-----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, Lsqeb1XGoIOdZgJPYjmGIc5fdI0EJEARYU6sns5dertTok6B4rXPz7jDRJGy0ePc ynPs02MWCLO167tnwPr5kw== 0000950144-95-000785.txt : 199507120000950144-95-000785.hdr.sgml : 19950711 ACCESSION NUMBER: 0000950144-95-000785 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19941231 FILED AS OF DATE: 19950328 SROS: AMEX SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SONAT INC CENTRAL INDEX KEY: 0000092236 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS TRANSMISSION [4922] IRS NUMBER: 630647939 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-07179 FILM NUMBER: 95523747 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: 12/31/94 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, 1994 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 filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE REGISTRANT, AS OF JANUARY 31, 1995 -- $2,310,175,672. NUMBER OF SHARES OF COMMON STOCK, $1.00 PAR VALUE, OUTSTANDING ON JANUARY 31, 1995 -- 86,351,011 DOCUMENTS INCORPORATED BY REFERENCE PORTIONS OF THE PROXY STATEMENT OF THE REGISTRANT DATED AS OF MARCH 15, 1995, 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, 1994
ITEM PAGE - ---------- ----- PART I Item 1. Business.................................................................... I-1 Exploration and Production................................................ I-1 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, Storage, and Marketing of Natural Gas....................... I-7 Southern Natural Gas Company............................................ I-7 Order No. 636 Restructuring........................................... I-8 Customer Settlement................................................... I-9 Markets -- Transportation and Sales................................... I-10 Gas Supplies.......................................................... I-13 Administrative Law Judge Ruling Concerning Recoverability of Investment in Offshore Gas Supply Facilities; Settlement with Exxon Corporation................................... I-13 Potential Royalty Claims.............................................. I-14 Sea Robin Pipeline Company............................................ I-14 Sonat Intrastate-Alabama Inc.......................................... I-15 Sonat Ventures Inc.................................................... I-15 South Georgia Natural Gas Company..................................... I-15 Southern Energy Company............................................... I-15 Sonat Energy Services Company........................................... I-15 Sonat Marketing Company............................................... I-16 Sonat Power Inc....................................................... I-16 Citrus Corp............................................................. I-16 Florida Gas Transmission Company...................................... I-16 Competition and Current Business Conditions............................. I-17 Investment in Sonat Offshore Drilling Inc................................. I-19 Governmental Regulation................................................... I-20 Exploration and Production.............................................. I-20 Transmission, Storage, and Marketing of Natural Gas..................... I-20 Rate and Regulatory Proceedings....................................... I-21 Environmental Matters................................................... I-21 Corporate Restructuring................................................. I-21 Item 2. Properties.................................................................. I-21
3 SONAT INC. INDEX TO REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1994 (CONTINUED)
ITEM PAGE - ---------- ----- Item 3. Legal Proceedings........................................................... I-21 Item 4. Submission of Matters to a Vote of Security Holders......................... I-23 Executive Officers of the Registrant.................................................... I-23 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters... II-32 Item 6. Selected Financial Data..................................................... II-40 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................................ II-2 Item 8. Financial Statements and Supplementary Data................................. II-16 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................................................. II-42 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 and through Southern Natural Gas Company ("Southern"), Citrus Corp. ("Citrus"), and Sonat Energy Services Company ("Energy Services") in the transmission, storage, and marketing of natural gas. 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 38 percent of Sonat's consolidated operating profit for 1994. 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' largest subsidiary, Sonat Marketing Company ("Marketing"), sells natural gas throughout much of the United States. In 1993 Marketing assumed responsibility for the sale of most of Exploration's natural gas production and at year-end 1994 was one of the twenty largest natural gas marketers in the United States. Natural gas operations, excluding Citrus, contributed approximately 60 percent of Sonat's consolidated operating profit for 1994. Sonat's share of Citrus' earnings are reflected in Equity in Earnings of Unconsolidated Affiliates. Sonat owns approximately 11.3 million or 39.7 percent of the outstanding shares of Sonat Offshore Drilling Inc. ("Offshore"), which is in the offshore contract drilling business. Prior to the initial public offering of Offshore's common stock, which closed on June 4, 1993, Offshore had been a wholly owned subsidiary of Sonat. Sonat also owns four million shares of convertible preferred stock of Baker Hughes Incorporated ("Baker Hughes"), which provides products and services to the petroleum and continuous process industries. 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. Sonat was incorporated under the laws of Delaware in 1973 in connection with a reorganization of Southern. At March 1, 1995, Sonat and its subsidiaries employed approximately 1,910 people. Sonat's principal executive offices are located at 1900 Fifth Avenue North, AmSouth-Sonat Tower, Birmingham, Alabama 35203, and its telephone number is (205) 325-3800. Additional business information is contained in Management's Discussion and Analysis of Financial Condition and Results of Operations and in the Notes to Consolidated Financial Statements in Part II of this report, which are incorporated herein by reference. Reference is made to Note 12 of the Notes to Consolidated Financial Statements contained in Part II of this report for further information with respect to the portions of Sonat's revenues, operating profit, and identifiable assets attributable to each of its business segments and geographic areas of operations. EXPLORATION AND PRODUCTION Sonat is engaged in the exploration for and the acquisition, development, and production of oil and natural gas through its wholly owned subsidiary, Sonat Exploration Company, and its subsidiary companies (collectively referred to as "Exploration" unless the context indicates otherwise). Exploration's principal office is located in Houston, Texas. Exploration has regional offices in Tyler, Texas and Oklahoma City, Oklahoma. The oil and gas properties of Exploration are principally located onshore in the Southern coastal states, in various states in the Southwest and Midwest, and in federal waters offshore Louisiana and Texas. As of December 31, 1994, Exploration had operations or properties in 14 states. Exploration had working interests in I-1 5 approximately 2.2 million gross acres or 1.5 million net acres onshore as of December 31, 1994. Of this onshore acreage, approximately 1.2 million gross or 654,986 net acres were producing oil or gas. In addition, as of such date, Exploration had a working interest in 70 federal offshore blocks in the Gulf of Mexico and one state offshore block, totaling 308,344 gross acres or 160,932 net acres. Of these blocks, 58 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 at spot-market prices under a long-term contract. Beginning in 1988 Exploration implemented a strategy to acquire gas properties with significant development potential. As a result of this strategy, Exploration has increased its total proved reserves since that time to approximately 1.6 trillion cubic feet of natural gas equivalent at the end of 1994, which represents more than a six-fold increase. Approximately 88 percent of Exploration's proved reserves are natural gas. In 1994 Exploration continued its strategy of acquiring producing oil and gas properties with potential for additional reserves and production development. Exploration's acquisition strategy is to make investments in areas where it currently operates in order to take advantage of operating efficiencies and to expand the geographic scope of its operations in select regions where opportunities make it attractive to do so. During 1994 Exploration acquired approximately 278 billion cubic feet ("Bcf") of proved natural gas equivalent reserves in 37 separate transactions totaling $163 million, for an average acquisition cost of $.59 per thousand cubic feet equivalent. Through these acquisitions, Exploration extended its operations to the Permian Basin of west Texas and increased its position in south Texas. In January 1995 Exploration announced two significant acquisitions of oil and gas producing properties, one in north Louisiana and the other in the Texas Panhandle area. When fully completed, these transactions, which total $158.3 million, will add proved reserves of 188 Bcf of natural gas and 11.2 million barrels of oil and condensate, yielding