (vi) present value of estimated future net revenues from estimated production of proved oil and gas reserves, see Note 13 of the Notes to Consolidated Financial Statements in Part II of this report. The standardized measures of discounted future net cash flows relating to Exploration's oil (including condensate) and gas reserves are calculated as prescribed by Statement of Financial Accounting Standards No. 69. The standardized measures of Exploration's proved oil and gas reserves presented in Part II of this report do not represent Sonat's estimate of their fair market value and are not otherwise representative of the value thereof, but rather, as stipulated and required by the Financial Accounting Standards Board, are intended solely to assist financial statement users in making comparisons between companies. 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. Supply and demand for natural gas are in close balance for the first time in many years and demand appears to be growing. Near term, however, the recent drop in oil prices could put pressure on the price of natural gas. Natural gas prices averaged $1.99 per thousand cubic feet in 1993 compared with $1.71 in 1992. Oil prices were lower, however: $17.42 per barrel in 1993 versus $18.94 per barrel in 1992. Exploration is unable to predict price levels for oil or natural gas in 1994 or beyond. Exploration believes, however, that over the long term the improvement in the balance between natural gas supply and demand should positively impact natural gas prices. Since 1986 Exploration has marketed gas released from contracts with pipelines and new uncommitted gas production on the spot market. With the exception of gas from the Brookwood coal seam degasification project, most of Exploration's natural gas volumes in 1993 were sold at spot-market prices. Exploration agreed to a contract amendment with Southern during 1993 pursuant to which, in return for a payment from Southern of approximately $34 million, beginning January 1, 1994, all of Exploration's gas from the Brookwood coal seam degasification project is now sold at spot-market prices as well. Sales of natural gas by Exploration to affiliates accounted for approximately 44 percent of Exploration's revenues in 1993 and 23 percent in 1992. Exploration's business is subject to all of the operating risks normally associated with the exploration for and production of oil and gas, including blowouts, cratering, pollution, and fires, each of which could result in damage to or destruction of oil and gas wells, formations, production facilities, or properties or in personal injury. Sonat maintains broad insurance coverage on behalf of Exploration limiting financial loss resulting from these operating hazards. See "Governmental Regulation -- Exploration and Production" below for information concerning the effect of various laws and governmental regulations on Exploration's operations. I-7 11 TRANSMISSION, SALE AND MARKETING OF NATURAL GAS SONAT NATURAL GAS GROUP In March 1991 Sonat formed the Sonat Natural Gas Group to coordinate more efficiently the activities of the various companies comprising its natural gas transmission and marketing segment. Included in the Sonat Natural Gas Group are Southern and its subsidiaries, Energy Services and its subsidiaries, and Sonat's 50-percent interest in Citrus. Southern Natural Gas Company The principal business of Southern, which is a wholly owned subsidiary of Sonat, is the transmission of natural gas in interstate commerce. Southern, including its subsidiaries, owns approximately 9,230 miles of interstate pipeline. Its pipeline system has a certificated daily delivery capacity of approximately 2.4 billion cubic feet of natural gas. Southern's pipeline system extends from gas fields in Texas, Louisiana, Mississippi, Alabama, and the Gulf of Mexico to markets in Louisiana, Mississippi, Alabama, Florida, Georgia, South Carolina, and Tennessee. Southern also has pipeline facilities offshore Texas connecting gas supplies to other pipelines that transport such gas to Southern's system. A map of Southern's pipeline system, including pipelines of its subsidiaries, as well as of the pipeline system of Florida Gas, appears on page I-17. Southern owns and operates Muldon Storage Field ("Muldon"), a large underground natural gas storage field in Mississippi connected to its pipeline system. Based on operating experience, Southern recently sought to have the working storage capacity of Muldon reduced from 52 to 31 billion cubic feet of gas. The FERC approved this reduction for a one-year period ending November 1, 1994, subject to a further review of Muldon's operations during the 1993-94 winter period. Bear Creek Storage Company ("Bear Creek"), an unincorporated joint venture between wholly owned subsidiaries of Southern and Tenneco Inc., each of which is a 50-percent participant, owns a large underground natural gas storage field located in Louisiana that is operated by Southern and provides storage service to Southern and Tennessee Gas Pipeline Company, a subsidiary of Tenneco Inc. The Bear Creek Storage Field has a total certificated working storage capacity of approximately 65 billion cubic feet of gas, half of which is committed to Southern. At December 31, 1993, Bear Creek's gross facilities cost was approximately $246,923,000 and its participants' equity was $90,907,000. Southern had an investment in Bear Creek, including its equity in undistributed earnings, of $45,453,000 at December 31, 1993. Under the terms of Order No. 636, discussed below, effective November 1, 1993, Southern commenced providing contract storage services as part of its unbundled and restructured services. Consequently, most of Southern's working storage capacity at Muldon and its half of Bear Creek are now used for such services. As a part of making this new service available, effective November 1, 1993, Southern sold at its cost $123 million of its working storage gas inventory to its new storage customers. Southern's interstate pipeline business is subject to regulation by the FERC, the U.S. Department of Energy's Economic Regulatory Administration (the "ERA"), and the U.S. Department of Transportation under the terms of the Natural Gas Policy Act of 1978 (the "NGPA"), the Natural Gas Act, and various pipeline safety and environmental laws. See "Governmental Regulation" below for information concerning the regulation of natural gas transmission operations. Southern's business is subject to the usual operating risks associated with the transmission of natural gas through a pipeline system, which could result in property damage and personal injury. Sonat maintains broad insurance coverage on behalf of Southern limiting financial loss resulting from these operating risks. Additional information concerning Southern for the year ended December 31, 1993, may be found in Southern's Annual Report on Form 10-K to the Securities and Exchange Commission for such period. Order No. 636 Restructuring. In 1992 the FERC issued its Order No. 636 (the "Order"). As required by the Order, interstate natural gas pipeline companies, including Southern, South Georgia Natural Gas Company ("South Georgia"), a wholly owned interstate pipeline subsidiary of Southern, and Florida Gas, have made significant changes in the way they operate. The Order required pipelines, among other things, to I-8 12 (1) separate (unbundle) their sales, transportation, and storage services; (2) provide a variety of transportation services, including a "no-notice" service pursuant to which the customer is entitled to receive gas from the pipeline to meet fluctuating requirements without having previously scheduled delivery of that gas; (3) adopt a straight-fixed-variable method for rate design (which assigns more costs to the demand component of the rates than do other rate-design methodologies previously utilized by pipelines); and (4) implement a pipeline capacity release program under which firm customers have the ability to "broker" the pipeline capacity for which they have contracted. The Order also authorizes pipelines to offer unbundled sales services at market-based rates and allows for pregranted abandonment of some services. Interstate pipeline companies, including Southern, are incurring certain costs ("transition costs") as a result of the Order, the principal one being costs related to amendment or termination of existing gas purchase contracts, which are referred to as gas supply realignment ("GSR") costs. The Order provides for the recovery of 100 percent of the GSR costs and other transition costs to the extent the pipeline can prove that they are eligible, that is, incurred as a result of customers' service choices in the implementation of the Order, and were incurred prudently. In its restructuring settlement discussions, Southern has advised its customers that the amount of GSR costs that it actually incurs will depend on a number of variables, including future natural gas and fuel oil prices, future deliverability under Southern's existing gas purchase contracts, and Southern's ability to renegotiate certain of these contracts. While the level of GSR costs is impossible to predict with certainty because of these numerous variables, based on current spot-market prices, a range of estimates of future oil and gas prices, and recent contract renegotiations, the amount of GSR costs would be approximately $275-$325 million on a present-value basis. This amount includes the payments made to amend or terminate gas purchase contracts described below. On September 3, 1993, the FERC generally approved a compliance plan for Southern and directed Southern to implement its restructured services pursuant to the Order on November 1, 1993 (the "September 3 order"). Pursuant to Southern's compliance plan, GSR costs that are eligible for recovery include payments to reform or terminate gas purchase contracts. Where Southern can show that it can minimize transition costs by continuing to purchase gas under the contract (i.e., it is more economic to continue to perform), eligible GSR costs would also include the difference between the contract price and the higher of (a) the sales price for gas purchased under the contract or (b) a price established by an objective index of spot-market prices. Recovery of these latter costs is permitted for an initial period of two years. Southern's compliance plan contains two mechanisms pursuant to which Southern is permitted to recover 100 percent of its GSR costs. The first mechanism is a monthly fixed charge designed to recover 90 percent of the GSR costs from Southern's firm transportation customers. The second mechanism is a volumetric surcharge designed to collect the remaining ten percent of such costs from Southern's interruptible transportation customers. This funding will continue until the GSR costs are fully recovered or funded. The FERC also indicated that Southern could file to recover any GSR costs not recovered through the volumetric surcharge after a period of two years. In addition, Southern's compliance plan provides for the recovery of other transition costs as they are incurred and any remaining transition costs may be recovered through a regular rate filing. Southern's customers have generally opposed the recovery of its GSR costs. The September 3 order rejected the argument of certain customers that a 1988 take-or-pay recovery settlement bars Southern from recovering GSR costs under gas purchase contracts executed before March 31, 1989, which comprise most of Southern's GSR costs. Those customers subsequently filed motions urging the FERC to reverse its ruling on that issue. On December 16, 1993, the FERC affirmed its September 3 ruling with respect to the 1988 take-or-pay recovery settlement (the "December 16 order"). The December 16 order generally approved Southern's restructuring tariff submitted pursuant to the September 3 order. Various parties have filed motions urging the FERC to modify the December 16 order and have sought judicial review of the September 3 order. Southern and its customers engaged in settlement discussions regarding Southern's restructuring filing prior to the September 3 order, but the parties were unable to reach a settlement. Those discussions are continuing. During 1993 Southern reached agreements to reduce significantly the price payable under a number of high cost gas purchase contracts in exchange for payments of approximately $114 million. On December 1, I-9 13 1993, Southern filed with the FERC to recover such costs and approximately $3 million of prefiling interest (the "December 1 filing"). On December 30, 1993, the FERC accepted such filing to become effective January 1, 1994, subject to refund, and subject to a determination through a hearing before an administrative law judge that such costs were prudently incurred and eligible under Order No. 636. Southern's customers are opposing its recovery of these GSR costs in this proceeding. The December 30 order rejected arguments of various parties that a pipeline's payments to affiliates, in this case Southern's payment to a subsidiary of Exploration that represented approximately $34 million of the December 1 filing, may not be recovered under Order No. 636. In December 1993 Southern reached agreement to reduce the price under another contract in exchange for payments having a present value of approximately $52 million. Payments will be made in equal monthly installments over an eight-year period ending December 31, 2001. On February 14, 1994, Southern made a rate filing to recover, beginning March 1, 1994, those costs as well as approximately $2 million of other settlement costs and $800,000 of prefiling interest. Southern also incurred approximately $17.5 million of GSR costs, plus prefiling interest, from November 1, 1993, through January 31, 1994, from continuing to purchase gas under contracts that are in excess of current market prices. On March 1, 1994, Southern made a rate filing to recover those costs beginning April 1, 1994. Southern plans to make additional rate filings quarterly to recover these "price differential" costs and any other GSR costs. Southern is unable to predict all of the elements of the ultimate outcome of its Order No. 636 restructuring proceeding, its settlement discussions with its customers regarding all of the pending issues arising in connection with the proceeding, or its rate filings to recover its transition costs. In requiring that Southern provide unbundled storage service, the Order resulted in a substantial reduction of Southern's working storage gas inventory and consequently a reduction in its rate base. This reduction was effective on November 1, 1993, when Southern restructured pursuant to the Order and sold at its cost $123 million of its working storage gas inventory to its customers. The Order also resulted in rates that are less seasonal, thereby shifting revenues and earnings for Southern out of the winter months. Markets -- Transportation and Sales. As described above, effective November 1, 1993, Southern and South Georgia (collectively "Southern" unless the context indicates otherwise), restructured their services in compliance with FERC Order No. 636 by separating their transportation, storage, and merchant services. With the exception of some limited sales necessary to dispose of its gas supply remaining under contract, Southern essentially became solely a transporter of natural gas. Effective May 5, 1992, South Georgia had converted all its sales service to transportation-only service and Southern had begun to provide a gas sales service to South Georgia's former sales customers. Southern transports or sells gas at wholesale for distribution for domestic, commercial, and industrial uses to nine gas distributing companies, to 114 municipalities and gas districts, and to nine connecting interstate pipeline companies. Southern also transported or sold gas directly to 55 industrial end-users in 1993. Southern principally transports gas to resale and industrial customers and to other pipelines, sells some limited volumes of gas at wholesale for distribution, and sells very minimal volumes of gas directly to industrial customers. The principal industries served directly by Southern's pipeline system and indirectly through its resale customers' distribution systems include the chemical, pulp and paper, textile, primary metals, stone, clay and glass industries. Transportation volumes in 1993 were 763 Bcf or 91 percent of Southern's total throughput of 836 Bcf, compared with 733 Bcf or 87 percent of Southern's total 1992 throughput of 842 Bcf. Sales to resale distribution customers, including municipalities and gas districts, accounted for virtually all of 1993 sales of 73 Bcf (excluding the sale of storage inventory) and 1992 sales of 109 Bcf. Southern's sales to direct sales customers and interstate pipeline companies in both years were negligible. Southern had sales of 19 Bcf during November and December 1993 (following implementation of its Order No. 636 restructuring) that were made at receipt points where the gas entered its pipeline system; consequently, those volumes are included within the 763 Bcf of transportation volumes for 1993. I-10 14 Transportation service is rendered by Southern for its resale customers, direct industrial customers and other end-users, gas producers, other gas pipelines, and gas marketing and trading companies. Southern provides transportation service in both its gas supply and market areas. Transportation service is provided under rate schedules that are subject to FERC regulatory authority. Rates for transportation service depend on whether such service is on a firm or interruptible basis and the location of such service on Southern's pipeline system. Transportation rates for interruptible service (i.e., service of a lower priority than firm transportation) are charged for actual volumes transported. Firm transportation service also includes a demand charge designed so that the customer pays for a significant portion of the service each month based on a contract demand volume regardless of the actual volume transported. Rates for transportation service are discounted by Southern in individual instances to respond to competition in the markets it serves. Continued discounting could, under certain circumstances, increase the risk that Southern may not recover all of its costs allocated to transportation services. Sales by Southern are anticipated to continue only until Southern's remaining supply contracts expire, are terminated, or are assigned. As a result of Order No. 636 Southern is attempting to terminate its remaining gas purchase contracts through which it had traditionally obtained its long-term gas supply. Some of these contracts contain clauses requiring Southern either to purchase minimum volumes of gas under the contract or to pay for it ("take-or-pay" clauses). Although Southern currently is incurring essentially no take-or-pay liabilities under these contracts, the annual weighted average cost of gas under these contracts is in excess of current spot-market prices. Pending the termination of these remaining supply contracts, Southern has agreed to sell a portion of its remaining gas supply to a number of its firm transportation customers for a one-year term that began November 1, 1993. Recently, the sales agreements with Atlanta Gas Light Company and its subsidiary, Chattanooga Gas Company (collectively "Atlanta") were extended through March 31, 1995. The rest of Southern's remaining supply will be sold on a month-to-month basis. Southern will file to recover as a GSR cost pursuant to Order No. 636 the difference between the cost associated with the gas supply contracts and the revenue from the sale agreements and month-to-month sales and also any cost incurred to reduce the price under or to terminate Southern's remaining gas supply contracts. When long-term sales service agreements with substantially all of Southern's resale customers expired or were terminated in 1989, Southern entered into a series of short-term agreements on an annual basis with virtually all of such customers. Prior to the implementation of Order No. 636, several customers had already reduced their firm sales contract demand volumes or converted a portion of their firm sales volumes to firm transportation volumes. From 1988 until Southern's implementation of Order No. 636, total daily delivery obligations under firm sales contracts (the "contract demand" upon which monthly demand charges are based) were reduced by approximately 689 million cubic feet ("MMcf") from their level at the end of 1987 of approximately 2.1 Bcf. Prior to Southern's implementation of Order No. 636, approximately 74 percent of this reduction had been replaced with firm transportation volumes under contracts of varying terms and durations, which also provided for fixed monthly charges. In accordance with the September 3 order approving Southern's Order No. 636 compliance plan, Southern solicited service elections from its customers in order to implement its restructured services on November 1, 1993. Southern's largest customer, Atlanta, bid for firm transportation service on Southern at prices significantly below Southern's filed tariff rates. Southern rejected Atlanta's bids. Southern and Atlanta subsequently entered into an interim agreement under which Atlanta signed firm transportation service agreements with transportation demands of 582 million cubic feet per day for a minimum term of four months beginning November 1, 1993, and 118 million cubic feet per day for a term extending until April 30, 2007, at the maximum FERC-approved rates. This represented an aggregate reduction of 100 million cubic feet per day from Atlanta's level of service prior to November 1, 1993. In January 1994 Atlanta provided notice that it had elected to continue that level of firm service until October 31, 1994. Southern's other customers elected in aggregate to obtain an amount of firm transportation services that represented a slight increase from their level of firm sales and transportation services from Southern prior to Southern's implementation of Order No. 636, at the maximum FERC-approved tariff rates, for terms ranging from one to ten or more years. I-11 15 Although management believes that most of Southern's former resale customers ultimately will commit to some type of new long-term firm transportation agreements with Southern under its restructuring program, it is unable to predict at what total volume level or for what duration such commitments will be made. Transportation and sales by Southern, combined with sales by Marketing, to two unaffiliated distribution customers, Atlanta and Alabama Gas Corporation, accounted for approximately 21 percent and 12 percent, respectively, of Sonat's 1993 consolidated revenues. Atlanta and Alabama Gas Corporation were the only two customers that accounted for ten percent or more of Sonat's consolidated revenues for 1993. Southern is continuing to pursue growth opportunities to expand the level of services in its traditional market area and to connect new gas supplies. On May 13, 1993, Southern and South Georgia received approval from the FERC for a $27 million expansion of South Georgia's pipeline system into northern Florida and southwestern Georgia that will increase firm daily capacity by 40 million cubic feet per day. Construction on this project is under way and should be completed in mid-1994. In January 1994 Southern reached tentative agreement with a group of new customers to expand its service in the growing eastern Tennessee area. The proposed project entails a 20-mile pipeline extension that would deliver approximately nine million cubic feet of natural gas per day to a delivery point near Chattanooga. For additional information regarding Southern's transportation and sales of gas, see Management's Discussion and Analysis of Financial Condition and Results of Operations contained in Part II of this report. Gas Supplies. During 1993 Southern purchased its gas supply from the following areas: 51 percent from southern Louisiana and from the Gulf of Mexico, offshore Louisiana, and Texas; three percent from northern Louisiana and Texas; and 46 percent from Mississippi and Alabama. Southern has approximately 60 gas purchase contracts remaining with gas producers that commit proved recoverable reserves to Southern. As described above, pursuant to Order No. 636, Southern is attempting to terminate its remaining gas purchase contracts. The following table contains information as to Southern's gas supply and the general sources from which that supply was obtained during the years 1991 through 1993.
MMCF* ------------------------------- 1993 1992 1991 ------- ------- ------- Purchased from non-affiliated field producers................. 102,438 109,481 102,822 Purchased from affiliate...................................... 7,317 11,003 9,653 Other......................................................... 54 97 2 ------- ------- ------- Total Purchases............................................... 109,809 120,581 112,477
- --------------- * As used in this report, the term "Mcf" means thousand cubic feet; the term "MMcf" means million cubic feet; and the term "Bcf" means billion cubic feet. All volumes of natural gas referred to in this report are stated at a pressure base of 14.73 pounds per square inch absolute ("psia") and at 60 degrees Fahrenheit. Southern entered into no new long-term gas purchase agreements in 1993, due to the cessation of its merchant role because of Order No. 636 as discussed above. Since Order No. 636 prohibits Southern from providing its traditional bundled merchant service, Southern does not anticipate at this time that it will need to contract for the long-term purchase of any additional natural gas supplies in the future. Southern will purchase minimal volumes of gas from time to time as may be required for system management purposes. Southern does expect, however, that adequate gas supplies will need to continue to be available to its system; consequently, Southern has continued its efforts to have new gas supplies attached to its system. Potential Royalty Claims. In connection with its settlements of take-or-pay claims made by producers over the past few years, Southern has in certain limited instances indemnified, to varying degrees, the producer from certain potential claims made by royalty owners. Southern has thus far been notified of 12 potential royalty claims under the indemnity provisions of various settlement agreements. The claims for which Southern may have to indemnify these producers have been asserted by both private lessors with respect to onshore leases and the Minerals Management Service Division of the U.S. Department of the Interior (the I-12 16 "MMS") with respect to offshore and Indian leases. Southern settled four of these claims during 1993 for approximately $1.2 million. In addition to the claims for which Southern has been put on notice, it is possible that other producers may make future claims against Southern for royalty indemnification. The June 26, 1992 decision of the Louisiana Supreme Court in Frey v. Amoco, in which the court held that royalty was due on take-or-pay payments, may form a basis for royalty claims for a share of take-or-pay settlements by private lessors in Louisiana and in other states that may follow the Frey decision. Because courts typically require that interest be paid on the royalty back to the date of settlement, the amount owed can substantially exceed the royalty amount. Management believes that Southern's maximum exposure under all of its various royalty indemnities in onshore take-or-pay settlements, including interest, approximates $15 million. Management is unable to state whether any additional royalty claims based on Southern's indemnification provisions in its take-or-pay settlements will be asserted or to predict the outcome of any such claims or resulting litigation. In addition to the potential royalty claims related to onshore production, Southern also faces exposure in connection with indemnifications in take-or-pay settlements with producers who have federal offshore or Indian leases. The MMS issued a policy statement and guidelines on May 3, 1993, declaring its intention to collect royalty payments for contract buy-downs, buy-outs, pricing disputes, and on any portion of take-or-pay settlement payments that are subject to future recoupment. In June 1993 the MMS began to issue letters to producers requiring payment of royalty on all such payments received under take-or-pay settlements, along with interest back to the date of payment. The MMS has been aggressively auditing producers since this time and issuing orders to pay. A lawsuit filed by the Independent Petroleum Association of America against the MMS and others challenging the validity of the MMS' new policy is pending in federal district court for the District of Columbia. Management is unable to predict the outcome of this litigation or the ultimate outcome of any collection efforts by the MMS. Management believes that Southern's maximum exposure for all royalty claims related to offshore production, including interest, approximates $10 million if no recovery from its customers is allowed. Under the terms of a 1988 take-or-pay recovery settlement with Southern's customers, Southern is entitled to seek recovery of these costs under the FERC's Order No. 500 cost-sharing procedures. The customers, however, are entitled to challenge any effort by Southern to recover those costs. Management is unable to predict the outcome of the efforts of the MMS to collect royalty on a portion of any offshore settlement or of Southern's efforts to recover any amounts it may ultimately pay from its customers. Southern believes that it is adequately reserved for any royalty claims that it may ultimately have to pay or to settle and that, in any event, such claims will not have a material adverse effect on its financial condition or results of operations. Southern Energy Company. Southern Energy Company ("Southern Energy"), a wholly owned subsidiary of Southern, owns a liquefied natural gas ("LNG") receiving terminal near Savannah, Georgia, which was constructed for a project, now terminated, to import LNG from Algeria. The terminal has been inactive since the early 1980s. On July 22, 1992, the FERC issued an order approving a settlement relating to Southern Energy's LNG facilities. The settlement resolved a number of outstanding rate and accounting issues on a favorable basis and preserved an option for customers of Southern Energy to obtain LNG through this facility at least through the year 1999. Sea Robin Pipeline Company. For many years Southern was a 50-percent participant, through a wholly owned subsidiary, with a wholly owned subsidiary of United Gas Pipe Line Company ("United"), in Sea Robin Pipeline Company ("Sea Robin"), an unincorporated gas supply pipeline joint venture. Sea Robin was originally constructed to obtain Gulf of Mexico gas supplies for Southern's and United's respective pipeline systems and was operated by United. In December 1990 Southern, through a newly formed subsidiary, acquired the 50-percent interest in Sea Robin formerly owned by the subsidiary of United. As a result of the acquisition, two wholly owned subsidiaries of Southern own 100 percent of Sea Robin, which is now being operated by Southern. Sea Robin has a 436-mile pipeline system located in the Gulf of Mexico through which it transports gas for others under its FERC-regulated tariffs. Sea Robin is a transportation-only pipeline that has restructured in compliance with FERC Order No. 636. Sea Robin's compliance filing has been accepted I-13 17 by the FERC. Sea Robin transported approximately 287 Bcf of natural gas in 1993. These Sea Robin volumes are included within the Southern transportation volumes discussed earlier. See Note 9 of the Notes to Consolidated Financial Statements in Part II of this report for additional information regarding Sea Robin. Sonat Energy Services Company Energy Services, which is a wholly owned subsidiary of Sonat, acts as a holding company for several of Sonat's largely non-FERC-regulated companies engaged in natural gas marketing, intrastate transportation, and other nonregulated natural gas ventures. Effective January 1, 1990, Marketing, which had been a wholly owned subsidiary of Sonat, became a wholly owned subsidiary of Energy Services. Sonat Marketing Company. Marketing, which is headquartered in Birmingham, Alabama, provides natural gas marketing services for industrial and commercial users, gas distribution companies, gas producers, and gas pipelines throughout the Gulf Coast, Southeast, Midwest, and Northeast United States. During 1993 Marketing sold 285 Bcf of natural gas purchased from approximately 250 natural gas producers. Based on its year-end 1993 volumes, Marketing is expected to exceed 400 Bcf in sales during 1994. Marketing continues to expand its natural gas marketing business. At the end of 1992 Marketing's volumes were approximately 500 million cubic feet per day and were primarily on the Southern system. During 1993 Marketing assumed responsibility for marketing almost all of the natural gas and liquids production of Exploration, including execution of Exploration's risk management program. This has allowed Marketing to expand its presence in Gulf Coast, Midwest, and Northeast markets and, in turn, provide attractive markets to unaffiliated producers. As a result of these efforts, Marketing's volumes exceeded 1.1 billion cubic feet per day at the end of 1993, making it one of the twenty largest natural gas marketers in the country. Sonat Intrastate-Alabama Inc. Sonat Intrastate-Alabama Inc. ("SIA"), a wholly owned subsidiary of Energy Services, owns a 454-mile intrastate pipeline system extending from natural gas fields and coal seam gas production areas in the Black Warrior Basin in northwest and central Alabama to connections with customers in Alabama, as well as interconnections with three other pipelines, including Southern. SIA's throughput in 1993 was approximately 36 Bcf. Sonat Ventures Inc. Sonat Ventures Inc. ("Ventures"), a wholly owned subsidiary of Energy Services, was created in January 1992 for the purpose of commercializing alternative uses for natural gas and to engage in various activities related to the purchase and marketing of natural gas. Sonat NGV Technology Inc. ("NGV"), a wholly owned subsidiary of Ventures, was created in July 1992. NGV, along with Georgia Energy Company, a wholly owned subsidiary of Atlanta Gas Light Company, and Natural Gas Vehicles Development Company Southeast, Inc., formed a joint venture in 1992 to convert vehicles to natural gas. The conversion facility near Atlanta, Georgia, opened in February 1993. In addition to the conversion of vehicles, the venture plans to operate an EPA/FTP lab and emissions testing facility, which is currently under construction. During 1993 Ventures also entered into two joint ventures with local distribution companies in Alabama and Florida to construct, own, and operate natural gas vehicle refueling stations as well as finance the conversion of fleet vehicles. The first station in Alabama began operating in March of 1994. Ventures is currently pursuing opportunities to own and operate refueling centers elsewhere in the Southeast. AES/Sonat Power, L.L.C. In June 1992 Sonat and The AES Corporation announced a 50-50 joint venture, AES/Sonat Power, that will construct, own, and operate natural gas-fueled independent power and cogeneration plants in the United States, Canada, and Mexico. In January 1994 Pacific Gas and Electric Company announced that it would sign a contract with AES Pacific, Inc., an affiliate of AES/Sonat Power, to purchase power from a 221-megawatt power plant to be constructed in San Francisco. Efforts to satisfy all contract-signing prerequisites are under way and, if successful, a subsidiary of The AES Corporation will construct and operate the plant and a subsidiary of Sonat will manage the gas supply and transportation requirements. The plant is scheduled to be completed by mid-1997 and would require an equity investment from Sonat in the range of approximately $15-20 million. I-14 18 Citrus Corp. On June 30, 1986, Sonat acquired one-half of the stock of Citrus, which owns all of the stock of Florida Gas. Citrus also owns 100 percent of three natural gas marketing companies, Citrus Trading Corp., which began selling natural gas to Florida Power & Light Company during 1990 under a 15-year contract for up to 125 Bcf annually, and Citrus Marketing Company and Citrus Industrial Sales Company, Inc., both of which market gas to customers in Florida. Florida Gas Transmission Company. Florida Gas, like Southern, is an interstate natural gas transmission company. It is operated by a subsidiary of Enron Corp., which through a subsidiary owns the other 50 percent of Citrus. Florida Gas' approximately 4,700-mile pipeline system extends from south Texas to a point near Miami, Florida, with a certificated daily delivery capacity of 925 million cubic feet per day. See the map on page I-17. Florida Gas is the primary pipeline transporter of natural gas in the state of Florida and the sole pipeline transporter to peninsular Florida. In August 1990 Florida Gas commenced providing open-access gas transportation services under the provisions of FERC Order No. 500 and restructured its sales and transportation services. As a result, Florida Gas' throughput volumes, once primarily sales, became primarily transportation volumes. Effective November 1, 1993, Florida Gas, like Southern, restructured its services in compliance with FERC Order No. 636 and essentially became solely a transporter of natural gas. Florida Gas has terminated its gas purchase contracts with a weighted average cost in excess of current spot-market prices and has been negotiating with its customers and the FERC to recover settlement payments made to terminate such contracts as a part of its Order No. 636 proceeding. On September 17, 1993, Florida Gas received approval of its restructuring settlement proposal (the "Restructuring Settlement") with regard to Order No. 636. The Restructuring Settlement includes a Transition Cost Recovery ("TCR") mechanism that allows Florida Gas, effective November 1, 1993, to recover from its customers 100 percent of payments above the $106 million level approved in a previous settlement, up to $160 million. Florida Gas will be allowed to recover 75 percent of any amounts greater than $160 million. Florida Gas has substantially completed the renegotiation and termination of these contracts for less than $160 million, however, and therefore expects to recover all of the amounts spent and not already expensed through its approved TCR mechanism. In 1993 Florida Gas transported approximately 314 Bcf under transportation agreements and had sales of approximately 10 Bcf to resale customers and approximately 5 Bcf to direct sale customers, compared to transportation of approximately 298 Bcf, sales for resale of approximately 28 Bcf, and direct sales of approximately 16 Bcf in 1992. Transportation rates are regulated by the FERC. A large majority of the gas transported in 1993 by Florida Gas was sold by the Citrus marketing companies. A significant 15-year gas supply contract ending in 2005 that Citrus Trading Corp. has with its principal customer has become unprofitable. This contract may be terminated by Citrus under certain circumstances relating to future prices for natural gas and competing fuel oil. Citrus is seeking to negotiate a restructuring of the pricing under the contract. No assurance can be given, however, that the contract will be terminated or that Citrus will be successful in negotiating a restructuring. Florida Gas, with approval of the FERC, completed a project in late 1991 known as the Phase II expansion, which increased its system capacity by 100 million cubic feet of gas per day to its current total of 925 million cubic feet per day. Also, in response to continuing growth in demand for natural gas in Florida, primarily in the electric generation market, Florida Gas filed with the FERC in 1991 a proposal that would further increase its system capacity. This expansion, known as Phase III, will increase capacity to existing markets and also offer new service to the Tampa-St. Petersburg area. Florida Gas was granted final certificate authority by the FERC on September 15, 1993, for its Phase III expansion. This expansion will increase system capacity by 530 million cubic feet per day at a capital cost of approximately $900 million. As part of the expansion project, Florida Gas contracted for 100 million cubic feet per day of new firm transportation to be delivered from Southern's system. In connection with the Phase III expansion, Sonat expects to increase its equity investment in Citrus by $150 million by the end of the construction period. Additionally, Florida Gas is I-15 19 currently reviewing the prospects for further expansions of its pipeline system into the Florida market that could be in service in 1996 or 1997. In connection with its Phase III expansion, Florida Gas entered into an agreement to acquire an interest in an existing pipeline in the Mobile Bay area that, pursuant to the agreement, will be expanded by over 300,000 Mcf per day and connected to Florida Gas' pipeline system. At December 31, 1993, Citrus' gross pipeline and facilities cost was approximately $1,731,456,000. Sonat had an investment in Citrus, including its equity in undistributed earnings, of $103,822,000 at December 31, 1993. For additional information regarding Citrus, see Management's Discussion and Analysis of Financial Condition and Results of Operations contained in Part II of this report, and the Notes to Citrus' Consolidated Financial Statements contained in Part IV of this report. Competition and Current Business Conditions The natural gas transmission industry, although regulated, is very competitive. During the period from the mid-1980s until the Order No. 636 restructuring, customers had switched much of their volumes from a bundled merchant service to transportation service, reflecting an increased willingness to rely on gas supply under unregulated arrangements such as those provided by Sonat Marketing and Citrus Marketing. Southern competes with several pipelines for the transportation business of its customers and at times discounts its transportation rates in order to maintain market share. Southern continues to provide a limited merchant service with gas supply remaining under contract and, in this capacity, competes with other suppliers, pipelines, gas producers, marketers, and alternate fuels. Natural gas is sold in competition principally with fuel oil, coal, liquefied petroleum gases, and electricity. An important consideration in Southern and Florida Gas' markets is the ability of natural gas to compete with alternate fuels. Residual fuel oil, the principal competitive alternate fuel in Southern and Florida Gas' market area, was at certain times in 1993, and currently is, priced at or below the comparable price of natural gas in industrial and electric generation markets. Some parts of Southern's market area are also served by one or more other pipeline systems that can provide transportation as well as sales service in competition with Southern. Southern's two largest customers are both able to obtain a portion of their natural gas requirements through transportation by other pipelines. Competition in the gas marketing business is changing as Order No. 636 is implemented across the pipeline industry, but it is expected to remain intense due to the large number of industry participants. Natural gas in the Florida market faces intense competition from residual fuel oil, which affects both the volumes of gas transported by Florida Gas and the volumes of gas sold by the Citrus marketing companies. In addition, certain pipeline competitors of Florida Gas are currently pursuing proposed pipelines that may be built to serve the Florida market later in the decade. Orimulsion, a heavy crude oil product from Venezuela, has also recently emerged as a potential competitive fuel for the electric generation market in Florida. Orimulsion is a mixture of tar and water that is very high in sulfur. It can be burned as an alternative to coal or to fuel oil, but is cheaper than fuel oil and more easily transported than coal. Because of its high sulfur content, however, Orimulsion can only be burned in plants that have advanced environmental protection equipment. I-16 20 [SOUTHERN NATURAL PIPELINE MAP GOES HERE] I-17 21 INVESTMENT IN SONAT OFFSHORE DRILLING INC. Sonat Offshore Drilling Inc. and its subsidiaries (collectively referred to as "Offshore" unless the context indicates otherwise) are engaged in contract drilling for oil and gas in offshore areas throughout the world. As a result of the initial public offering of Offshore's common stock on June 4, 1993, Sonat currently retains ownership of 39.9 percent of Offshore's outstanding shares. Offshore maintains offices, land bases, and other facilities at various locations throughout the world. See "Governmental Regulation -- Contract Drilling" below for information concerning governmental regulation of contract drilling operations. See "Stock Sale by Subsidiary" below for information concerning the public offering. Drilling Units and Equipment As of March 15, 1994, Offshore wholly owns nineteen marine units and operates three others, two of which it partially owns and one of which it bareboat charters. All of Offshore's drilling equipment is suitable for both exploratory and development drilling, and Offshore is normally engaged in both types of drilling activity. At March 15, 1994, 17 of the 22 marine units were working or committed to work under contract. The offshore contract drilling industry principally uses the following four types of rigs: (1) Semisubmersibles are floating vessels that can be submerged so that a substantial portion of the lower hull is below the water surface during drilling operations, which make them well suited for operations in rough water conditions. (2) Drillships are generally self-propelled and designed to drill in deep water. Shaped like a conventional ship, they are the most mobile of the major rig types. (3) Jack-up rigs stand on the ocean floor with their hull and drilling equipment elevated above the water on connected support legs. They are best suited for water depths of 350 feet or less. (4) Submersibles sit on the ocean floor with the drilling deck structure supported above the water by vertical trusses and columns. They are limited to shallow water applications. The search for oil and gas has increasingly been moving into deeper and more demanding offshore environments, and Offshore's primary focus has been on the technically demanding deep water and harsh environment segments of the market. Offshore operates five of the world's thirteen "fourth-generation" semisubmersibles. "Fourth-generation" semisubmersibles are those built after 1984 that are larger than other semisubmersibles, are capable of working in harsh environments, and have other advanced features. With the acquisition of the outstanding interests in the Polar Pioneer described below, Offshore now wholly owns three of these five semisubmersibles, while the other two are owned by a company in which Offshore has a 25 percent interest and are managed by Offshore through 1995. As of March 15, 1994, four of these rigs were working in the North Sea under contracts of varying duration, expiring from April 1994 through October 1997, and one was working in a deep water area of the Gulf of Mexico under a contract expiring in November 1994. Offshore also owns three older semisubmersibles. One of them was mobilized from the North Sea to the Gulf of Mexico during 1993. As of March 15, 1994, that rig was under contract through August 1994, one rig was enroute from the North Sea to the Gulf of Mexico, and the other one was idle in the North Sea. Offshore owns two dynamically positioned drillships that, as of March 15, 1994, were under contracts expiring in May 1994 and December 1994. One is working in the U.S. Gulf of Mexico and the other is working offshore Brazil. Offshore also operates eleven jack-ups and one submersible in selected shallow water markets. Ten of the jack-ups and the submersible are owned by Offshore, while one of the jack-ups is owned by unaffiliated companies and bareboat chartered to Offshore through completion of its current contract. Five jack-ups and the submersible are in the Gulf of Mexico. As of March 15, 1994, four of these jack-ups and the submersible were under short-term contracts of varying duration. Offshore has five jack-ups in Egypt, four of which, as of March 15, 1994, were under contracts of varying duration. The eleventh jack-up is currently idle in the United Arab Emirates. I-18 22 Upon the expiration of existing contracts, there can be no assurance that such contracts will be renewed or extended, that new contracts will be available, or if contracts are available, that they will provide revenues adequate to cover all fixed and variable costs associated with the units. Offshore acquired ten offshore drilling rigs from Dixilyn-Field Drilling Company ("Dixilyn-Field"), a subsidiary of Panhandle Eastern Corporation, in 1987. Under the terms of the purchase agreement, the total consideration to be paid to Dixilyn-Field for the transfer of the rigs will be determined solely by the economic performance of the rigs during a period no longer than 13 years from the date of the acquisition. In 1993 the rigs had a negative cash flow position on a combined, cumulative basis and, therefore, Dixilyn-Field was not entitled to receive any additional compensation for the rigs for that year. Offshore has sold four of the rigs acquired from Dixilyn-Field, including one which was bareboat chartered by Offshore from the rig purchaser and is expected to be returned to the rig purchaser in April 1994. In December 1993 Offshore entered into agreements with its partners in the Polar Frontier joint venture providing for the purchase of the remaining 52.5 percent interest in the Polar Pioneer by Offshore for approximately $44.6 million plus certain adjustments relating to rig upgrades and drydocking estimated at $2.5 million and limited future consideration (up to $3 million) contingent upon the future operations of the Polar Pioneer. The transaction closed on February 18, 1994. The acquisition was funded by Offshore through cash reserves and a private placement of $30 million of senior notes. Drilling Contracts Offshore's drilling contracts are individually negotiated, generally after competitive bidding, and vary in their terms and provisions. The contracts generally provide for a basic daily drilling rate ("dayrate") and for lower rates for periods of travel or when drilling operations are interrupted or restricted by equipment breakdowns, adverse weather conditions, or other circumstances beyond the control of Offshore. A drilling contract may be terminated by the customer in the event the drilling unit is destroyed or lost or if drilling operations are suspended for a specified period of time as a result of a breakdown of major equipment or, in some cases, due to other events beyond the control of either party. The duration of a dayrate drilling contract may be determined either by the time required to drill a specified number of wells or by the lapse of a stated term. Offshore has also entered into "turnkey" contracts at fixed prices per well. Under turnkey contracts, Offshore agrees to drill a well to a specified depth for a fixed price. Turnkey contracts offer the possibility of gains or losses that are substantially greater than those that would ordinarily result under typical dayrate contracts, depending upon the performance of the drilling unit and other factors. Consequently, turnkey contracts generally provide an opportunity for greater profits than do conventional dayrate contracts, but entail more financial risk. In addition, revenues and operating costs from turnkey contracts are much higher than under dayrate contracts since Offshore provides substantially more of the material and services necessary to drill the wells. In 1991 Offshore was awarded contracts to drill up to six turnkey wells in the Bay of Campeche, Mexico by Petroleos Mexicanos ("Pemex"), the national oil company of Mexico. The turnkey portions of all six of these wells have been completed. In 1992 Pemex awarded contracts to Offshore to drill up to an additional four turnkey wells in the Bay of Campeche, two of which had been completed as of March 15, 1994, and one of which Pemex had decided not to drill. Offshore continues to investigate additional turnkey opportunities as they arise, but there can be no assurance that Offshore will obtain additional contracts before the completion of its current projects. During the past five years Offshore has engaged in contract drilling for many of the international oil companies (or their affiliates) in the world, as well as for many government-controlled and independent oil companies. During this period Offshore's principal customers included Royal Dutch/Shell, Conoco, British Petroleum, Pemex, Gulf of Suez Petroleum Company, Amoco, Petrobras, and Norsk Hydro. Offshore's two largest customers in 1993 were Pemex and Royal Dutch/Shell, which accounted for 35 percent and 26 percent, respectively, of Offshore's 1993 consolidated operating revenues. I-19 23 Sales of Marine Units In December 1990 Offshore contributed one of its fourth-generation semisubmersibles, the Henry Goodrich, to Arcade Drilling as. ("Arcade Drilling"), a Norwegian corporation whose shares are traded on the Oslo Stock Exchange, for $70 million in cash and 21.75 percent of Arcade Drilling's common stock. Arcade Drilling also owns another fourth-generation semisubmersible, the Sonat Arcade Frontier, which was delivered from a Korean shipyard in 1990. Offshore has been engaged by Arcade Drilling to manage both of these rigs under five-year management contracts expiring in 1995. In August 1991 Reading & Bates Corporation ("R&B"), a competitor of Offshore, acquired effective control of Arcade Shipping as. ("Shipping"), a company that has a 46.25 percent interest in Arcade Drilling. R&B's control of Shipping, together with the shares of Arcade Drilling that it owns individually, gave R&B control of Arcade Drilling. Offshore has subsequently purchased additional shares of Arcade Drilling stock on the open market, increasing its interest in Arcade Drilling to approximately 25 percent. Operational Hazards and Insurance Offshore's operations are subject to the usual hazards inherent in the drilling of oil and gas wells, such as blowouts, reservoir damage, loss of production, loss of well control, cratering, or fires, which could result in the suspension of drilling operations, damage to or destruction of the equipment involved, and injury to rig personnel. In addition, offshore drilling operations are subject to perils peculiar to marine operations, including capsizing, grounding, collision, and loss or damage from severe weather or storms. Offshore maintains broad insurance coverage limiting financial loss resulting from these operating hazards, but present insurance coverage would not in all situations provide sufficient funds to protect Offshore from all liabilities that could result from its drilling operations or to replace the unit if a total loss occurred, including certain of its fourth-generation semisubmersibles and drillships. Also, insurance coverage in most cases does not protect against loss of revenues. Offshore is subject to liability under various environmental laws and regulations. See "Governmental Regulations -- Contract Drilling" below. Damage to the environment could also result from Offshore's operations, particularly through oil spillage or extensive uncontrolled fires. Offshore has generally been able to obtain some degree of contractual indemnification pursuant to which Offshore's customer agrees to protect and indemnify Offshore from liability for pollution and environmental damages. There is no assurance, however, that Offshore can obtain such indemnities in all of its contracts or that, in the event of extensive pollution and environmental damages, the customer will have the financial capability to fulfill its contractual obligation to Offshore. Also, these indemnities may not be enforceable in all instances. No such indemnification is typically available for turnkey operations. Competition and Current Business Conditions Historically, the offshore contract drilling industry has been highly competitive and cyclical, with periods of high demand, short rig supply, and high dayrates followed by periods of low demand, excess rig supply, and low dayrates. The industry is characterized by high capital costs, long lead times for construction of new rigs, and numerous competitors. The offshore contract drilling business is influenced by many factors, including the current and anticipated prices of oil and gas (which affect the expenditures by oil companies for exploration and production) and the availability of drilling units. For a number of years, depressed oil and gas prices and an oversupply of rigs have adversely affected the offshore drilling market. These forces have resulted in fewer contract drilling opportunities and substantial declines in dayrates for drilling services. In addition, Offshore has competition from many other offshore drilling contractors in all of the areas in which it operates. Offshore cannot predict the timing or extent of any improvement in the industry or the future level of demand for Offshore's drilling services. The offshore drilling market in 1992 and 1993 generally experienced difficult conditions, although certain geographic areas have performed better than others. The North Sea market continues to be depressed in comparison with recent years, primarily due to the recent decline in oil prices and the effects of changes made in 1993 to the U.K. Petroleum Revenue Tax on exploratory drilling. Despite the recent awarding of additional I-20 24 licenses by the U.K. and Norwegian governments providing new drilling prospects and Offshore's belief that there has been a permanent reduction in the supply of rigs available for drilling in the North Sea as a result of U.K. safety regulations, Offshore expects the North Sea market to remain weak in 1994, especially in the first half of the year. A strong natural gas price environment continues to support the U.S. Gulf of Mexico drilling market. As a result of the improved market there, several drilling contractors, including Offshore, have recently moved rigs back to the Gulf of Mexico and additional mobilizations are expected through early 1994. The recent influx of rigs and decline in oil prices, however, have resulted in decreased dayrates and drilling opportunities over the past few months. Offshore believes the market will strengthen after the first quarter and will then remain strong for the remainder of 1994 as long as gas prices continue at or above the corresponding 1993 levels. Additional contractors have recently elected to focus on turnkey drilling, which has caused that market to become more competitive as compared to prior years. Generally, Offshore has had a good degree of success in keeping its deep water and harsh environment drilling units utilized at acceptable dayrates. In spite of this success, however, there can be no assurance that as contracts for these units end new contracts offering similar returns can be found. Foreign Operations Offshore has derived a majority of its revenues from its foreign drilling operations in each of the past three years. Offshore cannot predict whether foreign drilling operations will account for a greater or lesser percentage of such revenues in future periods. Risks inherent in foreign operations include loss of revenue and equipment from such hazards as expropriation, nationalization, war, insurrection, and other political risks. Offshore is protected to a substantial extent against capital loss (but typically not loss of revenues) from most of these hazards by insurance, indemnity provisions in its drilling contracts, or both, but usually not risk of expropriation or other political risks. Other risks inherent in foreign operations are the possibility of currency exchange losses where revenues are received in currencies other than U.S. dollars and losses resulting from an inability to collect U.S. dollar revenues because of a shortage of U.S. currency available to the foreign country. To date, Offshore's foreign operations have not been materially affected by these currency risks. The ability of Offshore to compete in the international drilling market may be adversely affected by foreign governmental practices that favor or effectively require the awarding of drilling contracts to local contractors. Offshore expects to continue to structure certain of its operations through joint ventures or other appropriate means in order to remain competitive in the world market. GOVERNMENTAL REGULATION Exploration and Production The federal government and the states in which Exploration has oil and gas production and owns interests in producing properties regulate production, the drilling and spacing of wells, conservation, and various other matters affecting Exploration's oil and gas production. The operations of Exploration under federal oil and gas leases are subject to certain statutes and regulations of the U.S. Department of the Interior that currently impose liability upon lessees for the cost of clean-up of pollution resulting from their operations. Royalty obligations on all federal leases are regulated by the MMS, which has promulgated valuation guidelines for the payment of royalty by producers. To the extent the MMS finally determines valuation based on a method other than actual sales proceeds received, producers could be required to pay royalties at a rate higher than actual sales proceeds. Other federal, state, and local laws and regulations relating to the protection of the environment may affect Exploration's oil and gas operations, both directly and indirectly, through their effect on the construction and operation of facilities, drilling operations, production, or the delay or prevention of future offshore lease sales. Sonat maintains substantial insurance on behalf of Exploration for oil pollution liability. Exploration is also subject to various governmental safety regulations in the jurisdictions in which it operates. I-21 25 Transmission, Sale, and Marketing of Natural Gas Southern is subject to regulation by the FERC and by the Secretary of Energy under the Natural Gas Act, the NGPA, and the Department of Energy Organization Act of 1977 (the "DOE Act"). Southern's operating subsidiaries and Florida Gas are also subject to such regulation. The Natural Gas Act, modified by the DOE Act, grants to the FERC authority to regulate the construction and operation of pipeline and related facilities utilized in the transportation and sale of natural gas in interstate commerce, including the extension, enlargement, or abandonment of such facilities. Southern, its operating subsidiaries, and Florida Gas hold required certificates of public convenience and necessity issued by the FERC authorizing them to construct and operate all pipelines, facilities, and properties now in operation for which certificates are required, and to transport and sell natural gas in interstate commerce. The FERC also has authority to regulate the transportation of natural gas in interstate commerce and the sale of natural gas in interstate commerce for resale. Although the FERC still retains jurisdiction over their resale rates, following the implementation of Order No. 636, Southern, Florida Gas, and other interstate pipeline companies are now permitted to charge market-based rates for gas sold in interstate commerce for resale. Gas sold by Marketing and other marketing companies is not regulated by the FERC. Transportation rates remain fully regulated. The price at which gas is sold to direct industrial customers is not subject to the FERC's jurisdiction. As necessary, Southern, its operating subsidiaries, and Florida Gas file with the FERC applications for changes in their transportation rates and charges designed to allow them to recover fully their costs of providing such service to their customers, including a reasonable rate of return. These rates are normally allowed to become effective, subject to refund, until such time as the FERC rules on the actual level of rates. See "Rate and Regulatory Proceedings" below. The Natural Gas Wellhead Decontrol Act of 1989, enacted on July 26, 1989, phased in decontrol of the wellhead price of all gas then remaining subject to maximum lawful price limitations by January 1, 1993. Thus, the price of all gas sold at the wellhead is no longer regulated. Regulation of the importation of natural gas is vested in the Secretary of Energy, who has delegated various aspects of this import jurisdiction to the FERC and the ERA. Southern, its operating subsidiaries, and Florida Gas are subject to the Natural Gas Pipeline Safety Act of 1968, as amended, which regulates pipeline and LNG plant safety requirements, and to the National Environmental Policy Act and other environmental legislation. Southern, its operating subsidiaries, and Florida Gas have a continuing program of inspection designed to keep all of their facilities in compliance with pollution control and pipeline safety requirements and believe that they are in substantial compliance with applicable requirements. Southern's capital expenditures to comply with environmental and pipeline safety regulations were approximately $14 million in 1993. It is anticipated that such expenditures will be approximately $11 million in 1994 and approximately $10 million in 1995. For more information regarding environmental matters, see the discussion below. Rate and Regulatory Proceedings. Various matters pending before the FERC, or before the courts on appeal from the FERC, relating to, or that could affect, Sonat or one or more of its subsidiaries are described in Part II of this report in Note 9 of the Notes to Consolidated Financial Statements and in Management's Discussion and Analysis of Financial Condition and Results of Operations, which are incorporated herein by reference. As described in Note 9, several general rate changes have been implemented by Southern and remain subject to refund. Contract Drilling Offshore's operations are affected from time to time in varying degrees by governmental laws and regulations. The drilling industry is dependent on demand for services from the oil and gas exploration industry and, accordingly, is affected by changing tax and other laws relating to the energy business generally. Foreign contract drilling operations are subject to various other governmental laws and regulations in countries in which Offshore operates. Such laws and regulations govern various aspects of foreign operations, I-22 26 including the equipping and operation of drilling units, currency conversions and repatriation, oil exploration and development, taxation of foreign earnings and earnings of expatriate personnel, and use of local employees and suppliers by foreign contractors. Governments in some foreign countries have become increasingly active in regulating and controlling the ownership of concessions and companies holding concessions, the exportation of oil, and other aspects of the oil industries in their countries. In addition, government action, including initiatives by OPEC, may continue to cause oil price volatility. In some areas of the world this governmental activity has adversely affected the amount of foreign exploration and development work done by major oil companies and may continue to do so. In the United States regulations applicable to Offshore's operations include certain regulations controlling the discharge of materials into the environment, requiring removal and cleanup of materials that may harm the environment, or otherwise relating to the protection of the environment. For example, as an operator of mobile offshore drilling units in navigable United States waters and certain offshore areas, Offshore may be liable for damages and costs incurred in connection with oil spills for which it is held responsible, subject to certain limitations. Laws and regulations protecting the environment have become more stringent in recent years and may in certain circumstances impose "strict liability," rendering a person liable for environmental damage without regard to negligence or fault on the part of such person. Such laws and regulations may expose Offshore to liability for the conduct of or conditions caused by others, or for acts of Offshore that were in compliance with all applicable laws at the time such acts were performed. The application of these requirements or the adoption of new requirements could have a material adverse effect on Offshore. The Oil Pollution Act of 1990 ("OPA") and regulations promulgated pursuant thereto impose a variety of requirements on "responsible parties" related to the prevention of oil spills and liability for damages resulting from such spills. Few defenses exist to the liability imposed by the OPA, which could be substantial. A failure to comply with ongoing requirements or inadequate cooperation in a spill event could subject a responsible party to civil or criminal enforcement action. In addition, the Outer Continental Shelf Lands Act authorized regulations relating to safety and environmental protection applicable to lessees and permittees operating on the Outer Continental Shelf. Specific design and operational standards may apply to Outer Continental Shelf vessels, rigs, platforms, vehicles, and structures. Violations of environmental-related lease conditions or regulations issued pursuant to the Outer Continental Shelf Lands Act can result in substantial civil and criminal penalties as well as potential court injunctions curtailing operations and the cancellation of leases. Such enforcement liabilities can result from either governmental or citizen prosecution. Certain of the foreign countries in whose waters Offshore is presently operating or may operate in the future have regulations covering the discharge of oil and other contaminants in connection with drilling operations. Offshore believes that it has conducted its operations in substantial compliance with applicable environmental laws and regulations governing its activities. Although significant capital expenditures may be required to comply with such governmental laws and regulations, such compliance has not materially adversely affected the earnings or competitive position of Offshore. In 1992 regulations relating to offshore drilling rigs were issued in the U.K. that required a comprehensive review of the technical characteristics of and operating procedures for each rig in the U.K. sector of the North Sea. Offshore does not believe that any upgrade required on its rigs as a result of such technical review will be significant. Two rigs for which upgrades would be significant, however, the Sonat D-F 96 and the Sonat D-F 97, were moved from the North Sea because market conditions there did not justify the amount of capital expenditures required to upgrade these rigs. It is possible that such laws and regulations in the future may add to the cost of operating offshore drilling equipment or may significantly limit drilling activity. The United Kingdom levies a petroleum revenue tax ("PRT") on revenue derived from the extraction of oil and natural gas from the U.K. sector of the North Sea. Prior to the changes discussed below, a company was permitted to reduce the amount of PRT it owed by taking as a credit against its revenues certain of its I-23 27 expenditures used to explore for oil and natural gas in the U.K. On March 16, 1993, the Chancellor of the Exchequer proposed certain changes in the PRT that were subsequently enacted. Among other things, these changes have (i) effective July 1, 1993, reduced the rate of PRT from 75 percent to 50 percent on revenues derived from existing fields; (ii) abolished the PRT for new fields, defined as those for which development consent is received after March 15, 1993; and (iii) eliminated the credit attributable to exploration costs. The changes in the PRT adversely affected exploratory drilling in the U.K. sector of the North Sea in 1993 and the first quarter of 1994. Offshore expects the impact on developmental drilling to be favorable, however, because the tax burden has been reduced on new field production. While Offshore expects these trends to become clearer in the future, Offshore cannot predict the long-term effect of changes in the PRT on demand for offshore drilling rigs in the U.K. Sector of the North Sea or on Offshore. The combination of low oil prices and the changes in the PRT, however, have resulted in a substantial reduction of drilling activities in the U.K. sector of the North Sea. ENVIRONMENTAL MATTERS Exploration and Southern and certain of their subsidiaries are subject to extensive federal, state, and local environmental laws and regulations that affect their operations. Governmental authorities may enforce these laws and regulations with a variety of civil and criminal enforcement measures, including monetary penalties, assessment and remediation requirements, and injunctions as to future activities. Exploration, Southern, and certain of their subsidiaries' use and disposal of hazardous materials and toxic substances are subject to the requirements of the federal Toxic Substances Control Act ("TSCA") and the federal Resource Conservation and Recovery Act ("RCRA"), among others, and comparable state and local statutes. The Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), also known as "Superfund," imposes liability, without regard to fault or the legality of the original act, for release of a "hazardous substance" into the environment. Exploration is named as a potentially responsible party ("PRP") at two Superfund sites, at one of which its status is that of a de minimis contributor. Exploration has reached tentative agreement with the Environmental Protection Agency ("EPA") for this latter site, which is projected to result in a total settlement of Exploration's involvement at the site for less than $20,000. Based on the information that it currently possesses, Exploration does not believe that any contribution will be sought from it with regard to the other site. Southern is named as a PRP at three Superfund sites, at two of which it is a de minimis party. Based on the number of other financially responsible PRPs at each of the sites, the estimated relative volume of material contributed to the sites by Southern, the information that it currently possesses regarding the expected costs required to remediate the sites, and the amounts already contributed to remediation, Southern currently estimates that it should not ultimately be required to contribute in excess of $200,000 in the aggregate to the costs of remediation of all three sites. In addition, Southern has been advised by a joint defense group of PRPs ("JDG") at another Superfund site that the JDG might seek to add it as a PRP, but Southern has received no notification from the EPA asserting that it is a PRP. A corporation in which a subsidiary of Exploration is a 50-percent shareholder has been named as a PRP at this site, however, and it has elected to join the JDG, which acting pursuant to an Administrative Order on Consent among the EPA and its members, has undertaken to stabilize the site by removing and disposing of all liquids and containers located thereon for a total cost believed to be less than $1.5 million, of which Exploration's share, through this 50-percent-owned corporation, is presently less than $50,000. Sonat has been informed by representatives of the JDG that no characterization of soil or groundwater contamination at this site has yet taken place and, therefore, the extent of such contamination, if any, is not currently known. Southern has thus far elected not to join the JDG, because it believes that it has significant potential defenses to liability for this site and that, in any event, it shipped de minimis amounts of material to this site. Based on the number of other financially responsible PRPs and other information that it currently possesses, Sonat currently estimates that neither Southern nor Exploration's subsidiary will incur liabilities related to this site in an amount material to Sonat. I-24 28 Liability under CERCLA (and applicable state law) can be joint and several with other PRPs. Although volumetric allocation is a factor in assessing liability, it is not necessarily determinative; thus, the ultimate liability at any of these sites could be substantially greater than the amounts described above. Neither Exploration nor Southern believes that its status as a PRP at any of these sites will have a material adverse effect on its financial condition or results of operations. Southern has in the past used lubricating oils containing polychlorinated biphenyls ("PCBs") in conjunction with auxiliary compressed air systems at Southern's natural gas compressor stations. Although the use of such oils was discontinued in the early 1970's, Southern has discovered residual PCB contamination at certain of its gas compressor station sites. For some time, Southern has had an ongoing internal project to identify and deal with the presence of PCBs at these sites. A total of thirteen stations evidenced some level of on-site PCB contamination ranging from low to moderate. Southern has completed the characterization and clean-up of twelve of these sites based on the guidelines of the TSCA at a total cost of approximately $6 million. Southern has partially completed the characterization and clean-up of the remaining site and believes that it should be able to complete the remediation of this site for a total cost of less than $5 million. In the operation of their natural gas pipeline systems, Southern and South Georgia have used, and continue to use at several locations, gas meters containing elemental mercury. Many of these meters have been removed from service. Southern and South Georgia plan to remove the remaining mercury meters during the course of regularly scheduled facilities upgrades, but until such time, the meters are handled pursuant to established procedures that protect employees and comply with Occupational Safety and Health Administration standards. It is generally believed in the natural gas pipeline industry that, in the course of normal maintenance and replacement operations, elemental mercury may have been released from mercury meters. Although at this time neither the EPA nor any state in which Southern or South Georgia operates has yet issued clean-up levels or guidelines with respect to contamination from past releases or spills of mercury, Sonat expects that guidelines will be forthcoming. Southern and South Georgia have nonetheless begun preliminary efforts to address this situation and plan to begin remediation if contamination is detected upon characterization of these sites. Because the number of sites involved and the extent of contamination at any site are not yet known, Sonat is unable at this time to estimate the cost of remediation. Based on its experience with other remediation projects, the industry experience to date with remediation of mercury, and its preliminary analysis of the possible extent of the contamination, however, Sonat believes that its remediation of any mercury contamination will not have a material adverse effect on its financial condition or results of operations. Sonat generally considers environmental assessment and remediation costs and costs associated with compliance with environmental standards incurred by Southern and South Georgia to be recoverable through rates since they are prudent costs incurred in the ordinary course of business and, accordingly, will seek recovery of such costs through rate filings, although no assurance can be given with regard to their ultimate recovery. Exploration, Southern, and their subsidiaries are subject to the federal Clean Air Act and the federal Clean Air Act Amendments of 1990 ("1990 Amendments"), which added significantly to the existing requirements established by the federal Clean Air Act. The 1990 Amendments require that the EPA issue new regulations, mainly related to mobile sources, air toxics, ozone non-attainment areas, acid rain, permitting, and enhanced monitoring. While it will not be possible to estimate the additional costs of compliance with these new requirements until the EPA and the states complete their regulations, Sonat expects that the regulations when issued may require significant capital spending to modify certain of its subsidiaries' facilities, particularly with regard to modifications that may be required for certain natural gas compressor stations of Southern to reduce their emissions of oxides of nitrogen. In the opinion of Sonat's management, based on information currently possessed by Sonat, the probability is remote that Sonat or any of its subsidiaries will incur a liability as a result of the presently identified environmental contingencies described above in an amount material to Sonat. While the nature of environmental contingencies makes complete evaluation impractical, Sonat is currently aware of no other environmental matter that could reasonably be expected to have a material impact on its results of operations I-25 29 or financial condition. Sonat has an active and ongoing environmental program at all levels of its organization and believes responsible environmental management is integral to its business. Sonat believes that its subsidiaries have conducted their operations in substantial compliance with applicable environmental laws and regulations governing their activities. For a discussion of the environmental matters affecting Offshore, see "Governmental Regulation -- Contract Drilling" above. STOCK SALE BY SUBSIDIARY On June 4, 1993, the initial public offering of Offshore's Common Stock at $22.00 per share was closed. Prior to the offering, Sonat owned 100 percent of Offshore. Offshore issued 15.5 million shares and Sonat sold 1.448 million of its shares resulting in a combined pretax gain of $155.8 million. Net proceeds from the combined transactions after underwriting commissions, expenses, and tax provisions totaled approximately $340 million. Sonat retained ownership of approximately 11.3 million or 39.9 percent of Offshore's outstanding shares and recognized an after-tax gain of $99.7 million or $1.15 per share from the combined transactions. DISCONTINUED OPERATIONS On April 23, 1992, Sonat completed the sale of Teleco Oilfield Services Inc., which had been acquired by Sonat in 1984, to Baker Hughes Incorporated ("Baker Hughes"). Sonat received $200 million in cash and four million shares of Baker Hughes convertible preferred stock. The convertible preferred stock has a liquidation preference of $200 million, a dividend rate of six percent per annum, and is convertible at $32.50 per share into Baker Hughes common stock. The cash proceeds were used to reduce Sonat's debt and the dividends paid on the convertible preferred stock had a positive impact on 1993 earnings. ITEM 2. PROPERTIES A description of Sonat's and its subsidiaries' properties is included under Item 1. Business above and is hereby incorporated by reference herein. ITEM 3. LEGAL PROCEEDINGS For information regarding certain proceedings pending before federal regulatory agencies, see Note 9 of the Notes to Consolidated Financial Statements in Part II of this report. Arcadian Corporation v. Southern Natural Gas Company and Atlanta Gas Light Company was filed in January 1992 in the U.S. District Court for the Southern District of Georgia. In this lawsuit against Southern and Atlanta Gas Light Company for alleged violation of the antitrust laws in connection with Southern's refusal to provide direct service to the Plaintiff, Arcadian Corporation ("Arcadian"), Arcadian claims actual damages of at least $15 million, which could be trebled under the antitrust laws. Southern and Arcadian executed an agreement settling this lawsuit on November 30, 1993. The settlement provides that the lawsuit will be dismissed with prejudice upon final, nonappealable approval by the FERC of the direct connection and transportation service requested by Arcadian. Pending such approval, the lawsuit has been stayed. While management believes it has meritorious defenses and intends to defend the suit vigorously if the stay were to be lifted, given the inherently unpredictable nature of litigation and the relatively early state of discovery in the case, management is unable to predict the ultimate outcome of the proceeding if it were to go forward, but believes that it will not have a material adverse effect on Southern's financial position. Exxon Corporation v. Southern Natural Gas Company was filed in February 1994 in the U.S. District Court for the Southern District of Texas. Exxon Corporation ("Exxon"), the plaintiff in this suit, asked the court to declare that Southern has no right to terminate a gas purchase contract with Exxon providing for the sale and purchase of gas produced from Mississippi Canyon and Ewing Bank Area Blocks, offshore Louisiana (the "Contract"), which Southern gave notice of termination effective March 1, 1994. In the alternative, Exxon alleged that Southern has repudiated and breached the Contract and asked for an unspecified amount I-26 30 of monetary damages. Management is unable to predict the outcome of this litigation and whether its position that it has the right to terminate this contract will be sustained. 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 the financial position or results of operations of Sonat. 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 1993. Executive Officers of the Registrant
OFFICER OFFICE AGE - ------------------------------------------- ------------------------------------------- --- Ronald L. Kuehn, Jr....................... Chairman of the Board, President and Chief 58 Executive Officer Donald G. Russell......................... Executive Vice President 62 William A. Smith.......................... Executive Vice President 49 Thomas W. Barker, Jr...................... Vice President -- Finance and Treasurer 49 Beverley T. Krannich...................... Vice President -- Human Resources and 43 Secretary *Ronald B. Pruet........................... Vice President and Controller 41 James A. Rubright......................... Vice President and General Counsel 47 *James E. Moylan, Jr....................... President of Southern 43 Richard B. Bates.......................... President of Energy Services 40
- --------------- * Effective April 1, 1994. There is no family relationship between any of the above-named executive officers. The officers of Sonat are elected annually by the Board of Directors. The identification of an individual as an executive officer in this report does not constitute a determination by Sonat or its Board of Directors that such individual is an officer of Sonat for purposes of Section 16 of the Securities Exchange Act of 1934. Ronald L. Kuehn, Jr. was elected Chairman of the Board of Sonat effective March 28, 1986. Mr. Kuehn has served as Director of Sonat since April 30, 1981, as President of Sonat since January 1, 1982, and as Chief Executive Officer of Sonat since June 1, 1984, and currently serves in those capacities. Mr. Kuehn also serves as Director of various Sonat subsidiaries. During the past five years Mr. Kuehn has served as a senior executive officer of Sonat. Donald G. Russell was elected Executive Vice President of Sonat effective January 1, 1991, and currently serves in that capacity. Mr. Russell also serves as Chairman and Chief Executive Officer of Exploration. During the past five years Mr. Russell has served as an officer of Sonat and Exploration. William A. Smith was elected Executive Vice President of Sonat effective March 1, 1991, and currently serves in that capacity. Mr. Smith also serves as Chairman and President of Southern and Chairman of Energy Services until April 1, 1994, when he will become Vice Chairman of Exploration. During the past five years, Mr. Smith has served as an officer of Sonat, Southern, and Energy Services. Thomas W. Barker, Jr. was elected Vice President -- Finance of Sonat effective June 15, 1984, and Treasurer of Sonat effective January 1, 1990, and currently serves in those capacities. Mr. Barker also serves as Vice President -- Finance and Assistant Treasurer of Exploration and Treasurer of Southern and Energy Services. During the past five years Mr. Barker has served as an officer of Sonat, Southern, Exploration, and Energy Services. I-27 31 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. During the past five years Ms. Krannich has served as an officer of Sonat and Exploration. Ronald B. Pruet was elected Vice President and Controller of Sonat effective April 1, 1994, and will serve in that capacity beginning on such date. Mr. Pruet also serves as Senior Vice President and Treasurer of Exploration. During the past five years Mr. Pruet has served as an officer of Exploration. James A. Rubright was elected Vice President and General Counsel of Sonat effective February 15, 1994, and currently serves in that capacity. Mr. Rubright also serves as Executive Vice President and General Counsel of Exploration, Southern, and Energy Services. During the past five years until his election as Vice President and General Counsel of Sonat, Mr. Rubright had been a member of the Atlanta, Georgia law firm of King & Spalding. James E. Moylan, Jr. was elected Vice President and Controller of Sonat effective June 15, 1984, and will serve in that capacity until April 1, 1994, when he will become President of Southern. During the past five years Mr. Moylan has served as an officer of Sonat and Southern. Richard B. Bates was elected President of Energy Services effective January 1, 1994, and currently serves in that capacity. Mr. Bates also serves as President of Marketing. During the past five years Mr. Bates has served as an officer of Exploration, Energy Services, and Marketing. I-28 32 PART II
ITEM PAGE - -------- ----- Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.... II-27 Item 6. Selected Financial Data...................................................... II-36 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................ II-2 Item 8. Financial Statements and Supplementary Data.................................. II-14 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......................................................... II-38
--------------------- The financial data following on pages II-2 through II-37 is reproduced from, and the Table of Contents below is taken from, the Sonat Inc. Annual Report to Stockholders for 1993. 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 Management's Discussion and Analysis of Financial Condition and Results of Operations 28 Report of Management 38 Report of Ernst & Young, Independent Auditors 39 Consolidated Financial Statements 40 Consolidated Balance Sheets 40 Consolidated Statements of Income 42 Consolidated Statements of Changes in Stockholders' Equity 43 Consolidated Statements of Cash Flows 44 Notes to Consolidated Financial Statements 45 Selected Consolidated Financial Data 62
II-1 33 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS OPERATING INCOME Sonat Inc. and its subsidiaries (the Company) operate in the energy industry through three business segments: Exploration and Production, Natural Gas Transmission and Marketing, and Offshore Drilling. Segment Operating Income (Loss)
Years Ended December 31, 1993 1992 1991 ---- ---- ---- (In Millions) Exploration and Production $ 86 $ 54 $ 45 Natural Gas Transmission and Marketing 144 151 140 Offshore Drilling 2 7 22 Other 1 (1) (4) ---- ---- ---- Consolidated Operating Income $233 $211 $203 ==== ==== ====
EXPLORATION AND PRODUCTION The Company participates in the exploration and production business in the United States through Sonat Exploration Company. Beginning in 1988, Sonat Exploration implemented a strategy to acquire gas properties with significant development potential. As a result of this strategy, Sonat Exploration has more than quintupled its proved reserves. At the end of 1993, the Company had proved reserves totaling more than 1.3 trillion cubic feet of natural gas equivalent, including a portion that qualifies for tax credits authorized by Congress in 1991 (Section 29 tax credits). The Section 29 tax credits were $19 million in 1993; however, production from wells that qualify for these credits will begin to decline in 1994 as these wells follow their normal decline pattern. Sonat Exploration is continuing its strategy of aggressively acquiring domestic gas properties with significant development potential. During 1993 Sonat Exploration acquired oil and gas interests and properties totaling $266 million, which increased proved reserves by approximately 313 billion cubic feet of natural gas equivalent. The largest transaction was the third quarter acquisition of 34 producing wells on 21 lease blocks in the Gulf of Mexico from Mobil Exploration and Producing U.S., Inc. Sonat Exploration plans to drill eight wells on these properties in 1994 and up to 13 wells in 1995. During the fourth quarter, oil and gas properties in south Texas were acquired from Tri-C Resources, Inc. The properties include 87 producing wells located in 18 fields 34 and approximately 40,000 gross acres. In December 1993, Sonat Exploration began a significant drilling program on the properties to hold lease acreage under the terms of a farmout agreement. As of February 1, 1994, Sonat Exploration had drilled 90 wells on these properties and plans to drill 46 additional wells during 1994. Another significant 1993 transaction was the acquisition of certain oil and gas properties belonging to Grace Petroleum Corporation located in eastern Texas and northwestern Louisiana. Sonat Exploration has a substantial acreage position in the eastern extension of the Austin Chalk trend in Texas and Louisiana. During 1993 Sonat Exploration participated in the drilling of 15 wells, all of which were successful. As of December 31, 1993, Sonat Exploration has participated in the completion of 25 wells in the Austin Chalk trend, 24 of which are commercial. On October 4, 1993, Sonat Exploration acquired the limited partnership interest of Prudential Insurance Company in Sonat/P Anadarko Limited Partnership (Sonat/P) for $11.5 million cash and the assumption of $4.1 million of debt pertaining to Prudential's interest in Sonat/P. As part of the transaction, the Company issued a total of $18.5 million of long-term debt to purchase all of Sonat/P's outstanding notes. Sonat Exploration was the general partner of Sonat/P, which acquired oil and gas reserves in the Anadarko Basin of Oklahoma from Louisiana Land and Exploration Company in the third quarter of 1992. Total capital expenditures for Sonat Exploration (excluding its share of Sonat/P's capital expenditures) increased to $431 million in 1993 from $156 million in 1992. Low spot-market natural gas prices in early 1992 reduced cash flows from operations and resulted in lower capital expenditures in 1992. The opportunity to continue acquiring properties with value-enhancement potential by reinvesting proceeds from the Sonat Offshore Drilling Inc. initial public offering (IPO) and a stronger cash flow from oil and gas operations resulted in increased capital spending in 1993. Capital spending in 1994 is expected to approximate $390 million, which includes amounts for increased development drilling and additional producing property acquisitions. Sonat Exploration's liquids and natural gas production is marketed in the spot market almost entirely by Sonat Marketing Company, a subsidiary of Sonat Energy Services Company operating in the Natural Gas Transmission and Marketing Segment. Due to the volatility of spot-market prices, part of Sonat Exploration's production is hedged from time to time through gas futures transactions and oil price swaps to reduce the effects of spot-market prices on operating results. 35 Exploration and Production Operations
Years Ended December 31, 1993 1992 1991 ---- ---- ---- (In Millions) Revenues: Sales to others $ 198 $ 214 $ 208 Intersegment sales 155 65 62 ------- ------- ------- Total Revenues $ 353 $ 279 $ 270 ======= ======= ======= Depreciation, Depletion and Amortization $ 149 $ 108 $ 96 Operating Income 86 54 45 Equity in Earnings of Unconsolidated Affiliates 5 2 - ======= ======= ======= Proved Reserves: (Includes Sonat/P) Net gas (Bcf) 1,187 1,028 1,078 Net liquids (MBbls) 27,094 20,144 19,125 Net Sales Volumes: (Includes Sonat/P) Gas (Bcf) 150 127 116 Oil and condensate (MBbls) 3,052 2,364 2,988 Natural gas liquids (MBbls) 726 733 1,060 ======= ======= ======= Average Sales Prices: (Includes Sonat/P) Gas (Mcf) $ 1.99 $ 1.71 $ 1.58 Oil and condensate (Bbl) 17.42 18.94 20.64 Natural gas liquids (Bbl) 7.96 13.04 10.04 ======= ======= =======
1993 Versus 1992. Operating results for 1993 were up significantly from 1992, reflecting a 16 percent increase in natural gas prices. Acquisition activity led to higher oil and gas volumes, which increased by 29 percent and 18 percent over 1992, respectively. Amortization expense also increased due to higher production volumes as well as higher amortization rates due to increased Austin Chalk production, which is predominantly oil, recent tight-sands gas drilling, along with acquisitions which included more proved producing reserves. General and administrative expense compared favorably to 1992 due to $4 million of restructuring charges included in 1992. 1992 Versus 1991. Spot-market gas prices for 1992 compared favorably to 1991, and gas volumes increased 9 percent over 1991. Much of the favorable gas revenue increase was offset by decreased oil and condensate production, which was down 21 percent due to the sale of oil properties in the second quarter of 1991 and to higher amortization costs. A significant decrease in operating 36 expenses in 1992 due to lower production was partially offset by a $4 million increase in stock-based employee compensation. NATURAL GAS TRANSMISSION AND MARKETING The Company participates in the natural gas transmission and marketing business through Southern Natural Gas Company, Citrus Corp. (a 50 percent-owned company), and Sonat Energy Services. Southern and Florida Gas Transmission Company (a subsidiary of Citrus), operating in the natural gas transmission industry, have historically provided customers of their natural gas pipelines both merchant and transportation services. Effective November 1, 1993, Southern separated its transportation, storage and merchant services to comply with Order No. 636. (See following discussion.) Florida Gas also restructured its services in compliance with Order No. 636 effective on November 1, 1993. As a result of Order No. 636, both Southern and Florida Gas have essentially become solely gas transporters, although Southern will continue to make limited sales until it has exhausted its gas supply remaining under contract. Sonat Energy Services, through its subsidiaries, manages Sonat's unregulated natural gas businesses including natural gas marketing and gathering and intrastate natural gas pipeline services. Natural gas marketing activities for Citrus, primarily to customers of Florida Gas, are provided by affiliates of Citrus. The natural gas transmission industry, although regulated, is very competitive. Even before the Order No. 636 restructuring, customers switched much of their volumes from a bundled merchant service to transportation service, reflecting an increased willingness to rely on gas supply under unregulated arrangements such as those provided by Sonat Marketing and affiliates of Citrus. Southern competes with several pipelines for the transportation business of its customers and at times discounts its transportation rates in order to maintain market share. Although it is now predominantly a transporter of gas, Southern continues to provide a limited merchant service with gas supply remaining under contract and, in this capacity, competes with other suppliers, gas producers, marketers and alternate fuels. Southern is pursuing growth opportunities to expand the level of services in its traditional market area and to connect new gas supplies. On May 13, 1993, approval was received from the Federal Energy Regulatory Commission (FERC) for expansion of South Georgia Natural Gas Company's pipeline system into northern Florida and southwestern Georgia that will increase firm daily capacity by 40 million cubic feet per day. Construction on this project is under way and should be completed by mid-1994. In May 1993, the Company announced a proposed intrastate natural gas pipeline to be built in Florida that would extend from the existing facilities of South Georgia near Tallahassee to the Tampa area. The size and timing of this project are uncertain, but projections indicate a substantial need for additional gas supply in this market later in this decade. Additionally, Southern has entered 37 into an agreement in principle to expand its system to Chattanooga, Tennessee, and is meeting with major local distribution companies and other potential customers, primarily in eastern North Carolina, to discuss expansion opportunities in the rapidly growing North Carolina market. Florida Gas, which has a current pipeline system capacity of 925 million cubic feet per day, was granted final certificate authority by the FERC on September 15, 1993, for the further expansion of its pipeline system. This expansion will increase system capacity by 530 million cubic feet per day at a capital cost of approximately $900 million. As part of the expansion project, Florida Gas contracted with Southern to deliver 100 million cubic feet per day of new firm transportation. In connection with this expansion, the Company will advance funds to Citrus and expects to have an equity investment in the project of $150 million by the end of the construction period. Additionally, Florida Gas is currently reviewing the prospects for further expansions of its pipeline system into the Florida market that could be in service in 1996 or 1997. Sonat Marketing continues to expand its natural gas marketing business. Prior to 1993, Sonat Marketing's volumes were approximately 500 million cubic feet per day and were primarily on the Southern system. During the past year, Sonat Marketing assumed responsibility for marketing almost all of the natural gas and liquids production of Sonat Exploration, including execution of Sonat Exploration's risk management program. This has allowed Sonat Marketing to expand its presence in Gulf Coast, Midwest and Northeast markets and, in turn, provide attractive markets to unaffiliated producers. As a result of these efforts, Sonat Marketing's average daily sales volumes now exceed 1.1 billion cubic feet per day, making it one of the largest natural gas marketers in the country. Competition in the gas marketing business is changing as Order No. 636 is implemented across the pipeline industry and is expected to remain intense due to the large number of industry participants. Sonat Ventures Inc. (a subsidiary of Sonat Energy Services) is focused primarily on the growing natural gas vehicle (NGV) market and opened an NGV conversion and emissions testing center in Atlanta in February 1993, along with Atlanta Gas Light Company and another partner. Separately, Sonat Ventures has established joint ventures in Alabama and Florida. These joint ventures, which are partnerships with local distribution companies that are customers of Southern, generally offer a complete range of services to facilitate the use of natural gas vehicles in those states. Sonat Ventures is also pursuing opportunities to own and operate refueling centers elsewhere in the Southeast. In December 1993, AES/Sonat Power L.L.C. (a 50 percent-owned company), submitted a successful bid for a 221 megawatt power plant to be constructed near San Francisco. If a contract is signed, The AES Corporation will handle the construction and operation of the plant, while the Company will manage the gas supply requirements. The plant is scheduled to be completed by mid-1997 and 38 would require an equity investment from the Company of approximately $15 million-$20 million. Natural Gas Transmission & Marketing Operations
Years Ended December 31, 1993 1992 1991 ---- ---- ---- (In Millions) Revenues: Gas sold by Southern $ 569 $ 529 $ 574 Gas sold by Sonat Marketing 599 320 270 Other sales 13 12 9 ------ ------ ------ Total Gas Sold 1,181 861 853 Market transportation 194 144 136 Supply transportation 51 52 49 Other 11 5 2 ------ ------ ------ Total Revenues $1,437 $1,062 $1,040 ====== ====== ====== Natural Gas Cost: Purchased from others $ 846 $ 580 $ 568 Intersegment purchases 155 65 62 ------ ------ ------ Total Natural Gas Cost $1,001 $ 645 $ 630 ====== ====== ====== Depreciation and Amortization $ 66 $ 76 $ 62 Operating Income 144 151 140 Equity in Earnings (Loss) of Unconsolidated Affiliates 2 (1) 6 ====== ====== ====== (Billion Cubic Feet) Southern Volumes: Gas sold (excludes storage gas) 73 109 118 Market transportation 435 391 371 ------ ------ ------ Total Market Throughput 508 500 489 Supply transportation 328 342 289 ------ ------ ------ Total Volumes 836 842 778 ====== ====== ====== Sonat Marketing Sales Volumes 285 178 172 ====== ====== ====== Florida Gas Volumes (100%): Gas sold 15 44 85 Market transportation 269 245 200 ------ ------ ------
39 Total Market Throughput 284 289 285 Supply transportation 45 53 60 ---- ---- ---- Total Volumes 329 342 345 ==== ==== ====
1993 Versus 1992. Southern's operating results for 1993 were down primarily due to a favorable settlement of $9.6 million in 1992 relating to Southern Energy Company's idle liquefied natural gas (LNG) facility. A settlement at Sea Robin Pipeline Company increased 1993 results by $4.5 million. General and administrative expenses were up in 1993 due to a $4 million increase in health insurance expense and an increase in stock-based employee compensation. Gas sales revenue and gas cost increased at Southern due to the sale of $123 million of storage gas inventory pursuant to the implementation of Order No. 636 on November 1, 1993. Total market throughput increased 2 percent; however, Order No. 636 resulted in a shift in volumes from sales to market transportation. Supply transportation volumes decreased due to competition from other pipelines. Sonat Marketing's sales volumes increased significantly over last year as a result of fully integrating the marketing of Sonat Exploration's production and expanding activities on non-affiliated pipelines through the purchase of additional third-party volumes. Equity in earnings of Citrus increased $3 million over 1992. Operationally, high prices for natural gas relative to competing No. 6 fuel oil significantly reduced earnings in 1993. However, the decline was offset by gains from the sale of gas supply contracts at Citrus Marketing in 1993, decreased depreciation expense resulting from a change in the estimated useful life of the pipeline system and the recognition of natural gas settlement costs in 1992. Citrus' results (100 percent) were reduced by $10 million in 1993 by the recognition of the increase in the U.S. federal income tax rate. 1992 Versus 1991. Operating income for 1992 includes the effect of a favorable settlement of $9.6 million relating to Southern Energy's LNG facility, while 1991 was negatively affected by one-time charges totaling $11 million related to a cost-containment program and the cancellation of the Mobile Bay project. Excluding these items, operating income was lower primarily as a result of an $8 million increase for stock-based employee compensation. Southern's total volumes increased 8 percent in 1992. Market throughput was higher because of colder weather and new markets, offsetting the loss of a competitive load to coal that was served in 1991 when gas prices were 40 substantially lower and losses to other pipeline competition. The 18 percent increase in supply transportation is primarily the result of higher deliverability and an aggressive program of hooking up new gas supply to the Sea Robin system. Sonat Marketing's sales volumes increased 6 billion cubic feet in 1992 due in part to its marketing of Sonat Exploration's production volumes. Net margins remained relatively flat. Equity in earnings from Citrus in 1992 decreased from 1991 due primarily to the recognition of natural gas contract settlement costs and increased interest expense. Market throughput increased slightly over 1991, reflecting the increased capacity available to serve the Florida market. Throughput continued to reflect a shift from sales to market transportation. ORDER NO. 636 In 1992 the FERC issued its Order No. 636 (the Order). As required by the Order, interstate natural gas pipeline companies have made significant changes in the way they operate. The Order required pipelines, among other things, to: (1) separate (unbundle) their sales, transportation and storage services; (2) provide a variety of transportation services, including a "no-notice" service pursuant to which the customer will be entitled to receive gas from the pipeline to meet fluctuating requirements without having previously scheduled delivery of that gas; (3) adopt a straight fixed variable (SFV) method for rate design (which assigns more costs to the demand component of the rates than do other rate design methodologies previously utilized by pipelines); and (4) implement a pipeline capacity release program under which firm customers will have the ability to "broker" the pipeline capacity for which they have contracted. The Order also authorized pipelines to offer unbundled sales services at market-based rates and allowed for pregranted abandonment of some services. As discussed in Note 9 of the Notes to Consolidated Financial Statements, Southern is incurring certain transition costs as a result of implementing Order No. 636, and for Southern, those are primarily gas supply realignment (GSR) costs relating to existing gas purchase contracts. In its restructuring settlement discussions, Southern has advised its customers that the amount of GSR costs that it actually incurs will depend on a number of variables, including future natural gas and fuel oil prices, future deliverability under Southern's existing gas purchase contracts and Southern's ability to renegotiate certain of these contracts. While the level of GSR costs is impossible to predict with certainty because of these numerous variables, based on current spot-market prices, a range of estimates of future oil and gas prices, and recent contract renegotiations, the amount of GSR costs would be approximately $275 million-$325 million on a present value basis. This includes the $168 million of settlements discussed below. 41 In requiring that Southern provide unbundled storage service, the Order resulted in a substantial reduction of Southern's working storage gas inventory and consequently a reduction in its rate base. The reduction in rate base was effective on November 1, 1993, when Southern restructured pursuant to the Order and sold $123 million of its storage gas inventory to its customers. The Order also resulted in rates that are less seasonal, thereby shifting revenues and earnings for Southern out of the winter months. The FERC issued an order on September 3, 1993 (the September 3 order), that generally approved a compliance plan for Southern and directed it to implement restructured services on November 1, 1993. In accordance with the September 3 order, Southern solicited service elections from its customers in order to implement its restructured services on November 1, 1993. Southern's largest customer, Atlanta Gas Light Company and its subsidiary, Chattanooga Gas Company (collectively Atlanta), bid for firm transportation service on Southern at prices significantly below Southern's filed tariff rates. Southern rejected Atlanta's bids. Southern and Atlanta subsequently entered into an interim agreement under which Atlanta signed firm transportation service agreements with transportation demands of 582 million cubic feet per day for a minimum term of four months beginning November 1, 1993, and 118 million cubic feet per day for a term extending until April 30, 2007, at the maximum FERC-approved rates. This represented an aggregate reduction of 100 million cubic feet per day from Atlanta's level of services prior to November 1, 1993. In January 1994, Atlanta provided notice, subject to change, that it had elected to continue that level of firm service until October 31, 1994. Southern's other customers elected in aggregate to obtain an amount of firm transportation services that represented a slight increase from their previous level of firm sales and transportation services from Southern, at the maximum FERC-approved tariff rates, for terms ranging from one to 30 years. Southern is unable to predict all of the elements of the ultimate outcome of its Order No. 636 restructuring proceeding, its settlement discussions with Atlanta and its other customers, and the limited rate filings to recover its transition costs. NATURAL GAS SALES AND SUPPLY As a result of Order No. 636, Southern is attempting to terminate its remaining gas purchase contracts through which it had traditionally obtained its long-term gas supply. Some of these contracts contain clauses requiring Southern either to purchase minimum volumes of gas under the contract or to pay for it (take-or-pay clauses). Although Southern currently is incurring essentially no take-or-pay liabilities under these contracts, the annual weighted average cost of gas under these contracts is in excess of current spot-market prices. Pending the termination of these remaining supply contracts, Southern has agreed to sell a portion of its remaining gas supply to a number of its firm transportation customers for a one-year term which began 42 November 1, 1993. The rest of Southern's remaining supply will be sold on a month-to-month basis. The difference between the cost associated with the gas supply contracts and the revenue from the sale agreements and month-to-month sales should be recoverable as a GSR cost pursuant to Order No. 636. In addition, any cost to terminate or reduce the price under Southern's remaining contracts should also be recoverable as a GSR cost pursuant to Order No. 636. During 1993 Southern reached agreements to reduce significantly the price payable under a number of high-cost gas purchase contracts in exchange for payments with a present value of approximately $168 million. Southern's purchase commitments under its remaining gas supply contracts for the years 1994 through 1998 are estimated as follows:
Estimated Purchase Commitments (In Millions) 1994 $230 1995 150 1996 85 1997 70 1998 65
These estimates are subject to significant uncertainty due both to the number of assumptions inherent in these estimates and to the wide range of possible outcomes for each assumption. None of the three major factors which determine purchase commitments (underlying reserves, future deliverability and future price) is known today with certainty. As explained above, Southern expects to recover all of these costs, including its costs to terminate these purchase commitments, either through sale of the gas or as a GSR cost. RATE MATTERS Several general rate changes have been implemented by Southern and remain subject to refund. See Note 9 of the Notes to Consolidated Financial Statements for a discussion of rate matters. 43 CITRUS CORP. Citrus' historical losses are mainly due to a high level of depreciation and interest expense. However, since Citrus was acquired in mid-1986, cash generated by operations has been sufficient to fund normal capital expenditures and a portion of major expansion projects. Citrus' restructuring of its services in 1990 has helped to mitigate the effect of declines in the price of No. 6 fuel oil on its revenue and margins. However, the results of operations from Citrus have continued to be strongly influenced by the level of No. 6 fuel oil prices and the relationship of natural gas prices to fuel oil prices. Negotiations are under way to amend the gas supply services contract with its major customer. Florida Gas has terminated its gas purchase contracts with a weighted average cost in excess of current spot-market prices and has been negotiating with its customers and the FERC to recover settlement payments made to terminate such contracts as a part of its Order No. 636 proceeding. On September 17, 1993, Florida Gas received approval of its restructuring settlement proposal (the Restructuring Settlement) with regard to the Order. The Restructuring Settlement includes a Transition Cost Recovery (TCR) mechanism that allows Florida Gas, effective November 1, 1993, to recover from its customers 100 percent of payments above the $106 million level approved in a previous settlement, up to $160 million. Florida Gas will be allowed to recover 75 percent of any amounts greater than $160 million. However, Florida Gas has substantially completed the renegotiation and termination of these contracts for less than $160 million and therefore expects to recover all of the amounts spent and not already expensed through its approved TCR mechanism. Citrus has historically obtained its own financing independent of its parent companies. Debt financing by Citrus with outside parties is nonrecourse to its parent companies, and the Company has no contractual or legal requirement to maintain Citrus' liquidity. Citrus recently obtained a $300 million one-year financing that has support provisions from its parent companies. In connection with the construction of the Phase III expansion, the Company will advance Citrus funds and expects to have made an equity investment of approximately $150 million in 1994. OFFSHORE DRILLING The Company participates in the offshore drilling business in markets around the world through its investment in Sonat Offshore. As a result of the IPO of Sonat Offshore's common stock on June 4, 1993, the Company currently retains ownership of approximately 40 percent of Sonat Offshore's outstanding shares. The offshore drilling market in 1992 and 1993 generally experienced difficult conditions, although certain geographic areas have performed better than others. The North Sea market continues to be depressed in comparison with recent years, primarily due to the recent decline in oil prices and the effects 44 of changes to the U.K. Petroleum Revenue Tax on exploratory drilling. Despite the recent awarding of additional licenses by the U.K. and Norwegian governments providing new drilling prospects and Sonat Offshore's belief that there has been a permanent reduction in the supply of rigs available to drill in the North Sea as a result of U.K. safety regulations, Sonat Offshore expects the North Sea market to remain weak in 1994, especially in the first half of the year. A strong natural gas price environment continues to support the U.S. Gulf of Mexico drilling market. As a result of the improved market, several drilling contractors, including Sonat Offshore, have recently moved rigs back to the Gulf of Mexico, and additional mobilizations are expected through early 1994. However, the recent influx of rigs and decline in oil prices have resulted in decreased dayrates over the past few months. Sonat Offshore believes the market will strengthen after the first quarter and will then remain strong for the remainder of 1994 as long as gas prices continue to remain at or above the corresponding 1993 levels. In 1991 and 1992, Sonat Offshore was awarded three turnkey packages providing for the drilling of a total of 10 wells offshore Mexico. Two wells were completed under these three packages in 1992, six wells were completed in 1993 and one other well should be completed by mid-1994. In addition, one turnkey well was completed in 1993 in the U.S. sector of the Gulf of Mexico. Under a turnkey contract, Sonat Offshore is paid a fixed fee for drilling a well to a specified depth. Turnkey contracts generally provide an opportunity for greater profits than do conventional dayrate contracts, but entail more financial risk. Revenues and operating costs from turnkey contracts are much higher than under dayrate contracts since Sonat Offshore provides substantially more of the material and services necessary to drill the wells. Sonat Offshore continues to investigate additional turnkey opportunities as they arise, but there can be no assurance that Sonat Offshore will obtain additional contracts before the completion of its current projects. In December 1993, Sonat Offshore entered into agreements with its partners in the Polar Frontier Drilling joint venture providing for the purchase of the remaining 52.5 percent interest in the semisubmersible rig, POLAR PIONEER, by Sonat Offshore for approximately $44.6 million plus certain adjustments relating to rig upgrades and drydocking estimated at $2.9 million and limited future consideration (up to $3 million) contingent upon the future operations of the POLAR PIONEER. The transaction closed on February 18, 1994. As a result of management's reevaluation of the remaining useful lives of certain of its drilling units, effective January 1, 1993, Sonat Offshore adjusted the estimated working lives of these units from periods ranging 16-20 years to 25 years. This adjustment decreased Sonat Offshore's depreciation expense in 1993 by approximately $7 million. 45 Offshore Drilling Operations
Years Ended December 31, 1993 1992 1991 ---- ---- ---- (In Millions) Pre-IPO: Revenues $108 $210 $173 Depreciation 9 28 25 Operating income 2 7 22 ---- ---- ---- Post-IPO: Equity in earnings of Sonat Offshore 4 - - ---- ---- ---- Drilling rigs available (at end of year) Owned directly 18 18 18 Owned by joint ventures 3 3 3 Leased 1 1 2 Drilling rigs on contract (at end of year) 19 13 14 Drilling rig utilization rates 86% 66% 72% ==== ==== ====
1993 Versus 1992. The pre-IPO amounts shown above reflect results of operations from January 1, 1993, through June 4, 1993, the completion date of the IPO. Amounts shown for 1992 and 1991 are for full years of operations. Hence, 1993 results are not comparable with the prior years due to the shorter period. The Company's share of Sonat Offshore's results for the period June 5, 1993, through December 31, 1993, is reflected in the above table as equity in earnings of Sonat Offshore. On a 100 percent basis, Sonat Offshore's operating results for 1993 were favorable compared to 1992 due primarily to increased operating margins offshore Brazil, increased utilization of the Gulf of Mexico jack-up fleet and lower depreciation expense as mentioned above. General and administrative expense was also lower in 1993, primarily due to favorable adjustments relating to certain benefit plans. Operating results for 1993 also included favorable adjustments related to certain insurance accruals. These favorable results were partially offset by the recognition in 1992 of $7.7 million of deferred revenue relating to the termination of the DISCOVERER 534 contract. 1992 Versus 1991. In 1992 operating results for contract drilling operations were unfavorable primarily due to lower fleet utilization and lower operating margins per day. Margins from operations in the North Sea declined from 1991. Results in the Gulf of Mexico jack-up market, though not as 46 significant to Sonat Offshore as its North Sea operations, showed significant improvement in the fourth quarter. Turnkey operations in India contributed significantly to operating income in 1992. Operating income was otherwise negatively affected by higher operating expenses, higher depreciation expense and a $3 million increase in stock-based employee compensation. ----------------------------------
Years Ended December 31, 1993 1992 1991 ---- ---- ---- (In Millions) OTHER INCOME-EXCLUDING EQUITY IN EARNINGS OF UNCONSOLIDATED AFFILIATES $170 $ 18 $ 6
1993 Versus 1992. Other income in 1993 increased primarily due to the $155.8 million pretax gain on the Sonat Offshore IPO. In addition, dividends received on the Baker Hughes Incorporated preferred stock received in the sale of Teleco Oilfield Services Inc. in April 1992 contributed $12 million in 1993 and $7 million in 1992. 1992 included the recognition of a $9 million gain on the sale of oil and gas assets. 1992 Versus 1991. Other income in 1992 includes $9 million related to gains on the sale of oil and gas assets and $7 million from dividends received on the Baker Hughes preferred stock.
Years Ended December 31, 1993 1992 1991 ---- ---- ---- (In Millions) INTEREST INCOME (EXPENSE), NET $ (47) $ (96) $(118)
1993 Versus 1992. 1993 includes $31 million in net interest income related to a settlement of an examination of the Company's federal income tax returns for the years 1983-1985 and certain other tax issues. Interest expense was lower in 1993 due to decreased debt levels and lower interest rates, in part due to the refinancing of some higher interest rate debt during 1993. 1992 Versus 1991. Interest on debt decreased $7 million due to a decrease in average debt outstanding and lower average interest rates. The remainder is largely due to adjustments related to interest on income taxes. 47
Years Ended December 31, 1993 1992 1991 ---- ---- ---- (In Millions) INCOME TAXES $103 $ 36 $ 23
1993 Versus 1992. Income taxes in 1993 increased due to higher pretax income including the gain on the Sonat Offshore IPO. The increase in taxes was partially offset by various tax adjustments, higher Section 29 tax credits and a settlement of an examination of the Company's federal income tax returns for the years 1983-1985. 1992 Versus 1991. Income taxes increased due to higher pretax earnings in 1992 and adjustments to overall tax provisions, partially offset by higher Section 29 tax credits.
Years Ended December 31, 1993 1992 1991 ---- ---- ---- (In Millions) NET INCOME (LOSS) FROM DISCONTINUED OPERATIONS $ - $ 111 $ (12)
1992 includes a $112.8 million gain on the sale of Teleco to Baker Hughes and a $.8 million loss on the disposal of the Company's insurance subsidiary.
Years Ended December 31, 1993 1992 1991 ---- ---- ---- (In Millions) EXTRAORDINARY LOSS $ (4) $ - $ -
In March 1993, the Company recognized a $4 million loss, net of taxes of $2 million, on the redemption of the Company's 7 1/4 Percent Zero Coupon, Subordinated Convertible Notes which were due September 6, 2005. FINANCIAL CONDITION Cash Flows
Years Ended December 31, 1993 1992 1991 ---- ---- ---- (In Millions) Net Cash Provided by Operating Activities $ 454 $ 361 $ 344
48 1993 Versus 1992. Net cash provided by operating activities increased due to higher earnings at Sonat Exploration and a $62 million settlement of an examination of the Company's federal income tax returns for the years 1983-1985. Also contributing to the increase was the sale of storage gas inventory at Southern pursuant to Order No. 636 and lower cash outflows relating to gas imbalances. Partially offsetting the increase were GSR payments of approximately $128 million made by Southern in 1993. 1992 Versus 1991. Net cash provided by operating activities was higher due to improved operations and a tax refund at Sonat Exploration. Offsetting the increase was the inclusion of Teleco's operations for a full period in 1991.
Years Ended December 31, 1993 1992 1991 ---- ---- ---- (In Millions) Net Cash Used in Investing Activities $(189) $ (30) $(477)
1993 Versus 1992. Net cash used in investing activities increased $159 million in 1993. Capital expenditures of $516 million in 1993 were $290 million over the 1992 expenditures, primarily attributable to oil and gas acquisitions. A significant source of investing cash flows in 1993 was net cash proceeds of approximately $340 million from the sale of Sonat Offshore common stock. 1992 included cash proceeds of approximately $188 million from the sale of Teleco. 1992 Versus 1991. The net change in cash used in investing activities reflects the net cash proceeds from the sale of Teleco mentioned above as well as lower capital expenditures in 1992.
Years Ended December 31, 1993 1992 1991 ---- ---- ---- (In Millions) Net Cash Provided by (Used in) Financing Activities $(312) $(296) $ 135
1993 Versus 1992. The net change in cash used in financing activities reflects a slight increase in debt repayments. 1992 Versus 1991. The change in net cash used in financing activities reflects the use of the proceeds from the sale of Teleco to pay down debt in 1992 as compared to an increase in borrowings in 1991. 49 CAPITAL EXPENDITURES Capital expenditures for the Company's business segments (excluding unconsolidated affiliates) were as follows:
Years Ended December 31, 1993 1992 1991 ---- ---- ---- (In Millions) Exploration and Production $431 $156 $276 Natural Gas Transmission and Marketing 61 44 112 Offshore Drilling 5 13 21 Measurement-While-Drilling - 11 61 Other 19 2 8 ---- ---- ---- Total $516 $226 $478 ==== ==== ====
The Company's share of capital expenditures by its unconsolidated affiliates were as follows:
Years Ended December 31, 1993 1992 1991 ---- ---- ---- (In Millions) Exploration and Production $ 11 $ 37 $ - Natural Gas Transmission and Marketing 18 12 57 Offshore Drilling 2 1 4 Other 1 1 1 ---- ---- ---- Total $ 32 $ 51 $ 62 ==== ==== ====
The Company's capital expenditures (including its $410 million share of unconsolidated affiliates' expenditures) for 1994 are expected to be $870 million and will include oil and gas acquisition, exploration and development, pipeline expansion and other projects. 50 LIQUIDITY AND CAPITAL RESOURCES At December 31, 1993, the Company had lines of credit and a revolving credit agreement with a total capacity of $750 million. Of this, $546 million was unborrowed and available. The amount available under the lines of credit has been reduced by the amount of commercial paper outstanding of $60 million to reflect the Company's policy that credit line and commercial paper borrowings in the aggregate will not exceed the maximum amount available under its lines of credit. On July 26, 1993, Sonat filed a shelf registration with the Securities and Exchange Commission for up to $500 million in debt securities. The Company may use the proceeds from the sale of its registered debt securities to refinance the long-term debt redeemed in 1993. As discussed in Note 3 of the Notes to Consolidated Financial Statements, the Company holds four million shares of Baker Hughes convertible preferred stock as well as 11.3 million shares of Sonat Offshore common stock. These resources, when combined with a strong cash flow and borrowings in the public or private markets, provide the Company with the means to invest for the future and continue earnings growth. Capitalization Information
Years Ended December 31, 1993 1992 1991 ---- ---- ---- Cash Flow from Operating Activities to Weighted Average Debt 43% 29% 27% Debt to Capitalization - End of Year 42% 50% 57% Book Value Per Share - End of Year $15.64 $13.62 $12.14 ====== ====== ======
INFLATION AND THE EFFECT OF CHANGING ENERGY PRICES Although the rate of inflation in the United States has been moderate over the past several years, its potential impact should be considered when analyzing historical financial information. In past times of high general inflation, oil and gas prices have increased at comparable, and at times, higher rates. The changing regulatory environment in which the natural gas business operates, along with other competitive factors, would currently make it difficult to increase prices enough to recover significantly higher costs of operations. The results of operations in the Company's two major business segments will be affected by future changes in domestic and international oil and gas prices, the interrelationship between oil, gas and other energy prices and the ability of the Company's natural gas business to purchase gas at competitive prices. 51 ENVIRONMENTAL ISSUES The Company's subsidiaries are involved in various environmental compliance and cleanup activities, and certain of these subsidiaries have been notified that they are one of many potentially responsible parties at certain federal Superfund sites. The Company does not expect costs relating to these activities, including any responsibility for cleanup of such sites, to be material, taken either separately or in the aggregate, with respect to the financial position or results of operations of the Company. In addition, Southern has taken steps to test for the presence of polychlorinated biphenyls (PCB) at its natural gas compressor stations. A total of 13 stations evidenced some level of on-site PCB contamination ranging from low to moderate. Southern has completed the characterization and cleanup of 12 of these sites at a cost of approximately $6 million. Southern has partially completed the characterization and cleanup of the 13th site and believes that it should be able to complete the remediation of this site for a total cost of less than $5 million, approximately half of which had been incurred at December 31, 1993. Sonat generally considers environmental assessment and remediation costs and costs associated with compliance with environmental standards for its regulated companies to be recoverable through rates since they are prudent costs incurred in the ordinary course of business, and accordingly, will seek recovery of such costs through rate filings, although no assurance can be given with regard to their ultimate recovery. The Company has an active and ongoing environmental program at all levels of its organization and believes responsible environmental management is integral to its business. 52 REPORT OF MANAGEMENT The management of the Company is responsible for the preparation and integrity of all financial data included in this annual report. The Consolidated Financial Statements have been prepared in conformity with generally accepted accounting principles and necessarily include amounts based on estimates and judgments of management. The Company maintains a system of internal accounting controls designed to provide reasonable assurance that assets are safeguarded against loss or unauthorized use and that the financial records are adequate and reliable for preparation of financial statements and other financial data. The concept of reasonable assurance is based on the recognition that the cost of a system of internal accounting control must not exceed the related benefits. The systems of internal accounting control are complemented by the selection, training and development of qualified accounting and internal audit personnel. The Company engages the firm of Ernst & Young as independent auditors to audit the Company's financial statements and express their opinion thereon. Their audits are conducted in accordance with generally accepted auditing standards and include a review and evaluation of the Company's internal accounting control systems and tests of transactions as they consider appropriate. The Report of Ernst & Young, 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, authorizes all audit and other professional services rendered by the independent auditors and regularly reviews their independence. The Audit Committee reviews and reports on significant accounting decisions and transactions and the scope and results of audits by the Company's internal auditing staff and the independent auditors. It reviews with management and the independent auditors compliance with the Company's business ethics and conflict of interest policies and reviews with independent auditors the adequacy of the Company's system of internal controls. The internal auditors and the independent auditors have free access to the Audit Committee, without management's presence, to discuss the Company's internal controls and the results of their audits. /s/ James E. Moylan, Jr. - ------------------------- JAMES E. MOYLAN, JR. Vice President and Controller February 24, 1994 53 REPORT OF ERNST & YOUNG, Independent Auditors The Board of Directors and Stockholders Sonat Inc. We have audited the accompanying consolidated balance sheets of Sonat Inc. and Subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1993. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sonat Inc. and Subsidiaries at December 31, 1993 and 1992, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. /s/ Ernst & Young Birmingham, Alabama January 20, 1994 54 CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS
December 31, 1993 1992 ---- ---- (In Thousands) Assets Current Assets: Cash and cash equivalents $ 10,822 $ 58,007 Accounts and notes receivable 256,925 273,585 Inventories (Note 4) 29,896 156,525 Gas supply realignment costs (Note 9) 59,862 - Recoverable natural gas purchase contract settlement costs (Note 9) 18,535 52,936 Gas imbalance receivables (Note 1) 43,867 69,478 Other 43,953 38,621 ------------ ----------- Total Current Assets 463,860 649,152 ------------ ----------- Investments and Advances: Unconsolidated affiliates (Note 5) 295,221 255,687 Other investments (Notes 2 and 3) 214,105 209,111 ------------ ----------- 509,326 464,798 ------------ ----------- Plant, Property and Equipment, successful efforts method of accounting used for oil and gas properties (Notes 6 and 13) 4,400,286 4,544,478 Less accumulated depreciation, depletion and amortization 2,313,168 2,553,864 ------------ ----------- 2,087,118 1,990,614 ------------ ----------- Deferred Charges: Gas supply realignment costs (Note 9) 119,724 - Recoverable natural gas purchase contract settlement costs (Note 9) - 17,546 Other 33,969 43,222 ------------ ----------- 153,693 60,768 ------------ ----------- $ 3,213,997 $ 3,165,332 ============ ===========
See accompanying notes. 55 CONSOLIDATED BALANCE SHEETS
December 31, 1993 1992 ---- ---- (In Thousands) Liabilities and Stockholders' Equity Current Liabilities: Unsecured notes and long-term debt due within one year (Note 7) $ 232,929 $ 20,102 Accounts payable 193,383 192,863 Accrued income taxes 55,828 53,930 Accrued interest 49,853 51,942 Gas imbalance payables (Note 1) 59,144 56,574 Other 42,274 72,912 ----------- ----------- Total Current Liabilities 633,411 448,323 ----------- ----------- Long-Term Debt (Note 7) 741,161 1,175,666 ----------- ----------- Deferred Credits and Other: Deferred income taxes (Note 8) 192,977 207,892 Reserves for regulatory matters (Note 9) 120,801 103,956 Other 162,432 57,175 ----------- ----------- 476,210 369,023 ----------- ----------- Commitments and Contingencies (Note 9) Stockholders' Equity: Common stock, $.50 par, 200,000,000 shares authorized; 87,157,982 and 86,076,654 shares outstanding in 1993 and 1992, respectively (Note 10) 43,579 43,038 Other capital 79,653 60,378 Retained earnings 1,239,983 1,068,904 ------------ ----------- 1,363,215 1,172,320 ------------ ----------- $ 3,213,997 $ 3,165,332 ============ ===========
See accompanying notes. 56 CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1993 1992 1991 ---- ---- ---- (In Thousands, Except Per-Share Amounts) Operating Revenues (Note 12) $1,741,147 $1,484,423 $1,420,963 ---------- ---------- ---------- Costs and Expenses: Natural gas cost 846,081 584,909 572,795 Operating and maintenance 249,801 286,773 278,162 General and administrative 148,738 153,928 141,779 Depreciation, depletion and amortization 225,989 213,877 186,694 Taxes, other than income 37,623 33,845 38,060 ---------- ---------- ---------- 1,508,232 1,273,332 1,217,490 ---------- ---------- ---------- Operating Income 232,915 211,091 203,473 ---------- ---------- ---------- Other Income, Net: Equity in earnings of unconsolidated affiliates (Note 5) 12,365 4,132 8,947 Sale of subsidiary - stock (Note 3) 155,836 - Other 13,884 17,904 5,744 ---------- ---------- ---------- 182,085 22,036 14,691 ---------- ---------- ---------- Interest Income (Expense): Interest income 39,331 10,735 11,095 Interest expense (90,704) (115,515) (136,724) Interest capitalized 4,101 8,422 7,951 ---------- ---------- ---------- (47,272) (96,358) (117,678) ---------- ---------- ---------- Income from Continuing Operations before Extraordinary Item and Income Taxes 367,728 136,769 100,486 Income Taxes (Note 8) 102,659 35,807 22,605 ---------- ---------- ---------- Income from Continuing Operations before Extraordinary Item 265,069 100,962 77,881 Income (Loss) from Discontinued Operations (Note 3) - 111,447 (11,893)
57 Extraordinary Loss, Net of Income Tax Benefit of $1,972,000 (Note 7) (3,829) - - ------------- -------------- ------------- Net Income $ 261,240 $ 212,409 $ 65,988 ============= ============== ============= Earnings Per Share of Common Stock: (Note 10) Earnings from continuing operations before extraordinary item $ 3.05 $ 1.17 $ .91 Earnings (loss) from discontinued operations - 1.30 (.14) Extraordinary loss (.04) - - ------------- -------------- ------------- Earnings Per Share $ 3.01 $ 2.47 $ .77 ============= ============== ============= Weighted Average Shares Outstanding (Note 10) 86,703 85,945 85,771 Dividends Paid Per Share (Note 10) $ 1.04 $ 1.00 $ 1.00 ============= ============== =============
See accompanying notes. 58 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1993 1992 1991 Shares Amount Shares Amount Shares Amount --------- --------- --------- --------- --------- --------- (In Thousands) Common Stock, $.50 Par, 200,000,000 Shares Authorized (Note 10): Balance at beginning of year 86,077 $ 43,038 85,878 $ 42,939 85,747 $ 42,874 Issued 1,081 541 199 99 131 65 --------- ---------- --------- ---------- --------- ---------- Balance at end of year 87,158 43,579 86,077 43,038 85,878 42,939 --------- ---------- --------- ---------- --------- ---------- Other Capital: Balance at beginning of year 60,378 57,336 55,432 Benefit plans 19,275 3,042 1,904 --------- ---------- --------- ---------- --------- ---------- Balance at end of year 79,653 60,378 57,336 --------- ---------- --------- ---------- --------- ---------- Retained Earnings: Balance at beginning of year 1,068,904 942,421 962,169 Net income 261,240 212,409 65,988 Cash dividends at $1.04 per share for 1993 and $1.00 per share for 1992 and 1991 (90,161) (85,926) (85,736) --------- ---------- --------- ---------- --------- ---------- Balance at end of year 1,239,983 1,068,904 942,421 --------- ---------- --------- ---------- --------- ---------- 87,158 $1,363,215 86,077 $1,172,320 85,878 $1,042,696 ========= ========== ========= ========== ========= ==========
See accompanying notes. 59 CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1993 1992 1991 ---- ---- ---- (In Thousands) Cash Flows from Operating Activities: Net income $ 261,240 $ 212,409 $ 65,988 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization 225,989 224,691 216,867 Deferred income taxes 49,635 20,479 (7,643) Equity in earnings of unconsolidated affiliates, less distributions 1,532 3,040 (2,197) (Gain) loss on sale of subsidiary stock and disposal of assets (158,592) (191,843) 5,021 Reserves for regulatory matters 16,845 22,458 24,467 Gas supply realignment costs (127,986) - - Natural gas purchase contract settlement costs 51,947 52,619 68,626 Change in: Accounts receivable (60,687) (36,302) 21,886 Inventories 50,535 2,473 22,205 Accounts payable 44,921 27,312 (30,887) Accrued interest and income taxes, net 5,199 56,214 (58,576) Other current assets 10,446 (21,243) 13,257 Other current liabilities (2,325) (7,099) (21,261) Other 84,823 (4,467) 26,215 ---------- ---------- ---------- Net cash provided by operating activities 453,522 360,741 343,968 ---------- ---------- ----------
60 Cash Flows from Investing Activities: Plant, property and equipment additions (516,466) (225,766) (477,825) Net proceeds from sale of subsidiary stock and disposal of assets 343,610 227,842 8,924 Other, net (16,185) (32,114) (8,585) ---------- ---------- ---------- Net cash used in investing activities (189,041) (30,038) (477,486) ---------- ---------- ---------- Cash Flows from Financing Activities: Proceeds from issuance of long-term debt 880,676 221,881 873,780 Payments of long-term debt (1,237,694) (379,181) (663,159) Changes in short-term borrowings 112,846 (59,792) 8,837 ---------- ---------- ---------- Net changes in debt (244,172) (217,092) 219,458 Dividends paid (90,161) (85,926) (85,736) Other 22,667 6,653 1,581 ---------- ---------- ---------- Net cash provided by (used in) financing activities (311,666) (296,365) 135,303 ---------- ---------- ---------- Net Increase (Decrease) in Cash and Cash Equivalents (47,185) 34,338 1,785 Cash and Cash Equivalents at Beginning of Year 58,007 23,669 21,884 ---------- ---------- ---------- Cash and Cash Equivalents at End of Year $ 10,822 $ 58,007 $ 23,669 ========== ========== ========== Supplemental Disclosures of Cash Flow Information Cash Paid for: Interest (net of amount capitalized) $ 66,793 $ 78,555 $ 112,176 Income taxes, net 71,398 16,643 83,705 ========== ========== ==========
See accompanying notes. 61 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation-The Consolidated Financial Statements include the accounts of Sonat Inc. and its subsidiaries (the Company). Intercompany transactions and accounts have been eliminated in consolidation. The equity method of accounting is used for investments in affiliates owned 50 percent or less. Certain amounts in the 1992 and 1991 Consolidated Financial Statements have been reclassified to conform with the 1993 presentation. Cash Equivalents-Cash equivalents are typically money-market investments in the form of treasury bills, certificates of deposit and time deposits with original maturities of three months or less. These investments are accounted for at cost, which approximates market value. Inventories-At December 31, 1993, inventories consist primarily of materials and supplies and are carried at cost. Gas Imbalance Receivables and Payables-Gas imbalances represent the difference between gas receipts from and gas deliveries to the Company's transportation and storage customers. Gas imbalances arise when these customers deliver more or less gas into the pipeline than they take out. Under the provisions of Order No. 636, these amounts are settled monthly. Plant, Property and Equipment and Depreciation-Plant, property and equipment is carried at cost. The Company provides for depreciation on a composite or straight-line basis, except for oil and gas properties. (See Notes 6 and 13.) Revenue Recognition-Revenue is recognized in the Exploration and Production segment when deliveries of oil and natural gas are made. The Company's Natural Gas Transmission and Marketing segment recognizes revenue from both natural gas sales and transportation in the period the service is provided. Reserves are provided on revenues collected subject to refund when appropriate. Revenues included in the Consolidated Statements of Income for the Offshore Drilling segment were recognized as earned through June 4, 1993, based on contractual daily drilling rates, or on a per-well basis. (See Note 3.) Foreign Currency Translation-For periods in which the Company had foreign operations, the U.S. dollar was the functional currency. The effect of foreign currency exchange transactions included in "Other Income" for those periods was not material. (See Note 3.) 62 Income Taxes-The Company follows an asset and liability approach in accounting for income taxes. Deferred tax assets and liabilities are determined using the tax rate for the period in which those amounts are expected to be received or paid. Futures-The Company engages in the gas futures market to lock in natural gas prices in its exploration and production business and in its gas marketing business to decrease volatility related to fluctuations in spot-market prices. Gains or losses resulting from changes in the market value of these transactions entered into as hedges are deferred until the hedged commodity transaction occurs. Neither net futures positions nor the unrecognized gain at December 31, 1993, was material. Swaps-The Company engages in oil and gas price swap agreements with certain counterparties to effectively manage a portion of the market risk associated with fluctuations in the prices of natural gas and crude oil and to provide risk management services to its customers. The agreements call for the Company to make payments to (or receive payments from) other parties based upon the differential between a fixed and a variable price as specified by the contract. At December 31, 1993, the Company had a price swap agreement having a notional contract amount of 4,105,000 MMBtu of natural gas equivalent. This agreement runs for a period of three years. Issuance of Stock by Subsidiary-The Company follows an accounting policy of income statement recognition for issuances of stock by a subsidiary. Other than the initial public offering (IPO) by Sonat Offshore Drilling Inc. (see Note 3) there have been no issuances of subsidiary stock during the periods presented in these financial statements. Earnings Per Share-Earnings per share amounts are computed on the basis of the weighted average number of common shares outstanding during the periods. (See Note 10.) 2. FINANCIAL INSTRUMENTS The carrying amounts and fair values of the Company's financial instruments are as follows:
Carrying Amounts Fair Value ---------------- ---------- DECEMBER 31, 1993 (In Thousands) Cash and Cash Equivalents $ 10,822 $ 10,822 Investment Securities: Non-current equity securities 180,000 170,000-190,000 Non-current debt securities 30,854 33,469 Gas Supply Realignment Costs 179,586 179,586 Natural Gas Purchase Contract Settlement Costs 18,535 18,535 Unsecured Notes Payable 112,846 112,846 Long-Term Debt 861,244 945,888
63 DECEMBER 31, 1992 Cash and Cash Equivalents $ 58,007 $ 58,007 Investment Securities: Non-current equity securities 180,000 180,000-200,000 Non-current debt securities 25,725 27,337 Natural Gas Purchase Contract Settlement Costs 70,482 70,482 Long-Term Debt 1,195,768 1,248,969
The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Cash and cash equivalents, gas supply realignment costs, natural gas purchase contract settlement costs and unsecured notes payable: The carrying amount reported in the balance sheet approximates its fair value. Investment securities: The fair value for equity securities is estimated using values obtained from an independent appraisal. The fair values for marketable debt securities are based on quoted market prices. Long-term debt: The fair values of the Company's long-term debt are based on quoted market values or estimated using discounted cash flow analyses, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. 3. CHANGES IN OPERATIONS Stock Sale by Subsidiary-On June 4, 1993, the IPO of Sonat Offshore's common stock at $22.00 per share was closed. Prior to the offering, the Company owned 100 percent of Sonat Offshore. Sonat Offshore issued 15.5 million shares, and the Company sold 1.448 million of its shares resulting in a combined pretax gain of $155.8 million. Net cash proceeds from the combined transactions after underwriting commissions, expenses and tax provisions totaled approximately $340 million. The Company retained ownership of approximately 40 percent of Sonat Offshore's outstanding shares and recognized an after-tax gain of $99.7 million, or $1.15 per share, from the combined transactions. At December 31, 1993, the Company held 11.3 million shares of Sonat Offshore common stock at a market value of $180.0 million. 64 Discontinued Operations-On April 23, 1992, the Company completed the sale of Teleco Oilfield Services Inc. to Baker Hughes Incorporated. The Company received $200 million in cash and four million shares of Baker Hughes convertible preferred stock. The convertible preferred stock has a face amount of $200 million, a dividend rate of 6 percent per annum, and is convertible at $32.50 per share into Baker Hughes common stock. The Company attributed a value of $180 million to the noncash portion of the transaction which is included in "Other Investments" on the Consolidated Balance Sheets. Summary operating results of discontinued operations are as follows:
Years Ended December 31, 1992 1991 ---- ---- (In Thousands) Revenues $ 44,868 $ 148,802 Loss Before Income Taxes $ (472) $ (15,455) Income Taxes (Benefit) 166 (3,562) Loss from Discontinued Operations (638) (11,893) Net Gain on Disposals, Net of Income Taxes of $70,618,000 112,085 - --------- --------- Income (Loss) from Discontinued Operations $ 111,447 $ (11,893) ========= =========
65 4. INVENTORIES The table below shows the values of various categories of the Company's inventories by business segment.
December 31, 1993 1992 ---- ---- (In Thousands) Exploration and Production: Materials and supplies $ 4,050 $ 5,311 Natural Gas Transmission and Marketing: Gas stored underground 1,829 120,072 Materials and supplies 23,945 26,448 --------- --------- 25,774 146,520 --------- --------- Offshore Drilling: Materials and supplies - 4,637 Other 72 57 --------- --------- $ 29,896 $ 156,525 ========= =========
Gas stored underground decreased due to the sale of $123 million of storage gas inventory by Southern pursuant to the implementation of Order No. 636 on November 1, 1993. (See Note 9.) 5. UNCONSOLIDATED AFFILIATES At December 31, 1993, the Company's investments in unconsolidated affiliates totaled $295.2 million, and the Company's share of underlying equity in net assets of the investees was $363.1 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, 1993, the Company's cumulative equity in earnings of these unconsolidated affiliates was $177.8 million and cumulative dividends received from them totaled $134.0 million. 66 The following table presents the components of equity in earnings of unconsolidated affiliates.
Years Ended December 31, 1993 1992 1991 ---- ---- ---- (In Thousands) COMPANY'S SHARE OF REPORTED EARNINGS (LOSS) Exploration and Production: Sonat/P Anadarko $ 4,163 $ 1,368 $ - Other exploration and production affiliates 502 410 151 ------- ------- ------- 4,665 1,778 151 ------- ------- ------- Natural Gas Transmission and Marketing: Citrus Corp. (8,066) (11,058) (4,602) Amortization of Citrus basis difference 1,738 2,096 2,096 Bear Creek Storage 8,638 8,002 7,822 Other natural gas transmission and marketing affiliates (121) 332 374 ------- ------- ------- 2,189 (628) 5,690 ------- ------- ------- Offshore Drilling: Sonat Offshore Drilling 4,497 - - Other offshore drilling affiliates (292) 1,750 2,112 ------- ------- ------- 4,205 1,750 2,112 ------- ------- ------- Other 1,306 1,232 994 ------- ------- ------- $12,365 $ 4,132 $ 8,947 ======= ======= =======
Exploration and Production Affiliate-Sonat Exploration Company had an initial 49 percent interest in Sonat/P Anadarko Limited Partnership (Sonat/P) which acquired oil and gas reserves in the Anadarko Basin of Oklahoma from Louisiana Land and Exploration Company in the third quarter of 1992. On October 4, 1993, Sonat Exploration acquired the limited partnership interest of Prudential Insurance Company in Sonat/P. (See Notes 7 and 13.) For the 1993 period prior to acquisition, Sonat/P had revenues of $16.3 million and reported earnings of $6.6 million. The Company's investment in Sonat/P at December 31, 1992, was $19.7 million. Sonat/P had revenues of 67 $6.1 million and reported earnings of $2.5 million in 1992. Natural Gas Transmission and Marketing Affiliates- Sonat owns 50 percent of Citrus, the parent of Florida Gas Transmission Company. Southern Natural Gas Company owns 50 percent of Bear Creek Storage Company, an underground gas storage company. The following is summarized financial information for Citrus:
Years Ended December 31, 1993 1992 1991 ---- ---- ---- (In Thousands) Revenues $ 574,302 $ 550,139 $ 565,606 Natural Gas Cost 421,148 414,051 427,598 Operating Expenses 71,754 70,170 71,616 Depreciation 44,668 51,502 45,899 Other Expenses, Net 48,223 49,686 36,074 Income Taxes (Benefits) 4,641 (13,153) (6,380) --------- --------- --------- Loss Reported $ (16,132) $ (22,117) $ (9,201) ========= ========= =========
December 31, 1993 1992 ---- ---- (In Thousands) Assets Current $ 59,872 $ 65,386 Net transmission plant and property 1,396,748 1,330,106 Other 116,650 124,479 ---------- ---------- $1,573,270 $1,519,971 ========== ========== Liabilities and Equity Current $ 417,689 $ 291,557 Long-term debt and other liabilities 815,614 872,315 Stockholders' equity 339,967 356,099 ---------- ---------- $1,573,270 $1,519,971 ========== ==========
On December 23, 1993, Citrus entered into a $300 million, 364-day revolving credit agreement with a group of banks. Advances under the credit agreement may be used for general corporate purposes, including the interim 68 construction costs for Florida Gas' Phase III expansion project. The Company is providing indirect credit support to the extent of up to 50 percent of the outstanding advances in the form of a standby note purchase agreement for up to $150 million principal amount plus accrued interest and/or fees if any. At December 31, 1993, $275 million was outstanding under the credit agreement at a rate of 3.63 percent. In connection with the expansion project, the Company expects to make an equity investment of $150 million in 1994. The following is summarized financial information for Bear Creek. No provision for income taxes has been included since its income taxes are paid directly by the joint-venture participants.
Years Ended December 31, 1993 1992 1991 ---- ---- ---- (In Thousands) Revenues $ 36,566 $ 36,528 $ 37,067 Operating Expenses 6,137 5,156 9,673 Depreciation 5,397 5,397 857 Other Expenses, Net 7,756 9,971 10,893 --------- --------- --------- Income Reported $ 17,276 $ 16,004 $ 15,644 ========= ========= =========
December 31, 1993 1992 ---- ---- (In Thousands) Assets Current $ 5,916 $ 6,337 Net plant and property 169,521 174,793 Other 594 647 --------- --------- $ 176,031 $ 181,777 ========= ========= Liabilities and Equity Current $ 8,607 $ 8,700 Long-term debt and other liabilities 76,517 83,446 Participants' equity 90,907 89,631 --------- --------- $ 176,031 $ 181,777 ========= =========
69 Offshore Drilling Affiliate-The Company's investment in Sonat Offshore has been accounted for on the equity method since June 5, 1993 (see Note 3). The following is summarized financial information for Sonat Offshore:
Period of June 5-December 31, 1993 ---- (In Thousands) Revenues $ 164,983 Operating Expenses 132,523 Depreciation 12,082 Other (Income) Expenses, Net (931) Income Taxes 10,036 --------- Income Reported $ 11,273 =========
December 31, 1993 ---- (In Thousands) Assets Current $ 143,713 Net plant and property 259,527 Other 68,780 --------- $ 472,020 ========= Liabilities and Equity Current $ 65,427 Long-term debt and other liabilities 92,287 Stockholders' equity 314,306 --------- $ 472,020 =========
6. PLANT, PROPERTY AND EQUIPMENT AND DEPRECIATION Plant, property and equipment, by business segment, is shown in the following table (see Note 3). 70
December 31, 1993 1992 ---- ---- (In Thousands) Exploration and Production $2,077,854 $1,700,594 Natural Gas Transmission and Marketing 2,261,020 2,147,598 Offshore Drilling - 647,730 Other 61,412 48,556 ---------- ---------- $4,400,286 $4,544,478 ========== ==========
Plant, property and equipment includes construction work in progress of $56.0 million and $49.0 million at December 31, 1993 and 1992, respectively. The accumulated depreciation, depletion and amortization amounts, by business segment, are as follows:
December 31, 1993 1992 ---- ---- (In Thousands) Exploration and Production $ 853,634 $ 776,026 Natural Gas Transmission and Marketing 1,437,739 1,381,569 Offshore Drilling - 375,971 Other 21,795 20,298 ---------- ---------- $2,313,168 $2,553,864 ========== ==========
The annual depreciation rates or useful productive lives, by business segment, are as follows: Natural Gas Transmission and Marketing: Mainline transmission property 2.8% Gas supply 5.1% Gas gathering 6.25% Underground storage facilities 3.3% Liquefied natural gas facilities 3.2% Other 5-20 yrs. ========
The successful efforts method of accounting results in the cost of proved oil and gas properties and development dry holes being capitalized and amortized on a unit-of-production basis over the life of 71 remaining proved reserves. Also included in amortization on a unit-of-production basis are the estimated future dismantlement and abandonment costs. 7. LONG-TERM DEBT AND LINES OF CREDIT Long-Term Debt-Long-term debt consisted of:
December 31, 1993 1992 ---- ---- (In Thousands) Sonat Inc. Revolving Credit Agreement at rates based on prime, international or money-market lending rates due December 31, 1998 $ 135,000 $ - 9 7/8% Notes due June 1, 1996 - 200,000 9 1/2% Notes due August 15, 1999 100,000 100,000 7 1/4% Zero Coupon, Subordinated Convertible Notes due September 6, 2005 (face value $661,250,000) - 268,002 9% Term Loan due through December 1993 - 4,000 8.65% Notes due through July 29, 1997 37,143 46,428 9.41% Notes due July 29, 1997 35,000 35,000 9% Notes due May 1, 2001 100,000 100,000 8.24% Senior Notes due through December 31, 2000 17,400 - Southern Natural Gas Company 7.85% Notes due January 15, 2002 100,000 100,000 8 5/8% Notes due May 2, 2002 100,000 100,000 9 5/8% Notes due June 15, 1994 100,000 100,000 8 7/8% Notes due February 15, 2001 100,000 100,000 South Georgia Natural Gas Company 9.85% Term Loan due through December 31, 1997 3,520 4,400 7.80% Term Loan due through December 31, 1997 1,600 2,000 Southern Energy Company Promissory Note (an effective rate of 6.75% at December 31, 1993) due through April 1999 30,000 35,000 Other Notes and Capital Leases 1,581 938 --------- ---------- Total Outstanding 861,244 1,195,768 Less Long-Term Debt Due Within One Year 120,083 20,102 --------- ---------- $ 741,161 $1,175,666 ========= ==========
72 Annual maturities of long-term debt at December 31, 1993, are as follows: Years (In Thousands) 1994 $ 120,083 1995 18,836 1996 18,359 1997 52,766 1998 142,100 1999-2002 509,100 --------- $ 861,244 =========
On March 15, 1993, Sonat redeemed all of its outstanding 7 1/4 Percent Zero Coupon, Subordinated Convertible Notes due September 6, 2005, at a cost of approximately $272 million. The funds utilized for the redemption consisted of $52 million of cash on hand and a $220 million borrowing under Sonat's $500 million revolving credit agreement. The Company recognized an extraordinary noncash loss after income taxes of $3.8 million, or $.04 per share, on the redemption. On June 1, 1993, Sonat redeemed all of its outstanding 9 7/8 Percent Notes due June 1, 1996, at par value plus accrued interest, totaling approximately $210 million. The funds utilized for the redemption were provided from cash on hand. On October 4, 1993, in connection with Sonat Exploration's purchase of Prudential's interest in Sonat/P, Sonat issued to Prudential $18.5 million of 8.24 Percent Senior Notes dated September 30, 1993, to mature December 31, 2000. Proceeds from the notes were utilized by Sonat to purchase all of Sonat/P's outstanding notes to Prudential. On November 23, 1993, in connection with the acquisition of certain oil and gas properties by Sonat Exploration, Sonat issued a promissory note for $43.8 million payable in full on January 3, 1994. Lines of Credit and Credit Agreement-At December 31, 1993, the Company had available $546 million under short-term lines of credit and a revolving credit agreement. The amount available under the lines of credit has been reduced by the amount of commercial paper outstanding to reflect the Company's policy that credit line and commercial paper borrowings in the aggregate will not exceed the maximum amount available under its lines of credit. On May 31, 1993, Sonat and Southern renewed their short-term lines of credit of $200 73 million and $50 million, respectively, for a period of 364 days. Borrowings are in the form of unsecured promissory notes and bear interest at rates based on the banks' prevailing prime, international or money-market lending rates. On December 15, 1993, Sonat renegotiated and extended its revolving credit agreement with a group of banks. The revolving credit agreement will provide for periodic borrowings and repayments of up to $500 million through December 15, 1998. Borrowings are supported by unsecured promissory notes that at the option of the Company, will bear interest at the banks' prevailing prime or international lending rate, or such rates as the banks may competitively bid. At December 31, 1993, $9 million was outstanding under the lines of credit at a rate of 3.38 percent, $135 million was outstanding under the revolving credit agreement at a rate of 3.75 percent, and $60 million in commercial paper was outstanding at an average rate of 3.64 percent. 8. INCOME TAXES An analysis of the Company's income tax expense (benefit) on continuing operations is as follows:
Years Ended December 31, 1993 1992 1991 ---- ---- ---- (In Thousands) Current: Federal $ 46,230 $ (5,497) $ 19,501 Foreign 3,305 (651) (493) State 6,446 10,245 5,427 --------- --------- --------- 55,981 4,097 24,435 --------- --------- --------- Deferred: Federal 40,435 35,074 815 Foreign 649 (26) 26 State 5,594 (3,338) (2,671) --------- --------- --------- 46,678 31,710 (1,830) --------- --------- --------- Income Tax Expense on Continuing Operations $ 102,659 $ 35,807 $ 22,605 ========= ========= =========
74 Net deferred tax liabilities are comprised of the following:
December 31, 1993 1992 ---- ---- (In Thousands) Deferred Tax Liabilities: Depreciation $ 235,490 $ 289,642 Investments 56,383 - Inventories 10,513 6,979 Natural gas purchase contract settlement costs 1,234 16,394 Other 2,768 871 --------- --------- Total deferred tax liabilities 306,388 313,886 --------- --------- Deferred Tax Assets: Revenue reserves 45,997 38,978 Non-conventional fuel tax credits 24,856 18,830 Employee benefits 16,604 5,309 Other accounting accruals 1,107 13,056 Interest on income taxes 11,548 9,581 Demand charge 3,103 11,085 Other 10,196 9,155 --------- --------- Total deferred tax assets 113,411 105,994 --------- --------- Net Deferred Tax Liabilities $ 192,977 $ 207,892 ========= =========
The Company has not provided a valuation allowance to offset deferred tax assets because, based on the weight of available evidence, it is more likely than not that all deferred tax assets will be realized. Consolidated income tax expense relating to continuing operations is different from the amount computed by applying the U.S. federal income tax rate to income from continuing operations before income tax. The reasons for this difference are as follows: 75
Years Ended December 31, 1993 1992 1991 ---- ---- ---- (In Thousands) Income Tax Expense at Statutory Federal Income Tax Rates $ 128,705 $ 46,501 $ 34,165 Increases (Decreases) in Tax Resulting From: Provisions for state income taxes 4,899 4,940 4,896 Non-conventional fuel tax credits (19,242) (13,998) (8,472) Refunds and adjustment of accrued tax position (9,319) (2,769) (9,581) Effect of change in statutory rate on deferred taxes 1,342 - - Other (3,726) 1,133 1,597 --------- --------- --------- Income Tax Expense on Continuing Operations $ 102,659 $ 35,807 $ 22,605 ========= ========= =========
The effect of the deferred tax rate increase to 35 percent due to the Omnibus Budget Reconciliation Act of 1993 has been reduced by the effect of the Company's regulated subsidiaries' reduction of liabilities established for excess deferred income taxes expected to be returned over future periods to customers. The domestic and foreign components of income (loss) from continuing operations before income taxes are as follows:
Years Ended December 31, 1993 1992 1991 ---- ---- ---- (In Thousands) Domestic $ 360,771 $ 119,245 $ 101,495 Foreign 6,957 17,524 (1,009) --------- --------- --------- Income from Continuing Operations before Income Taxes $ 367,728 $ 136,769 $ 100,486 ========= ========= =========
76 9. COMMITMENTS AND CONTINGENCIES Leases-The Company has operating lease commitments expiring at various dates, principally for office space and equipment. The Company has no significant capital leases. Rental expense for all operating leases from continuing operations is summarized below:
Rental Expense Years Ended December 31, 1993 1992 1991 ---- ---- ---- (In Thousands) Non-Affiliated Operating Leases $ 14,816 $ 16,962 $ 17,762 Affiliated Operating Leases 3,589 3,482 2,977 --------- --------- --------- $ 18,405 $ 20,444 $ 20,739 ========= ========= =========
At December 31, 1993, future minimum payments for non-cancelable operating leases for the years 1994 through 1998 are less than $7 million per year. Rate Matters-Periodically, Southern and its subsidiaries file 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 provide reserves relating to such amounts collected subject to refund, as appropriate, and make refunds upon establishment of the final rates. On September 1, 1989, Southern implemented new rates, subject to refund, reflecting a general rate decrease of $6 million. In January 1991, Southern implemented new rates, subject to refund, that restructured its rates consistent with a FERC policy statement on rate design and increased its sales and transportation rates by approximately $65 million annually. These two proceedings have been consolidated for hearing. On October 7, 1993, the presiding administrative law judge certified to the FERC a contested offer of settlement pertaining to the consolidated rate cases which (1) resolved all outstanding issues in the rate decrease proceeding, (2) resolved the cost of service, throughput, billing determinant and transportation discount issues in the rate increase proceeding, and (3) provided a method to resolve all other issues in the latter proceeding, including the appropriate rate design. On December 16, 1993, the FERC issued an order (December 16 Order) approving the settlement, but with modifications. On December 22, 1993, Southern filed a letter with the FERC that outlined certain objections with respect to the 77 FERC's modifications to the terms and conditions of the settlement. Southern advised the FERC that the December 16 Order undercut the economic compromise achieved in the settlement. Southern also filed a request for rehearing of the December 16 Order but is unable to determine at this time if or to what extent rehearing will be granted by the FERC. On September 1, 1992, Southern implemented another general rate change. The rates reflected the continuing shift in the mix of throughput volumes away from sales and toward transportation and a $5 million reduction in annual revenues. On April 30, 1993, Southern submitted a proposed settlement in the proceeding which, if approved by the FERC, would resolve the throughput and certain cost of service issues. On June 4, 1993, the presiding administrative law judge certified the settlement to the FERC. In another order issued on December 16, 1993, the FERC also approved this settlement, but with modifications. Southern objects to these modifications and has also requested rehearing of this order, but is unable to determine at this time if rehearing will be granted by the FERC. In 1992 Southern placed in service certain facilities constructed to connect to its pipeline system gas reserves produced from certain Mississippi Canyon and Ewing Bank Area Blocks, offshore Louisiana. By order dated May 15, 1991, the FERC had authorized Southern, subject to certain conditions affecting Southern's ability to include the cost of the facilities in its rates, to construct and operate the pipeline, compression, and related facilities necessary to connect these reserves. Southern sought rehearing of the unacceptable certificate conditions, but in an order issued on January 13, 1993, the FERC left intact the conditions contained in its 1991 order. It deferred the specific application of the conditions to Southern's pending rate case implemented September 1, 1992. The certificate order itself is now on appeal. The Company is unable to predict the ultimate rate treatment of the $45 million cost of these facilities, but does not expect such treatment to have a material adverse effect on its financial position. On May 1, 1993, Southern implemented a general rate change, subject to refund, which increased its sales and transportation rates by approximately $57 million annually. The filing is designed to recover increased operating costs and to reflect the impact of competition on both Southern's level and mix of services. A hearing regarding various cost allocation and rate design issues in this proceeding is set for June 14, 1994. Sea Robin Pipeline Company has previously filed under the provisions of Order No. 500 to recover $83.1 million in gas purchase contract settlement payments from its former pipeline sales customers, Koch Gateway Pipeline Company, successor to United Gas Pipe Line Company (United), and Southern. Those filings remain subject to refund pending the outcome of any prudence challenges in the proceedings. Although the eligibility issues have been 78 resolved, one party has reserved its rights to challenge prudence until such time as certain take-or-pay allocation issues are resolved with respect to the flow-through of costs billed to United. Southern is authorized to flow through to its jurisdictional customers $38.1 million of the costs allocated to it by Sea Robin as well as the $32.7 million in Order No. 500 costs allocated to it by United. Southern's flow-through of United and Sea Robin's costs remains subject to refund pending the outcome of any challenges to the costs or allocation of the costs in those pipelines' Order No. 500 proceedings. The Company does not believe that the outcome of any such challenges will have a material adverse effect on its financial position. On July 2, 1993, the FERC issued an order reaffirming its approval of the non-take-or-pay aspects of a settlement filed by United in 1988, which included Southern's phased abandonment of its contract demand with United. The order rejected the take-or-pay aspects of the settlement, including United's proposed Order No. 528 allocation methodology. As a consequence, various parties that had originally supported the settlement are now contesting it. United has evidenced its intention to honor the non-take-or-pay aspects of the 1988 settlement and has induced several of the parties to withdraw their judicial appeals of the July 2 order. The Company does not believe that the final resolution of this matter will have a material adverse effect on its financial position. Gas Purchase Contracts-Gas purchase contract settlement payments (other than the gas supply realignment payments discussed below) made by Southern and not previously recovered or expensed are included on the Consolidated Balance Sheet at December 31, 1993, in "Current Assets." Pursuant to a final and nonappealable FERC order, Southern is entitled to collect these amounts from its customers over the remainder of a five-year period which commenced May 1, 1989. Southern currently is incurring essentially no take-or-pay liabilities under its gas purchase contracts. Southern regularly evaluates its position relative to gas purchase contract matters, including the likelihood of loss from asserted or unasserted take-or-pay claims or above-market prices. When a loss is probable and the amount can be reasonably estimated, it is accrued. Order No. 636-In 1992 the FERC issued its Order No. 636 (the Order). The Order requires significant changes in interstate natural gas pipeline services. Interstate pipeline companies, including Southern, are incurring certain costs (transition costs) as a result of the Order, the principal one being costs related to amendment or termination of existing gas purchase contracts, which are referred to as gas supply realignment (GSR) costs. The Order provides for the recovery of 100 percent of the GSR costs and other transition costs arising out of the implementation of the Order to the extent that the pipeline can prove that they were prudently incurred. Numerous parties have appealed 79 the Order to the Circuit Courts of Appeal. On September 3, 1993, the FERC generally approved a compliance plan for Southern and directed Southern to implement its restructured services pursuant to the Order on November 1, 1993 (the September 3 order). Pursuant to Southern's compliance plan, GSR costs that are eligible for recovery include payments to reform or terminate gas purchase contracts or, for contracts where Southern can show that it can minimize transition costs by continuing to purchase gas under the contract (i.e., it is more economic to continue to perform), the difference between the contract price and the higher of (a) the sales price for gas purchased under the contract, or (b) a price established by an objective index of spot-market prices. Recovery of these latter costs is permitted for an initial period of two years. Southern's compliance plan contains two mechanisms pursuant to which Southern is permitted to recover 100 percent of its GSR costs. The first mechanism is a monthly fixed charge designed to recover 90 percent of the GSR costs from Southern's firm transportation customers. The second mechanism is a volumetric surcharge designed to collect the remaining 10 percent of such costs from Southern's interruptible transportation customers. This funding will continue until the GSR costs are fully recovered or funded. The FERC also permitted Southern to file to recover any GSR costs not recovered through the volumetric surcharge after a period of two years. In addition, Southern's compliance plan provides for the recovery of other transition costs as they are incurred and any remaining transition costs may be recovered through a regular rate filing. The September 3 order rejected the argument of certain customers that a 1988 take-or-pay recovery settlement bars Southern from recovering GSR costs under gas purchase contracts executed before March 31, 1989. Those customers have filed motions urging the FERC to reverse its ruling on that issue. On December 16, 1993, the FERC affirmed its September 3 ruling with respect to the 1988 take-or-pay recovery settlement. The December 16 Order generally approved Southern's restructuring tariff submitted pursuant to the September 3 order. Various parties have filed motions urging the FERC to modify the December 16 Order and have sought judicial review of the September 3 order. Southern and its customers engaged in settlement discussions regarding Southern's restructuring filing prior to the September 3 order, but the parties were unable to reach a settlement. Those discussions are continuing. During 1993 Southern reached agreements to reduce significantly the price payable under a number of high cost gas purchase contracts in exchange for payments of approximately $114 million. On December 1, 1993, Southern filed to recover such costs and approximately $3 million of prefiling interest. On December 30, 1993, the FERC accepted such filing to become effective January 1, 1994, subject to refund, and subject to a determination that such costs 80 were prudently incurred and eligible under Order No. 636. The December 30 order rejected arguments of various parties that a pipeline's payments to affiliates, which represented approximately $34 million of the December 1, 1993 filing, may not be recovered under Order No. 636. In December 1993, Southern reached agreement to reduce the price under another contract in exchange for payments having a present value of approximately $52 million which is included in "Deferred Credits and Other" in the Consolidated Balance Sheet. Payments will be made in equal monthly installments over an eight-year period ending December 31, 2001. Southern expects to make a limited rate filing by mid-February 1994 to recover such costs beginning April 1, 1994. Southern has also incurred approximately $11 million of costs during November and December 1993 from continuing to purchase gas under contracts that are in excess of current market prices. Southern will make additional rate filings to recover these costs quarterly. The total costs of $180 million accrued through December 31, 1993, are included in current and long-term gas supply realignment costs in the Consolidated Balance Sheet. Southern is unable to predict all of the elements of the ultimate outcome of its Order No. 636 restructuring proceeding, its settlement discussions with its customers, and the limited rate filings to recover its transition costs. 10. CAPITAL STOCK On July 22, 1993, the Company's Board of Directors approved a two-for-one stock split which became effective September 14, 1993, to stockholders of record on August 31, 1993. All share, per share and dividend amounts reported in the Consolidated Financial Statements have been restated to reflect the two-for-one stock split. 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. 81 Price Range and Dividends Paid Per Common Share (Unaudited)
Quarter 1993 1992 ---- ---- Price Range High-Low First $28 11/16 - 21 5/8 $18 1/8 - 14 9/16 Second 33 5/8 - 27 1/8 19 1/4 - 14 15/16 Third 35 13/16 - 32 1/8 22 - 18 5/16 Fourth 36 1/2 - 26 3/8 24 1/8 - 19 9/16 Dividends Paid First $ .25 $ .25 Second .25 .25 Third .27 .25 Fourth .27 .25 ------ ------ $ 1.04 $ 1.00 ------ ------ Shareholders of Record at Year-End 13,040 13,700 ====== ======
The Company had no restrictions on the payment of dividends at December 31, 1993. The Company has a Stockholder Rights Plan designed to protect the interest of stockholders in the event of a hostile attempt to take over the Company and to make it more difficult for a person to gain control of the Company in a manner or on terms not approved by the Board of Directors. The rights under the Plan are redeemable at any time by the Company before the end of their 10-year term, February 3, 1996, so long as an entity has not acquired 20 percent or more of the Company. As of December 31, 1993, 92,675,535 shares of common stock were reserved for issuance under this Plan. The Company has a Restricted Stock Plan for non-employee members of the Board of Directors of Sonat Inc. Full rights vest over a maximum of five years. The Company issued 21,200 shares during 1993. At December 31, 1993, 13,860 of the 35,060 cumulative shares granted have vested. 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 82 (appreciation). The appreciation is payable in cash, common stock, or a combination of both. SARs are subject to the same terms and conditions as the options to which they are related. No SARs have been issued since 1990. At December 31, 1993, 392,134 SARs were outstanding. The Company issued 62,400 shares of restricted stock to employees during 1993. The shares generally vest 10 years from the date of grant, unless the closing price of the Company's common stock achieves certain specified levels. At December 31, 1993, 33,316 of the 246,300 cumulative restricted shares issued have vested. The following table summarizes option activities in the Plan:
Number of Shares Under Option Years Ended December 31, 1993 1992 1991 ---- ---- ---- Beginning of Year 3,889,154 3,191,082 2,257,050 Granted 989,700 956,200 1,047,800 Exercised (1,332,661) (198,592) (105,768) Forfeited (27,598) (59,536) (8,000) --------- --------- --------- End of Year 3,518,595 3,889,154 3,191,082 ========= ========= ========= Exercisable 2,245,556 2,050,612 1,632,478 ========= ========= ========= Outstanding Option Prices $12.0625-30.00 $11.5625-26.0625 $11.5625-26.0625 ============= =============== =============== Exercised Option Prices $12.0625-25.75 $ 11.5625-17.75 $ 19.0625-23.125 ============= ============= ============== Shares Authorized for Future Grants at Year-End 1,999,256 3,009,758 4,082,590 ========= ========= =========
Stock-based employee compensation decreased pretax income by $12.6 million in 1993, decreased pretax income by $9.3 million in 1992 and increased pretax income by $12.3 million in 1991. At December 31, 1993 and 1992, there were 10,000,000 shares of Preference Stock authorized, with none issued. 83 11. RETIREMENT PLANS AND OTHER POST EMPLOYMENT BENEFITS Retirement Plans-Sonat Inc. has a trusteed, non-contributory, tax qualified defined benefit retirement plan (the Retirement Plan) covering substantially all domestic employees of the Company. A supplemental benefit plan (the Supplemental Plan) that provides retirement benefits in excess of those allowed under the Company's tax qualified retirement plan is also in effect for the Company. Benefits under the plans are based on a combination of years of service and a percentage of compensation. Benefits are vested over five years. In connection with the Sonat Offshore divestiture, the qualified retirement plan assets and liabilities related to Sonat Offshore employees were transferred to a new, separate qualified retirement plan to be maintained by Sonat Offshore. As a result of splitting the plans, Sonat recorded a $4 million prepaid pension asset. For the Supplemental Plan, Sonat has retained the obligation to pay the supplemental benefit accrued through the date of the IPO for all of Sonat Offshore's current and retired employees. An additional $2.7 million liability was recorded by Sonat for this obligation. Sonat Offshore retains responsibility for the obligation to its employees' supplemental benefits subsequent to the date of the IPO. The Company determines the amount of funding to the Retirement Plan on a year-to-year basis, with amounts consistent with minimum and maximum funding requirements established by various governmental bodies. The trust established to provide benefits under the Supplemental Plan is being funded; however, this trust is not subject to any funding requirements. At December 31, 1993, this trust had assets with a fair market value of $33.5 million to pay benefits under the Supplemental Plan. The Company's net periodic pension cost included in continuing operations consists of the following components:
Years Ended December 31, 1993 1992 1991 ---- ---- ---- (In Thousands) Service Cost-Benefits Earned during the Period $ 9,722 $ 11,190 $ 13,634 Interest Cost on Projected Benefit Obligation 25,246 27,101 27,121 Gain on Assets (60,558) (22,495) (68,983) Net Amortization and Deferral 29,607 (10,004) 35,234 --------- --------- --------- $ 4,017 $ 5,792 $ 7,006 ========= ========= =========
84 For a limited period during 1993 and 1991, special early retirement programs were offered to certain employees. The total cost of the programs was $5.5 million and $12.2 million, respectively. All of the 1993 costs related to regulated operations and are deferred to be collected in future rates. The following table sets forth the assets and liabilities of the plans and the amount of the net pension liability recognized in the Company's Consolidated Balance Sheets.
Plans with Obligations Plans with Obligations Less than Assets (1) in Excess of Assets (2) December 31, December 31, 1993 1992 1993 1992 ---- ---- ---- ---- (In Thousands) Actuarial Present Value of Benefit Obligations: Vested benefit obligations $ 239,797 $ 264,821 $ 24,604 $ 22,874 Non-vested benefit obligations 12,848 13,251 491 688 --------- --------- --------- --------- Accumulated benefit obligations 252,645 278,072 25,095 23,562 Effect of projected future salary increases 76,096 88,099 3,750 4,362 --------- --------- --------- --------- Projected benefit obligations 328,741 366,171 28,845 27,924 Plan Assets at Fair Value (3) 383,000 394,728 - - --------- --------- --------- --------- Projected Benefit Obligations (in Excess of) or Less than Plan Assets 54,259 28,557 (28,845) (27,924) Unrecognized Net (Assets) or Obligations at Transition (4) (16,416) (29,775) 409 461 Unrecognized Net (Gain) Loss (50,542) (11,708) 5,740 6,063 Unrecognized Prior Service Cost 9,150 11,803 2,698 2,959 Net Unamortized Deferred Charge from Early Retirement Termination
85 Benefits (5) 5,401 1,923 984 3,323 ----------- --------- ----------- ----------- Net Pension Asset (Liability) Recognized in the Consolidated Balance Sheets $ 1,852 $ 800 $ (19,014) $ (15,118) =========== ========= =========== ===========
(1) The Retirement Plan. (2) The Supplemental Plan. (3) Plan assets consist of equity securities, commingled funds and debt securities. (4) Amortization periods for unrecognized net (asset) or obligation are 16.5 years for the Retirement Plan and 15 years for the Supplemental Plan. (5) Amortization periods for early retirement termination benefits are 10 years for the Retirement Plan and five years for the Supplemental Plan. Until July 1993, the Company set aside assets in fixed income securities such that values of those assets equal or exceed the present value of the Company's benefit obligations to current retirees (immunized obligations). After that date, a separate immunized portfolio has not been maintained. The assumed rates used to measure the projected benefit obligations and the expected earnings of plan assets are:
Years Ended December 31, 1993 1992 1991 ---- ---- ---- Weighted Average Discount Rate: Immunized obligations - 7.4% 7.4% Non-immunized obligations 7.0% 7.0% 7.0% Long-Term Rate of Return: Immunized assets - 7.4% 7.4% Non-immunized assets 9.0% 9.0% 9.0% Increase in Future Compensation Levels: Retirement and Supplemental Plans 6.0% 6.0% 7.0% ==== ==== ====
Other Post Employment Benefits-The Company has plans that provide for postretirement health care and life insurance benefits to substantially all of its domestic employees when they retire. The Company adopted Statement of Financial Accounting Standards (SFAS) No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," for all plans as of January 1, 1993. SFAS No. 106 requires companies to accrue the cost of postretirement health care and life insurance benefits within the employees' active service periods. The Company has elected to amortize the transition obligation over a 20-year period. The Company previously expensed the cost of its retiree medical benefits as they were paid. Expense for retiree life insurance 86 benefits was recognized as the Company funded its Retiree Life Insurance Plan. With respect to the Sonat Offshore IPO, Sonat Offshore will maintain responsibility for its retired employees for both health care and life insurance benefits. The portion of assets held by Sonat in a Continued Life Insurance Reserve fund that related to Sonat Offshore employees, $1.2 million, was transferred to Sonat Offshore during 1993. The annual net periodic cost for postretirement health care and life insurance benefits for the year ended December 31, 1993, includes the following components:
(In Thousands) Service Cost $ 2,109 Interest Cost 7,567 Return on Plan Assets (219) Net Amortization and Deferral 3,947 --------- $ 13,404 =========
Prior to the adoption of SFAS No. 106, the cost of providing health care and life insurance benefits was $5.1 million and $5.2 million in 1992 and 1991, respectively. Southern implemented rates effective May 1, 1993, which provide for the recovery of its $9.7 million share of the 1993 expense. Costs incurred in 1993 prior to that date, amounting to $2.6 million, were deferred to be amortized over a three-year period commencing when Southern's next rate case becomes effective. The Company funds its Retiree Life Insurance Plan with the amount of funding determined on a year-to-year basis with the objective of having assets equal plan liabilities. In addition, during 1993 the Company initiated funding of postretirement health care benefits for employees of its regulated subsidiaries in an amount generally equal to the subsidiaries' SFAS No. 106 expense. 87 The following table sets forth the funded status at December 31, 1993, and at the date of SFAS No. 106 adoption, January 1, 1993, for the Company's postretirement health care and life insurance plans:
December 31, January 1, 1993 1993 ---- ---- (In Thousands) Accumulated Postretirement Benefit Obligation: Retirees $ 69,421 $ 56,037 Fully eligible active plan participants 15,767 12,903 Other active plan participants 23,586 24,145 --------- --------- 108,774 93,085 Plan Assets at Fair Value (1) 11,050 8,100 --------- --------- Accumulated Postretirement Benefit Obligation in Excess of Plan Assets (97,724) (84,985) Unrecognized Transition Obligation 77,899 84,985 Unrecognized Net Loss 15,031 - --------- --------- Accrued Postretirement Benefit Cost $ (4,794) $ - ========= =========
(1) Plan assets are held in a life insurance reserve account and consist primarily of fixed income securities. The assumed rates used to measure the projected benefit obligation and the expected earnings of plan assets are:
December 31, January 1, 1993 1993 ---- ---- Discount Rate 7.0% 8.0% Long-Term Rate of Return: Medical assets 5.5% 6.5% Life insurance assets 7.0% 7.5% ==== ====
The rate of increase in the per capita costs of covered health care benefits is assumed to be 12.3 percent in 1994, decreasing gradually to 6 percent by the year 2002. Increasing the assumed health care cost trend rate 88 by 1 percentage point would increase the accumulated postretirement benefit obligation as of December 31, 1993, by approximately $8.9 million and increase the service cost and interest cost components of the net periodic postretirement benefit cost by approximately $.7 million. 12. BUSINESS SEGMENT AND GEOGRAPHIC AREA ANALYSIS The Company's financial statements reflect operations in three segments: Exploration and Production, Natural Gas Transmission and Marketing, and Offshore Drilling. The Exploration and Production segment is involved in exploration, development and production of domestic oil and natural gas. The principal activity of the Natural Gas Transmission and Marketing segment is the interstate transmission and sale of natural gas. The Offshore Drilling segment provides contract drilling services in offshore areas. The Sonat Offshore IPO closed on June 4, 1993; therefore, the offshore drilling information shown for 1993 reflects results from January 1, 1993, through June 4, 1993. The Company's share of Sonat Offshore's results for the period June 5, 1993, through December 31, 1993, is shown as equity in earnings of Sonat Offshore. Intersegment sales are primarily gas sales by the Exploration and Production segment and are generally priced at rates determined by market forces. Operating profit is revenues less operating expenses. In determining operating profit, none of the following items have been included: unallocated general corporate revenues and expenses, interest, dividend and other income, interest expense, income taxes and equity in earnings of unconsolidated affiliates. 89 Business Segment Analysis
Years Ended December 31, 1993 1992 1991 ---- ---- ---- (In Thousands) Revenues: Exploration and production $ 353,018 $ 279,161 $ 269,628 Natural gas transmission and marketing 1,437,321 1,061,564 1,039,691 Offshore drilling 108,244 209,694 173,303 Other 5,658 12,711 8,001 Intersegment revenue (163,094) (78,707) (69,660) ---------- ---------- ---------- $1,741,147 $1,484,423 $1,420,963 ========== ========== ========== Depreciation, Depletion and Amortization Expense: Exploration and production $ 149,179 $ 107,537 $ 95,951 Natural gas transmission and marketing 66,448 76,335 61,854 Offshore drilling 8,903 28,082 24,593 Other, including depreciation of corporate equipment 1,459 1,923 4,296 ---------- ---------- ---------- $ 225,989 $ 213,877 $ 186,694 ========== ========== ========== Operating Profit: Exploration and production $ 86,474 $ 54,033 $ 45,200 Natural gas transmission and marketing 143,461 151,354 140,423 Offshore drilling 2,307 7,293 21,773 Other 2,170 90 2,577 ---------- ---------- ---------- Operating profit 234,412 212,770 209,973 Corporate Expenses (1,497) (1,679) (6,500) ---------- ---------- ---------- Operating income 232,915 211,091 203,473 Equity in Earnings of Unconsolidated Affiliates: Exploration and production 4,665 1,778 151 Natural gas transmission and marketing 2,189 (628) 5,690 Offshore drilling 4,205 1,750 2,112
90 Other 1,306 1,232 994 Other Income, Net 169,720 17,904 5,744 Interest Expense, Net (47,272) (96,358) (117,678) ---------- ---------- ---------- Income from Continuing Operations before Extraordinary Item and Income Taxes $ 367,728 $ 136,769 $ 100,486 ========== ========== ==========
Financial instruments, which potentially subject the Company to concentration of credit risks, consist principally of accounts receivables. Customers of the Exploration and Production segment include primarily oil and gas marketing companies and also pipeline companies. Revenues and accounts receivable of the Natural Gas Transmission and Marketing segment relate to business conducted with gas distribution companies, municipalities, gas districts, industrial customers and other interstate pipeline companies in the Southeast. The Company performs ongoing credit evaluations of its customers' financial condition and, in some circumstances, requires collateral from its customers. Revenues from the Major Unaffiliated Customers of the Natural Gas Transmission & Marketing Segment
Years Ended December 31, 1993 1992 1991 ---- ---- ---- (In Thousands) Atlanta Gas Light $ 352,866 $ 312,361 $ 357,731 Alabama Gas Corporation 204,558 161,779 145,698 ========== ========== ==========
Capital expenditures for unconsolidated affiliates are accounted for on the books of the unconsolidated affiliates and therefore are not reflected in the totals appearing in the Company's consolidated financial statements. 91 Capital Expenditures by Business Segment
Years Ended December 31, 1993 1992 1991 ---- ---- ---- (In Thousands) Consolidated: Exploration and production $ 430,852 $ 156,418 $ 275,855 Natural gas transmission and marketing 61,012 43,796 112,245 Offshore drilling 5,095 12,919 20,381 Measurement-while-drilling - 10,673 61,118 Other 19,507 1,960 8,226 ---------- ---------- ---------- 516,466 225,766 477,825 ---------- ---------- ---------- Unconsolidated Affiliates (Company's Portion): Exploration and production 10,559 37,415 60 Natural gas transmission and marketing 18,516 11,988 56,365 Offshore drilling 1,914 683 4,292 Other 1,166 1,489 1,003 ---------- ---------- ---------- 32,155 51,575 61,720 ---------- ---------- ---------- $ 548,621 $ 277,341 $ 539,545 ========== ========== ==========
Identifiable assets by business and geographic area are those assets that are used in the Company's operations in each business and location. Corporate assets are typically investments, cash and equipment. Assets by Business Segment
December 31, 1993 1992 1991 ---- ---- ---- (In Thousands) Identifiable Assets: Exploration and production $1,308,189 $1,034,678 $ 994,689 Natural gas transmission and marketing 1,400,796 1,297,945 1,333,990 Offshore drilling - 350,999 356,509 Measurement-while-drilling - - 250,619 Other 42,640 16,705 25,507 Adjustments and eliminations (86,159) (64,566) (34,995) ---------- ---------- ---------- 2,665,466 2,635,761 2,926,319 ---------- ---------- ----------
92 Investments in Unconsolidated Affiliates: Exploration and production 6,345 26,898 4,331 Natural gas transmission and marketing 150,069 155,526 163,302 Offshore drilling 125,335 61,127 58,771 Other 13,472 12,136 4,448 ---------- ---------- ---------- 295,221 255,687 230,852 Corporate Assets 253,310 273,884 51,281 ---------- ---------- ---------- Total Assets $3,213,997 $3,165,332 $3,208,452 ========== ========== ==========
Revenues and operating profit from continuing operations of domestic and foreign operations have been computed consistent with the methods previously discussed. Foreign operations were conducted by the Company's offshore drilling subsidiary. The following table summarizes by domestic and foreign areas revenues, operating profit and equity in earnings of unconsolidated affiliates by year and identifiable assets and investments in unconsolidated affiliates by domestic and foreign areas at the end of each year. Geographic Area Analysis
Years Ended December 31, 1993 1992 1991 ---- ---- ---- (In Thousands) Revenues: Domestic $1,655,380 $1,322,064 $1,329,086 Foreign 85,767 162,359 91,877 ---------- ---------- ---------- $1,741,147 $1,484,423 $1,420,963 ========== ========== ========== Operating Profit: Domestic $ 226,756 $ 202,276 $ 193,496 Foreign 7,656 10,494 16,477 ---------- ---------- ---------- Operating profit 234,412 212,770 209,973 Corporate Expenses (1,497) (1,679) (6,500) ---------- ---------- ---------- Operating income 232,915 211,091 203,473
93 Equity in Earnings (Loss) of Unconsolidated Affiliates: Domestic 12,657 2,382 6,835 Foreign (292) 1,750 2,112 Other Income, Net 169,720 17,904 5,744 Interest Expense, Net (47,272) (96,358) (117,678) ---------- ---------- ---------- Income from Continuing Operations before Extraordinary Item and Income Taxes $ 367,728 $ 136,769 $ 100,486 ========== ========== ========== Identifiable Assets: Domestic $2,665,466 $2,354,875 $2,669,423 Foreign - 280,886 256,896 ---------- ---------- ---------- 2,665,466 2,635,761 2,926,319 ---------- ---------- ---------- Investments in Unconsolidated Affiliates: Domestic 295,221 194,560 172,081 Foreign - 61,127 58,771 ---------- ---------- ---------- 295,221 255,687 230,852 Corporate Assets 253,310 273,884 51,281 ---------- ---------- ---------- Total Assets $3,213,997 $3,165,332 $3,208,452 ========== ========== ==========
Foreign cash equivalents amounted to $18.4 million and $9.7 million at December 31, 1992 and 1991, respectively. 13. OIL AND GAS OPERATIONS (Unaudited) At December 31, 1993, the Company had interests in oil and gas properties that are located primarily in Texas, Louisiana, Arkansas, Oklahoma, Alabama, and offshore Louisiana and Texas, in the Gulf of Mexico. The Company does not own or lease any oil and gas properties outside the United States. In October 1993, the Company purchased Prudential Insurance Company's interest in Sonat/P, whereby the partnership was subsequently dissolved. (See Note 5.) 94 Capitalized costs relating to oil and gas producing activities and related accumulated depreciation, depletion and amortization were as follows: Capitalized Costs
December 31, 1993 1992 ---- ---- (In Thousands) Oil and Gas Properties: Proved properties $1,935,450 $1,602,479 Unproved properties 142,404 98,115 ---------- ---------- 2,077,854 1,700,594 Less Accumulated Depreciation, Depletion and Amortization 853,634 776,026 ---------- ---------- $1,224,220 $ 924,568 ========== ========== Sonat's Share of Sonat/P's Net Capitalized Costs $ - $ 34,621 ========== ==========
Costs incurred in oil and gas producing activities were as follows:
Costs Incurred Years Ended December 31, 1993 1992 1991 ---- ---- ---- (In Thousands) Property Acquisition Costs: Proved properties $ 211,933 $ 14,253 $ 137,697 Unproved properties 62,617 11,975 8,534 Exploration Costs 8,265 7,017 7,408 Development Costs 151,875 126,265 124,225 ---------- ---------- ---------- Total Costs $ 434,690 $ 159,510 $ 277,864 ========== ========== ========== Sonat's Share of Sonat/P's Costs of Property Acquisition, Exploration, and Development $ 10,432 $ 37,053 $ - ========== ========== ==========
95 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
December 31, 1993 1992 1991 Oil- Gas- Oil- Gas- Oil- Gas- Thousand Billion Thousand Billion Thousand Billion Bbls. Cu. Ft. Bbls. Cu. Ft. Bbls. Cu. Ft. -------- ------- -------- ------- -------- ------- Proved (Developed and Undeveloped) Reserves, Net: Beginning of year 19,604 974.9 19,125 1,077.9 18,221 905.2 Revisions of previous estimates 2,410 (6.2) 1,987 1.1 2,227 10.3 Transfer of Sonat/P reserves 426 39.5 - - - - Extensions, discoveries and other additions 2,470 68.7 1,790 41.0 631 44.5 Purchases of reserves in place 6,396 274.7 525 34.6 3,868 247.8 Sales of reserve in place (468) (18.9) (735) (54.0) (1,774) (13.5) Production (3,744) (146.1) (3,088) (125.7) (4,048) (116.4) ------ ------- ------- ------- ------ ------- End of Year 27,094 1,186.6 19,604 974.9 19,125 1,077.9 ====== ======= ======= ======= ====== ======= Proved Developed Reserves Beginning of year 15,304 696.5 15,745 658.7 13,382 540.4 End of year 19,776 899.6 15,304 696.5 15,745 658.7 ====== ======= ======= ======= ====== ======= Sonat's Proportional Intet in: Proved reserves Sonat/P end of year - - 540 53.1 - - Production of Sonat/P 34 4.2 9 1.3 - - ====== ======= ======= ======= ====== =======
96 The significant changes to reserves, other than acquisitions, dispositions or production, are due to reservoir performance in existing fields, drilling of additional wells in existing fields and development of new fields. No major discovery or other event, favorable or adverse, that may be considered to have caused a significant change in the estimated proved reserves, has occurred since December 31, 1993. Results of operations from producing activities by fiscal year were as follows: Results of Operations
Years Ended December 31, 1993 1992 1991 ---- ---- ---- (In Thousands) Net Revenues: Sales $ 200,143 $ 211,339 $ 201,725 Transfers to affiliates 151,987 62,095 58,880 --------- --------- --------- Total 352,130 273,434 260,605 Production Costs (64,548) (55,565) (62,978) Exploration Expenses (6,678) (5,125) (4,400) Depreciation, Depletion and Amortization (149,179) (107,537) (95,951) --------- --------- --------- 131,725 105,207 97,276 Income Tax Expense (27,066) (21,839) (24,581) --------- --------- --------- Results of Operations from Producing Activities (Excluding Corporate Overhead and Interest Costs) $ 104,659 $ 83,368 $ 72,695 ========= ========= ========= Sonat's Share of Sonat/P's Results of Operations for Producing Activities (before Tax) $ 4,900 $ 1,689 $ - ========= ========= =========
97 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
December 31, 1993 1992 1991 ---- ---- ---- (In Thousands) Future Cash Inflows $3,051,484 $2,483,976 $2,514,200 Future Production and Development Costs (1,044,410) (816,706) (867,646) Future Income Tax Expenses (236,632) (180,754) (233,328) Future Net Cash Flows 1,770,442 1,486,516 1,413,226 10% Annual Discount for Estimated Timing of Cash Flows (477,824) (489,043) (409,111) ---------- ---------- ---------- Standardized Measure of Discounted Future Net Cash Flows $1,292,618 $ 997,473 $1,004,115 ========== ========== ========== Sonat's Share of Sonat/P's Standardized Measure of Discounted Future Net Cash Flows (before Tax) $ - $ 48,677 $ - ========== ========== ==========
For the calculations in the preceding table, estimated future cash inflows from estimated future production of proved reserves were computed using average year-end oil and gas prices. 98 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
Years Ended December 31, 1993 1992 1991 ---- ---- ---- (In Thousands) Sales and Transfers of Oil and Gas Produced, Net of Production Costs $(287,583) $(217,869) $(202,485) Net Changes in Prices and Production Costs (25,100) 81,509 (352,132) Extensions, Discoveries and Improved Recovery, Less Related Costs 87,185 44,226 40,181 Transfer of Sonat/P Reserves 44,209 - - Changes in Estimated Future Development Costs (17,179) (527) (25,370) Development Costs Incurred During the Period 47,278 52,817 53,000 Revisions of Previous Quantity Estimates 8,572 13,973 23,408 Accretion of Discount 103,689 102,663 120,375 Net Change in Income Taxes (34,751) 13,767 126,302 Purchases of Reserves in Place 317,764 31,791 242,411 Sales of Reserves in Place (17,159) (55,606) (26,490) Changes in Production Rates (Timing) and Other 68,220 (73,386) (49,955) --------- --------- --------- $ 295,145 $ (6,642) $ (50,755) ========= ========= =========
99 14. QUARTERLY RESULTS (Unaudited) Shown below are selected unaudited quarterly data.