a unit acquisition cost on a natural gas equivalent basis of $.62 per thousand cubic feet. In north Louisiana, Exploration will acquire, for $135.7 million, interests of Cobra Oil and Gas, Inc. and its partners in the north Shongaloo-Red Rock Field. Proved reserves are estimated at 162 Bcf of natural gas and 10 million barrels of condensate and gas liquids, with only 21 percent of the reserves presently developed and producing. An aggressive drilling program to bring the undeveloped reserves to producing status is planned. In the other transaction, Exploration will acquire from Horizon Oil and Gas Company and partners, for $22.6 million, producing interests in the northern Texas Panhandle producing area. Proved reserves are estimated at 26 Bcf of natural gas and 1.2 million barrels of oil and condensate, of which 41 percent are developed and producing. In 1994 Exploration continued its aggressive drilling program, participating in the drilling of 343 development wells, of which approximately 85 percent were successful, increasing proved reserves by approximately 137 Bcf of natural gas equivalent. Exploration also participated in the drilling of 15 exploratory wells in 1994, none of which were successful. Of these 15 exploratory wells, however, 13 were drilled as part of a shallow-well drilling program in south Texas done in order to acquire additional lease acreage. Of the total of 358 wells in which Exploration participated in drilling in 1994, it operated 250. Exploration is also continuing to develop its substantial acreage position in the eastern extension of the Austin Chalk trend in Texas and Louisiana. As a part of its drilling program, Exploration participated in the drilling of 26 horizontal wells in this trend during 1994, all of which were successful. As of December 31, 1994, Exploration's net proved reserves totaled 32 million barrels of crude oil, condensate, and natural gas liquids and 1,367 Bcf of natural gas. As of December 31, 1993, Exploration's net proved reserves amounted to 27 million barrels of crude oil, condensate, and natural gas liquids and 1,187 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. I-2 6 Exploration's total exploration and production capital expenditures in 1994 were $390 million compared with $441 million in 1993, which includes its share of the capital expenditures of Sonat/P Anadarko Limited Partnership in 1993 (see Note 5 of the Notes to Consolidated Financial Statements in Part II of this report). Exploration will continue to emphasize producing property acquisitions and development drilling in 1995, when capital spending is expected to be approximately $410 million. While maintaining an active program, Exploration has also continued its cost control and productivity improvement efforts. In order to focus its exploration and production efforts and to minimize administrative and other costs, Exploration disposed of certain non-strategic oil and gas interests in 1994 in the states of Louisiana, Texas, Oklahoma, and Arkansas. These properties were sold for a total of approximately $6 million and included approximately 10,106 net developed acres of oil and gas leases with interests in approximately 54 gross productive wells, representing net proved reserves of approximately seven Bcf natural gas equivalent. Exploration expects that it will continue to dispose of non-strategic oil and gas interests in the future and anticipates that the number and size of properties sold in 1995 will be greater than in 1994. Exploration relies on its own technical staff for the selection of its drilling prospects. Leases on desirable, nonproducing offshore prospects are typically acquired in federal and state waters by acquisition or through a competitive bidding process from the federal or state governments. Exploration has, and may in the future, bid with other companies for leases on prospective offshore acreage. Onshore leases are acquired by Exploration's staff and by independent lease brokers at the direction of Exploration's staff, through farmouts, through participation in prospects developed by others, or by acquisition. Exploration may, as it has in the past, enter into joint venture arrangements where exploration and development activity is performed on behalf of the joint venture by whichever company is designated as operator. Drilling for Exploration is conducted by independent drilling contractors. There have been no oil or gas reserve estimates filed or included in any reports to any federal agency within the last twelve months, except Form EIA-23 Annual Survey of Domestic Oil and Gas Reserves filed with the Federal Energy Regulatory Commission (the "FERC") and Form 9-1866 (Request for Reservoir Maximum Efficient Rate) filed with the Minerals Management Service of the U.S. Department of the Interior (the "MMS"). There are no material differences in the reserves reflected in such reports and the estimated reserves as reflected in Note 13 of the Notes to Consolidated Financial Statements in Part II of this report, except for differences resulting from actual production, acquisitions, property sales, and necessary reserve revisions and additions to reflect actual experience. Exploration's business is subject to all of the operating risks normally associated with the exploration for and production of oil and gas, including blowouts, cratering, pollution, and fires, each of which could result in damage to or destruction of oil and gas wells, formations, production facilities, or properties or in personal injury. Sonat maintains broad insurance coverage on behalf of Exploration 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-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, 1994. 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................................................... 322,091 35,591 357,682 Louisiana.................................................. 177,296 675,535 852,831 Oklahoma................................................... 256,584 84,523 341,107 Texas...................................................... 305,391 254,903 560,294 Other...................................................... 19,829 2,380 22,209 --------- --------- --------- Total............................................ 1,161,775 1,052,932 2,214,707 ========= ========= =========
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.................................................... 10 3 13 South Marsh Island.............................................. 1 0 1 Eugene Island(2)................................................ 4 1 5 Ship Shoal...................................................... 11 3 14 Main Pass....................................................... 1 4 5 Mississippi Canyon(3)........................................... 4 0 4 -- -- ----- Total................................................. 61 1 74
- --------------- (1) Exploration has a 12.5 percent working interest below 9,500 feet in West Cameron 290, which is one of the 15 producing blocks. In one of the producing blocks, West Cameron 421, Exploration only has an overriding interest. (2) In one of the producing blocks, Eugene Island 10, Exploration only has an overriding interest. (3) Exploration is not a lessee of one of the four producing blocks (Mississippi Canyon 150), but this block has been unitized with the three producing lease blocks in the area in which Exploration has working interests. I-4 8 SONAT EXPLORATION COMPANY MAP [MAP TO COME] I-5 9 Consolidated Net Production Exploration had interests in production from 3,545 producing wells onshore and 157 producing wells offshore as of December 31, 1994. 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 1992 to 1994 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 1994, $.38 in 1993, and $.38 in 1992. The average production cost is calculated by converting all units of production to equivalent Mcf of gas using the relative energy content method. Exploration sells its crude oil production generally at posted prices, subject to adjustments for gravity and transportation. Exploration sells its natural gas primarily to Marketing at spot-market prices. Exploration also sells some of its gas under long-term contracts directly to pipelines, distribution companies, and end-users. Exploration sells natural gas liquids at market prices under monthly or long-term contracts. Sales of natural gas by Exploration to affiliates accounted for approximately 65 percent of Exploration's revenues in 1994 and 44 percent in 1993. During 1993 Marketing assumed responsibility for marketing all of Exploration's natural gas production that is not sold under pre-existing term dedications. Marketing purchases most of this production directly from Exploration and markets the balance pursuant to an agency agreement. Marketing, on behalf of Exploration, uses derivative transactions, including natural gas futures contracts, options on natural gas futures contracts, and oil and gas price swap agreements, as hedges for Exploration's production to reduce the risks associated with spot-market price volatility. See Note 2 of the Notes to Consolidated Financial Statements contained in Part II of this report. Consolidated Wells and Acreage The following table sets forth information concerning Exploration's consolidated working interests in oil and gas properties as of December 31, 1994.
TOTAL NO. OF PRODUCTIVE NO. OF WELLS WELLS ---------------- DEVELOPED UNDEVELOPED BEING OIL GAS ACRES ACRES DRILLED ---- ----- --------- --------- ------- Gross...................................... 540(1) 3,162(2) 1,407,988 1,115,063 69 Net........................................ 226 1,733 789,325 843,117 37
- --------------- (1) One of these wells is a multiple completion. (2) 148 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 1992 through 1994.