1st 2nd 3rd 4th Quarter Quarter Quarter Quarter ------- ------- ------- ------- (In Thousands, Except Per-Share Amounts) 1993 (1) Revenues $ 496,913 $ 356,492 $ 324,546 $ 563,196 Operating Income 83,102 43,682 44,273 61,858 Income from Continuing Operations before Extraordinary Item 68,923 125,865 20,294 49,987 Loss from Extraordinary Item (3,829) - - - Net Income 65,094 125,865 20,294 49,987 ========= ========= ========= ========= Earnings Per Share: Earnings from continuing operations before extraordinary item $ .80 $ 1.45 $ .23 $ .57 Loss from extraordinary item (.04) - - - --------- --------- --------- --------- Earnings Per Share $ .76 $ 1.45 $ .23 $ .57 ========= ========= ========= ========= 1992 (2) Revenues $ 419,977 $ 295,586 $ 299,662 $ 469,198 Operating Income 78,437 15,509 51,525 65,620 Income (Loss) from Continuing Operations 42,944 (4,165) 21,252 40,931 Income (Loss) from Discontinued Operations 292 111,915 - (760) Net Income 43,236 107,750 21,252 40,171 ========= ========= ========= ========= Earnings Per Share: Earnings (loss) from continuing operations $ .50 $ (.05) $ .25 $ .48 Earnings (loss) from discontinued operations - 1.30 - (.01) --------- --------- --------- --------- Earnings Per Share $ .50 $ 1.25 $ .25 $ .47 ========= ========= ========= =========
100 (1) Net income for the second quarter of 1993 includes a gain of $99.7 million, or $1.15 per share, from the closing of the initial public offering of Sonat Offshore Drilling Inc. common stock. Net income also includes a net gain of $21 million, or $.24 per share, related to the settlement of an examination of the Company's federal income tax returns from 1983 through 1985 and other tax issues. The third quarter of 1993 includes a loss of $12 million, or $.14 per share, due to the Omnibus Budget Reconciliation Act of 1993 which increased corporate and personal income tax rates. Net income also included favorable income tax adjustments of $4 million, or $.05 per share. Net income for the fourth quarter of 1993 includes favorable income tax adjustments of $3 million, or $.03 per share. (2) Income from discontinued operations for the second quarter of 1992 includes the gain on the sale of Teleco Oilfield Services Inc. of $112.8 million or $1.30 per share. Also, net income includes a loss of $3 million, or $.03 per share, relating to restructuring charges. Net income for the third quarter of 1992 includes favorable adjustments of $6 million related to a settlement regarding Southern Energy Company's idle liquefied natural gas facilities and a loss for the Company's share of Citrus Corp.'s recognition of natural gas purchase contract settlement costs of $3.4 million, for a total favorable impact of $.04 per share. Net income for the fourth quarter of 1992 includes a loss for the Company's share of Citrus Corp.'s recognition of natural gas purchase contract settlement costs of $1.3 million or $.01 per share. 101 SELECTED CONSOLIDATED FINANCIAL DATA (1)
1993 1992 1991 1990 1989 1988 1987 1986 ---- ---- ---- ---- ---- ---- ---- ---- (In Millions, Except Per Share Amounts) Revenues $1,741.1 $1,484.4 $1,421.0 $1,356.9 $1,659.2 $1,277.3 $1,344.9 $1,628.6 Costs and Expenses 1,508.2 1,273.3 1,217.5 1,192.2 1,481.4 1,142.4 1,176.5 1,929.3 -------- -------- -------- -------- -------- -------- -------- -------- Operating Income (Loss) 232.9 211.1 203.5 164.7 177.8 134.9 168.4 (300.7) Other Income (Expense), Net 182.1 22.0 14.7 69.8 47.1 12.5 41.5 118.1 Interest Expense, Net (47.3) (96.3) (117.7) (102.6) (75.2) (54.4) (54.6) (77.9) -------- -------- -------- -------- -------- -------- -------- -------- Income (Loss) from Continuing Operations before Extraordinary Item and Income Taxes 367.7 136.8 100.5 131.9 149.7 93.0 155.3 (260.5) Income Taxes (Benefits) 102.7 35.8 22.6 40.7 54.1 40.5 85.2 (144.7) -------- -------- -------- -------- -------- -------- -------- -------- Income (Loss) from Continuing Operations before Cumulative Effect of Accounting Changes 265.0 101.0 77.9 91.2 95.6 52.5 70.1 (115.8) Income (Loss) from Discontinued Operations (2) - 111.4 (11.9) 2.7 (2.0) 2.2 24.9 (73.6) Loss from Extraordinary Item (3) (3.8) - - - - - - - Cumulative Effect of Change in Method of Accounting for Investment Tax Credits - - - - - - - - Cumulative Effect of Change in Method of Accounting for Income Taxes - - - - - 13.1 - - -------- -------- -------- -------- -------- -------- -------- -------- Net Income (Loss) $ 261.2 $ 212.4 $ 66.0 $ 93.9 $ 93.6 $ 67.8 $ 95.0 $ (189.4) ======== ======== ======== ======== ======== ======== ======== ========= 1985 1984 1983 ---- ---- ---- Revenues $2,258.6 $2,380.9 $2,549.1 Costs and Expenses 2,225.2 2,050.8 2,205.2 -------- -------- -------- Operating Income (Loss) 33.4 330.1 343.9 Other Income (Expense), Net 5.2 (1.3) 18.7 Interest Expense, Net (47.9) (30.0) (47.5) --------- -------- -------- Income (Loss) from Continuing Operations before Extraordinary Item and Income Taxes (9.3) 298.8 315.1 Income Taxes (Benefits) (13.0) 136.9 136.4 -------- -------- -------- Income (Loss) from Continuing Operations before Cumulative Effect of Accounting Changes 3.7 161.9 178.7 Income (Loss) from Discontinued Operations (2) (14.1) 35.1 9.1 Loss from Extraordinary Item (3) - - - Cumulative Effect of Change in Method of Accounting for Investment Tax Credits 62.4 - - Cumulative Effect of Change in Method of Accounting for Income Taxes - - - -------- -------- -------- Net Income (Loss) $ 52.0 $ 197.0 $ 187.8 ======== ======== ========
102
1993 1992 1991 1990 1989 ---- ---- ---- ---- ---- Earnings (Loss) Per Share from Continuing Operations before Extraordinary Item $ 3.05 $ 1.17 $ .91 $ 1.07 $ 1.17 Earnings (Loss) Per Share $ 3.01 $ 2.47 $ .77 $ 1.10 $ 1.15 Weighted Average Shares Outstanding (thousands) 86,703 85,945 85,771 85,612 81,682 Dividends Paid Per Share $ 1.04 $ 1.00 $ 1.00 $ 1.00 $ 1.00 ========= ========= ========= ========= ========= Assets $ 3,214.0 $ 3,165.3 $ 3,208.5 $ 3,045.1 $ 2,892.3 Debt Maturing within One Year $ 232.9 $ 20.1 $ 79.2 $63.1 $ 155.9 Long-Term Debt 741.2 1,175.7 1,315.1 1,094.0 929.5 Stockholders' Equity 1,363.2 1,172.3 1,042.7 1,060.5 1,035.3 --------- --------- --------- --------- --------- Total Capitalization $ 2,337.3 $ 2,368.1 $ 2,437.0 $ 2,217.6 $ 2,120.7 ========= ========= ========= ========= ========= 1988 1987 1986 1985 1984 1983 ---- ---- ---- ---- ---- ---- Earnings (Loss) Per Share from Continuing Operations before Extraordinary Item $ .65 $ .87 $ (1.43) $ .05 $ 2.00 $ 2.21 Earnings (Loss) Per Share $ .83 $ 1.17 $ (2.34) $ .64 $ 2.44 $ 2.32 Weighted Average Shares Outstanding (thousands) 81,238 80,912 80,948 80,916 80,902 80,896 Dividends Paid Per Share $ 1.00 $ 1.00 $ 1.00 $ .9625 $ .85 $ .7125 ========= ========= ========= ========= ========= ========= Assets $ 2,969.5 $ 3,074.4 $ 3,288.8 $ 3,413.2 $ 3,392.5 $ 3,010.0 Debt Maturing within One Year $ 50.4 $225.6 $ 104.6 $ 150.7 $ 20.1 $ 27.6 Long-Term Debt 859.4 824.8 1,336.3 996.2 810.8 630.3 Stockholders' Equity 1,010.2 1,023.0 1,005.9 1,276.3 1,301.5 1,173.3 --------- --------- --------- --------- --------- --------- Total Capitalization $ 1,920.0 $ 2,073.4 $ 2,446.8 $ 2,423.2 $ 2,132.4 $ 1,831.2 ========= ========= ========= ========= ========= =========
Notes: (1) All earnings per share amounts and dividend amounts reflect a two-for-one stock split effective September 14, 1993. (2) Discontinued operations include the measurement-while-drilling businesses as of 1991, the marine transportation and underwater services businesses as of 1986, and the forest products business as of 1984. (3) In March 1993, the Company recognized a loss on the redemption of the Company's 7 1/4 Percent Zero Coupon, Subordinated Convertible Notes which were due September 6, 2005. 103 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-38 104 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 16, 1994 (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 headings "Ownership of Common Stock by Directors and Executive Officers" and "Institutional Ownership of Common Stock" in the Proxy Statement, which information is hereby incorporated by reference herein. A copy of the Proxy Statement is filed as an exhibit to this report on Form 10-K. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information regarding certain relationships and related transactions required by Item 404 of Regulation S-K is presented under the heading "Certain Business Relationships and Transactions" in the Proxy Statement, which information is hereby incorporated by reference herein. A copy of the Proxy Statement is filed as an exhibit to this report on Form 10-K. III-1 105 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
PAGE ----- Included in Part II of this report: Report of Ernst & Young, Independent Auditors...................................... II-13 Consolidated Balance Sheets at December 31, 1993 and 1992.......................... II-14 Consolidated Statements of Income for the years ended December 31, 1993, 1992, and 1991............................................................................ II-16 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1993, 1992, and 1991............................................... II-17 Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1992, and 1991........................................................................ II-18 Notes to Consolidated Financial Statements......................................... II-19
2. FINANCIAL STATEMENT SCHEDULES
PAGE ----- Included in Part IV of this report: Consolidated Schedules for each of the three years in the period ended December 31, 1993: V -- Plant, Property and Equipment.............................................. IV-8 VI -- Accumulated Depreciation, Depletion and Amortization of Plant, Property and Equipment.................................................................. IV-11 IX -- Short-Term Borrowings..................................................... IV-14 X -- Supplementary Income Statement Information................................. IV-15 Consolidated Financial Statements and Financial Statement Schedules of Citrus Corp. (50-percent-owned joint venture) at December 31, 1993, listed on Page IV-17..... IV-17
All other schedules have been omitted as the subject matter is either not present or is not present in amounts sufficient to require submission of the schedule, in accordance with the instructions contained in Regulation S-X, or the required information is included in the financial statements or notes thereto. Financial statements of 50-percent or less owned companies and joint ventures, other than Citrus Corp., are not presented herein because such companies and joint ventures do not meet the significance test. 3. EXHIBITS (1)
NUMBER DESCRIPTION METHOD OF FILING - ------- ---------------------------------------------------- ---------------------------- RESTATED CERTIFICATE OF INCORPORATION AND BY-LAWS 3-(a) Restated Certificate of Incorporation of Sonat Inc. Filed as Exhibit 3-(1) to dated May 1, 1987 Form 10-K of Sonat Inc. for the year 1992
- --------------- (1) Sonat will furnish to requesting security holders any exhibit on this list upon the payment of a fee of 10 cents per page up to a maximum of $5.00 per exhibit. Requests must be made in writing and should be addressed to Beverley T. Krannich, Secretary, Sonat Inc., P.O. Box 2563, Birmingham, Alabama 35202. IV-1 106
NUMBER DESCRIPTION METHOD OF FILING - ------- ---------------------------------------------------- ---------------------------- 3-(b) By-Laws of Sonat Inc. as amended and in effect Filed as Exhibit 3-(2) to January 1, 1987 Form 10-K of Sonat Inc. for year 1992 INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS 4-(1) Rights Agreement dated January 23, 1986 between Filed as Exhibit 4-(1) to Sonat Inc. and Manufacturers Hanover Trust Company, Form 10-K of Sonat Inc. for as Rights Agent, with exhibits, as amended by year 1992 Amendment dated July 28, 1988 4-(2) Form of Indenture dated June 1, 1986 from Sonat Inc. Filed as Exhibit 4-(1) to to Manufacturers Hanover Trust Company, Trustee Amendment No. 1 to Registration No. 33-5947, dated June 4, 1986 4-(3) Form of Indenture dated June 1, 1987 from Southern Filed as Exhibit 4-(1) to Natural Gas Company to Manufacturers Hanover Trust Registration No. 33-47266 of Company, Trustee Southern Natural Gas Company dated April 16, 1992 4-(4) $400 Million Note Agreement dated November 3, 1986 Filed as Exhibit 4-(5) to between Citrus Corp. and the Purchasers named Form 10-K of Sonat Inc. for therein the year 1990 4-(5) Credit Agreement dated as of December 15, 1993 among Filed herewith Sonat Inc., the Banks named therein, and The Chase Manhattan Bank (National Association), Chemical Bank and Morgan Guaranty Trust Company of New York as Co-Agents PRINCIPAL SERVICE AGREEMENTS OF SOUTHERN NATURAL GAS COMPANY 10-(1) Form of Service Agreements, Nos. 866940, 866941 and Filed as Exhibit 10-(2) to S10710, between Southern Natural Gas Company and Form 10-Q of Sonat Inc. for Alabama Gas Corporation, effective November 1, 1993 the quarter ended September 30, 1993 10-(2) Form of Service Agreements, Nos. 868005, 868006 and Filed as Exhibit 10-(1) to S10730, between Southern Natural Gas Company and Form 10-Q of Sonat Inc. for Atlanta Gas Light Company, effective November 1, the quarter ended September 1993 30, 1993 10-(3) Form of Service Agreements, Nos. 867660, 867661 and Filed as Exhibit 10-(3) to S10019, between Southern Natural Gas Company and Form 10-Q of Sonat Inc. for South Carolina Pipeline Corporation, effective the quarter ended September November 1, 1993 30, 1993 COMPENSATION PLANS AND MANAGEMENT CONTRACTS 10-(4) Supplemental Benefit Plan of Sonat Inc. as Amended Filed herewith and Restated effective February 25, 1993 10-(5) Executive Award Plan of Sonat Inc. as Amended and Filed herewith Restated as of December 3, 1993 10-(6) Restricted Stock Plan for Directors of Sonat Inc. Filed herewith (as Amended and Restated as of September 15, 1993)
IV-2 107
NUMBER DESCRIPTION METHOD OF FILING - ------- ---------------------------------------------------- ---------------------------- 10-(7) Performance Award Plan of Sonat Inc. effective as of Filed herewith January 27, 1994 10-(8) Cash Bonus Plan of Sonat Inc. effective as of Filed herewith January 27, 1994 10-(9) Sonat Inc. Retirement Plan for Directors as Amended Filed as Exhibit 19-(2) to and Restated as of April 25, 1991 Form 10-Q of Sonat Inc. for the quarter ended March 31, 1991 10-(10) Executive Severance Agreement dated April 27, 1989 Filed as Exhibit 10-(14) to between Sonat Inc. and Ronald L. Kuehn, Jr. and (1) Form 10-K of Sonat Inc. for schedule identifying substantially identical the year 1989 except (1), Executive Severance Agreements between Sonat Inc. which is filed herewith and other parties 10-(11) Directors' Fees Deferral Plan of Sonat Inc. Filed as Exhibit 10-(14) to effective as of August 15, 1985 Form 10-K of Sonat Inc. for the year 1990 10-(12) Indemnity Agreement dated December 4, 1987 between Filed as Exhibit 10-(11) to Sonat Inc. and Ronald L. Kuehn, Jr. and schedule Form 10-K of Sonat Inc. for identifying substantially identical indemnity the year 1992 agreements between Sonat Inc. and other directors of Sonat Inc. 10-(13) Trust Agreement dated December 19, 1986 between Filed as Exhibit 10-(15) to Sonat Inc. and AmSouth Bank N.A. for Section 415 Form 10-K of Sonat Inc. for Retirement Plan Benefits and Vesting Benefits under the year 1991 the Supplemental Benefit Plan and Early Retirement Benefits under the Executive Severance Agreements 10-(14) Trust Agreement dated December 19, 1986 between Filed as Exhibit 10-(16) to Sonat Inc. and AmSouth Bank N.A. for Section 415 Form 10-K of Sonat Inc. for Stock Purchase Plan Benefits under the Supplemental the year 1991 Benefit Plan 10-(15) Trust Agreement dated December 19, 1986 between Filed as Exhibit 10-(17) to Sonat Inc. and AmSouth Bank N.A. for Benefits under Form 10-K of Sonat Inc. for the Retirement Plan for Directors the year 1991 10-(16) Form of Sonat Inc. Executive Life Insurance Program Filed as Exhibit 10-(20) to Split Dollar Agreement, Collateral Assignment Form 10-K of Sonat Inc. for Agreement and Program Description, each dated as of the year 1990 except (1) July 1, 1990, with (1) schedule identifying the which is filed herewith persons participating in such Programs OTHER MATERIAL CONTRACTS 10-(17) Service Agreement dated January 26, 1978 with Filed as Exhibit 10-(20) to Southern Energy Company Form 10-K of Sonat Inc. for the year 1991 10-(18) FERC Gas Tariff of Southern Energy Company, Filed as Exhibit 10-(21) to effective July 7, 1978 Form 10-K of Sonat Inc. for the year 1991 10-(19) Restated and Amended Joint Venture Agreement dated Filed as Exhibit 10-(22) to September 1, 1981 between Tennessee Storage Company Form 10-K of Sonat Inc. for and Southern Gas Storage Company forming Bear Creek the year 1991 Storage Company (with Appendices A-G)
IV-3 108
NUMBER DESCRIPTION METHOD OF FILING - ------- ---------------------------------------------------- ---------------------------- 10-(20) Service Agreement dated June 1, 1981 with Bear Creek Filed as Exhibit 10-(23) to Storage Company, and FERC Gas Tariff of Bear Creek Form 10-K of Sonat Inc. for Storage Company, effective July 1, 1981 the year 1991 10-(21) Parents Agreement dated September 15, 1981 from Filed as Exhibit 10-(25) to Southern Natural Gas Company and Tenneco Inc. in Form 10-K of Sonat Inc. for favor of Manufacturers Hanover Trust Company and T. the year 1991 C. Crane 10-(22) Capital Stock Agreement among Sonat Inc., Enron Filed as Exhibit 10-(26) to Corp., Houston Natural Gas Corporation and Citrus Form 10-K of Sonat Inc. for Corp. dated June 30, 1986 the year 1991 10-(23) Standby Note Purchase Agreement among Sonat Inc., Filed herewith Credit Lyonnais New York Branch, as Administrative Agent for the Banks party to the Revolving Credit Agreement with Citrus Corp., and Citrus Corp. dated December 23, 1993, and the $300 Million Revolving Credit Agreement dated as of December 23, 1993, among Citrus Corp., as Borrower, and The Banks named therein, as Banks, and Credit Lyonnais New York Branch and The Toronto-Dominion Bank, as Managing Agents, to which the Standby Note Purchase Agreement applies 11-(1) Sonat Inc. and Subsidiaries Computation of Earnings Filed herewith Per Share 21-(1) Subsidiaries of Sonat Inc. Filed herewith 22-(1) Proxy Statement of Sonat Inc. dated as of March 16, Filed herewith 1994 (which is not to be deemed "filed" as part of the Form 10-K, except to the extent incorporated by reference under Items 10, 11, 12 and 13 of Part III of the Form 10-K of Sonat Inc. for the year 1993) 23-(1) Consent of Ernst & Young, Independent Auditors dated Filed herewith March 25, 1994 24-(1) Powers of Attorney authorizing Ronald L. Kuehn, Jr.; Filed herewith Thomas W. Barker, Jr.; James A. Rubright; James E. Moylan, Jr.; and John C. Griffin to sign the Sonat Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 1993 on behalf of certain directors and officers of the registrant
IV-4 109 Exhibits listed above which 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 10 percent of the total assets of Sonat and its subsidiaries on a consolidated basis. Sonat agrees to furnish a copy of each such instrument to the Commission upon request. (b) Reports on Form 8-K There were no reports on Form 8-K filed during the quarter ended December 31, 1993. (c) Exhibits Exhibits required by Item 601 of Regulation S-K and filed with this report on Form 10-K accompany this report in a separate exhibit volume. IV-5 110 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 25, 1994 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.
SIGNATURE CAPACITY DATE - ----------------------------------------------- ---------------------------- --------------- (i) Principal Executive Officer: Chairman of the Board March 25, 1994 /s/ RONALD L. KUEHN, JR. President and - ----------------------------------------------- Chief Executive Officer RONALD L. KUEHN, JR. (ii) Principal Financial Officer: /s/ THOMAS W. BARKER, JR. Vice President -- Finance March 25, 1994 - ----------------------------------------------- and Treasurer THOMAS W. BARKER, JR. Principal Accounting Officer: /s/ JAMES E. MOYLAN, JR. Vice President and March 25, 1994 - ----------------------------------------------- Controller JAMES E. MOYLAN, JR. (iii) Directors: RONALD L. KUEHN, JR.* March 25, 1994 - ----------------------------------------------- RONALD L. KUEHN, JR. WILLIAM O. BOURKE* March 25, 1994 - ----------------------------------------------- WILLIAM O. BOURKE JOHN J. CREEDON* March 25, 1994 - ----------------------------------------------- JOHN J. CREEDON ROBERTO C. GOIZUETA* March 25, 1994 - ----------------------------------------------- ROBERTO C. GOIZUETA
IV-6 111
SIGNATURE CAPACITY DATE - ----------------------------------------------- ---------------------------- --------------- ROBERT J. LANIGAN* March 25, 1994 - ----------------------------------------------- ROBERT J. LANIGAN HENRY R. LINDEN* March 25, 1994 - ----------------------------------------------- HENRY R. LINDEN CHARLES MARSHALL* March 25, 1994 - ----------------------------------------------- CHARLES MARSHALL BENJAMIN F. PAYTON* March 25, 1994 - ----------------------------------------------- BENJAMIN F. PAYTON JOHN J. PHELAN, JR.* March 25, 1994 - ----------------------------------------------- JOHN J. PHELAN, JR. JEROME J. RICHARDSON* March 25, 1994 - ----------------------------------------------- JEROME J. RICHARDSON L. EDWIN SMART* March 25, 1994 - ----------------------------------------------- L. EDWIN SMART JAMES B. WILLIAMS* March 25, 1994 - ----------------------------------------------- JAMES B. WILLIAMS JOE B. WYATT* March 25, 1994 - ----------------------------------------------- JOE B. WYATT *By /s/ JAMES A. RUBRIGHT - ----------------------------------------------- JAMES A. RUBRIGHT VICE PRESIDENT AND GENERAL COUNSEL AS AUTHORIZED BY CERTAIN POWERS OF ATTORNEY DATED FEBRUARY 24, 1994, AND ONE DATED FEBRUARY 27, 1994, ALL OF WHICH ARE FILED HEREWITH AS EXHIBIT 24-(1)
IV-7 112 REPORT OF INDEPENDENT AUDITORS We have audited the accompanying consolidated financial statements of Sonat Inc. and Subsidiaries as of December 31, 1993 and 1992, and for each of the three years in the period ended December 31, 1993, and have issued our report thereon dated January 20, 1994 (included elsewhere in this Annual Report). Our audits also included the financial statement schedules listed in Item 14(a)2 of this Annual Report. 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. /s/ Ernst & Young ERNST & YOUNG Birmingham, Alabama January 20, 1994 113 SONAT INC. AND SUBSIDIARIES SCHEDULE V - PLANT, PROPERTY AND EQUIPMENT YEAR ENDED DECEMBER 31, 1993
Other Changes Balance at Additions Retirements Debit or Balance at Classification Jan. 1, 1993 at Cost(a) or Sales (Credit) Dec. 31, 1993 -------------- ------------ ------------ ----------- ----------- ------------- (In Thousands) Exploration and Production: Plant, property and equipment $1,656,134 $442,872 $100,263 $ 46,671(c) $2,045,414 Construction work in progress 44,460 (12,020) - - 32,440 ---------- -------- -------- -------- ---------- Total Exploration and Production 1,700,594 430,852 100,263 46,671 2,077,854 ---------- -------- -------- -------- ---------- Natural Gas Transmission and Marketing: Plant, property and equipment 2,076,782 35,965 18,126 1,156 2,095,777 Gas stored underground - noncurrent 66,681 5,631 - 69,380(d) 141,692 Construction work in progress 4,135 19,416 - - 23,551 ---------- -------- -------- -------- ---------- Total Natural Gas Transmission and Marketing 2,147,598 61,012 18,126 70,536 2,261,020 ---------- -------- -------- -------- ---------- Offshore Drilling: Plant, property and equipment 647,316 2,543 649,859(b) - - Construction work in progress 414 2,552 2,966 - - ---------- -------- -------- -------- ---------- Total Offshore Drilling 647,730 5,095 652,825 - - ---------- -------- -------- -------- ---------- Other 48,556 19,507 5,772 (879) 61,412 ---------- -------- -------- -------- ---------- Total Plant, Property and Equipment $4,544,478 $516,466 $776,986 $116,328 $4,400,286 ========== ======== ======== ======== ==========
(a) Additions include $4,516,000 of funds capitalized. (b) Reflects the removal of fixed assets due to the Initial Public Offering of Sonat Offshore Drilling Inc. common stock. (See Note 3 of the Notes to Consolidated Financial Statements located in Item 8.) (c) Reflects the acquisition of the remaining interest in Sonat/P Anadarko Limited Partnership. (See Note 5 of the Notes to Consolidated Financial Statements located in Item 8.) (d) Reflects the transfer of current working storage to noncurrent pursuant to Order No. 636. (See Notes 4 and 9 of the Notes to Consolidated Financial Statements located in Item 8.) 114 SONAT INC. AND SUBSIDIARIES SCHEDULE V - PLANT, PROPERTY AND EQUIPMENT - (CONTINUED) YEAR ENDED DECEMBER 31, 1992
Other Changes Balance at Additions Retirements Debit or Balance at Classification Jan. 1, 1992 at Cost(a)(b) or Sales (Credit)(d) Dec. 31, 1992 -------------- ------------ ------------- ----------- ----------- ------------- (In Thousands) Exploration and Production: Plant, property and equipment $1,683,508 $125,035 $152,908 $ 499 $1,656,134 Construction work in progress 13,077 31,383 - - 44,460 ---------- -------- -------- -------- ---------- Total Exploration and Production 1,696,585 156,418 152,908 499 1,700,594 ---------- -------- -------- -------- ---------- Natural Gas Transmission and Marketing: Plant, property and equipment 2,042,056 47,044 18,321 6,003 2,076,782 Gas stored underground - noncurrent 63,808 2,873 - - 66,681 Construction work in progress 10,256 (6,121) - - 4,135 ---------- -------- -------- -------- ---------- Total Natural Gas Transmission and Marketing 2,116,120 43,796 18,321 6,003 2,147,598 ---------- -------- -------- -------- ---------- Offshore Drilling: Plant, property and equipment 638,790 12,852 4,326 - 647,316 Construction work in progress 347 67 - - 414 ---------- -------- -------- -------- ---------- Total Offshore Drilling 639,137 12,919 4,326 - 647,730 ---------- -------- -------- -------- ---------- Measurement-While-Drilling: Plant, property and equipment 241,299 46,196 287,495(c) - - Construction work in progress 35,523 (35,523) - - - ---------- -------- -------- -------- ---------- Total Measurement-While Drilling 276,822 10,673 287,495 - - ---------- -------- -------- -------- ---------- Other 46,944 1,960 918 570 48,556 ---------- -------- -------- -------- ---------- Total Plant, Property and Equipment $4,775,608 $225,766 $463,968 $ 7,072 $4,544,478 ========== ======== ======== ======== ==========
(a) Additions include $8,941,000 of funds capitalized. (b) Additions include purchases of assets as described in the Notes to Consolidated Financial Statements located in Item 8. (c) Reflects the sale of Teleco Oilfield Services Inc. (See Note 3 of the Notes to Consolidated Financial Statements located in Item 8.) (d) Other changes include transfers and reclassifications between plant and property and other accounts. 115 SONAT INC. AND SUBSIDIARIES SCHEDULE V - PLANT, PROPERTY AND EQUIPMENT - (CONTINUED) YEAR ENDED DECEMBER 31, 1991
Other Changes Balance at Additions Retirements Debit or Balance at Classification Jan. 1, 1991 at Cost(a)(b) or Sales (Credit)(c) Dec. 31, 1991 -------------- ------------ ------------- ----------- -------- ------------- (In Thousands) Exploration and Production: Plant, property and equipment $1,414,046 $350,420 $ 78,771 $(2,187) $1,683,508 Construction work in progress 87,642 (74,565) - - 13,077 ---------- -------- -------- ------- ---------- Total Exploration and Production 1,501,688 275,855 78,771 (2,187) 1,696,585 ---------- -------- -------- ------- ---------- Natural Gas Transmission and Marketing: Plant, property and equipment 1,929,298 114,672 6,756 4,842 2,042,056 Gas stored underground - noncurrent 61,875 1,933 - - 63,808 Construction work in progress 14,616 (4,360) - - 10,256 ---------- -------- -------- ------- ---------- Total Natural Gas Transmission and Marketing 2,005,789 112,245 6,756 4,842 2,116,120 ---------- -------- -------- ------- ---------- Offshore Drilling: Plant, property and equipment 622,291 23,897 6,941 (457) 638,790 Construction work in progress 3,863 (3,516) - - 347 ---------- -------- -------- ------- ---------- Total Offshore Drilling 626,154 20,381 6,941 (457) 639,137 ---------- -------- -------- ------- ---------- Measurement-While-Drilling: Plant, property and equipment 199,269 70,362 27,233 (1,099) 241,299 Construction work in progress 44,767 (9,244) - - 35,523 ---------- -------- -------- ------- ---------- Total Measurement-While-Drilling 244,036 61,118 27,233 (1,099) 276,822 ---------- -------- -------- ------- ---------- Other 39,714 8,226 1,276 280 46,944 ---------- -------- -------- ------- ---------- Total Plant, Property and Equipment $4,417,381 $477,825 $120,977 $ 1,379 $4,775,608 ========== ======== ======== ======= ==========
(a) Additions include $10,251,421 of funds capitalized. (b) Additions include purchases of assets as described in the Notes to Consolidated Financial Statements located in Item 8. (c) Other changes include transfers and reclassifications between plant and property and other accounts. 116 SONAT INC. AND SUBSIDIARIES SCHEDULE VI - ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF PLANT, PROPERTY AND EQUIPMENT (a) YEAR ENDED DECEMBER 31, 1993
Additions ------------------------ Charged to Other Charged Clearing Changes Balance at to Accounts, Retirements (Debit) or Balance at Classification Jan.1, 1993 Income etc. or Sales Credit(c) Dec. 31, 1993 -------------- ----------- -------- ---------- ----------- ---------- ------------- (In Thousands) Exploration and Production $ 776,026 $149,179 $ 3,799 $ 82,605 $7,235 $ 853,634 Natural Gas Transmission and Marketing 1,381,569 66,448 3,425 15,807 2,104 1,437,739 Offshore Drilling 375,971 8,903 - 384,874(b) - - Other 20,298 1,459 4,278 3,882 (358) 21,795 ---------- -------- ------- -------- ------ ---------- Total Accumulated Depreciation, Depletion and Amortization $2,553,864 $225,989 $11,502 $487,168 $8,981 $2,313,168 ========== ======== ======= ======== ====== ==========
(a) Depreciation, depletion and amortization is provided as described in Note 1 and Note 6 of the Notes to Consolidated Financial Statements located in Item 8. (b) Reflects the removal of depreciation, depletion and amortization balances due to the Initial Public Offering of Sonat Offshore Drilling Inc. common stock. (See Note 3 of the Notes to Consolidated Financial Statements located in Item 8.) (c) Other changes are either transfers or amounts received as reimbursement for alterations of facilities. 117 SONAT INC. AND SUBSIDIARIES SCHEDULE VI - ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF PLANT, PROPERTY AND EQUIPMENT (a) - (CONTINUED) YEAR ENDED DECEMBER 31, 1992
Additions ------------------------ Charged to Other Charged Clearing Changes Balance at to Accounts, Retirements (Debit) or Balance at Classification Jan.1, 1992 Income etc. or Sales Credit(d) Dec. 31, 1992 -------------- ----------- -------- --------- ----------- ---------- ------------- (In Thousands) Exploration and Production $ 798,157 $107,537 $ 2,032 $128,041 $(3,659) $ 776,026 Natural Gas Transmission and Marketing 1,299,030 76,335 11,776(b) 14,024 8,452 1,381,569 Offshore Drilling 351,397 28,082 - 3,508 - 375,971 Measurement-While-Drilling 113,540 10,814 - 124,354(c) - - Other 15,894 1,923 3,535 62 (992) 20,298 ---------- -------- ------- -------- ------- ---------- Total Accumulated Depreciation, Depletion and Amortization $2,578,018 $224,691 $17,343 $269,989 $ 3,801 $2,553,864 ========== ======== ======= ======== ======= ==========
(a) Depreciation, depletion and amortization is provided as described in Note 1 and Note 6 of the Notes to Consolidated Financial Statements located in Item 8. (b) Includes an adjustment of $9.6 million for a settlement relating to Southern Energy Company's idle liquefield natural gas facilities. (c) Reflects the sale of Teleco Oilfield Services Inc. (See Note 3 of the Notes to Consolidated Financial Statements located in Item 8.) (d) Other changes are either transfers or amounts received as reimbursement for alterations of facilities. 118 SONAT INC. AND SUBSIDIARIES SCHEDULE VI - ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF PLANT, PROPERTY AND EQUIPMENT (a) - (CONTINUED) YEAR ENDED DECEMBER 31, 1991
Additions --------------------------- Charged to Other Charged Clearing Changes Balance at to Accounts, Retirements (Debit) or Balance at Classification Jan.1, 1991 Income etc. or Sales Credit(b) Dec. 31, 1991 -------------- ----------- -------- --------- ----------- ---------- -------------- (In Thousands) Exploration and Production $ 776,752 $ 95,951 $ 830 $ 74,201 $(1,175) $ 798,157 Natural Gas Transmission and Marketing 1,236,993 61,854 2,305 4,607 2,485 1,299,030 Offshore Drilling 332,672 24,593 - 5,411 (457) 351,397 Measurement-While-Drilling 99,309 30,173 - 14,330 (1,612) 113,540 Other 12,209 4,296 284 685 (210) 15,894 ---------- -------- ------ -------- ------- ---------- Total Accumulated Depreciation, Depletion and Amortization $2,457,935 $216,867 $3,419 $ 99,234 $ (969) $2,578,018 ========== ======== ====== ======== ======= ==========
(a) Depreciation, depletion and amortization is provided as described in Note 1 and Note 6 of the Notes to Consolidated Financial Statements located in Item 8. (b) Other changes are either transfers or amounts received as reimbursement for alterations of facilities. 119 SONAT INC. AND SUBSIDIARIES SCHEDULE IX - SHORT-TERM BORROWINGS FOR YEARS ENDED DECEMBER 31, 1993, 1992 and 1991 (In Thousands)
Maximum Amount Weighted Balance Weighted Average Outstanding Average Daily Weighted Average at Interest Rate at at Any Outstanding Interest Rate December 31 Balance Sheet Date Month-End Balance for the Year(1) ----------- ------------------ -------------- ------------- ---------------- Sonat Inc. U.S. Dollar Borrowings from Bank Lines of Credit 1993 $ 9,040 3.38% $25,679 $10,103 3.73% 1992 $ - - % $62,015 $18,764 5.99% 1991 $48,719 5.08% $68,945 $46,609 6.27% Sonat Inc. Foreign Currency Borrowings from Bank Lines of Credit 1993 $ - - % $ 2,295 $ 352 7.10% 1992 $ - - % $ 9,830 $ 2,892 10.97% 1991 $11,073 11.44% $13,430 $10,580 11.62% Sonat Inc. Commercial Paper Borrowings 1993 $60,000 3.64% $60,000 $15,148 3.31% 1992 $ - - % $70,000 $13,769 4.52% 1991 $ - - % $78,870 $24,739 6.07% Southern Natural Gas Company Borrowings from Bank Lines of Credit 1993 - - - - - 1992 - - - - - 1991 - - - - -
(1) Total interest paid divided by weighted average daily balance. 120 SONAT INC. AND SUBSIDIARIES SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION YEARS ENDED DECEMBER 31, 1993, 1992 and 1991
Charged to Costs and Expenses ---------------------------------------------- 1993 1992 1991 ---- ---- ---- (In Thousands) Maintenance and Repairs $41,073 $52,569 $50,710 ======= ======= =======
Other information required to be disclosed has been omitted because amounts are less than 1% of consolidated revenues or the information required has been included elsewhere herein. 121 CITRUS CORP. (AN INCORPORATED JOINT VENTURE) INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES COVERED BY REPORT OF INDEPENDENT AUDITORS (Item 14(a)2) Report of Independent Auditors Consolidated Balance Sheets at December 31, 1993 and 1992 Consolidated Statements of Operations and Retained Earnings for the years ended December 31, 1993, 1992 and 1991 Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1992 and 1991 Notes to Consolidated Financial Statements Schedules for the years ended December 31, 1993, 1992 and 1991: V - Property, Plant and Equipment VI - Accumulated Depreciation of Property, Plant and Equipment IX - Short-Term Borrowings All other schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule or because the information required is included in the financial statements including the notes thereto. 122 Report of Ernst & Young, Independent Auditors Board of Directors Citrus Corp. and Subsidiaries We have audited the accompanying consolidated balance sheets of Citrus Corp. and Subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of operations and retained earnings and cash flows for each of the three years in the period ended December 31, 1993. Our audits also included the financial statement schedules listed in the Index at Item 14(a)2. These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Citrus Corp. and Subsidiaries at December 31, 1993 and 1992, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. /s/ Ernst & Young ERNST & YOUNG Birmingham, Alabama February 25, 1994 123 CITRUS CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
- ---------------------------------------------------------------------------------------------- December 31, ------------------------------- (In Thousands) 1993 1992 - ---------------------------------------------------------------------------------------------- ASSETS Current Assets Cash and cash equivalents $ 9,455 $ 936 Trade and other receivables Customers, net 42,869 49,101 Affiliated companies 2,017 2,987 Refundable income taxes 250 2,811 Materials and supplies 5,281 9,551 ------------------------------ Total Current Assets 59,872 65,386 ------------------------------ Deferred Charges Unamortized debt expense 3,243 2,841 Contract reformation costs, net 88,331 84,757 Other 25,076 36,881 ------------------------------ Total Deferred Charges 116,650 124,479 ------------------------------ Property, Plant and Equipment, at cost 1,731,456 1,622,708 Less-accumulated depreciation and amortization 334,708 292,602 ------------------------------ Net Property, Plant and Equipment 1,396,748 1,330,106 ------------------------------ TOTAL ASSETS $ 1,573,270 $ 1,519,971 - ----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. 124 CITRUS CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
- ---------------------------------------------------------------------------------------------------- December 31, ---------------------------------- (In Thousands) 1993 1992 - ---------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Notes payable to banks and current maturities of long-term debt $ 305,000 $ 185,000 Accounts payable Trade 44,383 64,136 Affiliated companies 48,071 17,278 Accrued liabilities Interest 9,951 9,492 Other taxes 1,358 1,046 Overrecovered purchased gas costs 3,664 6,168 Other current liabilities 5,262 8,437 ------------------------------- Total Current Liabilities 417,689 291,557 ------------------------------- Long-Term Debt 395,000 425,000 Deferred Credits Deferred income taxes 418,673 414,979 Other 1,941 32,336 ------------------------------- Total Deferred Credits 420,614 447,315 ------------------------------- 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 316,271 316,271 Retained earnings 23,695 39,827 ------------------------------- Total Stockholders' Equity 339,967 356,099 ------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,573,270 $ 1,519,971 - ----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. 125 CITRUS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
- ------------------------------------------------------------------------------------------------- YEARS ENDED DECEMBER 31, ---------------------------------------- (In Thousands) 1993 1992 1991 - ------------------------------------------------------------------------------------------------- Revenues Gas sales $ 407,977 $ 434,153 $ 476,703 Gas transportation 141,725 115,986 88,903 Other 24,600 - - ------------------------------------------ 574,302 550,139 565,606 ------------------------------------------ Costs and Expenses Natural gas purchased 421,148 414,051 427,598 Operations and maintenance 63,228 62,016 65,150 Depreciation and amortization 44,668 51,502 45,899 Taxes-other than income taxes 8,526 8,154 6,466 ------------------------------------------ 537,570 535,723 545,113 ------------------------------------------ Operating Income 36,732 14,416 20,493 ------------------------------------------ Other Income (Expense) Interest expense, net (50,779) (50,417) (46,550) Other, net 2,556 731 10,476 ------------------------------------------ (48,223) (49,686) (36,074) ------------------------------------------ Loss Before Income Tax (11,491) (35,270) (15,581) Income Tax Expense (Benefit) 4,641 (13,153) (6,380) ------------------------------------------ Net Loss (16,132) (22,117) (9,201) Retained Earnings, Beginning of Year 39,827 61,944 71,145 ------------------------------------------ Retained Earnings, End of Year $ 23,695 $ 39,827 $ 61,944 - ---------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. 126 CITRUS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------------------------ YEARS ENDED DECEMBER 31, -------------------------------------------- (In Thousands) 1993 1992 1991 - ------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES Net Loss $ (16,132) $ (22,117) $ (9,201) Adjustments to reconcile net loss to net cash provided by (used in) operating activities Depreciation and amortization 44,668 51,502 45,899 Deferred income taxes 4,641 (9,941) (10,509) Changes in assets and liabilities Trade and other receivables 9,763 (4,196) 28,482 Materials and supplies 4,270 2,859 (8,858) Accounts payable 11,040 (41,116) (33,522) Accrued liabilities 771 (93) 3,406 Over (under) recovered purchased gas costs (2,504) (1,859) 10,303 Other current assets and liabilities (3,175) (1,357) 649 Contract reformation costs, net (3,574) (57,411) (9,008) Other, net (19,938) 7,400 5,829 ------------------------------------------- Net Cash Provided by (Used in) Operating Activities 29,830 (76,329) 23,470 ------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to property, plant and equipment (110,615) (23,731) (112,346) Disposition of property, plant and equipment (696) 491 150 ------------------------------------------- Net Cash Used in Financing Activities (111,311) (23,240) (112,196) ------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Short-term bank borrowings, net 120,000 129,800 (3,320) Proceeds from issuance of long-term debt - - 160,000 Payment of long-term debt (30,000) (30,000) (68,750) ------------------------------------------ Net Cash Provided by Financing Activities 90,000 99,800 87,930 ------------------------------------------ Increase (Decrease) in Cash and Cash Equivalents 8,519 231 (796) Cash and Cash Equivalents, Beginning of Year 936 705 1,501 ------------------------------------------ Cash and Cash Equivalents, End of Year $ 9,455 $ 936 $ 705 - ------------------------------------------------------------------------------------------------------------------------ Additional cash flow information The Company made the following interest and income tax payments: Interest (net of amounts capitalized) $ 54,510 $ 55,377 $ 45,091 Income taxes paid (received) (2,149) (2,064) 3,887
The accompanying notes are an integral part of these consolidated financial statements. 127 CITRUS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) REPORTING ENTITY Citrus Corp. (the Company), a holding company formed during 1986, owns 100% of the stock of Florida Gas Transmission Company (Transmission), Citrus Trading Corp. (Trading), Citrus Industrial Sales Company, Inc. (Industrial) and Citrus Marketing, Inc. (Marketing). The stock of the Company is owned 50% by Sonat Inc. (Sonat) and 50% by Houston Pipe Line Company, a subsidiary of Enron Corp. (Enron). Transmission, an interstate gas pipeline, is engaged in the interstate transmission and sale of natural gas, and is subject to the jurisdiction of the Federal Energy Regulatory Commission (FERC). Trading is engaged in the sale of natural gas primarily to Florida Power and Light, a large electric utility in the state of Florida. Industrial is engaged in the sale of natural gas to local distribution customers and end users. Marketing specializes in supply acquisition, nontraditional gas sales and purchases, and gas related financial instrument transactions (see Note 7). (2) SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions and accounts have been eliminated in consolidation. CASH AND CASH EQUIVALENTS - The Company considers as cash equivalents all highly liquid short-term investments with original maturities of three months or less. These investments are accounted for at cost, which approximates estimated fair value. MATERIALS AND SUPPLIES - Materials and supplies are valued at actual cost. Materials transferred out of warehouses are priced out at average cost. OVERRECOVERED PURCHASED GAS COSTS - For the portion of gas costs that are applicable to regulated revenues, the FERC requires Transmission to defer the overrecovery or underrecovery of gas costs. Pursuant to Transmission's Order No. 636 settlement, Transmission will flowthrough the overrecovery or underrecovery of gas costs on or before November 1, 1995. 128 (2) SIGNIFICANT ACCOUNTING POLICIES (continued) ACCOUNTING FOR PRICE RISK MANAGEMENT ACTIVITIES - To manage the risks of price fluctuations, Marketing follows the practice of entering into swap agreements in certain energy products. All related gains and losses are recognized currently in income as adjustments to costs and expenses. DEPRECIATION, AMORTIZATION AND MAINTENANCE POLICIES - The Company amortizes that portion of its investment in Transmission and other subsidiaries which is in excess of historical cost (acquisition adjustment) on a straight-line basis at an annual rate of 1.9% based upon the estimated remaining useful life of the pipeline system. During the third quarter of 1993, the Company changed its depreciation rate applicable to the acquisition adjustment to better reflect its remaining useful life. The effect of the change was a reduction in depreciation and amortization expense of $5.6 million in 1993. Transmission has provided for depreciation of assets on a straight-line basis at an annual composite rate of 3.06%, 3.16% and 2.45% for 1993, 1992 and 1991, respectively. Depreciation rates are based on the estimated useful lives of the individual assets and are subject to approval by the FERC. The Company charges to maintenance the costs of repairs and renewal of items determined to be less than units of property. Costs of replacements and renewals of units of property are capitalized. The original costs of units of property retired are charged to the depreciation reserves, net of salvage and removal costs. INCOME TAXES - The Company and its subsidiaries file a consolidated federal income tax return. Pursuant to a tax allocation agreement between the Company and its subsidiaries, the Company will pay to each subsidiary an amount equal to the tax benefits realized in the consolidated federal income tax return resulting from the utilization of the subsidiary's net operating losses and tax credits. Conversely, each subsidiary will pay to the Company an amount equal to the federal income tax computed on its separate company taxable income, less the tax benefits associated with the net operating losses and tax credits generated by the subsidiary which are utilized in the consolidated federal income tax return. The Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 109 - "Accounting for Income Taxes" effective January 1, 1993, and applied the provisions of the statement retroactively. The Company previously accounted for income taxes under the provisions of SFAS No. 96 which was superseded by SFAS No. 109. Both SFAS No. 96 and SFAS No. 109 129 (2) SIGNIFICANT ACCOUNTING POLICIES (continued) utilize the asset and liability approach for accounting for income taxes. Under this approach, deferred tax assets and liabilities are recognized based on anticipated future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax bases. The adoption of SFAS No. 109 did not have a material impact on the Company's results of operations or financial position. RECLASSIFICATIONS - Certain items on the Consolidated Statements of Operations and Retained Earnings have been reclassified in 1992 and 1991 to conform with the 1993 presentation. (3) LONG-TERM DEBT Long-term debt outstanding as of December 31, 1993 and 1992 was as follows (in thousands): Citrus Corp. 1993 1992 ------------ --------- --------- 9.70% Notes due 1994-1996 $ 90,000 $120,000 11.10% Notes due 1999-2006 175,000 175,000 -------- -------- 265,000 295,000 -------- -------- Transmission ------------ 9.30% Notes due 1998 25,000 25,000 9.75% Notes due 1999-2008 65,000 65,000 10.11% Notes due 2009-2013 70,000 70,000 -------- -------- 160,000 160,000 -------- -------- Total Long-Term Debt 425,000 455,000 Less Current Maturities 30,000 30,000 -------- -------- Total Long-Term Debt, Net of Current Maturities $395,000 $425,000 ======== ======== Annual maturities and sinking fund requirements on long-term debt outstanding as of December 31, 1993 were as follows (in thousands): Year Amount ---- ------ 1994 $ 30,000 1995 30,000 1996 30,000 1997 - 1998 44,250 Thereafter 290,750 -------- $425,000 ======== The Company has a note agreement that contains certain restrictions which, among other things, limits the incurrence of additional debt, the sale of assets and the payment of dividends. The agreements relating to Transmission's promissory notes include, among other things, restrictions as to the payment of dividends. As of December 31, 1993, the Company is restricted in its ability to 130 (3) LONG-TERM DEBT (continued) incur any additional long-term debt other than for the addition, expansion or modification of the gas transmission system or to extend, renew or refund its outstanding debt. The Company has committed lines of credit of $300.0 million with $275.0 million outstanding at December 31, 1993. Transmission has committed lines of credit of $175.0 million which was all available at December 31, 1993. Transmission also has uncommitted bid note facilities for up to $45.0 million. At December 31, 1993, there were no amounts outstanding under these facilities. (4) INCOME TAXES In August 1993, the corporate federal income tax rate increased from 34% to 35% retroactive to January 1, 1993. Under the provisions of SFAS No. 109, the effect of a change in the tax rate is recognized in income in the period of enactment. The principal components of the Company's net deferred income tax liability at December 31, 1993 and 1992 are as follows (in thousands):
1993 1992 -------- --------- Deferred income tax assets Net operating loss carryforward $ 24,928 $ 18,262 Regulatory and other reserves - 8,328 Other 5,568 1,983 -------- -------- 30,496 28,573 -------- -------- Deferred income tax liabilities Depreciation and amortization 420,155 416,080 Gas contract reformation costs 25,713 22,042 Other 3,301 5,430 -------- -------- 449,169 443,552 -------- -------- Net deferred income tax liabilities $418,673 $414,979 ======== ========
Total income tax expense (benefit) for the years ended December 31, 1993, 1992 and 1991 is summarized as follows (in thousands):
1993 1992 1991 --------- --------- --------- Payable currently Federal $ - $ (2,758) $ 3,553 State - - 576 --------- --------- --------- - (2,758) 4,129 --------- --------- --------- Payment deferred Federal (5,091) (8,604) (8,675) State (347) (1,791) ( 1,834) --------- --------- --------- (5,438) (10,395) (10,509) --------- --------- --------- Effect of tax rate increase on deferred tax liability 10,079 - - --------- --------- --------- Total income tax expense (benefit) $ 4,641 $ (13,153) $ (6,380) ========= ========= =========
131 (4) INCOME TAXES (continued) The differences between income taxes computed at the U.S. federal statutory rate and the Company's effective tax rate for the years ended December 31, 1993, 1992 and 1991 are as follows (in thousands):
1993 1992 1991 --------- --------- -------- Statutory federal income tax provision $ (4,022) $(11,992) $(5,298) Net state income taxes (226) (1,183) (81) Tax rate increase 10,079 - - Revision of prior years' tax estimates (1,200) - (749) Other 10 22 (252) --------- --------- -------- Income tax expense (benefit) $ 4,641 $(13,153) $(6,380) ========= ========= ========
The Company has a consolidated net operating loss carryforward for tax purposes of approximately $62 million. This loss carryforward will be available until 2006, at which time it will begin to expire. For financial statement purposes, the Company has recognized the benefit of this loss carryforward as a reduction of deferred tax liabilities. (5) EMPLOYEE BENEFIT PLANS Employees of the Company participate in a defined benefit pension plan maintained by Enron. Employees with five years or more of service are entitled to retirement benefits based upon a formula that uses a percentage of final average pay and years of service. It is Enron's policy to fund pension costs to the minimum legal amount required by federal tax regulations. Pension expenses charged by Enron were $.4 million, $.3 million and $.5 million for 1993, 1992 and 1991, respectively. During 1986, Enron formed a new employee stock ownership plan (ESOP). Concurrent with the establishment of the ESOP, Enron amended its retirement plan to provide that the value of stock allocated to an employee's account in the ESOP will be utilized to partially fund the employee's retirement benefits accrued subsequent to the date of the amendment. As of September 30, 1993, the most recent valuation date, the actuarial present value of projected plan benefit obligations for the Enron Corp. Retirement Plan in which the employees of the Company participate was less than the plan net assets by approximately $25.3 million. The assumed discount rate and rate of return on plan assets used in determining the actuarial present value of projected plan benefits were 7.0% and 10.5%. The assumed rate of increase in wages was 4.0%. 132 (5) EMPLOYEE BENEFIT PLANS (continued) In addition to providing pension benefits, Enron also provides certain health care and life insurance benefits to eligible employees (and their eligible surviving spouses) who retire under the Enron Corp. Retirement Plan. Benefits are provided under the provisions of a contributory defined dollar benefit plan. Effective January 1, 1993, the Company adopted the provisions of SFAS No. 106 "Employers Accounting for Postretirement Benefits Other Than Pensions" (SFAS 106). SFAS 106 requires that employers providing postretirement benefits accrue those costs over the service lives of the employees expected to be eligible to receive such benefits. The Company has elected the prospective transition approach and is amortizing the transition obligation which existed at January 1, 1993, over a period of approximately 19 years. The Company's net periodic postretirement benefit cost for 1993 totaled approximately $.8 million, substantially all of which relates to Transmission and is expected to be recovered through rates, while the accumulated postretirement benefit obligation exceeded plan assets by $6.1 million as of December 31, 1993. (6) MAJOR CUSTOMERS Revenues from individual customers exceeding 10% of total revenues for the years ended December 31, 1993, 1992 and 1991 were approximately as follows (in thousands): Customers 1993 1992 1991 --------- ---- ---- ---- Florida Power & Light Company $263,000 $269,000 $275,000 Peoples Gas System, Inc. 55,000 65,000 81,000
At December 31, 1993, the Company's subsidiaries had receivables of approximately $14.7 and $4.0 million from Florida Power and Light and Peoples Gas System, Inc., respectively. (7) RELATED PARTY TRANSACTIONS The Company incurred corporate administrative expenses including employee benefit costs from Enron and its affiliates. The Company was charged approximately $14.8, $12.1 and $15.9 million for these expenses for the years ended December 31, 1993, 1992 and 1991, 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 $13.0, $4.3 and $13.1 million for the years ended December 31, 1993, 1992 and 1991, respectively. The Company's subsidiaries purchased gas from affiliates of Sonat of approximately $10.8, $8,8 and $11.9. 133 RELATED PARTY TRANSACTIONS (continued) million for the years ended December 31, 1993, 1992 and 1991, respectively. The Company's subsidiaries also purchased gas from affiliates of Enron of approximately $31.1, $41.4 and $53.7 million for the years ended December 31, 1993, 1992 and 1991, respectively. In 1993 Marketing sold certain gas purchase and sales contracts to Enron Gas Marketing, Inc. The combined proceeds of the sales, $24.6 million, are included in other revenues. On November 1, 1993, the Company, Marketing, Trading and Industrial (collectively the Citrus Marketing Group) entered into an Operating and Marketing Agreement (Agreement) with Enron Gas Services Corp. (EGS). Under the terms of the Agreement, EGS provides certain marketing and operating services to the Citrus Marketing Group, including administration of existing and new contracts. EGS also performs marketing functions on behalf of the Citrus Marketing Group for its customers taking natural gas deliveries in Florida on Transmission's pipeline. (8) RATE MATTERS AND CONTINGENCIES On January 15, 1993, the FERC approved Transmission's rate case settlement which resolved all issues of cost of service, volumes and rates pending in the July 1991 rate case filing. Transmission made refunds by April 30, 1993, and with the acceptance of Transmission's refund report by the FERC all matters related to the rate case are closed. Transmission has been authorized by the FERC to recover certain take-or-pay costs billed to Transmission by Southern Natural Gas Company through a flowthrough billing mechanism similar to, but separate from, the PGA mechanism. The FERC authorization requires a cap be placed on the liability of customers based on some measure of historical purchases. Deferred settlement charges in the balance sheets at December 31, 1993 and 1992 include approximately $3.4 and $10.5 million, respectively, related to this matter. In April 1992, the FERC issued Order No. 636 (Order 636). Among other features, Order 636 requires pipelines to eliminate their bundled city-gate sales service by separating (or unbundling) their sales services from their transportation services, requires an expanded capacity relinquishment program and adopts a straight fixed variable rate design methodology. Order 636 also provides for the recovery of transition costs. In a series of orders issued in 1993, the FERC approved most aspects of Transmission's June 16, 1993 settlement of all Order 636 issues including the recovery of transition payments. 134 (8) RATE MATTERS AND CONTINGENCIES (continued) Transmission has been authorized by the FERC to recover certain transition costs incurred through the reformation of gas supply contracts related to Transmission's jurisdictional sales services. On November 1, 1993, Transmission's Order 636 restructuring settlement went into effect. In addition to the existing recovery mechanism, the settlement allows Transmission to recover 100% of any transition payments from $106 million up to $160 million and 75% of payments after the $160 million level. Transmission has certain gas purchase contracts which provide for take-or-pay obligations. Certain suppliers have made claims for payment under the take-or-pay provision of these contracts. Thus far, Transmission has made payments totaling $129.6 million as consideration for modifying claims or other gas purchase contract terms. As Transmission completes the transition to a transportation only function and terminates all of its remaining gas purchase contracts, it is possible that additional payments to suppliers may be made to resolve contract issues. To the extent additional payments are made, Management believes that these costs will be 100% recoverable through existing tariff mechanisms. Transmission has received authority for an expansion of its pipeline system (Phase III Expansion) with an estimated cost of approximately $908 million. On August 25, 1992, Transmission filed a settlement (Phase III Settlement) that covers the expansion facilities needed to provide an additional firm transportation service that will average approximately 530,000 MMBtu per day. This settlement amended Transmission's previous filings for an expansion of its facilities for approximately 825,000 MMBtu per day and was agreed to by all customers. Service on Phase III Expansion facilities is to be provided under a new firm transportation rate schedule which calls for payment of incremental rates based upon a levelized rate methodology. On September 15, 1993, the FERC issued Transmission a certificate of public convenience and necessity approving the Phase III settlement and authorizing Transmission to construct and operate the Phase III Expansion facilities. Transmission accepted the certificate on October 14, 1993. On February 2, 1994, the FERC denied rehearing on an environmental issue but granted Transmission's request for clarification on a rate issue. 135 (9) COMMITMENTS AND CONTINGENCIES In August 1990, Marketing entered into a price swap agreement to effectively manage a portion of the market risk caused by fluctuations in the price of natural gas and residual fuel oil. The agreement provides a hedge on 41,000 MMBtu of natural gas and 5,000 barrels of residual fuel oil per day. The agreement requires Marketing to make payments to (or receive payments from) the other party based upon the differential between a fixed and a floating price for natural gas and residual fuel oil as specified in the agreement. The current swap agreement is effective for a period of five years beginning August 1, 1990. The Company's after-tax results of operations for the years ended December 31, 1993 and 1992, included net gains of $4.6 and $1.1 million, respectively, and a net loss for the year ended December 31, 1991 of $1.6 million, related to this agreement. (10) CONCENTRATIONS OF CREDIT RISK AND OTHER FINANCIAL INSTRUMENTS The Company and its subsidiaries have a concentration of customers in the electric and gas utility industries. These concentrations of customers may impact the Company's overall exposure to credit risk, either positively or negatively, in that the customers may be similarly affected by changes in economic or other conditions. Credit losses incurred on receivables in these industries compare favorably to losses experienced in the Company's receivable portfolio as a whole. The Company and its subsidiaries also have a concentration of customers located in the southeastern United States, primarily within the state of Florida. Receivables are generally not collateralized. The Company's management believes that the portfolio of receivables, which includes local distribution companies and municipalities, is well diversified and that such diversification minimizes any potential credit risk. The carrying amounts and fair value of the Company's financial instruments at December 31, 1993 and 1992, are as follows (in thousands):
1993 1992 --------------------- ------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value --------- ---------- -------- ---------- Contract reformation costs $ 88,331 $ 88,331 $ 84,757 $ 84,757 Notes payable to banks 275,000 275,000 155,000 155,000 Long-term debt (including current) 425,000 512,532 455,000 528,171 maturities)
The carrying amount of contract reformation costs 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. 136 CITRUS CORP. AND SUBSIDIARIES SCHEDULE V PROPERTY, PLANT AND EQUIPMENT YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 (IN THOUSANDS)
============================================================================================================================== COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F ============================================================================================================================== BALANCE AT BALANCE AT BEGINNING ADDITIONS OTHER END OF CLASSIFICATION OF PERIOD AT COST RETIREMENTS CHANGES PERIOD - ----------------------------- ---------------- ----------- -------------- ------------ ---------- 1993 NATURAL GAS PIPELINE SYSTEM Intangible $ 277 $ 67 $ - $ - $ 344 Transmission plant 713,997 11,280 1,464 - 723,813 General plant 14,203 1,668 403 - 15,468 Construction work in progress 7,096 97,600 - - 104,696 Acquisition adjustment (3) 887,135 - - - 887,135 ---------- ---------- -------- -------- ---------- $1,622,708 $ 110,615(1) $ 1,867 $ - $1,731,456 ========== ========== ======== ======== ========== 1992 NATURAL GAS PIPELINE SYSTEM Intangible $ 145 $ 132 $ - $ - 277 Transmission plant 695,200 25,163 6,366 - 713,997 General plant 14,006 970 773 - 14,203 Construction work in progress 9,630 (2,534) - - 7,096 Acquisition adjustment (3) 887,135 - - - 887,135 ---------- ---------- -------- -------- ---------- $1,606,116 $ 23,731(2) $ 7,139 $ - $1,622,708 ========== ========== ======== ======== ========== 1991 NATURAL GAS PIPELINE SYSTEM Intangible $ 145 $ - $ - $ - 145 Transmission plant 573,260 127,190 5,451 201 695,200 General plant 12,901 1,132 27 - 14,006 Construction work in progress 25,606 (15,976) - - 9,630 Acquisition adjustment (3) 887,135 - - - 887,135 ---------- ---------- -------- -------- ---------- $1,499,047 $ 112,346(2) $ 5,478 $ 201 $1,606,116 ========== ========== ======== ======== ==========
(1) Additions in 1993 primarily relate to expansion of transmission plant commonly referred to as Phase III. (2) Additions in 1992 and 1991 primarily relate to Phase II expansion. (3) Acquisition adjustment includes the effect of Statement of Financial Accounting Standards No.96. "Accounting for Income Taxes". Reference is made to Note 2 to the financial statements. 137 CITRUS CORP. AND SUBSIDIARIES SCHEDULE VI - ACCUMULATED DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 (IN THOUSANDS)
========================================================================================================================= COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E ========================================================================================================================= DEDUCTIONS ADDITIONS TO RESERVES FROM RESERVES ------------------------------------ ------------------------ CHARGED TO BALANCE AT OPERATING RETIREMENTS, BALANCE AT BEGINNING REVENUE SALVAGE RENEWALS AND COST OF END OF DESCRIPTION OF PERIOD DEDUCTIONS RECOVERIES OTHER REPLACEMENTS REMOVAL PERIOD - ---------------- ----------- ---------- ---------- ------- ------------ ------- ---------- 1993 Natural gas pipeline system $ 454,353 $ 18,976 $ 444 $ 159 $ 1,912 $ 1,253 $ 470,767 Acquisition adjustment (161,751) 25,692 - - - - (136,059) ---------- --------- -------- ------ --------- ------- ---------- $ 292,602 $ 44,668 $ 444 $ 159 $ 1,912 $ 1,253 $ 334,708 ========== ========= ======== ====== ========= ======= ========== 1992 Natural gas pipeline system $ 440,819 $ 20,182 $ 662 $ 200 $ 7,139 $ 371 $ 454,353 Acquisition adjustment (193,071) 31,320 - - - - (161,751) ---------- --------- -------- ------ --------- ------- ---------- $ 247,748 $ 51,502 $ 662 $ 200 $ 7,139 $ 371 $ 292,602 ========== ========= ======== ====== ========= ======= ========== 1991 Natural gas pipeline system $ 431,367 $ 14,579 $ 990 $ 384 $ 5,478 $ 1,023 $ 440,819 Acquisition adjustment (224,391) 31,320 - - - - (193,071) ---------- --------- -------- ------ --------- ------- ---------- $ 206,976 $ 45,899 $ 990 $ 384 $ 5,478 $ 1,023 $ 247,748 ========== ========= ======== ====== ========= ======= ==========
138 CITRUS CORP. AND SUBSIDIARIES SCHEDULE IX -- SHORT-TERM BORROWINGS YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 (IN THOUSANDS)
==================================================================================================================================== COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F ==================================================================================================================================== MAXIMUM AVERAGE WEIGHTED CATEGORY OF BALANCE AT END WEIGHTED AMOUNT AMOUNT AVERAGE AGGREGATE OF PERIOD AVERAGE OUTSTANDING OUTSTANDING INTEREST RATE SHORT-TERM INTEREST DURING THE DURING THE DURING THE BORROWINGS RATE PERIOD PERIOD (1) PERIOD (1) ------------------ ------------------- ----------- ---------------- ---------------- ----------------- YEAR ENDED DECEMBER 31, 1993 NOTES PAYABLE TO BANKS $ 275,000 0.0368 $ 275,000 $ 157,720 0.0382 YEAR ENDED DECEMBER 31, 1992 NOTES PAYABLE TO BANKS $ 155,000 0.0507 $ 155,000 $ 92,475 0.0485 YEAR ENDED DECEMBER 31, 1991 NOTES PAYABLE TO BANKS $ 25,200 0.0536 $ 31,600 $ 11,775 0.0676
(1) Computations based on daily outstanding balances and applicable rates during the period. 139 APPENDIX TO ANNUAL REPORT ON FORM 10-K OF SONAT INC. FOR THE YEAR ENDED DECEMBER 31, 1993 In compliance with Section 304 of Regulation S-T, the following information describes pictorial and/or graphic materials contained herein:
PAGE DESCRIPTION ------------------------------------- ------------------------------------- I-5.................................. Map of the Southwestern and Southcentral United States (Texas, Oklahoma, Arkansas, Louisiana, Mississippi, and Alabama) generally showing the gas reserve basins and areas in which Exploration has significant lease interests. These leases are described in the charts on page I-4. I-17................................. Map of the Southeastern United States showing the approximate location of the pipeline systems of Southern, SIA, and Florida Gas (as described on pages I-8, I-14, and I-15), the underground storage facilities of Southern (as described on page I-8), and Southern Energy's LNG terminal (as discussed on page I-13).
EX-4.(5) 2 SONAT CREDIT AGREEMENT 1 EXHIBIT 4-(5) ________________________________________________________________ CREDIT AGREEMENT dated as of December 15, 1993 among SONAT INC., THE BANKS NAMED HEREIN, and THE CHASE MANHATTAN BANK (NATIONAL ASSOCIATION), CHEMICAL BANK and MORGAN GUARANTY TRUST COMPANY OF NEW YORK as Co-Agents ________________________________________________________________ 2 TABLE OF CONTENTS
Article Page - ------- ---- I. LOANS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 1.01 Syndicated Loans . . . . . . . . . . . . . 1 Section 1.02 Money Market Loans . . . . . . . . . . . . 1 Section 1.03 Commitment Fee . . . . . . . . . . . . . . 5 Section 1.04 Change of Commitments. . . . . . . . . . . 6 Section 1.05 Borrowings of Syndicated Loans . . . . . . 7 Section 1.06 Several Commitments; Remedies Independent. . . . . . . . . . . . . . . 9 Section 1.07 Availability of Funds. . . . . . . . . . . 9 Section 1.08 Extension of Commitment Termination Date . . . . . . . . . . . . 10 Section 1.09 Lending Offices. . . . . . . . . . . . . . 10 Section 1.10 Notes. . . . . . . . . . . . . . . . . . . 10 II. PAYMENTS, INTEREST AND CERTAIN FEES. . . . . . . . . . . . . . 11 Section 2.01 Repayment of Loans . . . . . . . . . . . . 11 Section 2.02 Interest . . . . . . . . . . . . . . . . . 11 Section 2.03 Interest Periods . . . . . . . . . . . . . 12 Section 2.04 Prepayments. . . . . . . . . . . . . . . . 13 Section 2.05 Payments, etc. . . . . . . . . . . . . . . 14 Section 2.06 Pro Rata Treatment; Sharing. . . . . . . . 14 Section 2.07 Computations . . . . . . . . . . . . . . . 16 Section 2.08 Facility Fee . . . . . . . . . . . . . . . 16 Section 2.09 Administration Fee . . . . . . . . . . . . 16 III. PROVISIONS RELATING TO FIXED RATE LOANS . . . . . . . . . . . 16 Section 3.01 Additional Costs . . . . . . . . . . . . . 17 Section 3.02 Limitation on Types of Loans . . . . . . . 20 Section 3.03 Illegality . . . . . . . . . . . . . . . . 21 Section 3.04 Treatment of Affected Loans. . . . . . . . 21 Section 3.05 Compensation . . . . . . . . . . . . . . . 21 Section 3.06 Survival . . . . . . . . . . . . . . . . . 22 IV. CONDITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Section 4.01 Conditions to Effectiveness. . . . . . . . 22 Section 4.02 Conditions Precedent to Loans. . . . . . . 24
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Article Page - ------- ---- V. COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Section 5.01 Financial Statements . . . . . . . . . . . 24 Section 5.02 Access to Books and Inspection . . . . . . 25 Section 5.03 Litigation . . . . . . . . . . . . . . . . 26 Section 5.04 Maintenance of Existence . . . . . . . . . 26 Section 5.05 Merger; Sale of Assets . . . . . . . . . . 26 Section 5.06 Default; Investment Rating . . . . . . . . 28 Section 5.07 ERISA . . . . . . . . . . . . . . . . . . 28 Section 5.08 Liens. . . . . . . . . . . . . . . . . . . 29 Section 5.09 Total Indebtedness to Consolidated Capitalization . . . . . . . . . . . . . 30 Section 5.10 Subsidiary Indebtedness Limitations. . . . 30 Section 5.11 Insurance. . . . . . . . . . . . . . . . . 30 Section 5.12 Maintenance of Properties. . . . . . . . . 31 Section 5.13 Public Utility Holding Company Act . . . . 31 VI. REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . 31 Section 6.01 Corporate Existence and Powers . . . . . . 31 Section 6.02 Corporate Authority, etc.. . . . . . . . . 31 Section 6.03 Financial Condition. . . . . . . . . . . . 32 Section 6.04 Litigation . . . . . . . . . . . . . . . . 32 Section 6.05 Taxes. . . . . . . . . . . . . . . . . . . 33 Section 6.06 Approvals. . . . . . . . . . . . . . . . . 33 Section 6.07 ERISA. . . . . . . . . . . . . . . . . . . 33 Section 6.08 Regulation U . . . . . . . . . . . . . . . 33 Section 6.09 Certain Subsidiaries . . . . . . . . . . . 33 Section 6.10 Investment Company Act . . . . . . . . . . 34 Section 6.11 Environmental Laws . . . . . . . . . . . . 34 VII. EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . 34 VIII. MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . 37 Section 8.01 Waiver . . . . . . . . . . . . . . . . . . 37 Section 8.02 Notices and Delivery of Documents. . . . . 37 Section 8.03 Governing Law. . . . . . . . . . . . . . . 37 Section 8.04 Offsets, etc . . . . . . . . . . . . . . . 37 Section 8.05 Disposition of Loans . . . . . . . . . . . 38 Section 8.06 Expenses . . . . . . . . . . . . . . . . . 38 Section 8.07 Amendments, Waivers, etc.. . . . . . . . . 39 Section 8.08 Definitions. . . . . . . . . . . . . . . . 39 Section 8.09 Successors and Assigns . . . . . . . . . . 40 Section 8.10 Counterparts . . . . . . . . . . . . . . . 40
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Article Page - ------- ---- IX. THE AGENTS . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Section 9.01 Appointment, Power and Immunities. . . . . 40 Section 9.02 Reliance by Agents . . . . . . . . . . . . 40 Section 9.03 Default. . . . . . . . . . . . . . . . . . 41 Section 9.04 Rights as a Lender . . . . . . . . . . . . 41 Section 9.05 Indemnification. . . . . . . . . . . . . . 42 Section 9.06 Reports. . . . . . . . . . . . . . . . . . 42 Section 9.07 Non-Reliance on Agents and Other Banks . . 42 Section 9.08 Failure to Act . . . . . . . . . . . . . . 43 Section 9.09 Resignation or Removal of Agents . . . . . 43 SCHEDULE 1 Definitions SCHEDULE 2 Lending Offices and/or Addresses for Notices EXHIBIT A-1 - Form of Note for Syndicated Loans EXHIBIT A-2 - Form of Note for Money Market 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) 5 CREDIT AGREEMENT dated as of December 15, 1993 among SONAT INC., a Delaware corporation (the Company"); the undersigned banks (each herein called a "Bank"); and THE CHASE MANHATTAN BANK (NATIONAL ASSOCIATION), CHEMICAL BANK and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, each as agent for the Banks under this Agreement (in such capacity, each such agent being herein called an "Agent" and collectively the "Agents"). 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 Section 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 aggregate principal amount of all Money Market Loans, together with the aggregate principal amount of all Syndicated 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 Section 1.04 hereof need not be prepaid on account of this proviso. Section 1.02 Money Market Loans. (a) In addition to borrowings of Syndicated Loans, the Company may, as set forth in this Section 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 Section 1.02. Money Market Loans may be LIBOR Market Loans or Set Rate Loans (each a "type" of Money Market Loan), 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 Section 2.03 hereof shall be deemed to be different Interest Periods even if they are coterminous); and 6 2 (ii) the aggregate principal amount of all Money Market Loans, together with the aggregate principal amount of all Syndicated 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 Section 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 (x) the fourth Business Day prior to the date of borrowing proposed therein, in the case of a LIBOR Auction or (y) the Business Day next preceding the date of borrowing proposed therein, in the case of a Set Rate Auction (or, in any such case, such other time and date as the Company and the Majority Banks may agree). The Company may request offers to make LIBOR Market Loans and/or Set Rate Loans for up to three different Interest Periods for all Money Market Loans 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 Section 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; (iv) whether the Money Market Quotes requested for a particular Interest Period are to set forth a Money Market Margin or a Money Market Rate; and (v) if the Money Market Quotes requested are to set forth a Money Market Rate, the date on which the Money 7 3 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 Section 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 Section 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 (x) 2:00 p.m. New York time on the fourth Business Day prior to the proposed date of borrowing, in the case of a LIBOR Auction or (y) 10:00 a.m. New York time on the Quotation Date, in the case of a Set Rate Auction (or, in any such case, such other time and date as the Company and the Majority Banks may agree). Subject to Section 3.02(b), Section 3.03, Section 4.02 and Article VII hereof, any Money Market Quote so made shall be irrevocable except with the written consent of the Company. (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) in the case of a LIBOR Auction, the margin above or below the applicable LIBO Rate (the "Money Market Margin") offered for each such Money Market Loan, expressed as a percentage (rounded upwards, if necessary, to the nearest 1/10,000th of 1%) to be added to or subtracted from the applicable LIBO Rate; 8 4 (D) in the case of a Set Rate Auction, the rate of interest per annum (rounded upwards, if necessary, to the nearest 1/10,000th of 1%) offered for each such Money Market Loan (the "Money Market Rate"); and (E) 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 (x) the third Business Day prior to the proposed date of borrowing, in the case of a LIBOR Auction or (y) the Quotation Date, in the case of a Set Rate Auction (or, in any such case, 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 Section 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 Section 1.02 hereof to be violated; (iii) acceptance of offers may be made only in ascending order of Money Market Margins or Money Market Rates, as the case may be, in each case commencing with the lowest rate so offered; and (iv) the Company may not accept any offer that fails to comply with Section 1.02(c)(ii) hereof or otherwise fails to comply with the requirements of this Agreement (including, without limitation, Section 1.02(a) hereof). 9 5 If offers are made by two or more Banks with the same Money Market Margins or Money Market Rates, as the case may be, 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 NYAO-DI-900-9-000002 maintained by Chase with The Chase Manhattan Bank (National Association) 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 (National Association) at its Principal Office designated by the Company. (g) Except for the purpose and to the extent expressly stated in Section 1.03 hereof, the amount of any Money Market Loan made by any Bank shall not constitute a utilization of such Bank's Commitment. Section 1.03 Commitment Fee. The Company shall pay to Chase for account of each Bank a commitment fee on the daily average unused amount of such Bank's Commitment (solely for which purpose the amount of any Money Market Loans outstanding shall be deemed to be a pro rata (based on the Commitments) utilization of each Bank's Commitment) 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 Section 1.04 hereof) at a rate per annum for each day during such period equal to the Applicable Commitment Fee Rate in effect on such day. Accrued commitment fees shall be payable quarterly on the last Business Day in March, June, September and December in each year, commencing on the first such date after the 10 6 Effective Date, and on the date the Commitments are terminated in full. Section 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, the aggregate unused amount of the Commitments (and, in accordance with Section 1.02(g) hereof, outstanding Money Market Loans shall not constitute a utilization of the Commitments). Each such reduction shall be in an aggregate amount of at least $25,000,000 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 Section 1.02(g) hereof, outstanding Money Market Loans shall not constitute a utilization of such Bank's Commitment). 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 the Agents 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 that has claimed any compensation under Section 3.01(a) or Section 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 11 7 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 Section 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 Section 3.01(a) or Section 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 Section 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) in the amount of such Bank being replaced and such loan (or loans) shall be deemed a Loan (or Loans) hereunder. (e) The Commitments once terminated or reduced may not be reinstated. Section 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 12 8 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 Section 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 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 Section 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 Section 1.05(b) or Section 1.05(c) hereof, 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 13 9 borrowed, the duration of the Interest Period therefor and (v) such Bank's pro rata portion thereof. (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 NYAODI-900-9-000002 maintained by The Chase Manhattan Bank (National Association) at its Principal Office in immediately available funds the amount of the Syndicated Loan or Syndicated Loans to be made by it on such date. 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). Section 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. Section 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 14 10 (or if such day is not a Business Day, the next preceding Business Day). Section 1.08 Extension of Commitment Termination Date. The Company may, by notice to the Agents not less than 60 days and not more than 90 days prior to the Commitment Termination Date, request that the Banks extend the Commitment Termination Date to the Annual Date in the calendar year next succeeding the calendar year in which the Commitment Termination Date then falls. The Agents shall promptly notify each Bank of such request. Upon the receipt by Chase of the agreement in writing of each Bank to such extension not less than 30 days prior to the Commitment Termination Date then in effect, Chase shall notify the Company and each Bank that all of the Banks have agreed to such extension, which extension shall become effective upon the receipt by Chase (with sufficient copies for each Bank) not less than five Business Days prior to such Commitment Termination Date of an opinion of counsel to the Company, satisfactory to each Bank and special counsel to the Banks, as to the due authorization, execution and delivery by the Company of such notice of extension, the validity and binding effect as regards the Company of this Agreement and the Notes as so extended, and there being no necessity for any authorization or approval by, or any filing or registration with, any public regulatory body for such extension and for the performance of this Agreement and the Notes as so extended (or, if any such action is necessary or required, that the same has been duly obtained or effected, is valid and sufficient for the purpose and a true copy thereof is attached to such opinion) and covering such other matters relating to such extension as any Agent or Bank may reasonably request. Section 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. Section 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 15 11 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, type, 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. II. PAYMENTS, INTEREST AND CERTAIN FEES Section 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, and such Loan shall mature, on the last day of the Interest Period therefor. Section 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 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); (c) if such Loan is a LIBOR Market Loan, the LIBO Rate for such Loan for the Interest Period therefor plus (or minus) the Money Market Margin quoted by the Bank making such Loan and accepted by the Company in accordance with Section 1.02 hereof; and 16 12 (d) 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 Section 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 or LIBOR Market Loan that is converted into a Domestic Loan (pursuant to Section 3.04 hereof) shall be payable on the date of conversion (but only to the extent so converted). Promptly after the determination of any 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. Section 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 Section 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 Section 1.02(b) hereof; and 17 13 (d) With respect to any LIBOR Market Loan, the period commencing on the date such LIBOR Market 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 Section 1.02(b) hereof, except that each Interest Period which commences on the last Business Day of a calendar month (or 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. 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 or LIBOR Market 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 or LIBOR Market Loans shall have a duration of less than one month and, if the Interest Period for any Eurodollar Loans or LIBOR Market Loans would otherwise be a shorter period, such Loans shall not be available hereunder. Section 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 Section 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 prepaid, accrued to the prepayment date, together with all other amounts owing hereunder, including without limitation under Section 3.05, shall be paid on such prepayment date). 18 14 (b) If, after giving effect to any termination or reduction of the Commitment of any Bank pursuant to Section 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 Section 3.05 hereof in connection therewith. Section 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 Section 1.02 or Section 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 Section 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 such date shall be extended to the next succeeding Business Day and interest shall be payable for any principal so extended for the period of such extension. 19 15 Section 2.06 Pro Rata Treatment; Sharing. (a) Except to the extent otherwise provided herein: (i) each borrowing from the Banks under Section 1.01 hereof shall be made from the Banks, each payment of commitment fee under Section 1.03 hereof shall be made for account of the Banks, and each termination or reduction of the amount of the Commitments under Section 1.04 hereof shall be applied to the Commitments of the 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 20 16 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 Section 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 Section 2.06 to share in the benefits of any recovery on such secured claim. Section 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 and commitment, facility and supplemental fees shall be computed on the basis of a year of 365 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. Section 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 Section 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. Section 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: 21 17 Section 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 Section 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 (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 Section 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 Section 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. 22 18 (b) Without limiting the effect of the provisions of paragraph (a) of this Section 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 Section 3.04 hereof shall be applicable). (c) Without limiting the effect of the foregoing provisions of this Section 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 Section 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 Section 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 23 19 supplemented and in effect from time to time or any replacement thereof. (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 Section 3.01 as promptly as practicable, but in any event within 150 days, after such Bank obtains actual knowledge thereof; provided, however, that if any Bank fails to give such notice within 150 days after it obtains actual knowledge of such an event, such Bank shall, with respect to compensation payable pursuant to this Section 3.01 in respect of any costs resulting from such event, only be entitled to payment under this Section 3.01 for costs incurred from and after the date 150 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 Section 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 Section 3.01. Determinations and allocations by any Bank for purposes of this Section 3.01 of the effect of any Regulatory Change pursuant to paragraph (a) or (b) of this Section 3.01, or of the effect of capital maintained pursuant to paragraph (c) of this Section 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 Section 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 or LIBOR Market Loans is determined as provided in this Agreement or against any category of extensions of credit or other assets of such 24 20 Bank which includes any Eurodollar Loans or LIBOR Market 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 or LIBOR Market Loan made by such Bank for each day during such Interest Period: (i) the principal amount of such Eurodollar Loan or LIBOR Market 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 or LIBOR Market 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. Section 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 (or any Bank that has outstanding a Money Market Quote with respect to a LIBOR Market Loan determines), 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 or LIBOR Market Loans, as the case may be, 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; 25 21 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. Section 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 or LIBOR Market 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 Section 3.04 hereof shall be applicable), and such Bank shall no longer be obligated to make any LIBOR Market Loan that it has offered to make. Section 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 Section 3.01 or Section 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 Section 3.01(b) or Section 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. Section 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: (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 26 22 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 Section 1.05 or Section 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 a LIBOR Market 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). Section 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 Section 4.01 Conditions to Effectiveness. (a) The Agreement herein contemplated shall become effective on the date (the "Effective Date") on which each Agent has received each of the following documents (with a copy for each Bank delivered to Chase), in form and substance satisfactory to each Agent: (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 27 23 signed this Agreement on behalf of 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 as provided in Section 1.10 hereof, in each case duly completed and executed by the Company; (v) an opinion of Hughes Hubbard & Reed, 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 Vice President and Secretary of the Company substantially in the form attached to said Exhibit B; (vi) an opinion of Vinson & Elkins, L.L.P., 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. (b) On the Effective Date, (i) the Company shall repay the principal of and interest on the loan outstanding under the Existing Agreement made by Continental Bank N.A., (ii) the Company shall pay all accrued and unpaid commitment fees outstanding under the Existing Agreement to Chase for account of each "Bank" under the Existing Agreement, (iii) each loan outstanding under the Existing Agreement other than the loan referred to in clause (i) of this sentence shall be deemed a Money Market Loan hereunder in the amount, with the same rate of interest and maturity date as such loan under the Existing Agreement, and the obligations of the Company with respect to such loan under the Existing Agreement including accrued and unpaid interest shall be deemed renewed and carried forward hereunder and (iv) the Existing Agreement and the "Commitments" thereunder shall be terminated. On or promptly after the Effective Date, the Banks that are "Banks" under the Existing Agreement shall return to the Company the "Notes," as defined in the Existing Agreement (the "Existing Notes"), issued to such Banks thereunder, marked "paid in full," and the Agents shall not deliver to any Bank the Notes issued by the Company under this Agreement to which such Bank would otherwise be entitled until such Bank has so returned its Existing Notes unless the Company shall consent in writing thereto. 28 24 Section 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 Section 6.03, Section 6.04, Section 6.05, Section 6.07, Section 6.09 and Section 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: Section 5.01 Financial Statements. The Company shall deliver to each Bank: (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, (B) a statement by said accountants that in the course of their 29 25 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, and (C) 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. (c) With the report delivered under Section 5.01(b) hereof, a statement signed by an Appropriate Officer of the Company certifying and, where calculations are necessary, demonstrating compliance by the Company and (if applicable) its Restricted Subsidiaries with the provisions of Section 5.09 and Section 5.10 hereof. (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. Section 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 Section 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 30 26 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 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 Section 8.05 hereof. Section 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. Section 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. Section 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, except that any such Restricted Subsidiary may merge or consolidate with the Company or any of the Company's other Subsidiaries provided that (i) the surviving entity of such merger or consolidation (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 or consolidation, no Default shall have occurred and be continuing; or 31 27 (c) from and after the Effective Date, sell, assign, transfer or otherwise dispose of any of the Company's assets, or permit any Restricted Subsidiary to sell, assign, transfer or otherwise dispose of any of the assets of such Restricted Subsidiary, if the sum of (A) the net book value of such assets measured at the time of the disposition thereof, plus (B) the net book value of all other such assets of the Company and the Restricted Subsidiaries measured at the time of the disposition thereof which have been sold, assigned, transferred or otherwise disposed of subsequent to the Effective Date, minus (C) the aggregate net book value of all assets useful in the ordinary course of the business of the Company and its Consolidated Subsidiaries as conducted on the Effective Date purchased or otherwise acquired by the Company and its Consolidated Subsidiaries subsequent to the Effective Date, would exceed $500,000,000; provided that (1) the Company may sell, assign or transfer any of its assets to any such Restricted Subsidiary, (2) any such Restricted Subsidiary may sell, assign or transfer any of its assets to the Company or another such Restricted Subsidiary, (3) the Company or any Restricted Subsidiary may sell any of its marketable securities, (4) the Company or any Restricted Subsidiary may sell, assign or transfer any assets that are, in the good faith judgment of the Company or such Restricted Subsidiary, worn-out or obsolete and no longer useful in the business of the Company or such Restricted Subsidiary, (5) the Company or any Restricted Subsidiary may sell inventories and oil and gas produced in the ordinary course of business, (6) the Company may, to the extent permitted by clause (d) of this Section 5.05, sell, assign, transfer or otherwise dispose of the stock of or other equity interest in any Restricted Subsidiary, (7) the Company may sell, assign, transfer or otherwise dispose of capital stock of Sonat Offshore Drilling Inc., a Delaware corporation, and capital stock of Baker Hughes Inc. and (8) the Company or any Restricted Subsidiary may assign, transfer or otherwise dispose of cash, and the transactions referred to in this proviso shall be excluded from the calculations referred to in this clause (c); and provided, further that, as used in this clause (c), references to the assets of the Company shall be deemed to be references to assets held directly by the Company and references to the assets of, or to any sale, assignment, transfer or other disposition to or by, any Restricted Subsidiary shall be deemed to be references to the assets of, or to a sale, assignment, transfer or other disposition to or by, such Restricted Subsidiary and its Subsidiaries; or 32 28 (d) sell, assign, transfer or otherwise dispose of 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 (d), (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 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). Section 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. Section 5.07 ERISA. The Company will furnish to the Banks: 33 29 (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. Section 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 Agent for the benefit of the Banks an equal and ratable security interest in the assets subject to 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 34 30 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 not otherwise permitted under the preceding clauses (a) through (c) 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 (d) shall not exceed $1,000,000. Section 5.09 Total Indebtedness to Consolidated Capitalization. The Company will not at any time permit Total Indebtedness of the Company to exceed 60% of the Consolidated Capitalization of the Company. Section 5.10 Subsidiary Indebtedness Limitations. The Company shall not permit any Restricted Subsidiary (other than SNG and its Subsidiaries), or any of their respective Subsidiaries, to incur or have outstanding any Indebtedness except for: (a) in the case of Sonat Exploration and its Subsidiaries, Indebtedness in an aggregate principal amount up to but not exceeding $15,000,000 at any one time outstanding; and (b) any Indebtedness of any Subsidiary to the Company or to another Subsidiary of the Company, provided that such Indebtedness shall not have a final maturity of more than one year after the date of creation thereof or be extendible or renewable at the option of such Subsidiary for more than one year from such date. Section 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 35 31 and carry such other insurance as is usually carried by such corporations. Section 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 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 Section 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 Section 5.12 shall prohibit any sale, assignment, transfer or other disposition permitted by Section 5.05 hereof. Section 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: Section 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. Section 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 36 32 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 Section 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. Section 6.03 Financial Condition. The consolidated balance sheets of the Company and its Consolidated Subsidiaries as at December 31, 1992 and September 30, 1993 and the related 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 the financial statements as of September 30, 1993 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). Except as disclosed in a letter dated December 22, 1993, from the Treasurer of the Company, a copy of which has been furnished to each Bank, since December 31, 1992 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. Section 6.04 Litigation. Except as disclosed in a letter dated December 22, 1993, from the Vice President and Secretary of the Company, a copy of which has heretofore been furnished to each Bank, there are no actions, suits or proceedings, and 37 33 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. Section 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. Section 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). Section 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. Section 6.08 Regulation U. 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 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. Section 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. 38 34 Section 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. Section 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. 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 Section 1.03 or Section 2.08 hereof which shall remain unremedied for ten days after the same becomes due and payable; 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 Section 5.05, Section 5.08 or Section 5.09 hereof; 39 35 E. default by the Company in the due performance or observance of Section 5.06(a) or Section 5.10 hereof which shall remain unremedied for a period of ten days; F. default by the Company in the due performance or observance of Section 5.03 or Section 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 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 $10,000,000, 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 debts, or 40 36 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, (1) in the case of any of the Events of Default specified in paragraphs A through I above, (i) any 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 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 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, 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 Agent or the Majority Banks or any Bank, all 41 37 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 thereunder shall become and be due and payable. VIII. MISCELLANEOUS Section 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 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. Section 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. Section 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. Section 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 42 38 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 Section 8.04 are in addition to other rights and remedies (including, without limitation, other rights of set-off) which the Banks may have. Section 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 Section 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 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 Section 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 Section 5.02 hereof (and such Bank shall promptly furnish a copy of each such agreement to the Company). Section 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 43 39 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 Vinson & Elkins, L.L.P., 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. Section 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 Section 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 Section 8.07, (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. 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 extend to any subsequent or other Event of Default or any right, power or privilege of the Banks hereunder in connection therewith. Section 8.08 Definitions. Certain terms are defined in Schedule 1 hereto and as used herein shall have meanings as so defined. 44 40 Section 8.09 Successors and Assigns. 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. Section 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. IX. THE AGENTS Section 9.01 Appointment, Power and Immunities. Each Bank hereby irrevocably appoints and authorizes each 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 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. Section 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 45 41 payee of any Note as the owner thereof for all purposes hereof unless and until a notice of the assignment thereof satisfactory to Chase 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. Section 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 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 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 Agents shall have received such directions, the 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. Section 9.04 Rights as a Lender. With respect to its Commitment and the Loans made by it or any collateral therefor, each of Chase, Chemical and Morgan (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, Chemical and Morgan (and any successor Agent hereunder) in its individual capacity. Each of Chase, Chemical and Morgan (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. 46 42 Section 9.05 Indemnification. The Banks severally agree to indemnify each Agent (to the extent requested by such Agent as provided in Section 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 Section 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 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. Section 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. Section 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 47 43 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. Section 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. Section 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. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written. SONAT INC. By /s/ Thomas W. Barker, Jr. ------------------------- Title: Vice President - Finance and Treasurer 48 44
Commitment - ------------ $ 60,000,000 THE CHASE MANHATTAN BANK (NATIONAL ASSOCIATION) By /s/ Bettylou J. Roleert ------------------------------ Title: Vice President $ 60,000,000 CHEMICAL BANK By /s/ R. C. Wilson III ------------------------------ Title: Vice President $ 55,000,000 THE TORONTO-DOMINION BANK By /s/ Lisa Allison ------------------------------ Title: Manager, Credit Administration $ 45,000,000 THE BANK OF NOVA SCOTIA By /s/ Patrick M. Brown ------------------------------ Title: Representative $ 45,000,000 CIBC INC. By /s/ Alice E. Davidson ------------------------------ Title: Vice President $ 20,000,000 MORGAN GUARANTY TRUST COMPANY OF NEW YORK By /s/ Steven Tulip ------------------------------ Title: Vice President
49 45 $ 35,000,000 TRUST COMPANY BANK By /s/ James O. Clarke III ------------------------------ Title: Group Vice President $ 25,000,000 CREDIT LYONNAIS CAYMAN ISLAND BRANCH By /s/ Xavier Ratouis ------------------------------ Title: Authorized Signature $ 25,000,000 NATIONSBANK OF TEXAS, N.A. By /s/ H. Gene Shiels ------------------------------ Title: Vice President $ 20,000,000 MELLON BANK, N.A. By /s/ Mary Ellen Usher ------------------------------ Title: Vice President $ 40,000,000 J.P. MORGAN DELAWARE By /s/ Philip S. Detjens ------------------------------ Title: Vice President $ 20,000,000 WACHOVIA BANK OF GEORGIA, N.A. By /s/ Nicholi T. Weaver ------------------------------- Title: Assistant Vice President $ 10,000,000 AMSOUTH BANK N.A. By /s/ John M. Kettig ------------------------------ Title: Senior Vice President
50 46 $ 10,000,000 THE MITSUBISHI BANK LIMITED - NEW YORK BRANCH By /s/ Yukuo Ashida ------------------------------ Title: Joint General Manager $ 10,000,000 NBD BANK, N.A. By /s/ James L. Caldwell -------------------------------- Title: First Vice President $ 10,000,000 PNC BANK, NATIONAL ASSOCIATION By /s/ William S. Bennett -------------------------------- Title: Assistant Vice President $ 10,000,000 THE SANWA BANK, LIMITED, ATLANTA AGENCY By /s/ Virginia C. Simpson -------------------------------- Title: Assistant Vice President - ------------ $500,000,000
51 47 Agents THE CHASE MANHATTAN BANK (NATIONAL ASSOCIATION) as Agent By /s/ Bettylou J. Roleert ------------------------------ Title: Vice President CHEMICAL BANK as Agent By /s/ R. C. Wilson III ------------------------------ Title: Vice President MORGAN GUARANTY TRUST COMPANY OF NEW YORK as Agent By /s/ Steven Tulip ------------------------------ Title: Vice President 52 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 Section 3.01(a) hereof. "Affected Loans" shall have the meaning attributed thereto in Section 3.04 hereto. "Affected Type" shall have the meaning attributed thereto in Section 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 Commitment Fee Rate" shall mean, with respect to any day, the percentage indicated below opposite the Rating Level in effect on such day:
Rating Level Percentage ------------ ---------- I 0.050% II 0.060% III 0.065% IV 0.070% V 0.100% VI 0.000%
"Applicable Facility Fee Rate" shall mean, with respect to any day, the percentage indicated below opposite the Rating Level in effect on such day:
Rating Level Percentage ------------ ---------- I 0.1000% II 0.1150% III 0.1225% IV 0.1300% V 0.1500% VI 0.3000%
"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 53 2 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:
Rating Level Percentage ------------ ---------- I 0.30% II 0.40% III 0.45% IV 0.50% V 0.55% VI 0.60%
"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. "Banks" shall have the meaning attributed thereto in the preamble to this Agreement. "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 Section 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 the giving of notices or quotes in connection with a LIBOR Auction or to a borrowing of, a payment or prepayment of principal of or interest on, or the Interest Period for, a Eurodollar Loan or a LIBOR Market 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 Section 1.04(b) hereto. 54 3 "Chase" shall mean The Chase Manhattan Bank (National Association) in its capacity as one of the Agents. "Chemical" shall mean Chemical Bank in its capacity as one of the Agents. "Commitment" shall mean, as to each Bank, the obligation of such Bank to make Syndicated Loans pursuant to Section 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 the signature pages hereto under the caption "Commitment" (as the same may be reduced at any time or from time to time pursuant to Section 1.04 hereof). "Commitment Termination Date" shall mean the Annual Date in 1998 or any subsequent Annual Date to which the Commitment Termination Date shall have been extended pursuant to Section 1.08 hereof. "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. "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. "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 Section 4.01(a) 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 55 4 (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. "Existing Agreement" shall mean that certain Amended and Restated Credit Agreement dated as of November 1, 1989, among the Company, the banks named therein and the agents named therein, as amended by Amendment No. 1 thereto dated as of August 1, 1990, and Amendment No. 2 thereto dated as of January 9, 1991. "Existing Note" shall have the meaning attributed thereto in Section 4.01(b) 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 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 (National Association) 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 56 5 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 or LIBOR Market 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; provided that in the case of any LIBOR Market Loan, the Fixed Base Rate for such Loan shall be determined with reference to deposits of $25,000,000. 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 Banks. "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 and, for the purposes of the definition of "Fixed Base Rate" herein and Article III hereof, LIBOR Market 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 57 6 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 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 (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 58 7 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 or a LIBOR Market 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 Section 2.03 hereof. "LIBO Rate" shall mean, for any LIBOR Market Loan, a rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) determined by Chase to be equal to the rate of interest specified in the definition of "Fixed Base Rate" in this Schedule 1 for the Interest Period for such Loan. "LIBOR Auction" shall mean a solicitation of Money Market Quotes setting forth Money Market Margins based on the LIBO Rate pursuant to Section 1.02 hereof. "LIBOR Market Loans" shall mean Money Market Loans the interest rates on which are determined on the basis of LIBO Rates pursuant to a LIBOR Auction. "Loans" shall mean Money Market Loans and Syndicated 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 Banks shall mean Banks 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. 59 8 "Money Market Borrowing" shall have the meaning assigned to such term in Section 1.02(b) hereof. "Money Market Loans" shall mean the loans provided for by Section 1.02 hereof. "Money Market Margin" shall have the meaning assigned to such term in Section 1.02(c)(ii)(C) hereof. "Money Market Note" shall have the meaning assigned to such term in Section 1.10(b) hereof. "Money Market Quote" shall mean an offer in accordance with Section 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 Section 1.02(b) hereof. "Money Market Rate" shall have the meaning assigned to such term in Section 1.02(c)(ii)(D) hereof. "Morgan" shall mean Morgan Guaranty Trust Company of New York in its capacity as one of the Agents. "Note" shall mean a Syndicated Note or a Money Market 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 60 9 unincorporated organization or a government or any agency, instrumentality or political subdivision thereof. "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 Section 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 (National Association), its principal office in New York, New York, presently located at 1 Chase Manhattan Plaza, New York, N.Y., (ii) with respect to Morgan, its principal office in New York, New York, presently located at 23 Wall Street, New York, N.Y. and (iii) with respect to Chemical, its principal office in New York, New York, presently located at 270 Park Avenue, New York, N.Y. "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 Section 1.02(b)(v) 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: 61 10
Rating Level ------ ----- A- or better by S&P and I A3 or better by Moody's BBB+ or better by S&P II and Baa1 or better by Moody's, but such ratings do not qualify for a higher Rating Level BBB or better by S&P and III Baa1 or better by Moody's or BBB+ or better by S&P and Baa2 or better by Moody's but in either case such ratings do not qualify for a higher Rating Level BBB or better by S&P and IV Baa2 or better by Moody's, but such ratings do not qualify for a higher Rating Level BBB- or better by S&P and V Baa2 or better by Moody's or BBB or better by S&P and Baa3 or better by Moody's but in either case such ratings do not qualify for a higher Rating Level BBB- or below by S&P or Baa3 VI or below by Moody's but in either case such ratings do not qualify for a higher Rating Level
For purposes of this definition, "I" shall be the highest level and "VI" 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 62 11 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 VI. "Reference Banks" shall mean The Chase Manhattan Bank (National Association), The Bank of Nova Scotia and Morgan Guaranty Trust Company of New York (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. "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 Section 1.02 hereof. 63 12 "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 Corporation. "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. "Syndicated Loans" shall mean the loans provided for by Section 1.01 hereof. "Syndicated Note" shall have the meaning assigned to such term in Section 1.10(a) hereof. "Termination Event" shall mean any event or condition which would constitute grounds under Section 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). 64 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 65 2 2. THE CHASE MANHATTAN BANK, N.A. (AS A BANK AND AS AGENT) Lending Office for All Types of Loans: ------------------------------------- The Chase Manhattan Bank, N.A. 1 Chase Manhattan Plaza New York, New York 10081 Address for Notices: ------------------- The Chase Manhattan Bank, N.A. 90 William Street New York, New York 10081 Attention: New York Agency Group Jeannine Lazzara Telephone: 212-676-0581 Fax: 212-676-0659 Telex: 6720516 Answerback: CMBNYAUW With copies to: -------------- The Chase Manhattan Bank, N.A. 1 Chase Manhattan Plaza New York, New York 10081 Attention: Global Energy Division The Chase Manhattan Bank, N.A. 1 Chase Manhattan Plaza New York, New York 10081 Attention: Financial Products Money Market Management 35th floor Chase Manhattan Securities 1100 Milan, Suite 2345 Houston, Texas 77002 66 3 3. MORGAN GUARANTY TRUST COMPANY OF NEW YORK (AS A BANK AND AS AGENT) Lending Office for Domestic Loans: --------------------------------- Morgan Guaranty Trust Company of New York 60 Wall Street New York, New York 10260 Lending Office for Eurodollar Loans: ----------------------------------- Morgan Guaranty Trust Company of New York Nassau Bahamas Office c/o J.P. Morgan Services Inc. Euro-Loan Servicing Unit - Loan Operations 500 Stanton-Christiana Road - 3rd Fl. Newark, Delaware 19713 Address for Notices: ------------------- Morgan Guaranty Trust Company of New York c/o J.P. Morgan Services Inc. 500 Stanton-Christiana Road Newark, Delaware 19713 Attention: Multi-Option Unit-Loan Department Telephone: 302-634-1800 Fax: 302-634-1094 Telex: 177615 Answerback: MGT UT 67 4 4. CHEMICAL BANK (AS A BANK AND AS AGENT) Lending Office for All Types of Loans: ------------------------------------- Chemical Bank 270 Park Avenue 8th Floor New York, New York 10017 Address for Notices: ------------------- Chemical Bank 270 Park Avenue 8th Floor New York, NY 10017 Attention: Sonat Inc. Telephone: (212) 270-3521 Fax: (212) 270-4016 68 5 5. THE TORONTO-DOMINION BANK Lending Office for All Types of Loans: ------------------------------------- The Toronto-Dominion Bank 909 Fannin Street 17th Floor Houston, TX 77010 Address for Notices: ------------------- The Toronto-Dominion Bank 909 Fannin Street 17th Floor Houston, TX 77010 Attention: Ms. Lisa Allison Manager, Credit Administration Telephone: 713-653-8247 Fax: 713-951-9921 69 6 6. 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: Eudia Smith Telephone: 404-877-1553 Fax: 404-888-8998 70 7 7. CANADIAN IMPERIAL BANK OF COMMERCE Lending Office for All Types of Loans: ------------------------------------- Canadian Imperial Bank of Commerce 2 Paces West 2727 Paces Ferry Road Suite 1200 Atlanta, Georgia 30339 Address for Notices: -------------------- Canadian Imperial Bank of Commerce 2 Paces West 2727 Paces Ferry Road Suite 1200 Atlanta, Georgia 30339 Attention: Adrienne Burch Senior Associate Telephone: 404-319-4835 Fax: 404-319-4950 Telex: 54-2413 Answerback: CANBANK ATL 71 8 8. TRUST COMPANY BANK Lending Office for All Types of Loans: ------------------------------------- Trust Company Bank 25 Park Place Atlanta, Georgia 30303 Address for Notices: ------------------- Trust Company Bank P.O. Box 4418, Mail Code 120 Atlanta, Georgia 30303 Attention: Tanya Van Hoozer Telephone: 404-581-1612 Fax: 404-588-8833 Telex: 54220 Answerback: TruscoIntAtl 72 9 9. CREDIT LYONNAIS CAYMEN ISLAND BRANCH Lending Office for All Types of Loans ------------------------------------- Credit Lyonnais Cayman Island Branch c/o Credit Lyonnais Houston Representative Office 1000 Louisiana, Suite #5360 Houston, Texas 77002 Address for Notices: ------------------- Credit Lyonnais Cayman Island Branch c/o Credit Lyonnais Houston Representative Office 1000 Louisiana, Suite #5360 Houston, Texas 77002 Attention: Richard S. Kaufman Vice President Telephone: (713) 751-0500 Fax: (713) 751-0307 Telex: 6868674 Answerback: CL HOU UN 73 10 10. NATIONSBANK OF TEXAS, N.A. Lending Office for All Types of Loans: ------------------------------------- NationsBank of Texas, N.A. 700 Louisiana Houston, TX 77002 Address for Notices: ------------------- NationsBank of Texas, N.A. 700 Louisiana Houston, TX 77002 Attention: Energy Group Telephone: 713-247-6078 Fax: 713-247-6432 Telex: 6829317 Answerback: NationSBk DAL 74 11 11. MELLON BANK, N.A. Lending Office for All Types of Loans: ------------------------------------- Mellon Bank, N.A. Mellon Financial Services Suite 3600 1100 Louisiana Houston, Texas 77002 Address for notices: -------------------- Mellon Bank, N.A. Three Mellon Bank Center Loan Administration Room 2303 Pittsburgh, PA 15259 Attention: Kristine DiDomenico Telephone: 412-234-4714 Fax: 412-236-2077 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 75 12 12. J.P. MORGAN DELAWARE Lending Office for All Types of Loans: ------------------------------------- J.P. Morgan Services, Inc. Loan Department 500 Stanton-Christiana Road Newark, DE 19713-2107 Address for Notices: ------------------- J.P. Morgan Services, Inc. Loan Operations 500 Stanton-Christiana Road Newark, DE 19713-2107 Attention: Joy Murphy Compher Associate Telephone: 302-634-1411 Fax: 302-634-1093 76 13 13. WACHOVIA BANK OF GEORGIA, N.A. Lending Office for All Types of Loans: ------------------------------------- Wachovia Bank of Georgia, N.A. 191 Peachtree Street N.E. 29th Floor Atlanta, Georgia 30303-1757 Address for Notices: ------------------- Wachovia Bank of Georgia, N.A. 191 Peachtree Street N.E. 29th Floor Atlanta, Georgia 30303-1757 Attention: Nick Weaver Assistant Vice President Telephone: 404-332-4062 Fax: 404-332-5016 77 14 14. AMSOUTH BANK N.A. Lending Office for All Types of Loans: ------------------------------------- AmSouth Bank N.A. 1900 Fifth Avenue North Birmingham, Alabama 35203 Address for Notices: ------------------- AmSouth Bank N.A. 1900 Fifth Avenue North Birmingham, Alabama 35203 Attention: John M. Kettig Senior Vice President Telephone: 205-326-5924 Fax: 205-801-0157 78 15 15. THE MITSUBISHI BANK LIMITED - NEW YORK BRANCH Lending Office for All Types of Loans: ------------------------------------- The Mitsubishi Bank Limited - New York Branch 191 Peachtree Street Suite 1170 Atlanta, GA 30303 Address for Notices: ------------------- The Mitsubishi Bank Limited - New York Branch 225 Liberty Street Two World Financial Center New York, NY 10281 Attention: Frank Conigliaro Assistant Vice President Telephone: Fax: 212-667-3554 Telex: 232328 Answerback: MITUR 79 16 16. NBD BANK, N.A. Lending Office for All Types of Loans ------------------------------------- NBD Bank, N.A. 611 Woodward Avenue Detroit, Michigan 48226 Address for Notices: ------------------- NBD Bank, N.A. 611 Woodward Avenue Detroit, Michigan 48226 Attention: Energy Group Telephone: 313-225-3191 Fax: 313-225-2649 80 17 17. PNC BANK, NATIONAL ASSOCIATION Lending Office for All Types of Loans ------------------------------------- PNC Bank Natural Resources Department 3rd Floor One PNC Plaza Pittsburgh, PA 15265 Address for Notices: ------------------- PNC Bank Natural Resources Department 3rd Floor One PNC Plaza Pittsburgh, PA 15265 Attention: William Bennett Telephone: 412-762-2571 Fax: 412-762-2784 81 18 18. THE SANWA BANK, LIMITED, ATLANTA AGENCY Lending Office for All Types of Loans: ------------------------------------- The Sanwa Bank, Limited, Atlanta Agency 133 Peachtree Street, N.E. Suite 4750 Atlanta, GA 30303 Address for Notices: ------------------- The Sanwa Bank, Limited, Atlanta Agency 133 Peachtree Street, N.E. Suite 4750 Atlanta, GA 30303 Attention: Kristie Hartrampf Telephone: 404-586-6893 Fax: 404-589-1629 Telex: 4611830 Answerback: SANWATL 82 EXHIBIT A-1 (Form of Note for Syndicated Loans) PROMISSORY NOTE $________________ ____________, 1993 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 (National Association) 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 December 15, 1993, among the Company, the banks named therein and The Chase Manhattan Bank (National Association), Chemical Bank and Morgan Guaranty Trust Company of New York, as Agents, 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. 83 2 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. This Note shall be governed by, and construed in accordance with, the law of the State of New York. SONAT INC. By -------------------------- Title: 84 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:
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 ---- --------- ---- -------- -------- ------- --------- --------
85 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 (National Association) 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, type, 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 December 15, 1993, among the Company, the banks named therein (including the Bank) and The Chase Manhattan Bank (National Association), Chemical Bank and Morgan Guaranty Trust Company of New York, as Agents, 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. 86 2 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. This Note shall be governed by, and construed in accordance with, the law of the State of New York. SONAT INC. By ---------------------------- Title: 87 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:
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 ---- --------- ---- -------- -------- ------- --------- --------
88 EXHIBIT B (Form of Opinion of Special Counsel to the Company) December ___, 1993 To the Banks party to the Agreement referred to below and The Chase Manhattan Bank (National Association), Chemical Bank and Morgan Guaranty Trust Company of New York, as Agents 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 December 15, 1993, among the Company, the Banks named therein and The Chase Manhattan Bank (National Association), Chemical Bank and Morgan Guaranty Trust Company of New York, as Agents. This opinion is delivered to you pursuant to Section 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 Beverley T. Krannich, Esq., Vice President and Secretary of the Company. 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. 89 2 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. 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. 90 3 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, insolvency, moratorium and other like laws of general application affecting creditors' rights and to the application of general principles of equity), except that we express no opinion as to (i) Section 2.06(c) of the Agreement or (ii) the effect of the law of any jurisdiction (other than the State of New York) wherein any Bank (including any of its Applicable Lending Offices) may be located which limits rates of interest which may be charged or collected by such Bank or (iii) whether a Federal or state court outside of the State of New York would give effect to the choice of New York law provided for in the Agreement and the Notes. 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. Very truly yours, 91 (ATTACHMENT TO EXHIBIT B) (Form of Opinion of Vice President and Secretary of the Company) December ___, 1993 Hughes Hubbard & Reed One Battery Park Plaza New York, New York 10004 Dear Sirs: As Vice President and Secretary of Sonat Inc., a Delaware corporation (the "Company"), I am familiar with the Credit Agreement (the "Agreement") dated as of December 15, 1993, among the Company, the Banks named therein, and The Chase Manhattan Bank (National Association), Chemical Bank and Morgan Guaranty Trust Company of New York, as Agents. This opinion is delivered to you in connection with the opinion which you are rendering pursuant to Section 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 offices 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 92 2 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. 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, 93 EXHIBIT C (Form of Opinion of Special Counsel to the Banks and the Agents) December ___, 1993 To the Banks party to the Credit Agreement referred to below and The Chase Manhattan Bank (National Association), Chemical Bank and Morgan Guaranty Trust Company of New York, as Agents Gentlemen: We have acted as your specialcounsel in connection with the Credit Agreement (the "Credit Agreement") dated as of December 15, 1993, among Sonat Inc. (the "Company"), the Banks named therein, and The Chase Manhattan Bank (National Association), Chemical Bank and Morgan Guaranty Trust Company of New York, as Agents. Terms defined in the Credit Agreement are used herein as defined therein. We have assumed for purposes of our opinion hereinafter set forth that the Credit Agreement has been duly authorized, executed and delivered by the Company, each Bank and each Agent, and that 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. We have examined originals or copies authenticated to our satisfaction of all such corporate records of the Company, agreements and other instruments, certificates of public officials and of officers and representatives of the Company and other documents, as we have deemed necessary in connection with the opinions hereinafter expressed. In such examination 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. As to questions of fact material to such opinions we have, when relevant facts were not independently established, relied upon representations and certificates of the Company and its officers. 94 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 will constitute, valid and binding obligations of the Company enforceable in accordance with their respective terms, except as such enforceability may be limited by (a) bankruptcy, insolvency, reorganization, moratorium or other similar laws of general applicability affecting the enforcement of creditors' rights and (b) the application of general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law), and except that we express no opinion as to (i) Section 2.06(c) of the Credit Agreement or (ii) the effect of the law of any jurisdiction (other than the State of New York) wherein any Bank (including any of its Applicable Lending Offices) may be located which limits rates of interest which may be charged or collected by such Bank. In addition, we express no opinion as to whether a Federal or state court outside of the State of New York would give effect to the choice of New York law provided for in the Credit Agreement and the Notes. In connection with the above, we wish to point out that provisions of the Credit Agreement which permit either Agent or any Bank to take action or make determinations, 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 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 undertaking be taken or not taken, on a reasonable basis and in good faith. We 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. Very truly yours, 95 EXHIBIT D (Form of Money Market Quote Request) (Date) To: (Bank) From: Sonat Inc. Re: Money Market Quote Request Pursuant to Section 1.02 of the Credit Agreement (the "Credit Agreement") dated as of December 15, 1993, between Sonat Inc., the banks named therein and The Chase Manhattan Bank (National Association), Chemical Bank and Morgan Guaranty Trust Company of New York, as Agents, we hereby give notice that we request Money Market Quotes for the following proposed Money Market Borrowing(s):
Borrowing Quotation Interest Date Date(*1) Amount(*2) Type(*3) Period(*4) - --------- --------- ---------- -------- ----------
Money Market Quotes responding to this Money Market Quote Request must be submitted to us not later than (time and date) (*5). Terms used herein have the meanings assigned to them in the Credit Agreement. SONAT INC. By --------------------- Title: ___________________ * All numbered footnotes appear on the last page of this Exhibit. 96 2 ____________________ (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) Insert either "Margin" (in the case of LIBOR Market Loans) or "Rate" (in the case of Set Rate Loans). (4) One, two, three or six months, in the case of a LIBOR Market Loan or, in the case of a Set Rate Loan, a period of up to 180 days after the making of such Set Rate Loan and ending on a Business Day. (5) Insert time and date determined pursuant to Section 1.02(c)(i). 97 EXHIBIT E (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 Section 1.02(c) of the Credit Agreement (the "Credit Agreement") dated as of December 15, 1993, between Sonat Inc., the banks named therein and The Chase Manhattan Bank (National Association), Chemical Bank and Morgan Guaranty Trust Company of New York, as Agents. 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):
Borrowing Quotation Interest Date Date(*1) Amount(*2) Type(*3) Period(*4) Rate(*5) - --------- --------- ---------- -------- ---------- --------
____________________ * All numbered footnotes appear on the last page of this Exhibit. 98 2 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 Section 1.02(d) of the Credit Agreement). Very truly yours, (Name of Bank) By --------------------- Authorized Officer 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) Indicate "Margin" (in the case of LIBOR Market Loans) or "Rate" (in the case of Set Rate Loans). (4) One, two, three or six months, in the case of a LIBOR Market Loan or, in the case of a Set Rate Loan, 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. (5) For a LIBOR Market Loan, specify margin over or under the London interbank offered rate determined for the applicable Interest Period. Specify percentage (rounded to the nearest 1/10,000 of 1%) and specify whether "PLUS" or "MINUS". For a Set Rate Loan, specify rate of interest per annum (rounded to the nearest 1/10,000 of 1%). EX-10.(4) 3 SONAT SUPPLEMENTAL BENEFIT PLAN 1 EXHIBIT 10-(4) SONAT INC. SUPPLEMENTAL BENEFIT PLAN (AS AMENDED AND RESTATED EFFECTIVE FEBRUARY 25, 1993) 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: (a) To provide benefits ("Excess Retirement Plan Benefits") in excess of the limitations imposed by Sections 401(a)(17) and 415 of the Internal Revenue Code of 1986, as amended (the "Code"), on the Retirement Plan. (b) 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). (c) 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. 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 2 2 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"). 3 3 The Plan was amended effective as of September 6, 1989 to reflect an amendment to the Retirement Plan permitting participants to elect that benefits payable to a child be instead payable to a trust for the benefit of such child. The Plan was amended and restated as of December 1, 1991 in order to further modify the time of commencement and form in which Excess Retirement Plan Benefits, Excess Savings Plan Benefits and Vesting Benefits are paid. The Plan is amended and restated as of the date hereof 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. 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 (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. 4 4 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 full calendar months before the date of the Participant's Termination of Continuous Employment, the Participant filed with the Company an irrevocable written election to have such benefits paid in Annuity Form, in which case such benefits shall be paid in Annuity Form. Notwithstanding any other provision of the Plan, a Participant's election with respect to the portion of his or her Excess Retirement Plan Benefit attributable to his or her retirement benefit shall determine the Form in which the portion of such benefit attributable to any related survivor benefit is paid. 2.3 LUMP SUM FORM The following provisions of this Section 2.3 apply to Excess Retirement Plan Benefits which are paid in Lump Sum Form. (A) BENEFIT UPON TERMINATION OF CONTINUOUS EMPLOYMENT. Upon the Termination of Continuous Employment 5 5 (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 6 6 (2) if the Participant is entitled to a Retirement Benefit and has an Eligible Spouse (as defined in Section 2.3(e) below) on the date of such Termination of Continuous Employment, the Actuarial Equivalent of the excess, if any, of (i) the amount that hypothetically would have been payable to the Eligible Spouse as a Survivors Benefit under the Retirement Plan upon the death of the Participant if Sections 401(a)(17) and 415 of the Code were nonexistent and Section 7.10 and the provisions of the Retirement Plan incorporating the limitations contained in Sections 401(a)(17) and 415 of the Code were inoperative, over (ii) the amount which hypothetically would have been payable to the Eligible Spouse as a Survivors Benefit under the Retirement Plan upon application of the actual terms of the Retirement Plan, assuming that for purposes of clauses (i) and (ii) the Participant died at the end of his or her life expectancy as determined pursuant to the mortality table used to determine Actuarial Equivalents. 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 7 7 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 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 8 8 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 10-year AA-rated general obligation tax-exempt bonds as determined by Merrill Lynch & Co. (or its affiliates) and 9 9 published in The Wall Street Journal (or other financial publication) on the business day immediately preceding the date of the Participant's Termination of Continuous Employment (for calculation of Actuarial Equivalents under Sections 2.3(a) and 4.2 of this Plan), the date of the Participant's death (for calculation of Actuarial Equivalents under Section 2.3(b) of this Plan), or the date of the Participant's Eligible Spouse's death (for calculation of Actuarial Equivalents under Section 2.3(c) of this Plan) (or, if such yield is not so determined and published on such business day, on the most immediately preceding day on which such yield was so determined and published); provided, however, that if such yield has not been so determined and published within 90 days prior to the date of the Participant's Termination of Continuous Employment or death or the date of the Participant's Eligible Spouse's death (as the case may be), the interest rate shall be the yield on substantially similar securities on the business day preceding the applicable date as determined by AmSouth Bank N.A. upon the request of either the Company or the Participant, Eligible Spouse or Eligible Child (as the case may be). Notwithstanding the preceding provisions of this Section 2.3(d), if the only Survivors Benefit to which an Eligible Spouse is entitled under the Retirement Plan is an ERISA Preretirement Survivor Annuity, determination of Actuarial Equivalent under Section 2.3(b) shall be based upon 10 10 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 Annuity Form 11 11 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 12 12 annuity, in monthly installments commencing (A) on the Participant's early or normal retirement date, as the case may be, under the Retirement Plan; or (B) in the case of a Participant entitled to a Projected Retirement Benefit, upon his or her Termination of Continuous Employment. (ii) If the Participant is entitled to a Vested Benefit under the Retirement Plan, the amount of the Participant's Excess Retirement Plan Benefit shall be calculated using the Retirement Plan's early benefit commencement factors (which are incorporated in the Retirement Plan's definition of Actuarial Equivalent) and the Section 415 limits which apply for the benefit commencement date elected by the Participant under the Retirement Plan. However, payment of such Excess Retirement Plan Benefit shall not commence until the first day of the month following the Participant's attainment of normal retirement age. Such Benefit shall be payable (1) to the Participant in the form of a single life annuity if the Participant does not have a Spouse at the time the Excess Retirement Plan Benefit commences, and (2) to the Participant and his or her Spouse in the form of a 50% joint and survivor annuity if the Participant has a Spouse at the time the Excess Retirement Plan Benefit commences. 13 13 (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 14 14 (ii) one-fourth of the annual prime rate for corporate borrowers quoted by The Chase Manhattan Bank, N.A. at the beginning of the calendar quarter. At the end of the calendar quarter in which occurs the earlier of the Participant's attainment of normal retirement age or the Participant's death, the Company shall debit the Participant's Vested Benefits Account and pay to such Participant (or in the event of the Participant's death, to his or her Beneficiary) the entire balance in such Account. (B) SURVIVOR ANNUITY. Each Eligible Family Member of a Participant under the Retirement Plan shall be entitled to Excess Retirement Plan Benefits equal to the excess, if any, of (i) the amount that hypothetically would have been payable to the Eligible Family Member as a Survivors Benefit under the Retirement Plan (after any 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, 15 15 commencing on the first day of the month following the death of the Participant, as follows: (i) If the Participant's Eligible Family Members include an Eligible Spouse (which term, for purposes of this Section 2.4, shall have the meaning set forth in the Retirement Plan), the Excess Retirement Plan Benefits for such Eligible Family Members shall be payable to such Eligible Spouse until such person dies or is no longer an Eligible Spouse. (ii) If Excess Retirement Plan Benefits cease to be payable to an Eligible Spouse, or in the event there is no Eligible Spouse at the date of the Participant's death, the Excess Retirement Plan Benefits otherwise payable to such Eligible Spouse shall be payable to an Eligible Child, until the earlier of the death of such Eligible Child or the date on which he or she ceases to be an Eligible Child, with such Benefits to be divided equally among the Eligible Children in the event that there is more than one Eligible Child. In the event there is more than one Eligible Child and Excess Retirement Plan Benefits cease with respect to one Eligible Child, each subsequent payment of Excess Retirement Plan Benefits will be divided equally among the remaining Eligible Children. Notwithstanding the preceding provisions of this Section 2.4(b), if the only Survivor's Benefit to which the Eligible 16 16 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) or, if the Participant has so elected under the Retirement Plan, an Eligible Trust (as defined in the Retirement Plan) for the benefit of such Eligible Child. However, if the Administrative Committee of the Retirement Plan determines that a 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, notwithstanding the Participant's election with respect to the trust. ARTICLE III - EXCESS SAVINGS PLAN BENEFITS 3.1 ELIGIBILITY Each employee on whose behalf Employer Contributions to the Savings Plan are limited by Sections 401(a)(17), 401(m), 17 17 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 Deferred and Employee Contributions to the Savings Plan is limited by Sections 401(a)(17), 401(m), and/or 415 of the Code and the incorporation of those limitations in the Savings Plan shall be entitled to Excess Savings Plan Benefits under this Plan, regardless of whether such Participant has received notice that he or she is so entitled. All capitalized terms used in this Article III and not defined in this Plan shall have the meanings ascribed thereto in the Savings Plan. 3.2 CREDITS TO ACCOUNT The Company shall create and maintain on its books an account for each Participant (the "Account") to which it shall credit (i) the amount of any Employer 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 Employer 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 18 18 Participant contributed the Deferred and Employee 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 to the Account at such time after the end of each pay period as Employer Contributions for such pay period are paid to the Savings Plan. At the end of each calendar quarter, regardless of whether any other credits are then made to the Account or whether the Participant is then in the employ of the Employers, the Company shall also credit to the Account a sum which is equal to the product of (i) the average balance in the Account for the quarter (without regard to any debits made at the end of such quarter) times (ii) one-fourth of the annual prime rate for corporate borrowers quoted by The Chase Manhattan Bank, N.A. at the beginning of the quarter. The amount of a Participant's Excess Savings Plan Benefits shall be equal to the balance of his or her Account. 3.3 PAYMENT OF ACCOUNT Upon a Participant's Termination of Employment, the Company shall debit his or her Account 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 3.3. 19 19 (A) CASH LUMP SUM. Except as provided in Section 3.3(b) or 3.3(c) below, upon a Participant's Termination of Employment, 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 balance in the Participant's Account (contributions credited plus interest thereon) as of the date of Termination of Employment; (ii) interest on such balance equal to the product of (A) the average balance in the Account for the period from the end of the previous calendar quarter to the date of Termination of Employment (without regard to any debits made at the end of such period), times (B) one-twelfth of the annual prime rate for corporate borrowers quoted by The Chase Manhattan Bank, N.A. at the beginning of the period, times (C) the number of full and fractional calendar months in the period; and (iii) any Employer Contributions that would have been credited to the Account under Section 3.2 for pay periods beginning before the Participant's Termination of Employment if such Employer Contributions have not yet been credited at the time of Termination of Employment. (B) INSTALLMENTS. If, at least twelve full calendar months before the date of the Participant's Termination of Employment, the Participant filed with the Company an irrevocable written election to have all or any designated portion of such benefits paid in installments, payment of such Participant's Account shall be made in such number of annual 20 20 installments (to a maximum of 15) as shall have been designated by the Participant in the written election referred to above. Payment shall commence as soon as practicable after the last day of the calendar quarter following the Participant's Termination of Employment. Each installment shall be in an amount equal to the quotient of (i) the balance in the Participant's Account at the time the payment is to be made, divided by (ii) the number of installments remaining to be paid (including the installment about to be paid). (C) PRIOR ELECTIONS. Notwithstanding the provisions of Sections 3.3 (a) and (b), any election made by a Participant prior to February 25, 1993 to have payment of all or a portion of his Account made in installments shall be irrevocable. In the event that no election is in effect for a given year after 1983 and prior to 1988, the Participant shall be deemed to have elected installment payments for such year for purposes of the preceding sentence. The provisions of Sections 3.3 (a) and (b) shall apply with respect to any portion of the Participant's Account 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. 3.4 CHANGE OF CONTROL PROVISIONS Notwithstanding a Participant's election or the provisions of Section 3.3, in the event of a Participant's 21 21 Termination of Employment within three years following a Change of Control (as defined in Section 4.3 below), then the Participant's entire Excess Savings Plan Benefit shall be paid to the Participant as soon as practicable (and within 30 days) after his or her Termination of Employment in a cash lump sum as provided in Section 3.3(a) above. 3.5 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 Beneficiary under the Savings Plan. ARTICLE IV - VESTING BENEFITS 4.1. ELIGIBILITY Each employee who has had a Termination of Continuous Employment and who is a member of the Vesting Group (as defined in Section 4.4 below) (a "Participant") shall be entitled to Vesting Benefits hereunder, regardless of whether such Participant has received notice that he or she is so entitled, but only if a Change of Control (as defined in Section 4.3 below) has occurred while he or she is employed by one of the Employers and is a member of the Vesting Group. All capitalized terms used in this Article IV and not defined in 22 22 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. 23 23 4.3 DEFINITION OF CHANGE OF CONTROL A "Change of Control" shall be deemed to have occurred if: (i) any "person" (as defined in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934, as in effect as of May 3, 1984) is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934, as such Rules were in effect as of May 3, 1984) of securities of the Company representing 35% or more of the voting power of the outstanding securities of the Company having the right under ordinary circumstances to vote at an election of the Board of Directors, (ii) there shall occur a change in the composition of a majority of the Board of Directors of the Company within any period of three consecutive years which change shall not have been approved by a majority of the Board of Directors of the Company as constituted immediately prior to the commencement of such period, or (iii) at any meeting of the stockholders of the Company called for the purpose of electing directors, all persons nominated by the Board of Directors for election as directors shall fail to be elected. 4.4 DEFINITION OF VESTING GROUP An employee shall be deemed to be a member of the Vesting Group if, immediately prior to the occurrence of a Change of Control, he or she (1) is a participant in the Retirement Plan, (2) is employed as an officer by an Employing Company (as defined in the Retirement Plan) and (3) is not fully vested under the Retirement Plan. ARTICLE V - FUNDING 5.1. UNFUNDED PLAN The Plan shall be unfunded, and the entire cost of 24 24 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 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 25 25 Disability Plan to the full extent that they formerly would have been payable under this Plan. To the extent that abenefit 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. 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 26 26 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, 27 27 representative, individual or institution shall be a valid and complete discharge for payment of such benefit. 6.10 CHOICE OF LAW THIS PLAN SHALL BE INTERPRETED PURSUANT TO THE LAWS OF THE STATE OF ALABAMA, WITHOUT GIVING EFFECT TO ITS CONFLICTS OF LAWS PRINCIPLES. IN WITNESS WHEREOF, Sonat Inc. has caused this Plan as amended and restated hereby to be executed as of February 25, 1993. By: /s/ Ronald L. Kuehn, Jr. ---------------------------------- Ronald L. Kuehn, Jr., Chairman, President and Chief Executive Officer EX-10.(5) 4 SONAT EXECUTIVE AWARD PLAN 1 EXHIBIT 10-(5) EXECUTIVE AWARD PLAN OF SONAT INC. (AS AMENDED AND RESTATED AS OF DECEMBER 3, 1993) I. GENERAL 1.1 PURPOSE OF THE PLAN The Executive Award Plan (the "Plan") of Sonat Inc. (the "Company") is intended to advance the best interests of the Company and its subsidiaries by providing key employees with additional incentives through the grant of options ("Options") to purchase shares of Common Stock of the Company ("Common Stock") and through the award of shares of restricted Common Stock ("Restricted Stock"), thereby increasing the personal stake of such employees in the continued success and growth of the Company and encouraging them to remain in the employ of the Company. The Plan was adopted effective May 1, 1981, and has been amended at various times. The provisions of the Plan as hereby amended and restated may, at the discretion of the Committee referred to below, be made available to all grants outstanding on April 25, 1991, and all awards granted after such date, except that no such provision shall alter any outstanding grant in a manner unfavorable to the holder thereof without the written consent of the holder. 1.2 ADMINISTRATION OF THE PLAN (a) The Plan shall be administered by the Executive Compensation Committee or other designated committee (the "Committee") of the Board of Directors of the Company (the "Board of Directors") which shall consist of at least three Directors all of whom are not eligible to participate in the Plan and are "disinterested" within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934. The Committee shall have authority to interpret conclusively the provisions of the Plan, to adopt such rules and regulations for carrying out the Plan as it may deem advisable, to decide conclusively all questions of fact arising in the application of the Plan, and to make all other determinations necessary or advisable for the administration of the Plan. All decisions and acts of the Committee shall be final and binding upon all affected Plan participants. (b) The Committee shall meet once each fiscal year, and at such additional times as it may determine or at the request of the chief executive officer of the 2 Company, to designate the eligible employees, if any, to be granted awards under the Plan and the type and amount of such awards and the time when awards will be granted. All awards granted under the Plan shall be on the terms and subject to the conditions hereinafter provided. 1.3 ELIGIBLE PARTICIPANTS Key employees, including officers, of the Company and its subsidiaries, and of partnerships or joint ventures in which the Company and its subsidiaries have a significant ownership interest as determined by the Committee (all of such subsidiaries, partnerships and joint ventures being referred to as "Subsidiaries") shall be eligible to participate in the Plan. Directors who are not employees of the Company or its Subsidiaries shall not be eligible to participate in the Plan. 1.4 AWARDS UNDER THE PLAN Awards under the Plan may be in the form of (i) Options to purchase shares of Common Stock, (ii) Stock Appreciation Rights which may be issued in tandem with such Options, (iii) shares of Restricted Stock, (iv) Supplemental Payments which may be awarded with respect to Options, Stock Appreciation Rights and Restricted Stock, or (v) any combination of the foregoing. 1.5 SHARES SUBJECT TO THE PLAN The aggregate number of shares of Common Stock which may be issued with respect to Options or Restricted Stock granted after April 24, 1991 (including Stock Appreciation Rights and Supplemental Payments related thereto) shall not exceed (i) 4,000,000 shares plus (ii) the number of shares previously authorized for use in the Plan which have not been issued or have again become available for grants pursuant to the following paragraph. At no time shall the number of shares issued plus the number of shares subject to outstanding awards under the Plan exceed the number of shares that may be issued under the Plan. Options with respect to more than 250,000 shares of Common Stock shall not be granted to any optionee in any 12-month period. Shares distributed pursuant to the Plan may consist of authorized but unissued shares or treasury shares of the Company, as shall be determined from time to time by the Board of Directors. If any Option under the Plan shall expire, terminate or be cancelled (except upon the holder's exercise of a related Stock Appreciation Right) for any reason without having been exercised in full, or if any shares of Restricted Stock shall be forfeited to the Company, the unexercised Options and forfeited shares of Restricted Stock shall not count against the above limit and shall again become available for grants under the Plan (unless the holder of such Options or shares received dividends or other economic benefits with respect to such Options or shares, which dividends or other - 2 - 3 economic benefits are not forfeited). Shares of Common Stock equal in number to the shares surrendered in payment of the option price, and shares of Common Stock which are withheld in order to satisfy federal, state or local tax liability, shall count against the above limit. Notwithstanding the foregoing, the shares referred to in clause (ii) of the first sentence of this Section 1.5 shall be available for issuance only with respect to Options or Restricted Stock granted prior to April 24, 1995 and Stock Appreciation Rights and Supplemental Payments related thereto. 1.6 OTHER COMPENSATION PROGRAMS The existence and terms of the Plan shall not limit the authority of the Board of Directors in compensating employees of the Company and its subsidiaries in such other forms and amounts, including compensation pursuant to any other plans as may be currently in effect or adopted in the future, as it may determine from time to time. II. STOCK OPTIONS 2.1 TERMS AND CONDITIONS OF OPTIONS Subject to the following provisions, all Options granted under the Plan shall be in such form and shall have such terms and conditions as the Committee, in its discretion, may from time to time determine. (a) Option Price. The option price per share shall not be less than the fair market value of the Common Stock (as determined by the Committee) on the date the Option is granted. (b) Term of Option. The term of an Option shall not exceed ten years from the date of grant, and, notwithstanding any other provision of this Plan, no Option shall be exercised after the expiration of its term. (c) Exercise of Options. Options shall be exercisable at such time or times and subject to such terms and conditions as the Committee shall specify in the Option grant. The Committee shall have discretion to at any time declare all or any portion of the Options held by any optionee to be immediately exercisable. An Option may be exercised in accordance with its terms as to any or all shares purchasable thereunder. (d) Payment for Shares. Payment for shares as to which an Option is exercised shall be made in such manner and at such time or times as shall be provided by the Committee in the Option grant. Payment may be made in cash or in such other manner as the Committee in its discretion may authorize. - 3 - 4 (e) Nontransferability of Options. No Option or any interest therein shall be transferable by the optionee other than by will or by the laws of descent and distribution. During an optionee's lifetime, all Options shall be exercisable only by such optionee or by the guardian or legal representative of the optionee. (f) Shareholder Rights. The holder of an Option shall, as such, have none of the rights of a shareholder. (g) Termination of Employment. The Committee shall have discretion to specify in the Option grant or an amendment thereof, provisions with respect to the period, not extending beyond the term of the Option, during which the Option may be exercised following the optionee's termination of employment. (h) Change of Control. Notwithstanding the exercisability schedule governing any Option, upon the occurrence of a Change of Control (as defined in Section 4.9) all Options outstanding at the time of such Change of Control and held by optionees who are employees of the Company or its Subsidiaries at the time of such Change of Control shall become immediately exercisable and, unless the optionee agrees otherwise in writing, shall remain exercisable for a period of three years following the optionee's termination of employment or such longer period as may be provided in the Option. 2.2 STOCK APPRECIATION RIGHTS IN TANDEM WITH OPTIONS (a) The Committee may, either at the time of grant of an Option or at any time during the term of the Option, grant Stock Appreciation Rights with respect to all or any portion of the shares of Common Stock covered by such Option. A Stock Appreciation Right may be exercised at any time the Option to which it relates is then exercisable, but only to the extent the Option to which it relates is exercisable, and shall be subject to the conditions applicable to such Option. When a Stock Appreciation Right is exercised, the Option to which it relates shall cease to be exercisable to the extent of the number of shares with respect to which the Stock Appreciation Right is exercised. Similarly, when an Option is exercised, the Stock Appreciation Rights relating to the shares covered by such Option exercise shall terminate. Any Stock Appreciation Right which is outstanding on the last day of the term of the related Option (as determined pursuant to Section 2.1(b)) shall be automatically exercised on such date for cash without any action by the optionee. (b) Upon exercise of a Stock Appreciation Right, the holder shall receive, for each share with respect to which the Stock Appreciation Right is exercised, an amount (the "Appreciation") equal to the difference between the option price per share of the Option to which the Stock Appreciation Right relates and the fair market value (as determined by the Committee) of a share of Common Stock on the date of - 4 - 5 exercise of the Stock Appreciation Right. The Appreciation shall be payable in cash, Common stock, or a combination of both, at the option of the Committee, and shall be paid within 30 days of the exercise of the Stock Appreciation Right. (c) Notwithstanding the foregoing, if a Stock Appreciation Right is exercised within 60 days of the occurrence of a Change of Control, (i) the Appreciation and any Supplemental Payment (as defined in Section 2.3) to which the holder is entitled shall be payable solely in cash if the Stock Appreciation Right has been outstanding at least six months and solely in Common Stock in all other cases, and (ii) in addition to the Appreciation and the Supplemental Payment (if any), the holder shall receive (in cash, if the Stock Appreciation Right has been outstanding for at least six months, and in Common Stock in all other cases) (1) the amount by which the greater of (a) the highest market price per share of Common Stock during the 60-day period preceding exercise of the Stock Appreciation Right or (b) the highest price per share of Common Stock (or the cash-equivalent thereof as determined by the Board of Directors) paid by an acquiring person during the 60-day period preceding a Change of Control, exceeds the Appreciation, plus (2) if the holder is entitled to a Supplemental Payment, an additional payment, calculated under the same formula as used for calculating such holder's Supplemental Payment, with respect to the amount referred to in clause (1) of this sentence. 2.3 SUPPLEMENTAL PAYMENT ON EXERCISE OF OPTIONS OR STOCK APPRECIATION RIGHTS The Committee, either at the time of grant or at the time of exercise of any Option or related Stock Appreciation Right, may provide for a supplemental payment (the "Supplemental Payment") by the Company to the optionee with respect to the exercise of any Option or related Stock Appreciation Right. The Supplemental Payment shall be in the amount specified by the Committee, which shall not exceed, but may be equal to, the amount necessary to pay the federal income tax payable with respect to both exercise of the Option or related Stock Appreciation Right and receipt of the Supplemental Payment, assuming the optionee is taxed at the maximum effective federal income tax rate applicable thereto. The Supplemental Payment shall be paid in cash, Common Stock, or a combination of both, at the option of the Committee. The Supplemental Payment shall be paid within 30 days of the date of exercise of an Option or Stock Appreciation Right (or, if later, within 30 days of the date on which income is recognized for federal income tax purposes with respect to such exercise). 2.4 STATUTORY OPTIONS Subject to the limitations on Option terms set forth in Section 2.1, the Committee shall have the authority to grant (i) incentive stock options within the meaning of Section 422 of the Code and (ii) Options containing such terms and conditions as shall be required to qualify such Options for preferential tax treatment - 5 - 6 under the Code as in effect at the time of such grant. Options granted pursuant to this Section 2.4 may contain such other terms and conditions permitted by Article II of this Plan as the Committee, in its discretion, may from time to time determine (including, without limitation, provision for Stock Appreciation Rights and Supplemental Payments), to the extent that such terms and conditions do not cause the Options to lose their preferential tax treatment. To the extent the Code and Regulations promulgated thereunder require a plan to contain specified provisions in order to qualify options for preferential tax treatment, such provisions shall be deemed to be stated in this Plan. III. RESTRICTED STOCK 3.1 TERMS AND CONDITIONS OF RESTRICTED STOCK AWARDS Subject to the following provisions, all awards of Restricted Stock shall be in such form and shall have such terms and conditions as the Committee, in its discretion, may from time to time determine: (a) The Restricted Stock award shall specify the number of shares of Restricted Stock to be awarded, the price, if any, to be paid by the recipient of the Restricted Stock, and the date or dates on which the Restricted Stock will vest. The vesting of Restricted Stock may be conditioned upon the completion of a specified period of service with the Company or its Subsidiaries, upon the attainment of specified performance goals, or upon such other criteria as the Committee may determine in its sole discretion. (b) Stock certificates representing the Restricted Stock granted to an employee shall be registered in the employee's name. Such certificates shall either be held by the Company on behalf of the employee, or delivered to the employee bearing a legend to restrict transfer of the certificate until the Restricted Stock has vested, as determined by the Committee. The Committee shall determine whether the employee shall have the right to vote and/or receive dividends on the Restricted Stock before it has vested. No share of Restricted Stock may be sold, transferred, assigned, or pledged by the employee until such share has vested in accordance with the terms of the Restricted Stock award. In the event of an employee's termination of employment before all of his Restricted Stock has vested, or in the event other conditions to the vesting of Restricted Stock have not been satisfied prior to any deadline for the satisfaction of such conditions set forth in the award, the shares of Restricted Stock which have not vested shall be forfeited and any purchase price paid by the employee shall be returned to the employee. At the time Restricted Stock vests (and, if the employee has been issued legended certificates of Restricted Stock, upon the return of such certificates to the - 6 - 7 Company), a certificate for such vested shares shall be delivered to the employee (or the beneficiary designated by the employee in the event of death), free of all restrictions. (c) Notwithstanding the vesting conditions set forth in the Restricted Stock award, (i) the Committee may in its discretion accelerate the vesting of Restricted Stock at any time, and (ii) all shares of Restricted Stock shall vest upon a Change of Control of the Company. 3.2 SUPPLEMENTAL PAYMENT ON VESTING OF RESTRICTED STOCK The Committee, either at the time of grant or at the time of vesting of Restricted Stock, may provide for a Supplemental Payment by the Company to the employee in an amount specified by the Committee which shall not exceed, but may be equal to, the amount necessary to pay the federal income tax payable with respect to both the vesting of the Restricted Stock and receipt of the Supplemental Payment, assuming the employee is taxed at the maximum effective federal income tax rate applicable thereto and has not elected to recognize income with respect to the Restricted Stock before the date such Restricted Stock vests. The Supplemental Payment shall be paid within 30 days of each date that Restricted Stock vests. The Supplemental Payment shall be paid in cash or Common Stock, in the discretion of the Committee, except that in the event of a Change of Control the Supplemental Payment shall be paid in cash. IV. ADDITIONAL PROVISIONS 4.1 GENERAL RESTRICTIONS Each award under the Plan shall be subject to the requirement that, if at any time the Committee shall determine that (i) the listing, registration or qualification of the shares of Common Stock subject or related thereto upon any securities exchange or under any state or federal law, or (ii) the consent or approval of any government regulatory body, or (iii) an agreement by the recipient of an award with respect to the disposition of shares of Common Stock is necessary or desirable (in connection with any requirement or interpretation of any federal or state securities law, rule or regulation) as a condition of, or in connection with, the granting of such award or the issuance, purchase or delivery of shares of Common Stock thereunder, such award may not be consummated in whole or in part unless such listing, registration, qualification, consent, approval or agreement shall have been effected or obtained free of any conditions not acceptable to the Committee. - 7 - 8 4.2 ADJUSTMENTS FOR CHANGES IN CAPITALIZATION In the event of a reorganization, recapitalization, stock split, stock dividend, combination of shares, rights offer, liquidation, dissolution, merger, consolidation, spin-off, sale of assets, payment of an extraordinary cash dividend, or any other change in or affecting the corporate structure or capitalization of the Company, the Committee shall make appropriate adjustment in the number and kind of shares authorized by the Plan, in the number, price or kind of shares covered by the awards and in any outstanding awards under the Plan. 4.3 AMENDMENTS (a) The Board of Directors may amend the Plan from time to time. No such amendment shall require approval by the stockholders unless stockholder approval is required by applicable law or stock exchange requirements. (b) The Committee shall have the authority to amend any grant to include any provision which, at the time of such amendment, is authorized under the terms of the Plan; however, no outstanding award may be revoked or altered in a manner unfavorable to the holder without the written consent of the holder. 4.4 CANCELLATION OF AWARDS Any award granted under the Plan may be cancelled at any time with the consent of the holder and a new award may be granted to such holder in lieu thereof, which award may, in the discretion of the Committee, be on more favorable terms and conditions than the cancelled award. 4.5 WITHHOLDING (a) Whenever the Company proposes or is required to issue or transfer shares of Common Stock under the Plan, the Company shall have the right to require the holder to remit to the Company an amount sufficient to satisfy any federal, state or local withholding tax liability prior to the delivery of any certificate for such shares. Whenever under the Plan payments are to be made in cash, such payments shall be net of an amount sufficient to satisfy any federal, state or local withholding tax liability. (b) An employee entitled to receive Common Stock under the Plan who has not received a cash Supplemental Payment may elect to have the federal, state and local tax liability (or a specified portion thereof) with respect to such Common Stock satisfied by having the Company withhold from the shares otherwise deliverable to the employee shares of Common Stock having a value equal to the amount of the tax liability to be satisfied with respect to the Common Stock. An election to have all or - 8 - 9 a portion of the tax liability satisfied using Common Stock shall comply with such requirements as may be imposed by the Committee and shall be subject to the disapproval of the Committee (expressed either prior to or within two days after the making of such election). 4.6 NON-ASSIGNABILITY Except as expressly provided in the Plan, no award under the Plan shall be assignable or transferable by the holder thereof except by will or by the laws of descent and distribution. During the life of the holder, awards under the Plan shall be exercisable only by such holder or by the guardian or legal representative of such holder. 4.7 NON-UNIFORM DETERMINATIONS Determinations by the Committee under the Plan (including, without limitation, determinations of the persons to receive awards; the form, amount and timing of such awards; the terms and provisions of such awards and the agreements evidencing same; and provisions with respect to termination of employment) need not be uniform and may be made by it selectively among persons who receive, or are eligible to receive, awards under the Plan, whether or not such persons are similarly situated. 4.8 NO GUARANTEE OF EMPLOYMENT The grant of an award under the Plan shall not constitute an assurance of continued employment for any period. 4.9 CHANGE OF CONTROL A "Change of Control" shall be deemed to have occurred if: (i) any "person" (as defined in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934, as in effect on March 1, 1985) is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934 as in effect on March 1, 1985) of securities of the Company representing 35% or more of the voting power of the outstanding securities of the Company having the right under ordinary circumstances to vote at an election of the Board of Directors, (ii) there shall occur a change in the composition of a majority of the Board of Directors within any period of three consecutive years which change shall not have been approved by a majority of the Board of Directors as constituted immediately prior to the commencement of such period, or - 9 - 10 (iii) at any meeting of the stockholders of the Company called for the purpose of electing directors, all persons nominated by the Board of Directors for election as directors shall fail to be elected. 4.10 DURATION AND TERMINATION (a) The Plan shall be of unlimited duration. Notwithstanding the foregoing, no incentive stock option (within the meaning of Section 422 of the Code) shall be granted under the Plan after April 24, 2001, but awards granted prior to such date may extend beyond such date, and the terms of this Plan shall continue to apply to all awards granted hereunder. (b) The Board of Directors may discontinue or terminate the Plan at any time. Such action shall not impair any of the rights of any holder of any award outstanding on the date of the Plan's discontinuance or termination without the holder's written consent. This document (a) incorporates into a single document the provisions of the Plan as amended and restated as of April 25, 1991 and the provisions of the amendment to the Plan dated as of May 28, 1992, (b) pursuant to Section 4.2, amends the Plan to reflect the two-for-one split of the Company's Common Stock that was effective as of September 15, 1993, and (c) amends the Plan to limit the number of Options that may be granted to any employee in a 12-month period. IN WITNESS WHEREOF, this document has been executed as of December 3, 1993. SONAT INC. by: /s/ Ronald L. Kuehn, Jr. ---------------------------- Ronald L. Kuehn, Jr. Chairman of the Board, President and Chief Executive Officer - 10 - EX-10.(6) 5 SONAT RESTRICTED STOCK PLAN 1 EXHIBIT 10-(6) RESTRICTED STOCK PLAN FOR DIRECTORS OF SONAT INC. (AS AMENDED AND RESTATED AS OF SEPTEMBER 15, 1993) 1. PURPOSE. This Restricted Stock Plan for Directors of Sonat Inc. (the "Plan") is hereby established by Sonat Inc. (the "Company"). The purpose of the Plan is to enable the Company to pay part of the compensation of its non-employee Directors in shares of the Company's Common Stock, thereby providing for or increasing such Directors' proprietary interest in the Company. The Plan provides for the grant of shares of Common Stock of the Company which are restricted in accordance with the terms and conditions set forth below ("Restricted Shares"). 2. ELIGIBILITY. Each Director of the Company who is not an officer or employee of the Company or any of its subsidiaries (an "Eligible Director") shall be eligible for awards under the Plan. Each Eligible Director to whom Restricted Shares are granted under the Plan is hereinafter referred to as a "Participant". 3. ADMINISTRATION. The Plan shall be administered by a committee of at least three Directors (the "Committee") appointed by the Board of Directors of the Company (the "Board of Directors"). The Committee shall have authority to interpret the Plan, to adopt, amend and rescind administrative regulations to further the purposes of the Plan, and to take any other action necessary to the proper operation of the Plan. All decisions and acts of the Committee shall be final and binding upon all Plan Participants. 4. GRANT OF RESTRICTED SHARES. (a)(1) Each Eligible Director who is a member of the Board of Directors on the commencement date of the Initial Plan Period (as defined below) and whose Retirement Date (as defined below) will occur after the termination date of such Initial Plan Period shall be granted 600 Restricted Shares, effective as of the commencement date of the Initial Plan Period. Each Eligible Director who is a member of the Board of Directors on the commencement date of the Initial Plan Period and whose Retirement Date will occur prior to the termination date of such Initial Plan Period shall be granted, effective as of the commencement date of the Initial Plan Period, 10 Restricted Shares for every calendar month or fraction thereof between the commencement date of the Initial Plan Period and the March 31 coincident with or immediately preceding the Participant's Retirement Date. (2) Each person who becomes an Eligible Director after the commencement date of the Initial Plan Period shall be granted, effective as of the date such person 2 becomes an Eligible Director, 10 Restricted Shares for every calendar month or fraction thereof between the date of such person's election as an Eligible Director and the earlier of March 31, 1993 or the March 31 coincident with or immediately preceding the Participant's Retirement Date. (b)(1) Each Eligible Director who is a member of the Board of Directors on the commencement date of the Second Plan Period (as defined below) and whose Retirement Date will occur after the termination date of such Second Plan Period shall be granted 2,000 Restricted Shares, effective as of the commencement date of the Second Plan Period. Each Eligible Director who is a member of the Board of Directors on the commencement date of the Second Plan Period and whose Retirement Date will occur prior to the termination date of such Second Plan Period shall be granted, effective as of the commencement date of the Second Plan Period, 400 Restricted Shares for every full Plan Year (as defined below) in the period commencing April 1, 1993 and ending on the March 31 coincident with or immediately preceding the Participant's Retirement Date. (2) Each person who becomes an Eligible Director after the commencement date of the Second Plan Period shall be granted, effective as of the date such person becomes an Eligible Director, a number of Restricted Shares equal to the sum of (i) the product of 33.33 multiplied by the number of full and partial calendar months between the date of such person's election as an Eligible Director through the March 31 following such election, with such product rounded up or down to the nearest whole share; plus (ii) 400 Restricted Shares for every full Plan Year in the period commencing on the April 1 following such election and ending on the earlier of March 31, 1998 or the March 31 coincident with or immediately preceding the Participant's Retirement Date. (c) The Initial Plan Period shall mean the period commencing on April 28, 1988 and terminating on April 1, 1993. The Second Plan Period shall mean the period commencing on April 22, 1993 and terminating on April 1, 1998. Plan Year shall mean the period April 1 through the following March 31. (d) For purposes of this Section 4, a Participant's Retirement Date shall mean the date on which the Participant shall be required to retire from the Board of Directors under the retirement policies of the Board of Directors as in effect on the date of grant of Restricted Shares to such Participant. (e) Awards under the Plan shall be made from shares held in the Company's treasury. 