NET EXPLORATORY NET DEVELOPMENT WELLS DRILLED WELLS DRILLED -------------------- ------------------------- 1992 1993 1994 1992 1993 1994 ----- ----- ------ ------- ------- ------- Productive.......................................... .50 3.71 -0- 125.10 145.22 180.00 Dry................................................. .50 6.00 13.70 12.35 20.15 43.79
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 I-6 10 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. Natural gas prices were down significantly in 1994, with Exploration's realized gas prices averaging $1.83 per thousand cubic feet compared with $1.99 in 1993. Oil prices were also significantly lower, averaging $15.91 per barrel in 1994 versus $17.42 per barrel in 1993. Thus far in 1995 natural gas prices are lower than prices for the same months in 1994. Exploration is unable to predict price levels for oil or natural gas in 1995 or beyond, but if the trend of lower natural gas prices continues for the entire year of 1995, Exploration's earnings and cash flow will be lower than 1994 results. TRANSMISSION, STORAGE, AND MARKETING OF NATURAL GAS Southern Natural Gas Company The principal business of Southern, which is a wholly owned subsidiary of Sonat, is the transmission of natural gas in interstate commerce. Southern, including its subsidiaries, owns approximately 9,320 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-18. 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 sought to have 21 Bcf of the certificated working storage capacity of Muldon reclassified to cushion gas, resulting in a certificated working storage capacity of 31 Bcf of gas. The FERC approved Southern's reclassification application on a limited-term basis for a one-year period ending November 1, 1994, subject to a further review of engineering and geophysical data supporting the reclassification and Muldon's operations during the 1993-94 winter period. On December 30, 1994, Southern filed a comprehensive study with the FERC containing the data it had requested, which is pending FERC review. Southern believes the results of the study support the reclassification of working storage gas to cushion gas requested by Southern. Southern's limited-term authorization has been extended until the FERC completes its review of the study. Bear Creek Storage Company ("Bear Creek"), an unincorporated joint venture between wholly owned subsidiaries of Southern and Tenneco Inc., each of which is a 50-percent participant, owns a large underground natural gas storage field located in Louisiana that is operated by Southern and provides storage service to Southern and Tennessee Gas Pipeline Company, a subsidiary of Tenneco Inc., and their customers. The Bear Creek Storage Field has a total certificated working storage capacity of approximately 65 Bcf of gas, half of which is committed to Southern. At December 31, 1994, Bear Creek's gross facilities cost was approximately $246,902,000, its net facilities cost was approximately $164,257,000, and its participants' equity was $93,815,000. Southern had an investment in Bear Creek, including its equity in undistributed earnings, of $46,907,000 at December 31, 1994. I-7 11 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 is now used for such services. Southern's interstate pipeline business is subject to regulation by the FERC, the U.S. Department of Energy's Economic Regulatory Administration (the "ERA"), and the U.S. Department of Transportation under the terms of the Natural Gas Policy Act of 1978 (the "NGPA"), the Natural Gas Act (the "NGA"), and various pipeline safety and environmental laws. See "Governmental Regulation -- Transmission, Storage, and Marketing of Natural Gas" below for information concerning the regulation of natural gas transmission operations. Southern's business is subject to the usual operating risks associated with the transmission of natural gas through a pipeline system, which could result in property damage and personal injury. Sonat maintains broad insurance coverage on behalf of Southern limiting financial loss resulting from these operating risks. Order No. 636 Restructuring. In 1992 the FERC issued its Order No. 636 (the "Order"), which required interstate natural gas pipeline companies, including Southern, South Georgia Natural Gas Company ("South Georgia"), a wholly owned interstate pipeline subsidiary of Southern, and Florida Gas, to make significant changes in the way they 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 is entitled to receive gas from the pipeline to meet fluctuating requirements without having previously scheduled delivery of that gas; (3) adopt a straight-fixed-variable method for rate design (which assigns more costs to the demand component of the rates than do other rate-design methodologies previously utilized by pipelines); and (4) implement a pipeline capacity release program under which firm customers have the ability to "broker" the pipeline capacity for which they have contracted. The Order also authorized pipelines to offer unbundled sales services at market-based rates and allowed for pregranted abandonment of some services. In requiring that Southern provide unbundled storage service, the Order resulted in a substantial reduction of Southern's working storage gas inventory and consequently a reduction in its rate base. This reduction was effective on November 1, 1993, when Southern restructured pursuant to the Order and sold at its cost $123 million of its working storage gas inventory to its new storage customers. The Order also resulted in rates that are less seasonal, thereby shifting revenues and earnings for Southern out of the winter months. Interstate pipeline companies, including Southern, are incurring certain costs ("transition costs") as a result of the Order, the principal one being costs related to amendment or termination of, or purchasing gas at above-market prices under, existing gas purchase contracts, which are referred to as gas supply realignment ("GSR") costs. The Order provided for the recovery of 100 percent of the GSR costs and other transition costs to the extent the pipeline can prove that they are eligible, that is, incurred as a result of customers' service choices in the implementation of the Order, and were incurred prudently. The prudence review will extend both to the prudence of the underlying gas purchase contracts, based on the circumstances that existed at the time the contracts were executed, and to the prudence of the amendments or terminations of the contracts. Numerous parties have appealed 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 to 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 "price differential" 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 I-8 12 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 based on both eligibility and prudence grounds. 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 FERC's finding that the 1988 settlement is not a bar in general to the recovery as GSR costs of payments made to amend or to terminate these contracts does not prevent an eligibility challenge to specific payments, however, on the theory that they are actually take-or-pay costs that would have been unavoidable regardless of the Order. The December 16 order generally approved Southern's restructuring tariff submitted pursuant to the September 3 order. Various parties have sought judicial review of the September 3 and December 16 orders. As of December 31, 1994, Southern had either paid or accrued $134 million in GSR costs (including $4 million in interest) either to reduce significantly the price payable under or to terminate a number of gas supply contracts providing for payment of above-market prices. In addition, on February 17, 1995, Southern reached an agreement to resolve its remaining high-cost supply contracts with Exxon Corporation ("Exxon") by paying an additional $45 million in GSR costs and foregoing a claim against $19 million in price differential costs that have been paid to Exxon under an interim agreement entered into between the parties pending resolution of litigation contesting Southern's termination on March 1, 1994, of a gas purchase contract with Exxon. This agreement is conditioned upon the Customer Settlement (described below) becoming effective. Southern also has an agreement under which another high-cost contract price is reduced in exchange for monthly payments having a present value of approximately $44 million. Southern has received permission from the FERC to purchase an annuity in order to monetize this obligation. In addition to its GSR costs relating to termination or amendment of its remaining gas supply contracts, Southern has incurred and expects to continue to incur certain price differential GSR costs resulting from Southern's continued purchase of gas under its remaining supply contracts that provide for prices in excess of current market prices. As of December 31, 1994, Southern had incurred $69 million in price differential costs. Beginning in December 1993 Southern has made a number of filings with the FERC seeking to recover GSR costs paid through various periods prior to the filings. In each instance, the FERC has accepted Southern's filing subject to refund, and subject to a determination through a hearing before an administrative law judge regarding whether such costs were prudently incurred and are eligible for recovery under the Order. Southern's customers are opposing its recovery of its GSR costs in these proceedings based on both eligibility and prudence grounds. These proceedings, which have all been consolidated, are in the early stages of discovery and Southern cannot predict their outcome at this time. Customer Settlement. Southern filed with the FERC on March 15, 1995, a Stipulation and Agreement that would settle all of Southern's pending rate and GSR cost recovery proceedings ("Customer Settlement"). As of that date, Southern had been advised that customers representing more than 90 percent of the firm transportation capacity on its pipeline system intend to support the Customer Settlement. Pursuant to the Customer Settlement, which must be approved by the FERC, all issues in Southern's current and prior rate cases would be settled and Southern would credit against GSR costs incurred by Southern the full amount of Southern's rate reserves as of February 28, 1995, which were approximately $155 million. Such amount, less certain amounts withheld for potential rate refunds to parties, if any, that contest the Customer Settlement, will be credited in the aggregate to reduce the GSR costs borne by Southern's customers. Southern has filed I-9 13 with the FERC to implement reduced settlement rates for parties that support the Customer Settlement on an interim basis effective as of March 1, 1995, subject to reinstatement, pending FERC consideration and approval of the Customer Settlement. The Customer Settlement provides that, except in certain limited circumstances, Southern will not file a general rate case to be effective prior to March 1, 1998. In the fourth quarter of 1994 Sonat recognized a $29 million charge associated with the Customer Settlement, which includes anticipated amounts for GSR costs that Southern would not recover from its customers, and a $28 million provision relating to regulatory assets that will not be recovered as a result of the Customer Settlement, including amounts for a corporate restructuring undertaken in 1994. Southern's Customer Settlement would settle as to supporting parties all of the proceedings pursuant to which Southern is seeking recovery of its GSR costs as well as all of its other outstanding rate proceedings. If the Customer Settlement is ultimately approved by the FERC, all challenges to the recovery of Southern's GSR costs would be resolved as to those customers supporting the Customer Settlement, including all issues related to eligibility and prudence. Additionally, Southern would absorb an agreed-upon portion of its total GSR costs, which was reflected in the provision for the Customer Settlement noted above. It is possible that the Customer Settlement will be contested by certain of Southern's customers, in which case the Customer Settlement, if approved by the FERC, will become effective only as to supporting parties and Southern's rates and GSR costs applicable to contesting parties would be determined by the outcome of Southern's pending rate and GSR proceedings, where Southern anticipates that those contesting customers will continue to challenge both the eligibility and prudence of such costs. It is also possible that the Customer Settlement might not be approved by the FERC or, if approved, might be modified in a way unacceptable to Southern or its customers. In its Customer 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, recent contract renegotiations, and price differential costs actually incurred, the total amount of GSR costs is estimated to be approximately $328 million on a present-value basis. This amount includes the payments made or accrued through December 31, 1994, to amend or to terminate gas purchase contracts, price differential costs through December 31, 1994, and the $64 million cost that will be incurred under the settlement of existing contracts with Exxon, which will become effective if the Customer Settlement becomes effective. These costs collectively total $288 million. Thus, Southern currently estimates it will ultimately pay an additional $40 million in GSR costs. These amounts do not include an additional $87 million in GSR costs that would be incurred if the settlement with Exxon does not become effective and Exxon prevails in its lawsuit regarding Southern's March 1, 1994, termination of a contract relating to Exxon's reserves in its Mississippi Canyon blocks. See "Administrative Law Judge Ruling Concerning Recoverability of Investment in Offshore Gas Supply Facilities; Settlement with Exxon Corporation" below. Until the Customer Settlement is approved, Southern plans to make additional rate filings quarterly to recover its price differential costs and any other GSR costs. Additionally, Southern will continue to make monthly filings designed to adjust the billing determinants and associated surcharges for its firm transportation customers to reflect changes in the level of systemwide contract demands and effective carrying charges that occur from time to time. If the Customer Settlement is not approved, Southern cannot predict the ultimate outcome of its Order No. 636 restructuring proceedings, its rate filings to recover its GSR costs, or its other outstanding rate proceedings. 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 I-10 14 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 113 municipalities and gas districts, and to eight connecting interstate pipeline companies. Southern also transported gas directly to 56 industrial end-users in 1994. Southern principally transports gas to resale and industrial customers and to other pipelines and, as indicated, continues to sell some limited volumes of gas at wholesale for distribution. 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 1994 for Southern and all of its subsidiaries were 886 Bcf, which was all of Southern's throughput in 1994, compared with transportation volumes in 1993 of 763 Bcf, which was 91 percent of Southern's total 1993 throughput of 836 Bcf. Sales to resale distribution customers, including municipalities and gas districts, accounted for virtually all of 1994 sales of 103 Bcf and 1993 sales of 73 Bcf (excluding the sale of storage inventory). The volumes associated with the 1994 sales are included in transportation volumes because, as required by Order No. 636, all sales are now made at the receipt points where the gas enters Southern's pipeline system. Likewise, Southern had sales of 19 Bcf during November and December 1993 (following implementation of its Order No. 636 restructuring) that were made at the receipt points where the gas entered its pipeline system; consequently, those volumes are included within the 763 Bcf of transportation volumes for 1993. 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. 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 Gas Light Company, and its subsidiary, Chattanooga Gas Company (collectively "Atlanta"), signed firm transportation service agreements with transportation demands of 582 million cubic feet per day for a one-year term that ended October 31, 1994, and 118 million cubic feet per day for a term extending until April 30, 2007. This represented an aggregate reduction of 100 million cubic feet per day from Atlanta's level of service prior to November 1, 1993. 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 for terms ranging from one to ten or more years. Alabama Gas Corporation ("Alagasco"), Southern's second largest customer, executed firm transportation contracts for 393 million cubic feet per day under terms extending through October 31, 2008. Atlanta elected to renew its firm transportation service agreements with transportation demands of 582 million cubic feet per day, which expired October 31, 1994, for a one-year term beginning November 1, 1994. In September and October of 1994 Atlanta Gas Light Company and South Carolina Pipeline Corporation ("SCPL") executed three-year firm service agreements with transportation demands of an additional 100 million cubic feet per day and 28 million cubic feet per day, respectively. With these additional subscriptions, substantially all of Southern's firm market-area capacity currently available became fully subscribed. I-11 15 If the Customer Settlement becomes effective, Atlanta will amend its firm transportation contracts for an aggregate of 682 million cubic feet per day to extend their primary terms for a period of three years beginning March 1, 1995. An additional 118 million cubic feet per day would remain under its current term to April 30, 2007. If the Customer Settlement becomes effective, SCPL will amend its firm transportation contract for 28 million cubic feet per day to extend its primary term for a period of three years beginning March 1, 1995. Such extension will be in addition to the remaining 160 million cubic feet per day of SCPL's firm transportation services that remain in effect under terms extending from 1997 through 2003. Sales by Southern of natural gas are anticipated to continue only until Southern's remaining supply contracts expire, are terminated, or are assigned. As a result of Order No. 636 Southern is attempting to terminate its remaining gas purchase contracts through which it had traditionally obtained its long-term gas supply. Some of these contracts contain clauses requiring Southern either to purchase minimum volumes of gas under the contract or to pay for it ("take-or-pay" clauses). Although Southern currently is incurring 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 sold 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. A portion of these sales agreements were extended for an additional one-year term, while the sales agreements with Atlanta were extended through March 31, 1995. Certain customers, including Atlanta, have advised Southern that if the Customer Settlement becomes effective, they will extend their sales agreements through November 1997. The remainder of Southern's gas supply will continue to be sold on a month-to-month basis. Subject to the cost-sharing mechanism in the Customer Settlement, pursuant to which Southern will absorb an agreed-upon portion of its total GSR costs, Southern will recover in accordance with the Customer Settlement or, pending approval of the Customer Settlement, will file to recover as a GSR cost pursuant to Order No. 636, the difference between the cost associated with the gas supply contracts and the revenue from the sale agreements and month-to-month sales as well as any cost previously incurred or to be incurred as a result of Order No. 636 to terminate or to reduce the price under Southern's remaining gas supply contracts. Transportation and sales by Southern, combined with sales by Marketing, to two unaffiliated distribution customers, Atlanta and Alagasco, accounted for approximately 16 percent and ten percent, respectively, of Sonat's 1994 consolidated revenues. Atlanta and Alagasco were the only two customers that accounted for ten percent or more of Sonat's consolidated revenues for 1994. Southern continues to pursue growth opportunities to expand the level of services in its traditional market area and to connect new gas supplies. On May 1, 1994, Southern completed its second pipeline expansion into northern Florida and southwestern Georgia, which increased firm daily capacity by 40 million cubic feet per day. On July 22, 1994, Southern filed an application with the FERC for authorization to construct a 21-mile pipeline extension to a delivery point near Chattanooga that will deliver natural gas to a group of new customers that have signed ten-year contracts for firm transportation volumes totaling approximately 11 million cubic feet per day. For additional information regarding Southern's transportation and sales of gas, see Management's Discussion and Analysis of Financial Condition and Results of Operations contained in Part II of this report. I-12 16 Gas Supplies. During 1994 Southern reduced the number of its existing long-term gas supply contracts from 60 at the end of 1993 to 31 at the end of 1994. The following table contains information as to Southern's gas supply and the general sources from which that supply was purchased during the years 1992 through 1994.
MMCF* ----------------------------------- 1992 1993 1994 ------- ------- ------- Purchased from non-affiliates............................. 109,578 102,492 96,992 Purchased from affiliates................................. 11,003 7,317 5,795 ------- ------- ------- Total Purchases........................................... 120,581 109,809 102,787