5. TERMS AND CONDITIONS OF RESTRICTED SHARES. Stock certificates representing the Restricted Shares granted to a Participant shall be registered in the Participant's name and shall be held by the Company on behalf of the Participant. The -2- 3 Participant shall have the right to vote and receive dividends on such Restricted Shares. The Participant shall not be entitled to delivery of the stock certificates, and no Restricted Share may be sold, transferred, assigned, or pledged by the Participant, until such Restricted Share has vested, as provided in Section 6. In the event a Participant ceases to be a Director of the Company before all of his Restricted Shares have vested, any of such Participant's Restricted Shares which have not vested shall be forfeited. At the time Restricted Shares vest, a certificate for such shares shall be delivered to the Participant (or the Participant's Beneficiary (as defined in Section 10) in the event of the Participant's death), free of all restrictions. 6. VESTING OF RESTRICTED SHARES. (a) With respect to Restricted Shares granted as of the commencement date of the Initial Plan Period, 120 shares shall vest on April 1 of each of the years 1989 through and including 1993. With respect to Restricted Shares granted during the Initial Plan Period but after the commencement date of such Initial Plan Period, (i) on the April 1 following such grant there shall vest a number of shares equal to the product of 10 multiplied by the number of full or partial calendar months from the date of such person's election as an Eligible Director through the March 31 following such election, and (ii) on each April 1 thereafter through the April 1 of the year in which such Initial Plan Period terminates there shall vest 120 shares. (b) With respect to Restricted Shares granted as of the commencement date of the Second Plan Period, 400 shares shall vest on April 1 of each of the years 1994 through and including 1998. With respect to Restricted Shares granted during the Second Plan Period but after the commencement date of such Second Plan Period, (i) on the April 1 following such grant there shall vest a number of shares equal to the product of 33.33 multiplied by the number of full or partial calendar months from the date of such person's election as an Eligible Director through the March 31 following such election, with such product rounded up or down to the nearest whole share, and (ii) on each April 1 thereafter through the April 1 of the year in which such Second Plan Period terminates there shall vest 400 shares. (c) Notwithstanding the provisions of Sections 5, 6(a) and 6(b), all Restricted Shares granted to a Participant shall vest immediately upon the Participant's death or disability. (d) Notwithstanding the provisions of Sections 5, 6(a) and 6(b), in the event of a "Change of Control" (as defined in Section 13), all Restricted Shares shall vest immediately; however, stock certificates for such shares shall be delivered to the Participants, and the restrictions on transfer of the shares shall lapse, in the amounts and at the times set forth in Sections 6(a) and 6(b), regardless of whether the Participant is then serving as a Director of the Company. -3- 4 7. SUPPLEMENTAL PAYMENT ON VESTING OF RESTRICTED SHARES. Within 30 days of each date that Restricted Shares vest, a Supplemental Payment shall be paid to the Participant (or to the Participant's Beneficiary in the event of death), in cash, in an amount equal to the amount necessary to pay the federal income tax payable with respect to both the vesting of the Restricted Shares and receipt of the Supplemental Payment, assuming the Participant is taxed at the maximum effective federal income tax rate applicable thereto and has not elected to recognize income with respect to the Restricted Shares before the date such Restricted Shares vest. 8. REGULATORY COMPLIANCE. The Company shall not be obligated to issue or deliver any Restricted Shares or certificates for Common Stock if (i) the issuance or delivery of such shares shall constitute a violation of any provision of any law or any regulation of any governmental authority or any national securities exchange, or (ii) the Company determines that an agreement by a Participant with respect to the disposition of shares of Common Stock is necessary or desirable (in connection with any requirement or interpretation of any federal or state securities law, rule or regulation) and such agreement has not been obtained. 9. ADJUSTMENTS FOR CHANGES IN CAPITALIZATION. In the event of a reorganization, recapitalization, stock split, stock dividend, combination of shares, rights offer, liquidation, dissolution, merger, consolidation, spin-off, sale of assets, payment of an extraordinary cash dividend, or any other change in or affecting the corporate structure or capitalization of the Company, each Restricted Share then outstanding shall be converted into or exchanged for the number and kind of securities or property into which each outstanding share of Common Stock of the Company shall be converted as a result of such event, and the provisions of this Plan shall continue to apply to such substituted securities or property. 10. BENEFICIARY. A Participant may file with the Company a written designation of Beneficiary, on such form as may be prescribed or permitted by the Committee, to receive any Restricted Shares and Supplemental Payments that become deliverable to the Participant pursuant to the Plan after the Participant's death. A Participant may, from time to time, amend or revoke a designation of Beneficiary. If no designated Beneficiary survives the Participant, the Participant's estate shall be deemed to be the Participant's Beneficiary. 11. AMENDMENT TO PLAN. The Board of Directors may amend the Plan from time to time, provided that the Plan provisions with respect to eligibility and the amount, price and timing of awards under the Plan shall not be amended more than once every six months (other than to comport with changes in the Internal Revenue Code of 1986 (as amended), the Employee Retirement Income Security Act of 1974 (as amended), or the rules thereunder). No amendment, without approval by stockholders, may (i) increase the total number of Restricted Shares that may be awarded under the Plan to any individual, or (ii) extend the term of the Plan. No -4- 5 amendment shall adversely affect a Participant's right to receive Restricted Shares granted under the Plan without the written consent of the affected Participant. 12. NO GUARANTY OF DIRECTORSHIP. Nothing in this Plan shall be deemed to create any obligation on the part of the Board to nominate any Director for re-election by the Company's stockholders. 13. CHANGE OF CONTROL. A "Change of Control" shall be deemed to have occurred if: (i) any "person" (as defined in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934, as in effect on March 1, 1985) is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934, as in effect on March 1, 1985) of securities of the Company representing 35% or more of the voting power of the outstanding securities of the Company having the right under ordinary circumstances to vote at an election of the Board of Directors, (ii) there shall occur a change in the composition of a majority of the Board of Directors within any period of three consecutive years which change shall not have been approved by a majority of the Board of Directors as constituted immediately prior to the commencement of such period, or (iii) at any meeting of the stockholders of the Company called for the purpose of electing Directors, all persons nominated by the Board of Directors for election as Directors shall fail to be elected. 14. WITHHOLDING. Whenever the Company proposes or is required to deliver shares of Common Stock under the Plan, the Company shall have the right to require the Participant to remit to the Company an amount sufficient to satisfy any federal, state or local withholding tax liability prior to the delivery of any certificate or certificates for such shares. Supplemental Payments under the Plan shall be net of an amount sufficient to satisfy any federal, state and local withholding tax liability on both the vesting of Restricted Shares and receipt of the Supplemental Payment. 15. EFFECTIVE DATE AND TERMINATION DATE. This Plan became effective April 28, 1988, upon the approval of the Plan by the stockholders of the Company at the Company's 1988 Annual Meeting. The termination date of the Initial Plan Period shall be April 1, 1993. The amendment adding the Second Plan Period shall be effective April 22, 1993, upon the approval of such amendment by the stockholders of the Company at the Company's 1993 Annual Meeting. The Plan's termination date shall be April 1, 1998. The Board of Directors may terminate the Plan prior to its termination date, but such action shall have no effect on Restricted Shares granted prior to such action. -5- 6 Pursuant to Section 9, this document amends and restates the Plan to reflect the two-for-one split of the Company's Common Stock that was effective as of September 15, 1993. SONAT INC. by: /s/ Ronald L. Kuehn, Jr. ------------------------------------- Ronald L. Kuehn, Jr. Chairman of the Board, President and Chief Executive Officer -6- EX-10.(7) 6 SONAT PERFORMANCE AWARD PLAN 1 EXHIBIT 10-(7) PERFORMANCE AWARD PLAN OF SONAT INC. I. GENERAL 1.1 PURPOSE OF THE PLAN The Performance Award Plan (the "Plan") of Sonat Inc. (the "Company") is intended to advance the best interests of the Company and its subsidiaries by providing officers with additional incentives through the payment of bonuses based on the performance of the Company relating to specified objective financial and business criteria, thereby increasing the personal stake of such officers in the continued success and growth of the Company and encouraging them to remain in the employ of the Company. Awards under the Plan are intended to qualify as "performance-based compensation" for purposes of Section 162(m) of the Internal Revenue Code ("Section 162(m)"). 1.2 ADMINISTRATION OF THE PLAN The Plan shall be administered by the Executive Compensation Committee or other designated Committee (the "Committee") of the Board of Directors of the Company (the "Board of Directors") which shall consist solely of two or more Directors, each of whom qualifies as an "outside director" for purposes of Section 162(m). The Committee shall have authority, subject to the provisions of the Plan, in its discretion, to grant awards ("Awards") under the Plan, to interpret conclusively the provisions of the Plan, to adopt such rules and regulations for carrying out the Plan as it may deem advisable, to decide conclusively all questions of fact arising in the application of the Plan, and to make all other determinations necessary or advisable for the administration of the Plan. All decisions and acts of the Committee shall be final and binding upon all affected Plan participants. No member of the Committee shall be liable for any action taken, or determination made, in good faith. 1.3 ELIGIBLE PARTICIPANTS All officers of the Company and its Subsidiaries shall be eligible to participate in the Plan. For purposes of the Plan the term "Subsidiaries" shall mean subsidiaries, partnerships and joint ventures in which the Company and its subsidiaries have at least a 50% ownership interest. Directors who are not officers of the Company or its Subsidiaries shall not be eligible to participate in the Plan. 2 1.4 AWARDS UNDER THE PLAN The Committee shall designate the eligible employees, if any, to be granted Awards under the Plan. All Awards granted under the Plan shall be on the terms and subject to the conditions hereinafter provided. 1.5 OTHER COMPENSATION PROGRAMS The existence and terms of the Plan shall not limit the authority of the Board of Directors in compensating employees of the Company and its Subsidiaries in such other forms and amounts, including compensation pursuant to any other plans as may be currently in effect or adopted in the future, as it may determine from time to time. II. TERMS AND CONDITIONS OF AWARDS 2.1 ESTABLISHMENT OF PERFORMANCE OBJECTIVES AND BONUS OPPORTUNITY Prior to the commencement of each Performance Year (or such later time as may be permitted for performance-based compensation under Section 162(m)), the Committee shall establish written Performance Objectives and a Bonus Opportunity for each eligible employee chosen to receive an Award for such Performance Year. The Performance Objectives shall be based on one or more of the following criteria: Company earnings per share; Company or Subsidiary earnings before interest and taxes or earnings before interest, taxes and corporate charges; Company or Subsidiary net income; Company or Subsidiary revenues, pipeline throughput, oil and gas production volumes, or oil and gas marketing volumes; Company or Subsidiary unit revenues minus unit variable costs; Company or Subsidiary return on capital, return on equity, return on assets, or return on invested capital; Company or Subsidiary cash flow return on assets or cash flows from operating activities; Company or Subsidiary capital expenditures; Company or Subsidiary operations and maintenance expense or general and administrative expense; Company or Subsidiary oil and gas unit operating income or oil and gas unit lifting costs; Company or Subsidiary reserve replacement, reserve replacement costs and reserve acquisition costs; and Company or Subsidiary debt-equity ratios and key profitability ratios. At the time of setting the Performance Objectives, the Committee shall specify the formula to be used in calculating each of the criteria on which an Award is based and their relative weights. The Bonus Opportunity shall be expressed as an amount of cash. The Committee may also specify a minimum acceptable level of achievement of the relevant Performance Objectives, as well as one or more additional levels of achievement, and a formula to determine the percentage of the Bonus Opportunity deemed to have been earned by the employee upon attainment of each such level of achievement, which percentage may exceed 100%. The Performance Objectives and Bonus Opportunity relating to any particular Award need not be the same as those relating to any other Award, whether made at the same or a different time. 2 3 2.2 PERFORMANCE YEAR The Performance Year with respect to an Award shall be the calendar year within which the Performance Objectives relating to that Award are to be achieved. 2.3 EARNING OF AWARD Promptly after the date on which the necessary information for a particular Performance Year becomes available, the Committee shall determine, and certify in writing, the extent to which the Bonus Opportunity for such Performance Year has been earned, through the achievement of the relevant Performance Objectives, by each employee who was granted an Award for such Performance Year. Notwithstanding the terms of any Award, the maximum payout under this Plan to any individual for any Performance Year shall not exceed $1.5 million. 2.4 DISCRETIONARY DOWNWARD ADJUSTMENTS Notwithstanding the terms of any Award, the Committee, in its sole and absolute discretion, may reduce the amount of the Award payable to any employee for any reason, including the Committee's judgment that the Performance Objectives have become an inappropriate measure of achievement, a change in the employment status, position or duties of the employee, unsatisfactory performance of the employee, or the employee's service for less than the entire Performance Year. 2.5 DISTRIBUTIONS Promptly after the Committee has determined the extent to which an Award has been earned, such Award shall be distributed in cash in a lump sum, unless the Committee determines, either at the time of grant or the time of distribution, to distribute all or a portion of such Award in installments or as deferred compensation. The Committee, in its discretion, may adopt a program to permit employees to defer all or a portion of their Award. 2.6 CHANGE OF CONTROL Notwithstanding any other provision of this Plan or contained in any Award granted hereunder (including any provision for deferred payment thereof), upon the occurrence of a Change of Control (as defined in Section 3.6), a participant shall be deemed to have fully earned the Bonus Opportunities contained in his outstanding Awards, and the amount of such Bonus Opportunities shall be paid promptly (and no later than 30 days after the Change of Control) in a cash lump sum. Notwithstanding the provisions of Section 2.4, following a Change of Control the Committee shall not adjust the Bonus Opportunity specified in an Award from that in effect immediately prior to the Change of Control in a manner adverse to the participant. 3 4 III. ADDITIONAL PROVISIONS 3.1 AMENDMENTS The Board of Directors may, in its sole discretion, amend the Plan from time to time. Any such amendment may be made without stockholder approval unless required to satisfy Section 162(m). 3.2 WITHHOLDING Payments under the Plan shall be net of an amount sufficient to satisfy any federal, state or local withholding tax liability. 3.3 NON-ASSIGNABILITY; DEATH OF PARTICIPANT No Award under the Plan shall be assignable or transferable by the holder thereof except by will or by the laws of descent and distribution. In the event of the death of a participant, any payments due to such participant shall be paid to his beneficiary designated in writing to the Committee, or, if none has been designated, to his estate. 3.4 NON-UNIFORM DETERMINATIONS Determinations by the Committee under the Plan (including, without limitation, determinations of the persons to receive Awards; the terms and provisions of such Awards; the relevant Performance Objectives; the amount of Bonus Opportunity; and the amount of any downward adjustment) need not be uniform and may be made by it selectively among persons who receive, or are eligible to receive, Awards under the Plan, whether or not such persons are similarly situated. 3.5 NO GUARANTEE OF EMPLOYMENT The grant of an Award under the Plan shall not constitute an assurance of continued employment for any period. 3.6 CHANGE OF CONTROL A "Change of Control" shall be deemed to have occurred if: (i) any "person" (as defined in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934, as in effect on March 1, 1985) is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934 as in effect on March 1, 1985) of securities of the Company representing 35% or more of the voting power of the outstanding securities of the 4 5 Company having the right under ordinary circumstances to vote at an election of the Board of Directors, (ii) there shall occur a change in the composition of a majority of the Board of Directors within any period of three consecutive years which change shall not have been approved by a majority of the Board of Directors as constituted immediately prior to the commencement of such period, or (iii) at any meeting of the stockholders of the Company called for the purpose of electing directors, all persons nominated by the Board of Directors for election as directors shall fail to be elected. 3.7 UNFUNDED STATUS OF AWARDS; CREATION OF TRUSTS The Plan is intended to constitute an "unfunded" plan. With respect to any amounts payable to a participant pursuant to an Award, nothing contained in the Plan (or in any documents related thereto), nor the creation or adoption of the Plan, the grant of any Award, or the taking of any other action pursuant to the Plan, shall give any such participant any rights that are greater than those of a general creditor of the Company. The Committee may authorize the creation of trusts or make other arrangements to meet the Company's obligations under the Plan, which trusts or other arrangements shall be consistent with the "unfunded" status of the Plan. 3.8 EFFECTIVE DATE AND DURATION OF PLAN The Plan shall become effective on January 27, 1994 subject to the approval thereof by stockholders of the Company at the 1994 annual meeting. Awards may be granted under the Plan for calendar years 1994 through 1998, unless the Plan is terminated earlier by the Board of Directors, in its sole discretion. The Plan shall remain in effect for purposes of administering the payment of Awards granted under the Plan until such payments have been completed. SONAT INC. By: /s/ Ronald L. Kuehn, Jr. ------------------------------------- Ronald L. Kuehn, Jr. Chairman of the Board, President and Chief Executive Officer 5 EX-10.(8) 7 SONAT CASH BONUS PLAN 1 EXHIBIT 10-(8) CASH BONUS PLAN OF SONAT INC. I. GENERAL 1.1 PURPOSE OF THE PLAN The Cash Bonus Plan (the "Plan") of Sonat Inc. (the "Company") is intended to advance the best interests of the Company and its subsidiaries by providing officers with additional incentives through the payment of cash bonuses based on company or individual performance, thereby increasing the personal stake of such employees in the continued success and growth of the Company and encouraging them to remain in the employ of the Company. Such bonuses shall be in addition to any bonuses paid under the Performance Award Plan. 1.2 ADMINISTRATION OF THE PLAN The Plan shall be administered by the Executive Compensation Committee or other designated committee (the "Committee") of the Board of Directors of the Company (the "Board of Directors") which shall consist solely of two or more Directors who are not eligible to participate in the Plan. The Committee shall have authority, subject to the provisions of the Plan, in its discretion, to grant awards under the Plan, to interpret conclusively the provisions of the Plan, to adopt such rules and regulations for carrying out the Plan as it may deem advisable, to decide conclusively all questions of fact arising in the application of the Plan, and to make all other determinations necessary or advisable for the administration of the Plan. All decisions and acts of the Committee shall be final and binding upon all affected Plan participants. No member of the Committee shall be liable for any action taken, or determination made, in good faith. 1.3 ELIGIBLE PARTICIPANTS All officers of the Company and its Subsidiaries shall be eligible to participate in the Plan. For purposes of the Plan, the term "Subsidiaries" shall mean subsidiaries, partnerships and joint ventures in which the Company and its subsidiaries have at least a 50% ownership interest. Directors who are not officers of the Company or its Subsidiaries shall not be eligible to participate in the Plan. 1.4 AWARDS UNDER THE PLAN The Committee shall designate the eligible employees, if any, to be granted awards under the Plan 2 2 (collectively, "Awards"). Awards may be in the form of (i) Annual Bonus Awards pursuant to Article II, or (ii) other bonuses and awards pursuant to Article III. All awards granted under the Plan shall be on the terms and subject to the conditions hereinafter provided. 1.5 OTHER COMPENSATION PROGRAMS The existence and terms of the Plan shall not limit the authority of the Board of Directors in compensating employees of the Company and its Subsidiaries in such other forms and amounts, including compensation pursuant to any other plans as may be currently in effect or adopted in the future, as it may determine from time to time. II. ANNUAL BONUS AWARDS 2.1 ESTABLISHMENT OF PERFORMANCE OBJECTIVES AND BONUS OPPORTUNITY At the time of each grant of an Annual Bonus Award (an "Annual Bonus Award"), the Committee shall establish written Performance Objectives for a specified Performance Period and a Bonus Opportunity for each eligible employee chosen to receive such Annual Bonus Award. The Performance Objectives shall be based on one or more criteria specified by the Committee in the Annual Bonus Award. Such Performance Objectives may be described in terms of Company-wide objectives or of objectives which are related to performance of the employee or of the division, Subsidiary, department or function within the Company in which the employee is employed. The Bonus Opportunity shall be expressed as an amount of cash. The Committee may also specify a minimum acceptable level of achievement of the relevant Performance Objectives, as well as one or more additional levels of achievement, and a formula to determine the percentage of the Bonus Opportunity deemed to have been earned by the employee upon attainment of each such level of achievement, which percentage may exceed 100%. The Performance Objectives and Bonus Opportunity relating to any particular Annual Bonus Award need not be the same as those relating to any other Annual Bonus Award, whether made at the same or a different time. If during the Performance Period relating to any Annual Bonus Award events or transactions occur which, in the sole judgment of the Committee, cause the Performance Objectives or levels of achievement relating to such Annual Bonus Award to be an inappropriate measure of achievement, the 3 3 Committee may adjust such Performance Objectives or levels of achievement. 2.2 PERFORMANCE PERIOD The Performance Period with respect to an Annual Bonus Award shall be the period specified by the Committee within which the Performance Objectives relating to that Annual Bonus Award are to be achieved. 2.3 EARNING OF AWARD Promptly after the date on which the necessary information for a particular Performance Period becomes available, the Committee shall determine the extent to which the Bonus Opportunity for such Performance Period has been earned, through the achievement of the relevant Performance Objectives, by each employee who was granted an Annual Bonus Award for such Performance Period. 2.4 DISCRETIONARY DOWNWARD ADJUSTMENTS Notwithstanding the terms of any Annual Bonus Award, the Committee, in its sole and absolute discretion, may reduce the amount of the Annual Bonus Award payable to any employee for any reason, including the Committee's judgment that the Performance Objectives have become an inappropriate measure of achievement, a change in the employment status, position or duties of the employee, unsatisfactory performance of the employee, or the employee's service for less than the entire Performance Period. 2.5 DISTRIBUTIONS Promptly after the Committee has determined the extent to which an Annual Bonus Award has been earned, such Annual Bonus Award shall be distributed in cash in a lump sum, unless the Committee determines, either at the time of grant or the time of distribution, to distribute all or a portion of such Annual Bonus Award in installments or as deferred compensation. The Committee, in its discretion, may adopt a program to permit employees to defer all or a portion of their Annual Bonus Award. 2.6 CHANGE OF CONTROL Notwithstanding any other provision of this Plan or contained in any Annual Bonus Award granted hereunder (including any provision for deferred payment thereof), upon the occurrence 4 4 of a Change of Control (as defined in Section 4.6), a participant shall be deemed to have fully earned the Bonus Opportunities contained in his outstanding Annual Bonus Awards, and the amount of such Bonus Opportunities shall be paid promptly (and no later than 30 days after theChange of Control) in a cash lump sum. Notwithstanding the provisions of Sections 2.1 and 2.4, following a Change of Control the Committee shall not adjust the Bonus Opportunity specified in an Annual Bonus Award from that in effect immediately prior to the Change of Control in a manner adverse to the participant. III. OTHER CASH BONUSES AND AWARDS 3.1 CASH BONUSES AND AWARDS The Committee, from time to time, may make other cash bonuses and other cash awards to eligible employees. All such awards shall be subject to such terms and conditions, including deferred payment, as the Committee, in its discretion, may determine from time to time. 3.2 CHANGE OF CONTROL Notwithstanding any provision for deferred payment of any bonus or award granted under Section 3.1, upon the occurrence of Change of Control (as defined in Section 4.6), the full amount of such bonus or award shall be paid promptly (and no later than 30 days after the Change of Control) in a cash lump sum. IV. ADDITIONAL PROVISIONS 4.1 AMENDMENTS The Board of Directors may, in its sole discretion, terminate the Plan at any time, or amend it from time to time. Any such amendment may be made without stockholder approval. 4.2 WITHHOLDING Payments under the Plan shall be net of an amount sufficient to satisfy any federal, state or local withholding tax liability. 4.3 NON-ASSIGNABILITY 5 5 No Award under the Plan shall be assignable or transferable by the holder thereof except by will or by the laws of descent and distribution. In the event of the death of a participant, any payments due to such participant shall be paid to his beneficiary designated in writing to the Committee, or, if none has been designated, to his estate. 4.4 NON-UNIFORM DETERMINATIONS Determinations by the Committee under the Plan (including, without limitation, determinations of the persons to receive Awards; the terms and provisions of such Awards; the applicable Performance Objectives and Bonus Opportunity; and the amount of any downward adjustment) need not be uniform and may be made by it selectively among persons who receive, or are eligible to receive, Awards under the Plan, whether or not such persons are similarly situated. 4.5 NO GUARANTEE OF EMPLOYMENT The grant of an Award under the Plan shall not constitute an assurance of continued employment for any period. 4.6 CHANGE OF CONTROL A "Change of Control" shall be deemed to have occurred if: (i) any "person" (as defined in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934, as in effect on March 1, 1985) is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934 as in effect on March 1, 1985) of securities of the Company representing 35% or more of the voting power of the outstanding securities of the Company having the right under ordinary circumstances to vote at an election of the Board of Directors, (ii) there shall occur a change in the composition of a majority of the Board of Directors within any period of three consecutive years which change shall not have been approved by a majority of the Board of Directors as constituted immediately prior to the commencement of such period, or (iii) at any meeting of the stockholders of the Company called for the purpose of electing directors, all persons nominated by the Board of Directors for election as directors shall fail to be elected. 6 6 4.7 UNFUNDED STATUS OF AWARDS; CREATION OF TRUSTS The Plan is intended to constitute an "unfunded" plan. With respect to any amounts payable to a participant pursuant to an Award, nothing contained in the Plan (or in any documents related thereto), nor the creation or adoption of the Plan, the grant of any Award, or the taking of any other action pursuant to the Plan, shall give any such participant any rights that are greater than those of a general creditor of the Company. The Committee may authorize the creation of trusts or make other arrangements to meet the Company's obligations under the Plan, which trusts or other arrangements shall be consistent with the "unfunded" status of the Plan. 4.8 EFFECTIVE DATE AND DURATION OF PLAN The Plan shall become effective on January 27, 1994 and shall remain in effect until such time as it has been terminated by the Board of Directors. SONAT INC. By: /s/ Ronald L. Kuehn, Jr. ------------------------ EX-10.(10) 8 SONAT EXECUTIVE SEVERENCE AGREEMENT 1 EXHIBIT 10-(10) SCHEDULE EXECUTIVE SEVERANCE AGREEMENTS The following Executive Severance Agreements are substantially identical to the Executive Severance Agreement dated April 27, 1989 between Sonat Inc. and Ronald L. Kuehn, Jr. which was filed as Exhibit 10-(14) to the Sonat Inc. Annual Report on Form 10-K for the year ended December 31, 1989: Executive Severance Agreement dated April 27, 1989, between Sonat Inc. and Donald G. Russell. Executive Severance Agreement dated April 27, 1989, between Sonat Inc. and William A. Smith. Executive Severance Agreement dated February 24, 1994, between Sonat Inc. and James A. Rubright. EX-10.(16) 9 SONAT EXECUTIVE LIFE INS PROGRAM 1 EXHIBIT 10-(16) SCHEDULE OF PARTICIPANTS SONAT INC. EXECUTIVE LIFE INSURANCE PROGRAMS The following are participants in the Sonat Inc. Executive Life Insurance Programs, form of which is filed as Exhibit 10-(20) to the Sonat Inc. Annual Report on Form 10-K for the year ended December 31, 1990: Thomas W. Barker, Jr. Richard B. Bates Beverley T. Krannich Ronald L. Kuehn, Jr. James E. Moylan, Jr. Ronald B. Pruet, Jr. James A. Rubright Donald G. Russell William A. Smith EX-10.(23) 10 SONAT STANDBY NOTICE PURCHASE AGREEMENT 1 EXHIBIT 10-(23) STANDBY NOTE PURCHASE AGREEMENT among SONAT INC. and CREDIT LYONNAIS NEW YORK BRANCH as Administrative Agent for the Banks party to the Revolving Credit Agreement with Citrus Corp. dated as of the date hereof and Citrus Corp. Joining for Purposes of Acknowledging and Consenting Dated as of December 23, 1993 Relating to $150,000,000 Revolving Credit Agreement Series B Notes of Citrus Corp. 2
TABLE OF CONTENTS ----------------- Page ---- ARTICLE I DEFINITIONS SECTION 1.01. Terms Defined in Revolving Credit Agreement . . . . . . . . . . . . . 1 SECTION 1.02. Certain Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . 1 SECTION 1.03. Accounting Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 ARTICLE II PURCHASE OF NOTES; PAYMENTS AND FEES SECTION 2.01. Purchases of the Series B Notes . . . . . . . . . . . . . . . . . . . 4 SECTION 2.02. Sonat's Status After Purchase of the Series B Notes . . . . . . . . . 6 SECTION 2.03. Returned Payments . . . . . . . . . . . . . . . . . . . . . . . . . . 7 SECTION 2.04. Amendments and Modifications . . . . . . . . . . . . . . . . . . . . . 8 ARTICLE III OBLIGATIONS ABSOLUTE SECTION 3.01. Obligations Absolute . . . . . . . . . . . . . . . . . . . . . . . . . 8 SECTION 3.02. Additional Consents and Agreements . . . . . . . . . . . . . . . . . . 9 SECTION 3.03. No Duty to Pursue Others . . . . . . . . . . . . . . . . . . . . . . . 9 SECTION 3.04. Waiver of Notices, etc . . . . . . . . . . . . . . . . . . . . . . . . 9 ARTICLE IV REPRESENTATIONS AND WARRANTIES SECTION 4.01. Representations and Warranties of Sonat . . . . . . . . . . . . . . . 10 SECTION 4.02. Survival of Representations; Deemed Representations . . . . . . . . . 12 ARTICLE V COVENANTS OF SONAT SECTION 5.01. Affirmative Covenants . . . . . . . . . . . . . . . . . . . . . . . . 13 SECTION 5.02. Negative Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . 15 ARTICLE VI EVENTS OF DEFAULT SECTION 6.01. Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . 15 ARTICLE VII MISCELLANEOUS SECTION 7.01. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 SECTION 7.02. Waivers; Amendments . . . . . . . . . . . . . . . . . . . . . . . . . 18 SECTION 7.03. Rights Cumulative . . . . . . . . . . . . . . . . . . . . . . . . . . 18 SECTION 7.04. Continuing Obligation . . . . . . . . . . . . . . . . . . . . . . . . 19 SECTION 7.05. Costs, Expenses and Taxes . . . . . . . . . . . . . . . . . . . . . . 19 SECTION 7.06. Right of Set-off . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 SECTION 7.07. Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 SECTION 7.08. Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
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Page ---- SECTION 7.09. Transfer of Borrower Obligations . . . . . . . . . . . . . . . . . . . . 22 SECTION 7.10. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 SECTION 7.11. Submission to Jurisdiction . . . . . . . . . . . . . . . . . . . . . . . 22 SECTION 7.12. Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 SECTION 7.13. Business Days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 SECTION 7.14. Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 SECTION 7.15. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Exhibit A - Terms of Subordination A-1
-ii- 4 This STANDBY NOTE PURCHASE AGREEMENT ("this Agreement") is made and entered into this 23rd day of December, 1993 by and among SONAT INC., a Delaware corporation ("Sonat"), Credit Lyonnais New York Branch, a duly licensed branch under the New York Banking Law of a foreign banking corporation organized under the laws of the Republic of France, as Administrative Agent for the Banks party to the Revolving Credit Agreement with Citrus Corp., a Delaware corporation, dated of even date herewith, and Citrus Corp. joining for purposes of acknowledging and consenting to the terms hereof. PRELIMINARY STATEMENTS A. Citrus Corp. ("Citrus" or the "Borrower") has entered into that certain Revolving Credit Agreement of even date herewith with the Banks party thereto, and The Toronto-Dominion Bank and Credit Lyonnais New York Branch, as Managing Agents, and with Credit Lyonnais New York Branch, as Administrative Agent for the Banks thereunder (such agreement, as it may from time to time be amended or supplemented, the "Revolving Credit Agreement"). B. The Banks will, subject to the terms and conditions of the Revolving Credit Agreement, make Advances to the Borrower. C. One of the conditions under the Revolving Credit Agreement to the Banks' making Advances to the Borrower is the execution and delivery of this Agreement by Sonat. D. To induce the Banks to enter into the Revolving Credit Agreement and make Advances to the Borrower subject to the terms and conditions thereof, Sonat desires to execute and deliver this Agreement to the Administrative Agent for the benefit of Citrus and each Bank. NOW, THEREFORE, in consideration of the premises, the parties agree as follows: ARTICLE I DEFINITIONS SECTION 1.01. Terms Defined in Revolving Credit Agreement. Capitalized terms which are defined in the Revolving Credit Agreement have the same meaning herein, except as otherwise defined herein. SECTION 1.02. Certain Defined Terms. As used in this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and the plural forms of the terms defined): 5 "Accrued Interest" means, with respect to the Series B Notes, the interest from time to time accrued thereon (including, without limitation, interest accruing or becoming owing both prior to and subsequent to the commencement of any proceeding against or with respect to the Borrower under any chapter of the Bankruptcy Code) and, with respect to any Tendered Series B Notes to be purchased hereunder, the accrued interest on such Tendered Series B Notes to but not including the date on which such Tendered Series B Notes are purchased, in all cases determined in accordance with the Revolving Credit Agreement and to the extent not previously paid by the Borrower (subject to Section 2.03(c)). "Additional Interest" has the meaning assigned to that term in Section 2.03(a). "Borrower Obligations" means all payment obligations of the Borrower under the Revolving Credit Agreement and the Notes, including, without limitation, all obligations in respect to principal of and interest on the Notes, fees, expenses and other amounts (whether due to increased cost, taxes, indemnification or otherwise) which may be due under such Loan Documents. "Change in Control" means (a) the failure of Enron and Sonat collectively to own, directly or indirectly, 51% of the outstanding Voting Stock of Citrus free and clear of all Liens (other than Liens for so long as the ability of Enron and Sonat, collectively, to fully exercise voting rights with respect to such shares remains unaffected); or (b) the failure of Citrus to own, directly or indirectly, 51% of the outstanding Voting Stock of FGT free and clear of all Liens (other than Liens permitted pursuant to Section 5.02(d) of the Revolving Credit Agreement). "Debt" of any Person means, at any date, without duplication, (i) obligations for the repayment of money borrowed which are or should be shown on a balance sheet as debt in accordance with GAAP, (ii) obligations as lessee under leases which, in accordance with GAAP, are capital leases, and (iii) guaranties of payment or collection of any obligations described in clauses (i) and (ii) of other Persons, provided, that clauses (i) and (ii) include, in the case of obligations of the Borrower or any Subsidiary, only such obligations as are or should be shown as debt or capital lease liabilities on a Consolidated balance sheet in accordance with GAAP; provided, further, that none of the following shall constitute Debt: (A) the liability of any Person as a general partner of a partnership for Debt of such partnership, if the partnership is not a Subsidiary of such Person, and (B) obligations (other than borrowings, capital leases or financial guaranties by the Borrower or any Subsidiary) related to the sale, purchase or delivery of -2- 6 hydrocarbons in respect of production payments conveyed in transfers constituting sales under GAAP. "Effective Date" means the date this Agreement becomes effective pursuant to Section 7.15. "Event of Default" has the meaning assigned to that term in Section 6.01. "Expiration Date" means the first date on which all the Series B Notes have been paid in full (except for Tendered Series B Notes purchased under this Agreement) and no Bank has any further Commitment. "Indemnified Party" has the meaning assigned to that term in Section 7.05(b). "Moody's" means Moody's Investors Service, Inc. "Note Purchase Event" means (a) the failure of Citrus to pay any or all of the Notes on the Termination Date, or (b) an Event of Default has occurred and is continuing, or (c) an Enron Event of Default has occurred and is continuing. "Other Accrued Obligations" means at any time one-half of the then unpaid Borrower Obligations that have become due and payable, except for principal and interest on the Notes. "Other Loan Documents" means all Loan Documents other than this Agreement. "Principal Subsidiary" means Southern Natural Gas Company and Sonat Exploration Company and any other Subsidiary of Sonat which shall acquire or succeed to all or any substantial part of the assets or stock of either such Principal Subsidiary, in which case all references to such Principal Subsidiary shall mutatis mutandi be deemed to refer to such other Subsidiary. "Purchase Date" means, with respect to any Tendered Series B Note, the date on which such Tendered Series B Note is to be purchased in accordance with Section 2.01. "Related Indemnified Party" has the meaning assigned to that term in Section 7.05(b). "Remaining Purchase Commitment" means, as of any date of determination, the Standby Purchase Commitment minus the principal -3- 7 amount of all Series B Notes purchased theretofore in accordance with Section 2.01. "Return Date" has the meaning assigned to that term in Section 2.03(a). "Returned Payment" has the meaning assigned to that term in Section 2.03(a). "SEC" means the Securities and Exchange Commission. "Standard & Poor's" means Standard & Poor's Corporation. "Standby Purchase Commitment" means the obligation of Sonat to purchase Tendered Series B Notes in the principal amount up to, but not exceeding at any time, the lesser of (i) the aggregate principal amount of Series B Notes then outstanding and (ii) $150,000,000. "Tendered Series B Note" means any Series B Note which has been tendered for purchase in accordance with this Agreement. "Voting Stock" means securities (as such term is defined in Section 2(1) of the Securities Act of 1933, as amended) of any class or classes of a Person, the holders of which are ordinarily, in the absence of contingencies, entitled to elect a majority of the corporate directors (or Persons performing similar functions) of such Person. SECTION 1.03. Accounting Terms. All accounting terms not specifically defined herein shall be construed in accordance with GAAP, except as otherwise stated herein. ARTICLE II PURCHASE OF NOTES; PAYMENTS AND FEES SECTION 2.01. Purchases of the Series B Notes. (a) The Administrative Agent may at any time (or from time to time) while a Note Purchase Event shall have occurred and be continuing, deliver written notice to Sonat requiring Sonat to purchase Tendered Series B Notes on the Purchase Date specified in such notice which shall be at least ten Business Days after the date of such notice, which notice shall (1) state that a Note Purchase Event has occurred and is continuing, (2) demand that Sonat purchase Series B Notes hereunder, (3) specify the Purchase Date, (4) specify the principal amount of each Tendered Series B Note and of the aggregate amount of Tendered Series B Notes to be purchased by Sonat on such Purchase Date and (5) specify the Accrued Interest to be paid on each such Tendered Series B Note and in the aggregate for all such Tendered Series B Notes by Sonat on such Purchase Date, assuming, for the purposes of such notice, that -4- 8 Sonat makes such purchase on such Purchase Date and that the applicable rate or rates of interest do not change. In the event of a change in such rate or rates of interest after the date of the Administrative Agent's notice pursuant to Section 2.01(a) or in the event that Sonat makes the required purchase on a date other than the Purchase Date specified in such notice, the Accrued Interest will be adjusted accordingly. (b) On or before each Purchase Date notified to Sonat by the Administrative Agent in accordance with Section 2.01(a), Sonat agrees to purchase Series B Notes tendered by the Banks in a principal amount not greater than the Remaining Purchase Commitment in effect on such Purchase Date at a purchase price equal to 100% of the aggregate principal amount of such Tendered Series B Notes then outstanding plus Accrued Interest thereon, subject, however, to the provisions of Section 2.03. (c) Upon receipt of written demand in accordance with Section 2.01(a), Sonat will honor its purchase obligations under Section 2.01(b) by transferring the purchase price in same day funds to the Administrative Agent, for the account of the Banks, not later than 11:00 a.m. New York time, on the Purchase Date. Payment by Sonat of the purchase price, as set forth in this subsection (c), shall completely satisfy Sonat's obligations with respect to such payment (subject to any adjustment in the Accrued Interest as provided in the last sentence of Section 2.01(a)), and it shall be the obligation of the Administrative Agent to transmit such funds to the Banks in accordance with their respective interests. (d) Pending payment thereof to the Banks, the Administrative Agent shall hold all funds paid by Sonat hereunder in trust for the benefit of Sonat. The Administrative Agent shall not disburse such funds to any Bank until the Series B Note held by such Bank (the aggregate unpaid principal of which shall be at least equal to the aggregate principal portion of the purchase price thereof) has been indorsed without recourse or warranty (except as provided in Section 2.01(g)) to the order of Sonat and delivered by such Bank to the Administrative Agent for delivery to Sonat against such Bank's receipt of the purchase price thereof; provided, however, in the event any Bank has lost its Series B Note, such Bank may, in lieu of delivering such original Series B Note endorsed to Sonat as required above, deliver an affidavit of lost note with a photocopy of such lost Series B Note attached together with an indemnity by such Bank indemnifying Sonat for any loss Sonat may experience resulting from the loss of such Series B Note. After payment by Sonat of the purchase price for Tendered Series B Notes, the Tendered Series B Notes delivered to the Administrative Agent shall promptly thereafter be delivered to Sonat. (E) EACH PURCHASE OF A SERIES B NOTE HEREUNDER SHALL BE ON A NON-RECOURSE BASIS, IT BEING EXPRESSLY UNDERSTOOD AND AGREED THAT NO BANK SHALL AT ANY TIME OR UNDER ANY CIRCUMSTANCE HAVE ANY -5- 9 RESPONSIBILITY OR LIABILITY WITH RESPECT TO THE VALUE, GENUINENESS, VALIDITY, ENFORCEABILITY OR COLLECTABILITY OF, OR AS TO THE VALIDITY OR SUFFICIENCY OF ANY GUARANTY OR SECURITY FOR, ANY SERIES B NOTE. EACH SUCH PURCHASE SHALL BE MADE WITHOUT REPRESENTATION OR WARRANTY OF ANY KIND BY THE ADMINISTRATIVE AGENT OR ANY BANK WITH RESPECT TO THE MATTERS DISCUSSED IN THE PRECEDING SENTENCE OR ANY OTHER REPRESENTATION OR WARRANTY WHATSOEVER (EXPRESS OR IMPLIED) BY ANY BANK EXCEPT AS TO THE MATTERS STATED IN SECTION 2.01(G) WITH RESPECT TO SUCH BANK'S TENDERED SERIES B NOTE AND BY THE ADMINISTRATIVE AGENT ON BEHALF OF SUCH BANK AS TO THE STATEMENTS MADE IN CLAUSES (1), (4) AND (5) OF SECTION 2.01(A) AND IN CLAUSE (1) OF SECTION 2.03(A) (WHICH IN EACH CASE ARE DEEMED TO BE SUBJECT TO THE MATTERS DISCUSSED IN THE PRECEDING SENTENCE), IT BEING THE INTENTION OF THE PARTIES HERETO THAT ALL RISKS INCIDENT TO THE MATTERS DISCUSSED IN THE PRECEDING SENTENCE, AS BETWEEN SONAT AND THE BORROWER, ON THE ONE HAND, AND THE ADMINISTRATIVE AGENT OR ANY BANK, ON THE OTHER HAND, SHALL BE BORNE BY SONAT AND THE BORROWER. (f) On each Purchase Date, the Administrative Agent will make each tender of Series B Notes to Sonat under this Agreement concurrently with a tender of Series A Notes to Enron under the Enron Note Purchase Agreement in equal amounts of principal and interest accrued thereon, except to the extent that injunctions, stay orders or other legal requirements would operate to prevent or delay such equal tenders, in which case they may be made unequally. (g) Each Bank that sells a Tendered Series B Note hereunder shall be deemed to warrant to Sonat that on each Purchase Date (i) such Bank has good title to such Tendered Series B Note and has the right to sell and transfer such Tendered Series B Note, and upon conveyance of such Tendered Series B Note to Sonat in accordance with this Agreement Sonat will receive good title thereto, free and clear of Liens attributable to such Bank, (ii) the unpaid principal balance of such Tendered Series B Note has been correctly stated by the Administrative Agent pursuant to Section 2.01(a)(4) and is correctly stated on the grid attached to such Tendered Series B Note, and (iii) the Accrued Interest on such Tendered Series B Note has been correctly stated by the Administrative Agent pursuant to Section 2.01(a)(5) (subject to any adjustment in the Accrued Interest as provided in the last sentence of Section 2.01(a)). SECTION 2.02. Sonat's Status After Purchase of the Series B Notes. Each Tendered Series B Note, upon purchase by Sonat, shall automatically (i.e., without the necessity of execution and delivery of any further instruments or agreements) become subordinated in right of payment to any and all Notes held by the Banks from time to time, in accordance with the terms of -6- 10 subordination in Exhibit A (which exhibit is a part of this Agreement and is incorporated herein by reference). The purchase by Sonat of Tendered Series B Notes hereunder shall not cause Sonat to be a "Bank" under the Revolving Credit Agreement or obligate Sonat to make Advances to Citrus thereunder. SECTION 2.03. Returned Payments. (a) If any payment made by the Borrower with respect to any Series B Notes other than any Series B Notes which have been purchased by Sonat is rescinded or must otherwise be returned by the Administrative Agent or any Bank upon or as the result of the insolvency, bankruptcy or reorganization of the Borrower (a "Returned Payment"), the Administrative Agent may deliver written notice to Sonat requiring Sonat to pay to the Administrative Agent the amount of any Returned Payment (together with "Additional Interest" as provided below), subject to the provisions of Section 2.03(b), which notice shall (1) state the amount of such Returned Payment and that it has been returned on a date which shall be specified in such notice (the "Return Date"), (2) demand that Sonat pay an amount equal to such Returned Payment to the Administrative Agent, (3) specify in reasonable detail the amount of such Returned Payment attributable to (i) the principal amount of the Series B Notes and (ii) the Accrued Interest thereon to the Return Date, (4) specify the date (which shall be at least ten Business Days after the date of such notice) upon which such amount shall be paid and (5) specify the amount of interest on such Returned Payment at a rate equal to the Base Rate plus 2% per annum (but not in excess of the highest lawful rate, if any) from the Return Date to the date on which the amount of such Returned Payment is paid by Sonat (the "Additional Interest"), assuming, for the purposes of such notice, that Sonat makes such payment on the date for payment specified in such notice. (b) Upon receipt of any written demand in accordance with Section 2.03(a), Sonat will pay an amount equal to the sum of (i) the amount of such Returned Payment attributable to the principal amount of the Series B Notes not in excess of the Remaining Purchase Commitment in effect on the date such payment will be required pursuant to Section 2.03(a) and (ii) the Accrued Interest thereon to the Return Date and (iii) the Additional Interest, in each case, by transferring the amount thereof in same day funds to the Administrative Agent for the account of any Bank that has returned such Returned Payment, not later than 11:00 a.m. New York time, on the date specified in such demand. Payment by Sonat of the amount of any Returned Payment together with Additional Interest in accordance with this Section 2.03(b) shall completely satisfy Sonat's obligations with respect to such Returned Payment and such Additional Interest, and it shall be the obligation of the Administrative Agent to transmit such funds to the Bank entitled to receive such amount. In the event of a change in the Base Rate after the date of the Administrative Agent's notice pursuant to -7- 11 Section 2.03(a) or in the event that Sonat makes the required payment on a date other than the date for payment specified in such notice, the Additional Interest will be adjusted accordingly. (c) If any payment made by the Borrower with respect to any Series B Notes other than Series B Notes which have been purchased by Sonat is rescinded or must otherwise be returned by the Administrative Agent or any Bank upon or as the result of the insolvency, bankruptcy or reorganization of the Borrower, such Series B Notes shall be deemed for all purposes of this Agreement to have been restored or reinstated to the principal amounts that would have been outstanding, as if such payment had never been made, and Accrued Interest shall be re-computed accordingly, net of interest not rescinded or required to be returned and any interest for periods prior to the actual return of such principal payment. SECTION 2.04. Amendments and Modifications. All amendments or modifications of the Loan Documents shall require the written consent of Sonat, the Borrower, the Administrative Agent and the Majority Banks (or, where required under the express terms of the Loan Documents, all the Banks). This Section 2.04 shall not apply to waivers of compliance with the Loan Documents by the Borrower or (subject to Section 2.01(f)) Enron that might (contrary to the express provisions of Section 7.02 or of similar provisions of the Other Loan Documents) have the effect of amending or modifying the terms and provisions of the Loan Documents. Any purported amendment or modification to any Loan Document that does not meet the requirements of this Section 2.04 shall be deemed ineffective and to have no effect whatsoever for the purposes of this Agreement or otherwise. ARTICLE III OBLIGATIONS ABSOLUTE SECTION 3.01. Obligations Absolute. Sonat's obligation under Article II shall be absolute, unconditional (other than conditions to purchase or payment expressly stated therein) and irrevocable, and shall be paid and performed strictly in accordance with the terms of this Agreement, including, without limitation, under the following circumstances: (a) any lack of validity or enforceability of any of the Other Loan Documents; (b) subject to Section 2.04, any amendment or waiver of or any consent to departure from the terms of any of the Other Loan Documents; (c) the existence of any claim, set-off, defense or other right which the Borrower or Enron may have at any time against Sonat or any of the Banks or the Administrative Agent, whether in connection with this Agreement or any of the Other Loan Documents -8- 12 or any unrelated transaction (except payment with respect to the Tendered Series B Notes, subject, however, to Section 2.03); (d) the existence of any claim, set-off, defense or other right which Sonat may have at any time against (i) the Borrower or Enron whether in connection with this Agreement or any of the Other Loan Documents or any unrelated transaction or (ii) the Administrative Agent, any Bank or any other Person arising out of any unrelated transaction; and (e) (i) any voluntary or involuntary liquidation, dissolution, receivership, insolvency, bankruptcy, proceeding for relief, assignment for benefit of creditors, reorganization, composition or readjustment of, or the marshalling of the assets and liabilities of the Borrower or Enron or (ii) any merger, consolidation, or sale or other disposition of all or substantially all of the assets of the Borrower, Enron or Sonat. SECTION 3.02. Additional Consents and Agreements. Sonat consents and agrees that the Administrative Agent and the Banks (or any of them) may, from time to time, in their sole discretion and without notice to the Borrower or Sonat (or either of them), except as expressly provided in Article II of this Agreement or Section 8.02 of the Revolving Credit Agreement, take any or all of the following actions: (a) exercise or refrain from exercising any rights against the Borrower, Enron or any other Person; (b) consent to or waive any breach of, or any act, omission or default by the Borrower, Enron or Sonat under, any of the Loan Documents; and (c) fail to notify or timely notify, Sonat of any default, event of default or similar event under any of the Loan Documents. SECTION 3.03. No Duty to Pursue Others. Except as expressly provided in Section 2.01(f), it shall not be necessary for the Administrative Agent or any Bank (and, to the fullest extent permitted by applicable law, Sonat hereby waives any rights which Sonat may have to require the Administrative Agent or any Bank), in order to enforce payment by Sonat hereunder, first to (i) institute suit or exhaust its remedies against the Borrower, Enron or any other Person, (ii) enforce the rights of the Administrative Agent or any Bank under any Loan Document, (iii) join Enron or any others liable on or with respect to the Borrower Obligations in any action seeking to enforce this Agreement, or (iv) resort to any other means of obtaining payment of the Borrower Obligations. SECTION 3.04. Waiver of Notices, etc. Except as expressly provided in Article II of this Agreement or Section 8.02 of the Revolving Credit Agreement, Sonat consents, with respect to its -9- 13 obligations under Article II, to the provisions of the Loan Documents and, to the fullest extent permitted by applicable law, hereby waives (a) notice of (i) any Advances made by the Banks to the Borrower, (ii) the acceptance of this Agreement, (iii) the execution and delivery by the Borrower, Enron, the Administrative Agent and any Bank of any Other Loan Documents, (iv) the occurrence of any breach by the Borrower or any "Event of Default" under the Revolving Credit Agreement or any Enron Event of Default, (v) any transfer or disposition by a Bank of the Borrower Obligations or any part thereof or any interest therein, (vi) protest, presentment, demand for payment and proof of nonpayment, (vii) dishonor or nonpayment, intent to accelerate, acceleration, and default by the Borrower or any other Person and (viii) any other action at any time taken or omitted by or on behalf of the Administrative Agent or any Bank pursuant to or in connection with any of the Other Loan Documents, except to the extent that notice thereof is expressly required by the provisions of this Agreement; and (b) (i) any requirement that any Person proceed against the Borrower or any other Person (subject to Section 2.01(f)) primarily or secondarily obligated with respect to any of the Borrower Obligations, or exercise any other right or remedy against the Borrower or any other Person, (ii) any right to require marshaling of assets and liabilities of the Borrower, and (iii) all diligence in collection or protection of or realization upon the Borrower Obligations or any thereof, or any obligation under the Other Loan Documents. ARTICLE IV REPRESENTATIONS AND WARRANTIES SECTION 4.01. Representations and Warranties of Sonat. Sonat represents and warrants to the Banks as follows: (a) Sonat and each Principal Subsidiary are corporations duly incorporated, validly existing and in good standing in each case under the laws of its jurisdiction of incorporation. Sonat and each of its Principal Subsidiaries have all corporate powers and all governmental licenses, authorizations, consents and approvals required in each case to carry on its business as now conducted, except where all failures to have such licenses, authorizations, consents and approvals would not, in the aggregate, have a material adverse effect on Sonat and its Subsidiaries taken as a whole. (b) The execution, delivery and performance by Sonat of this Agreement are within Sonat's corporate powers, have been duly authorized by all necessary corporate action of Sonat, require no action by or in respect of, or filing with, any governmental body, agency or official and do not contravene, or constitute a default under, any provision of law or regulation (including, without -10- 14 limitation, Regulation X issued by the Federal Reserve Board) applicable to Sonat or Regulation U issued by the Federal Reserve Board or the restated certificate of incorporation or by-laws of Sonat or any judgment, injunction, order, decree or material ("material" for the purposes of this representation meaning creating a liability of $50,000,000 or more) agreement binding upon Sonat. (c) This Agreement constitutes the legal, valid and binding obligation of Sonat enforceable against Sonat in accordance with its terms, except as the enforceability thereof may be limited by the effect of any applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally and by general principles of equity. (d) Except as disclosed in Sonat's Form 10-K for the year ended December 31, 1992 or Sonat's Form 10-Q for the quarters ended March 31, 1993, June 30, 1993 or September 30, 1993, which were delivered to the Banks prior to the date hereof, there is no action, suit or proceeding pending against Sonat or any of its Subsidiaries, or to the knowledge of Sonat threatened against Sonat or any of its Subsidiaries, before any court or arbitrator or any governmental body, agency or official in which there is a reasonable likelihood of any adverse decision which would materially adversely affect the business, Consolidated financial position or Consolidated results of operations of Sonat and its Subsidiaries taken as a whole or which in any manner draws into question the validity of this Agreement. (e) The audited Consolidated balance sheet of Sonat and its Subsidiaries as of December 31, 1992, and the related audited Consolidated statements of income, cash flows and changes in stockholders' equity accounts for the fiscal year then ended, and the unaudited Consolidated balance sheet of Sonat and its Subsidiaries as at September 30, 1993, and the related unaudited Consolidated statements of income and cash flows for the fiscal quarter (in the case of the statement of income) and the nine months then ended, copies of which have been delivered to each Bank, fairly present in all material respects in conformity with GAAP, except as otherwise expressly noted therein and except that such unaudited financial statements were prepared in accordance with SEC rules applicable to interim financial statements, the Consolidated financial position of Sonat and its Subsidiaries as of such dates and their Consolidated results of operations and cash flows for such fiscal periods, subject (in the case of the unaudited balance sheet and related statements) to changes resulting from audit and normal year-end adjustments. (f) Since December 31, 1992, there has been no material adverse change in the business, Consolidated financial condition or Consolidated results of operations of Sonat and its Subsidiaries, considered as a whole. -11- 15 (g) Sonat is not an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (h) Sonat is not a "holding company" under the Public Utility Holding Company Act of 1935, as amended. (i) Sonat has received true and accurate copies of, and is familiar with, the Revolving Credit Agreement, the Notes dated the date hereof and each Note Purchase Agreement. Sonat is familiar with, and has independently reviewed books and records regarding, the financial condition of the Borrower and is aware that no collateral will secure the payment of the Borrower Obligations; provided however, Sonat is not relying on such financial condition as an inducement to enter into this Agreement. (j) Sonat has independent means of obtaining information concerning the affairs, financial condition and business of the Borrower. Sonat understands that neither the Administrative Agent nor any Bank will have any duty or responsibility to provide any credit or other information concerning the affairs, financial condition or business of the Borrower which may come into their possession. (k) Sonat has not relied upon any representation, warranty or statement of the Administrative Agent, any Bank or any other Person in order to induce Sonat to enter into this Agreement. (l) Sonat is duly qualified to do business as a foreign corporation in the State of New York. Sonat has appointed Prentice-Hall Corporation System, Inc. as its registered agent for receipt of service of process in the State of New York. SECTION 4.02. Survival of Representations; Deemed Representations. All representations and warranties made by Sonat in this Agreement shall survive the execution and delivery of this Agreement. The acceptance of an Advance by Citrus (prior to the Termination Date) pursuant to the Revolving Credit Agreement, shall be deemed to constitute a representation and warranty by Sonat that on the date of such Advance (a) the representations and warranties contained in Section 4.01 are correct on and as of the date of such Advance, as though made on and as of such date (except for those expressly made as of an earlier date), and (b) no event has occurred and is continuing which constitutes an Event of Default or would constitute an Event of Default but for the requirement that notice be given or time elapse, or both. -12- 16 ARTICLE V COVENANTS OF SONAT SECTION 5.01. Affirmative Covenants. From the date hereof until the Expiration Date Sonat shall, unless the Majority Banks shall otherwise consent in writing: (a) Reporting Requirements. Furnish to the Administrative Agent with a copy for each Bank: (i) (1) promptly after the filing thereof with the SEC, a copy of each of Sonat's reports on Form 8-K (or any successor form), (2) promptly after the filing thereof with the SEC, and in any event within 75 days after the end of each of the first three fiscal quarters of each fiscal year of Sonat, a copy of Sonat's report on Form 10-Q (or any successor form) for such quarter, which report will include Sonat's quarterly unaudited Consolidated financial statements as of the end of and for such quarter, and (3) promptly after the filing thereof with the SEC, and in any event within 135 days after the end of each fiscal year of Sonat, a copy of Sonat's annual report which it sends to its public security holders, and a copy of Sonat's report on Form 10-K (or any successor form) for such year, which annual report will include Sonat's annual audited Consolidated financial statements as of the end of and for such year; (ii) simultaneously with the delivery of each of the annual or quarterly reports referred to in clause (i) above, a certificate of the chief financial officer or the chief accounting officer of Sonat in a form reasonably acceptable to the Administrative Agent stating whether there exists on the date of such certificate any Event of Default or event which, with the giving of notice or lapse of time, or both, would constitute an Event of Default, and, if so, setting forth the details thereof and the action which Sonat has taken and proposes to take with respect thereto; (iii) as soon as possible and in any event within five days after an executive officer of Sonat having obtained knowledge thereof, notice of the occurrence of any Event of Default or any event which, with the giving of notice or lapse of time, or both, would constitute an Event of Default, continuing on the date of such notice, and a statement of the chief financial officer of Sonat setting forth details of such Event of Default or -13- 17 event and the action which Sonat has taken and proposes to take with respect thereto; and (iv) such other information respecting the condition or operations, financial or otherwise of Sonat as any Bank through the Administrative Agent may from time to time reasonably request. (b) Compliance with Laws, Etc. Comply, and cause each of its Subsidiaries to comply, with all applicable laws, rules, regulations and orders to the extent non-compliance therewith would have a material adverse effect on Sonat and its Subsidiaries taken as a whole, such compliance to include, without limitation, compliance with environmental laws and the paying before the same become delinquent of all taxes, assessments and governmental charges imposed upon Sonat or upon Sonat's property except to the extent contested in good faith. (c) Maintenance of Insurance. Maintain, and cause each of its Principal Subsidiaries to maintain, insurance with insurance companies or associations in such amounts and covering such risks as is usually carried by companies of comparable size engaged in similar businesses and owning similar properties as Sonat or such Principal Subsidiary, provided, that self-insurance by Sonat or any such Principal Subsidiary shall not be deemed a violation of this covenant to the extent that companies engaged in similar businesses and owning similar properties as Sonat or such Principal Subsidiary self-insure. Sonat may maintain its Principal Subsidiaries' insurance on behalf of them. (d) Preservation of Corporate Existence, Etc. Preserve and maintain, and cause each of its Principal Subsidiaries to preserve and maintain, its corporate existence; provided, however, that this Section 5.01(d) shall not apply to any transactions permitted by Section 5.02(b) and shall not prevent the termination of existence of any Principal Subsidiary pursuant to any merger or consolidation to which such Principal Subsidiary is a party. (e) Visitation Rights. At any reasonable time and from time to time, after reasonable notice, permit the Administrative Agent or any of the Banks or any agents or representatives thereof, to examine the records and books of account of, and visit the properties of Sonat and any of its Principal Subsidiaries and to discuss the affairs, finances and accounts of Sonat and any of its Principal Subsidiaries with any of their respective officers or directors. (f) Borrower's Performance of Revolving Credit Agreement. Use best efforts to cause the Borrower to perform all its obligations under the Revolving Credit Agreement; provided, that Sonat's only monetary obligations in respect of this Agreement are as stated in Article II and in Section 7.05. -14- 18 SECTION 5.02. Negative Covenants. From the date hereof until the Expiration Date Sonat shall not, without the written consent of the Majority Banks: (a) Change in Control. Permit or suffer to exist a Change in Control. (b) Mergers, Etc. Merge or consolidate with or into, any Person, unless (i) Sonat is the survivor or (ii) the surviving Person, if not Sonat, is organized under the laws of the United States or a state thereof and assumes all obligations of Sonat under this Agreement, provided, in each case that immediately after giving effect to such proposed transaction, (x) no Event of Default or event which, with the giving of notice or the lapse of time, or both, would constitute an Event of Default would exist or result and (y) the senior unsecured long-term debt of the surviving Person, if not Sonat, is classified either Baa3 or better by Moody's or BBB- or better by Standard & Poor's. (c) Qualification and Service Agent in New York. (i) Cease to be duly qualified to do business in the State of New York, or (ii) cease to have Prentice-Hall Corporation System, Inc. as its duly appointed registered agent for the receipt of service of process in the State of New York, except upon 30 days' prior written notice to the Administrative Agent accompanied by a certificate of Sonat in a form reasonably acceptable to the Administrative Agent stating the name and address of any Person appointed as registered agent for the receipt of service of process in the State of New York, for purposes of Section 7.11. ARTICLE VI EVENTS OF DEFAULT SECTION 6.01. Events of Default. If any of the following events ("Event of Default") shall occur and be continuing: (a) Sonat shall fail to make any payment required under Section 2.01(c) or Section 2.03(b) when due and payable; or (b) Any representation or warranty made by Sonat (or any of its officers) in Article IV or in any certificate or other document delivered pursuant hereto (or deemed made pursuant to Section 4.02) shall prove to have been incorrect in any material respect when made or deemed made and such materiality is continuing; or (c) Sonat shall fail to perform or observe in any material respect any term or covenant contained in Section 5.02 or shall fail to perform or observe in any material respect any other term or covenant contained in this Agreement on its part to be performed or observed if, in the case of any such other term or covenant, such failure shall remain unremedied for 30 days after receipt of -15- 19 written notice thereof given by the Administrative Agent to Sonat, at the request of any Bank; or (d) (1) Sonat or any of its Principal Subsidiaries shall fail to pay any principal of or premium or interest on any Debt (other than Debt described in clause (iii) of the definition of Debt) which is outstanding in the principal amount of at least $50,000,000 in the aggregate, of Sonat or such Principal Subsidiary (as the case may be), when the same becomes due and payable (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise), and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such Debt; or (2) any other event shall occur or condition shall exist under any agreement or instrument relating to any such Debt and shall continue after the applicable grace period, if any, specified in such agreement or instrument, if the effect of such event or condition is to accelerate the maturity of such Debt, or any such Debt shall be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment or as a result of the giving of notice of a voluntary prepayment), prior to the stated maturity thereof; or (3) with respect to Debt described in clause (iii) of the definition of Debt, Sonat or any of its Principal Subsidiaries shall fail to pay any such Debt which is outstanding in the principal amount of at least $50,000,000 in the aggregate, of Sonat or such Principal Subsidiary (as the case may be), when the same becomes due and payable and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such Debt; or (e) Sonat or any of its Principal Subsidiaries shall generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against Sonat or any of its Principal Subsidiaries seeking to adjudicate it as bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee or other similar official for it or for any substantial part of its property and, in the case of any such proceeding instituted against it (but not instituted by it), shall remain undismissed or unstayed for a period of 60 consecutive days; or Sonat or any of its Principal Subsidiaries shall take any corporate action to authorize any of the actions set forth above in this subsection (e); or (f) Any judgment, decree or order for the payment of money in excess of $50,000,000 shall be rendered against Sonat or any of its Principal Subsidiaries and remains unsatisfied and there shall be any period of 60 consecutive days during which a stay of -16- 20 enforcement of such judgment, decree or order, by reason of a pending appeal or otherwise, shall not be in effect; or (g) Any material provision of this Agreement, after execution and delivery hereof, shall for any reason cease to be valid and binding on Sonat, or Sonat shall contest the validity or enforceability of this Agreement or so state in writing; then, and in any such event, an Event of Default shall also exist under Section 6.01 of the Revolving Credit Agreement and the Administrative Agent and Banks may exercise the rights and remedies provided in the Revolving Credit Agreement as a result thereof, including, without limitation, such rights and remedies in respect of this Agreement. ARTICLE VII MISCELLANEOUS SECTION 7.01. Notices. All notices and other communications provided for hereunder shall: (a) be in writing (including telecopier communication); (b) be (i) sent by registered or certified mail, postage prepaid, return receipt requested, (ii) sent by overnight courier service, such as Federal Express, or (iii) be sent by telecopy, or (iv) delivered by hand; (c) be addressed to the following respective addresses: (i) If to the Borrower at: Citrus Corp. 1400 Smith Street Houston, Texas 77002 Attention: Vice President and Chief Financial Officer TELEPHONE: (713) 853-6178 FAX: (713) 646-3201 with a copy to Sonat at the address provided for Sonat below; (ii) If to Sonat at: Sonat Inc. 1900 5th Avenue North Birmingham, Alabama 35203 Attention: Treasurer TELEPHONE: (205) 325-3528 FAX: (205) 325-7490 -17- 21 (iii) if to the Administrative Agent or the Banks, to the address specified for each in Section 8.02 of the Revolving Credit Agreement; (iv) in any of the foregoing cases, at such other address or telecopy number as the addressee may hereafter specify for such purpose in a notice to the other parties hereto specifically captioned Notice of Change of Address Pursuant to Section 7.01 and (d) All such notices, consents and communications shall be effective, if mailed, five Business Days after deposit in the mails; if sent by overnight courier service, one Business Day after delivery to the courier company; and if delivered by hand, when so delivered; and if sent by telecopier, when received by the receiving telecopier equipment, respectively; provided, however, that telecopied notices received by any party after its normal business hours (or on a day other than a Business Day) shall be effective on the next Business Day. SECTION 7.02. Waivers; Amendments. No failure to exercise, and no delay in exercising, on the part of the Administrative Agent or any Bank, any right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right. The rights of the Administrative Agent and the Banks hereunder shall be in addition to all other rights provided by law or by the Loan Documents. Any term, covenant, agreement or condition of this Agreement may be amended or waived, and any departure therefrom may be consented to, if, but only if, such amendment, waiver or consent is in writing and is signed by Sonat and the Majority Banks, provided, however, that no amendment, waiver or consent shall, unless in writing and signed by Sonat and all the Banks, do any of the following: (a) decrease the Standby Purchase Commitment or Remaining Purchase Commitment of Sonat, (b) reduce the purchase price for any Tendered Series B Notes, (c) postpone any Purchase Date or the date when any other amounts become payable hereunder, (d) release Sonat from its obligations under this Agreement or (e) amend this Section 7.02 or Section 7.05. Unless otherwise specified in such waiver or consent, a waiver or consent given hereunder shall be effective only in the specific instance and for the specific purpose for which given. No notice or demand given in any case shall constitute a waiver of the right to take other action in the same, similar or other instances without such notice or demand. SECTION 7.03. Rights Cumulative. The rights and remedies of the Administrative Agent and the Banks under this Agreement shall be cumulative and not exclusive of any rights or remedies which they would otherwise have. No failure or delay by the Administrative Agent or the Banks in exercising any right or remedy shall operate as a waiver thereof, nor shall any single or partial -18- 22 exercise of any remedy or right preclude their other or further exercise or the exercise of any other remedy or right. SECTION 7.04. Continuing Obligation. This Agreement is a continuing obligation and shall (i) be binding upon the parties and their successors and assigns, and (ii) inure to the benefit of and be enforceable by the parties and their successors, transferees and assigns; provided, that Sonat shall not have the right to assign its rights hereunder or any interest herein without the prior written consent of all Banks (other than an assignment effectuated by a merger or consolidation permitted by Section 5.02 to the surviving Person referred to therein). Each Bank shall be an express third party beneficiary of this Agreement. SECTION 7.05. Costs, Expenses and Taxes. (a) Sonat agrees to pay on demand, (i) all reasonable costs and expenses of the Administrative Agent in connection with the preparation, execution and delivery of this Agreement or the modification, amendment or waiver of this Agreement at the request of Sonat, including, without limitation, the reasonable fees and out-of-pocket expenses of counsel for the Administrative Agent with respect thereto, and (ii) for any period an Event of Default has occurred and is continuing, all reasonable costs and expenses (including, without limitation, reasonable counsel fees and out-of-pocket expenses of counsel) of each Bank in connection with the enforcement (whether through negotiations, legal proceedings or otherwise) of this Agreement. (b) SONAT AGREES, TO THE FULLEST EXTENT PERMITTED BY LAW, TO INDEMNIFY AND HOLD HARMLESS THE ADMINISTRATIVE AGENT AND EACH BANK (COLLECTIVELY, "THE INDEMNIFIED PARTIES") AND EACH OF THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS (COLLECTIVELY WITH RESPECT TO EACH INDEMNIFIED PARTY, THE "RELATED INDEMNIFIED PARTIES") FROM AND AGAINST ONE-HALF (ENRON BEING RESPONSIBLE FOR THE OTHER ONE-HALF UNDER ITS NOTE PURCHASE AGREEMENT) OF ANY AND ALL CLAIMS, DAMAGES, LIABILITIES AND EXPENSES (INCLUDING, WITHOUT LIMITATION, REASONABLE FEES AND DISBURSEMENTS OF COUNSEL) ARISING UNDER LAWS RELATING TO THE PROTECTION OF HUMAN HEALTH AND THE PRESERVATION OF ENVIRONMENTAL QUALITY (INCLUDING, WITHOUT LIMITATION, FINES, PENALTIES, POLLUTION CLEANUP COSTS, ENVIRONMENTAL RESTORATION OBLIGATIONS, AND OTHER SIMILAR LIABILITIES ARISING UNDER SUCH LAWS) FOR WHICH ANY OF THEM MAY BECOME LIABLE OR WHICH MAY BE INCURRED BY OR ASSERTED AGAINST AN INDEMNIFIED PARTY OR RELATED INDEMNIFIED PARTY (OTHER THAN BY THE ADMINISTRATIVE AGENT OR ANOTHER BANK OR ANY OF THEIR RESPECTIVE SUCCESSORS OR ASSIGNS), IN EACH CASE IN CONNECTION WITH OR ARISING OUT OF OR BY REASON OF ANY INVESTIGATION, LITIGATION OR PROCEEDING, WHETHER OR NOT SUCH INDEMNIFIED PARTY OR RELATED INDEMNIFIED PARTY -19- 23 IS A PARTY THERETO, ARISING OUT OF, RELATED TO OR IN CONNECTION WITH THIS AGREEMENT OR THE REVOLVING CREDIT AGREEMENT OR ANY TRANSACTION IN WHICH ANY PROCEEDS OF ALL OR ANY PART OF THE ADVANCES ARE APPLIED BY OR ON BEHALF OF CITRUS OR FGT, AND EXPRESSLY INCLUDING ANY SUCH CLAIM, DAMAGE, LIABILITY OR EXPENSE ATTRIBUTABLE TO THE ORDINARY, SOLE OR CONTRIBUTORY NEGLIGENCE OF SUCH INDEMNIFIED PARTY OR RELATED INDEMNIFIED PARTY (BUT EXCLUDING ANY SUCH CLAIM, DAMAGE, LIABILITY OR EXPENSE ATTRIBUTABLE TO THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF SUCH INDEMNIFIED PARTY OR RELATED INDEMNIFIED PARTY). IT IS THE INTENT OF THE PARTIES HERETO THAT EACH INDEMNIFIED PARTY AND RELATED INDEMNIFIED PARTY SHALL, TO THE EXTENT PROVIDED IN THIS SECTION 7.05(B), BE INDEMNIFIED FOR ITS OWN ORDINARY, SOLE OR CONTRIBUTORY NEGLIGENCE. (c) If any payment by Sonat attributable to principal of any Adjusted CD Rate Advance or LIBOR Advance with respect to any Series B Note is made other than on the last day of an Interest Period relating to such Advance as a result of a purchase pursuant to Section 2.01 or a payment pursuant to Section 2.03, Sonat shall, upon demand by any Bank (with a copy of such demand to the Administrative Agent), pay to the Administrative Agent for the account of such Bank any amounts required to compensate such Bank for any additional losses, costs or expenses which it may reasonably incur as a result of any such payment or purchase, including, without limitation, any loss (excluding loss of anticipated profits), cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such Bank to fund or maintain such Advance. (d) If there exists any Other Accrued Obligations (other than as determined pursuant to Sections 7.05(a), 7.05(b) or 7.05(c)), then Sonat shall, upon demand by any Bank (with a copy of such demand to the Administrative Agent) or upon demand by the Administrative Agent, pay to the Administrative Agent for the account of such Bank or the Administrative Agent, as the case may be, the amount of such Other Accrued Obligations; provided, however, Sonat's obligations under this Section 7.05(d) shall not at any time be increased as a result of Enron's failure to pay its portion of the unpaid Borrower Obligations pursuant to Section 7.05(d) of the Enron Note Purchase Agreement. (e) Any amount payable under Sections 7.05(a), 7.05(b), 7.05(c) and 7.05(d) shall be paid by Sonat to the Administrative Agent for the account of the appropriate Indemnified Party or Related Indemnified Party within ten Business Days following an Indemnified Party's demand therefor given in writing to Sonat with a copy to the Administrative Agent (which demand shall set forth in reasonable detail the basis and calculation of such amount). The obligations of Sonat pursuant to Sections 7.05(a), 7.05(b), 7.05(c) and 7.05(d) shall survive the termination of the Revolving Credit Agreement, the Expiration Date, the purchase of all Tendered Series B Notes, and any payment of the obligations under the Loan Documents. -20- 24 (f) Any Indemnified Party that proposes to assert the right to reimbursement under Section 7.05(b) with respect to any claim asserted against such Indemnified Party or a Related Indemnified Party will, promptly after receipt of notice of commencement of any action, suit or proceeding against such Indemnified Party or Related Indemnified Party in respect of which a claim is to be made against Sonat under Section 7.05(b), notify Sonat of the commencement of such action, suit or proceeding, enclosing a copy of all papers served. However, the failure of an Indemnified Party to notify Sonat of any such action, suit or proceeding shall not relieve Sonat from any liability that it may have to any Indemnified Party or Related Indemnified Party, except to the extent that Sonat may have been prejudiced by the failure of such Indemnified Party to so notify Sonat in which case Sonat's obligations to indemnify such Indemnified Party or Related Indemnified Party shall be discharged to the extent that Sonat has been prejudiced thereby. (g) In case any such action, suit or proceeding shall be brought against any Indemnified Party or any of its Related Indemnified Parties and it shall notify Sonat of the commencement thereof, then Sonat shall be entitled to participate in the defense of any such investigation, litigation or proceeding on terms reasonably acceptable to Sonat and the Indemnified Parties involved therein (whether or not as a party). SECTION 7.06. Right of Set-off. Upon (i) the occurrence and during the continuance of any Event of Default and the written approval of the Majority Banks, (ii) the failure of Sonat on any Purchase Date to purchase any Tendered Series B Notes pursuant to Section 2.01(c) or (iii) the failure of Sonat to pay the amount of any Returned Payment when due and payable pursuant to Section 2.03(b) each Bank is hereby authorized at any time and from time to time, to the fullest extent permitted by law, 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 Sonat against any and all of the obligations of Sonat then existing under this Agreement owing to or for the benefit of such Bank, irrespective of whether or not the Administrative Agent or any Bank shall have made any demand under this Agreement (except as expressly required herein). Each Bank agrees promptly to notify Sonat after 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 each Bank under this Section are in addition to other rights and remedies (including, without limitation, other rights of set-off) which such Bank may have. SECTION 7.07. Termination. The rights and obligations of the parties hereunder shall continue until the Expiration Date, provided that Sonat's obligations under Article II and Section 7.05 shall survive the Expiration Date. -21- 25 SECTION 7.08. Severability. If any provision of this Agreement is held to be illegal, invalid or unenforceable under present or future laws effective during the term of this Agreement, such provision shall be fully severable and this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part of this Agreement, and the remaining provisions of this Agreement shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance from this Agreement. SECTION 7.09. Transfer of Borrower Obligations. Each Bank may, from time to time, without notice to Sonat, assign or transfer all or a part of the Borrower Obligations or any interest therein in accordance with the terms and provisions of the Revolving Credit Agreement. Notwithstanding any such assignment or transfer or any subsequent assignment or transfer thereof, such Borrower Obligations shall be and remain Borrower Obligations for purposes of this Agreement. Each and every immediate and successive assignee or transferee of any of the Borrower Obligations or of any interest therein in accordance with the terms and provisions of the Revolving Credit Agreement shall, to the extent of the interest of such assignee or transferee in the Borrower Obligations and to the extent so provided in the Revolving Credit Agreement, be entitled to the benefit of this Agreement to the same extent as if such assignee or transferee were a Bank; provided, that neither Sonat nor Enron, as purchasers under their respective Note Purchase Agreements, shall be a "Bank" or entitled to the benefits provided by this Agreement in favor of the Administrative Agent and the Banks. SECTION 7.10. Governing Law. Pursuant to Section 5-1401 of the New York General Obligations Law, this Agreement shall be governed by, and construed in accordance with, the laws of the State of New York. This Agreement constitutes the entire understanding among the parties hereto with respect to the subject matter hereof and supersedes any prior agreements, written or oral, with respect thereto. SECTION 7.11. Submission to Jurisdiction. (a) Any legal action or proceeding with respect to this Agreement, the Series B Notes or any Other Loan Document may be brought in the courts of the State of New York sitting in New York City or of the United States of America for the Southern District of New York, and, by execution and delivery of this Agreement, Sonat irrevocably submits itself to the nonexclusive jurisdiction of such New York State or Federal courts to the extent permitted by law. Sonat hereby irrevocably waives any objection to the laying of venue in such courts based on the grounds of forum non conveniens. (b) Sonat has designated Prentice-Hall Corporation System, Inc., 15 Columbus Circle, New York, New York 10023, as the -22- 26 designee, appointee and agent of Sonat to receive, for and on behalf of Sonat, service of copies of the summons and complaint and any other process in such action or proceeding with respect to this Agreement, the Series B Notes or any Other Loan Document. It is understood that a copy of such process served on such agent (or on a successor agent permitted by Section 5.02(c)) will be promptly forwarded by overnight courier to Sonat at its address set forth in Section 7.01(c), but the failure of Sonat to receive such copy shall not affect in any way the service of such process. Sonat further irrevocably consents to the service of process of any of the aforementioned courts in any such action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to Sonat at its said address, such service to become effective 30 days after such mailing. (c) Nothing in this Section 7.11 shall affect (i) the right of the Administrative Agent or any Bank to serve process in any other manner permitted by law or to commence legal proceedings or otherwise proceed against Sonat in any other jurisdiction or (ii) the right of Sonat to commence legal proceedings or otherwise proceed against the Administrative Agent or any Bank in any proper jurisdiction. SECTION 7.12. Headings. Article and section headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. References to Articles and Sections are to this Agreement unless otherwise provided. SECTION 7.13. Business Days. If any payment under this Agreement shall be specified to be made upon a day which is not a Business Day, it shall be made on the next Business Day, provided, in the case of Tendered Series B Notes with one or more Interest Periods for LIBOR Advances, if such extension would cause the purchase price to be paid after the last day of any such Interest Period and in the next following calendar month, then the purchase price shall be paid on the next preceding Business Day. SECTION 7.14. Confidentiality. Each Bank, by accepting the benefits of this Agreement, agrees that it will use reasonable efforts not to disclose without the prior consent of Sonat (other than to its employees, auditors or counsel or to the Administrative Agent or another Bank if the disclosing Bank or such Bank's holding or parent company in its sole discretion determines that any such party should have access to such information) any information with respect to Sonat which is furnished pursuant to this Agreement and which is designated by Sonat to the Administrative Agent or the Banks in writing as confidential, provided that any Bank may disclose any such information (a) as has become generally available to the public, (b) as may be required or appropriate in any report, statement or testimony submitted to any municipal, state or federal regulatory body having or claiming to have jurisdiction over such Bank or to the Federal Reserve Board, the FDIC or similar -23- 27 organizations (whether in the United States or elsewhere), (c) as may be required or appropriate in response to any summons or subpoena or in connection with any litigation, (d) in order to comply with any law, order, regulation or ruling applicable to such Bank, (e) to the prospective transferee in connection with any contemplated transfer of any of the Notes or any interest therein by such Bank, provided, that such prospective transferee executes an agreement with Sonat or the transferor containing provisions substantially identical to those contained in this Section, or (f) to the extent reasonably necessary to disclose in connection with the exercise of any remedy hereunder and under the Revolving Credit Agreement and the Series B Notes. SECTION 7.15. Counterparts. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which shall be deemed to be an original and all of which shall constitute together but one and the same agreement. This Agreement shall become effective when the Administrative Agent shall have received counterparts hereof executed on behalf of Sonat and the Borrower. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered by their respective, duly authorized officers, all as of the date first above written. CITRUS CORP. By: /s/ Kurt S. Huneke -------------------------------------- Title: Vice President, Finance and Treasurer SONAT INC. By: /s/ -------------------------------------- Title: Vice President CREDIT LYONNAIS NEW YORK BRANCH as Administrative Agent By: /s/ Ratouis -------------------------------------- Title: Senior Vice President -24- 28 EXHIBIT A TERMS OF SUBORDINATION The Series B Notes purchased by Sonat pursuant to the terms of the Standby Note Purchase Agreement dated as of December 23, 1993 among Sonat Inc. and Credit Lyonnais New York Branch as Administrative Agent (the "Subordinated Debt"), including principal and interest, shall be subordinate and junior in right of payment to the extent and in the manner set forth below, to all Superior Indebtedness (as hereinafter defined) of the Borrower. The term "Superior Indebtedness" shall mean any and all Series A Notes and Series B Notes held by the Banks and their respective successors and assigns pursuant to the Revolving Credit Agreement, except for Notes that are Tendered Series A Notes or Tendered Series B Notes which are purchased by Enron or Sonat under their respective Note Purchase Agreements. 1. All Superior Indebtedness shall first be paid in full before any payment on account of the principal or interest is paid on any Subordinated Debt. 2. Unless and until the Superior Indebtedness shall be paid in full, Sonat will not ask or sue for, take, demand, receive or accept from Borrower, by set-off or in any other manner, any payment or distribution on account of Subordinated Debt, nor present any instrument evidencing Subordinated Debt for payment, nor shall any property of Borrower be applied to the purchase or other acquisition or retirement of any Subordinated Debt. 3. In the event of any receivership, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization or arrangement with creditors, adjustment of debt (whether or not pursuant to bankruptcy laws), sale of all or substantially all of the assets, dissolution, liquidation or any other marshalling of the assets and liabilities of the Borrower, then the holders of the Superior Indebtedness shall be entitled to receive payment in full of all Superior Indebtedness before Sonat shall be entitled to receive any payment on account of principal of the Subordinated Debt or interest due thereon, and to that end the holders of Superior Indebtedness shall be entitled to receive for application in payment thereof any payment or distribution of any kind or character, whether in cash, property or securities, which may be payable or deliverable in any such proceedings in respect of the terms of subordination, except securities which are subordinated and junior in right of payment to the payment of all Superior Indebtedness then outstanding. 4. In case cash, securities or other property otherwise payable or deliverable to Sonat shall have been applied, pursuant to paragraph 3, to the payment of Superior Indebtedness, then and in such case, upon the payment in full of all Superior A-1 29 Indebtedness, Sonat shall be subrogated to the rights of the holders of Superior Indebtedness to receive payments and distributions made on the Superior Indebtedness until all principal of and interest shall have been paid in full, and no such payments or distributions to Sonat by reason of such subrogation, of cash, securities and other property which otherwise would be payable or distributable to the holders of Superior Indebtedness, shall, as between the Borrower and its creditors (other than the holders of Superior Indebtedness), on the one hand, and Sonat, on the other, be deemed to be a payment by the Borrower on account the Subordinated Debt. 5. No present or future holder of any Superior Indebtedness shall be prejudiced in any way in the right to enforce the terms of subordination by any act or failure to act on the part of the Borrower. The holders of the Superior Indebtedness may, at any time and from time to time, without (i) any consent of or notice to Sonat, (ii) incurring any responsibility to Sonat, or (iii) impairing or releasing any of the rights of holders of the Superior Indebtedness or the obligations of Sonat under these terms of subordination: (a) change the amount, manner, place or terms of the payment of, or change or extend for any period the time of payment of, or renew or otherwise alter, Superior Indebtedness, the Revolving Credit Agreement or any Other Loan Document in any manner consistent with the provisions of such document; (b) release any Person liable in any manner for payment or collection of Superior Indebtedness; (c) exercise or refrain from exercising any rights or remedies against the Borrower or others (including Enron or Sonat); and (d) apply any sums received, by whomsoever paid and however realized, to payment of Superior Indebtedness in such a manner as such holders, in their sole discretion, may deem appropriate; provided, however, that no amendment of or addition or supplement to any Superior Indebtedness or any instrument or agreement relating thereto shall be effective to change the extent or the terms of the subordination effected hereby without the consent of Sonat. Nothing contained herein shall impair, as between the Borrower and Sonat, the obligation of the Borrower, which is absolute and unconditional, to pay to the holder the principal and interest as and when the same becomes due and payable, all subject to the rights, if any, of the holders of Superior Indebtedness to receive cash, property or securities otherwise payable or deliverable by the Borrower to Sonat. A-2 30 6. All payments or distributions upon or with respect to the Subordinated Debt which are received by Sonat contrary to these terms of subordination shall be received in trust for the benefit of the holders of Superior Indebtedness, shall be segregated from other funds and property held by Sonat and shall be immediately paid over to the Administrative Agent (with any necessary endorsement) to be applied (in the case of cash) to or held as collateral (in the case of non-cash property or securities) for the payment of the Superior Indebtedness in accordance with the terms of the Revolving Credit Agreement. 7. Sonat and the Borrower will cause each Series B Note that becomes Subordinated Debt promptly to be endorsed with the following legend: "The indebtedness evidenced by this instrument is subordinated to the prior payment in full of the Superior Indebtedness (as defined in the Terms of Subordination hereinafter referred to) pursuant to and to the extent provided in the Terms of Subordination attached as Exhibit A to the Standby Note Purchase Agreement dated December 23, 1993 among Sonat Inc., Credit Lyonnais New York Branch, as Administrative Agent for the Banks party to the Revolving Credit Agreement of even date therewith, and Citrus Corp." 8. These terms of subordination shall (i) remain in effect until the Superior Indebtedness shall either have been paid in full or entirely sold under the Note Purchase Agreements, (ii) be binding on Sonat, the Borrower and their respective successors and assigns, and (iii) inure to the benefit of and be enforceable by the Administrative Agent, the Banks and their respective successors, transferees and assigns. A-3 31 U.S. $300,000,000 REVOLVING CREDIT AGREEMENT Dated as of December 23, 1993 Among CITRUS CORP. as Borrower and THE BANKS NAMED HEREIN as Banks and CREDIT LYONNAIS NEW YORK BRANCH and THE TORONTO-DOMINION BANK as Managing Agents 32
TABLE OF CONTENTS ----------------- Section Page - ------- ---- ARTICLE I DEFINITIONS AND ACCOUNTING TERMS . . . . . . . . . . . . . . 1 1.01. Certain Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.02. Computation of Time Periods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 1.03. Accounting Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 1.04. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 ARTICLE II AMOUNT AND TERMS OF THE ADVANCES . . . . . . . . . . . . . . 10 2.01. The Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 2.02. Making the Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 2.03. Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 2.04. Repayment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 2.05. Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 2.06. Additional Interest on LIBOR Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 2.07. Interest Rate Determination and Protection . . . . . . . . . . . . . . . . . . . . . . . . . . 13 2.08. Voluntary Conversion of Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 2.09. Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 2.10. Increased Costs; Capital Adequacy, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 2.11. Illegality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 2.12. Payments and Computations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 2.13. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 2.14. Sharing of Payments, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 2.15. Ratable Reduction or Termination of the Commitments . . . . . . . . . . . . . . . . . . . . . . 22 2.16. Replacement of Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 2.17. Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 ARTICLE III CONDITIONS TO ADVANCES . . . . . . . . . . . . . . . . 23 3.01. Initial Conditions Precedent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 3.02. Additional Conditions Precedent to Each Advance . . . . . . . . . . . . . . . . . . . . . . . . 25 ARTICLE IV REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . 26 4.01. Representations and Warranties of the Borrower . . . . . . . . . . . . . . . . . . . . . . . . 26
-i- 33 ARTICLE V COVENANTS OF THE BORROWER . . . . . . . . . . . 28 5.01. Affirmative Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 5.02. Negative Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 ARTICLE VI EVENTS OF DEFAULT . . . . . . . . . . . . . 31 6.01. Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 ARTICLE VII THE ADMINISTRATIVE AGENT . . . . . . . . . . . . 33 7.01. Authorization and Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 7.02. Agent's Reliance, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 7.03. Administrative Agent and Its Affiliates . . . . . . . . . . . . . . . . . . . . . . . . 34 7.04. Bank Credit Decision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 7.05. Certain Rights of the Administrative Agent . . . . . . . . . . . . . . . . . . . . . . 35 7.06. Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 7.07. Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 7.08. Resignation by the Administrative Agent . . . . . . . . . . . . . . . . . . . . . . . . 37 7.09. No Duty of Managing Agents or Co-Agents . . . . . . . . . . . . . . . . . . . . . . . . 37 ARTICLE VIII MISCELLANEOUS . . . . . . . . . . . . . . 37 8.01. Amendments, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 8.02. Notices, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 8.03. No Waiver; Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 8.04. Costs, Expenses and Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 8.05. Right of Set-Off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 8.06. Binding Effect; Assignments; Participations . . . . . . . . . . . . . . . . . . . . . . 41 8.07. Governing Law; Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 8.08. Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 8.09. Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 8.10. Submission to Jurisdiction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 8.11. Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 8.12. Execution in Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 8.13. Domicile of Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
-ii- 34
EXHIBITS -------- Exhibit 1.01 Form of Series A and Series B Note Exhibit 2.02 Notice of Borrowing Exhibit 3.01-A Opinion of Vinson & Elkins L.L.P., Counsel to Borrower Exhibit 3.01-B Opinion of Vinson & Elkins L.L.P., Counsel to Enron Exhibit 3.01-C Opinion of Senior Vice President and General Counsel of Enron Exhibit 3.01-D Opinion of Vinson & Elkins L.L.P., Counsel to Sonat Exhibit 3.01-E Opinion of Vice President and Secretary of Sonat Exhibit 3.01-F Opinion of Andrews & Kurth L.L.P., Counsel to Managing Agents Exhibit 8.06 Transfer Agreement