- --------------- * 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 supply agreements in 1994, 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, except for the two contracts entered into with Exxon as part of the settlement described below, which, if the Exxon settlement becomes effective, will replace six above-market-priced contracts with longer terms. 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. Administrative Law Judge Ruling Concerning Recoverability of Investment in Offshore Gas Supply Facilities; Settlement with Exxon Corporation. In an initial decision issued on May 2, 1994, which Southern has appealed, an administrative law judge ruled, in a rate case Southern had filed before the FERC, that Southern could not include in its rates the approximately $45 million cost of certain pipeline facilities placed in service by Southern in 1992 to connect to its interstate pipeline system extensive new gas reserves being developed by Exxon in the Mississippi Canyon and Ewing Bank Area Blocks, offshore Louisiana (the "Mississippi Canyon Facilities").The judge ruled that Southern's recovery of these costs was precluded by the 1988 settlement with Southern's customers that limits the amount of take-or-pay payments Southern may recover in its rates. The judge found that the cost of the facilities constitutes non-cash consideration to Exxon for a 1989 take-or-pay settlement and is therefore subject to the dollar "cap" on these payments contained in the 1988 settlement. Southern has previously recovered the maximum amount permitted by the 1988 settlement in its rates. Southern has appealed the administrative law judge's decision to the FERC, but cannot predict the outcome of this appeal. The Customer Settlement provides that, as to customers supporting the settlement, the costs of the Mississippi Canyon Facilities will be recovered by Southern on a rolled-in basis and the 1988 take-or-pay settlement cap will not preclude Southern's recovery of such costs. On February 17, 1995, Southern reached a settlement with Exxon pursuant to which, in return for an additional cash payment by Southern of $45 million, plus allowing Exxon to retain $19 million in price differential costs already paid to Exxon, all existing gas purchase contracts would be terminated, two new gas purchase contracts would be entered into having three-year terms and providing for market-based index prices, and a lawsuit regarding Southern's termination of the gas purchase contract covering gas reserves connected by the Mississippi Canyon Facilities (the "Mississippi Canyon Contract") would be dismissed. The settlement with Exxon is contingent on FERC approval of the Customer Settlement. If this settlement with Exxon does not become effective, total GSR costs under the Mississippi Canyon Contract through the scheduled renegotiation of its pricing provisions in 1997 are estimated to be approximately $125 million on a present-value basis, although such estimate is subject to significant uncertainty since the assumptions inherent in the estimate (including underlying reserves, future deliverability, and a range of estimated future gas market prices) are not known today with certainty and there is a wide range of possible outcomes for each assumption. In addition, Southern has given notice to Exxon that effective March 1, 1994, I-13 17 it has terminated the Mississippi Canyon Contract pursuant to certain provisions of the contract. Such termination, if effective, would reduce GSR costs associated with such contract to $14 million. Exxon has filed suit against Southern seeking a declaratory judgment that Southern does not have the right to terminate the contract or alternatively for damages of an unspecified amount arising out of the alleged repudiation or breach of the contract by Southern. The court entered a summary judgment order upholding Southern's termination of this contract, which Exxon has appealed to the Fifth Circuit Court of Appeals. Southern's customers are challenging the recovery of GSR costs attributable to such contract on eligibility and prudence grounds and on the basis that such costs also constitute non-cash consideration for the 1989 take-or-pay settlement with Exxon and thus are not recoverable due to the 1988 take-or-pay cost cap. If the settlement with Exxon does not become effective, Southern cannot predict the outcome of pending or future proceedings for the recovery of GSR costs related to the gas supplies connected by the Mississippi Canyon Facilities or its pending litigation with Exxon regarding Southern's notice of termination of the Mississippi Canyon Contract. Potential Royalty Claims. In connection with certain of its settlements of take-or-pay claims made by producers during the 1980s, Southern indemnified the producers against various potential claims related to the settlement that might be made by royalty owners. Southern has thus far been notified by ten producers of potential royalty claims under the indemnity provisions of various settlement agreements. The claims for which Southern may have to indemnify these producers have been asserted by both private lessors with respect to onshore leases and the MMS with respect to federal offshore and Indian leases. Southern has spent approximately $1.2 million to date in settlement of claims of this type. Under the terms of a 1988 take-or-pay recovery settlement with Southern's customers, Southern is entitled to seek recovery of such costs related to federal offshore or Indian leases under the FERC's Order No. 500 cost-sharing procedures. The customers are entitled, however, to challenge any effort by Southern to recover those costs. Southern is unable to state whether any additional royalty claims based on Southern's indemnification provisions in its take-or-pay settlements will be asserted or to predict the outcome of any such claims or resulting litigation or of Southern's efforts to recover from its customers any amounts it may pay, but believes that these claims will not have a material adverse effect on Southern's financial condition or results of operations. Sea Robin Pipeline Company. Sea Robin Pipeline Company ("Sea Robin"), a wholly owned subsidiary of Southern, owns and operates a 438-mile pipeline system located in the Gulf of Mexico through which it gathers natural gas and condensate for others and delivers those products to shore for condensate removal and gas processing and redelivery to five downstream transmission pipelines. See the system map on page I-18. Sea Robin is a transportation-only pipeline that has restructured in compliance with FERC Order No. 636. During 1994 Sea Robin connected three new offshore gas fields to its system at a cost of $9 million. Sea Robin has also executed contracts to connect a new deepwater offshore production area to its system during 1995 at an expected cost of $1.1 million. Sea Robin transported approximately 282 Bcf of natural gas in 1994 compared to 287 Bcf in 1993. These Sea Robin volumes are included within the Southern transportation volumes discussed earlier. During the past year the FERC has issued a series of orders in which it has found that certain facilities operated by interstate natural gas transmission companies and, in some instances, facilities previously certificated under the NGA, are exempt from its jurisdiction pursuant to Section 1(b) of the NGA because they qualify as gathering facilities. Sea Robin began discussions during the fourth quarter of 1994 with the shippers on its pipeline system regarding the terms under which it would gather gas supplies for its existing shippers as a gathering company not subject to the jurisdiction of the FERC. As of March 1, 1995, Sea Robin has executed new gathering contracts with shippers representing approximately 53 percent of its annual deliveries in 1994. Discussions are continuing with the remaining shippers. Sea Robin's general proposal to all of its shippers includes maintenance of Sea Robin's existing rates for five years, following which the gathering rates will be adjusted on an annual basis by application of an inflation index. Sea Robin has negotiated gathering contracts with each shipper on an individual basis, however, and the specific terms and conditions of each contract may vary. On January 20, 1995, Sea Robin filed a petition requesting the FERC to declare that Sea Robin's facilities are exempt from the jurisdiction of the FERC under Section 1(b) of the NGA. Shippers representing approximately 21 percent of Sea Robin's annual deliveries in 1994 have filed in opposition to Sea I-14 18 Robin's petition at the FERC. The new gathering contracts described above are contingent on the FERC granting Sea Robin's request. If Sea Robin's petition is approved by the FERC, Sea Robin expects that the FERC will require it to tender to those shippers with which it has been unable to reach agreement a "default contract" that will provide for gathering services under Sea Robin's existing rates, as adjusted for inflation, for a two-year term. In addition to their protests in the gathering proceeding, on February 16, 1995, several of Sea Robin's shippers filed with the FERC a complaint against Sea Robin under Section 5 of the NGA claiming that Sea Robin's rates are unjust and unreasonable. Any reduction in Sea Robin's rates as a result of this complaint, however, could be implemented only on a prospective basis. Sea Robin is unable to predict the outcome of either of these proceedings. Sonat Intrastate-Alabama Inc. Sonat Intrastate-Alabama Inc. ("SIA"), a wholly owned subsidiary of Southern, owns and operates a 454-mile intrastate pipeline system extending from natural gas fields and coal seam gas production areas in the Black Warrior Basin in northwest and central Alabama to connections with customers in Alabama, as well as interconnections with three other pipelines, including Southern. See the system map on page I-18. SIA's throughput in 1994 was approximately 38 Bcf compared to 36 Bcf in 1993. Sonat Ventures Inc. Sonat Ventures Inc. ("Ventures"), a wholly owned subsidiary of Southern, 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. ("Sonat NGV"), a wholly owned subsidiary of Ventures, was created in July 1992. Sonat 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. In 1994 this joint venture was reorganized into a Georgia limited liability company, NGV Southeast Technologies Center, L.L.C. ("NGV Southeast"). The conversion facility near Atlanta, Georgia, opened in February 1993. In addition to the conversion of vehicles, NGV Southeast has constructed a mobile source emissions testing laboratory, which is scheduled for completion during the second quarter of 1995. NGV Southeast intends to seek certification by the U. S. Environmental Protection Agency to perform vehicular emissions tests. During 1993 Ventures also entered into two joint ventures with affiliates of 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 and the first station in Florida is expected to begin operating in the second quarter of 1995. A Florida limited partnership, in which Ventures is a 50-percent general partner and an affiliate of a Florida local distribution company is a 50-percent general partner, entered into a joint venture in January 1995 with Amoco Oil Company to develop a public fueling infrastructure for vehicular natural gas in Dade, Broward, and Palm Beach Counties, Florida. South Georgia Natural Gas Company. South Georgia, a wholly owned subsidiary of Southern, owns and operates a 909-mile interstate natural gas transmission system located in eastern Alabama, southern Georgia, and the Florida Panhandle. See the system map on page I-18. As described above, South Georgia has restructured pursuant to Order No. 636 and is a transportation-only pipeline. South Georgia transported approximately 34 Bcf of natural gas in 1994 compared to 32 Bcf in 1993. These South Georgia volumes are included within the Southern transportation volumes discussed earlier. Southern Energy Company. Southern Energy Company ("Southern Energy"), a wholly owned subsidiary of Southern, owns a liquefied natural gas ("LNG") receiving terminal near Savannah, Georgia, which was constructed for a project, now terminated, to import LNG from Algeria. The terminal has been inactive since the early 1980s. On July 22, 1992, the FERC issued an order approving a settlement relating to Southern Energy's LNG facilities. The settlement resolved a number of outstanding rate and accounting issues and preserved an option for customers of Southern Energy to obtain LNG through this facility at least through the year 1999. Sonat Energy Services Company Energy Services, which is a wholly owned subsidiary of Sonat, acts as a holding company for two of Sonat's largely non-FERC-regulated companies engaged in natural gas marketing and power generation. I-15 19 Sonat Marketing Company. Marketing, which is a wholly owned subsidiary of Energy Services and 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 1994 Marketing sold 482 Bcf of natural gas purchased from approximately 275 natural gas producers compared to 1993 sales of 285 Bcf of natural gas purchased from approximately 250 natural gas producers. 