-iii- 35 REVOLVING CREDIT AGREEMENT Dated as of December 23, 1993 CITRUS CORP., a Delaware corporation, the lenders party hereto (the "Banks") and Credit Lyonnais New York Branch and The Toronto-Dominion Bank, as managing agents (in such capacities the "Managing Agents"), with Credit Lyonnais New York Branch acting as administrative agent (in such capacity, the "Administrative Agent") for the Banks hereunder, agree as follows: ARTICLE I DEFINITIONS AND ACCOUNTING TERMS SECTION 1.01. Certain Defined Terms. As used in this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and the plural forms of the terms defined): "Address For Notices" means, with respect to any Bank, the office of such Bank specified as its "Address For Notices" on such Bank's signature page to this Agreement or, as to any Person who becomes a Bank after the date hereof, in the Transfer Agreement executed by such Person pursuant to Section 8.06 or the document pursuant to which such Person became a party pursuant to Section 2.16, as the case may be, or such other office of such Bank as such Bank may from time to time specify to the Borrower and the Administrative Agent. "Adjusted CD Rate" means, for any Interest Period for each Adjusted CD Rate Advance comprising part of the same Borrowing, an interest rate per annum equal to the sum of: (a) the rate per annum obtained by dividing (i) the rate of interest determined by the Administrative Agent to be the average (rounded upward to the nearest whole multiple of 1/100 of 1% per annum, if such average is not such a multiple) of the consensus bid rate determined by each of the Reference Banks for the bid rates per annum, at 12:00 P.M. (noon) (or as soon thereafter as practicable) one Business Day before the first day of such Interest Period, of New York certificate of deposit dealers of recognized standing selected by such Reference Bank for the purchase at face value of certificates of deposit of such Reference Bank in an amount substantially equal to such Reference Bank's Adjusted CD Rate Advance comprising part of such Borrowing and with a maturity equal to such Interest Period (provided that, if bid rate quotes from such dealers are not available to any Reference Bank, such Reference Bank shall notify the Administrative Agent of a reasonably equivalent rate determined by it on the basis of another source or sources 36 selected by it), by (ii) a percentage equal to 100% minus the Adjusted CD Rate Reserve Percentage for such Interest Period, plus (b) the Assessment Rate for such Interest Period. The Adjusted CD Rate for the Interest Period for each Adjusted CD Rate Advance comprising part of the same Borrowing shall be determined by the Administrative Agent on the basis of applicable rates furnished to and received by the Administrative Agent from the Reference Banks one Business Day before the first day of such Interest Period, subject however, to the provisions of Section 2.07. "Adjusted CD Rate Advance" means an Advance which bears interest as provided in Section 2.05(b). "Adjusted CD Rate Reserve Percentage" for any Interest Period for each Adjusted CD Rate Advance comprising part of the same Borrowing means the reserve percentage applicable one Business Day before the first day of such Interest Period under regulations issued from time to time by the Federal Reserve Board for determining the maximum reserve requirement (including, but not limited to, any emergency, supplemental or other marginal reserve requirement) for a member bank of the Federal Reserve System in New York City with deposits exceeding one billion dollars with respect to liabilities consisting of or including (among other liabilities) Dollar nonpersonal time deposits in the United States with a maturity equal to such Interest Period. "Administrative Agent" shall have the meaning specified in the first paragraph of this Agreement, together with any successor thereto pursuant to Section 7.08. "Advance" means an advance by a Bank to the Borrower pursuant to Article II, and refers to an Adjusted CD Rate Advance, a Base Rate Advance or a LIBOR Advance (each of which shall be a "Type" of Advance). "Agreement" means this Revolving Credit Agreement, as same may be amended, supplemented or modified from time to time in the future. "Applicable Lending Office" means, with respect to each Bank, such Bank's Domestic Lending Office in the case of a Base Rate Advance, such Bank's CD Lending Office in the case of an Adjusted CD Rate Advance and such Bank's Eurodollar Lending Office in the case of a LIBOR Advance. "Applicable Margin" means, (a) 1/2 of 1% for any Interest Period for each Adjusted CD Rate Advance comprising part of the same Borrowing, and (b) 3/8 of 1% for any Interest Period for each LIBOR Advance comprising part of the same Borrowing. "Assessment Rate" for any Interest Period for each Adjusted CD Rate Advance comprising part of the same Borrowing means the annual assessment rate -2- 37 estimated by the Bank which is the Administrative Agent one Business Day before the first day of such Interest Period for determining the then current annual assessment payable by such Bank to the FDIC for insuring dollar deposits of such Bank at its principal office in the United States. "Bankruptcy Code" means Title 11 of the United States Code, as now or hereafter in effect, or any successor thereto. "Banks" has the meaning specified in the first paragraph of this Agreement, and shall include any financial institution which becomes a Bank pursuant to Section 2.16 or Section 8.06. "Base Rate" means as determined by the Bank which is the Administrative Agent on a daily basis, the higher of (a) the overnight cost of funds of such Bank as determined solely by such Bank plus a margin of 1/2% per annum, or (b) the rate per annum established by such Bank from time to time as the reference rate for short term commercial loans in Dollars to domestic corporate borrowers (which the Borrower acknowledges is not necessarily such Bank's lowest rate). "Base Rate Advance" means an Advance which bears interest as provided in Section 2.05(a). "Borrower" means Citrus Corp., a Delaware corporation, and any successor thereto pursuant to Section 5.02(a). "Borrowing" means a borrowing hereunder consisting of Advances of the same Type made on the same day by the Banks. "Business Day" means (i) any day of the year except Saturday, Sunday and any day on which banks are required or authorized to close in New York City and (ii) if the applicable Business Day relates to any LIBOR Advances, any day which is a "Business Day" described in clause (i) and which is also a day for trading by and between banks in the London interbank Eurodollar market. "CD Lending Office" means, with respect to any Bank, the office of such Bank specified as its "CD Lending Office" on such Bank's signature page to this Agreement, or as to any Person who becomes a Bank after the date hereof, in the Transfer Agreement executed by such Person pursuant to Section 8.06 or the document pursuant to which such Person became a party pursuant to Section 2.16, as the case may be (or, if no such office is specified, its Domestic Lending Office), or such other office of such Bank as such Bank may from time to time specify to the Borrower and the Administrative Agent. "Co-Agents" means those Banks whose names appear on the signature pages of this Agreement under the heading "Co-Agents". -3- 38 "Code" means the Internal Revenue Code of 1986 as amended from time to time, or any successor Federal tax code, and any reference to any statutory provision of the Code shall be deemed to be a reference to any successor provision or provisions. "Commitment" has the meaning specified in Section 2.01. "Consolidated" as to any Person refers to the consolidation of the accounts of such Person and its Subsidiaries in accordance with GAAP. "Convert", "Conversion" and "Converted" each refers to a conversion of Advances of one Type into Advances of another Type pursuant to Section 2.07, Section 2.08 or Section 2.10(b). "Credit Lyonnais" means Credit Lyonnais New York Branch. "Dollar" and the sign "$" mean lawful money of the United States. "Domestic Lending Office" means, with respect to any Bank, the office of such Bank specified as its "Domestic Lending Office" on such Bank's signature page to this Agreement or, as to any Person who becomes a Bank after the date hereof, in the Transfer Agreement executed by such Person pursuant to Section 8.06 or the document pursuant to which such Person became a party pursuant to Section 2.16, as the case may be, or such other office of such Bank as such Bank may from time to time specify to the Borrower and the Administrative Agent. "Enron" means Enron Corp., a Delaware corporation. "Enron Event of Default" means an "Event of Default" as defined in the Enron Note Purchase Agreement. "Enron Note Purchase Agreement" means the Standby Note Purchase Agreement dated as December 23, 1993 among Enron, the Administrative Agent, and the Borrower joining therein for purposes of acknowledging the consenting thereto, as the same now exists or may hereafter be amended from time to time. "Eurocurrency Liabilities" has the meaning assigned to that term in Regulation D of the Federal Reserve Board, as in effect from time to time. "Eurodollar Lending Office" means, with respect to any Bank, the office of such Bank specified as its "Eurodollar Lending Office" on such Bank's signature page to this Agreement or, as to any Person who becomes a Bank after the date hereof, in the Transfer Agreement executed by such Person pursuant to Section 8.06 or the document pursuant to which such Person became a party hereto pursuant to Section 2.16, as the case may be (or if no such office is specified, its Domestic Lending Office), or such other office of such -4- 39 Bank as such Bank may from time to time specify to the Borrower and the Administrative Agent. "Events of Default" has the meaning specified in Section 6.01. "Excepted Liens" means (a) legal or equitable encumbrances deemed to exist by reason of negative pledge covenants and other covenants or undertakings of like nature; (b) legal or equitable Liens deemed to exist by reason of the existence of any litigation or other legal proceeding or arising out of a judgment or award with respect to which an appeal is being or will timely be prosecuted, in each case securing indebtedness for money borrowed; (c) Liens on defeasance deposits to secure indebtedness for money borrowed, which is being or will be defeased, in whole or in part, out of the moneys constituting such defeasance deposits; and (d) Liens encumbering cash or securities securing the obligations of the Borrower to reimburse draws made by the Borrower under letters of credit or obligations of the Borrower with respect to bankers acceptances, so long as such cash or securities are encumbered for the purpose of being used promptly after the payment of the letter of credit or bankers acceptance to pay such obligations of the Borrower secured by such cash or securities. "FDIC" means the Federal Deposit Insurance Corporation, or any federal agency or authority of the United States from time to time succeeding to its function. "Federal Funds Rate" means, for any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by it. "Federal Reserve Board" means the Board of Governors of the Federal Reserve System, or any federal agency or authority of the United States from time to time succeeding to its function. "FERC" means the Federal Energy Regulatory Commission, or any federal agency or authority of the United States from time to time succeeding to its function. "FGT" means Florida Gas Transmission Company, a Delaware corporation. "GAAP" has the meaning specified in Section 1.03. "Indemnified Party" has the meaning specified in Section 8.04(c). -5- 40 "Interest Period" means, with respect to each Adjusted CD Rate Advance or LIBOR Advance, in each case comprising part of the same Borrowing, the period commencing on the date of such Advance or the date of the Conversion of any Advance into such an Advance and ending on the last day of the period selected by the Borrower pursuant to the provisions below and, thereafter, each subsequent period commencing on the last day of the immediately preceding Interest Period and ending on the last day of the period selected by the Borrower pursuant to the provisions below. The duration of each such Interest Period shall be (a) in the case of an Adjusted CD Rate Advance, 30, 60, 90 or 180 days (including the day on which such Interest Period commences) and (b) in the case of a LIBOR Advance, the period beginning on (and including) the date on which such Interest Period commences and ending on (but excluding) the day which numerically corresponds to such date one, two, three or six months thereafter (or, if such month has no numerically corresponding day, on the last Business Day of such month), in each case as the Borrower may, upon notice received by the Administrative Agent not later than 11:00 A.M. on the third Business Day (first Business Day in the case of an Adjusted CD Rate Advance) prior to the first day of such Interest Period, select; provided, however, that: (i) Interest Periods commencing on the same date for Advances comprising part of the same Borrowing shall be of the same duration; (ii) whenever the last day of any Interest Period would otherwise occur on a day other than a Business Day, the last day of such Interest Period shall be extended to occur on the next succeeding Business Day,provided, in the case of any Interest Period for a LIBOR Advance, that if such extension would cause the last day of such Interest Period to occur in the next following calendar month, the last day of such Interest Period shall occur on the next preceding Business Day; and (iii) no Interest Period may end after the Termination Date. "LIBO Rate" means, for any Interest Period for each LIBOR Advance comprising part of the same Borrowing, an interest rate per annum determined by the Administrative Agent and equal to (a) an interest rate per annum shown on page 3750 of the Dow Jones & Company Telerate screen or any successor page as the composite offered rate for London interbank deposits with a period equal to such Interest Period, as shown under the heading "USD", as of 11:00 A.M. (London time) two Business Days prior to the first day of such Interest Period, (b) if the rate specified in clause (a) of this definition does not appear, an interest rate per annum based on the rates at which Dollar deposits with a period equal to such Interest Period are displayed on page "LIBO" of the Reuters Monitor Money Rates Service or such other page as may replace the LIBO page on that service for the purpose of displaying London interbank offered rates of major banks as of 11:00 A.M. (London time) two Business Days prior to the first day of such Interest Period, it being understood that if two or more such rates appear on such page, the rate will be the arithmetic average of such displayed rates and if fewer than two such rates are displayed, this clause (b) of this definition shall not be applicable, (c) if the rate specified in clause (a) of this definition does not appear and if clause (b) of this definition is not applicable, an -6- 41 interest rate per annum equal to the average of the rates at which deposits in Dollars are offered by the Reference Banks at approximately 11:00 A.M. (London time) two Business Days prior to the first day of such Interest Period to prime banks in the London interbank market in an amount approximately equal to such LIBOR Advance with a period equal to such Interest Period, it being understood that if two such quotations are provided, the rate shall be the arithmetic average of such provided rates and if only one such rate is provided, this clause (c) of this definition shall not be applicable, and (d) if the rate specified in clause (a) of this definition does not appear and if clauses (b) and (c) of this definition are not applicable, an interest rate per annum that is the arithmetic average of the rates quoted by major banks in New York City, selected by the Administrative Agent, at approximately 11:00 A.M. on the first day of such Interest Period to leading European banks in an amount approximately equal to such LIBOR Advance with a period equal to such Interest Period; provided, that the applicable rate determined pursuant to clause (a), (b), (c) or (d), as the case may be, of this definition shall be rounded upward to the nearest whole multiple of 1/16 of 1%, if such rate is not such a multiple. "LIBOR Advance" means an Advance which bears interest as provided in Section 2.05(c). "Lien" means a mortgage, pledge, security interest or other charge or encumbrance, including any conditional sale or title retention agreement. "Loan Document" means this Agreement, each Note, each Notice of Borrowing, each Note Purchase Agreement and each other document or instrument executed and delivered in connection with this Agreement. "Majority Banks" means at any time Banks holding at least 66 2/3% of the then aggregate unpaid principal amount of the Notes held by Banks, or, if no such principal amount is then outstanding, Banks having at least 66 2/3% of the Commitments. "Managing Agents" has the meaning specified in the first paragraph of this Agreement. "Notes" means the Series A Notes and the Series B Notes. "Note Purchase Agreements" means the Enron Note Purchase Agreement and the Sonat Note Purchase Agreement. "Note Purchase Event" has the meaning ascribed to such term in the Enron Note Purchase Agreement and the Sonat Note Purchase Agreement. "Notice of Borrowing" has the meaning specified in Section 2.02. "Other Taxes" has the meaning specified in Section 2.13(c). -7- 42 "Payment Office" means the office of the Administrative Agent located at 1301 Avenue of the Americas, New York, New York 10019, or such other office as the Administrative Agent may designate by written notice to the other parties hereto. "Person" means an individual, partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated association, joint venture, firm or other entity, or a government or any political subdivision or agency, department or instrumentality thereof. "Phase III Expansion" means the proposed expansion to FGT's existing pipeline system described and approved by FERC in that certain Order Issuing Certificates, Authorizing Abandonments, and Clarifying Prior Order issued September 15, 1993 in Docket Nos. CP 92-182-004 and 005 and CP 92-415-002 and 003. "Prescribed Forms" shall mean such duly executed form(s) or statement(s), and in such number of copies, which may, from time to time, be prescribed by law and which, pursuant to applicable provisions of (a) an income tax treaty between the United States and the country of residence of the Bank providing the form(s) or statement(s), (b) the Code, or (c) any applicable rule or regulation under the Code, permit the Borrower to make payments hereunder for the account of such Bank free of deduction or withholding of income or similar taxes (except for any deduction or withholding of income or similar taxes as a result of any change in or in the interpretation of any such treaty, the Code or any such rule or regulation). "Reference Banks" means Credit Lyonnais New York Branch and The Toronto-Dominion Bank. "Related Indemnified Party" has the meaning specified in Section 8.04(c). "Series A Note" means a promissory note of the Borrower payable to the order of any Bank, in substantially the form of Exhibit 1.01 hereto, evidencing fifty percent (50%) of the aggregate indebtedness of the Borrower to such Bank resulting from the Advances owed to such Bank. "Series B Note" means a promissory note of the Borrower payable to the order of any Bank, in substantially the form of Exhibit 1.01 hereto, evidencing fifty percent (50%) of the aggregate indebtedness of the Borrower to such Bank resulting from the Advances owed to such Bank. "Sonat" means Sonat Inc., a Delaware corporation. "Sonat Event of Default" means an "Event of Default" as defined in the Sonat Note Purchase Agreement. -8- 43 "Sonat Note Purchase Agreement" means the Standby Note Purchase Agreement dated as of December 23, 1993, among Sonat, the Administrative Agent, and the Borrower joining therein for purposes of acknowledging and consenting thereto, as the same now exists or may hereafter be amended from time to time. "Subsidiary" means, as to any Person, any corporation, partnership, joint venture or other entity of which more than 50% of the outstanding capital stock or other equity interests having ordinary voting power (irrespective of whether or not at the time capital stock or other equity interest of any other class or classes of such corporation, partnership, joint venture or other entity shall or might have voting power upon the occurrence of any contingency) is at the time directly or indirectly owned by such Person. "Taxes" has the meaning specified in Section 2.13(a). "Termination Date" means the earliest to occur of (a) December 22, 1994, (b) termination in whole of the Commitments pursuant to Section 2.15 or 6.01, or (c) the Notes and all other amounts under this Agreement becoming due and payable pursuant to the final clause (ii) of Section 6.01. "Transfer Agreement" has the meaning specified in Section 8.06(a). SECTION 1.02. Computation of Time Periods. In this Agreement in the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including" and the words "to" and "until" each means "to but excluding". Unless otherwise indicated, all references to a particular time are references to New York City time. SECTION 1.03. Accounting Terms. Unless otherwise specified, all accounting terms used herein or in any other Loan Document shall be interpreted, all accounting determinations and computations hereunder or thereunder shall be made, and all financial statements required to be delivered hereunder or thereunder shall be prepared in accordance with, those generally accepted accounting principles ("GAAP") in effect at the time of application of such accounting terms for purposes of this Agreement or of such other Loan Document. SECTION 1.04. Miscellaneous. The words "hereof", "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and Article, Section and Exhibit references are to Articles and Sections of and Exhibits to this Agreement, unless otherwise specified. The term "including" shall mean "including, without limitation,". -9- 44 ARTICLE II AMOUNT AND TERMS OF THE ADVANCES SECTION 2.01. The Advances. Each Bank severally agrees, on the terms and conditions hereinafter set forth, to make one or more Advances to the Borrower from time to time on any Business Day during the period from the date hereof until the Termination Date in an aggregate amount not to exceed at any time outstanding the amount set opposite such Bank's name on the signature pages hereof (as such pages are deemed modified pursuant to this Article II or Section 8.06) (as such amount may be reduced pursuant to Section 2.10(e), Section 2.15 or Section 6.01, such Bank's "Commitment"). Each Borrowing shall be in an aggregate amount not less than (x) in the case of a Borrowing comprised of LIBOR Advances, $25,000,000 and (y) in the case of a Borrowing comprised of Base Rate Advances or Adjusted CD Rate Advances, $15,000,000, and shall consist of Advances of the same Type having (in the case of a Borrowing comprised of Adjusted CD Rate Advances or LIBOR Advances) the same Interest Period, made on the same day by the Banks ratably according to their respective Commitments. Within the limits of each Bank's Commitment, the Borrower may borrow, prepay pursuant to Section 2.09 and reborrow under this Section 2.01. SECTION 2.02. Making the Advances. (a) Each Borrowing shall be made on notice, (x) in the case of a proposed Borrowing comprised of LIBOR Advances, given not later than 11:00 A.M. at least three Business Days prior to the date of the proposed Borrowing, (y) in the case of a proposed Borrowing comprised of Adjusted CD Rate Advances, given not later than 11:00 A.M. at least one Business Day prior to the date of the proposed Borrowing, and (z) in the case of a proposed Borrowing comprised of Base Rate Advances, given not later than 10:00 A.M. on the day of the proposed Borrowing, by the Borrower to the Administrative Agent, which shall give to each Bank prompt notice thereof by telecopy. Each such notice of a Borrowing (a "Notice of Borrowing") shall be by telecopy, confirmed immediately in writing, in substantially the form of Exhibit 2.02 hereto, specifying therein the requested (i) date of such Borrowing, (ii) Type of Advances comprising such Borrowing, (iii) aggregate amount of such Borrowing, and (iv) in the case of a Borrowing comprised of Adjusted CD Rate Advances or LIBOR Advances, initial Interest Period for each such Advance, provided that the Borrower may not specify LIBOR Advances for any Borrowing if, after giving effect to such Borrowing, LIBOR Advances having more than four different Interest Periods shall be outstanding and the Borrower may not specify Adjusted CD Rate Advances for any Borrowing if, after giving effect to such Borrowing, Adjusted CD Rate Advances having more than four different Interest Periods shall be outstanding. In the case of a proposed Borrowing comprised of Adjusted CD Rate Advances or LIBOR Advances, the Administrative Agent shall promptly notify each Bank of the applicable interest rate under Section 2.05(b) or (c). Each Bank shall, before 11:00 A.M. (2:00 P.M. in the case of a Borrowing comprised of Base Rate Advances) on the date of such Borrowing, make available for the account of its Applicable Lending Office to the Administrative Agent at its Payment Office, in same day funds, such Bank's ratable portion of such Borrowing. After the Administrative Agent's receipt of such funds and upon -10- 45 fulfillment of the applicable conditions set forth in Article III, the Administrative Agent will make such funds available to the Borrower at the Administrative Agent's aforesaid address. (b) Each Notice of Borrowing shall be irrevocable and binding on the Borrower. In the case of any Borrowing which the related Notice of Borrowing specifies is to be comprised of Adjusted CD Rate Advances or LIBOR Advances, the Borrower shall indemnify each Bank against any loss, cost or expense incurred by such Bank as a result of any failure to fulfill on or before the date specified in such Notice of Borrowing for such Borrowing the applicable conditions set forth in Article III, including, without limitation, any loss (excluding loss of anticipated profits), cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such Bank to fund the Advance to be made by such Bank as part of such Borrowing when such Advance, as a result of such failure, is not made on such date. (c) Unless the Administrative Agent shall have received notice from a Bank prior to the date of any Borrowing that such Bank will not make available to the Administrative Agent such Bank's ratable portion of such Borrowing, the Administrative Agent may assume that such Bank has made such portion available to the Administrative Agent on the date of such Borrowing in accordance with subsection (a) of this Section 2.02 and the Administrative Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent that such Bank shall not have so made such ratable portion available to the Administrative Agent, such Bank and the Borrower severally agree to repay to the Administrative Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Administrative Agent, at (i) in the case of the Borrower, the interest rate applicable at the time to Advances comprising such Borrowing and (ii) in the case of such Bank, the Federal Funds Rate. If such Bank shall repay to the Administrative Agent such corresponding amount, such amount so repaid shall constitute such Bank's Advance as part of such Borrowing for purposes of this Agreement. (d) The failure of any Bank to make the Advance to be made by it as part of any Borrowing shall not relieve any other Bank of its obligation, if any, hereunder to make its Advance on the date of such Borrowing, but no Bank shall be responsible for the failure of any other Bank to make the Advance to be made by such other Bank on the date of any Borrowing. (e) Each advance made by each Bank to the Borrower hereunder, and the indebtedness of the Borrower to such Bank resulting from such Advance, shall be evidenced 50% by a Series A Note and 50% by a Series B Note. SECTION 2.03. Fees. (a) Commitment Fee. The Borrower agrees to pay to each Bank a commitment fee, at a rate per annum of 0.1875 of 1% on the average daily unused amount of such Bank's Commitment, from the date hereof until the Termination Date. The commitment fee is payable on the last day of each March, June, September and -11- 46 December during the term of such Bank's Commitment, commencing December 31, 1993, and on the date such Bank's Commitment is terminated. (b) Agents' Fees. The Borrower shall pay to the Managing Agents and the Administrative Agent, at or prior to the time this Agreement becomes effective pursuant to Section 8.06 hereof, such fees as may have been separately agreed to by the Borrower and the Managing Agents and the Borrower and the Administrative Agent. SECTION 2.04. Repayment. The Borrower shall repay the unpaid principal amount of each Advance owed to each Bank in accordance with the Series A Note and the Series B Note to the order of such Bank evidencing such Advance. All Advances shall be due and payable on the Termination Date. SECTION 2.05. Interest. The Borrower shall pay interest on the unpaid principal amount of each Advance owed to each Bank from the date of such Advance until such principal amount shall be paid in full, at the following rates per annum: (a) Base Rate Advances. During such periods as such Advance is a Base Rate Advance, a rate per annum equal at all times to the Base Rate in effect from time to time, payable quarterly on the last day of each March, June, September and December during such periods and on the date such Base Rate Advance shall be Converted or paid in full; provided that any amount of principal (other than principal of Adjusted CD Rate Advances bearing interest pursuant to the proviso to Section 2.05(b) and principal of LIBOR Advances bearing interest pursuant to the proviso to Section 2.05(c)) which is not paid when due (whether at stated maturity, by acceleration or otherwise) shall bear interest, from the date on which such amount is due until such amount is paid in full, payable on demand, at a rate per annum equal at all times to 2% per annum above the Base Rate in effect from time to time. (b) Adjusted CD Rate Advances. During such periods as such Advance is an Adjusted CD Rate Advance, a rate per annum equal at all times during each Interest Period for such Advance to the sum of the Adjusted CD Rate for such Interest Period for such Advance plus the Applicable Margin per annum for such Interest Period, payable on the last day of such Interest Period and, if such Interest Period has a duration of more than 90 days, on the day which occurs during such Interest Period 90 days from the first day of such Interest Period; provided that any amount of principal of any Adjusted CD Rate Advance which is not paid when due (whether at stated maturity, by acceleration or otherwise) shall bear interest, from the date on which such amount is due until such amount is paid in full, payable on demand, at a rate per annum equal at all times to the greater of (x) 2% per annum above the Base Rate in effect from time to time and (y) 2% per annum above the rate per annum required to be paid on such Advance immediately prior to the date on which such amount became due. -12- 47 (c) LIBOR Advances. During such periods as such Advance is a LIBOR Advance, a rate per annum equal at all times during each Interest Period for such Advance to the sum of the LIBO Rate for such Interest Period for such Advance plus the Applicable Margin per annum for such Interest Period, payable on the last day of such Interest Period and, if such Interest Period has a duration of more than three months, on the day which occurs during such Interest Period three months from the first day of such Interest Period; provided that any amount of principal of any LIBOR Advance which is not paid when due (whether at stated maturity, by acceleration or otherwise) shall bear interest, from the date on which such amount is due until such amount is paid in full, payable on demand, at a rate per annum equal at all times to the greater of (x) 2% per annum above the Base Rate in effect from time to time and (y) 2% per annum above the rate per annum required to be paid on such Advance immediately prior to the date on which such amount became due. SECTION 2.06. Additional Interest on LIBOR Advances. If any Bank is required under regulations of the Federal Reserve Board to maintain reserves with respect to liabilities or assets consisting of or including Eurocurrency Liabilities, and if as a result thereof there is an increase in the cost to such Bank of agreeing to make or making, funding or maintaining LIBOR Advances, then the Borrower shall from time to time, upon demand by such Bank (with a copy of such demand to the Administrative Agent), pay to the Administrative Agent for the account of such Bank additional amounts, as additional interest hereunder, sufficient to compensate such Bank for such increased cost. A certificate in reasonable detail as to the basis for and the amount of such increased cost, submitted to the Borrower and the Administrative Agent by such Bank, shall be conclusive and binding for all purposes, absent manifest error. SECTION 2.07. Interest Rate Determination and Protection. (a) Each Reference Bank agrees to furnish to the Administrative Agent timely information for the purpose of determining each Adjusted CD Rate and, when applicable, for the purpose of determining each LIBO Rate. (b) The Administrative Agent shall give prompt notice to the Borrower and the Banks of the applicable interest rate determined by the Administrative Agent for purposes of Section 2.05(a), (b) or (c), and the applicable rate, if any, furnished by each Reference Bank for the purpose of determining the applicable interest rate under Section 2.05(b) or (c). (c) If only one Reference Bank furnishes timely information to the Administrative Agent for determining the Adjusted CD Rate for any Adjusted CD Rate Advances, or if the Administrative Agent is not able to ascertain the LIBO Rate for any LIBOR Advances as contemplated in the definition of "LIBO Rate", -13- 48 (i) the Administrative Agent shall forthwith notify the Borrower and the Banks that the interest rate cannot be determined for such LIBOR Advances or Adjusted CD Rate Advances, as the case may be, (ii) each such Advance will automatically, on the last day of the then existing Interest Period therefor, Convert into a Base Rate Advance (or if such Advance is then a Base Rate Advance, will continue as a Base Rate Advance), and (iii) the obligation of the Banks to make, or to Convert Advances into, Adjusted CD Rate Advances or LIBOR Advances, as the case may be, shall be suspended until the Administrative Agent shall notify the Borrower and the Banks that the circumstances causing such suspension no longer exist. (d) If, with respect to any Adjusted CD Rate Advances or LIBOR Advances, the Majority Banks notify the Administrative Agent that the applicable interest rate for any Interest Period for such Advances will not adequately reflect the cost to such Majority Banks of making, funding or maintaining their respective Adjusted CD Rate Advances or LIBOR Advances, as the case may be, for such Interest Period, the Administrative Agent shall forthwith so notify the Borrower and the Banks, whereupon (i) each such Advance will automatically, on the last day of the then existing Interest Period therefor, Convert into a Base Rate Advance (or, if such Advance is then a Base Rate Advance, will continue as a Base Rate Advance), and (ii) the obligation of the Banks to make, or to Convert Advances into, Adjusted CD Rate Advances or LIBOR Advances, as the case may be, shall be suspended until the Administrative Agent shall notify the Borrower and the Banks that the circumstances causing such suspension no longer exist. (e) If the Borrower shall fail to select the duration of any Interest Period for any Adjusted CD Rate Advances or LIBOR Advances in accordance with the provisions contained in the definition of "Interest Period" in Section 1.01, the Administrative Agent will forthwith so notify the Borrower and the Banks and such Advances will automatically, on the last day of the then existing Interest Period therefor, Convert into Base Rate Advances. (f) (i) On the date on which the aggregate unpaid principal amount of Advances comprising any Borrowing of LIBOR Advances shall be reduced, by payment or prepayment or otherwise, to less than $25,000,000, such Advances shall automatically Convert into Base Rate Advances, and on and after such date the right of the Borrower to Convert such Advances into LIBOR Advances shall terminate; provided, however, that if and so long as each such Advance shall be of the same Type and have the same Interest Period as Advances comprising another Borrowing or other Borrowings, and the aggregate unpaid principal amount of all such Advances of all such Borrowings shall equal or exceed $25,000,000, the Borrower shall have the right to continue all such Advances as, or to Convert all such Advances into, Advances of such Type having such Interest Period. -14- 49 (ii) On the date on which the aggregate unpaid principal amount of Advances comprising any Borrowing of Adjusted CD Rate Advances shall be reduced, by payment or prepayment or otherwise, to less than $15,000,000, such Advances shall automatically Convert into Base Rate Advances, and on and after such date the right of the Borrower to Convert such Advances into Adjusted CD Rate Advances shall terminate; provided, however, that if and so long as each such Advance shall be of the same Type and have the same Interest Period as Advances comprising another Borrowing or other Borrowings, and the aggregate unpaid principal amount of all such Advances of all such Borrowings shall equal or exceed $15,000,000, the Borrower shall have the right to continue all such Advances as, or to Convert all such Advances into, Advances of such Type having such Interest Period. SECTION 2.08. Voluntary Conversion of Advances. The Borrower may on any Business Day, upon notice given to the Administrative Agent not later than 11:00 A.M. (x) in the case of a proposed Conversion into LIBOR Advances, on the third Business Day prior to the date of the proposed Conversion, (y) in the case of a proposed Conversion into Adjusted CD Rate Advances, on the first Business Day prior to the date of the proposed Conversion, and (z) in the case of a proposed Conversion into Base Rate Advances, on the date of the proposed Conversion and subject to the limitations in Section 2.02(a) as to the number of permitted Interest Periods and subject to the provisions of Sections 2.07 and 2.11, Convert all Advances of one Type comprising the same Borrowing into Advances of another Type; provided, however, that any Conversion of any LIBOR Advances shall be made on, and only on, the last day of an Interest Period for such LIBOR Advances and that any Conversion of any Adjusted CD Rate Advances shall be made on, and only on, the last day of an Interest Period for such Adjusted CD Rate Advances. Each such notice of a Conversion shall, within the restrictions specified above, specify (i) the date of such Conversion, (ii) the Advances to be Converted and the Type into which they are to be Converted, and (iii) if such Conversion is into Adjusted CD Rate Advances or LIBOR Advances, the duration of the Interest Period for each such Advance. SECTION 2.09. Prepayments. The Borrower may (x) in respect of Adjusted CD Rate Advances, upon at least one Business Day's notice, (y) in respect of LIBOR Advances, upon at least three Business Days' notice, and, (z) in respect of Base Rate Advances, upon notice by 11:00 A.M. on the day of the proposed prepayment, to the Administrative Agent stating the proposed date and aggregate principal amount of the prepayment and the Types of Advances to be prepaid, and in the case of LIBOR Advances or Adjusted CD Rate Advances, the specific Borrowing or Borrowings pursuant to which made, and if such notice is given the Borrower shall, prepay the outstanding principal amounts of the Advances comprising part of the same Borrowing in whole or ratably in part, together with accrued interest to the date of such prepayment on the principal amount prepaid without premium or penalty; provided, however, that (i) each partial prepayment shall be in an aggregate principal amount not less than $10,000,000, and (ii) if the Borrower prepays any Adjusted CD Rate Advance or any LIBOR Advance on any day other than the last day of an Interest Period therefor, the Borrower shall compensate the Banks pursuant to Section 8.04(b). -15- 50 SECTION 2.10. Increased Costs; Capital Adequacy, Etc. (a) If, due to either (i) the introduction of or any change (other than any change by way of imposition or increase of reserve requirements included in the Adjusted CD Rate Reserve Percentage) in or in the interpretation of any law or regulation by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof or (ii) the compliance with any guideline or request from any governmental authority, central bank or comparable agency (whether or not having the force of law), there shall be any increase in the cost to any Bank of agreeing to make or making, funding or maintaining Adjusted CD Rate Advances or LIBOR Advances (other than increased costs described in Section 2.06 or in clause (c) below), then the Borrower shall from time to time, upon demand by such Bank (with a copy of such demand to the Administrative Agent), pay to the Administrative Agent for the account of such Bank additional amounts sufficient to compensate such Bank for such increased cost. A certificate in reasonable detail as to the basis for and the amount of such increased cost, submitted to the Borrower and the Administrative Agent by such Bank, shall be conclusive and binding for all purposes, absent manifest error. Promptly after any Bank becomes aware of any such introduction, change or proposed compliance, such Bank shall notify the Borrower thereof. No Bank shall be permitted to recover increased costs incurred or accrued more than 90 days prior to such notice to the Borrower. (b) If the Borrower so notifies the Administrative Agent within five Business Days after any Bank notifies the Borrower of any increased cost pursuant to the provisions of Section 2.10(a), the Borrower shall Convert all Advances of the Type affected by such increased cost of all Banks then outstanding into Advances of another Type in accordance with Section 2.08 and, additionally, reimburse such Bank for such increased cost in accordance with Section 2.10(a). (c) If any Bank shall have determined that, after the date hereof, the adoption of any applicable law, rule or regulation regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its lending office) with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency (except to the extent such request or directive arises as a result of the individual creditworthiness of such Bank), has the effect of increasing the amount of capital required or expected to be maintained as a result of its Commitment hereunder, such Bank shall have the right to give prompt written notice thereof to the Borrower with a copy to the Administrative Agent, which notice shall show in reasonable detail the calculation of such additional amounts as shall be required to compensate such Bank for the increased cost to such Bank as a result of such increase in capital and shall certify that such costs are generally being charged by such Bank to other similarly situated borrowers under similar credit facilities, which notice shall be conclusive and binding for all purposes, absent manifest error, although the failure to give any such notice shall not, unless such notice fails to set forth the information required above or except as otherwise expressly -16- 51 provided in Section 2.10(d), release or diminish any of the Borrower's obligations to pay additional amounts pursuant to Section 2.10(d). (d) Each Bank agrees that, upon giving notice specified in Section 2.10(c), at the request of the Borrower, it will promptly enter into good faith negotiations with the Borrower with respect to the method of reimbursement for the additional costs specified in such notice. No later than 15 days after the date of the giving of any such notice, and assuming the Bank giving same has made itself available for the aforesaid good faith negotiations, the Borrower shall have the option, to be exercised in writing, to (i) compensate such Bank for the specified additional costs on the basis, if any, negotiated between such Bank and the Borrower or (ii) terminate such Bank's Commitment to the extent, and on the terms and conditions, specified in Section 2.10(e), provided that if the Borrower fails to so exercise such option, it shall be deemed to have agreed to reimburse such Bank from time to time on demand the additional costs specified in the Bank's notice delivered pursuant to Section 2.10(c). Notwithstanding the foregoing, the Borrower shall not be obligated to reimburse any Bank pursuant to this Section 2.10(d) or Section 2.10(e) or Section 2.16 for any additional costs under Section 2.10(c) incurred or accruing more than 90 days prior to the date on which such Bank gave the written notice specified in Section 2.10(c). (e) In the event that the Borrower has given notice to a Bank pursuant to Section 2.10(d) that it elects to terminate such Bank's Commitment (a copy of which notice shall be sent to the Administrative Agent), such termination shall become effective 15 days thereafter unless such Bank withdraws its request for additional compensation. On the date of the termination of the Commitment of any Bank pursuant to this Section 2.10(e), (x) the Borrower shall deliver notice of the effectiveness of such termination to such Bank and to the Administrative Agent, (y) the Borrower shall pay all amounts owed by the Borrower to such Bank under this Agreement or under the Notes payable to such Bank (including principal of and interest on the Advances owed to such Bank, accrued commitment fees and amounts specified in such Bank's notice delivered pursuant to Section 2.10(c) with respect to the period prior to such termination) and (z) upon the occurrence of the events set forth in (x) and (y), such Bank shall cease to be a "Bank" hereunder for all purposes (except for its obligations under Section 7.07 hereof and the obligations of the Borrower to such Bank under Sections 8.04(a)(ii) and 8.04(c) hereof). The Borrower may elect to terminate a Bank's Commitment pursuant to Section 2.10(d) only if at such time: (i) no Event of Default is then in existence or would be in existence but for requirement that notice be given or time elapse or both; (ii) the Borrower has elected, or is then electing, to terminate the Commitments of all Banks which have made similar requests for increased compensation under Section 2.10(c), which requests have not been withdrawn, provided, that requests may be determined by the Borrower to be dissimilar based on the negotiation of materially dissimilar rates of compensation under clause (i) of Section 2.10(d); and -17- 52 (iii) after giving effect to such termination, there would not have been terminated pursuant to this Section 2.10(e), and not replaced pursuant to Section 2.16, Commitments aggregating more than $100,000,000. (f) Each Bank shall use its best efforts (consistent with its internal policies and legal and regulatory restrictions) to select a jurisdiction for its Applicable Lending Office or change the jurisdiction of its Applicable Lending Office, as the case may be, so as to avoid the imposition of any increased costs under this Section 2.10 or to eliminate the amount of any such increased cost which may thereafter accrue; provided that no such selection or change of the jurisdiction for its Applicable Lending Office shall be made if, in the reasonable judgment of such Bank, such selection or change would be disadvantageous to such Bank. SECTION 2.11. Illegality. Notwithstanding any other provision of this Agreement, if the introduction of or any change in or in the interpretation of any law or regulation shall make it unlawful, or any governmental authority, central bank or comparable agency shall assert that it is unlawful, for any Bank or its Eurodollar Lending Office to perform its obligations hereunder to make LIBOR Advances or to continue to fund or maintain LIBOR Advances hereunder, then, on notice thereof and demand therefor by such Bank to the Borrower through the Administrative Agent, (i) the obligation of the Banks to make LIBOR Advances and to Convert Advances into LIBOR Advances shall terminate and (ii) the Borrower shall forthwith Convert all LIBOR Advances of all Banks then outstanding into Advances of another Type in accordance with Section 2.08. SECTION 2.12. Payments and Computations. (a) The Borrower shall make each payment under any Loan Document not later than 11:00 A.M. on the day when due in Dollars to the Administrative Agent at its Payment Office in same day funds. The Administrative Agent will promptly thereafter cause to be distributed like funds relating to the payment of principal or interest or commitment fees ratably (other than amounts payable pursuant to Section 2.06, 2.10, 2.13, 2.16 or 8.04(b)) to the Banks (decreased, as to any Bank, for any taxes withheld in respect of such Bank as contemplated by Section 2.13(b)) for the account of their respective Applicable Lending Offices, and like funds relating to the payment of any other amount payable to any Bank to such Bank for the account of its Applicable Lending Office, in each case to be applied in accordance with the terms of this Agreement. (b) All computations of interest based on the Base Rate and of commitment fees shall be made by the Administrative Agent on the basis of a year of 365 or 366 days, as the case may be, and all computations of interest based on the Adjusted CD Rate, the LIBO Rate, or the Federal Funds Rate shall be made by the Administrative Agent, and all computations of interest pursuant to Section 2.06 shall be made by a Bank, on the basis of a year of 360 days, in each case for the actual number of days (including the first day but excluding the last day) occurring in the period for which such interest or commitment fees are payable. Each determination by the Administrative Agent (or, in the case of -18- 53 Section 2.06, by a Bank) of an interest rate hereunder shall be conclusive and binding for all purposes, absent manifest error. (c) Whenever any payment hereunder or under the Notes shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of payment of interest or commitment fee, as the case may be; provided, however, if such extension would cause payment of interest on or principal of LIBOR Advances to be made in the next following calendar month, such payment shall be made on the next preceding Business Day. (d) Unless the Administrative Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Banks hereunder that the Borrower will not make such payment in full, the Administrative Agent may assume that the Borrower has made such payment in full to the Administrative Agent on such date and the Administrative Agent may, in reliance upon such assumption, cause to be distributed to each Bank on such due date an amount equal to the amount then due such Bank. If and to the extent the Borrower shall not have so made such payment in full to the Administrative Agent, each Bank shall repay to the Administrative Agent forthwith on demand such amount distributed to such Bank together with interest thereon, for each day from the date such amount is distributed to such Bank until the date such Bank repays such amount to the Administrative Agent, at the Federal Funds Rate. (e) Each repayment by the Borrower of the unpaid principal of and accrued interest on each Advance owing to each Bank (including any prepayment pursuant to Section 2.09) shall, if such repayment is a repayment of less than all of the unpaid principal of and accrued interest on such Advance, be applied 50% to the Series A Note evidencing such Advance and 50% to the Series B Note evidencing such Advance. SECTION 2.13. Taxes. (a) Any and all payments by the Borrower hereunder or under the Notes shall be made, in accordance with Section 2.12, free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges, fees, duties or withholdings, and all liabilities with respect thereto, excluding, in the case of each Bank and the Administrative Agent, (1) taxes imposed on its income, and franchise taxes imposed on it, by the jurisdiction under the laws of which such Bank or Administrative Agent (as the case may be) is organized or any political subdivision thereof and, in the case of each Bank, taxes imposed on its income, and franchise taxes imposed on it, by the jurisdiction of such Bank's Applicable Lending Office or any political subdivision thereof and (2) any taxes imposed by the United States of America by means of withholding at the source if and to the extent that such taxes shall be in effect and shall be applicable, on the date hereof, to payments to be made to such Bank or the Administrative Agent (all such non-excluded taxes, levies, imposts, deductions, charges, fees, duties, withholdings and liabilities being hereinafter referred to as "Taxes"). If the Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder or under any Note to any Bank or the Administrative Agent, (i) the sum payable shall be increased as may be -19- 54 necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 2.13) such Bank or the Administrative Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions and (iii) the Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law. (b) Notwithstanding anything to the contrary contained in this Agreement, each of the Borrower and the Administrative Agent shall be entitled, to the extent it is required to do so by law, to deduct or withhold income or other similar taxes imposed by the United States of America from interest, fees or other amounts payable hereunder for the account of any Bank (without the payment by the Borrower of increased amounts to such Bank pursuant to clause (a) above) other than a Bank (i) which is a domestic corporation (as such term is defined in Section 7701 of the Code) for federal income tax purposes or (ii) which has the Prescribed Forms on file with the Borrower and the Administrative Agent for the applicable year to the extent deduction or withholding of such taxes is not required as a result of the filing of such Prescribed Forms, provided that if the Borrower shall so deduct or withhold any such taxes, it shall provide a statement to the Administrative Agent and such Bank, setting forth the amount of such taxes so deducted or withheld, the applicable rate and any other information or documentation which such Bank or the Administrative Agent may reasonably request for assisting such Bank or the Administrative Agent to obtain any allowable credits or deductions for the taxes so deducted or withheld in the jurisdiction or jurisdictions in which such Bank is subject to tax. (c) In addition, the Borrower agrees to pay any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies which arise from any payment made hereunder or under the Notes or from the execution, delivery or registration of, or otherwise with respect to, this Agreement or the Notes (hereinafter referred to as "Other Taxes"). (d) The Borrower, to the fullest extent permitted by law, will indemnify each Bank and the Administrative Agent for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed by any jurisdiction on amounts payable under this Section 2.13) paid by such Bank or the Administrative Agent (as the case may be) and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto except as a result of the gross negligence or willful misconduct of such Bank or Administrative Agent, whether or not such Taxes or Other Taxes were correctly or legally asserted. This indemnification shall be made within 30 days from the date such Bank or the Administrative Agent (as the case may be) makes written demand therefor. No Bank nor the Administrative Agent shall be indemnified for Taxes incurred or accrued more than 90 days prior to the date that such Bank or the Administrative Agent notifies the Borrower thereof. (e) Within 30 days after the date of any payment of Taxes by or at the direction of the Borrower, the Borrower will furnish to the Administrative Agent, at its address -20- 55 referred to in Section 8.02, the original or a certified copy of a receipt evidencing payment thereof. Should any Bank or the Administrative Agent ever receive any refund, credit or deduction from any taxing authority to which such Bank or the Administrative Agent would not be entitled but for the payment by the Borrower of Taxes as required by Section 2.13 (it being understood that the decision as to whether or not to claim, and if claimed, as to the amount of any such refund, credit or deduction shall be made by such Bank or the Administrative Agent in its sole discretion), such Bank or the Administrative Agent, as the case may be, thereupon shall repay to the Borrower an amount with respect to such refund, credit or deduction equal to any net reduction in taxes actually obtained by such Bank or the Administrative Agent, as the case may be, and determined by such Bank or the Administrative Agent, as the case may be, to be attributable to such refund, credit or deduction. (f) Each Bank shall use its best efforts (consistent with its internal policies and legal and regulatory restrictions) to select a jurisdiction for its Applicable Lending Office or change the jurisdiction of its Applicable Lending Office, as the case may be, so as to avoid the imposition of any Taxes or Other Taxes or to eliminate the amount of any such additional amounts which may thereafter accrue; provided that no such selection or change of the jurisdiction for its Applicable Lending Office shall be made if, in the reasonable judgment of such Bank, such selection or change would be disadvantageous to such Bank. (g) Without prejudice to the survival of any other agreement of the Borrower hereunder, the agreements and obligations of the Borrower contained in this Section 2.13 shall survive the payment in full of principal and interest hereunder and under the Notes. SECTION 2.14. Sharing of Payments, Etc. If any Bank shall obtain any payment (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise) on account of the Advances made by it (other than pursuant to Section 2.06, 2.10, 2.13, 2.16 or 8.04(b)) in excess of its ratable share of payments on account of the Advances obtained by all the Banks, such Bank shall forthwith purchase from the other Banks such participations in the Advances made by them as shall be necessary to cause such purchasing Bank to share the excess payment ratably with each of them, provided, however, that if all or any portion of such excess payment is thereafter recovered from such purchasing Bank, such purchase from each Bank shall be rescinded and such Bank shall repay to the purchasing Bank the purchase price to the extent of its ratable share (according to the proportion of (i) the amount of the participation purchased from such Bank as a result of such excess payment to (ii) the total amount of such excess payment) of such recovery together with an amount equal to such Bank's ratable share (according to the proportion of (i) the amount of such Bank's required repayment to (ii) the total amount so recovered from the purchasing Bank) of any interest or other amount paid or payable by the purchasing Bank in respect of the total amount so recovered. The Borrower agrees that any Bank so purchasing a participation from another Bank pursuant to this Section may, to the fullest extent permitted by law, exercise all its rights of payment (including the right of set-off) with respect to such participation as fully as if such Bank were the direct creditor of the Borrower in the amount of such participation. -21- 56 SECTION 2.15. Ratable Reduction or Termination of the Commitments. The Borrower shall have the right, upon at least three Business Days' notice to the Administrative Agent, to terminate in whole or reduce ratably in part the unused portions of the respective Commitments of the Banks (with the signature pages hereto deemed amended to reflect same), provided that each partial reduction shall be in the aggregate amount of at least $10,000,000 and shall be in integral multiples of $5,000,000. Section 2.16. Replacement of Bank. In the event that any Bank shall claim payment of any increased costs pursuant to Section 2.10 or any Taxes, Other Taxes or additional amounts pursuant to Section 2.13, the Borrower shall have the right, if no Event of Default then exists or would exist but for the requirement that notice be given or time elapse or both, to replace such Bank with another commercial bank or other financial institution; provided that such replacement commercial bank or other financial institution, (i) if it is not a Bank, shall be reasonably acceptable to the Administrative Agent, (ii) shall unconditionally offer in writing (with a copy to the Administrative Agent) to purchase all of such Bank's rights hereunder and interest in the Advances owing to such Bank and the Notes held by such Bank without recourse or warranty (other than a warranty as to the outstanding principal amount of such Notes and the amount of interest and fees accrued thereon) at the principal amount of such Notes plus interest and fees accrued thereon to the date of such purchase on a date therein specified, and (iii) shall execute and deliver to the Administrative Agent a document satisfactory to the Administrative Agent pursuant to which such replacement commercial bank or other financial institution becomes a party hereto with a Commitment equal to that of the Bank being replaced, which document, if such replacement commercial bank or other financial institution is not already a Bank, shall (among other matters) specify the Address For Notices, CD Lending Office, Domestic Lending Office and Eurodollar Lending Office of such replacement commercial bank or other financial institution. Upon satisfaction of the requirements set forth in the first sentence of this Section 2.16, acceptance of such offer to purchase by the Bank to be replaced, payment to such Bank of the purchase price in immediately available funds, and the payment by the Borrower of all requested costs accruing to the date of purchase which the Borrower is obligated to pay under Section 8.04 and all other amounts owed by the Borrower to such Bank (other than the principal of and interest on the Advances of such Bank purchased by the replacement commercial bank or other financial institution), the replacement commercial bank or other financial institution shall constitute a "Bank" hereunder with a Commitment as so specified and the Bank being so replaced shall no longer constitute a "Bank" hereunder (with the signature pages being amended to reflect same). If, however, (x) a Bank accepts such an offer and such commercial bank or other financial institution fails to purchase such rights and interest on such specified date in accordance with the terms of such offer, the Borrower shall continue to be obligated to pay the increased costs to such Bank pursuant to Section 2.10 or the Taxes, Other Taxes or additional amounts pursuant to Section 2.13, as the case may be, or (y) the Bank proposed to be replaced fails to accept such purchase offer, the Borrower shall not be obligated to pay to such Bank such increased costs or additional amounts incurred or accrued from and after the date of such purchase offer. -22- 57 Section 2.17. Survival. This Agreement and the Notes shall be reinstated with respect to the Borrower if at any time payment by the Borrower with respect to any Notes is rescinded or must otherwise be returned by the Administrative Agent, any of the Banks, Enron or Sonat, as the case may be, upon the insolvency, bankruptcy or reorganization of Enron, Sonat or the Borrower, all as though such payment had not been made. ARTICLE III CONDITIONS TO ADVANCES SECTION 3.01. Initial Conditions Precedent. The obligation of each Bank to make Advances pursuant to the terms and conditions of this Agreement is subject to the conditions precedent that the fees provided for in Section 2.03(b) hereof shall have been paid and that the Administrative Agent shall have received the following, each dated on or before the date of the initial Advance hereunder (unless otherwise specified below), in form and substance satisfactory to the Administrative Agent: (a) The Notes, dated the date of this Agreement, to the order of the Banks, respectively. (b) Each Note Purchase Agreement, dated the date of this Agreement, executed by each party thereto (which execution may be in counterparts). (c) Certified copies of the resolutions of the Board of Directors of the Borrower approving this Agreement, each Note and each Notice of Borrowing, each Note Purchase Agreement, and of all documents evidencing other necessary corporate action and governmental approvals, if any, with respect to each such Loan Document and certified copies of the restated certificate of incorporation and bylaws of the Borrower. (d) A certificate of the Secretary or an Assistant Secretary of the Borrower certifying the names and true signatures of the officers of the Borrower authorized to sign each Loan Document to which it is a party and the other documents to be delivered by the Borrower hereunder. (e) Certified copies of the resolutions of the Board of Directors of Enron approving the Enron Note Purchase Agreement and of all documents evidencing other necessary corporate action and governmental approvals, if any, with respect to the Enron Note Purchase Agreement, and certified copies of the restated certificate of incorporation and bylaws of Enron. (f) A certificate of the Secretary or an Assistant Secretary of Enron certifying the names and true signatures of the officers of Enron authorized to sign -23- 58 the Enron Note Purchase Agreement, and other documents to be delivered by Enron hereunder. (g) Certified copies of the resolutions of the Board of Directors of Sonat approving the Sonat Note Purchase Agreement and of all documents evidencing other necessary corporate action and governmental approvals, if any, with respect to the Sonat Note Purchase Agreement, and certified copies of the restated certificate of incorporation and bylaws of Sonat. (h) A certificate of the Secretary or an Assistant Secretary of Sonat certifying the names and true signatures of the officers of Sonat authorized to sign the Sonat Note Purchase Agreement, and other documents to be delivered by Sonat hereunder. (i) A favorable opinion of Vinson & Elkins L.L.P., counsel for the Borrower, dated the date of the initial Advance, to be delivered to, and for the benefit of, the Banks, the Managing Agents and the Administrative Agent, at the express instruction of the Borrower, substantially in the form of Exhibit 3.01-A hereto and as to such other matters as any Bank through the Administrative Agent may reasonably request. (j) A favorable opinion of Vinson & Elkins L.L.P., counsel for Enron in connection with the Enron Note Purchase Agreement, dated the date of the initial Advance, to be delivered to, and for the benefit of, the Banks, the Managing Agents and the Administrative Agent, at the express instruction of Enron, in substantially the form of Exhibit 3.01-B hereto and as to such other matters as any Bank through the Administrative Agent may reasonably request. (k) A favorable opinion of James V. Derrick, Jr., Senior Vice President and General Counsel of Enron, dated the date of the initial Advance, to be delivered to, and for the benefit of, the Banks, the Managing Agents and the Administrative Agent, at the express instruction of Enron, in substantially the form of Exhibit 3.01-C hereto and as to such other matters as any Bank through the Administrative Agent may reasonably request. (l) A favorable opinion of Vinson & Elkins L.L.P., counsel for Sonat in connection with the Sonat Note Purchase Agreement, dated the date of the initial Advance, to be delivered to, and for the benefit of, the Banks, the Managing Agents and the Administrative Agent, at the express instruction of Sonat, in substantially the form of Exhibit 3.01-D hereto and as to such other matters as any Bank through the Administrative Agent may reasonably request. (m) A favorable opinion of Beverley T. Krannich, Vice President and Secretary of Sonat, as counsel for Sonat, dated the date of the initial Advance, to be delivered to, and for the benefit of, the Banks, the Managing Agents and the -24- 59 Administrative Agent, at the express instruction of Sonat, in substantially the form of Exhibit 3.01-E hereto and as to such other matters as any Bank through the Administrative Agent may reasonably request. (n) A favorable opinion of Andrews and Kurth L.L.P., counsel for the Managing Agents, dated the date of the initial Advance, to be delivered to, and for the benefit of, the Banks, and the Administrative Agent and the Managing Agents, at the express instruction of the Managing Agents, substantially in the form of Exhibit 3.01-F hereto. (o) A budget prepared by the Borrower or FGT for the Phase III Expansion construction program. (p) A letter from CT Corporation System accepting appointment as the designee, appointee and agent of the Borrower and Enron pursuant to, respectively, (i) Section 8.10 hereof, and (ii) Section 7.11 of the Enron Note Purchase Agreement. SECTION 3.02. Additional Conditions Precedent to Each Advance. The obligation of each Bank to make any Advance shall be subject to the additional conditions precedent that on the date of such Advance (a) the following statements shall be true (and each of the giving of the applicable Notice of Borrowing and the acceptance by the Borrower of the proceeds of such Advance shall constitute a representation and warranty by the Borrower that on the date of such Advance such statements are true): (i) The representations and warranties contained in Section 4.01 of this Agreement are correct on and as of the date of such Advance (unless stated to relate solely to an earlier date, in which case such representations are true and correct as of such earlier date), before and after giving effect to such Advance and the Borrowing of which such Advance is a part and to the application of the proceeds therefrom, as though made on and as of such date, and (ii) No event has occurred and is continuing, or would result from such Advance or the Borrowing of which such Advance is a part or from the application of the proceeds therefrom, which constitutes an Event of Default (other than an Enron Event of Default or a Sonat Event of Default) or would constitute an Event of Default (other than an Enron Event of Default or a Sonat Event of Default) but for the requirement that notice be given or time elapse or both, (b) the following statements shall be true (and the acceptance by the Borrower of the proceeds of such Advance shall constitute a representation and warranty of Enron and Sonat pursuant to their respective Note Purchase Agreements that on the date of such Advance such statements are true): (i) The representations and warranties contained in Section 4.01 of the Sonat Note Purchase Agreement, in the case of Sonat, and in Section 4.01 of the -25- 60 Enron Note Purchase Agreement, in the case of Enron, are correct on and as of the date of such Advance (unless stated to relate solely to an earlier date, in which case such representations are true and correct as of such earlier date), before and after giving effect to such Advance and the Borrowing of which such Advance is a part and to the application of the proceeds therefrom, as though made on and as of such date, and (ii) No event has occurred and is continuing, or would result from such Advance or the Borrowing of which such Advance is part or from the application of the proceeds therefrom, which constitutes an Enron Event of Default, in the case of Enron, or a Sonat Event of Default, in the case of Sonat, or would constitute an Enron Event of Default or a Sonat Event of Default but for the requirement that notice be given or time elapse or both, and (c) the Administrative Agent shall have received such other approvals, opinions or documents as any Bank through the Administrative Agent may reasonably request. ARTICLE IV REPRESENTATIONS AND WARRANTIES SECTION 4.01. Representations and Warranties of the Borrower. The Borrower represents and warrants as follows: (a) The Borrower and each of its Subsidiaries are corporations duly incorporated, validly existing and in good standing in each case under the laws of its jurisdiction of incorporation. The Borrower and each of its Subsidiaries have all corporate powers and all material governmental licenses, authorizations, consents and approvals required in each case to carry on its business as now conducted. (b) The execution, delivery and performance by the Borrower of each Loan Document to which it is or will be a party are within the Borrower's corporate powers, have been duly authorized by all necessary corporate action of the Borrower, require, in respect of the Borrower, no action by or in respect of, or filing with, any governmental body, agency or official and do not contravene, or constitute a default under, any provision of law or regulation (including, without limitation, Regulation X issued by the Federal Reserve Board) applicable to the Borrower or any of its Subsidiaries or Regulation U issued by the Federal Reserve Board or the restated certificate of incorporation or bylaws of the Borrower or any judgment, injunction, order, decree or material ("material" for the purposes of this representation meaning creating a liability of $15,000,000 or more) agreement binding upon the Borrower or any of its Subsidiaries or result in the creation or imposition of any Lien on any asset of the Borrower or any of its Subsidiaries. -26- 61 (c) This Agreement and each Note are, and each other Loan Document to which the Borrower is or will be a party, when executed and delivered in accordance with this Agreement will be legal, valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their respective terms, except as the enforceability thereof may be limited by the effect of any applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally and by general principles of equity. (d) The audited Consolidated balance sheet of each of the Borrower and FGT as of December 31, 1992 and the related audited Consolidated statements of income, cash flows and changes in stockholders' equity accounts of each of the Borrower and FGT for the fiscal year then ended and the unaudited Consolidated balance sheet of each of the Borrower and FGT as of September 30, 1993 and the related unaudited Consolidated statements of income, cash flows and changes in stockholders' equity accounts of each of the Borrower and FGT for the fiscal quarter then ended, certified by the respective chief financial or accounting officer of the Borrower or FGT, copies of which have been delivered to each of the Banks, fairly present, in conformity with GAAP except as otherwise expressly noted therein, the Consolidated financial position of each of the Borrower and FGT as of such dates and their respective Consolidated results of operations and changes in financial position for such fiscal periods, subject (in the case of the unaudited balance sheet and statements) to changes resulting from audit and normal year-end adjustments. (e) Since December 31, 1992 there has been no material adverse change in the business, Consolidated financial position or Consolidated results of operations of the Borrower and its Subsidiaries, considered as a whole. (f) Except as disclosed in a letter dated the date hereof from the Vice President and General Counsel of the Borrower to the Banks, the Managing Agents and the Administrative Agent, there is no action, suit or proceeding pending against the Borrower or any of its Subsidiaries, or to the knowledge of the Borrower threatened against the Borrower or any of its Subsidiaries, before any court or arbitrator or any governmental body, agency or official in which there is a reasonable possibility of an adverse decision which could materially adversely affect the business, Consolidated financial position or Consolidated results of operations of the Borrower and its Consolidated Subsidiaries taken as a whole or which in any manner draws into question the validity of this Agreement or any other Loan Document to which the Borrower is or will be a party. (g) United States federal income tax returns of the Borrower and its Subsidiaries have been examined and closed through the fiscal year ended December 31, 1989. The Borrower and its Subsidiaries have filed or caused to be filed all United States federal income tax returns and all other material domestic tax returns which to the knowledge of the Borrower are required to be filed by them and have paid or provided for the payment, before the same become delinquent, of all -27- 62 taxes due pursuant to such returns or pursuant to any assessment received by the Borrower or any Subsidiary of the Borrower, other than those taxes contested in good faith by appropriate proceedings. The charges, accruals and reserves on the books of the Borrower and its Subsidiaries in respect of taxes are, in the opinion of the Borrower, adequate to the extent required by GAAP. (h) Neither the Borrower nor any of its Subsidiaries is an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (i) Neither the Borrower nor any of its Subsidiaries is a "holding company", a "subsidiary company" of a "holding company", an "affiliate" of a "holding company", or an "affiliate" of a "subsidiary company" of a "holding company", in each case as such terms are defined in the Public Utility Holding Company Act of 1935, as amended. (j) Following application of the proceeds of each Advance, not more than 25 percent of the value of the assets (either of the Borrower only or of the Borrower and its Subsidiaries on a Consolidated basis), which are subject to any arrangement with the Administrative Agent or any Bank (herein or otherwise) whereby the Borrower's or any Subsidiary's right or ability to sell, pledge or otherwise dispose of assets is in any way restricted, will be margin stock (within the meaning of Regulation U issued by the Federal Reserve Board). (k) On the date of this Agreement, the Borrower is the owner beneficially and of record directly or indirectly of 100% of the outstanding capital stock having ordinary voting power of FGT and its other Subsidiaries. ARTICLE V COVENANTS OF THE BORROWER SECTION 5.01. Affirmative Covenants. The Borrower covenants and agrees that so long as any Note shall remain unpaid or any Bank shall have any Commitment hereunder, the Borrower will, unless the Majority Banks shall otherwise consent in writing: (a) Reporting Requirements. Furnish to the Administrative Agent (with a copy for each Bank): (i) as soon as available and in any event within 60 days after the end of each of the first three fiscal quarters of each fiscal year of each of the Borrower and FGT, Consolidated balance sheets of each of the Borrower and FGT as of the end of such fiscal quarter and Consolidated statements of income and retained earnings and cash flow of each of the Borrower and FGT for such fiscal quarter and for the period commencing at the end of the previous fiscal year and ending with the end of such fiscal quarter, certified -28- 63 by the respective chief financial or accounting officer of the Borrower and FGT; (ii) as soon as available and in any event within 120 days after the end of each fiscal year of each of the Borrower and FGT, a copy of the Consolidated balance sheets of each of the Borrower and FGT as at the end of such fiscal year and Consolidated statements of income and retained earnings and cash flow of each of the Borrower and FGT for such fiscal year, in each case audited by independent public accountants of recognized national standing; (iii) simultaneously with the delivery of the financial statements referred to in clauses (i) and (ii) above, (x) a quarterly management discussion and analysis of the Borrower, and (y) a quarterly management report prepared by the Borrower or FGT describing the progress of the Phase III construction program; (iv) simultaneously with the delivery of the financial statements referred to in clauses (i) and (ii) above, a certificate of the respective chief financial or accounting officer of the Borrower or FGT, in a form acceptable to the Administrative Agent, stating whether there exists on the date of such certificate any Event of Default (other than an Enron Event of Default or a Sonat Event of Default) or event which, with the giving of notice or lapse of time, or both, would constitute an Event of Default (other than an Enron Event of Default or a Sonat Event of Default), and, if so, setting forth the details thereof and the action which the Borrower has taken and proposes to take with respect thereto; (v) as soon as possible and in any event within five days after an executive officer of the Borrower having obtained knowledge thereof, notice of the occurrence of any Event of Default (other than an Enron Event of Default or a Sonat Event of Default) or any event which, with the giving of notice or lapse of time, or both, would constitute an Event of Default (other than an Enron Event of Default or a Sonat Event of Default), continuing on the date of such notice, and a statement of the chief financial officer of the Borrower setting forth details of such Event of Default or event and the action which the Borrower has taken and proposes to take with respect thereto; (vi) promptly after the sending or filing thereof, copies of all reports and registration statements, if any, which the Borrower files with the Securities and Exchange Commission or any national securities exchange; and (vii) such other material information respecting the condition or operations, financial or otherwise, of the Borrower and its Consolidated -29- 64 Subsidiaries as any Bank through the Administrative Agent may from time to time reasonably request. (b) Compliance with Laws, Etc. Comply, and cause each of its Subsidiaries to comply, with all applicable laws, rules, regulations and orders to the extent noncompliance therewith would have a material adverse effect on the Borrower and its Subsidiaries taken as a whole, such compliance to include, without limitation, compliance with environmental laws and the paying before the same become delinquent of all taxes, assessments and governmental charges imposed upon it or upon its property except to the extent contested in good faith. (c) Use of Proceeds. Use the proceeds of each Advance (either directly or by making such proceeds available to or for the use of FGT), solely to provide for interim construction and bridge financing of the Phase III Expansion and for the general corporate purposes of FGT related thereto. (d) Preservation of Corporate Existence, Etc. Preserve and maintain, and cause each of its Subsidiaries to preserve and maintain, its corporate existence, rights (charter and statutory), and franchises; provided, however, that this Section 5.01(d) shall not apply to any transactions permitted by Section 5.02(a) and shall not prevent the termination of existence, rights and franchises of any Subsidiary of the Borrower pursuant to any merger or consolidation to which such Subsidiary is a party, and provided, further, that the Borrower or any of its Subsidiaries shall not be required to preserve any right or franchise if the Borrower or such Subsidiary shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Borrower or such Subsidiary as the case may be, and that the loss thereof is not disadvantageous in any material respect to the Banks. (e) Ownership of FGT. Own at all times at least 51% of the outstanding capital stock of FGT having ordinary voting power free and clear of all Liens other than Liens permitted pursuant to Section 5.02(d) hereof. (f) Visitation Rights. At any reasonable time and from time to time, after reasonable notice, permit the Administrative Agent or any of the Banks or any agents or representatives thereof, to examine the records and books of account of and visit the properties of, the Borrower and its Subsidiaries and to discuss the affairs, finances and accounts of the Borrower and any of its Subsidiaries with any of their respective officers or directors. SECTION 5.02. Negative Covenants. So long as any Note shall remain unpaid or any Bank shall have any Commitment hereunder, the Borrower will not at any time, without the written consent of the Majority Banks: (a) Mergers, Etc. Merge or consolidate with or into, any Person, unless (i) the Borrower is the survivor or (ii) the surviving Person, if not the Borrower, is organized under the laws of the United States or a state thereof and assumes all obligations of the Borrower -30- 65 under the Agreement, provided, in each case that immediately after giving effect to such proposed transaction, no Event of Default or event which, with the giving of notice or the lapse of time, or both, would constitute an Event of Default would exist or result. (b) Restricted Payments. During any period of time that an Enron Event of Default or a Sonat Event of Default is continuing, pay or declare any dividend on any class of its stock or make any other distribution on any class of its stock, or redeem, purchase or otherwise acquire, directly or indirectly, any class of its stock. (c) Business Activities. Engage in any business (or permit any of its Subsidiaries to engage in any business) except the general lines of business the Borrower and its Subsidiaries, collectively, are engaged in on the date hereof, and such activities as may be incidental or related thereto. (d) Liens. Create, incur, or assume any Lien upon any of its properties or assets, whether now or hereafter acquired, in each case to secure the payment of money borrowed, unless (x) the prior written consent of the Majority Banks has been obtained to the creation, incurrence, or assumption of such Lien, or (y) the Borrower shall have made effective provision whereby the Notes will be secured by such Lien equally and ratably with any and all other indebtedness for money borrowed thereby secured as long as such other indebtedness for money borrowed shall be so secured; provided, however, this Section 5.02(d) shall not apply to Excepted Liens. This Section 5.02(d) shall apply only to Liens on the property or assets of the Borrower, and shall not apply to Liens on the property or assets of FGT, any other Subsidiary of the Borrower or any other Person. ARTICLE VI EVENTS OF DEFAULT SECTION 6.01. Events of Default. If any of the following events ("Events of Default") shall occur and be continuing: (a) The Borrower shall fail to pay (i) any principal on any Note when due and payable or (ii) any interest on any Note for more than five days after such interest becomes due and payable or (iii) the commitment fee set forth in Section 2.03(a) herein for more than 15 days after such fee becomes due and payable; or (b) Any representation or warranty made by the Borrower (or any of its officers) (including representations and warranties deemed made pursuant to Section 3.02) under or in connection with any Loan Document shall prove to have been incorrect in any material respect when made or deemed made and such materiality is continuing; or (c) The Borrower shall fail to perform or observe any term, covenant or agreement contained in Section 5.02 or shall fail to perform or observe any other term, -31- 66 covenant or agreement contained in any Loan Document on its part to be performed or observed if, in the case of such other term, covenant or agreement, such failure shall remain unremedied for 30 days after written notice thereof shall have been given to the Borrower by the Administrative Agent at the request of any Bank; or (d) (i) The Borrower or any of its Subsidiaries shall fail to pay any principal of or premium or interest on any indebtedness for money borrowed which is outstanding in the principal amount of at least $15,000,000 in the aggregate, of the Borrower or such Subsidiary (as the case may be), when the same becomes due and payable (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise), and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such indebtedness, (ii) any other event shall occur or condition shall exist under any agreement or instrument relating to indebtedness for money borrowed of the Borrower or any of its Subsidiaries outstanding in the principal amount of at least $15,000,000 in the aggregate, and shall continue after the applicable grace period, if any, specified in such agreement or instrument, if the effect of such event or condition is to accelerate the maturity of such indebtedness, or (iii) any indebtedness for money borrowed of the Borrower or any of its Subsidiaries outstanding in the principal amount of at least $15,000,000 in the aggregate, shall be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment or as a result of the giving of notice of a voluntary prepayment), prior to the stated maturity thereof; or (e) The Borrower or any of its Subsidiaries shall generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against the Borrower or any of its Subsidiaries seeking to adjudicate it as bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee or other similar official for it or for any substantial part of its property and, in the case of any such proceeding instituted against it (but not instituted by it), shall remain undismissed or unstayed for a period of 60 consecutive days; or the Borrower or any of its Subsidiaries shall take any corporate action to authorize any of the actions set forth above in this subsection (e); or (f) Any judgment, decree or order for the payment of money in excess of $15,000,000 shall be rendered against the Borrower or any of its Subsidiaries and remains unsatisfied and either (i) enforcement proceedings shall have been commenced by any creditor upon such judgment, decree or order or (ii) there shall be any period of 60 consecutive days during which a stay of enforcement of such judgment, decree or order, by reason of a pending appeal or otherwise, shall not be in effect; or (g) Any material provision of this Agreement, the Notes or the other Loan Documents to which the Borrower is a party, after execution and delivery hereof, shall for any reason cease to be valid and binding on the Borrower, or the Borrower shall contest the -32- 67 validity or enforceability of this Agreement, the Notes or such other Loan Documents or so state in writing; or (h) The Enron Note Purchase Agreement ceases to be in effect or the validity or enforceability thereof is contested by any Person or the Sonat Note Purchase Agreement ceases to be in effect or the validity or enforceability thereof is contested by any Person; or (i) an Enron Event of Default; or (j) a Sonat Event of Default; then, and in any such event, the Administrative Agent (i) shall at the request, or may with the consent, of the Majority Banks, by notice to the Borrower, declare the obligation of each Bank to make Advances to be terminated, whereupon the same shall forthwith terminate, (ii) shall at the request, or may with the consent, of the Majority Banks, by notice to the Borrower, declare the Notes, all interest thereon and all other amounts payable under this Agreement to be forthwith due and payable, whereupon the Notes, all such interest and all such amounts shall become and be forthwith due and payable, without presentment, demand, protest, notice of intent to accelerate or further notice of any kind, all of which are hereby expressly waived by the Borrower, (iii) shall at the request, or may with the consent, of the Majority Banks exercise all remedies available to the Banks hereunder, and (iv) further, if such event constitutes a Note Purchase Event under either the Enron Note Purchase Agreement or the Sonat Note Purchase Agreement, shall at the request, or may with the consent, of the Majority Banks exercise all remedies available to the Banks under the Enron Note Purchase Agreement or the Sonat Note Purchase Agreement or both, in accordance with the provisions of such Note Purchase Agreements; provided, however, that in the event of an actual or deemed entry of an order for relief with respect to the Borrower, Enron, or Sonat under the Bankruptcy Code, (A) the obligation of each Bank to make its Advances shall automatically be terminated and (B) the Notes, all such interest and all such amounts due under such Notes and under this Agreement shall automatically become and be due and payable, without presentment, demand, protest or any notice of any kind, all of which are hereby expressly waived by the Borrower; and provided, further that upon the tender of any Series A Notes to Enron for purchase in accordance with the provisions of the Enron Note Purchase Agreement or the tender of any Series B Notes to Sonat for purchase in accordance with the provisions of the Sonat Note Purchase Agreements, the obligation of each Bank to make Advances hereunder shall automatically terminate. ARTICLE VII THE ADMINISTRATIVE AGENT SECTION 7.01. Authorization and Action. Each Bank hereby appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under the Loan Documents as are delegated to the Administrative -33- 68 Agent, by the terms hereof and thereof, together with such powers as are reasonably incidental thereto. As to any matters not expressly provided for by the Loan Documents (including, without limitation, enforcement or collection of the Notes), the Administrative Agent shall not be required to exercise any discretion or take any action, but shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of holders of the Majority Banks, and such instructions shall be binding upon all Banks and all holders of Notes; provided, however, that the Administrative Agent shall not be required to take any action which exposes the Administrative Agent to personal liability or which is contrary to any Loan Document or applicable law and shall not be required to initiate or conduct any litigation or other proceedings. The Administrative Agent agrees to give to each Bank prompt notice of each notice given to it by the Borrower, Enron or Sonat pursuant to the terms of this Agreement or any other Loan Document. SECTION 7.02. Agent's Reliance, Etc. Neither the Administrative Agent nor any of its directors, officers, agents or employees shall be liable for any action taken or omitted to be taken by it or them under or in connection with any Loan Document, except for its or their own gross negligence or willful misconduct. The duties of the Administrative Agent shall be mechanical and administrative in nature; the Administrative Agent shall not have, by reason of this Agreement or any other Loan Document a fiduciary relationship in respect of any Bank or the holder of any Note; and nothing in this Agreement or any other Loan Document, expressed or implied, is intended or shall be so construed as to impose upon the Administrative Agent any obligations in respect of this Agreement or any other Loan Document except as expressly set forth herein. Without limitation of the generality of the foregoing, the Administrative Agent: (i) may treat the payee of any Note as the holder thereof until the Administrative Agent receives written notice of the assignment or transfer thereof signed by such payee and in form satisfactory to the Administrative Agent; (ii) may consult with legal counsel (including counsel for the Borrower), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts; (iii) makes no warranty or representation to any Bank and shall not be responsible to any Bank for any statements, warranties or representations made in or in connection with any Loan Document; (iv) shall not have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of any Loan Document on the part of the Borrower or to inspect the property (including the books and records) of the Borrower; (v) shall not be responsible to any Bank for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of any Loan Document or any other instrument or document furnished pursuant hereto; and (vi) shall incur no liability under or in respect of any Loan Document by acting upon any notice, consent, certificate or other instrument or writing (which may be by telecopier, telegram, cable or telex) believed by it to be genuine and signed or sent by the proper party or parties. SECTION 7.03. Administrative Agent and Its Affiliates. With respect to its Commitment, the Advances made by it and the Notes issued to it, each Bank which is also -34- 69 the Administrative Agent or a branch or affiliate of the Administrative Agent shall have the same rights and powers under the Loan Documents as any other Bank and may exercise the same as though it were not the Administrative Agent or such branch or affiliate; and the term "Bank" or "Banks" shall, unless otherwise expressly indicated, include any Bank serving as the Administrative Agent in its individual capacity. Any Bank serving as the Administrative Agent and its affiliates may accept deposits from, lend money to, act as trustee under indentures of, and generally engage in any kind of business with, the Borrower, Enron, Sonat, or any of their respective Subsidiaries or affiliates, and any Person who may do business with or own securities of the Borrower, Enron, Sonat, or any of their respective Subsidiaries or affiliates, all as if such Bank were not the Administrative Agent and without any duty to account therefor to the Banks. SECTION 7.04. Bank Credit Decision. Each Bank acknowledges that it has, independently and without reliance upon the Administrative Agent or any other Bank and based on the financial statements referred to in Section 4.01(d) and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Bank also acknowledges that it will, independently and without reliance upon the Administrative 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 credit decisions in taking or not taking action under this Agreement and the other Loan Documents. The Administrative Agent shall not have any duty or responsibility, either initially or on a continuing basis, to provide any Bank or the holder of any Note with any credit or, except as expressly provided herein, other information with respect thereto, whether coming into its possession before the making of the Advances or at any time or times thereafter. The Administrative Agent shall not be responsible to any Bank or the holder of any Note for any recitals, statements, information, representations or warranties herein or in any document, certificate or other writing delivered in connection herewith or for the execution, effectiveness, genuineness, validity, enforceability, collectibility, priority or sufficiency of this Agreement or any other Loan Document or the financial condition of the Borrower or be required to make any inquiry concerning either the performance or observance of any of the terms, provisions or conditions of this Agreement or any other Loan Document, or the financial condition of the Borrower or the existence or possible existence of any Event of Default or event of which would constitute an Event of Default but for the requirement that notice be given or time elapse or both. SECTION 7.05. Certain Rights of the Administrative Agent. If the Administrative Agent shall request instructions from the Majority Banks with respect to any act or action (including failure to act) in connection with this Agreement or any other Loan Document, the Administrative Agent shall be entitled to refrain from such act or taking such action unless and until the Administrative Agent shall have received instructions from Majority Banks; and it shall not incur liability to any Person by reason of so refraining. Without limiting the foregoing, no Bank or the holder of any Note shall have any right of action whatsoever against the Administrative Agent as a result of its acting or refraining from acting hereunder or under any other Loan Document in accordance with the instructions of the Majority Banks or all of the Banks, as the case may be. Furthermore, -35- 70 except for action expressly required of the Administrative Agent hereunder, the Administrative Agent shall in all cases be fully justified in failing or refusing to act hereunder unless it shall be specifically 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. SECTION 7.06. Holders. Any request, authority or consent of any Person who, at the time of making such request or giving such authority or consent, is the holder of any Note shall be conclusive and binding on any subsequent holder, transferee, assignee or indorsee, as the case may be, of such Note or of any Note or Notes issued in exchange therefor. SECTION 7.07. INDEMNIFICATION. THE BANKS AGREE TO INDEMNIFY THE ADMINISTRATIVE AGENT (TO THE EXTENT NOT REIMBURSED BY THE BORROWER), RATABLY ACCORDING TO THE RESPECTIVE PRINCIPAL AMOUNTS OF THE NOTES THEN HELD BY EACH OF THEM (OR IF NO PRINCIPAL OF THE NOTES IS AT THE TIME OUTSTANDING OR IF ANY PRINCIPAL OF THE NOTES IS HELD BY PERSONS WHICH ARE NOT BANKS, RATABLY ACCORDING TO THE RESPECTIVE AMOUNTS OF THEIR COMMITMENTS THEN EXISTING, OR, IF NO SUCH PRINCIPAL AMOUNTS ARE THEN OUTSTANDING AND NO COMMITMENTS ARE THEN EXISTING, RATABLY ACCORDING TO THE RESPECTIVE AMOUNTS OF THE COMMITMENTS EXISTING IMMEDIATELY PRIOR TO THE TERMINATION THEREOF), FROM AND AGAINST ANY AND ALL LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES OR DISBURSEMENTS OF ANY KIND OR NATURE WHATSOEVER WHICH MAY BE IMPOSED ON, INCURRED BY, OR ASSERTED AGAINST THE ADMINISTRATIVE AGENT IN ANY WAY RELATING TO OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY ACTION TAKEN OR OMITTED BY THE ADMINISTRATIVE AGENT UNDER THE LOAN DOCUMENTS, PROVIDED THAT NO BANK SHALL BE LIABLE FOR ANY PORTION OF SUCH LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES OR DISBURSEMENTS RESULTING FROM THE ADMINISTRATIVE AGENT'S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. IT IS THE INTENT OF THE BANKS THAT THE ADMINISTRATIVE AGENT SHALL, TO THE EXTENT PROVIDED IN SECTION 7.07 HEREOF, BE INDEMNIFIED FOR ITS ORDINARY, SOLE OR CONTRIBUTORY NEGLIGENCE. WITHOUT LIMITATION OF THE FOREGOING, EACH BANK AGREES TO REIMBURSE THE ADMINISTRATIVE AGENT PROMPTLY UPON DEMAND FOR SUCH BANK'S RATABLE SHARE OF ANY REASONABLE OUT-OF-POCKET EXPENSES (INCLUDING REASONABLE COUNSEL FEES) INCURRED BY THE ADMINISTRATIVE AGENT IN CONNECTION WITH THE PREPARATION, EXECUTION, DELIVERY, ADMINISTRATION, MODIFICATION, AMENDMENT OR ENFORCEMENT (WHETHER THROUGH NEGOTIATIONS, LEGAL PROCEEDINGS OR OTHERWISE) OF, OR LEGAL ADVICE IN RESPECT OF RIGHTS OR RESPONSIBILITIES UNDER, THE LOAN DOCUMENTS, OR ANY OF THEM, TO THE -36- 71 EXTENT THAT THE ADMINISTRATIVE AGENT IS NOT REIMBURSED FOR SUCH EXPENSES BY THE BORROWER. SECTION 7.08. Resignation by the Administrative Agent. (a) The Administrative Agent may resign from the performance of all its functions and duties hereunder and under the other Loan Documents at any time by giving 15 Business Days' prior written notice to the Borrower and the Banks. Such resignation shall take effect upon the appointment of a successor Administrative Agent pursuant to clauses (b) and (c) below or as otherwise provided below. (b) Upon any such notice of resignation, the Majority Banks shall have the right to appoint a successor Administrative Agent which shall be a commercial bank or trust company reasonably acceptable to the Borrower. (c) If a successor to a resigning Administrative Agent shall not have been so appointed within such 15 Business Day period, the resigning Administrative Agent, with the consent of the Borrower (which consent will not be unreasonably withheld), shall have the right to then appoint a successor Administrative Agent who shall serve as Administrative Agent until such time, if any, as the Majority Banks appoint a successor Administrative Agent as provided above. (d) If no successor Administrative Agent has been appointed pursuant to clauses (b) or (c) above and shall have accepted such appointment by the 20th Business Day after the date such notice of resignation was given by the resigning Administrative Agent, the resigning Administrative Agent's resignation shall become effective and the Banks shall thereafter perform all the duties of the resigning Administrative Agent hereunder and under any other Loan Document until such time, if any, as the Majority Banks appoint a successor Administrative Agent as provided above. SECTION 7.09. No Duty of Managing Agents or Co-Agents. Neither theManaging Agents nor any Co-Agents shall have any duties, responsibilities or liabilities with respect to the administration of this Agreement. ARTICLE VIII MISCELLANEOUS SECTION 8.01. Amendments, Etc. No amendment, modification or waiver of any provision of any Loan Document, nor consent to any departure by the Borrower therefrom, shall in any event be effective unless the same shall be in writing and signed by the Majority Banks, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that (a) no amendment, modification, waiver or consent shall, unless in writing and signed by all the -37- 72 Banks, do any of the following: (i) waive any of the conditions specified in Article III, (ii) increase the Commitments of the Banks or subject the Banks to any additional obligations, (iii) forgive or reduce the principal of, or interest on, the Notes or any fees or other amounts payable hereunder, (iv) postpone any date fixed for any payment of principal of, or interest on, the Notes or any fees or other amounts payable hereunder, (v) take any action which requires the signing of all the Banks pursuant to the terms of any Loan Document, (vi) change the percentage of the Commitments or of the aggregate unpaid principal amount of the Notes which shall be required for the Banks or any of them to take any action under any Loan Document, (vii) release Enron or Sonat from any obligation under its respective Note Purchase Agreement or any other matter set forth in clauses (a) through (e) of the proviso to Section 7.02 of either Note Purchase Agreement, or (viii) amend this Section 8.01; (b) no amendment, waiver or consent shall, unless in writing and signed by the Administrative Agent in addition to the Banks required above to take such action, affect the rights or duties of the Administrative Agent under any Loan Document; and (c) no such amendment or modification shall be effective unless approved or consented to in writing by both Enron and Sonat, but no approval or consent of either Enron or Sonat shall be required for any waiver of compliance by the Borrower with the terms hereof or for any consent to departure by the Borrower from the terms hereof. SECTION 8.02. Notices, Etc. All notices and other communications provided for hereunder shall be in writing (including telecopier communication) and mailed, telecopied, sent by overnight courier service (such as Federal Express), or delivered by hand, if to the Borrower, at its address or telecopier number set forth below: Citrus Corp. 1400 Smith Street Houston, Texas 77002 Attention: Vice President and Chief Financial Officer Telecopier No.: 713-646-3201 if to any Bank, at its Address for Notices; if to the Administrative Agent, at its address or telecopier number set forth below: Credit Lyonnais New York Branch c/o Credit Lyonnais Houston Representative Office 1000 Louisiana Suite 5360 Houston, Texas 77002 Attention: Richard S. Kaufman Vice President Telecopier No.: (713) 751-0307 -38- 73 or, as to the Borrower or the Administrative Agent, at such other address as shall be designated by such party in a written notice to the other parties. A copy of each notice and communication provided for hereunder sent to or by the Borrower or to or by the Administrative Agent shall be sent to Enron and Sonat at their respective addresses or telecopier numbers set forth below, or at such other addresses as shall be designated by Enron or Sonat, as the case may be, to the parties hereto: Enron 1400 Smith Street Houston, Texas 77002 Attention: Vice President, Finance and Treasurer Telecopier No.: (713) 646-3422 Sonat Inc. 1900 5th Avenue North Birmingham, Alabama 35203 Attention: Treasurer Telecopier No.: (205) 325-7490 All such notices and communications shall be effective, if mailed, five Business Days after deposit in the mails; if sent by overnight courier, one Business Day after delivery to the courier company; if delivered by hand, when so delivered; and if sent by telecopier, when received by the receiving telecopier equipment, respectively; provided, however, that (i) notices and communications to the Administrative Agent shall not be effective until received by the Administrative Agent and (ii) telecopied notices received by any party after its normal business hours (or on a day other than a Business Day) shall be effective on the next Business Day. SECTION 8.03. No Waiver; Remedies. No failure on the part of any Bank or the Administrative Agent to exercise, and no delay in exercising, any right under any Loan Document shall operate as a waiver thereof; nor shall any single or partial exercise of any such right preclude any other or further exercise thereof or the exercise of any other right. The remedies provided in the Loan Documents are cumulative and not exclusive of any remedies provided by law. -39- 74 SECTION 8.04. Costs, Expenses and Taxes. (a) The Borrower agrees to pay on demand, (i) all reasonable costs and expenses in connection with the preparation, execution, delivery, administration, modification and amendment of the Loan Documents and the other documents to be delivered under the Loan Documents, including, without limitation, the reasonable fees and out-of- pocket expenses of one law firm as counsel for both the Managing Agents and the Administrative Agent with respect to preparation, execution and delivery of the Loan Documents and the satisfaction of the matters referred to in Section 3.01, and (ii) all reasonable legal and other costs and expenses, if any, of the Managing Agents, the Administrative Agent and each Bank in connection with the enforcement (whether through negotiations, legal proceedings or otherwise) of the Loan Documents and the other documents to be delivered under the Loan Documents or incurred in connection with any workout, restructuring or bankruptcy. (b) If any payment or purchase of principal of, or Conversion of, any Adjusted CD Rate Advance or LIBOR Advance is made other than on the last day of an Interest Period relating to such Advance, as a result of a payment, purchase or Conversion pursuant to Sections 2.07(f), 2.08, 2.09, 2.10, 2.11, 2.13 or 2.16 or acceleration of the maturity of the Notes pursuant to Section 6.01 or for any other reason, the Borrower shall, upon demand by any Bank (with a copy of such demand to the Administrative Agent), pay to the Administrative Agent for the account of such Bank any amounts required to compensate such Bank for any additional losses, costs or expenses which it may reasonably incur as a result of such payment, purchase or Conversion, including, without limitation, any loss (excluding loss of anticipated profits), cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such Bank to fund or maintain such Advance. (c) THE BORROWER AGREES, TO THE FULLEST EXTENT PERMITTED BY LAW, TO INDEMNIFY AND HOLD HARMLESS THE ADMINISTRATIVE AGENT AND EACH BANK (COLLECTIVELY, THE "INDEMNIFIED PARTIES") AND EACH OF THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS (COLLECTIVELY, THE "RELATED INDEMNIFIED PARTIES") FROM AND AGAINST ANY AND ALL CLAIMS, DAMAGES, LIABILITIES AND EXPENSES (INCLUDING, WITHOUT LIMITATION, REASONABLE FEES AND DISBURSEMENTS OF COUNSEL) ARISING UNDER LAWS RELATING TO THE PROTECTION OF HUMAN HEALTH AND THE PRESERVATION OF ENVIRONMENTAL QUALITY (INCLUDING, WITHOUT LIMITATION, FINES, PENALTIES, POLLUTION CLEANUP COSTS, ENVIRONMENTAL RESTORATION OBLIGATIONS, AND OTHER SIMILAR LIABILITIES ARISING UNDER SUCH LAWS) FOR WHICH ANY OF THEM MAY BECOME LIABLE OR WHICH MAY BE INCURRED BY OR ASSERTED AGAINST AN INDEMNIFIED PARTY OR RELATED INDEMNIFIED PARTY (OTHER THAN BY THE ADMINISTRATIVE AGENT OR ANOTHER BANK OR ANY OF THEIR RESPECTIVE SUCCESSORS OR ASSIGNS), IN EACH CASE IN CONNECTION WITH OR ARISING OUT OF OR BY REASON OF ANY INVESTIGATION, LITIGATION, OR PROCEEDING, WHETHER OR NOT SUCH INDEMNIFIED PARTY OR RELATED INDEMNIFIED PARTY IS -40- 75 A PARTY THERETO, ARISING OUT OF, RELATED TO OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR ANY TRANSACTION IN WHICH ANY PROCEEDS OF ALL OR ANY PART OF THE ADVANCES ARE APPLIED BY OR ON BEHALF OF THE BORROWER OR FGT, AND EXPRESSLY INCLUDING ANY SUCH CLAIM, DAMAGE, LIABILITY OR EXPENSE ATTRIBUTABLE TO THE ORDINARY, SOLE OR CONTRIBUTORY NEGLIGENCE OF SUCH INDEMNIFIED PARTY OR RELATED INDEMNIFIED PARTY (BUT EXCLUDING ANY SUCH CLAIM, DAMAGE, LIABILITY OR EXPENSE ATTRIBUTABLE TO THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF SUCH INDEMNIFIED PARTY). IT IS THE INTENT OF THE PARTIES HERETO THAT EACH INDEMNIFIED PARTY AND RELATED INDEMNIFIED PARTY SHALL, TO THE EXTENT PROVIDED IN THIS SECTION 8.04(c), BE INDEMNIFIED FOR ITS OWN ORDINARY, SOLE OR CONTRIBUTORY NEGLIGENCE. SECTION 8.05. Right of Set-Off. Upon (i) the occurrence and during the continuance of any Event of Default and (ii) the making of the request or the granting of the consent specified by Section 6.01 to authorize the Administrative Agent to declare the Notes due and payable pursuant to the provisions of Section 6.01, each Bank is hereby authorized at any time and from time to time, to the fullest extent permitted by law, 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 Borrower against any and all of the obligations of the Borrower now or hereafter existing under this Agreement and the Notes held by such Bank, irrespective of whether or not such Bank shall have made any demand under this Agreement or such Notes and although such obligations may be unmatured. Each Bank agrees promptly to notify the Borrower 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 each Bank under this Section are in addition to other rights and remedies (including, without limitation, other rights of set-off) which such Bank may have. Section 8.06. Binding Effect; Assignments; Participations. (a) This Agreement shall become effective when it shall have been executed by the Borrower and the Administrative Agent and when the Administrative Agent shall have, as to each Bank, either received a copy of the signature page hereof executed by such Bank or been notified by such Bank that such Bank has executed it and thereafter shall be binding upon and inure to the benefit of and be enforceable by the Borrower, the Administrative Agent and each Bank and their respective successors and assigns, except that the Borrower shall not have the right to assign its rights hereunder or any interest herein without the prior written consent of the Banks (other than an assignment effectuated by a merger or consolidation permitted by Section 5.02(a) to the surviving Person referred to therein). Each Bank may assign to one or more banks or other Persons all or any part of, or may grant participations to one or more banks or other Persons, in each case in accordance with applicable law, in or to all or any part of, the Advances owing to such Bank and the Notes held by such Bank and all or any portion of such Bank's Commitment (except as otherwise stated herein), and -41- 76 to the extent of any such assignment or participation (unless otherwise stated therein) the assignee or purchaser of such assignment or participation shall, to the fullest extent permitted by law, have the same rights and benefits hereunder and under such Notes as it would have if it were such Bank hereunder, provided that, except in the case of an assignment meeting the requirements of the next sentence hereof, (i) such Bank's obligations under this Agreement, including, without limitation, its Commitment to the Borrower hereunder, shall remain unchanged, such Bank shall remain responsible for the performance thereof, such Bank shall remain the holder of any such Notes for all purposes under this Agreement, and the Borrower, the Administrative Agent and the other Banks shall continue to deal solely with and directly with such Bank in connection with such Bank's rights and obligations under this Agreement; (ii) no such assignee or participant shall be entitled to receive any greater payment pursuant to Sections 2.06, 2.10 and 2.13 hereof than such Bank would have been entitled to receive with respect to the rights assigned except as a result of circumstances arising after the date of such assignment or participation to the extent that such circumstances affect other Banks and participants generally; and (iii) no Bank shall assign or grant a participation that conveys to the assignee or participant the right to vote or consent under this Agreement, other than the right to vote upon or consent to (A) any increase in the amount of such Bank's Commitment; (B) any reduction of the principal amount of, or interest to be paid on, such Bank's Advances or Notes; (C) any reduction of the commitment fee; (D) any postponement of any date for the payment of any amount payable in respect of such Bank's Advances or Notes; or (E) the release of Sonat or Enron from any obligation under its respective Note Purchase Agreement or any other matter set forth in clauses (a) through (e) of the proviso to Section 7.02 of either Note Purchase Agreement. If the assignee of any Bank is either another Bank or is approved in writing by the Administrative Agent and the Borrower (which approval will not be unreasonably withheld), and if such assignee assumes all or any portion (which portion shall be a constant, and not a varying, percentage, and the amount of the Commitment assigned, whether all or a portion, shall be in a minimum amount of $5,000,000 and in integral multiples of $1,000,000 and, if such assignee is not already a Bank hereunder, the remaining Commitment of the assigning Bank following such assignment shall not be less than $10,000,000) of such assigning Bank's Commitment by document in the form of Exhibit 8.06 (or in substantially the form of Exhibit 8.06, if all changes to such form have been approved in writing by the Administrative Agent in its sole discretion as evidenced by its execution thereof) duly executed by the Administrative Agent, the Borrower, such assigning Bank and such assignee and delivered to the Administrative Agent ("Transfer Agreement"), then upon such delivery and to the extent set forth in the Transfer Agreement, (i) such assigning Bank shall be released from its obligations under this Agreement with respect to all or such portion, as the case may be, of its Commitment, (ii) such assignee shall become obligated for all or such portion, as the case may be, of such Commitment and all other obligations of such assigning Bank hereunder with respect to or arising as a result of all or such portion, as the case may be, of such Commitment, (iii) such assignee shall be assigned the right to vote or consent under this Agreement, to the extent of all or such portion of such Commitment, as the case may be, (iv) the Borrower shall deliver, in replacement of the Notes of such assigning Bank then outstanding (X) to such assignee, new Notes in the amount of all or such portion of such Commitment, as the case may be, plus, in the case -42- 77 of any assignee which is already a Bank hereunder, the amount of such assignee's Commitment immediately prior to such assignment (any such assignee which is already a Bank hereunder agrees to cancel and return to the Borrower, with reasonable promptness following the delivery of such new Notes, the Notes being replaced thereby), (Y) to such assigning Bank (if the assigning Bank has retained any portion of its Commitment), new Notes in the amount of the balance of the Commitment of such assigning Bank retained by such assigning Bank (and the assigning Bank agrees to cancel and return to the Borrower, with reasonable promptness following delivery of such new Notes, the Notes being replaced thereby), and (Z) to the Administrative Agent, photocopies of such new Notes, (v) if such assignment is of all of such assigning Bank's Commitment, all of the outstanding Advances made by such assigning Bank shall be transferred to such assignee, (vi) if such assignment is not of all of such Commitment, a part of each Advance equal to the amount of such Advance multiplied by a fraction, the numerator of which is the amount of such portion of such Commitment so assumed and the denominator of which is the amount of the Commitment of such assigning Bank immediately prior to such assumption, shall be transferred to such assignee and evidenced by such assignee's Notes, and the balance of such Advance shall be evidenced by such assigning Bank's new Notes delivered pursuant to clause (iv)(Y) of this sentence, (vii) if such assignee is not a "Bank" hereunder prior to such assignment, such assignee shall become a party to this Agreement as a Bank and shall be deemed to be a "Bank" hereunder, (viii) if such assignee is not a Bank hereunder prior to such assignment, such assignee shall be deemed to have specified the offices of such assignee named in the respective Transfer Agreement as its "Address For Notices", "Domestic Lending Office", "CD Lending Office" and "Eurodollar Lending Office" for all purposes of this Agreement, and (ix) the signature pages to this Agreement shall be deemed to be modified to reflect the Commitments of such assignee, such assignor and the other Banks; and the Administrative Agent shall promptly after execution of any Transfer Agreement by the Administrative Agent and the other parties thereto notify the Banks and the Borrower of the parties to such Transfer Agreement and the amount of the assigning Bank's Commitment assumed thereby; provided that the Administrative Agent shall receive at the time of such transfer, from the assigning or assignee Bank, a non-refundable assignment fee of $2,000. (b) In addition to the assignments and participations permitted under subsection (a) of this Section 8.06, any Bank may assign, as collateral or otherwise, any of its rights (including, without limitation, rights to payments of principal of and/or interest on the Notes) under any Loan Document to any Federal Reserve Bank without notice to or consent of the Borrower or the Administrative Agent; provided, that no such assignment under this subsection (c) shall release the assigning Bank from its obligations hereunder. (c) Notwithstanding anything in this Section 8.06 to the contrary, each Advance made to the Borrower hereunder, and the indebtedness of the Borrower resulting from such Advance, shall always be evidenced 50% by a Series A Note and 50% by a Series B Note. Each assignment or grant of a participation by any Bank hereunder shall be made in accordance with the provisions of the preceding sentence. -43- 78 (d) Each Bank that tenders its Series A Note to Enron for purchase by Enron pursuant to the Enron Note Purchase Agreement shall tender and assign such Series A Note to Enron in accordance with the provisions of the Enron Note Purchase Agreement. Each Bank that tenders its Series B Note to Sonat for purchase by Sonat pursuant to the Sonat Note Purchase Agreement shall tender and assign such Series B Note to Sonat in accordance with the provisions of the Sonat Note Purchase Agreement. Upon the purchase by Enron of a Series A Note pursuant to the Enron Note Purchase Agreement, the Borrower shall make all payments of amounts then or thereafter due on such Series A Note to Enron. Upon the purchase by Sonat of a Series B Note pursuant to the Sonat Note Purchase Agreement, the Borrower shall make all payments of amounts then or thereafter due on such Series B Note to Sonat. Notwithstanding the foregoing, (i) the Borrower shall make payments under each Series A Note purchased by Enron, only in compliance with the subordination provisions set forth in Exhibit A to the Enron Note Purchase Agreement, and (ii) the Borrower shall make payments under each Series B Note purchased by Sonat, only in compliance with the subordination provisions set forth in Exhibit A to the Sonat Note Purchase Agreement. The purchase by Enron of Series A Notes under the Enron Note Purchase Agreement and the purchase by Sonat of Series B Notes under the Sonat Note Purchase Agreement shall not cause Enron or Sonat to be a Bank hereunder and shall not obligate Enron or Sonat to make Advances to the Borrower hereunder. SECTION 8.07. Governing Law; Entire Agreement. Pursuant to Section 5-1401 of the New York General Obligations Law, this Agreement and the Notes shall be governed by, and construed in accordance with, the laws of the State of New York. This Agreement, the Notes, the other Loan Documents and any fee letter to the Administrative Agent or the Managing Agents signed by the Borrower constitute the entire understanding among the parties hereto with respect to the subject matter hereof and supersede any prior agreements, written or oral, with respect thereto. SECTION 8.08. Interest. It is the intention of the parties hereto that the Administrative Agent and each Bank shall conform strictly to usury laws applicable to it, if any. Accordingly, if the transactions with the Administrative Agent or any Bank contemplated hereby would be usurious under applicable law, if any, then, in that event, notwithstanding anything to the contrary in the Notes, this Agreement or any other agreement entered into in connection with this Agreement or the Notes, it is agreed as follows: (i) the aggregate of all consideration which constitutes interest under applicable law that is contracted for, taken, reserved, charged or received by the Administrative Agent or such Bank, as the case may be, under the Notes, this Agreement or under any other agreement entered into in connection with this Agreement or the Notes shall under no circumstances exceed the maximum amount allowed by such applicable law and any excess shall be cancelled automatically and, if theretofore paid, shall at the option of the Administrative Agent or such Bank, as the case may be, be applied on the principal amount of the obligations owed to the Administrative Agent or such Bank, as the case may be, by the Borrower or refunded by the Administrative Agent or such Bank, as the case may be, to the Borrower, and (ii) in the event that the maturity of any Note or other obligation payable to the Administrative Agent or such Bank, as the case may be, is accelerated or in -44- 79 the event of any permitted prepayment, then such consideration that constitutes interest under law applicable to the Administrative Agent or such Bank, as the case may be, may never include more than the maximum amount allowed by such applicable law and excess interest, if any, to the Administrative Agent or such Bank, as the case may be, provided for in this Agreement or otherwise shall be cancelled automatically as of the date of such acceleration or prepayment and, if theretofore paid, shall, at the option of the Administrative Agent or such Bank, as the case may be, be credited by the Administrative Agent or such Bank, as the case may be, on the principal amount of the obligations owed to the Administrative Agent or such Bank, as the case may be, by the Borrower or refunded by the Administrative Agent or such Bank, as the case may be, to the Borrower. All sums paid, or agreed to be paid, to the Administrative Agent or any Bank for the use, forbearance or detention of the indebtedness of the Borrower to the Administrative Agent or any Bank evidenced by this Agreement and each Note and the other Loan Documents shall, to the fullest extent permitted by applicable law, be amortized, pro rated, allocated and spread throughout the full term of the indebtedness evidenced by this Agreement, such Note and such other Loan Documents. SECTION 8.09. Confidentiality. Each Bank agrees that it will use reasonable efforts not to disclose without the prior consent of the Borrower (other than to its employees, auditors or counsel or to the Administrative Agent or another Bank if the disclosing Bank or the disclosing Bank's holding or parent company in its sole discretion determines that any such party should have access to such information) any information with respect to the Borrower or its Subsidiaries which is furnished pursuant to this Agreement or any other Loan Document and which is designated by the Borrower to the Banks in writing as confidential, provided that any Bank may disclose any such information (a) as has become generally available to the public, (b) as may be required or appropriate in any report, statement or testimony submitted to any municipal, state or Federal regulatory body having or claiming to have jurisdiction over such Bank or to the Federal Reserve Board, or the FDIC or similar organizations (whether in the United States or elsewhere), (c) as may be required or appropriate in response to any summons or subpoena or in connection with any litigation, (d) in order to comply with any law, order, regulation or ruling applicable to such Bank, (e) to the prospective transferee in connection with any contemplated transfer of any of the Notes or any interest therein by such Bank, provided, that such prospective transferee executes an agreement with the Borrower or the transferor containing provisions substantially identical to those contained in this Section, or (f) to the extent reasonably necessary to disclose in connection with the exercise of any remedy hereunder and under the Notes. SECTION 8.10. Submission to Jurisdiction. (a) Any legal action or proceeding with respect to this Agreement, any Notes or any other Loan Document may be brought in the courts of the State of New York sitting in New York City or of the United States of America for the Southern District of New York, and, by execution and delivery of this Agreement, the Borrower irrevocably submits itself to the nonexclusive jurisdiction of such New York State or Federal courts to the extent -45- 80 permitted by law. The Borrower hereby irrevocably waives any objection, to the laying of venue based on the grounds of forum non conveniens. (b) The Borrower hereby irrevocably designates CT Corporation System, 1633 Broadway, New York, New York 10019 as the designee, appointee and agent of the Borrower to receive, for and on behalf of the Borrower, service of copies of the summons and complaint and any other process in such action or proceeding with respect to this Agreement, any Note or any other Loan Document. It is understood that a copy of such process served on such agent will be promptly forwarded by overnight courier to the Borrower at its address set forth in Section 8.02, but the failure to the Borrower to receive such copy shall not affect in any way the service of such process. The Borrower further irrevocably consents to the service of process of any of the aforementioned courts in any such action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to the Borrower at its said address, such service to become effective 30 days after such mailing. (c) Nothing in this Section 8.10 shall affect (i) the right of the Administrative Agent, the Managing Agents or any Bank to serve process in any other manner permitted by law or to commence legal proceedings or otherwise proceed against the Borrower in any other jurisdiction or (ii) the right of the Borrower to commence legal proceedings or otherwise proceed against the Administrative Agent, the Managing Agents or any Bank in any other jurisdiction. SECTION 8.11. Severability. If any provision of this Agreement is held to be illegal, invalid or unenforceable under present or future laws effective during the term of this Agreement, such provision shall be fully severable and this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part of this Agreement, and the remaining provisions of this Agreement shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance from this Agreement. SECTION 8.12. Execution in Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. SECTION 8.13. Domicile of Loans. Each Bank may transfer and carry its loans at, to or for the account of any office, subsidiary or affiliate of such Bank provided that no Bank shall be relieved of its Commitment as a result thereof. -46- 81 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. BORROWER: -------- CITRUS CORP. By: /s/ Kurt S. Huneke ------------------- Name: Kurt S. Huneke Title: Vice President, Finance and Treasurer ADMINISTRATIVE AGENT: ---------------------- CREDIT LYONNAIS NEW YORK BRANCH By: /s/Ratouis ------------------- Authorized Officer MANAGING AGENTS: ---------------------- CREDIT LYONNAIS NEW YORK BRANCH By: /s/Ratouis ------------------- Authorized Officer THE TORONTO-DOMINION BANK By: /s/ ------------------- Authorized Officer CO-AGENTS --------- CIBC, Inc. The Fuji Bank, Limited, Houston Agency Mellon Bank, N.A. NationsBank of Texas, N.A. The Bank of Nova Scotia Shawmut Bank, N.A. -47- 82 Banks ----- Commitment: $20,000,000 THE BANK OF NOVA SCOTIA By: /s/ A.S. Norsworthy -------------------- Name: A.S. Norsworthy Title: Assistant Agent Address: The Bank of Nova Scotia 600 Peachtree Street N.E., Suite 2700 Atlanta, Georgia 30308 Telecopy No.: (404) 888-8998 Domestic lending Office ----------------------- The Bank of Nova Scotia 600 Peachtree Street N.E., Suite 2700 Atlanta, Georgia 30308 CD Lending Office ----------------- The Bank of Nova Scotia 600 Peachtree Street N.E., Suite 2700 Atlanta, Georgia 30308 Eurodollar Lending Office ------------------------- 600 Peachtree Street N.E., Suite 2700 Atlanta, Georgia 30308 With a copy to: 1100 Louisiana, Suite 3000 Houston, Texas 77002 -48- 83 Banks ----- Commitment: $10,000,000 BAYERISCHE VEREINSBANK AG, LOS ANGELES AGENCY By: /s/ Christine Taylor -------------------- Name: Christine Taylor Title: Vice President By: /s/ John Carlson ----------------- Name: John Carlson Title: Assistant Vice President Address: 800 Wilshire Blvd., Suite 1600 Los Angeles, California 90017-2620 Telecopy No.: (213) 622-6341 Domestic Lending Office ----------------------- Bayerische Vereinsbank AG, Los Angeles Agency 800 Wilshire Blvd., Suite 1600 Los Angeles, California 90017-2620 CD Lending Office ----------------- Bayerische Vereinsbank AG, Los Angeles Agency 800 Wilshire Blvd., Suite 1600 Los Angeles, California 90017-2620 Eurodollar Lending Office ------------------------- Bayerische Vereinsbank AG, Cayman Island Branch c/o Bayerische Vereinsbank AG, Los Angeles Agency 800 Wilshire Blvd., Suite 1600 Los Angeles, California 90017-2620 -49- 84 Banks ----- Commitment: $10,000,000 CAISSE NATIONALE DE CREDIT AGRICOLE By: /s/ Dean Balige ---------------- Name: Dean Balige Title: Senior Vice President and Branch Manager Address: 55 East Monroe, Suite 4700 Chicago, Illinois 60603 Attn: Wilma Persenaire Telecopy No.: (312) 372-4421 Domestic Lending Office ----------------------- Caisse Nationale de Credit Agricole 55 East Monroe, Suite 4700 Chicago, Illinois 60603 Attn: Wilma Persenaire CD Lending Office ----------------- Caisse Nationale de Credit Agricole 55 East Monroe, Suite 4700 Chicago, Illinois 60603 Attn: Wilma Persenaire Eurodollar lending Office ------------------------- Caisse Nationale de Credit Agricole 55 East Monroe, Suite 4700 Chicago, Illinois 60603 Attn: Wilma Persenaire -50- 85 Banks ----- Commitment: $20,000,000 CIBC, INC. By: /s/ M.A.G. Corkum ----------------- Name: M.A.G. Corkum Title: Vice President Address: Two Paces West 2727 Paces Ferry Road, Suite 1200 Atlanta, Georgia 30339 Telecopy No.: (404) 319-4950 Domestic Lending office ----------------------- CIBC, Inc. Two Paces West 2727 Paces Ferry Road, Suite 1200 Atlanta, Georgia 30339 Attn: Adrienne Burch CD Lending Office ----------------- CIBC, Inc. Two Paces West 2727 Paces Ferry Road, Suite 1200 Atlanta, Georgia 30339 Attn: Adrienne Burch Eurodollar Lending Office ------------------------- CIBC, Inc. Two Paces West 2727 Paces Ferry Road, Suite 1200 Atlanta, Georgia 30339 Attn: Adrienne Burch -51- 86 Banks ----- Commitment: $40,000,000 CREDIT LYONNAIS CAYMAN ISLAND BRANCH By: /s/ Ratouis ------------------------- Name: Ratouis Title: Authorized Signature Address: 1301 Avenue of the Americas New York, New York 10019 Telecopy No.: (212) 261-7368 With a copy to: Credit Lyonnais Houston Representative Office 1000 Louisiana, Suite 5360 Houston, Texas 77002 Attention: Richard S. Kaufman Telecopy No.: (713) 751-0307 Domestic Lending Office ----------------------- Credit Lyonnais Cayman Island Branch c/o Credit Lyonnais New York Branch 1301 Avenue of the Americas New York, New York 10019 CD Lending Office ----------------- Credit Lyonnais Cayman Island Branch c/o Credit Lyonnais New York Branch 1301 Avenue of the Americas New York, New York 10019 Eurodollar Lending Office ------------------------- Credit Lyonnais Cayman Island Branch c/o Credit Lyonnais New York Branch 1301 Avenue of the Americas New York, New York 10019 -52- 87 Banks ----- Commitment: $20,000,000 THE FUJI BANK, LIMITED, HOUSTON AGENCY By: /s/Toyohiro Nakamari ------------------------- Name: Toyohiro Nakamari Title: Joint General Manager Address: Two Houston Center 909 Fannin Street, Suite 2800 Houston, Texas 77010 Telecopy No.: (713) 759-0048 Domestic Lending Office ----------------------- The Fuji Bank, Limited Two Houston Center 909 Fannin Street, Suite 2800 Houston, Texas 77010 CD Lending Office ----------------- The Fuji Bank, Limited Two Houston Center 909 Fannin Street, Suite 2800 Houston, Texas 77010 Eurodollar Lending Office ------------------------- The Fuji Bank, Limited Two Houston Center 909 Fannin Street, Suite 2800 Houston, Texas 77010 -53- 88 Banks ----- Commitment: $20,000,000 MELLON BANK, N.A. By: /s/ Mary Ellen Usher -------------------- Name: Mary Ellen Usher Title: Vice President Address: Roger Howard/Janet O. Jenkins Mellon Financial Services 1100 Louisiana, Suite 3600 Houston, Texas 77002 Telecopy No.: (713) 650-3409 Domestic Lending Office ----------------------- Mellon Bank, N.A. Three Mellon Bank Center, Room 2305 Pittsburgh, Pennsylvania 15259-0003 Attn: Sue Cooke CD Lending Office ----------------- Mellon Bank, N.A. Three Mellon Bank Center, Room 2305 Pittsburgh, Pennsylvania 15259-0003 Attn: Sue Cooke Eurodollar Lending Office ------------------------- Mellon Bank, N.A. Three Mellon Bank Center, Room 2305 Pittsburgh, Pennsylvania 15259-0003 Attn: Sue Cooke -54- 89 Banks ----- Commitment: $20,000,000 NATIONSBANK OF TEXAS, N.A. By: /s/ Jo A. Tamalis ----------------- Name: Jo A. Tamalis Title: Senior Vice President Address: 700 Louisiana, 8th Floor Houston, Texas 77002 Telecopy No.: (713) 247-6432 Domestic lending Office ----------------------- NationsBank of Texas, N.A. 700 Louisiana, 8th Floor Houston, Texas 77002 Attn: Amy McGilvra CD Lending Office ----------------- NationsBank of Texas, N.A. 700 Louisiana, 8th Floor Houston, Texas 77002 Attn: Amy McGilvra Eurodollar Lending Office ------------------------- NationsBank of Texas, N.A. 700 Louisiana, 8th Floor Houston, Texas 77002 Attn: Amy McGilvra -55- 90 Banks ----- Commitment: $15,000,000 THE SAKURA BANK, LIMITED HOUSTON AGENCY By: /s/ Akira Hara -------------- Name: Akira Hara Title: General Manager Address: 1100 Louisiana, Suite 2900 Houston, Texas 77002 Telecopy No.: (713) 659-1404 Domestic Lending Office ----------------------- The Sakura Bank, Limited Houston Agency 1100 Louisiana, Suite 2900 Houston, Texas 77002 CD Lending Office ----------------- The Sakura Bank, Limited Houston Agency 1100 Louisiana, Suite 2900 Houston, Texas 77002 Eurodollar Lending Office ------------------------- The Sakura Bank, Limited Houston Agency 1100 Louisiana, Suite 2900 Houston, Texas 77002 -56- 91 Banks ----- Commitment: $15,000,000 THE SANWA BANK LIMITED By: /s/ Robert J. Jelnick --------------------- Name: Robert J. Jelnick Title: Vice President Address: 901 Main Street, Suite 2830, LB165 Dallas, Texas 75202 Telecopy No.: (214) 741-6535 Domestic Lending Office ----------------------- The Sanwa Bank Limited, Dallas Agency 901 Main Street, Suite 2830, LB165 Dallas, Texas 75202 CD Lending Office ----------------- The Sanwa Bank Limited, Dallas Agency 901 Main Street, Suite 2830, LB165 Dallas, Texas 75202 Eurodollar Lending Office ------------------------- The Sanwa Bank Limited, Dallas Agency 901 Main Street, Suite 2830, LB165 Dallas, Texas 75202 -57- 92 EXHIBIT 1.01 SERIES (A)(B) PROMISSORY NOTE U.S. $________________ Dated: ________ ___, 199__ FOR VALUE RECEIVED, the undersigned, Citrus Corp., a Delaware corporation (the "Borrower"), HEREBY PROMISES TO PAY to the order of _______________________________________________________________________________ (the "Bank") for the account of its Applicable Lending Office (as defined in the Revolving Credit Agreement referred to below) on the Termination Date (as defined in the Revolving Credit Agreement referred to below) the principal sum of ____________________ U.S. dollars (U.S. $__________________) (which is fifty percent of the Bank's Commitment as defined in the Revolving Credit Agreement referred to below) or, if less, fifty percent of the aggregate unpaid principal amount of the Advances (as defined in the Revolving Credit Agreement dated as of December ___, 1993 among the Borrower, the Bank, certain other lenders parties thereto, Credit Lyonnais New York Branch and The Toronto-Dominion Bank as Managing Agents and Credit Lyonnais New York Branch as Administrative Agent for the Bank and such other lenders; such Revolving Credit Agreement, as amended from time to time being herein referred to as the "Revolving Credit Agreement") owing to the Bank outstanding on the Termination Date (as defined in the Revolving Credit Agreement). The Borrower promises to pay interest on the unpaid principal amount of this Series (A)(B) Note (such unpaid principal amount being the lesser of $ (amount equal to fifty percent of the Bank's Commitment) or fifty percent of each Advance owing to the Bank) from the date of such Advance until such principal amount is paid in full, at such interest rates, and payable at such times, as are specified in the Revolving Credit Agreement. Both principal and interest are payable in lawful money of the United States of America to Credit Lyonnais New York Branch as Administrative Agent, at 1301 Avenue of the Americas, New York, New York 10019, in same day funds. Fifty percent of each Advance owed to the Bank by the Borrower pursuant to the Revolving Credit Agreement, and fifty percent of all payments made on account of principal of such Advances, shall be recorded by the Bank and, prior to any transfer hereof, endorsed on the grid attached hereto which is part of this Series (A)(B) Note; provided that the failure of the Bank to make any such recordation or endorsement shall not affect the obligations of the Borrower hereunder or under the Revolving Credit Agreement. This Series (A)(B) Note is one of the Series (A)(B) Notes referred to in, and is subject to and is entitled to the benefits of, the Revolving Credit Agreement. The sum of (a) the principal amount of this Series (A)(B) Note and (b) the principal amount of the Series (B)(A) Note (as defined in the Revolving Credit Agreement) payable to order of the Bank, equals one hundred percent of the principal amount of the Advances owed to the Bank by the Borrower pursuant to the Revolving Credit Agreement. The Revolving Credit Agreement, among other 93 things, (i) provides for the making of Advances by the Bank to the Borrower from time to time in an aggregate amount not to exceed the amount of such Banks's Commitment, and (ii) contains provisions for acceleration of the maturity hereof upon the happening of certain stated events, the tender to and purchase by (Enron Corp.)(Sonat Inc.) pursuant to the (Enron)(Sonat) Note Purchase Agreement (as defined in the Revolving Credit Agreement) upon the happening of certain events, and also for prepayments on account of principal hereof prior to the maturity hereof upon the terms and conditions therein specified. Pursuant to Section 5-1401 of the New York General Obligations Law, this Series (A)(B) Note shall be governed by, and construed in accordance with, the laws of the State of New York. CITRUS CORP. By: ----------------------------------- Title: -2- 94 FIFTY PERCENT OF ADVANCES AND PAYMENTS OF PRINCIPAL
Amount of 50% of Principal Unpaid Amount Paid or Principal of Type of Prepaid on Balance of Notation Date Advance Advance This Note This Note Made By - ---- ------- ------- ---------- ---------- --------
-3- 95 EXHIBIT 2.02 NOTICE OF BORROWING Credit Lyonnais New York Branch c/o Credit Lyonnais Houston Representative Office 1000 Louisiana Suite 5360 Houston, Texas 77002 (Date) Attention: Richard S. Kaufman Vice President Ladies and Gentlemen: The undersigned, Citrus Corp., refers to the Revolving Credit Agreement, dated as of December ___, 1993 (such Revolving Credit Agreement, as amended from time to time being herein referred to as the "Revolving Credit Agreement," the terms defined therein being used herein as therein defined), among the undersigned, certain Banks parties thereto, Credit Lyonnais New York Branch and The Toronto-Dominion Bank as Managing Agents, and Credit Lyonnais New York Branch as Administrative Agent for said Banks, and hereby gives you notice, irrevocably, pursuant to Section 2.02 of the Revolving Credit Agreement that the undersigned hereby requests a Borrowing under the Revolving Credit Agreement, and in that connection sets forth below the information relating to such Borrowing (the "Proposed Borrowing") as required by Section 2.02(a) of the Credit Agreement. (i) The Business Day of the Proposed Borrowing is ____________, 199___. (ii) The Type of Advances comprising the Proposed Borrowing is (Base Rate Advances) (Adjusted CD Rate Advances) (LIBOR Advances). (iii) The aggregate amount of the Proposed Borrowing is $______________. *((iv) The initial Interest Period for each Advance made as part of the Proposed Borrowing is _____ (days) (months).) ________________ * To be included for a Proposed Borrowing comprised of Adjusted CD Rate Advances or LIBOR Advances. 96 The undersigned hereby certifies that the applicable conditions precedent set forth in Article III of the Revolving Credit Agreement to the making of the Proposed Borrowing have been satisfied. Very truly yours, CITRUS CORP. By: ---------------------------- Title: -2- 97 EXHIBIT 3.01-A (Opinion of Borrower's Counsel) Vinson & Elkins L.L.P. 2500 First City Tower 1001 Fannin Street Houston, Texas 77002-6760 (Date) To each of the Banks parties to the Revolving Credit Agreement dated as of December 23, 1993 among Citrus Corp., said Banks, Credit Lyonnais New York Branch and The Toronto-Dominion Bank as Managing Agents, and Credit Lyonnais New York Branch, as Administrative Agent for said Banks, and to such Managing Agents and Administrative Agent Re: Citrus Corp. Ladies and Gentlemen: This opinion is furnished to you pursuant to Section 3.01(i) of the Revolving Credit Agreement dated as of December 23, 1993 (the "Credit Agreement"), among Citrus Corp. (the "Borrower"), the Banks parties thereto, Credit Lyonnais New York Branch and The Toronto-Dominion Bank as Managing Agents, and Credit Lyonnais New York Branch as Administrative Agent for said Banks. Except as otherwise defined herein, terms defined in the Credit Agreement are used herein as therein defined. We have acted as counsel for the Borrower in connection with the preparation, execution, delivery and effectiveness of the Credit Agreement. In that connection, we have examined: (1) The Credit Agreement; (2) The Notes; and (3) The Note Purchase Agreements. 98 December __, 1993 Page 2 We have also examined the originals, or copies certified to our satisfaction, of the documents listed in a certificate of the Vice President and Chief Financial Officer of the Borrower and FGT dated the date hereof and attached hereto as Exhibit "A" (the "Officer's Certificate"), certifying that the documents listed therein are all of the material (meaning for purposes of this opinion those creating a monetary liability of $10,000,000 or more) indentures, loan or credit agreements, receivables sale or financing agreements, lease financing agreements, capital leases, mortgages, security agreements, bonds and notes (except bonds and notes issued pursuant to the aforesaid indentures and loan or credit agreements), and guaranties of any such obligations, to which the Borrower or FGT is subject and to the effect that there are no orders, writs, judgments, awards, injunctions or decrees which affect or purport to affect (i) the Borrower's right to borrow money or the Borrower's obligations under the Credit Agreement or the Notes, or (ii) the execution, delivery and consent by the Borrower to the terms of the Note Purchase Agreements. In addition, we have (i) investigated such questions of law and (ii) relied on such certificates from officers and representatives of the Borrower, FGT, Enron Corp. and Sonat Inc., and from public officials, as we have deemed necessary or appropriate for the purposes of this opinion. In rendering the opinions herein set forth, we have assumed (i) with respect to our opinions set forth in paragraphs 5 and 6 below, the due authorization, execution and delivery of the Credit Agreement and the Note Purchase Agreements by all parties to such documents (other than Enron and Sonat with respect to their respective Note Purchase Agreements and Citrus with respect to the Note Purchase Agreements and the Credit Agreement), and that the Credit Agreement and the Note Purchase Agreements are valid, binding and enforceable (subject to limitations on enforceability of the types referred to in paragraphs (a) and (b) below) against all parties to such documents (other than Enron and Sonat with respect to their respective Note Purchase Agreements and Citrus with respect to the Note Purchase Agreements and the Credit Agreement), (ii) the legal capacity of natural persons, (iii) the genuineness of all signatures, (iv) the authenticity of all documents submitted to us as originals, and (v) the conformity to original documents of all documents submitted to us as copies. Based upon the foregoing and upon such investigation as we have deemed necessary, we are of the following opinion: 1. The Borrower is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. 2. The Borrower has the corporate power and authority to enter into and perform its obligations under each of the Credit Agreement and the Notes, and to execute, deliver and consent to the terms of the Note Purchase Agreements. The Borrower's execution, delivery and performance of its obligations under the Credit Agreement and the Notes, and the execution, delivery and consent by the Borrower 99 December __, 1993 Page 3 to the terms of the Note Purchase Agreements, have been duly authorized by all requisite corporate action. The Credit Agreement has been validly executed and delivered by the Borrower. 3. No authorization, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body (including, without limitation, FERC) is required to be made or obtained by the Borrower for (i)the execution, delivery and performance by the Borrower of its obligations under the Credit Agreement and the Notes and (ii) the execution, delivery and consent by the Borrower to the terms of the Note Purchase Agreements. 4. The execution, delivery and performance by the Borrower of the Credit Agreement and the Notes, and the execution, delivery and consent by the Borrower to the terms of the Note Purchase Agreements, does not contravene (i) its Restated Certificate of Incorporation or Bylaws, (ii) any provision of law or regulation (including, without limitation, Regulation X issued by the Federal Reserve Board) applicable to the Borrower or of Regulation U issued by the Federal Reserve Board, or (iii) any contractual or legal restriction contained in any document listed in the Officer's Certificate. The execution, delivery and performance by the Borrower of the Credit Agreement and the Notes, and the execution, delivery and consent by the Borrower to the terms of the Note Purchase Agreements, will not result in the imposition of any Lien upon the property or assets of the Borrower or FGT under any document listed in the Officer's Certificate. 5. The Credit Agreement and the Notes constitute the legal, valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their terms. 6. The consent by the Borrower to the terms of the Note Purchase Agreements is valid and binding as against the Borrower and enforceable against the Borrower in accordance with its terms. 7. The Borrower is not an "investment company" within the meaning of the Investment Company Act of 1940, as amended. 8. The Borrower is not a "holding company", a "subsidiary company" of a "holding company", an "affiliate" of a "holding company", or an "affiliate" of a "subsidiary company" of a "holding company", in each case as such term is defined in the Public Utility Holding Company Act of 1935, as amended ("PUHCA"). 9. The Borrower is duly qualified to transact business as a foreign corporation and is in good standing in each of the States of Texas, Georgia, Louisiana, Mississippi, Alabama and Florida. 100 December __, 1993 Page 4 10. All of the outstanding shares of capital stock of FGT are owned of record directly by the Borrower. The opinions set forth above are subject to the following qualifications: (a) Our opinions in paragraphs 5 and 6 above are subject, as to enforceability, to the effect of any applicable bankruptcy, insolvency, reorganization, moratorium or similar law affecting creditors' rights generally. (b) Our opinions in paragraphs 5 and 6 above are subject, as to enforceability, to the effect of general principles of equity (regardless of whether considered in a proceeding in equity or at law), including without limitation, concepts of materiality, reasonableness, good faith and fair dealing, and also to the possible unavailability of specific performance or injunctive relief. Such principles of equity are of general application, and in applying such principles a court, among other things, might not allow a creditor to accelerate maturity of a debt upon the occurrence of a default deemed immaterial or might decline to order the Borrower to perform covenants. In rendering the opinions expressed in paragraph 4 above we have made no examination of any accounting or financial matters and express no opinion with respect thereto. In rendering the opinions set forth in paragraphs 3, 4, 5, 6 and 8 above, we call to your attention the fact that on June 1, 1987, the Securities and Exchange Commission issued an order declaring that FGT is not a "gas utility company" under PUHCA notwithstanding making a very limited number of "farm tap sales". Such order has not been modified or rescinded. In rendering the opinions set forth in paragraphs 3, 4, 5, 6 and 8 above, we have relied upon the opinions stated respectively in (a) paragraph 5 of the opinion, dated today of the Vice President and General Counsel of Enron which is hereby delivered to you pursuant to Section 3.01(k) of the Credit Agreement, and (b) paragraph 5 of the opinion, dated today, of the Vice President and Secretary of Sonat which is being delivered to you pursuant to Section 3.01(m) of the Credit Agreement. We have not been called upon to, and accordingly do not, express any opinion as to the various state and Federal laws regulating banks or the conduct of their business (except Regulation U issued by the Federal Reserve Board) that may relate to the Loan Documents or the transactions contemplated thereby. Without limiting the generality of the foregoing, we express no opinion as to the effect of the law of any jurisdiction other than the State of Texas and the State of New York wherein any Bank may be located or where any 101 December __, 1993 Page 5 enforcement of the Loan Documents may be sought which limits the rates of interest legally chargeable or collectible. This opinion is limited to the laws of the State of Texas and the State of New York, the General Corporation Law of the State of Delaware and the Federal law of the United States. The opinions herein are solely for the benefit of the Administrative Agent, the Managing Agents, each Bank and each Person that becomes a Bank pursuant to the provisions of the Credit Agreement, in connection with the subject transaction and may not be relied upon by any other person, or by such beneficiaries or any other person in any other context, without the prior written consent of the undersigned. Very truly yours, Vinson & Elkins L.L.P. 102 EXHIBIT 3.01-B (Opinion of Vinson & Elkins L.L.P. -- Enron Standby Note Purchase Agreement) Vinson & Elkins L.L.P. 2500 First City Tower 1001 Fannin Street Houston, Texas 77002-6760 (Date) To each of the Banks parties to the Revolving Credit Agreement dated as of December 23, 1993 among Citrus Corp., said Banks, Credit Lyonnais New York Branch and The Toronto-Dominion Bank as Managing Agents, and Credit Lyonnais New York Branch as Administrative Agent for said Banks, and to such Managing Agents and Administrative Agent Re: Enron Corp. Standby Note Purchase Agreement Ladies and Gentlemen: We have acted as counsel for Enron Corp., a Delaware corporation ("Enron"), in connection with the preparation, execution and delivery of the Standby Note Purchase Agreement dated as of December 23, 1993 (the "Enron Note Purchase Agreement") among Enron, Credit Lyonnais New York Branch as Administrative Agent, and Citrus Corp. ("Citrus") joining for the purpose of acknowledging and consenting to the terms thereof. The Enron Note Purchase Agreement relates to the Series A Notes executed and delivered pursuant to, and this opinion is furnished to you pursuant to Section 3.01(j) of, the Revolving Credit Agreement dated as of December 23, 1993 (the "Credit Agreement"), among Citrus, the Banks parties thereto, Credit Lyonnais New York Branch and The Toronto-Dominion Bank as Managing Agents, and Credit Lyonnais New York Branch as Administrative Agent for said Banks. Terms used herein but not defined herein shall have the meanings ascribed to such terms in the Enron Note Purchase Agreement, or if not defined in the Enron Note Purchase Agreement, in the Credit Agreement. 103 December __, 1993 Page 2 In that connection, we have examined: (1) The Enron Note Purchase Agreement; and (2) The Credit Agreement. We have also examined the originals, or copies certified to our satisfaction, of the documents listed in a certificate of the Vice President, Finance and Treasurer of Enron dated the date hereof (the "Officer's Certificate"), certifying that the documents listed in such certificate are all of the material (meaning for purposes of this opinion those creating a monetary liability of $50,000,000 or more) indentures, loan or credit agreements, receivables sale or financing agreements, lease financing agreements, capital leases, mortgages, security agreements, bonds and notes (except bonds and notes issued pursuant to the aforesaid indentures and loan or credit agreements), and guaranties of any such obligations, to which Enron is subject and to the effect that there are no orders, writs, judgments, awards, injunctions or decrees which affect or purport to affect Enron's obligations under the Enron Note Purchase Agreement. In addition, we have (i) investigated such questions of law and (ii) relied on such certificates from officers and representatives of Enron and from public officials, as we have deemed necessary or appropriate for the purposes of this opinion. In rendering the opinions herein set forth, we have assumed (i) with respect to our opinion set forth in paragraph 3 below, the due authorization, execution and delivery of the Enron Note Purchase Agreement and the Credit Agreement by all parties to such documents (other than Enron and Citrus with respect to the Enron Note Purchase Agreement and Citrus with respect to the Credit Agreement) and that each such document is valid, binding and enforceable (subject to limitations on enforceability of the types referred to in paragraphs (a) and (b) below) against the parties thereto (other than Enron and Citrus with respect to the Enron Note Purchase Agreement and Citrus with respect to the Credit Agreement), (ii) the legal capacity of natural persons, (iii) the genuineness of all signatures, (iv) the authenticity of all documents submitted to us as originals, and (v) the conformity to original documents of all documents submitted to us as copies. Based upon the foregoing and upon such investigation as we have deemed necessary, we are of the following opinion: 1. No authorization, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body (including, without limitation, FERC) is required to be made or obtained by Enron for the execution, delivery and performance by Enron of the Enron Note Purchase Agreement. 104 December __, 1993 Page 3 2. The execution, delivery and performance by Enron of the Enron Note Purchase Agreement does not contravene (i) its Restated Certificate of Incorporation, as amended, or Bylaws, as amended, (ii) any provision of law or regulation applicable to Enron, or (iii) any contractual or legal restriction contained in any document listed in the Officer's Certificate. 3. The Enron Note Purchase Agreement constitutes the legal, valid and binding obligation of Enron enforceable against Enron in accordance with its terms. The opinions set forth above are subject to the following qualifications: (a) Our opinion in paragraph 3 above is subject, as to enforceability, to the effect of any applicable bankruptcy, insolvency, reorganization, moratorium or similar law affecting creditors' rights generally. (b) Our opinion in paragraph 3 above is subject, as to enforceability, to the effect of general principles of equity (regardless of whether considered in a proceeding in equity or at law), including without limitation, concepts of materiality, reasonableness, good faith and fair dealing, and also to the possible unavailability of specific performance or injunctive relief. Such principles of equity are of general application, and in applying such principles a court, among other things, might decline to order Enron to perform covenants. In rendering the opinions expressed in paragraphs 1, 2 and 3 above, we have relied upon the opinions stated in paragraphs 1, 2 (so far as such paragraph 2 relates to the corporate powers of, and due authorization of the Enron Note Purchase Agreement by, Enron), 4 and 5 of the opinion, dated today, of the Senior Vice President and General Counsel of Enron Corp. which is being delivered to you pursuant to Section 3.01(k) of the Credit Agreement. In rendering the opinions expressed in paragraph 2 above we have made no examination of any accounting or financial matters and express no opinion with respect thereto. This opinion is limited to the laws of the State of Texas and the State of New York, the General Corporation Law of the State of Delaware and the Federal law of the United States. The opinions herein are solely for the benefit of the Administrative Agent, the Managing Agents, each Bank and each Person that becomes a Bank pursuant to the provisions of the Credit Agreement, in connection with the subject transaction and may not 105 December __, 1993 Page 4 be relied upon by any other person, or by such beneficiaries or any other person in any other context, without the prior written consent of the undersigned. Very truly yours, Vinson & Elkins L.L.P. 106 EXHIBIT 3.01-C (Opinion of Senior Vice President and General Counsel of Enron Corp. -- Standby Note Purchase Agreement) Enron Corp. (Date) To each of the Banks parties to the Revolving Credit Agreement dated as of December 23, 1993 among Citrus Corp., said Banks, Credit Lyonnais New York Branch and The Toronto-Dominion Bank as Managing Agents, and Credit Lyonnais New York Branch as Administrative Agent for said Banks, and to such Managing Agents and Administrative Agent Re: Enron Corp. Standby Note Purchase Agreement Ladies and Gentlemen: As Senior Vice President and General Counsel of Enron Corp., a Delaware corporation ("Enron"), I am familiar with the Standby Note Purchase Agreement dated as of December 23, 1993 (the "Enron Note Purchase Agreement") among Enron, Credit Lyonnais New York Branch as Administrative Agent, and Citrus Corp. ("Citrus") joining for the purposes of acknowledging and consenting to the terms thereof. The Enron Note Purchase Agreement relates to the Series A Notes executed and delivered pursuant to the Revolving Credit Agreement dated as of December 23, 1993 (the "Credit Agreement") among Citrus, the Banks parties thereto, Credit Lyonnais New York Branch and The Toronto-Dominion Bank as Managing Agents, and Credit Lyonnais New York Branch as Administrative Agent for said Banks. In such capacities, I am also familiar with the Restated Certificate of Incorporation, as amended, and Bylaws, as amended, of Enron. This opinion is being furnished to you pursuant to Section 3.01 (k) of the Credit Agreement. Terms used herein but not defined herein shall have the same meaning ascribed to such terms in the Enron Note Purchase Agreement, or if not defined in the Enron Note Purchase Agreement, in the Credit Agreement. 107 December __, 1993 Page 2 Before rendering this opinion, I (or other attorneys with Enron's legal department acting under my direction) have examined the Enron Note Purchase Agreement and the Credit Agreement, and have examined and relied upon originals or photostatic or certified copies of such corporate records, certificates of officers of Enron and of public officials, and such agreements, documents and instruments, and have made such investigations of law, as I or such other attorneys have deemed relevant and necessary as the basis for the opinion hereinafter expressed. In such examination, I or such other attorneys assumed the genuineness of all signatures (other than signatures of officers of Enron on the Enron Note Purchase Agreement), the authenticity of all documents submitted to us as originals, and the conformity to original documents of all documents submitted to us as photostatic or certified copies. Upon the basis of the foregoing, I am of the opinion that: 1. Enron is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and has all corporate powers and all governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted, except to the extent failure to obtain such licenses, authorizations, consents or approvals would not materially adversely affect the business, consolidated financial position or consolidated results of operations of Enron and its Subsidiaries taken as a whole. 2. The execution, delivery and performance by Enron of the Enron Note Purchase Agreement are within Enron's corporate powers, have been duly authorized by all necessary corporate action on the part of Enron, and do not contravene, or constitute a default under, (a) the Restated Certificate of Incorporation, as amended, or Bylaws, as amended, of Enron, (b) any contractual restriction contained in any material (meaning for the purposes of this opinion those creating a monetary liability of $50,000,000 or more) indenture, loan or credit agreement, receivables sale or financing agreement, lease financing agreement, capital lease, mortgage, security agreement, bond or note, or any guaranty of any of such obligations to which Enron is a party, or (c) any judgment, injunction, order or decree known to me to be binding upon Enron. The execution, delivery and performance by Enron of the Enron Note Purchase Agreement will not result in the creation or imposition of any lien, security interest or other charge or encumbrance on any asset of Enron. The Enron Note Purchase Agreement has been duly executed and delivered by Enron. 3. Except as disclosed in Enron's Form 10-K for the year ended December 31, 1992, or Enron's Form 10-Q for the quarters ended March 31, 1993, June 30, 1993 or September 30, 1993 there is no action, suit or proceeding pending or, to my knowledge, threatened against Enron or any of its Subsidiaries before any 108 December __, 1993 Page 3 court or arbitrator or any governmental agency, in which there is a reasonable possibility of an adverse decision which could materially adversely affect the business, consolidated financial position or consolidated results of operations of Enron and its Subsidiaries taken as a whole or which in any manner draws into question the validity of the Enron Note Purchase Agreement. 4. Enron is not, and is not directly or indirectly "controlled" by any Person which is, an "investment company" within the meaning of the Investment Company Act of 1940, as amended. 5. Enron is not a "holding company", an "affiliate" of a "holding company" or a "subsidiary company" of a "holding company", in each case as such terms are defined in the Public Utility Holding Company Act of 1935, as amended. 6. Fifty percent of the outstanding shares of capital stock of Citrus are owned of record, indirectly through a wholly-owned Subsidiary of Enron, by Enron. The opinions set forth above are subject to the following qualifications: 1. In rendering the opinions expressed in paragraph 2 above, neither I nor any other attorney acting under my direction has made any examination of any accounting or financial matters related to certain of the covenants contained in certain documents to which Enron may be subject, and I express no opinion with respect thereto. 2. This opinion is limited in all respects to the laws of the State of Texas and the General Corporation Law of the State of Delaware and Federal law. 3. In rendering the opinion expressed in paragraph 3 above, I (or the other attorneys acting under my direction) have only reviewed the files and records of Enron and its Subsidiaries, and we have consulted with such senior officers of Enron and its Subsidiaries as we have deemed necessary. This opinion is solely for the benefit of the Administrative Agent, the Managing Agents, each Bank and each Person that becomes a Bank pursuant to the provisions of the Credit Agreement, in connection with the subject transaction and may not be relied upon by any other person, or by such beneficiaries or any other person in any other context, without the written consent of the undersigned; provided, however, that Vinson & Elkins L.L.P. may rely on certain provisions of this opinion to the extent stated in its 109 December __, 1993 Page 4 opinion for the purposes of rendering its opinion pursuant to Sections 3.01(i) and 3.01(j) of the Credit Agreement Very truly yours, James V. Derrick, Jr. 110 EXHIBIT 3.01-D (Form of Opinion of Vinson & Elkins L.L.P. -- Sonat Standby Note Purchase Agreement) Vinson & Elkins L.L.P. 2500 First City Tower 1001 Fannin Street Houston, Texas 77002-6760 (Date) To each of the Banks parties to the Revolving Credit Agreement dated as of December 23, 1993 among Citrus Corp., said Banks, Credit Lyonnais New York Branch and The Toronto-Dominion Bank as Managing Agents, and Credit Lyonnais New York Branch as Administrative Agent for said Banks, and to such Managing Agents and Administrative Agent Re: Sonat Inc. Standby Note Purchase Agreement Ladies and Gentlemen: We have acted as counsel for Sonat Inc., a Delaware corporation ("Sonat"), in connection with the preparation, execution and delivery of the Standby Note Purchase Agreement dated as of December 23, 1993 (the "Sonat Note Purchase Agreement") among Sonat, Credit Lyonnais New York Branch as Administrative Agent, and Citrus Corp. ("Citrus") joining for the purpose of acknowledging and consenting to the terms thereof. The Sonat Note Purchase Agreement relates to the Series B Notes executed and delivered pursuant to, and this opinion is furnished to you pursuant to Section 3.01(l) of, the Revolving Credit Agreement dated as of December 23, 1993 (the "Credit Agreement"), among Citrus, the Banks parties thereto, Credit Lyonnais New York Branch and The Toronto-Dominion Bank as Managing Agents, and Credit Lyonnais New York Branch as Administrative Agent for said Banks. Terms used herein but not defined herein shall have the meanings ascribed to such terms in the Sonat Note Purchase Agreement, or if not defined in the Sonat Note Purchase Agreement, in the Credit Agreement. 111 December __, 1993 Page 2 In that connection, we have examined: (1) The Sonat Note Purchase Agreement; and (2) The Credit Agreement. We have also (i) investigated such questions of law and (ii) relied on such certificates from officers and representatives of Sonat and from public officials, as we have deemed necessary or appropriate for the purposes of this opinion. In rendering the opinion herein set forth, we have assumed (i) the due authorization, execution and delivery of the Sonat Note Purchase Agreement and the Credit Agreement by all parties to such documents (other than Sonat and Citrus with respect to the Sonat Note Purchase Agreement and Citrus with respect to the Credit Agreement) and that each such document is valid, binding and enforceable (subject to limitations on enforceability of the types referred to in paragraphs (a) and (b) below) against the parties thereto (other than Sonat and Citrus with respect to the Sonat Note Purchase Agreement and Citrus with respect to the Credit Agreement), (ii) the legal capacity of natural persons, (iii) the genuineness of all signatures, (iv) the authenticity of all documents submitted to us as originals, and (v) the conformity to original documents of all documents submitted to us as copies. Based upon the foregoing and upon such investigation as we have deemed necessary, we are of the opinion that the Sonat Note Purchase Agreement constitutes the legal, valid and binding obligation of Sonat enforceable against Sonat in accordance with its terms. The opinion set forth above is subject to the following qualifications: (a) Our opinion above is subject, as to enforceability, to the effect of any applicable bankruptcy, insolvency, reorganization, moratorium or similar law affecting creditors' rights generally. (b) Our opinion above is subject, as to enforceability, to the effect of general principles of equity (regardless of whether considered in a proceeding in equity or at law), including without limitation, concepts of materiality, reasonableness, good faith and fair dealing, and also to the possible unavailability of specific performance or injunctive relief. Such principles of equity are of general application, and in applying such principles a court, among other things, might decline to order Sonat to perform covenants. 112 December __, 1993 Page 3 In rendering the opinion expressed above, we have relied upon the opinions stated in paragraphs 1, 2, 3, 4, 5 and 6 of the opinion, dated today, of the Vice President and Secretary of Sonat which is being delivered to you pursuant to Section 3.01(m) of the Credit Agreement. This opinion is limited to the laws of the State of Texas and the State of New York, the General Corporation Law of the State of Delaware and the Federal law of the United States. The opinions herein are solely for the benefit of the Administrative Agent, the Managing Agents, each Bank and each Person that becomes a Bank pursuant to the provisions of the Credit Agreement, in connection with the subject transaction and may not be relied upon by any other person, or by such beneficiaries or any other person in any other context, without the prior written consent of the undersigned. Very truly yours, Vinson & Elkins L.L.P. 113 EXHIBIT 3.01-E (Opinion of Vice President and Secretary of Sonat Inc. -- Standby Note Purchase Agreement) Sonat Inc. (Date) To each of the Banks parties to the Revolving Credit Agreement dated as of December 23, 1993 among Citrus Corp., said Banks, Credit Lyonnais New York Branch and The Toronto-Dominion Bank as Managing Agents, and Credit Lyonnais New York Branch as Administrative Agent for said Banks, and to such Managing Agents and Administrative Agent Re: Sonat Inc. Standby Note Purchase Agreement Ladies and Gentlemen: As Vice President and Secretary of Sonat Inc., a Delaware corporation ("Sonat"), and an attorney licensed to practice law under the laws of the State of Alabama, I am familiar with the Standby Note Purchase Agreement dated as of December 23, 1993 (the "Sonat Note Purchase Agreement") among Sonat, Credit Lyonnais New York Branch as Administrative Agent, and Citrus Corp. ("Citrus") joining for the purposes of acknowledging and consenting to the terms thereof. The Sonat Note Purchase Agreement relates to the Series B Notes executed and delivered pursuant to the Revolving Credit Agreement dated as of December 23, 1993 (the "Credit Agreement") among Citrus, the Banks parties thereto, Credit Lyonnais New York Branch and The Toronto-Dominion Bank as Managing Agents, and Credit Lyonnais New York Branch as Administrative Agent for said Banks. In such capacities, I am also familiar with the Restated Certificate of Incorporation and By-laws of Sonat. This opinion is being furnished to you pursuant to Section 3.01(m) of the Credit Agreement. Terms used herein but not defined herein shall have the same meaning ascribed to such terms in the Sonat Note Purchase Agreement, or if not defined in the Sonat Note Purchase Agreement, in the Credit Agreement. 114 December __, 1993 Page 2 Before rendering this opinion, I (or other attorneys with Sonat's legal department acting under my direction) have examined the Sonat Note Purchase Agreement and the Credit Agreement, and have examined and relied upon originals or photostatic or certified copies of such corporate records, certificates of officers of Sonat and of public officials, and such agreements, documents and instruments, and have made such investigations of law, as I or such other attorneys have deemed relevant and necessary as the basis for the opinion hereinafter expressed. In such examination, I or such other attorneys assumed the genuineness of all signatures (other than signatures of officers of Sonat on the Sonat Note Purchase Agreement), the authenticity of all documents submitted to us as originals, and the conformity to original documents of all documents submitted to us as photostatic or certified copies. Upon the basis of the foregoing, I am of the opinion that: 1. Sonat is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all corporate powers and all governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted, except to the extent failure to obtain such licenses, authorizations, consents or approvals would not materially adversely affect the business, consolidated financial position or consolidated results of operations of Sonat and its Subsidiaries taken as a whole. 2. The execution, delivery and performance by Sonat of the Sonat Note Purchase Agreement are within Sonat's corporate powers, have been duly authorized by all necessary corporate action on the part of Sonat, and do not contravene, or constitute a default under, (a) the Restated Certificate of Incorporation or By-laws of Sonat, (b) any contractual or legal restriction contained in any material (meaning for the purposes of this opinion those creating a monetary liability of $50,000,000 or more) indenture, loan or credit agreement, receivables sale or financing agreement, lease financing agreement, capital lease, mortgage, security agreement, bond or note, or any guaranty of any of such obligations to which Sonat is a party, (c) any provision of any law or regulation applicable to Sonat or (d) any judgment, injunction, order or decree known to me to be binding upon Sonat. The execution, delivery and performance by Sonat of the Sonat Note Purchase Agreement will not result in the creation or imposition of any lien, security interest or other charge or encumbrance on any asset of Sonat except as provided in the Sonat Note Purchase Agreement. The Sonat Note Purchase Agreement has been duly executed and delivered by Sonat. 3. No authorization, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body (including, without 115 December __, 1993 Page 3 limitation, FERC) is required to be made or obtained by Sonat for the execution, delivery and performance by Sonat of the Sonat Note Purchase Agreement. 4. Sonat is not, and is not directly or indirectly "controlled" by any Person which is, an "investment company" within the meaning of the Investment Company Act of 1940, as amended. 5. Sonat is not a "holding company", an "affiliate" of a "holding company" or a "subsidiary company" of a "holding company", in each case as such terms are defined in the Public Utility Holding Company Act of 1935, as amended. 6. Fifty percent of the outstanding shares of capital stock of Citrus are owned of record directly by Sonat. The opinions set forth above are subject to the following qualifications: 1. In rendering the opinions expressed in paragraph 2 above, neither I nor any other attorney acting under my direction has made any examination of any accounting or financial matters related to certain of the covenants contained in certain documents to which Sonat may be subject, and I express no opinion with respect thereto. 2. This opinion is limited in all respects to the laws of the State of Alabama, the General Corporation Law of the State of Delaware and Federal law. In rendering the above opinion, I call to your attention that, except as disclosed in Sonat's Form 10-K for the year ended December 31, 1992, or Sonat's Form 10-Q for the quarters ended March 31, 1993, June 30, 1993 or September 30, 1993, to my knowledge there is no action, suit or proceeding pending or overtly threatened in writing against Sonat or any of its Subsidiaries before any court or arbitrator or any governmental agency, in which there is a reasonable likelihood of an adverse decision which would materially adversely affect the business, consolidated financial position or consolidated results of operations of Sonat and its Subsidiaries taken as a whole or which in any manner draws into question the validity of the Sonat Note Purchase Agreement. In calling to your attention the matters set forth in the preceding sentence, I (or the other attorneys acting under my direction) have only reviewed the files and records of Sonat and its Subsidiaries, and we have consulted with such senior officers of Sonat and its Subsidiaries as we have deemed necessary. This opinion is solely for the benefit of the Administrative Agent, the Managing Agents, each Bank and each Person that becomes a Bank pursuant to the provisions of the 116 December __, 1993 Page 4 Credit Agreement, in connection with the subject transaction and may not be relied upon by any other person, or any such person in any other context, without the prior written consent of the undersigned; provided, however, that Vinson & Elkins L.L.P. may rely on certain provisions of this opinion to the extent stated in its opinion for the purposes of rendering its opinion pursuant to Sections 3.01(i) and 3.01(l) of the Credit Agreement. Very truly yours, Beverley T. Krannich 117 EXHIBIT 3.01-F (Opinion of Andrews & Kurth L.L.P.) December _____, 1993 The Banks, the Administrative Agent and the Managing Agents Referred to Below c/o Credit Lyonnais Ladies and Gentlemen: We have acted as special counsel to Credit Lyonnais New York Branch and The Toronto-Dominion Bank, as managing agents (in such capacity, the "Managing Agents"), in connection with negotiation, execution and delivery by Citrus Corp., a Delaware corporation (the "Borrower"), of the Revolving Credit Agreement dated as of December 23, 1993 (the "Credit Agreement") with the banks party thereto (the "Banks"), Credit Lyonnais New York Branch, as administrative agent for the Banks (in such capacity, the "Administrative Agent"), and the Managing Agents, the Series A Notes and the Series B Notes dated the date hereof and issued by the Borrower to the Banks pursuant to the Credit Agreement (the "Notes"), the Standby Note Purchase Agreement dated as of December ____, 1993 (the "Enron Note Purchase Agreement") among Enron Corp., a Delaware corporation, the Administrative Agent and the Borrower and the Standby Note Purchase Agreement dated as of December 23, 1993 among Sonat Inc., a Delaware corporation, the Administrative Agent and the Borrower (the "Sonat Note Purchase Agreement"). This opinion is being delivered pursuant to Section 3.01(m) of the Credit Agreement. The Credit Agreement, the Notes, the Enron Note Purchase Agreement and the Sonat Note Purchase Agreement are herein individually referred to as a "Loan Document" and collectively referred to as the "Loan Documents." The Borrower, Enron and Sonat are herein individually referred to as a "Loan Party." In connection with this opinion, we have examined executed originals or copies, certified or otherwise identified to our satisfaction of the Loan Documents. For purposes of this opinion, we have assumed with your permission and without independent investigation the following: (a) that each of the parties to the Loan Documents has the requisite power and authority to execute, deliver and perform its obligations thereunder; 118 The Banks, the Administrative Agent and the Managing Agents Date Page 2 (b) that the Loan Documents have been duly authorized, executed and delivered by each of the parties thereto; (c) the genuineness of all signatures of, and the authority of, all Persons signing all documents examined by us in connection with this opinion on behalf of parties thereof; (d) the capacity of each signing party; and (e) the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as certified or photostatic copies and the authenticity of the originals of such copies. Based upon and subject to the foregoing and other qualifications and assumptions set forth below, and upon such other matters as we have deemed appropriate, we are of the opinion that each Loan Document constitutes the valid, binding and enforceable obligation of each Loan Party party thereto enforceable against such Loan Party in accordance with its terms. The foregoing opinion is subject to the following qualifications: The enforceability of the Loan Documents may be limited by the effect of applicable bankruptcy, insolvency, reorganization, moratorium and similar laws affecting the enforcement of creditors' rights generally and by general principles of equity (regardless of whether considered in a proceeding in equity or at law), including, without limitation, concepts of materiality, reasonableness, good faith and fair dealing, and also to the possible unavailability of specific performance or injunctive relief. Such principles of equity are of general application, and in applying such principles a court, among other things, might not allow a creditor to accelerate maturity of a debt upon the occurrence of a default deemed immaterial or might decline to order a Loan Party to perform covenants. We express no opinion as to the effect of the law of any jurisdiction other than the State of Texas and the State of New York wherein any Bank may be located or where any enforcement of the Loan Documents may be sought which limits the rates of interest legally chargeable or collectible. This opinion is limited in all respects to the laws of the States of Texas and New York and applicable federal law. This opinion is provided to you solely for the purpose of complying with a condition set forth in the Credit Agreement and, without our prior written consent, may not be relied upon in any manner by any other person (other than a person who becomes a Bank pursuant to the provisions of the Credit Agreement). Very truly yours, 119 EXHIBIT 8.06 TRANSFER AGREEMENT This Transfer Agreement dated as of ____________________ (this "Agreement"), is made by and among Citrus Corp., a Delaware corporation (the "Borrower"), Credit Lyonnais New York Branch as Administrative Agent (under the Revolving Credit Agreement dated as of December 23, 1993 among the Borrower, the Managing Agents, the Administrative Agent and the Banks parties thereto, such Revolving Credit Agreement as amended from time to time being herein referred to as the "Revolving Credit Agreement"), ________________________ ____________________ (the "Assignor") and ________________________ (the "Assignee"). In consideration of the mutual covenants herein contained, the parties agree to the following: 1. Transfer. Pursuant to Section 8.06 of the Revolving Credit Agreement, the Assignor assigns to the Assignee (without representation or warranty to the Assignee and without the Assignee having recourse against the Assignor as a result of such assignment), and the Assignee assumes, $___________ of the Assignor's $____________ Commitment under the Revolving Credit Agreement. (The Assignee is already a Bank under the Revolving Credit Agreement with a Commitment of $__________ prior to the assumption contemplated hereby.) (The Assignee is approved by the Administrative Agent and the Borrower for purposes of this assignment and assumption.) As contemplated by Section 8.06, it is agreed that: (i) the Assignor is released from all of its obligations under the Revolving Credit Agreement with respect to or arising as a result of the $______________ portion of its Commitment hereby assigned; (ii) the Assignee is obligated for such $______________ portion of such Commitment hereby assigned and all other obligations of the Assignor (including, without limitation, obligations to the Administrative Agent under Section 7.05 of the Revolving Credit Agreement or otherwise) under the Revolving Credit Agreement with respect to such portion of such Commitment hereby assigned; (iii) the Assignee is assigned the right to vote or consent under the Revolving Credit Agreement and all other rights and obligations of the Assignor under the Revolving Credit Agreement, in each case to the extent of such portion of such Commitment hereby assigned; (iv) the Borrower, contemporaneously (except as stated below) with the execution and delivery of this Agreement, will deliver, in replacement of the Series A Note of the Assignor currently outstanding ((and in replacement of the Assignee's existing $__________ Series A Note)) (a) to the Assignee, a new Series A Note in the amount of $_____________, such amount being 50 percent of the Assignee's Commitment 120 Commitment after giving effect to this Agreement ((and the Assignee agrees to cancel and return to the Borrower, with reasonable promptness following such delivery, the Series A Note of the Assignee being replaced thereby)), (b) to the Assignor, if the Assignor has a Commitment after giving effect to this Agreement, a new Series A Note in the amount of $___________, such amount being 50 percent of the Commitment, if any, of the Assignor after giving effect to this Agreement (and the Assignor agrees to cancel and return to the Borrower, with reasonable promptness following delivery of such new Series A Note, the Series A Note of the Assignor being replaced thereby, and if the Assignor has no Commitment after giving effect to this Agreement the Assignor agrees to cancel and return to the Borrower, contemporaneously with the execution of this Agreement, the exiting Series A Note of the Assignor), and (c) to the Administrative Agent, photocopies of all such new Series A Notes and, with reasonable promptness after the receipt by the Borrower of such cancelled Series A Notes, photocopies of all such cancelled Series A Notes; (v) the Borrower, contemporaneously (except as stated below) with the execution and delivery of this Agreement, will deliver, in replacement of the Series B Note of the Assignor currently outstanding ((and in replacement of the Assignee's existing $__________ Series B Note)) (a) to the Assignee, a new Series B Note in the amount of $_____________, such amount being 50 percent of the Assignee's Commitment after giving effect to this Agreement ((and the Assignee agrees to cancel and return to the Borrower, with reasonable promptness following such delivery, the Series B Note of the Assignee being replaced thereby)), (b) to the Assignor, if the Assignor has a Commitment after giving effect to this Agreement, a new Series B Note in the amount of $__________, such amount being 50 percent of the Commitment, if any, of the Assignor after giving effect to this Agreement (and the Assignor agrees to cancel and return to the Borrower, with reasonable promptness following delivery of such new Series B Note, the Series B Note of the Assignor being replaced thereby, and if the Assignor has no Commitment after giving effect to this Agreement the Assignor agrees to cancel and return to the Borrower, contemporaneously with the execution of this Agreement, the exiting Series B Note of the Assignor), and (c) to the Administrative Agent, photocopies of all such new Series B Notes and, with reasonable promptness after the receipt by the Borrower of such cancelled Series B Notes, photocopies of all such cancelled Series B Notes; ((vi) inasmuch as there are currently no outstanding Advances, no transfer of Advances is hereby made;) -2- 121 ((vi) $____________ of the Assignor's outstanding Advances are transferred to the Assignee, which amount represents (the aggregate amount of all of the Assignor's outstanding Advances) (the aggregate amount of the assigned portion of the outstanding Advances of the Assignor, there being assigned to the Assignee a portion of each such Advance with the assigned portion of each such Advance being equal to the amount of such Advance multiplied by a fraction, the numerator of which is the amount of the Assignor's Commitment assumed by the Assignee and the denominator of which is the amount of the Assignor's Commitment immediately prior to such assumption;) (vii) the Assignee confirms that it is a party to the Revolving Credit Agreement as a Bank and agrees that after giving effect to this Agreement its Commitment will be $_________________; and (viii) the Assignor agrees that after giving effect to this Agreement its Commitment will be $__________; (ix) the Assignee (a) represents and warrants that it is legally authorized to enter into this Agreement, (b) confirms that it has received copies of the Revolving Credit Agreement and the Note Purchase Agreements together with copies of the most recent financial statements delivered pursuant to Section 5.01 of each of the Revolving Credit Agreement and the Note Purchase Agreements and such other Loan Documents and other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Agreement, (c) agrees that it will, independently and without reliance upon the Administrative Agent or any other Bank and based upon such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Loan Documents, (d) appoints and authorizes the Administrative Agent to take such action as Administrative Agent on its behalf and to exercise such powers under the Loan Documents as are delegated to the Administrative Agent by the terms thereof, together with such powers as are reasonably incidental thereto(, AND) (e) agrees that it will perform in accordance with their respective terms all of the obligations which by the terms of the Loan Documents are required to be performed by it as a Bank (AND (F) REPRESENTS THAT IT HAS DELIVERED TO THE BORROWER AND THE ADMINISTRATIVE AGENT ALL APPLICABLE PRESCRIBED FORMS);*(and) __________________________________ ( * To be included if Assignee is organized under the laws of a jurisdiction outside the United States.) -3- 122 ((x) the Assignee specifies the following offices as its Applicable Lending Offices and its Address For Notices under the Revolving Credit Agreement:
Domestic CD Lending Eurodollar Lending Office Office Lending Office ------------- ----------- -------------- ____________________ ______________________ __________________________ ____________________ ______________________ __________________________ Attention:__________ Attention:____________ Attention:________________ Telecopy: __________ Telecopy:_____________ Telecopy:_________________ Address For Notices: _____________________ _____________________ _____________________ Attention:___________ Telecopy:____________
; and) (xi) The Assignor and Assignee have caused a counterpart of this Agreement to be delivered to the Administrative Agent, together with the non-refundable assignment fee referred to in Section 8.06 of the Revolving Credit Agreement. 2. Amendments, Etc. This Agreement shall not be amended, waived or otherwise modified except in writing executed by the parties hereto. 3. Governing Law. Pursuant to Section 5-1401 of the New York General Obligations Law, this Agreement shall be governed by, and construed in accordance with, the laws of the State of New York. 4. Definitions. Capitalized terms used herein which are defined in the Revolving Credit Agreement and not defined herein are used herein as defined in the Revolving Credit Agreement. 5. Execution in Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. 6. Effective Date. This Agreement shall be effective as of the date first above written for purposes of computation of facility fees under the Revolving Credit Agreement and for all other relevant purposes. -4- 123 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. CITRUS CORP. (NAME OF ASSIGNEE) ________________________ ________________________ By:_____________________ By:_____________________ Title:__________________ Title:__________________ CREDIT LYONNAIS, NEW YORK (NAME OF ASSIGNOR) BRANCH, as Administrative Agent ________________________ ________________________ By:_____________________ By:_____________________ Title:__________________ Title:__________________ -5- 124 Banks Commitment: $20,000,000 SHAWMUT BANK, N.A. By: /s/ Philip A. Messina ----------------------- Name: Philip A. Messina Title: Vice President Address: Resources & Utilities Group One Federal Street Boston, Massachusetts 02211 Telecopy No.: (617) 292-2969 Domestic lending Office ----------------------------- Shawmut Bank, N.A. One Federal Street Boston, Massachusetts 02211 CD Lending Office ----------------------------- Shawmut Bank, N.A. One Federal Street Boston, Massachusetts 02211 Eurodollar Lending Office ----------------------------- Shawmut Bank, N.A. One Federal Street Boston, Massachusetts 02211 -6- 125 Banks ------ Commitment: $15,000,000 SOCIETE GENERALE, SOUTHWEST AGENCY By: /s/ Mark A. Cox ----------------- Name: Mark A. Cox Title: Vice President Address: 2001 Ross Avenue, Suite 4800 Dallas, Texas 75201 Telecopy No.: (214) 979-1104 Domestic Lending Office ----------------------- Societe Generale, Southwest Agency Trammel Crow Center 2001 Ross Avenue, Suite 4800 Dallas, Texas 75201 CD Lending Office ----------------- Societe Generale, Southwest Agency Trammel Crow Center 2001 Ross Avenue, Suite 4800 Dallas, Texas 75201 Eurodollar Lending Office ------------------------- Societe Generale, Southwest Agency Trammel Crow Center 2001 Ross Avenue, Suite 4800 Dallas, Texas 75201 -7- 126 Banks ----- Commitment: $10,000,000 THE SUMITOMO BANK, LIMITED HOUSTON AGENCY By: /s/ H. Kobayashi ----------------- Name: H. Kobayashi Title: Joint General Manager Address: NationsBank Center, Suite 1750 700 Louisiana Street Houston, Texas 77002 Telecopy No.: (713) 759-0020 Domestic Lending Office ----------------------- The Sumitomo Bank, Limited Houston Agency NationsBank Center, Suite 1750 700 Louisiana Street Houston, Texas 77002 Eurodollar Lending Office ------------------------- The Sumitomo Bank, Limited Houston Agency NationsBank Center, Suite 1750 700 Louisiana Street Houston, Texas 77002 -8- 127 Banks ----- Commitment: $40,000,000 TORONTO DOMINION (TEXAS), INC. By: /s/ Kathy Lynn ---------------- Name: Kathy Lynn Title: Director Address: 909 Fannin Street, 17th Floor Houston, Texas 77010 Telecopy No.: (713) 951-9921 With a copy to: The Toronto-Dominion Bank 31 W. 52nd Street New York, New York 10019-6101 Attn: Director Utilities & Project Finance Telecopy No.: (212) 262-1929 Domestic Lending Office ----------------------- The Toronto-Dominion Bank 909 Fannin Street, 17th Floor Houston, Texas 77010 CD Lending Office ----------------- The Toronto-Dominion Bank 909 Fannin Street, 17th Floor Houston, Texas 77010 Eurodollar Lending Office ------------------------- The Toronto-Dominion Bank 909 Fannin Street, 17th Floor Houston, Texas 77010 -9- 128 Banks ----- Commitment: $15,000,000 TRUST COMPANY BANK By:/s/ James O. Clarke, III ------------------------ Name: James O. Clarke, III Title: Group Vice President By: /s/ William J. Bartlett ---------------------------- Name: William J. Bartlett Title: Banking Officer Address: Trust Company Bank P. O. Box 4418 Atlanta, Georgia 30302 Telecopy No.: (404) 588-8833 Domestic Lending Office ----------------------- Trust Company Bank Center 120 25 Park Place, N.E. Atlanta, Georgia 30303 CD Lending Office ----------------------- Trust Company Bank Center 120 25 Park Place, N.E. Atlanta, Georgia 30303 Eurodollar Lending Office ------------------------- Trust Company Bank Center 120 25 Park Place, N.E. Atlanta, Georgia 30303 -10- 129 Banks ----- Commitment: $10,000,000 WESTDEUTSCHE LANDESBANK GIROZENTRALE, NEW YORK AND CAYMAN ISLANDS BRANCHES By: /s/ Richard Pearse -------------------- Name: Richard Pearse Title: Manager-Director, Credit By: /s/ Stephen Frey ------------------ Name: S.Frey Title: Vice President Address: 1211 Avenue of the Americas New York, New York 10036 Attn: Richard Newman Telecopy No.: (212) 852-6307 Domestic Lending Office ----------------------- Westdeutsche Landesbank Girozentrale, New York Branch 1211 Avenue of the Americas New York, New York 10036 Attn: Cheryl Wilson Telecopy No.: (212) 852-6300 CD Lending Office ----------------- Westdeutsche Landesbank Girozentrale, New York Branch 1211 Avenue of the Americas New York, New York 10036 Attn: Cheryl Wilson Telecopy No.: (212) 852-6300 Eurodollar Lending Office ------------------------- Westdeutsche Landesbank Girozentrale, Cayman Islands Branch 1211 Avenue of the Americas New York, New York 10036 Attn: Cheryl Wilson Telecopy No.: (212) 852-6300 -11- EX-11.(1) 11 SONAT COMPUTATION OF EARNINGS 1 Exhibit 11-(1) SONAT INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE
Years Ended December 31, -------------------------------------- 1993 1992 1991 ---- ---- ---- (In Thousands Except Per-Share Amounts) Primary Earnings Per Share (1) -------------------------- Earnings: - -------- Income from Continuing Operations before Extraordinary Item $265,069 $100,962 $ 77,881 Income (Loss) from Discontinued Operations - 111,447 (11,893) Extraordinary Loss (3,829) - - -------- -------- -------- Net Income $261,240 $212,409 $ 65,988 ======== ======== ======== Common Stock and Common Stock Equivalents: - ----------------------------------------- Weighted Average Number of Shares of Common Stock Outstanding 86,703 85,945 85,771 Common Stock Equivalents Applicable to Outstanding Stock Options 994 414 454 -------- -------- -------- Weighted Average Number of Shares of Common Stock and Common Stock Equivalents Outstanding 87,697 86,359 86,225 ======== ======== ======== Primary Earnings Per Share: - -------------------------- Income from Continuing Operations before Extraordinary Item $ 3.02 $ 1.17 $ .90 Income (Loss) from Discontinued Operations - 1.29 (.13) Extraordinary Loss (.04) - - -------- -------- -------- $ 2.98 $ 2.46 $ .77 ======== ======== ========
(1) This calculation is submitted in accordance with Regulation S-K Item 601(b)(11) although not required by Footnote 2 to Paragraph 14 of APB Opinion No. 15 because it results in dilution of less than 3%. For this reason, the primary earnings per share amounts shown above do not agree with earnings per share shown on the Consolidated Statements of Income in Part II. EX-12.(1) 12 SONAT SUBSIDIARIES OF SONAT, INC. 1 EXHIBIT 21-(1) SUBSIDIARIES OF SONAT INC. AS OF JANUARY 1, 1994
Percent of Country of Voting Organization Securities or, if United Owned by States, State Immediate Name of Company of Organization Parent - --------------- --------------- ------------ SONAT INC.: CITRUS CORP. (a) Delaware 50% Florida Gas Transmission Company Delaware 100% Citrus Industrial Sales Company, Inc. Delaware 100% Citrus Energy Services, Inc. Delaware 100% (formerly Citrus Interstate Pipeline Company) Citrus Marketing Inc. Florida 100% Citrus Trading Corp. Delaware 100% SENECA G.P. INC. Delaware 100% SNT REALTY INC. (b) Alabama 100% SONAT ENERGY SERVICES COMPANY Delaware 100% Sonat Marketing Company Delaware 100% JV Trading Inc. (c) Delaware 100% Sonat Gathering Company Delaware 100% Sonat Intrastate-Alabama Inc. Alabama 100% Sonat Power Inc. (d) Delaware 100% Sonat Ventures Inc. (e)(f) Delaware 100% Sonat NGV Technology Inc. (g) Delaware 100%
______________________________ Indentations indicate subsidiaries of subsidiaries 2
Percent of Country of Voting Organization Securities or, if United Owned by States, State Immediate Name of Company of Organization Parent - --------------- --------------- ------------ SONAT EXPLORATION COMPANY Delaware 100% Crosstex Pipeline, Inc. Texas 100% Field Gas Gathering Inc. Delaware 100% Sonat Coal Gas Inc. (h) 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 INTEROCEAN (TEXAS) INC. Texas 100% SONAT SERVICES INC. Alabama 100% Sonat Services (D.C.) Inc. Delaware 100% SOUTHERN NATURAL GAS COMPANY Delaware 100% Peninsula Pipeline Company Delaware 100% South Georgia Natural Gas Company Delaware 100% Southern Deepwater Pipeline Company Delaware 100% Sea Robin Pipeline Company (i) Louisiana 50% Southern Energy Company Delaware 100%
-2- 3
Percent of Country of Voting Organization Securities or, if United Owned by States, State Immediate Name of Company of Organization Parent - --------------- --------------- ------------ (Southern Natural Gas Company - cont'd.) Southern Gas Storage Company Delaware 100% Bear Creek Storage Company (j) Louisiana 50% Bear Creek Capital Corporation Delaware 100% Southern Offshore Pipeline Company Delaware 100% Sea Robin Pipeline Company (i) Louisiana 50%
- 3 - 4 Notes (a) Houston Natural Gas Company, a subsidiary of Enron Corp., owns the remaining 50 percent of Citrus Corp. (b) SNT Realty Inc. has a 50-percent interest in Fifth Avenue Realty Company, an unincorporated joint venture, the remaining 50-percent of which is owned by AmSouth Bank N.A. (c) 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. (d) 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. (e) Sonat Ventures Inc. is a 50-percent participant in Monarch CNG, an Alabama general partnership, the remaining 50-percent interest of which is held by Midtown NGV, Inc., a subsidiary of Energen Corporation. (f) Sonat Ventures Inc. is a 50-percent participant in Florida Natural Fuels, Ltd., a Florida limited partnership, the remaining 50-percent interest of which is held by Suwannee Gas Marketing, Inc., a subsidiary of Lykes Energy, Inc. (g) Sonat NGV Technology Inc. is a 50-percent participant in NGV Southeast Technology Center, the remaining interests of which are held by Georgia Energy Company, a subsidiary of Atlanta Gas Light Company, and Natural Gas Vehicles Development Company Southeast, Inc., a subsidiary of Natural Gas Vehicles Development Company, Inc. (h) Sonat Coal Gas Inc. has a 50-percent interest in Black Warrior Methane Corp. and Black Warrior Transmission Corp., the remaining 50-percent of each being owned by Jim Walter Resources, Inc. (i) Sea Robin Pipeline Company is an unincorporated joint venture in the state of Louisiana. (j) Tennessee Storage Company, a subsidiary of Tenneco Inc., owns the remaining 50-percent interest in Bear Creek Storage Company, an unincorporated joint venture in the state of Louisiana. - 4 - EX-22.(1) 13 SONAT NOTICES OF ANNUAL MEETING 1 EXHIBIT 22-(1) SONAT INC. P. O. BOX 2563, BIRMINGHAM, ALABAMA 35202 TELEPHONE: (205) 325-3800 - -------------------------------------------------------------------------------- NOTICE OF ANNUAL MEETING OF STOCKHOLDERS TO BE HELD APRIL 28, 1994 To Our Stockholders: The Annual Meeting of Stockholders of Sonat Inc., a Delaware corporation, will be held at the AmSouth Upper Lobby Auditorium, AmSouth/Harbert Plaza, Birmingham, Alabama at 9:00 a.m., local time, on Thursday, April 28, 1994, for the following purposes: 1. To elect three Directors as members of the Board of Directors of the Company, to serve until the 1997 Annual Meeting of Stockholders and until their respective successors have been duly elected and qualified. 2. To elect an Auditor of the Company for the ensuing year. The Board of Directors of the Company has recommended Ernst & Young, the present Auditor, for election as Auditor (Proposal No. 1). 3. To approve the Company's Performance Award Plan (Proposal No. 2). 4. To approve each of the following five proposals to amend the Company's Restated Certificate of Incorporation ("Charter"): (a) to increase the number of authorized shares of Common Stock from 200,000,000 shares to 400,000,000 shares (Proposal No. 3); (b) to delete a Charter provision which provides in certain cases for minimum price protection or, alternatively, higher stockholder voting requirements, in connection with certain business combinations (Proposal No. 4); (c) to provide that, subject to certain conditions, the Board of Directors shall call a special meeting of the stockholders at the request of a person that has owned at least 3% of the Company's voting stock for at least six months (Proposal No. 5); (d) to reduce the vote required for stockholders to amend, repeal or adopt By-Laws from 67% of the outstanding shares to 60% (Proposal No. 6); and (e) to reduce the vote required for stockholders to amend, repeal or adopt any provision inconsistent with certain "anti-takeover" provisions of the Charter from 67% of the outstanding shares to 60% (Proposal No. 7). 5. To transact such other business as may properly be brought before the meeting. Only holders of Common Stock of record at the close of business on March 11, 1994, will be entitled to vote at the meeting. The meeting may be adjourned from time to time without other notice than by announcement at the meeting, or any adjournment thereof, and any and all business for which the meeting is hereby noticed may be transacted at any such adjournment. By order of the Board of Directors, /s/ Beverley T. Krannich ------------------------ BEVERLEY T. KRANNICH Secretary Birmingham, Alabama March 16, 1994 - -------------------------------------------------------------------------------- YOUR VOTE IS IMPORTANT PLEASE COMPLETE, SIGN AND RETURN YOUR PROXY IN THE ENCLOSED RETURN ENVELOPE. - -------------------------------------------------------------------------------- 2 PROXY STATEMENT FOR ANNUAL MEETING OF STOCKHOLDERS APRIL 28, 1994 This Proxy Statement is furnished in connection with the solicitation of proxies by Sonat Inc. on behalf of the Board of Directors of the Company, to be voted at the Annual Meeting of Stockholders, called to be held on Thursday, April 28, 1994 at 9:00 a.m. at the AmSouth Upper Lobby Auditorium, AmSouth/Harbert Plaza, Birmingham, Alabama. Mailing of the Proxy Statement and the accompanying proxy card to the stockholders is expected to commence on or about March 21, 1994. VOTING SECURITIES As of January 31, 1994, the Company had outstanding 87,172,087 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 11, 1994, as the record date for the determination of stockholders entitled to notice of, and to vote at, the Annual Meeting. All references in this Proxy Statement to shares of the Company's Common Stock reflect the two-for-one split of the Common Stock which became effective on September 14, 1993. THE PROXY If a proxy is executed properly by a stockholder and is not revoked, it will be voted at the Annual Meeting in the manner specified on the proxy, or if no manner is specified, it will be voted "FOR" the election of the three nominees for Director and "FOR" Proposal No. 1, 2, 3, 4, 5, 6 and 7. 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). Three Class II Directors are to be elected at the Annual Meeting of Stockholders to serve for a three-year term and until the election and qualification of their respective successors in office. The three nominees for election as Class II Directors are Jerome J. Richardson, James B. Williams and Joe B. Wyatt. Each of the nominees has been previously elected as a Director by the stockholders. In the event that any of the nominees becomes unavailable for any reason, which is not anticipated, the Board of Directors in its discretion may, unless it has taken appropriate action to provide for a lesser number of Directors, designate a substitute nominee, in which event, pursuant to the accompanying proxy, votes will be cast for such substitute nominee. THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" JEROME J. RICHARDSON, JAMES B. WILLIAMS AND JOE B. WYATT AS CLASS II DIRECTORS. 3 NOMINEES FOR DIRECTOR -- CLASS II -- TERMS TO EXPIRE 1997 - ----------------------- JEROME J. RICHARDSON, age 57, is Chairman of the Board and Chief Executive Officer of Flagstar Companies, Inc. and Flagstar Corporation (a wholly-owned subsidiary of Flagstar Companies, Inc.), the principal business of which is food services. He has served as a Director of the Company since 1991. Mr. Richardson is also a Director of NCAA Foundation and Isotechnologies, Inc., General [Picture] Partner of Richardson Sports (NFL Carolina Panthers), a trustee of Saint Mary's College and Wofford College, and a Member of the Board of Visitors of Duke University Medical Center. During the past five years, Mr. Richardson has served as an executive officer of Flagstar Companies, Inc. and Flagstar Corporation. - ----------------------- - --------------------------------------------------------------------------------------------------- - ----------------------- JAMES B. WILLIAMS, age 60, is Chairman of the Board and Chief Executive Officer of SunTrust Banks, Inc. He has served as a Director of the Company since 1987. Mr. Williams is also a Director of The Coca-Cola Company, Federal Reserve Bank of Atlanta, Genuine [Picture] Parts Company, Georgia-Pacific Corporation, Rollins, Inc. and RPC Energy Services, Inc. During the past five years, Mr. Williams has served as an executive officer of SunTrust Banks, Inc. and certain of its subsidiaries. - ----------------------- - --------------------------------------------------------------------------------------------------- - ----------------------- JOE B. WYATT, age 58, is Chancellor, Chief Executive Officer and Trustee of Vanderbilt University, a position he has held during the past five years. He has served as a Director of the Company since [Picture] 1984. Chancellor Wyatt is also a Director of Advanced Network & Services, Inc., Ingram Industries, Inc., Reynolds Metals Company and University Research Association, and a Trustee of EDUCOM, Inc. - ----------------------- - ---------------------------------------------------------------------------------------------------
2 4 CONTINUING DIRECTORS -- CLASS I -- TERMS EXPIRING 1996 - ----------------------- WILLIAM O. BOURKE, age 66, is Chairman of the Executive Committee of the Board of Directors and a Director of Reynolds Metals Company, an aluminum and consumer products company. He has served as a Director [Picture] of the Company since 1990. Mr. Bourke is also a Director of Merrill Lynch & Co., Inc. and Premark International Inc. During the past five years prior to his retirement in April 1992, Mr. Bourke served as an executive officer of Reynolds Metals Company. - ----------------------- - --------------------------------------------------------------------------------------------------- - ----------------------- ROBERTO C. GOIZUETA, age 62, is Chairman of the Board and Chief Executive Officer of The Coca-Cola Company, the principal business of which is the manufacture of soft drinks. He has served as a Director of the Company since 1981. Mr. Goizueta is also a Director [Picture] of Eastman Kodak Company, Ford Motor Company, SunTrust Banks, Inc., Trust Company of Georgia and Trust Company Bank of Georgia, and a member of the Board of Trustees of Emory University. During the past five years, Mr. Goizueta has served as an executive officer of The Coca-Cola Company. - ----------------------- - --------------------------------------------------------------------------------------------------- - ----------------------- RONALD L. KUEHN, JR., age 58, is Chairman of the Board, President and Chief Executive Officer of the Company. He has served as a Director of the Company since 1981. Mr. Kuehn is also a Director of [Picture] AmSouth Bancorporation, Praxair, Inc., Protective Life Corporation, Sonat Offshore Drilling Inc. and Union Carbide Corporation, and a member of the Board of Trustees of Birmingham-Southern College and Tuskegee University. During the past five years, Mr. Kuehn has served as an executive officer of the Company. - ----------------------- - ---------------------------------------------------------------------------------------------------
3 5 - ----------------------- ROBERT J. LANIGAN, age 65, is Chairman Emeritus of the Board of Directors of Owens-Illinois, Inc., the principal business of which is the manufacture and sale of packaging products. He has served as [Picture] a Director of the Company since 1983. Mr. Lanigan is also a Director of Chrysler Corporation, Sonat Offshore Drilling Inc. and The Dun & Bradstreet Corporation. During the past five years prior to his appointment to his current position, Mr. Lanigan served as an executive officer of Owens-Illinois, Inc. - ----------------------- - --------------------------------------------------------------------------------------------------- - ----------------------- CHARLES MARSHALL, age 64, is the former Vice Chairman of the Board of American Telephone and Telegraph Company. He has served as a Director of the Company since 1982. Mr. Marshall is also a Director [Picture] of Ceridian Corporation, GATX Corporation, Grumman Corporation, Hartmarx Corporation, Sundstrand Corporation and Zenith Electronics Corporation. During the past five years prior to his retirement in June 1989, Mr. Marshall served as an executive officer of American Telephone and Telegraph Company. - ----------------------- CONTINUING DIRECTORS -- CLASS III -- TERMS EXPIRING 1995 - ----------------------- JOHN J. CREEDON, age 69, is the former President and Chief Executive Officer of Metropolitan Life Insurance Company. He has served as a Director of the Company since 1987. Mr. Creedon is also a Director of Melville Corporation, Metropolitan Life Insurance Company, NYNEX [Picture] Corporation, Praxair, Inc., Rockwell International Corporation and Union Carbide Corporation. During the past five years, Mr. Creedon served as Chief Executive Officer and as Chairman of the Executive Committee of the Board of Directors of Metropolitan Life Insurance Company. - ----------------------- - ---------------------------------------------------------------------------------------------------
4 6 - ----------------------- BENJAMIN F. PAYTON, age 61, is President of Tuskegee University, a position he has held during the past five years. He has served as a [Picture] Director of the Company since 1992. Dr. Payton is also a Director of AmSouth Bancorporation, ITT Corporation, Liberty Corporation, Morrison's, Inc., Praxair, Inc. and The Sheraton Corporation. - ----------------------- - --------------------------------------------------------------------------------------------------- - ----------------------- JOHN J. PHELAN, JR., age 62, is the former Chairman of the Board and Chief Executive Officer of the New York Stock Exchange. He has served as a Director of the Company since 1990. Mr. Phelan is also a [Picture] Director of Avon Products, Inc., Eastman Kodak Company, Merrill Lynch & Co., Inc. and Metropolitan Life Insurance Company. During the past five years prior to his retirement in December 1990, Mr. Phelan served as Chairman of the Board and Chief Executive Officer of the New York Stock Exchange. - ----------------------- - --------------------------------------------------------------------------------------------------- - ----------------------- L. EDWIN SMART, age 70, serves as counsel to the law firm of Hughes Hubbard & Reed. He has served as a Director of the Company (or its predecessor, Southern Natural Gas Company, now a wholly-owned subsidiary of the Company) since 1967. Mr. Smart is also a Director [Picture] of The Continental Corporation, Flagstar Companies, Inc. and Flagstar Corporation. Prior to his retirement in April 1987, Mr. Smart served as an executive officer of Flagstar Corporation (and its predecessor, Transworld Corporation), Trans World Airlines, Inc. and Hilton International Co. - ----------------------- - ---------------------------------------------------------------------------------------------------
Henry R. Linden, who is currently a Class II Director, will retire from the Board of Directors on April 28, 1994, in accordance with the Board's retirement policy. BOARD MEETINGS AND COMMITTEES During 1993 the Board of Directors held eleven regular and special meetings. The Board has standing Audit, Employee Benefits, Executive Compensation, Finance, Nominating and Board Structure, Public Affairs, and Strategic Planning Committees which assist the Board in the discharge of its responsibilities. Each Director attended at least 75% of the meetings of the Board and the Committees on which he served, except Dr. Payton. 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 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 Mr. Creedon, Chairman, and Messrs. Goizueta, Linden, Phelan and Wyatt. The Committee met three times during 1993. Employee Benefits Committee. The Employee Benefits Committee periodically reviews the status of the Company's employee benefit programs and the performance of the managers of the funded programs. To assist in its review, the Committee meets periodically with the chairmen of the administrative and benefit asset committees of each of the funded plans. The current members of the Committee are Dr. Linden, Chairman, and Messrs. Marshall, Payton, Williams and Wyatt. The Committee met four times during 1993. Executive Compensation Committee. The Executive Compensation Committee reviews and approves the compensation of the officers of the Company and makes awards under the Executive Award Plan and the Performance Award and Cash Bonus Plan. The current members of the Committee are Mr. Goizueta, Chairman, and Messrs. Lanigan, Linden, Smart and Wyatt. The Committee met seven times during 1993. Finance Committee. The Finance Committee approves long-term financial policies and annual financial plans, significant capital expenditures, insurance programs and investment policies of the Company. It also makes recommendations to the Board concerning dividend policy, the issuance and terms of debt and equity securities and the establishment of bank lines of credit. The current members of the Committee are Mr. Williams, Chairman, and Messrs. Creedon, Lanigan, Richardson and Smart. The Committee met three times during 1993. Nominating and Board Structure Committee. The Nominating and Board Structure Committee makes recommendations to the Board with respect to the size and composition of the Board and Board retirement and tenure policies. It also reviews the qualifications of potential candidates for the Board of Directors, evaluates the performance of incumbent Directors and recommends to the Board nominees to be elected at the Annual Meeting of Stockholders. The current members of the Committee are Mr. Marshall, Chairman, and Messrs. Bourke, Payton, Phelan, Richardson and Williams. The Committee met three times during 1993. The Nominating and Board Structure Committee will consider nominees for Director recommended by stockholders. Such recommendations should be submitted in writing, accompanied by a resume of the nominee's qualifications and business experience and a signed statement of the proposed candidate consenting to be named as a candidate and, if nominated and elected, to serve as a Director, and addressed to the offices of the Company to the attention of Beverley T. Krannich, Secretary. 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, in coordination with the Nominating and Board Structure Committee, considers stockholder proposals and matters of corporate governance. The current members of the Committee are Mr. Smart, Chairman, and Messrs. Bourke, Creedon, Marshall and Phelan. The Committee met three times during 1993. Strategic Planning Committee. The Strategic Planning Committee assists in the formulation of the business strategies of the Company and its subsidiaries. The current members of the Committee are 6 8 Mr. Lanigan, Chairman, and Messrs. Bourke, Creedon, Goizueta, Linden, Marshall, Payton, Phelan, Richardson, Smart, Williams and Wyatt. The Committee met three times during 1993. COMPENSATION OF OUTSIDE DIRECTORS FEES AND RETAINERS. Each non-employee Director of the Company receives a quarterly retainer of $7,500 ($8,750 for Committee Chairmen) and a fee of $1,000 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 his fees and retainer. All amounts deferred are credited to the Director's account under the Plan, and interest is credited to the account quarterly. The Director may choose to have the balance in his account distributed to him in a lump sum or in annual installments, commencing upon termination of service as a Director or, at his election, attainment of a specified age. 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 either in a series of quarterly payments equal to the retainer (as of the date of the Director's retirement) for the period the Director served as a non-employee Director of the Company (or its predecessor, Southern Natural Gas Company) or in a cash lump-sum payment that equals the present value of such series of payments. 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 was granted 2,000 shares of restricted stock in 1993, except that each Director who is scheduled to retire from the Board under the Board's retirement policy prior to April 1, 1998 (the Plan's termination date) was granted 400 shares of restricted stock for each remaining year of service as a Director. The Plan provides that 400 shares granted to each Director will vest on April 1 of each of the years 1994 through 1998. Each person who first becomes a non-employee Director after April 22, 1993 (the effective date of the Plan, as amended and restated) will be granted 33.33 shares of restricted stock for each calendar month or fraction thereof from the Director's election as a non-employee Director to the following March 31 (rounded to the nearest whole share), plus 400 shares for each subsequent Plan Year (April 1 -- March 31) until the earlier of April 1, 1998 or the Director's scheduled retirement date. The product of 33.33 shares times the number of full and partial calendar months from the Director's election as a non-employee Director to the following March 31 (rounded to the nearest whole share) will vest on the April 1 following such election, and 400 shares will vest on each April 1 thereafter through April 1, 1998. All shares of restricted stock will vest immediately upon the Director's death or disability. At the time his 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 his shares of restricted stock have vested, the unvested shares will be forfeited. 7 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, 1994.