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 all of the natural gas production of Exploration that is not sold under pre-existing term dedications and for executing 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 1.6 billion cubic feet of natural gas per day at the end of 1994 versus 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. During 1994 Marketing also added a variety of new risk-management, transportation, and storage services for its customers. Sonat Power Inc. Sonat Power Inc. is a wholly owned subsidiary of Energy Services. In June 1992 Sonat and The AES Corporation formed a 50-50 joint venture, AES/Sonat Power, L.L.C., that will construct, own, and operate natural gas-fueled independent power and cogeneration plants in the United States, Canada, and Mexico. In January 1994 Pacific Gas and Electric Company announced that it would sign a contract with AES Pacific, Inc., an affiliate of AES/Sonat Power, to purchase power from a 221-megawatt natural gas-fueled power plant to be constructed in San Francisco. If this project goes forward, a subsidiary of The AES Corporation would construct and operate the plant. Energy Services is assisting in the negotiation of the gas supply and transportation contracts needed in connection with the project. The plant is currently planned to be completed by mid-1997 and would require an equity investment from Sonat in the range of approximately $15-20 million. Citrus Corp. Sonat owns one-half of the stock of Citrus, which owns all of the stock of Florida Gas and Citrus Trading Corp., a natural gas marketing company that began selling natural gas to Florida Power & Light Company during 1990 under a 15-year contract for up to 125 Bcf annually. During 1994 Citrus successfully negotiated a restructuring of the pricing terms under this contract. Florida Gas Transmission Company. Florida Gas, like Southern, is an interstate natural gas transmission company. It is operated by a subsidiary of Enron Corp., which owns the other 50 percent of Citrus. Florida Gas' approximately 4,500-mile pipeline system extends from south Texas to a point near Miami, Florida, with a certificated daily delivery capacity of 1,455 million cubic feet per day. See the map on page I-18. Florida Gas is the primary pipeline transporter of natural gas in the state of Florida and the sole pipeline transporter to peninsular Florida. In 1994 Florida Gas transported 325 Bcf of natural gas. In August 1990 Florida Gas commenced providing open-access gas transportation services under the provisions of FERC Order No. 500 and restructured its sales and transportation services. As a result, Florida Gas' throughput volumes, once primarily sales, became primarily transportation volumes. Effective November 1, 1993, Florida Gas, like Southern, restructured its services in compliance with FERC Order No. 636 and became solely a transporter of natural gas. Florida Gas has terminated its gas purchase contracts with a weighted average cost in excess of current spot-market prices for aggregate costs that are less than the $160 million maximum amount that it is entitled to recover from its customers pursuant to its 1993 restructuring settlement under Order No. 636. Florida Gas, with approval of the FERC, completed a project in the first quarter of 1995 known as the Phase III expansion, which increased its system capacity by 530 million cubic feet of gas per day to its current total of 1,455 million cubic feet per day. The project is fully subscribed by 31 customers under long-term service agreements, with over 60 percent of the capacity dedicated to the growing electric generation market in I-16 20 Florida. As part of Phase III, Florida Gas contracted for 100 million cubic feet per day of new firm transportation to be delivered from Southern's system. Also in connection with the expansion, Florida Gas acquired a 20-percent interest in an existing pipeline in the Mobile Bay area that has been expanded by over 300,000 Mcf per day and connected to Florida Gas' pipeline system. Primarily as a result of the delays and increased construction costs associated with weather and environmental problems, the $1 billion cost of the Phase III expansion project is more than originally estimated. While Florida Gas believes that all of the costs of the Phase III expansion have been prudently incurred, Florida Gas' customers have the right under general rate-making principles to challenge any of these costs as imprudently incurred. As of December 31, 1994, Sonat has increased its equity investment in Citrus by $159 million in order to fund Phase III. Florida Gas is currently reviewing the prospects for further expansions of its pipeline system into the Florida market. At December 31, 1994, Citrus' gross pipeline and facilities cost was approximately $2,593,563,000 and its net cost was approximately $2,235,167,000. Sonat had an investment in Citrus, including its equity in undistributed earnings, of $291,700,000 at December 31, 1994. 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. Since the mid-1980s customers have switched their volumes from a bundled merchant service to transportation service, acquiring gas supply under unregulated arrangements such as those provided by Marketing and Citrus Trading Corp. Southern competes with several pipelines for the transportation business of its customers and at times discounts its transportation rates in order to maintain market share. Southern continues to provide a limited merchant service with gas supply remaining under contract and, in this capacity, competes with other suppliers, pipelines, gas producers, marketers, and alternate fuels. Natural gas is sold in competition principally with fuel oil, coal, liquefied petroleum gases, electricity, and heavy crude oil. An important consideration in Southern and Florida Gas' markets is the ability of natural gas to compete with alternate fuels. Residual fuel oil, the principal competitive alternate fuel in Southern and Florida Gas' market area, was at certain times in 1994, and may be at times in the future, priced at or below the comparable price of natural gas in industrial and electric generation markets. Some parts of Southern's market area are also served by one or more other pipeline systems that can provide transportation as well as sales service in competition with Southern. Southern's two largest customers are both able to obtain a portion of their natural gas requirements through transportation by other pipelines. 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. FERC's Order No. 636 mandates a rate design, known as straight fixed-variable ("SFV"), that is designed to allow pipelines to recover substantially all fixed costs, a return on equity, and income taxes in the capacity reservation component of their rates. The firm transportation customers of Southern and Florida Gas (with the exception of certain small customers) must pay these reservation charges regardless of the volumes shipped. Accordingly, the SFV rate design should result in greater stability in the earnings and cash flows of interstate pipelines, including Southern and Florida Gas. This is particularly true at Florida Gas, which faces intense competition in the Florida market from residual fuel oil that affects the volumes of gas it transports. 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. I-17 21 [SOUTHERN NATURAL PIPELINE MAP GOES HERE] I-18 22 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 39.7 percent of Offshore's outstanding shares. Offshore maintains offices, land bases, and other facilities at various locations throughout the world. As of March 1, 1995, Offshore wholly owns 19 marine units and operates two others that are owned by a company in which Offshore has a 24.9 percent ownership interest. At March 1, 1995, 16 of the 21 marine units were working or committed to work under contract. 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 13 "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. Offshore now wholly owns three of these five semisubmersibles, while the other two are owned by a company in which Offshore has a 24.9 percent interest and are managed by Offshore through most of 1995. At March 1, 1995, Reading & Bates Corporation, a competitor of Offshore, owned 73.1 percent of the company that owns these two rigs. Offshore also owns and operates three other semisubmersibles, two dynamically positioned, deep-water drillships, ten jackups, and one submersible. All of Offshore's drilling equipment is suitable for both exploration and development drilling, and Offshore is normally engaged in both types of drilling activity. Offshore's contracts to provide offshore drilling services are individually negotiated and vary in their terms and provisions. Offshore obtains most of its contracts through competitive bidding against other contractors. It is not unusual, however, for Offshore to be awarded drilling contracts for its deep-water and harsh-environment units on a negotiated basis without competitive bidding. Drilling contracts generally provide for a basic drilling rate on a dayrate basis and for lower rates for periods of travel or when drilling operations are interrupted or restricted by equipment breakdowns, adverse environmental conditions, or other conditions beyond the control of Offshore. Offshore also performs drilling services under turnkey contracts, which provide for payment of a fixed price per well. Under turnkey contracts, Offshore agrees to drill a well to a specified depth for a fixed price. In general, no payment is received unless the well is drilled to the specified depth. Turnkey contracts offer the possibility of financial gains or losses that are substantially greater than those that would ordinarily result under conventional dayrate contracts. Revenues from dayrate contracts have historically accounted for substantially more of Offshore's revenues than turnkey contracts. 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. The offshore drilling market in 1993 and 1994 generally experienced difficult conditions, although certain geographic areas and market segments have performed better than others. Throughout most of 1994 the North Sea market was depressed in comparison with recent years, primarily due to the decline in oil prices and the effects of changes made in 1993 to the U.K. Petroleum Revenue Tax on exploratory drilling. Beginning in late 1994 and continuing into 1995, however, the market for drilling services in the U.K. sector of the North Sea improved significantly because of a combination of factors, including the exodus of rigs from the area, the commencement of both major and marginal field development programs, and major new discoveries in the area. Offshore expects nearly full utilization of semisubmersibles in the North Sea market in 1995. The U.S. Gulf of Mexico shallow-water market is largely dependent on U.S. natural gas prices. The steady decline of these prices in 1994, together with the influx of rigs into the Gulf beginning in late 1993, resulted in declines in I-19 23 demand and dayrates in the second half of 1994. Given the uncertainties of natural gas prices, Offshore cannot predict the extent or duration of the current weakness in this market. The deep-water market has continued to evidence increased demand, however, which started in early 1994. Additional contractors have elected to focus on turnkey drilling, a factor that 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 are completed, new contracts offering similar returns can be found. 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. Transmission, Storage, and Marketing of Natural Gas Southern is subject to regulation by the FERC and by the Secretary of Energy under the NGA, the NGPA, and the Department of Energy Organization Act of 1977 (the "DOE Act"). Southern's interstate transmission subsidiaries and Florida Gas are also subject to such regulation. The NGA, modified by the DOE Act, grants to the FERC authority to regulate the construction and operation of pipeline and related facilities utilized in the transportation and sale of natural gas in interstate commerce, including the extension, enlargement, or abandonment of such facilities. Southern, its interstate transmission subsidiaries, and Florida Gas hold required certificates of public convenience and necessity issued by the FERC authorizing them to construct and operate all pipelines, facilities, and properties now in operation for which certificates are required, and to transport and sell natural gas in interstate commerce. The FERC also has authority to regulate the transportation of natural gas in interstate commerce and the sale of natural gas in interstate commerce for resale. Although the FERC still retains jurisdiction over their resale rates, following the implementation of Order No. 636, Southern, Florida Gas, and other interstate pipeline companies are now permitted to charge market-based rates for gas sold in interstate commerce for resale. Gas sold by Marketing and other marketing companies is not regulated by the FERC. Transportation rates remain fully regulated. As necessary, Southern, its interstate transmission subsidiaries, and Florida Gas file with the FERC applications for changes in their transportation rates and charges designed to allow them to recover fully their costs of providing such service to their customers, including a reasonable rate of return. These rates are normally allowed to become effective, subject to refund, until such time as the FERC rules on the actual level of rates. See "Rate and Regulatory Proceedings" below. I-20 24 Regulation of the importation of natural gas is vested in the Secretary of Energy, who has delegated various aspects of this import jurisdiction to the FERC and the ERA. Southern, its natural gas transmission subsidiaries, 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 natural gas transmission 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 $13 million in 1994 compared to $14 million in 1993. It is anticipated that such expenditures will be approximately $20 million in 1995. Rate and Regulatory Proceedings. Various matters pending before the FERC, or before the courts on appeal from the FERC, relating to, or that could affect, Sonat or one or more of its subsidiaries are described in Part II of this report in Note 9 of the Notes to Consolidated Financial Statements and in Management's Discussion and Analysis of Financial Condition and Results of Operations under the caption "Rate Matters," which are incorporated herein by reference. As described in Note 9, several general rate changes have been implemented by Southern and remain subject to refund and Southern filed with the FERC on March 15, 1995, a Customer Settlement (described above) that, if it is approved by the FERC and becomes effective, would resolve all outstanding rates and GSR cost recovery proceedings as to supporting customers. ENVIRONMENTAL MATTERS Various environmental matters relating to, or that could affect, Sonat or one or more of its subsidiaries are described in Part II of this report in Management's Discussion and Analysis of Financial Condition and Results of Operations under the caption "Environmental Issues," which is incorporated herein by reference. CORPORATE RESTRUCTURING In late 1994 and early 1995 Sonat completed a reduction in staffing levels that is described in Part II of this report in Management's Discussion and Analysis of Financial Condition and Results of Operations under the caption "Corporate Restructuring," which is incorporated herein by reference. ITEM 2. PROPERTIES A description of Sonat's and its subsidiaries' properties is included under Item 1. Business above and is incorporated by reference herein. ITEM 3. LEGAL PROCEEDINGS For information regarding certain proceedings pending before federal regulatory agencies, see Note 9 of the Notes to Consolidated Financial Statements in Part II of this report. For information regarding various environmental matters relating to, or that could affect, Sonat or one or more of its subsidiaries, see Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II of this report under the caption "Environmental Issues." Arcadian Corporation v. Southern Natural Gas Company and Atlanta Gas Light Company was filed in January 1992 in the U.S. District Court for the Southern District of Georgia. This lawsuit was filed against Southern and Atlanta Gas Light Company ("Atlanta") for alleged violation of the antitrust laws in connection with Southern's refusal to provide direct service to the Plaintiff, Arcadian Corporation ("Arcadian"). Arcadian claims actual damages of at least $15 million, which could be trebled under the antitrust laws. Southern and Arcadian executed an agreement settling this lawsuit on November 30, 1993. The settlement provides that the lawsuit will be dismissed with prejudice upon final, nonappealable approval by the FERC of the direct connection and transportation service requested by Arcadian. Pending such approval the lawsuit has been stayed. On May 12, 1994, the FERC issued an order granting such approval. Atlanta and I-21 25 others sought rehearing on the May 12 order. Atlanta also filed a petition for review of such order in the Court of Appeals. The FERC has not acted upon the rehearing requests other than to give itself more time to consider the rehearing petition. While management believes it has meritorious defenses and intends to defend the suit vigorously if the stay were to be lifted, given the inherently unpredictable nature of litigation and the relatively early state of discovery in the case, management is unable to predict the ultimate outcome of the proceeding if it were to go forward. 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 of monetary damages. Southern's customers are challenging the recovery of GSR costs attributable to the Contract. See the discussion above in Item 1 under the caption "Administrative Law Judge Ruling Concerning Recoverability of Investment in Offshore Gas Supply Facilities; Settlement with Exxon Corporation." The U.S. District Court for the Southern District of Texas entered a summary judgment order on August 29, 1994, upholding Southern's termination of the Contract. On September 6, 1994, Exxon filed an appeal of the summary judgment order with the U.S. Court of Appeals for the Fifth Circuit, which remains pending. On February 17, 1995, Southern reached a settlement with Exxon pursuant to which this lawsuit would be dismissed. The settlement with Exxon, however, will not become effective until the Customer Settlement (described above in Item 1) is effective. Pending the settlement becoming effective, therefore, Exxon's appeal has been stayed. If it were to go forward, management is unable to predict the outcome of this litigation or whether its position that it has the right to terminate the Contract would be sustained. Southern Natural Gas Company v. ARCO Oil and Gas Company, d/b/a Vastar Resources, Inc., was filed in January 1994 in Civil District Court for the Parish of Orleans, Louisiana, and Vastar Resources, Inc. v. Southern Natural Gas Company was filed in April 1994 in the 125th Judicial Court of Harris County, Texas. Vastar Resources, Inc. ("Vastar") and Southern filed separate actions to petition these respective state courts to determine the price of gas under a 1949 contract between Vastar and Southern, providing for the purchase and sale of gas from the Logansport and Joaquin Fields located in Louisiana and Texas. Southern maintains that a provision of the contract provides for a market price, while Vastar maintains that the contract price is based upon the last regulated price in effect, adjusted for escalation. The parties have deferred the matter to arbitration and the two lawsuits have been stayed pending the outcome of that proceeding, which is scheduled to begin April 3, 1995, in New Orleans, Louisiana. Southern has recorded its reasonably estimable losses in connection with these proceedings,but will seek to recover as a GSR cost any amounts for gas purchases at prices above spot-market that may ultimately be determined it owes to Vastar as a result of these proceedings. Sonat and its subsidiaries are involved in a number of other lawsuits, all of which have arisen in the ordinary course of business. Sonat does not believe that any ultimate liability resulting from any of these other pending lawsuits will have a material adverse effect on it. I-22 26 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 1994. Executive Officers of the Registrant
OFFICER OFFICE AGE - ---------------------------------------- --------------------------------------------- ---- Ronald L. Kuehn, Jr..................... Chairman of the Board, President, and Chief 59 Executive Officer Donald G. Russell....................... Executive Vice President 63 William A. Smith........................ Executive Vice President 50 James A. Rubright....................... Senior Vice President and General Counsel 48 Thomas W. Barker, Jr.................... Vice President -- Finance and Treasurer 50 Beverley T. Krannich.................... Vice President -- Human Resources and 44 Secretary Ronald B. Pruet......................... Vice President and Controller 42 James E. Moylan, Jr..................... President of Southern 44 Richard B. Bates........................ President of Energy Services 41
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 a Director of Sonat effective September 22, 1994, and currently serves in those capacities. Mr. Russell also serves as Chairman and Chief Executive Officer of Exploration. 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 Vice Chairman of Exploration. During the past five years Mr. Smith has served as an officer of Sonat, Exploration, Southern, and Energy Services. James A. Rubright was elected Senior Vice President and General Counsel of Sonat effective April 1, 1995, and will serve in that capacity beginning on that date. Mr. Rubright currently serves as Vice President and General Counsel of Sonat and 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 effective February 15, 1994, Mr. Rubright had been a member of the Atlanta, Georgia law firm of King & Spalding. Thomas W. Barker, Jr. was elected Vice President -- Finance of Sonat effective June 15, 1984, and Treasurer of Sonat effective January 1, 1990, and currently serves in those capacities. Mr. Barker also serves as Vice President -- Finance and Assistant Treasurer of Exploration and Treasurer of Southern and Energy Services. During the past five years Mr. Barker has served as an officer of Sonat, Exploration, Southern, and Energy Services. I-23 27 Beverley T. Krannich was elected Vice President -- Human Resources of Sonat effective June 1, 1987, and Secretary of Sonat effective May 11, 1984, and currently serves in those capacities. Ms. Krannich also serves as Vice President -- Human Resources of Exploration and Southern. During the past five years Ms. Krannich has served as an officer of Sonat, Exploration, and Southern. Ronald B. Pruet was elected Vice President and Controller of Sonat effective April 1, 1994, and currently serves in that capacity. 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 Sonat and Exploration. James E. Moylan, Jr. was elected President of Southern effective April 1, 1994, and currently serves in that capacity. 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-24 28 PART II