AMOUNT AND NATURE OF NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP (1) ----------------------------------------------------------- ------------------------ Thomas W. Barker, Jr. ..................................... 39,079(2) William O. Bourke.......................................... 5,000(3) John J. Creedon............................................ 13,700(4) Roberto C. Goizueta........................................ 3,600 John D. Johns.............................................. 2,817 Ronald L. Kuehn, Jr. ...................................... 593,588(2 and 5) Robert J. Lanigan.......................................... 6,040(6) Henry R. Linden............................................ 6,568(7) Charles Marshall........................................... 7,600 James E. Moylan, Jr. ...................................... 42,121(2) William C. O'Malley........................................ 155,157(2) Benjamin F. Payton......................................... 2,373 John J. Phelan, Jr. ....................................... 2,660 Jerome J. Richardson....................................... 4,280 Donald G. Russell.......................................... 137,872(2) L. Edwin Smart............................................. 3,600 William A. Smith........................................... 187,056(2) James B. Williams.......................................... 15,200 Joe B. Wyatt............................................... 3,200 All Present Directors and Executive Officers as a Group (18 persons)............................................. 1,124,609(8)
NOTE 1: Each Director and executive officer has sole voting power and sole investment power with respect to all shares beneficially owned by him, unless otherwise indicated. As of January 31, 1994, each such individual beneficially owned less than 0.70% of the outstanding shares of Common Stock of the Company, and all present Directors and executive officers of the Company as a group, consisting of 18 persons, beneficially owned 1.29% of the outstanding shares of the Company's Common Stock. The number of shares shown includes 2,000 shares of restricted stock for each of Messrs. Bourke, Goizueta, Lanigan, Marshall, Payton, Phelan, Richardson, Williams and Wyatt, 1,600 shares of restricted stock for Mr. Creedon, 1,200 shares of restricted stock for Mr. Smart, and 400 shares of restricted stock for Dr. Linden, granted under the Company's Restricted Stock Plan for Directors, which shares had not vested as of January 31, 1994. 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. NOTE 2: The number of shares shown for Messrs. Barker, Kuehn, Moylan, O'Malley, Russell and Smith includes 3,568 shares, 73,400 shares, 4,368 shares, 26,534 shares, 18,534 shares and 12,534 shares, respectively, of restricted stock granted under the Company's Executive Award Plan, which shares had not vested as of January 31, 1994. 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. Barker, Kuehn, Moylan, O'Malley, Russell and Smith also includes (a) 7,334 shares, 41,078 shares, 8,106 shares, 20,605 shares, 7,969 shares and 13,818 shares, respectively, held by the Trustee under the Company's Savings Plan (or, with respect to Mr. O'Malley, the Sonat Offshore Drilling Savings Plan) as of January 31, 1994; and (b) 27,000 shares, 456,266 shares, 27,000 shares, 102,666 shares, 8 10 107,332 shares and 152,332 shares, respectively, covered by options under the Company's Executive Award Plan which were exercisable, but had not been exercised, as of January 31, 1994. NOTE 3: Mr. Bourke filed a late report to the Securities and Exchange Commission with respect to one transaction in the Company's Common Stock. NOTE 4: The number of shares shown for Mr. Creedon includes 3,200 shares held in trusts for two of his children, of which shares he disclaims any beneficial ownership. NOTE 5: The number of shares shown for Mr. Kuehn includes 6,000 shares owned by his wife and 1,500 shares held in trust for one of his children, of which shares he disclaims any beneficial ownership. NOTE 6: Mr. Lanigan filed a late report to the Securities and Exchange Commission with respect to four transactions in the Company's Common Stock. NOTE 7: The number of shares shown for Dr. Linden includes 6,168 shares owned jointly with his wife. NOTE 8: The number of shares shown includes 115,804 shares of restricted stock granted under the Company's Executive Award Plan, which shares had not vested as of January 31, 1994; 86,065 shares held by the Trustee under the Company's Savings Plan as of January 31, 1994; 808,262 shares covered by options under the Company's Executive Award Plan which were exercisable, but had not been exercised, as of January 31, 1994; and 21,200 shares of restricted stock granted under the Company's Restricted Stock Plan for Directors, which shares had not vested as of January 31, 1994. CERTAIN BUSINESS RELATIONSHIPS AND TRANSACTIONS James B. Williams, a Director of the Company, is Chairman and Chief Executive Officer of SunTrust Banks, Inc. Trust Company Bank, a subsidiary of SunTrust Banks, Inc. ("Trust Company"), has extended a line of credit to the Company permitting the short-term borrowing of $25,000,000. During 1993, there were periodic borrowings and repayments under this line of credit and, at December 31, 1993, there was no principal amount outstanding thereunder. In addition, the Company and one of its wholly-owned subsidiaries were permitted to borrow an aggregate of $40,120,000 pursuant to long-term loan agreements, and were indebted to Trust Company in the principal amount thereunder of an aggregate of $11,120,000 at December 31, 1993. A subsidiary of Trust Company also serves as investment manager for trusts that fund the Company's retirement, disability and retiree medical benefits programs. L. Edwin Smart, a Director of the Company, serves as counsel to the law firm of Hughes Hubbard & Reed. Hughes Hubbard & Reed provides legal services to the Company and certain of its subsidiaries. COMPENSATION OF EXECUTIVE OFFICERS REPORT OF THE EXECUTIVE COMPENSATION COMMITTEE The Executive Compensation Committee of the Board of Directors of the Company, which is composed solely of non-employee Directors, administers the Company's executive compensation program. The Committee's primary responsibility is to ensure that the executive compensation program furthers the interests of the Company and its stockholders. The Company's executive compensation program has three principal objectives: (1) to attract and retain a highly qualified and motivated management team; (2) to appropriately reward individual 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 9 11 peer group used for determining compensation for corporate executives consists of 19 publicly held companies in the Company's key business segments and investments -- natural gas transmission and sales, domestic oil and gas exploration and production, and offshore drilling (the "Corporate Peer Group"). The aggregate asset mix of the companies included in the Corporate Peer Group approximates the Company's asset mix. In comparing the level of the Company's compensation to that of the companies in the Corporate Peer Group, the Committee reviews an analysis which "size-adjusts" the compensation paid by a company to take into account the relative size of the company as measured by its revenues. The recommended size-adjustment is computed by an independent compensation consulting firm. The Committee also reviews and may give greater weight to compensation survey data specific to a particular business segment when considering the compensation of executive officers whose job is related primarily to a single business segment. The Standard & Poor's Natural Gas Distribution/Pipeline Group described in the five-year total stockholder return comparison on page 18 of this Proxy Statement is not used to determine the compensation of executives, because that group's aggregate asset mix does not include an appropriate weighting for exploration and production and offshore drilling. The key components of the Company's executive compensation program are base salary, annual cash bonus incentives, and long-term stock incentives. The Committee's policies with respect to each component of the program, including the bases for the compensation of Mr. Kuehn, Chairman of the Board, President and Chief Executive Officer of the Company, are described below. The Committee consults with Mr. Kuehn in reviewing the individual performance and compensation of key executives of the Company (other than Mr. Kuehn). The Committee reviews Mr. Kuehn's performance and compensation in executive session at least annually. BASE SALARIES. Base salaries are initially established by an evaluation of the executive's position, responsibilities and experience and a review of salary surveys. Each year the Committee reviews the base salaries of key executive officers of the Company and its subsidiaries and determines whether salaries should be adjusted, based primarily on the executive's individual performance and experience and salary survey information. In general, the Committee's objective is to maintain executive salaries at the median of the salaries for comparable executives in the Corporate Peer Group or other relevant peer group. Executive salaries for 1993 were at the median level overall, although some executives were below and some above the median. Taking into consideration Mr. Kuehn's individual performance and experience and the salary survey data, Mr. Kuehn's base salary was increased 7%, effective April 1, 1993. Mr. Kuehn has been in his current position for approximately 9 1/2 years and his salary for 1993 was slightly above the size-adjusted median for the Corporate Peer Group. ANNUAL CASH BONUS INCENTIVES. Annual cash bonus incentive opportunities are awarded each year. The amount of an executive's bonus opportunity (which is expressed as a percentage of base salary) is dependent primarily upon such individual's position and responsibilities and bonus opportunities provided to comparable positions within the Corporate Peer Group or other relevant peer group. At the beginning of each year, the Committee reviews and approves annual performance goals. Shortly after the end of the year, the Committee determines the appropriate bonus payout levels based on the degree to which these goals have been achieved. The annual incentive program is designed to pay total annual cash compensation in the upper quartile of the relevant peer group when the Company meets substantially all of the goals established for an executive's bonus opportunity. Similarly, when the goals are not achieved, the program is intended to result in total annual cash compensation below the median of the relevant peer group. The payout of an executive's 1993 bonus opportunity was based on the level of achievement of certain financial goals, corporate and subsidiary goals, and individual goals, as described below. The goals for each executive's bonus opportunity were weighted as follows: financial goals -- 40% for Mr. Kuehn and 30% for the other named executive officers; company and subsidiary goals -- 45% for Mr. Kuehn and 55% for the other named executive officers; and individual goals -- 15% for all executives. 10 12 The financial goals included in the 1993 bonus opportunities were the Company's 1993 earnings per share ("EPS") as compared to the Company's budgeted EPS, and the Company's five-year average cash flow return on assets as compared to that of the Corporate Peer Group. In general, these goals were weighted equally. Payout of the EPS goal was based on minimum, target and maximum levels of achievement. The payout of the cash flow return on assets goal was based on the Company's absolute ranking within the Corporate Peer Group and its performance against the mean of the Corporate Peer Group. The company and subsidiary goals included in the 1993 bonus opportunities included operating, marketing and strategic goals relating to each major business segment, and annual corporate goals relating to safety and the environment, human resources and customer-focus programs, and corporate citizenship. Subsidiary goals also included financial goals with respect to earnings and cash flow. When appropriate, an executive's goals focused on the company for which he was primarily employed. Achievement of many of the goals was determined by quantitative or objective measures, while other goals were subjective in nature. Each executive's 1993 bonus opportunity included individual goals. Mr. Kuehn's individual performance is based primarily on the Company's achievement of its financial and business goals. The Committee also has discretion to make additional cash bonus awards to recognize exceptional individual performance. In January 1994, the Committee reviewed in detail the extent to which the 1993 performance goals had been achieved. The Company's EPS was significantly above the budgeted EPS, and cash flow return on assets was in the upper quartile of the Corporate Peer Group and significantly above the mean for the Corporate Peer Group. The payout percentage for these financial goals was 120% of the bonus opportunity for the EPS goal and 91% of the bonus opportunity for the cash flow return on assets goal. The Company and its subsidiaries also substantially achieved the key company and subsidiary goals, including oil and gas production and reserve replacement goals, pipeline restructuring goals, oil and gas marketing goals, safety and environmental goals, and subsidiary earnings goals. In June 1993, the Company also completed a very successful sale of approximately 60% of the common stock of Sonat Offshore Drilling Inc. ("Sonat Offshore"), the Company's offshore drilling subsidiary. The payout percentages for Company and subsidiary goals ranged from 75% to 100% of the bonus opportunity for these goals. Mr. Kuehn's total bonus payout percentage for 1993 was 105% of his bonus opportunity. In connection with the sale of Sonat Offshore's common stock, William C. O'Malley, Chairman and Chief Executive Officer of Sonat Offshore, resigned as an officer and Director of the Company. In June 1993, the Committee awarded Mr. O'Malley a cash bonus equal to and in lieu of the full amount of his 1993 bonus opportunity, in recognition of his significant contribution to the completion of the sale. LONG-TERM STOCK INCENTIVES. The long-term stock incentives component of the Company's executive compensation program is designed to align executive and stockholder interests by rewarding executives for the attainment of stock price appreciation and total stockholder returns. As a general rule, the Committee administers the long-term stock incentive program through annual grants of stock options and restricted stock to certain executive officers of the Company and its major operating subsidiaries. Awards under the annual grant program were made in December 1993. In addition, the Committee may make special awards to individual executives during the year on a discretionary basis. In 1993, the number of stock options and restricted shares granted to each executive officer as part of the annual grant program was determined primarily by individual position and responsibilities, compensation survey data of the Company's Corporate Peer Group, and the Company's three-year total stockholder return (considering stock price appreciation and reinvestment of dividends) as compared to the total stockholder return of the Corporate Peer Group. The amount of an executive's annual long-term incentive grant was expressed as a percentage of base salary. The percentage used for each executive 11 13 was tied to the Company's total stockholder return as compared to that of the Corporate Peer Group. In 1993, the Company's three-year total stockholder return ranked in the upper quartile of the Corporate Peer Group, and the December 1993 long-term incentive grants were designed to result in long-term compensation at that level. For purposes of determining the value of long-term incentive compensation, an independent compensation consulting firm uses a modified Black-Scholes option pricing model to value stock options granted by the Company and the companies in the Corporate Peer Group. Similarly, the consulting firm values restricted share grants based on the present value of the shares on the date of grant (taking into account the vesting schedules of the grants and projected executive turnover). The Committee may adjust the grants to take into account individual performance and the number of options and restricted shares previously granted to the executive. In December 1993, Mr. Kuehn was awarded stock options and restricted stock as a part of the annual program. As discussed above, the amount of this award was intended to reward and compensate Mr. Kuehn for the excellent performance of the Company's stock as compared to the Corporate Peer Group and to result in long-term compensation in the upper quartile of the Corporate Peer Group. In connection with the sale of Sonat Offshore's common stock in June 1993, the Committee amended the stock options and restricted stock previously awarded to Mr. O'Malley to provide that service by Mr. O'Malley with Sonat Offshore following the sale will count as service for purposes of satisfying the vesting requirements for the options and restricted shares. In addition, Mr. O'Malley may exercise any of his vested options during the remainder of the original option terms. Mr. O'Malley is no longer eligible for stock awards under the Company's Executive Award Plan. STOCK OWNERSHIP GUIDELINES. In 1992 the Committee established guidelines designed to encourage key executives of the Company and its subsidiaries to attain specified levels of stock ownership over a five-year period. Stock ownership goals are based on the value of the Company's stock, and are expressed as a multiple of the executive's base salary. The Committee periodically reviews the guidelines and the executives' progress toward attaining the stock ownership goals. POLICY WITH RESPECT TO SECTION 162(m). Section 162(m) of the Internal Revenue Code, which was enacted in August 1993, limits the tax deduction that the Company or its subsidiaries can take with respect to the compensation of certain executive officers, unless the compensation is "performance based." The Committee expects that all income recognized by executive officers upon the exercise of stock options granted under the Executive Award Plan will qualify as performance based compensation. The portion of the Company's annual cash bonus program that is based on objective financial measures, and the restricted stock grant program, have been modified in an effort to qualify compensation thereunder as performance based. The Committee currently intends to continue to make cash bonus payments that are based on the achievement of subjective, non-quantifiable goals, and that may therefore not qualify as performance based compensation. The Committee believes that these Company, subsidiary and individual goals, while not properly measurable by the kind of quantifiable targets that are required to qualify compensation as performance based, are important to the long-term financial success of the Company and to its stockholders. CONCLUSION. The Committee believes that the executive compensation philosophy that it has adopted effectively serves the interests of the stockholders and the Company. It is the Committee's intention that the pay delivered to executives be commensurate with Company performance. Roberto C. Goizueta Robert J. Lanigan Henry R. Linden L. Edwin Smart Joe B. Wyatt 12 14 SUMMARY COMPENSATION TABLE The following table shows, for the fiscal years ending December 31, 1991, 1992 and 1993, 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
LONG TERM COMPENSATION AWARDS ANNUAL COMPENSATION ------------------------------ ---------------------------------- RESTRICTED SECURITIES OTHER ANNUAL STOCK UNDERLYING ALL OTHER NAME AND COMPENSATION AWARDS (2), OPTIONS/SARS COMPENSATION PRINCIPAL POSITION YEAR SALARY BONUS (1) (3) (3) (4) - ----------------------- ----- --------- --------- ------------ ----------- ------------ ------------ Ronald L. Kuehn, Jr., 1993 $ 590,000 $ 504,600 $300,362 $ 420,000 (5) 110,000 $113,528 Director, Chairman of 1992 $ 560,000 $ 455,000 $ 0 $1,071,100 (6 & 7) 91,600 $117,801 the Board, President 1991 $ 560,000 $ 340,000 $ 0 $ 205,538 (8) 112,000 $124,052 and Chief Executive Officer Thomas W. Barker, Jr., 1993 $ 152,675 $ 64,000 $ 58,578 $ 51,000 (5) 13,500 $ 20,353 Vice President -- 1992 $ 145,700 $ 58,700 $ 13,164 $ 29,575 (7) 9,000 $ 18,625 Finance and Treasurer 1991 $ 145,700 $ 45,900 $ 9,519 $ 22,838 (8) 12,000 $ 18,805 John D. Johns, 1993 $ 173,665 $ 91,000 $236,832 $ 0 0 $ 7,601 Vice President and 1992 $ 205,000 $ 95,000 $ 0 $ 229,750 (6 & 7) 15,000 $ 14,955 General Counsel(9) 1991 $ 202,500 $ 90,100 $ 3,656 $ 45,675 (8) 24,600 $ 14,890 James E. Moylan, Jr., 1993 $ 151,875 $ 65,500 $410,888 $ 75,000 (5) 21,000 $ 18,467 Vice President 1992 $ 142,500 $ 59,700 $ 563 $ 29,575 (7) 9,000 $ 16,589 and Controller 1991 $ 142,500 $ 46,500 $ 7,499 $ 22,838 (8) 12,000 $ 16,662 William C. O'Malley, 1993 $ 134,250 $ 216,500 $236,810 $ 0 0 $ 11,411 Director and Executive 1992 $ 315,000 $ 185,000 $ 0 $ 480,625 (6 & 7) 32,000 $ 47,456 Vice President(10) 1991 $ 315,000 $ 173,000 $ 0 $ 75,038 (8) 41,000 $ 48,815 Donald G. Russell, 1993 $ 362,500 $ 250,000 $649,292 $ 300,000 (5) 65,000 $102,687 Executive Vice 1992 $ 340,000 $ 218,000 $ 705 $ 147,875 (7) 40,000 $ 70,240 President 1991 $ 340,000 $ 161,100 $ 0 $ 75,038 (8) 41,000 $ 73,920 William A. Smith, 1993 $ 313,500 $ 200,000 $530,865 $ 180,000 (5) 45,000 $ 41,440 Executive Vice 1992 $ 300,000 $ 180,000 $ 1,339 $ 105,625 (7) 32,000 $ 38,271 President 1991 $ 293,917 $ 160,500 $ 0 $ 75,038 (8) 41,000 $ 38,122
NOTE 1: With respect to 1993, represents the amount of tax-offset "supplemental payments" paid upon the exercise of stock options (or tandem stock appreciation rights) granted under the Company's Executive Award Plan. NOTE 2: The amount shown represents the dollar value of restricted stock awards made during the year, calculated by multiplying the closing price of unrestricted shares of the Company's Common Stock on the date of grant by the number of shares awarded. Dividends are paid on all shares of restricted stock. All shares of restricted stock that have not previously vested are generally forfeited upon termination of employment, unless such termination occurs either after age 65, by reason of death or disability, or for the convenience of the Company (as determined by the Executive Compensation Committee). All shares of restricted stock that have not previously vested will immediately vest upon a "Change of Control" of the Company, as described under "Compensation Upon Change of Control" below. The number of shares of restricted stock held by the named executive officers as of December 31, 1993, and the value of such shares (calculated by multiplying the closing price of unrestricted shares of the Company's Common Stock on December 31, 1993 by the number of shares held on such date) is as follows: Mr. Kuehn, 73,400 shares, $2,119,425; Mr. Barker, 3,568 shares, $103,026; Mr. Johns, 0 shares, 13 15 $0; Mr. Moylan, 4,368 shares, $126,126; Mr. O'Malley, 26,534 shares, $766,169; Mr. Russell, 18,534 shares, $535,169; and Mr. Smith, 12,534 shares, $361,919. NOTE 3: The number of shares shown with respect to 1992 and 1991 has been adjusted to reflect the two-for-one split of the Company's Common Stock which became effective on September 14, 1993. NOTE 4: With respect to 1993, represents the following amounts for each of Messrs. Kuehn, Barker, Johns, Moylan, O'Malley, Russell and Smith, respectively: (1) Company matching contributions to the trust established under the Company's Savings Plan -- $6,377, $12,944, $7,387, $12,865, $6,377, $6,377 and $6,377; (2) Company contributions to the Savings Plan accounts under the Company's Supplemental Benefit Plan -- $43,773, $0, $0, $0, $5,034, $24,436 and $20,271; 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 -- $63,378, $7,409, $214, $5,602, $0, $71,874 and $14,792. NOTE 5: Includes the value of 14,000 shares, 1,700 shares, 2,500 shares, 10,000 shares and 6,000 shares of restricted stock granted on December 2, 1993 to Messrs. Kuehn, Barker, Moylan, Russell and Smith, respectively. Such shares generally vest 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. NOTE 6: Includes the value of 40,000 shares, 10,000 shares and 20,000 shares of restricted stock granted on May 28, 1992 to Messrs. Kuehn, Johns and O'Malley, respectively. Such shares were granted to such executive officers in recognition of their performance with respect to the sale of an oilfield services subsidiary. Such shares generally vest 10 years from the date of grant. The shares granted to Mr. Johns were forfeited upon his resignation on October 8, 1993. NOTE 7: Includes the value of 15,200 shares, 1,400 shares, 2,000 shares, 1,400 shares, 5,000 shares, 7,000 shares and 5,000 shares of restricted stock granted on December 3, 1992 to Messrs. Kuehn, Barker, Johns, Moylan, O'Malley, Russell and Smith, respectively. Such shares generally vest 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. The shares granted to Mr. Johns were forfeited upon his resignation on October 8, 1993. NOTE 8: Represents the value of 12,600 shares, 1,400 shares, 2,800 shares, 1,400 shares, 4,600 shares, 4,600 shares and 4,600 shares of restricted stock granted on December 6, 1991 to Messrs. Kuehn, Barker, Johns, Moylan, O'Malley, Russell and Smith, respectively. Such shares generally vest in equal installments on each of the first three anniversaries of the date of grant. The 1,868 shares granted to Mr. Johns that had not previously vested were forfeited upon his resignation on October 8, 1993. NOTE 9: Mr. Johns resigned from all of his positions with the Company and its subsidiaries on October 8, 1993. NOTE 10: On June 4, 1993, Sonat Offshore Drilling Inc. ("Sonat Offshore") completed an initial public offering (the "Offshore IPO") of its common stock. As a result of the Offshore IPO, Sonat Offshore is no longer a wholly-owned subsidiary of the Company. On the effective date of the Offshore IPO, Mr. O'Malley resigned from all of his positions with the Company. 14 16 OPTION GRANT TABLE The following table contains certain information with respect to stock options granted in 1993 under the Company's Executive Award Plan to the named executive officers. OPTION/SAR GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF INDIVIDUAL GRANTS STOCK PRICE APPRECIATION FOR ------------------------------------------------------ OPTION TERM (10 YEARS) NUMBER OF % OF TOTAL ------------------------------- SECURITIES OPTIONS/SARS 5% (RESULTING 10% (RESULTING UNDERLYING GRANTED TO EXERCISE COMPANY STOCK COMPANY STOCK OPTIONS/SARS EMPLOYEES PRICE EXPIRATION PRICE OF PRICE OF NAME GRANTED (1) IN 1993 ($/SHARE) (2) DATE (3) $48.87) (4) $77.81) (4) - ----------------------- ------------ ------------ -------------- ---------- -------------- -------------- All Stockholders....... -- -- -- -- $1,644,665,497 $4,167,008,872 Ronald L. Kuehn, Jr. .. 110,000 11.1% $30.00 12/1/03 $ 2,075,700 $ 5,259,100 Thomas W. Barker, Jr. . 13,500 1.4% $30.00 12/1/03 $ 254,745 $ 645,435 John D. Johns.......... 0 0% -- -- $ 0 $ 0 James E. Moylan, Jr. .. 21,000 2.1% $30.00 12/1/03 $ 396,270 $ 1,004,010 William C. O'Malley.... 0 0% -- -- $ 0 $ 0 Donald G. Russell...... 65,000 6.6% $30.00 12/1/03 $ 1,226,550 $ 3,107,650 William A. Smith....... 45,000 4.5% $30.00 12/1/03 $ 849,150 $ 2,151,450 Named Executive Officers' Potential Realizable Value as a % of All Stockholders' Potential Realizable Value 0.29% 0.29%
NOTE 1: All stock options shown were granted on December 2, 1993. The stock options become exercisable in equal installments on each of the first five anniversaries of the date of grant, provided that the entire option grant will become immediately exercisable if, during any 10 business day period ending prior to December 2, 1998, the average of the closing prices of the Company's Common Stock during such period is at least $45.00. Any stock options that have not previously become exercisable are generally forfeited upon termination of employment, unless such termination occurs by reason of death or disability or for the convenience of the Company (as determined by the Executive Compensation Committee). Any options held by then-current employees will become immediately exercisable and will remain exercisable for three years after the employee's termination of employment (but not beyond December 1, 2003) in the event of a "Change of Control" of the Company, as described under "Compensation Upon Change of Control" below. NOTE 2: The exercise price equals the closing price of the Company's Common Stock on the date of grant. NOTE 3: The stock options are subject to termination prior to their expiration date in the event of termination of employment. NOTE 4: The Resulting Company Stock Price shown in the table equals the price the Company's Common Stock would attain at the end of the stock options' 10-year term if the price of the Company's Common Stock appreciated from the date of stock option grant at a rate of 5% or 10% per year (as the case may be). The potential realizable values shown represent the difference between the $48.87 or $77.81 Resulting Company Stock Price (as the case may be) and the $30.00 exercise price, multiplied by (a) for all stockholders, the number of outstanding shares of the Company's Common Stock as of December 31, 1993, and (b) for each named executive officer, the number of options granted. 15 17 AGGREGATED OPTION/SAR EXERCISES AND FISCAL YEAR-END OPTION/SAR VALUE TABLE The following table shows certain information with respect to the named executive officers concerning the exercise of stock options (or stock appreciation rights ("SARs") granted in tandem therewith) during 1993 and unexercised stock options (and tandem SARs) held as of December 31, 1993.
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 VALUE --------------------------- --------------------------- NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ------------------------- ----------- -------- ----------- ------------- ----------- ------------- Ronald L. Kuehn, Jr. .... 37,000 $436,000 456,266 147,334 $ 5,308,517 $ 469,008 Thomas W. Barker, Jr. ... 13,000 $139,406 27,000 17,500 $ 195,750 $ 50,250 John D. Johns............ 54,700 $715,625 0 0 $ 0 $ 0 James E. Moylan, Jr. .... 44,000 $596,437 27,000 25,000 $ 201,500 $ 50,250 William C. O'Malley...... 30,000 $343,750 102,666 13,668 $ 888,452 $ 171,704 Donald G. Russell........ 80,000 $942,500 107,332 78,668 $ 778,359 $ 171,704 William A. Smith......... 47,000 $770,594 152,332 58,668 $ 1,541,109 $ 171,704
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 (i) exercise of the stock option (or tandem SAR) and (ii) receipt of the supplemental payment, based on the assumption that the participant is taxed at the maximum effective federal income tax rate applicable to such income. NOTE 2: The value of each unexercised in-the-money stock option (or tandem SAR) is equal to the difference between $28.875 (the closing price of the Company's Common Stock on December 31, 1993) and the exercise price of the stock option. Such value does not include the value of any tax-offset supplemental payments. DEFINED BENEFIT PLANS Employees and officers of the Company and participating subsidiaries are participants in the Company's Retirement Plan. In general, annual retirement benefits are based on average covered compensation for the highest five consecutive years of the final ten years of employment. Covered compensation under the Retirement Plan currently includes salaries and amounts paid under the Performance Award and Cash Bonus Plan (reported in the Summary Compensation Table) and certain personal benefits; covered compensation does not include amounts relating to the grant or vesting of restricted stock, the exercise of stock options and SARs, and receipt of supplemental payments under the Executive Award Plan, or to employer contributions under the Savings Plan or the Supplemental Benefit Plan. The maximum annual retirement benefit is 65% of the participant's average covered compensation minus 50% of his primary social security benefit. Participants accrue benefits under the following formula: (a) 2.4% of average covered compensation minus 2.0% of primary social security benefits for each year of service prior to January 1, 1992; plus (b) 2.0% of average covered compensation minus 1.667% of primary social security benefits for each year of service after January 1, 1992; plus (c) when the total of (a) plus (b) above equals 60% of average covered compensation minus 50% of primary social security benefits, 1% of average covered compensation for each year of service after January 1, 1992, not included in the calculation in (b) above, up to five such additional years of service. The eligible survivors of a deceased Retirement Plan participant are entitled to a survivors benefit, which usually equals 75% of the participant's retirement benefit. Retirement Plan benefits are generally paid as life annuities. 16 18 The Supplemental Benefit Plan provides its eligible participants and their eligible survivors with retirement and survivors benefits which would have been payable under the Retirement Plan but for the fact that benefits payable under funded pension plans are limited by federal tax laws. As a general rule, during 1993 the federal tax laws limited annual benefits under the Retirement Plan to $115,641 (subject to reduction in certain circumstances), and required the Retirement Plan to disregard any portion of the participant's 1993 compensation in excess of $235,840. A participant may choose to have benefits under the Plan paid either as a life annuity or in a cash lump sum upon termination of employment. The following table sets forth information with respect to certain named executive officers concerning the benefits payable under the Retirement Plan and Supplemental Benefit Plan. DEFINED BENEFIT PLAN TABLE
CURRENT ESTIMATED ANNUAL YEARS OF 1993 COVERED RETIREMENT NAME SERVICE (1) COMPENSATION (2) BENEFIT AT AGE 65 (3) - ---------------------------------------------- ----------- ---------------- --------------------- Ronald L. Kuehn, Jr. ......................... 23.4 $1,048,500 $ 671,040 Thomas W. Barker, Jr. ........................ 24.3 $ 215,565 $ 140,117 James E. Moylan, Jr. ......................... 17.5 $ 214,235 $ 139,253 Donald G. Russell............................. 5.9 $ 582,269 $ 112,960 William A. Smith.............................. 23.7 $ 498,815 $ 324,230
NOTE 1: The number of years of credited service under the Retirement Plan as of December 31, 1993. NOTE 2: The amount of covered compensation under the Retirement Plan during 1993. NOTE 3: The estimated annual retirement benefit payable as a single life annuity at age 65 to the named executive officer (based on the assumptions that such officer retires at age 65 and has average covered compensation at his retirement date equal to his 1993 covered compensation, and calculated prior to the offset for primary social security benefits). Prior to his resignation on June 4, 1993, from all of his positions with the Company, Mr. O'Malley accrued an annual benefit under the Retirement Plan and the Supplemental Benefit Plan of $142,207 (expressed as a single life annuity payable at age 65). Prior to his resignation on October 8, 1993, from all of his positions with the Company, Mr. Johns accrued an annual benefit under such Plans of $28,054 (expressed as a single life annuity payable at age 65). Mr. O'Malley may begin his benefit on the first day of the month after the date of his termination of employment with Sonat Offshore (with a reduction for early retirement if he terminates employment before attaining age 62). Mr. Johns may begin his benefit on the first day of any month after the date he attains age 55 (with an actuarial reduction to take into account the early commencement of the benefit). 17 19 PERFORMANCE GRAPH The following graph compares the cumulative total stockholder return on the Company's Common Stock for the five-year period ending December 31, 1993, with the cumulative total return of two indices during such period. COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL STOCKHOLDER RETURN SONAT INC.; STANDARD & POOR'S 500 STOCK INDEX; STANDARD & POOR'S NATURAL GAS DISTRIBUTION/PIPELINE GROUP(1)
MEASUREMENT PERIOD S&P NATURAL (FISCAL YEAR COVERED) SONAT INC. S&P 500 GAS 12/31/88 100.00 100.00 100.00 12/31/89 177.04 131.59 155.23 12/31/90 177.20 127.49 135.90 12/31/91 131.29 166.17 118.33 12/31/92 201.62 178.81 130.69 12/31/93 250.18 196.75 155.06
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, 1988, and that all dividends were reinvested. NOTE 1: The Standard & Poor's Natural Gas Distribution/Pipeline Group consists of the following companies: Arkla, Inc., The Coastal Corporation, Columbia Gas System, Inc., Consolidated Natural Gas Company, Eastern Enterprises, Enron Corp., Ensearch Corporation, NICOR Inc., ONEOK Inc., Pacific Enterprises, Panhandle Eastern Corporation, Peoples Energy Corporation, Sonat Inc., Transco Energy Company and Williams Companies Inc. COMPENSATION UPON CHANGE OF CONTROL Certain of the Company's benefit plans provide for the acceleration of certain benefits in the event of a "Change of Control" of the Company. Under such plans, a Change of Control will be deemed to have occurred if (1) any person or group acquires (or obtains the right to acquire) beneficial ownership of 35% or more of the Company's voting securities, (2) there is a change in the composition of a majority of the Company's Board of Directors within any period of three consecutive years which change was not approved by a majority of the Board of Directors as constituted immediately prior to the commencement of such three-year period, or (3) at any meeting of stockholders of the Company called for the purpose of electing Directors, the entire slate nominated by the Board of Directors fails to be elected. Any outside Director who is eligible for a retirement benefit under the Retirement Plan for Directors will receive such benefit (regardless of whether he has met the other eligibility requirements of the Plan) 18 20 in the event he ceases to be a Director following a Change of Control. A Director who participates in the Director's Fees Deferral Plan may, prior to the year the fees are earned, elect to have the balance of his account distributed to him in a lump sum in the event his service as a Director is terminated within one year following a Change of Control, regardless of any other elections he may have made with respect to the timing and manner of payment of amounts in his account. Also, all shares of restricted stock granted under the Restricted Stock Plan for Directors will vest immediately upon a Change of Control. Upon the occurrence of a Change of Control, all outstanding shares of restricted stock under the Executive Award Plan will immediately vest, and all outstanding options (and tandem SARs) under the Executive Award Plan held by then-current employees will become immediately exercisable and will remain exercisable for three years following the employee's termination of employment (but not beyond their expiration date). If an SAR is exercised within 60 days of the occurrence of a Change of Control, the holder will receive, in addition to the amount otherwise due on exercise, a payment equal to the excess over the amount otherwise due of the highest price per share of Common Stock paid during the 60-day period prior to exercise of the SAR, plus a supplemental payment on such excess. Also, upon the occurrence of a Change of Control, the participant will receive 100% of his bonus opportunities under the Performance Award Plan (if approved by the stockholders) and the Cash Bonus Plan. Any officer of the Company or certain of its subsidiaries who at the time of a Change of Control is not vested under the Retirement Plan will be provided with a vested benefit under the Supplemental Benefit Plan equal to the benefit that would have been payable under the Retirement Plan if his actual years of service had been sufficient for vesting. Following a Change of Control, a participant's Savings Plan account under the Supplemental Benefit Plan will be distributed within 30 days of his termination of employment. EXECUTIVE SEVERANCE AGREEMENTS The Company has Executive Severance Agreements with Messrs. Kuehn, Russell and Smith. These agreements provide that if the executive officer's employment is terminated within three years after a Change of Control (as defined above), either (a) by the Company for reasons other than dishonesty, conviction of a felony or willful unauthorized disclosure of confidential information or other than as a consequence of death, disability or retirement at age 65 or (b) by the executive officer for reasons relating to a diminution of responsibilities or compensation, or relocation requiring a change in residence or a significant increase in travel, or a good faith determination by the executive officer that he can no longer effectively discharge his duties, he will receive: (1) a lump sum payment equal to three times his highest earnings (defined to include those items described as covered compensation under the Retirement Plan) during any 12-month period during the three years preceding the termination (such lump sum payment to be reduced pro rata to the extent there are less than 36 months until the officer reaches age 65); (2) life, medical, and accident and disability insurance as provided in the Company's insurance programs or, in certain circumstances, substantially equivalent insurance to be provided by the Company for a period of 36 months after termination of employment (or until age 65, whichever is sooner); and (3) for an executive officer who has reached age 50 and is not otherwise entitled to an early retirement benefit under the terms of a qualified retirement plan of the Company or its subsidiaries, an annual benefit equal to the amount such officer would have received had he been entitled to an early retirement benefit (reduced by any benefits payable to him under such retirement plan and the Supplemental Benefit Plan), and a 75% survivors benefit with respect to such early retirement benefit. Assuming that the executive officers terminated employment on January 31, 1994, in a manner entitling them to benefits under the Executive Severance Agreements, the respective executive officers would receive the following lump sum cash payments pursuant to item (1) above and the following annual retirement benefits pursuant to item (3) above: Mr. Kuehn, $3,304,300 in cash and $0 in retirement benefits; Mr. Russell, $1,850,306 in cash and $13,543 in retirement benefits; and Mr. Smith, $1,560,945 in cash and $0 in retirement benefits. The Executive Severance Agreements provide that the executive officer may not voluntarily leave the employ of the Company if a third party attempts to effect a Change of Control until such third party abandons such attempt or a Change of Control has occurred. The executive officer is also required to be 19 21 available for three years after his termination of employment for consultation with senior officers of the Company. The Agreements renew automatically for one-year terms unless terminated at the end of any term by the Board of Directors. The Agreements shall also terminate if the Executive Compensation Committee determines that the executive officer is no longer a key employee, unless a Change of Control is threatened at the time or has occurred within the past three years. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION L. Edwin Smart, a member of the Executive Compensation Committee of the Board of Directors, serves as counsel to the law firm of Hughes Hubbard & Reed. Hughes Hubbard & Reed provides legal services to the Company and certain of its subsidiaries. ELECTION OF AUDITOR (PROPOSAL NO. 1) Ernst & Young has been nominated for election as Auditor of the Company. The Restated Certificate of Incorporation provides that no other person shall be eligible for election as Auditor unless notice of intention to nominate such person has been given to the Company not less than ten days before the Annual Meeting. A representative of Ernst & Young will be present at the Annual Meeting with the opportunity to make a statement if such representative desires to do so and will be available to respond to appropriate questions. THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF ERNST & YOUNG AS AUDITOR (PROPOSAL NO. 1). APPROVAL OF PERFORMANCE AWARD PLAN (PROPOSAL NO. 2) Since 1981 the Company has had a bonus plan pursuant to which annual cash bonuses were paid to officers and other employees based on the performance of the individual, the Company and its subsidiaries. The performance criteria used have included both objective and subjective measures. In 1993 the Internal Revenue Code was amended by the addition of Section 162(m), which limits the tax deduction available with respect to compensation paid to certain executive officers, unless the compensation qualifies as "performance based" (as defined for purposes of Section 162(m)). Among the requirements for "performance based" compensation are that the compensation be paid based solely on the attainment of objective performance measures established by a committee of outside directors, and that the plan providing for such compensation be approved by stockholders. The Board of Directors believes that in light of Section 162(m) it is desirable to restructure the Company's bonus program to create a separate plan providing for objective performance goals, and to submit that plan for stockholder approval. This would enable the portion of an executive's annual bonus based on objective performance criteria to qualify as "performance based" for purposes of Section 162(m), and thereby continue to be deductible without regard to the deduction limit otherwise imposed by Section 162(m). Accordingly, on January 27, 1994 the Board of Directors took action to adopt, subject to stockholder approval at the 1994 Annual Meeting of Stockholders, the Company's Performance Award Plan (the "Plan"). The Board believes that it is important to have a plan which permits the payment of bonuses based on subjective performance criteria and on a discretionary basis, even though amounts paid under such a plan may not qualify as "performance based" compensation under Section 162(m). Therefore, on January 27, 1994, the Board adopted the Company's Cash Bonus Plan, which permits awards based on any performance criteria established by the Executive Compensation Committee, as well as bonuses paid on a discretionary basis. The Cash Bonus Plan is not being submitted for stockholder approval. 20 22 PRINCIPAL PROVISIONS OF THE PLAN The following summary of the Plan is qualified by reference to the full text of the Plan, which is attached as Exhibit A to this Proxy Statement. The purpose of the Plan is to provide officers of the Company with additional incentives through the payment of bonuses based on the performance of the Company relating to specified objective financial and business criteria, thereby increasing the personal stake of such officers in the continued success and growth of the Company. ADMINISTRATION. The Plan is administered by the Executive Compensation Committee or other designated committee of the Board of Directors consisting solely of two or more Directors, each of whom qualifies as an "outside director" for purposes of Section 162(m). The Committee has authority to interpret the Plan, to adopt rules and regulations for carrying out the Plan, and to take any other action necessary or advisable for the administration of the Plan. ELIGIBILITY. All officers of the Company and its "Subsidiaries" are eligible to participate in the Plan. (For purposes of the Plan, the term "Subsidiaries" means subsidiaries, partnerships and joint ventures in which the Company and its subsidiaries have at least a 50% ownership interest.) Directors who are not officers of the Company or its Subsidiaries are not eligible. As of January 31, 1994, approximately 42 employees were eligible to participate in the Plan. TERMS AND CONDITIONS OF AWARDS. The Committee determines which of the eligible employees will be granted an award under the Plan for any given year. At or before the start of each calendar year, the Committee establishes written Performance Objectives based on one or more of the criteria set forth in the Plan for each eligible employee chosen to receive an award for that year. At the same time, the Committee also establishes a Bonus Opportunity for each employee, which is the amount of the bonus the employee will earn if the Performance Objectives are fully satisfied. The Committee may specify a minimum acceptable level of achievement of each Performance Objective below which no bonus is payable with respect to that Objective, and additional levels above the minimum (which may also be above the targeted Performance Objective), with a formula to determine the percentage of the Bonus Opportunity to be earned at each level of achievement above the minimum. Performance at a level above the targeted Performance Objective may entitle the employee to earn a bonus in excess of 100% of the Bonus Opportunity. However, the maximum payout to any individual under the Plan in any year cannot exceed $1.5 million. Performance Objectives may be based on one or more of the following criteria: Company earnings per share; Company or Subsidiary earnings before interest and taxes or earnings before interest, taxes and corporate charges; Company or Subsidiary net income; Company or Subsidiary revenues, pipeline throughput, oil and gas production volumes, or oil and gas marketing volumes; Company or Subsidiary unit revenues minus unit variable costs; Company or Subsidiary return on capital, return on equity, return on assets, or return on invested capital; Company or Subsidiary cash flow return on assets or cash flows from operating activities; Company or Subsidiary capital expenditures; Company or Subsidiary operations and maintenance expense or general and administrative expense; Company or Subsidiary oil and gas unit operating income or oil and gas unit lifting costs; Company or Subsidiary reserve replacement, reserve replacement costs and reserve acquisition costs; and Company or Subsidiary debt-equity ratios and key profitability ratios. At the end of the year, the Committee determines the extent to which the Performance Objectives have been attained and the extent to which the Bonus Opportunity has been earned under the formula previously established by the Committee. The Committee has discretion to reduce the amount of the bonus payable to any employee from the amount of the Bonus Opportunity "earned" under the formula. The Committee may exercise its discretion to reduce the award for any reason, including its judgment that a Performance Objective has become an inappropriate measure of achievement, a change in the employment status, position or duties of the employee, unsatisfactory performance of the employee, or the employee's service for less than the entire year. 21 23 Awards under the Plan are paid in cash in a lump sum promptly after the Committee has determined the amount of bonus to be paid, unless the Committee determines, either at the time of grant or the time of distribution, to distribute all or a portion of the award in installments or as deferred compensation. The Plan also authorizes the Committee, in its discretion, to adopt a program under which employees may elect to defer all or a portion of their award. CHANGE OF CONTROL. In the event of a change of control (as defined in the Plan), all participants are deemed to have fully earned the Bonus Opportunities contained in their outstanding awards, and the amount of such Bonus Opportunities is payable promptly (no later than 30 days) after the change of control, in a cash lump sum. Following a change of control, the Committee will have no power to decrease the amount of the Bonus Opportunity payable under an award. Under the Plan, a change of control is deemed to have occurred if (i) any person or group acquires (or obtains the right to acquire) beneficial ownership of 35% or more of the Company's voting securities, (ii) there is a change in the composition of a majority of the Company's Board of Directors within any period of three consecutive years which change was not approved by a majority of the Board as constituted immediately prior to the commencement of such three-year period, or (iii) at any meeting of stockholders of the Company called for the purpose of electing Directors the entire slate nominated by the Board of Directors fails to be elected. AMENDMENT AND TERMINATION. The Board of Directors may amend the Plan from time to time without stockholder approval except as required to satisfy Section 162(m). Awards may be granted under the Plan for calendar years 1994 through 1998, unless the Plan is terminated earlier by the Board of Directors. However, the Plan will remain in effect until payment has been competed with respect to all awards granted under the Plan prior to its termination. BENEFITS UNDER THE PLAN It is not possible to specify the amount of benefits to be paid to particular individuals under the Plan, since the amount of each employee's Bonus Opportunity will be set each year by the Committee in its discretion, subject to the Plan's limitation that the bonus paid to any employee under the Plan for any year may not exceed $1.5 million. In January 1994, the Committee granted awards under the Plan with respect to 1994 to each eligible employee under the Plan. Such awards are subject to stockholder approval of the Plan. The following 22 24 table sets forth the maximum bonus payable under the Plan for such awards for the persons indicated below. NEW PLAN BENEFITS PERFORMANCE AWARD PLAN OF SONAT INC.
1994 MAXIMUM NAME AND POSITION BONUS ------------------------------------------------------------------- --------------- Ronald L. Kuehn, Jr. .............................................. $ 331,200 Chairman of the Board, President and Chief Executive Officer Thomas W. Barker, Jr. ............................................. $ 20,460 Vice President -- Finance and Treasurer John D. Johns...................................................... $ 0 Former Vice President and General Counsel James E. Moylan, Jr. .............................................. $ 28,132 Vice President and Controller William C. O'Malley................................................ $ 0 Former Executive Vice President Donald G. Russell.................................................. $ 85,470 Executive Vice President William A. Smith................................................... $ 68,211 Executive Vice President Current Executive Officer Group.................................... $ 552,217 (6 persons) Non-Executive Director Group....................................... $ 0 (12 persons) Non-Executive Officer Employee..................................... $ 578,054 Group (36 persons)
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF THE PERFORMANCE AWARD PLAN (PROPOSAL NO. 2). APPROVAL OF PROPOSED AMENDMENT TO THE RESTATED CERTIFICATE OF INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK (PROPOSAL NO. 3) The Board of Directors of the Company believes that it would be in the best interest of the Company and its stockholders to amend the first paragraph of Article FOURTH of the Restated Certificate of Incorporation (the "Charter") to increase the number of shares of Common Stock which the Company is authorized to issue from 200,000,000 shares to 400,000,000 shares. Accordingly, at a meeting held on December 3, 1993, the Board of Directors unanimously adopted resolutions declaring such an amendment to be advisable and voted to recommend that the Company's stockholders consider and approve the amendment ("Proposal No. 3") at the Annual Meeting. Under the present Charter, the total number of shares of all classes of capital stock which the Company has authority to issue is 210,000,000 shares, of which 10,000,000 shares are Serial Preference Stock, par value $1.00 per share, and 200,000,000 shares are Common Stock, par value $1.00 per share. On January 31, 1994, no shares of Serial Preference Stock were outstanding and 87,172,087 shares of Common Stock were outstanding. As of such date, 5,503,448 shares of Common Stock were reserved for issuance under certain benefit plans and 92,675,535 shares of Common Stock were reserved for issuance in connection with the exercise of rights to purchase the Company's Common Stock (the 23 25 "Rights") upon the terms and subject to the conditions set forth in the Rights Agreement dated as of January 23, 1986, as amended, between the Company and Chemical Bank, as Rights Agent (the "Rights Agreement"). Accordingly, as of January 31, 1994, an aggregate of 185,351,070 shares of Common Stock were outstanding or reserved for issuance, and there remained an aggregate of 14,648,930 shares of Common Stock available for issuance. The number of available shares, however, may be effectively reduced in half after giving effect to the requirement of the Rights Agreement that, under certain circumstances, upon issuance of any shares of Common Stock the Company must issue one Right for each share issued and must reserve for issuance one additional share of Common Stock in connection with the exercise of each Right. The additional shares for which authorization is sought would be part of the existing class of Common Stock and, if and when issued, would have the same rights and privileges as the shares of Common Stock presently outstanding. As with the presently authorized Serial Preference Stock and Common Stock, the additional authorized Common Stock will not be subject to preemptive rights. If Proposal No. 3 is adopted, the first paragraph of Article FOURTH will be amended to delete the language in brackets and to add the language in italics, as follows: "FOURTH: The total number of shares which the Corporation shall have authority to issue is [two hundred ten million (210,000,000)] four hundred ten million (410,000,000), of which ten million (10,000,000) are to be Serial Preference Stock of the par value of One Dollar ($1.00) per share and [two hundred million (200,000,000)] four hundred million (400,000,000) are to be Common Stock of the par value of One Dollar ($1.00) per share." PURPOSES AND EFFECTS OF THE AMENDMENT Although the Company has no agreements, commitments or plans at this time with respect to the additional shares of Common Stock (other than under the terms of the Rights Agreement), the Board of Directors believes that it is desirable to have a sufficient number of additional shares of Common Stock available for possible future financing and acquisition transactions, stock dividends or splits, stock issuances pursuant to employee benefit plans and other proper corporate purposes. Having such additional shares available for issuance in the future would give the Company greater flexibility and allow shares of Common Stock to be issued without the expense and delay of a special stockholders' meeting. The additional shares of Common Stock would be available for issuance without further action by the stockholders of the Company, unless such action is required by applicable law or under the rules of any stock exchange on which the Company's securities may be listed. While the Company has no knowledge of any pending efforts to obtain control of the Company, shares of authorized but unissued Common Stock could be issued in one or more transactions which could make a takeover of the Company more difficult or costly and, therefore, less likely. Any such additional issuance of Common Stock could have the effect of diluting earnings and book value per share of outstanding shares of Common Stock, and issuance of additional shares could be used to dilute the stock ownership of any person or persons seeking to obtain control of the Company. The Board does not currently intend to authorize the issuance of any additional shares of Common Stock which are the subject of this amendment proposal. As noted above, however, 92,675,535 shares have been reserved for issuance in connection with the Rights Agreement. OTHER INFORMATION The Charter provides that Serial Preference Stock of the Company may be issued in one or more series and expressly vests in the Board of Directors the authority to determine the designations, preferences and certain rights of each such series. Although the Board presently has no intention of doing so, such shares could be issued with voting rights to a holder that would vote against a merger, sale of assets or other extraordinary corporate transaction. 24 26 The Company's Charter has provisions which may affect any possible takeover attempt by making a change of control of the Company more difficult or costly. For a description of these provisions and of proposed amendments thereto, see "Proposed Amendments to the Restated Certificate of Incorporation (Proposal No. 4, 5, 6 and 7)" below. For a description of the Rights and the Rights Agreement, see "Proposed Amendments to the Restated Certificate of Incorporation (Proposal No. 4, 5, 6 and 7) -- Description of Proposal No. 4" below. For a description of certain provisions of the Company's By-Laws which regulate the manner and timing of stockholder proposals and stockholder nominations for the Board of Directors, see "Proposals of Stockholders" below. THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ADOPTION OF THE PROPOSAL TO AMEND THE FIRST PARAGRAPH OF ARTICLE FOURTH OF THE CHARTER (PROPOSAL NO. 3). PROPOSED AMENDMENTS TO THE RESTATED CERTIFICATE OF INCORPORATION (PROPOSAL NO. 4, 5, 6 AND 7) The Board of Directors of the Company believes that it would be in the best interests of the Company and its stockholders to amend the Company's Charter to: -- delete a Charter provision which provides in certain cases for minimum price protection or, alternatively, higher stockholder voting requirements, in connection with certain business combinations (Proposal No. 4); -- provide that, subject to the conditions described below, the Board of Directors shall call a special meeting of stockholders at the request of a person that has owned at least 3% of the Company's voting stock for at least six months (Proposal No. 5); -- reduce the vote required for stockholders to amend, repeal or adopt By-Laws from 67% of the outstanding shares to 60% (Proposal No. 6); and -- reduce the vote required for stockholders to amend, repeal or adopt any provision inconsistent with certain "anti-takeover" provisions of the Charter from 67% of the outstanding shares to 60% (Proposal No. 7). INTRODUCTION In 1983 the stockholders of the Company approved amendments to the Company's Charter (the "1983 Amendments") which may affect any possible takeover attempt by making a change of control of the Company more difficult. In general, the purpose of the 1983 Amendments is to deter or delay a potential holder of a controlling interest in the Company's voting stock from exercising its voting power in a manner believed by the Board to be detrimental to the interests of the remaining stockholders. Pursuant to the 1983 Amendments, the Board of Directors is divided into three classes, with one class of Directors being elected each year. The Board of Directors has sole authority to increase or decrease its size and to fill all vacancies (provided that the Board may have no less than five nor more than fifteen members). Directors may not be removed without cause. Only the Board of Directors is authorized to call special meetings of stockholders, and corporate action may not be taken by written consent of stockholders in lieu of a meeting. The amendment, repeal or adoption by stockholders of the Company's By-Laws, as well as the amendment, repeal or adoption of any Charter provision inconsistent with the foregoing provisions of the Charter, requires the affirmative vote of the holders of not less than 67% of the voting power of the Company. The 1983 Amendments also revised the Charter to provide that approval of certain mergers, consolidations, or other business combinations between the Company and a holder of at least 10% of the voting power of the Company (a "related person") must be approved by a "super-majority" vote of the stockholders (80% of the Company's voting power and 67% of the Company's voting power held by stockholders other than the related person) unless either (1) certain Board approvals are obtained or (2) the related person paid all stockholders a price per share that equalled or exceeded the highest price 25 27 the related person paid in connection with the business combination. The same vote is required to amend or repeal the foregoing Charter provision. In each of the last five years, the Company's proxy statement for its Annual Meeting of Stockholders has included a stockholder proposal which has sought the repeal of the 1983 Amendments. The Board of Directors has opposed each of these stockholder proposals as not being in the best interest of the Company's stockholders, and the proposal has been rejected by the stockholders at each Annual Meeting at which it has been presented. In recent years, representatives of the Company have discussed the 1983 Amendments with many of the Company's stockholders, including stockholders with significant investments in the Company's stock. As a result of these discussions, the Board has conducted a careful review of the 1983 Amendments and of possible changes to the Amendments. The Board of Directors believes that the 1983 Amendments have served their purpose, but believes that the revisions to the 1983 Amendments set forth in this Proxy Statement are appropriate and advisable. The Board believes that such revisions will respond to stockholder concerns with respect to certain provisions of the 1983 Amendments, while preserving the principal protections established for the Company's stockholders by the 1983 Amendments. The Board of Directors has therefore determined that the proposed Charter amendments set forth in Proposal No. 4, 5, 6 and 7 are in the best interest of the Company and its stockholders, and recommends a vote "FOR" each of Proposal No. 4, 5, 6 and 7. DESCRIPTION OF PROPOSAL NO. 4 THE TEXT OF CURRENT ARTICLE SEVENTH OF THE CHARTER IS ATTACHED TO THIS PROXY STATEMENT AS EXHIBIT B. THE FOLLOWING DESCRIPTION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO EXHIBIT B. Proposal No. 4 would delete current Article SEVENTH (sometimes referred to as a "fair price" provision) from the Company's Charter. In general, Article SEVENTH requires that certain mergers, consolidations, or certain other business combinations initiated by a related person be approved by the holders of not less than 80% of the outstanding shares of the Company's capital stock, and by the holders of not less than 67% of the outstanding shares of capital stock not held by the related person, unless (a) the acquisition of the capital stock that caused such related person to become a related person was approved in advance by at least a majority of the Continuing Directors (as defined in Article SEVENTH), (b) the business combination was approved by a majority of the Continuing Directors, or (c) the consideration per share of Common Stock in the business combination equalled or exceeded the highest price paid by the related person in acquiring any shares of Common Stock in or subsequent to the transaction in which it became a related person. Article SEVENTH was intended to respond to situations in which a publicly-owned corporation was taken over by a swift purchase of control through a tender offer, followed by a merger or other transaction between the acquired corporation and the purchaser, which is not then dealing at arm's length because of its control and which may then give consideration for the acquired corporation's shares in the second step that is of substantially less value than the consideration given in the first step. While such a "two-tier" takeover may benefit all of the stockholders of the acquired company, it may also be detrimental to some or all of them, because the terms of an ensuing merger or other transaction with the purchaser may be less favorable to the remaining stockholders than is warranted, and the suddenness and relatively short duration of the offer may leave insufficient time for them to evaluate the merits of the offer in comparison with other possible alternatives. The coercive nature of a "two-tier" offer -- a stockholder who fails to tender into the offer runs the risk that, if the offer succeeds, the stockholder will receive lesser consideration in the second step than if he had tendered -- may also result in transactions that do not produce the highest value for stockholders. The Board of Directors believes that the protections currently provided by the Rights Agreement, and by Section 203 of the Delaware General Corporation Law ("Section 203"), make the provisions of Article SEVENTH unnecessary at this time. Accordingly, the Board of Directors recommends that the current provisions in Article SEVENTH be deleted from the Charter. 26 28 Section 203, which was enacted after the adoption of Article SEVENTH of the Company's Charter, generally protects the stockholders against the same types of activities that the Board considered when it recommended the adoption of Article SEVENTH, although there are material differences between Section 203 and Article SEVENTH. Section 203 provides, generally, that subject to certain exceptions specified therein, a corporation may not engage in any business combination with any "interested stockholder" for a three-year period following the date that such stockholder becomes an interested stockholder unless either (1) prior to such date, the board of directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder, (2) upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced (excluding certain shares) or (3) on or subsequent to such date, the business combination is approved by the board of directors of the corporation and by the affirmative vote of at least 66 2/3% of the outstanding voting stock of the corporation which is not owned by the interested stockholder. In general, an interested stockholder includes (1) any person that is the owner of 15% or more of the outstanding voting stock of the corporation, or is an affiliate or associate of the corporation and was the owner of 15% or more of the outstanding voting stock of the corporation, at any time within three years immediately prior to the relevant date and (2) the affiliates and associates of any such person. Section 203 provides that a corporation may elect to opt out of the restrictions imposed thereunder; however, the Company has not opted out of these provisions. On February 3, 1986, the Company issued the Rights as a dividend to the holders of its Common Stock. The Rights are not exercisable (or transferable apart from the Common Stock) until the earlier of (i) ten days following the public announcement that a person or group has acquired 20% or more of the outstanding Common Stock (an "Acquiring Person") or (ii) ten days following the commencement of or announcement of an intention to make a tender or exchange offer upon consummation of which a person or group would own 30% or more of the outstanding Common Stock. After the Rights become exercisable, each Right entitles the holder to buy one share of Common Stock at a price of $50, subject to adjustment (the "Purchase Price"). In addition, if certain types of mergers or other business combinations involving the Company occur after the Rights become exercisable, the Rights will be modified so as to entitle the holder thereof, upon payment of the then current Purchase Price, to purchase common stock of the acquiring company which at the time of such transaction would have a value equal to twice such Purchase Price. Alternatively, if an Acquiring Person acquires the Company by means of a reverse merger in which the Company and its Common Stock survive, or engages in certain self-dealing transactions with the Company, or if a person or group acquires 30% or more of the outstanding Common Stock (except pursuant to a cash tender offer for all outstanding shares by a bidder owning less than 20% of the outstanding shares that results in the bidder owning at least 85% of the outstanding shares), each Right not owned by the Acquiring Person would become exercisable for the number of shares of Common Stock that at that time have a value of twice the then current Purchase Price. (The Board may reduce the 30% threshold in the preceding sentence to 15%.) The Rights are redeemable, at the option of the Company, at $.025 per Right at any time prior to the acquisition by a person or group of ownership of 20% or more of the outstanding Common Stock (or 15% or more, if the Board has reduced the 30% threshold described above). The Rights will expire on February 3, 1996, unless previously redeemed as described above. THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ADOPTION OF THE PROPOSAL TO DELETE CURRENT ARTICLE SEVENTH FROM THE CHARTER (PROPOSAL NO. 4). DESCRIPTION OF PROPOSAL NO. 5 THE TEXT OF SECTION (6) OF ARTICLE FIFTH OF THE CHARTER, AS CURRENTLY IN EFFECT AND AS PROPOSED TO BE AMENDED, IS ATTACHED TO THIS PROXY STATEMENT AS EXHIBIT C. THE FOLLOWING DESCRIPTION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO EXHIBIT C. 27 29 Currently, Section (6) of Article FIFTH of the Charter ("Section (6)") provides that, subject to any special rights to call such meetings that may be granted to the holders of any series of preferred stock, special meetings of stockholders may be called only by a majority of the Board of Directors. Proposal No. 5 would amend Section (6) to add a requirement that, subject to certain conditions, at the request of a "Qualified Holder" the Board of Directors will call a special meeting of stockholders of the Company. A "Qualified Holder" would mean a person who, together with all "affiliates" of such person (as such term is defined in Rule 405 under the Securities Act of 1933 as in effect on December 3, 1993), has owned, for at least six months before the Company receives the request, at least 3% of the outstanding shares of capital stock of the Company entitled to vote for the election of directors. For these purposes, shares shall be considered as "owned" by a person only if such person has the sole power to both vote and dispose of, or to direct the voting or disposition of, such shares. A Qualified Holder will not include a group of persons acting in concert or pursuant to contractual arrangement. Proposal No. 5 provides that if a request to call a special meeting is received from a Qualified Holder, the Board of Directors will select a date for the special meeting not less than 60 nor more than 90 days after receipt of the request by the Secretary of the Company. However, the Board will not be required to call a special meeting if the request was received during the 150-day period immediately preceding the anniversary of the previous year's annual meeting of stockholders. The Board also will not be required to call a special meeting at the request of any Qualified Holder that has, within the twelve months preceding the date the request is received, delivered to the Company a request pursuant to which a special meeting has been called. Proposal No. 5 provides that a request to call a special meeting must set forth (1) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting; (2) the name and address of the stockholder who intends to propose such business; (3) a representation that the stockholder is a Qualified Holder, agrees to furnish such supporting documentation as the Company may request, is entitled to vote at such meeting and intends to appear in person or by proxy at such meeting to propose such business; and (4) any material interest of the stockholder in such business. In addition, only business properly brought before a special meeting will be able to be transacted at such meeting. Business will be deemed properly brought only if it is (1) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (2) otherwise properly brought before the meeting by or at the direction of the Board of Directors or (3) brought before the meeting by a Qualified Holder entitled to vote at such meeting if written notice of such stockholder's intent to bring such business before such meeting is contained in the request to call a special meeting. Proposal No. 5 also provides that if the stockholder intends to present a proposal at the special meeting and to have the proposal included in the Company's proxy materials for the meeting, the request must include such proposal and any supporting statement, and the Company will include the proposal and supporting statement in its proxy materials if the Qualified Holder complies with the requirements of Rule 14a-8 (or any successor rule) under the Securities Exchange Act of 1934 and if the Board of Directors does not determine that such proposal and supporting statement may be omitted from the Company's proxy materials pursuant to paragraph (c) of such Rule. The current provisions of Section (6) would preclude a stockholder from forcing stockholder consideration of a proposal over the opposition of the Board of Directors by calling a special meeting of stockholders prior to such time as the Board believes such consideration to be appropriate. The Board believes that a stockholder that meets the requirements of a Qualified Holder should generally be allowed to request that a special meeting be held, provided the Qualified Holder has furnished the Company with the information described above and the other requirements of Proposal No. 5 are met. Adoption of Proposal No. 5 would permit a Qualified Holder to cause the Board of Directors to call a special meeting of stockholders, regardless of whether the Board of Directors believed that a special meeting was necessary or appropriate at that time. THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ADOPTION OF THE PROPOSAL TO AMEND SECTION (6) OF ARTICLE FIFTH OF THE CHARTER (PROPOSAL NO. 5). 28 30 DESCRIPTION OF PROPOSAL NO. 6 THE TEXT OF SECTION (10) OF ARTICLE FIFTH OF THE CHARTER, AS CURRENTLY IN EFFECT AND AS PROPOSED TO BE AMENDED, IS ATTACHED TO THIS PROXY STATEMENT AS EXHIBIT D. THE FOLLOWING DESCRIPTION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO EXHIBIT D. Proposal No. 6 would amend Section (10) of Article FIFTH of the Company's Charter to reduce the vote required for stockholders to amend, repeal or adopt By-laws from 67% of the outstanding shares to 60%. The Board believes that it is appropriate to reduce the vote necessary for the stockholders to change the Company's By-Laws. Adoption of Proposal No. 6 would facilitate such changes by the stockholders, regardless of whether the change was proposed by the Board of Directors or any stockholder of the Company or whether the Board of Directors believed the change to be in the best interest of the Company's stockholders. THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ADOPTION OF THE PROPOSAL TO AMEND SECTION (10) OF ARTICLE FIFTH OF THE CHARTER (PROPOSAL NO. 6). DESCRIPTION OF PROPOSAL NO. 7 THE TEXT OF THE FINAL PARAGRAPH OF ARTICLE FIFTH OF THE COMPANY'S CHARTER, AS CURRENTLY IN EFFECT AND AS PROPOSED TO BE AMENDED, IS ATTACHED TO THIS PROXY STATEMENT AS EXHIBIT E. THE FOLLOWING DESCRIPTION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO EXHIBIT E. Proposal No. 7 would amend the final paragraph of Article FIFTH of the Company's Charter to reduce the vote required for stockholders to amend, repeal or adopt any provision inconsistent with Sections (1), (2), (3), (6), (7), (8), (9) or (10) of Article FIFTH of the Charter (which Sections include the Charter provisions adopted by the 1983 Amendments, other than the "fair price" provision described at "Description of Proposal No. 4" above) from 67% of the outstanding shares to 60%. Pursuant to the provisions of Section 242 of the Delaware General Corporation Law, in order for the Charter to be amended, the Board of Directors must adopt resolutions that set forth the proposed amendment, declare its advisability, and put the proposed amendment to a vote of the stockholders. Therefore, action by the Board of Directors approving any Charter amendment must precede any stockholder vote on such an amendment. If, in the future, the Board of Directors takes such action with respect to Sections (1), (2), (3), (6), (7), (8), (9) or (10) of Article FIFTH of the Charter, the adoption of Proposal No. 7 would reduce the vote necessary for adoption of the proposed amendment of such Sections. THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ADOPTION OF THE PROPOSAL TO AMEND THE LAST PARAGRAPH OF ARTICLE FIFTH OF THE CHARTER (PROPOSAL NO. 7). OTHER INFORMATION Each of Proposal No. 4, 5, 6 and 7 is an independent proposal which, if approved by the stockholders, will be adopted regardless of whether the remaining Proposals are so approved. If the proposed amendments are adopted, the Board will amend the By-Laws to conform them to the adopted Charter amendments. Approval of Proposal No. 4, 5, 6 and 7 by the stockholders would not eliminate all "anti-takeover" provisions with respect to the Company. In particular, the Rights would still be outstanding, and the Charter would retain the current provisions establishing a classified Board strucuture, permitting only the Board to increase or decrease the size of the Board and fill vacancies, and prohibiting removal of Directors without cause and corporate action by written consent of stockholders in lieu of a meeting. For a description of certain provisions of the Company's By-Laws which regulate the manner and timing of stockholder proposals and stockholder nominations for the Board of Directors, see "Proposals of Stockholders" below. 29 31 The Company has no current plans to propose any other amendments to its Charter or to take any other action having a similar effect if any of the Proposals is not approved. Except as described herein, if all of the Proposals are approved, the Board does not presently contemplate recommending the adoption of any further amendments to the Charter or By-Laws of the Company which would affect the ability of third parties to take over or change control of the Company. However, the financial markets and the environment for corporate takeovers are volatile, and the Board may at any time adopt measures designed to protect against hostile takeovers or other actions that the Board may believe to be contrary to the best interests of the Company and its stockholders. Such measures may include actions that do not require the consent of the stockholders (such as amendment of the Rights Agreement or the issuance of new rights with respect to the Company's Common Stock). 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 1995 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 18, 1994. Stockholder Proposals to be Presented at Meetings. A stockholder who desires to propose any business at a meeting of stockholders must give the Company written notice within ten days following public disclosure by the Company of the meeting date (by notice to the New York Stock Exchange or otherwise) or, if the meeting is adjourned and the Company is required by Delaware law to give notice of the adjourned meeting date, within five days after the earlier of the date public disclosure is made by the Company of the adjourned meeting date (by notice to such exchange or otherwise) or the date notice of the adjourned meeting is given to stockholders. The stockholder's notice must set forth (a) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting; (b) the name and address of the stockholder who intends to propose such business; (c) a representation that the stockholder is a holder of record of stock of the Company entitled to vote at such meeting (or if the record date for such meeting is subsequent to the date required for such stockholder notice, a representation that the stockholder is a holder of record at the time of such notice and intends to be a holder of record on the record date for such meeting) and intends to appear in person or by proxy at such meeting to propose such business; and (d) any material interest of the stockholder in such business. Stockholder Nominations for Directors. A stockholder who desires to nominate Directors at a meeting of stockholders must give the Company written notice within the time period described in the preceding paragraph. The stockholder's notice must set forth (a) the name and address of the stockholder who intends to make the nomination and of the person or persons to be nominated; (b) a representation that the stockholder is a holder of record of stock of the Company entitled to vote at such meeting (or if the record date for such meeting is subsequent to the date required for such stockholder notice, a representation that the stockholder is a holder of record at the time of such notice and intends to be a holder of record on the record date for such meeting) and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (c) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder; (d) such other information regarding each nominee proposed by such stockholder as would have been required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had each nominee been nominated, or intended to be nominated, by the Board of Directors; and (e) the consent of each nominee to serve as a Director of the Company if so elected. 30 32 The Chairman of the meeting may refuse to transact any business or to acknowledge the nomination of any person if a stockholder has failed to comply with the foregoing procedures. A copy of the Company's By-Laws may be obtained from the Company upon written request to the Company at its principal place of business. INSTITUTIONAL OWNERSHIP OF COMMON STOCK The table below sets forth, as of January 31, 1994, certain information with respect to each person or entity known by the Company to be the beneficial owner of more than 5% of the Company's Common Stock.
NAME AND ADDRESS TITLE OF NUMBER OF SHARES PERCENT OF BENEFICIAL OWNER CLASS BENEFICIALLY OWNED OF CLASS ------------------------------------ ------------- ------------------ -------- FMR Corp. Common Stock 5,019,174 5.8% 82 Devonshire Street Boston, Massachusetts 02109
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, 1993, FMR Corp. and certain of its affiliates stated that such stock was acquired in the ordinary course of business and was not acquired for the purpose of changing or influencing the control of the Company and was not acquired in connection with or as a participant in any transaction having such a purpose or effect. VOTING AT THE ANNUAL MEETING The presence, in person or by proxy, of the holders of a majority of the Company's Common Stock is necessary to constitute a quorum at the Annual Meeting or any adjournment thereof. The vote required for the election of Directors and the approval of the other matters scheduled for a vote at the Annual Meeting is controlled by the provisions of the Company's Charter and By-Laws and the Delaware General Corporation Law. Directors are elected by a plurality vote. Approval of Proposal No. 1 would require a plurality vote. Approval of Proposal No. 2 would require the affirmative vote of a majority of the shares of Common Stock represented in person or by proxy at the Annual Meeting and voting either for or against, or abstaining from voting on, such proposal. Approval of Proposal No. 3 would require the affirmative vote of a majority of the shares of Common Stock outstanding and entitled to vote at the Annual Meeting. Approval of Proposal No. 4 would require the affirmative vote of 80% of the shares of Common Stock outstanding and entitled to vote at the Annual Meeting. Approval of Proposal No. 5, 6 and 7 would each require the affirmative vote of 67% of the shares of Common Stock outstanding and entitled to vote at the Annual Meeting. 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, and shall have the effect of a vote against Proposal No. 3, 4, 5, 6 and 7. Abstentions shall have the effect of a vote against Proposal No. 2. The vote will be tabulated by an independent tabulator and the results of such vote will be certified by independent inspectors of election. SOLICITATION OF PROXIES The Company will bear the costs of solicitation of proxies. Officers and regular employees of the Company may solicit proxies by mail, telephone, telegraph and personal interview. In addition, the Company has retained D. F. King & Co., Inc. to assist in the solicitation of proxies, and anticipates that the fees that it will incur for this service, excluding out-of-pocket expenses, will not exceed $50,000. Arrangements will be made with brokerage houses and with other custodians, nominees and fiduciaries to forward proxy soliciting material to beneficial owners. The Company will reimburse persons holding stock for others in their names or in those of their nominees for their reasonable out-of-pocket expenses in sending proxy material to their principals and obtaining their proxies. 31 33 ------------------------ 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 1994 Annual Meeting, but if any other matters do properly come before the meeting, the persons named as proxies will vote upon such matters in accordance with their best judgment. Please complete, sign, date and return the enclosed proxy card promptly. SONAT INC. Beverley T. Krannich Secretary Birmingham, Alabama March 16, 1994 32 34 EXHIBIT A PERFORMANCE AWARD PLAN OF SONAT INC. I. GENERAL 1.1 PURPOSE OF THE PLAN. The Performance Award Plan (the "Plan") of Sonat Inc. (the "Company") is intended to advance the best interests of the Company and its subsidiaries by providing officers with additional incentives through the payment of bonuses based on the performance of the Company relating to specified objective financial and business criteria, thereby increasing the personal stake of such officers in the continued success and growth of the Company and encouraging them to remain in the employ of the Company. Awards under the Plan are intended to qualify as "performance-based compensation" for purposes of Section 162(m) of the Internal Revenue Code ("Section 162(m)"). 1.2 ADMINISTRATION OF THE PLAN. The Plan shall be administered by the Executive Compensation Committee or other designated Committee (the "Committee") of the Board of Directors of the Company (the "Board of Directors") which shall consist solely of two or more Directors, each of whom qualifies as an "outside director" for purposes of Section 162(m). The Committee shall have authority, subject to the provisions of the Plan, in its discretion, to grant awards ("Awards") under the Plan, to interpret conclusively the provisions of the Plan, to adopt such rules and regulations for carrying out the Plan as it may deem advisable, to decide conclusively all questions of fact arising in the application of the Plan, and to make all other determinations necessary or advisable for the administration of the Plan. All decisions and acts of the Committee shall be final and binding upon all affected Plan participants. No member of the Committee shall be liable for any action taken, or determination made, in good faith. 1.3 ELIGIBLE PARTICIPANTS. All officers of the Company and its Subsidiaries shall be eligible to participate in the Plan. For purposes of the Plan the term "Subsidiaries" shall mean subsidiaries, partnerships and joint ventures in which the Company and its subsidiaries have at least a 50% ownership interest. Directors who are not officers of the Company or its Subsidiaries shall not be eligible to participate in the Plan. 1.4 AWARDS UNDER THE PLAN. The Committee shall designate the eligible employees, if any, to be granted Awards under the Plan. All Awards granted under the Plan shall be on the terms and subject to the conditions hereinafter provided. 1.5 OTHER COMPENSATION PROGRAMS. The existence and terms of the Plan shall not limit the authority of the Board of Directors in compensating employees of the Company and its Subsidiaries in such other forms and amounts, including compensation pursuant to any other plans as may be currently in effect or adopted in the future, as it may determine from time to time. II. TERMS AND CONDITIONS OF AWARDS 2.1 ESTABLISHMENT OF PERFORMANCE OBJECTIVES AND BONUS OPPORTUNITY. Prior to the commencement of each Performance Year (or such later time as may be permitted for performance-based compensation under Section 162(m)), the Committee shall establish written Performance Objectives and a Bonus Opportunity for each eligible employee chosen to receive an Award for such Performance Year. The Performance Objectives shall be based on one or more of the following criteria: Company earnings per share; Company or Subsidiary earnings before interest and taxes or earnings before interest, taxes and corporate charges; Company or Subsidiary net income; Company or Subsidiary revenues, pipeline throughput, oil and gas production volumes, or oil and gas marketing volumes; Company or Subsidiary unit revenues minus unit variable costs; Company or Subsidiary return on capital, return on equity, return on assets, or return on invested capital; Company or Subsidiary cash flow return on assets or cash flows from operating activities; Company or Subsidiary capital expenditures; Company or Subsidiary operations and maintenance expense or general and administrative expense; Company or A-1 35 Subsidiary oil and gas unit operating income or oil and gas unit lifting costs; Company or Subsidiary reserve replacement, reserve replacement costs and reserve acquisition costs; and Company or Subsidiary debt-equity ratios and key profitability ratios. At the time of setting the Performance Objectives, the Committee shall specify the formula to be used in calculating each of the criteria on which an Award is based and their relative weights. The Bonus Opportunity shall be expressed as an amount of cash. The Committee may also specify a minimum acceptable level of achievement of the relevant Performance Objectives, as well as one or more additional levels of achievement, and a formula to determine the percentage of the Bonus Opportunity deemed to have been earned by the employee upon attainment of each such level of achievement, which percentage may exceed 100%. The Performance Objectives and Bonus Opportunity relating to any particular Award need not be the same as those relating to any other Award, whether made at the same or a different time. 2.2 PERFORMANCE YEAR. The Performance Year with respect to an Award shall be the calendar year within which the Performance Objectives relating to that Award are to be achieved. 2.3 EARNING OF AWARD. Promptly after the date on which the necessary information for a particular Performance Year becomes available, the Committee shall determine, and certify in writing, the extent to which the Bonus Opportunity for such Performance Year has been earned, through the achievement of the relevant Performance Objectives, by each employee who was granted an Award for such Performance Year. Notwithstanding the terms of any Award, the maximum payout under this Plan to any individual for any Performance Year shall not exceed $1.5 million. 2.4 DISCRETIONARY DOWNWARD ADJUSTMENTS. Notwithstanding the terms of any Award, the Committee, in its sole and absolute discretion, may reduce the amount of the Award payable to any employee for any reason, including the Committee's judgment that the Performance Objectives have become an inappropriate measure of achievement, a change in the employment status, position or duties of the employee, unsatisfactory performance of the employee, or the employee's service for less than the entire Performance Year. 2.5 DISTRIBUTIONS. Promptly after the Committee has determined the extent to which an Award has been earned, such Award shall be distributed in cash in a lump sum, unless the Committee determines, either at the time of grant or the time of distribution, to distribute all or a portion of such Award in installments or as deferred compensation. The Committee, in its discretion, may adopt a program to permit employees to defer all or a portion of their Award. 2.6 CHANGE OF CONTROL. Notwithstanding any other provision of this Plan or contained in any Award granted hereunder (including any provision for deferred payment thereof), upon the occurrence of a Change of Control (as defined in Section 3.6), a participant shall be deemed to have fully earned the Bonus Opportunities contained in his outstanding Awards, and the amount of such Bonus Opportunities shall be paid promptly (and no later than 30 days after the Change of Control) in a cash lump sum. Notwithstanding the provisions of Section 2.4, following a Change of Control the Committee shall not adjust the Bonus Opportunity specified in an Award from that in effect immediately prior to the Change of Control in a manner adverse to the participant. III. ADDITIONAL PROVISIONS 3.1 AMENDMENTS. The Board of Directors may, in its sole discretion, amend the Plan from time to time. Any such amendment may be made without stockholder approval unless required to satisfy Section 162(m). 3.2 WITHHOLDING. Payments under the Plan shall be net of an amount sufficient to satisfy any federal, state or local withholding tax liability. 3.3 NON-ASSIGNABILITY; DEATH OF PARTICIPANT. No Award under the Plan shall be assignable or transferable by the holder thereof except by will or by the laws of descent and distribution. In the event of A-2 36 the death of a participant, any payments due to such participant shall be paid to his beneficiary designated in writing to the Committee, or, if none has been designated, to his estate. 3.4 NON-UNIFORM DETERMINATIONS. Determinations by the Committee under the Plan (including, without limitation, determinations of the persons to receive Awards; the terms and provisions of such Awards; the relevant Performance Objectives; the amount of Bonus Opportunity; and the amount of any downward adjustment) need not be uniform and may be made by it selectively among persons who receive, or are eligible to receive, Awards under the Plan, whether or not such persons are similarly situated. 3.5 NO GUARANTEE OF EMPLOYMENT. The grant of an Award under the Plan shall not constitute an assurance of continued employment for any period. 3.6 CHANGE OF CONTROL. A "Change of Control" shall be deemed to have occurred if: (i) any "person" (as defined in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934, as in effect on March 1, 1985) is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934 as in effect on March 1, 1985) of securities of the Company representing 35% or more of the voting power of the outstanding securities of the Company having the right under ordinary circumstances to vote at an election of the Board of Directors, (ii) there shall occur a change in the composition of a majority of the Board of Directors within any period of three consecutive years which change shall not have been approved by a majority of the Board of Directors as constituted immediately prior to the commencement of such period, or (iii) at any meeting of the stockholders of the Company called for the purpose of electing directors, all persons nominated by the Board of Directors for election as directors shall fail to be elected. 3.7 UNFUNDED STATUS OF AWARDS; CREATION OF TRUSTS. The Plan is intended to constitute an "unfunded" plan. With respect to any amounts payable to a participant pursuant to an Award, nothing contained in the Plan (or in any documents related thereto), nor the creation or adoption of the Plan, the grant of any Award, or the taking of any other action pursuant to the Plan, shall give any such participant any rights that are greater than those of a general creditor of the Company. The Committee may authorize the creation of trusts or make other arrangements to meet the Company's obligations under the Plan, which trusts or other arrangements shall be consistent with the "unfunded" status of the Plan. 3.8 EFFECTIVE DATE AND DURATION OF PLAN. The Plan shall become effective on January 27, 1994 subject to the approval thereof by stockholders of the Company at the 1994 annual meeting. Awards may be granted under the Plan for calendar years 1994 through 1998, unless the Plan is terminated earlier by the Board of Directors, in its sole discretion. The Plan shall remain in effect for purposes of administering the payment of Awards granted under the Plan until such payments have been completed. A-3 37 EXHIBIT B PROPOSAL NO. 4 TEXT OF CURRENT ARTICLE SEVENTH If Proposal No. 4 is adopted, current Article SEVENTH of the Charter, bracketed below, will be deleted, and current Article EIGHTH will be renumbered as Article SEVENTH: [SEVENTH: Any other provision of this Certificate of Incorporation to the contrary notwithstanding, the affirmative vote of the holders of not less than 80 percent of the outstanding shares of capital stock of the Corporation entitled to vote generally (the "Voting Stock") and the affirmative vote of the holders of not less than 67 percent of the Voting Stock held by stockholders other than a Related Person (as hereinafter defined) shall be required for the approval or authorization of any Business Combination (as hereinafter defined) or of any series of related transactions which, if taken together, would constitute a Business Combination of the Corporation with any Related Person; provided, however, that the 80 percent and 67 percent voting requirements shall not be applicable if: 1. A majority of Continuing Directors (as hereinafter defined) of the Corporation (a) have expressly approved in advance the acquisition of Voting Stock of the Corporation that caused the Related Person to become a Related Person, or (b) have approved the Business Combination; or 2. The Business Combination is a merger or consolidation and the cash or fair market value of the property, securities or other consideration to be received per share by holders of Common Stock of the Corporation in the Business Combination is not less than the highest per share price (with appropriate adjustments for recapitalizations and for stock splits, stock dividends and like distributions), in each case determined in good faith by a majority of Continuing Directors, paid by the Related Person in acquiring any of its holdings of the Corporation's Common Stock either in or subsequent to the transaction or series of transactions in which the Related Person became a Related Person. Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that a lesser percentage may be specified, by law or in any agreement with any national securities exchange or otherwise. For purposes of this Article SEVENTH: (a) The term "Business Combination" shall mean (i) any merger or consolidation of the Corporation or a Subsidiary (as hereinafter defined) with or into a Related Person, (ii) any sale, lease, exchange, transfer or other disposition, including without limitation a pledge, mortgage or any other security device, of all or any Substantial Part (as hereinafter defined) of the assets either of the Corporation (including without limitation any voting securities of a Subsidiary) or of a Subsidiary, or both, to a Related Person, (iii) any merger or consolidation of a Related Person with or into the Corporation or a Subsidiary of the Corporation, (iv) any sale, lease, exchange, transfer or other disposition of all or any Substantial Part of the assets of a Related Person to the Corporation or a Subsidiary of the Corporation, (v) the issuance of any securities of the Corporation or a Subsidiary of the Corporation to a Related Person, (vi) any reclassification of securities (including a reverse stock split) or any other recapitalization that would have the effect of increasing the voting power of a Related Person and (vii) any agreement, contract or other arrangement providing for any of the transactions described in this definition of Business Combination. (b) The term "Related Person" shall mean and include any individual, corporation, partnership or other person or entity which, together with its "Affiliates" and "Associates" (as defined on March 1, 1983 in Rule 12b-2 under the Securities Exchange Act of 1934), "beneficially owns" (as defined on March 1, 1983 in Rule 13d-3 under the Securities Exchange Act of 1934) in the aggregate 10 percent or more of the outstanding Voting Stock of the Corporation, any Affiliate or Associate of any such individual, corporation, partnership or other person or entity, and any assignee of any of the foregoing. B-1 38 (c) Notwithstanding the definition of "beneficially owned" in subparagraph (b) of this Article SEVENTH, any Voting Stock of the Corporation that any Related Person has the right to acquire pursuant to any agreement, or upon exercise of conversion rights, warrants or options, or otherwise, shall be deemed beneficially owned by the Related Person. (d) The term "Substantial Part" shall mean more than 20 percent of the fair market value of the total assets of the corporation in question, as determined in good faith by a majority of Continuing Directors, as of the end of its most recent fiscal year ending prior to the time the determination is being made. (e) For the purposes of subparagraph (a) of this Article SEVENTH, the term "Subsidiary" means any corporation of which a majority of any class of equity security is owned directly or indirectly by the Corporation and whose assets constitute a Substantial Part of the assets of the Corporation, as determined in good faith by a majority of Continuing Directors. (f) For the purposes of the first paragraph of this Article SEVENTH, in any Business Combination of a Subsidiary of the Corporation with a Related Person, the voting provisions contained therein shall be deemed to be required for the Corporation to cause the Subsidiary to approve or authorize such Business Combination. (g) For the purposes of subparagraph (2) of this Article SEVENTH, the term "other consideration to be received" shall include, without limitation, Common Stock of the Corporation retained by its existing public stockholders in the event of a Business Combination in which the Corporation is the surviving corporation. (h) The term "Continuing Director" shall mean a Director who was a member of the Board of Directors of the Corporation immediately prior to the time that the Related Person involved in a Business Combination became a Related Person.] B-2 39 EXHIBIT C PROPOSAL NO. 5 AMENDMENT OF SECTION (6) OF ARTICLE FIFTH If Proposal No. 5 is adopted, the language in Section (6) of Article FIFTH below in italics will be added: (6) Except as otherwise provided in Article FOURTH of this certificate with respect to the holders of any one or more series of Serial Preference Stock, special meetings of the stockholders for any purpose or purposes shall be called solely by resolution of the Board of Directors, acting by not less than a majority of the entire Board, and, except as set forth in this Section (6), the power of stockholders to call a special meeting is specifically denied. Notwithstanding the foregoing, and subject to the conditions set forth in this Section (6), the Board of Directors shall call a special meeting of stockholders upon the receipt by the Secretary of the Corporation of a Request (as hereinafter defined) of a Qualified Holder (as hereinafter defined). The place and notice of any special meeting shall be as set forth below and in the By-Laws. Only business properly brought before a special meeting shall be transacted at such meeting. Business shall be deemed properly brought only if it is (i) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (ii) otherwise properly brought before the meeting by or at the direction of the Board of Directors or (iii) brought before the meeting by a Qualified Holder entitled to vote at such meeting if written notice of such Qualified Holder's intent to bring such business before such meeting was contained in the Request. The Chairman of the meeting may refuse to transact any business at any special meeting made without compliance with the foregoing procedure. If the Secretary of the Corporation receives a Request from a Qualified Holder, the Board of Directors shall select a date for the special meeting not less than 60 nor more than 90 days after the date the Request is received; provided, however, that (a) the Board shall not be required to call a special meeting at the request of any Qualified Holder that has, within the twelve months preceding the date the Request is received, delivered to the Corporation a Request pursuant to which a special meeting has been called, and (b) the Board shall not be required to call a special meeting pursuant to a Request received during the 150-day period preceding the anniversary of the most recent annual meeting of stockholders. For the purposes of this Section (6): (a) The term "Qualified Holder" shall mean any individual, corporation, partnership or other person or entity (collectively, a "Person") which, together with all of its "affiliates" (as such term is defined on December 3, 1993 in Rule 405 under the Securities Act of 1933), has had continuous Ownership (as hereinafter defined) of at least 3 percent of the outstanding shares of capital stock of the Corporation entitled to vote for the election of directors ("Voting Stock") throughout the six-month period prior to the date the Corporation receives the Request from such Person. A "Qualified Holder" shall not include a group of Persons acting in concert or pursuant to a contractual arrangement. (b) The term "Ownership" of Voting Stock shall mean the sole possession of both the power to vote (or direct the voting of) and the power to dispose of (or direct the disposition of) such Voting Stock. (c) The term "Request" shall mean a writing received by the Secretary of the Corporation at the principal executive offices of the Corporation, which requests the Board of Directors to call a special meeting of the stockholders and which sets forth: (1) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting; (2) the name and address of the Qualified Holder who intends to propose such business; (3) a representation that the stockholder is a Qualified Holder of Voting Stock, agrees to furnish such supporting documentation with respect to such stockholder's status as a Qualified Holder as the Corporation may request, is entitled to C-1 40 vote at such meeting and intends to appear in person or by proxy at such meeting to propose such business; and (4) any material interest of the stockholder in such business. If the Qualified Holder intends to present a proposal at the special meeting and to have such proposal included in the Corporation's proxy materials for such meeting and the Request includes the proposal and any supporting statement with respect thereto, the Corporation's proxy materials for the meeting shall include such proposal and supporting statement, provided (A) the Qualified Holder complies with the requirements of Rule 14a-8 under the Securities Exchange Act of 1934, as amended (or any successor rule), and (B) the Board of Directors does not determine that such proposal and supporting statement may be omitted from the Corporation's proxy materials pursuant to paragraph (c) of such Rule 14a-8. C-2 41 EXHIBIT D PROPOSAL NO. 6 If Proposal No. 6 is adopted, the language in Section (10) of Article FIFTH below in brackets will be deleted and the language in italics will be added: (10) The stockholders of the Corporation may exercise their power to alter, amend, change, repeal or adopt By-Laws of the Corporation only by the affirmative vote of the holders of not less than [67 percent] 60 percent of the outstanding shares of capital stock of the Corporation entitled to vote for the election of directors, provided that notice of such proposed alteration, amendment, repeal or adoption is included in the notice of meeting called for the taking of such action. D-1 42 EXHIBIT E PROPOSAL NO. 7 If Proposal No. 7 is adopted, the language in the last paragraph of Article FIFTH below in brackets will be deleted and the language in italics will be added: Notwithstanding any other provisions of this Certificate of Incorporation or the By-Laws of the Corporation (and notwithstanding the fact that a lesser percentage may be specified by law, this Certificate of Incorporation or the By-Laws of the Corporation), the affirmative vote of the holders of [67 percent] 60 percent of the outstanding shares of capital stock of the Corporation entitled to vote for the election of directors shall be required to amend, repeal or adopt any provision inconsistent with Sections (1), (2), (3), (6), (7), (8), (9) and (10) of this Article FIFTH. E-1 EX-23.(1) 14 SONAT CONSENT OF INDEPENDENT AUDITORS 1 EXHIBIT 23-(1) Consent of Independent Auditors We consent to the incorporation by reference in (i) the Registration Statement (Form S-8, No. 33-50140) pertaining to the Sonat Inc. Executive Award Plan and in the related Prospectus and (ii) the Registration Statement (Form S-8, No. 33-50142) pertaining to the Sonat Savings Plan and the related Prospectus of our report dated January 20, 1994, with respect to the consolidated financial statements and schedules of Sonat Inc. included in this Annual Report (Form 10-K) for the year ended December 31, 1993. /s/ Ernst & Young ----------------- ERNST & YOUNG Birmingham, Alabama March 25, 1994 EX-24.(1) 15 SONAT POWER OF ATTORNEY 1 EXHIBIT 24-(1) 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.; James A. Rubright and John C. Griffin, and each of them, his true and lawful attorneys to execute in his name (whether on behalf of Sonat Inc. or as a director of Sonat Inc.) the Sonat Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 1993, 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 24th day of February, 1994. /s/ William O. Bourke --------------------- William O. Bourke 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.; James A. Rubright and John C. Griffin, and each of them, his true and lawful attorneys to execute in his name (whether on behalf of Sonat Inc. or as an officer or director of Sonat Inc.) the Sonat Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 1993, 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 24th day of February, 1994. /s/ Ronald L. Kuehn, Jr. ------------------------ Ronald L. Kuehn, Jr. 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.; James A. Rubright and John C. Griffin, and each of them, his true and lawful attorneys to execute in his name (whether on behalf of Sonat Inc. or as a director of Sonat Inc.) the Sonat Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 1993, 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 24th day of February, 1994. /s/ John J. Creedon -------------------- John J. Creedon 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.; James A. Rubright and John C. Griffin, and each of them, his true and lawful attorneys to execute in his name (whether on behalf of Sonat Inc. or as a director of Sonat Inc.) the Sonat Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 1993, 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 24th day of February, 1994. /s/ Roberto C. Goizueta ----------------------- Roberto C. Goizueta 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.; James A. Rubright and John C. Griffin, and each of them, his true and lawful attorneys to execute in his name (whether on behalf of Sonat Inc. or as a director of Sonat Inc.) the Sonat Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 1993, 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 24th day of February, 1994. /s/ Robert J. Lanigan --------------------- Robert J. Lanigan 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.; James A. Rubright and John C. Griffin, and each of them, his true and lawful attorneys to execute in his name (whether on behalf of Sonat Inc. or as a director of Sonat Inc.) the Sonat Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 1993, 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 24th day of February, 1994. /s/ Henry R. Linden ------------------------ Dr. Henry R. Linden 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.; James A. Rubright and John C. Griffin, and each of them, his true and lawful attorneys to execute in his name (whether on behalf of Sonat Inc. or as a director of Sonat Inc.) the Sonat Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 1993, 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 24th day of February, 1994. /s/ Charles Marshall --------------------- Charles Marshall 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.; James A. Rubright and John C. Griffin, and each of them, his true and lawful attorneys to execute in his name (whether on behalf of Sonat Inc. or as a director of Sonat Inc.) the Sonat Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 1993, 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 24th day of February, 1994. /s/ Benjamin F. Payton ----------------------- Benjamin F. Payton 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.; James A. Rubright and John C. Griffin, and each of them, his true and lawful attorneys to execute in his name (whether on behalf of Sonat Inc. or as a director of Sonat Inc.) the Sonat Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 1993, and any and all amendments thereto to be filed with the Securities and Exchange Commission pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 and to file the same, with all exhibits thereto, and any other documents in connection therewith, with the Securities and Exchange Commission. The undersigned does hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. Each of such attorneys shall have and may exercise all powers to act hereunder with or without the others. IN WITNESS WHEREOF, the undersigned has signed his name hereto as of the 27th day of February, 1994. /s/ John J. Phelan, Jr. ----------------------- John J. Phelan, Jr. 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.; James A. Rubright and John C. Griffin, and each of them, his true and lawful attorneys to execute in his name (whether on behalf of Sonat Inc. or as a director of Sonat Inc.) the Sonat Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 1993, 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 24th day of February, 1994. /s/ Jerome J. Richardson ------------------------ Jerome J. Richardson 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.; James A. Rubright and John C. Griffin, and each of them, his true and lawful attorneys to execute in his name (whether on behalf of Sonat Inc. or as a director of Sonat Inc.) the Sonat Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 1993, 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 24th day of February, 1994. /s/ L. Edwin Smart ------------------- L. Edwin Smart 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.; James A. Rubright and John C. Griffin, and each of them, his true and lawful attorneys to execute in his name (whether on behalf of Sonat Inc. or as a director of Sonat Inc.) the Sonat Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 1993, 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 24th day of February, 1994. /s/ James B. Williams --------------------- James B. Williams 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.; James A. Rubright and John C. Griffin, and each of them, his true and lawful attorneys to execute in his name (whether on behalf of Sonat Inc. or as a director of Sonat Inc.) the Sonat Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 1993, 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 24th day of February, 1994. /s/ Joe B. Wyatt ----------------- Joe B. Wyatt -----END PRIVACY-ENHANCED MESSAGE-----