ITEM PAGE - --------- ----- Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters... II-32 Item 6. Selected Financial Data..................................................... II-40 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................... II-2 Item 8. Financial Statements and Supplementary Data................................. II-16 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................................................. II-42
--------------------- The financial data following on pages II-2 through II-41 is reproduced from, and the Table of Contents below is taken from, the Sonat Inc. Annual Report to Stockholders for 1994. 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 26 Report of Management 39 Report of Ernst & Young LLP, Independent Auditors 39 Consolidated Financial Statements 40 Consolidated Balance Sheet 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 64
II-1 29 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 its Exploration and Production and Natural Gas Transmission and Marketing segments. Segment Operating Income
Years Ended December 31, 1994 1993 1992 - ----------------------------------------------------------- (In Millions) ------------------------ Exploration and Production $ 64 $ 86 $ 54 Natural Gas Transmission and Marketing 100 144 151 Other 5 3 6 ------------------------ Consolidated Operating Income $169 $233 $211 ========================
EXPLORATION AND PRODUCTION The Company is engaged in the exploration for and the acquisition, development, and production of oil and natural gas in the United States through Sonat Exploration Company. Sonat Exploration's strategy is to acquire gas properties with significant development potential. Since implementing this strategy in 1988, Sonat Exploration's proved reserves have grown to approximately 1.6 trillion cubic feet of natural gas equivalent at December 31, 1994, more than a six-fold increase. Sonat Exploration intends to continue aggressively to acquire domestic gas properties with significant development potential. During 1994 Sonat Exploration acquired oil and gas interests and properties for a total of $163 million, with proved reserves of approximately 278 billion cubic feet of natural gas equivalent. Through these acquisitions, Sonat Exploration extended its operations to the Permian Basin of west Texas and increased its position in south Texas. In early 1995, Sonat Exploration announced two significant acquisitions of oil and gas producing properties, one in north Louisiana and the other in the Texas Panhandle area. These transactions, which total $158.3 million, will add proved reserves of 188 billion cubic feet of natural gas and 11.2 million barrels of oil and condensate, yielding a unit acquisition cost on a natural gas equivalent basis of $.62 per thousand cubic feet. Total capital expenditures for Sonat Exploration are expected to approximate $410 million in 1995, which would be up slightly from 1994. Capital spending planned for 1995 includes approximately $250 million for producing property acquisitions. Sonat Exploration's developmental drilling programs continue to be very successful. During 1994 Sonat Exploration participated in the drilling of 343 development wells. These drilling programs added proved reserves of approximately 136.5 billion cubic feet of natural gas equivalent. Sonat Exploration's natural gas production is marketed primarily in the spot-market by Sonat Marketing Company, a subsidiary of the Company operating in the Natural Gas Transmission and Marketing segment. The decline in natural gas prices since mid-year reduced earnings for 1994, particularly in the fourth quarter. These low prices are continuing into 1995 and, if the trend of lower prices continues for the entire year of 1995, Sonat Exploration's earnings and cash flow will be lower than 1994 results. Sonat Exploration, through Sonat Marketing, uses derivative financial instruments as hedges to reduce the risks associated with price volatility for its production (see Commodity Price Risk Management and Note 2 of the Notes to Consolidated Financial Statements). Exploration and Production Operations
Years Ended December 31, 1994 1993 1992 - ----------------------------------------------------------- (In Millions) Revenues: Sales to others $ 145 $ 198 $ 214 Intersegment sales 268 155 65 --------------------------- Total Revenues 413 353 279 --------------------------- Costs and Expenses: Operating and maintenance 63 52 48 Exploration expense 12 7 5 General and administrative 46 43 49 Depreciation, depletion and amortization 207 149 108 Taxes, other than income 21 16 15 --------------------------- 349 267 225 --------------------------- Operating Income $ 64 $ 86 $ 54 =========================== Equity in Earnings of Unconsolidated Affiliates $ - $ 5 $ 2 =========================== Proved Reserves: (Includes Sonat/P) Net gas (Bcf) 1,367 1,187 1,028 Net liquids (MBbls) 31,627 27,094 20,144 =========================== Net Sales Volumes: (Includes Sonat/P) Gas (Bcf) 182 150 127 Oil and condensate (MBbls) 4,155 3,052 2,364 Natural gas liquids (MBbls) 1,227 726 733 =========================== Average Sales Prices: (Includes Sonat/P) Gas ($/Mcf) $ 1.83 $ 1.99 $ 1.71 Oil and condensate ($/Bbl) 15.91 17.42 18.94 Natural gas liquids ($/Bbl) 8.90 7.96 13.04 ===========================
II-2 30 Sonat Inc. and Subsidiaries 1994 Versus 1993. Operating income for 1994 declined 26 percent when compared to 1993 primarily due to lower natural gas prices and higher amortization. Revenues for 1994 were up by $60 million over 1993 due primarily to a 21 percent increase in natural gas production and a 36 percent increase for oil and condensate production resulting from the continuing acquisition and development program. Natural gas liquids production increased 69 percent over last year, primarily as a result of increased production from the Austin Chalk trend. On average, 1994 oil and gas prices were 9 percent and 8 percent lower, respectively, than in 1993. The hedging program's effect on revenue was a favorable $10 million in 1994 and an unfavorable $5 million in 1993. The most significant price fluctuation occurred in the fourth quarter of 1994 as average gas prices declined to $1.59 per Mcf compared to $2.06 for the fourth quarter of 1993, a 23 percent decrease. Amortization expense increased 39 percent when compared with 1993, primarily due to increased production volumes. The 1994 amortization rate also increased from the 1993 rate due in large part to a higher proportion of Austin Chalk (predominantly oil, condensate and natural gas liquids) production in 1994. Expanding operations and acquisitions were primarily responsible for increases in other operating expenses, including general and administrative expenses. The reduction in equity in earnings of unconsolidated affiliates reflects Sonat Exploration's acquisition of the remaining interest in Sonat/P Anadarko Limited Partnership (Sonat/P) in late 1993. Sonat/P was established in the third quarter of 1992. 1993 Versus 1992. Operating income for 1993 was up significantly from 1992, reflecting in part 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. The higher amortization rates resulted from increased Austin Chalk production, tight-sands gas drilling, and acquisitions that included more proved, producing reserves. General and administrative expense compared favorably to 1992 due to $4 million of restructuring charges included in 1992. 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 Marketing. Southern and Florida Gas Transmission Company, a subsidiary of Citrus, operating in the natural gas transmission industry, have historically provided their customers with 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, both Southern and Florida Gas have essentially become solely gas transporters, although Southern continues to make limited sales pending the expiration, termination, or assignment of its remaining gas supply contracts. Citrus also provides natural gas marketing activities through affiliates, primarily to customers of Florida Gas. The natural gas transmission industry, although regulated, is very competitive. Since the mid-1980s customers have switched their volumes from a bundled merchant service to transportation service, acquiring gas supply under unregulated arrangements such as those provided by 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. Southern continues to pursue growth opportunities to expand the level of services in its traditional market area and to connect new gas supplies. On May 1, 1994, Southern completed its second pipeline expansion into northern Florida and southwestern Georgia, which increased firm daily capacity by 40 million cubic feet per day. On July 22, 1994, Southern filed an application with the Federal Energy Regulatory Commission (FERC) for authorization to construct a 21-mile pipeline extension to a delivery point near Chattanooga, Tennessee, that will deliver natural gas to a group of new customers who have signed 10-year contracts for firm transportation volumes totaling approximately 11 million cubic feet per day. Florida Gas, which has a pipeline system capacity of 925 million cubic feet per day, will place its Phase III expansion into service on March 1, 1995, increasing its system capacity by 530 million cubic feet per day. As part of Phase III, Florida Gas will contract for 100 million cubic feet per day of new firm transportation to be delivered from Southern's system. Also in connection with this expansion, Florida Gas will acquire a 20 percent interest in an existing pipeline in the Mobile Bay area that was expanded by over 300 million cubic feet per day and connected to Florida Gas' pipeline system. Primarily as a result of the delays and increased construction costs associated with weather and environmental problems, the $1 billion cost of the Phase III expansion project is more than originally estimated. While Florida Gas believes that all of the costs of the Phase III expansion have been II-3 31 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) prudently incurred, Florida Gas' customers have the right under general rate-making principles to challenge any of these costs as imprudently incurred. As of December 31, 1994, the Company had increased its equity investment in Citrus by $159 million in order to fund Phase III. Additionally, Florida Gas is currently reviewing the prospects for further expansions of its pipeline system into the Florida market. Sonat Marketing continued to expand its natural gas marketing business during 1994. It now markets the majority of the natural gas production of Sonat Exploration, and has responsibility for the execution of Sonat Exploration's risk management program. Adding the Sonat Exploration volumes has enabled Sonat Marketing to expand its presence in Gulf Coast, Midwest, and Northeast markets and to begin building a significant base of sales in these markets to enhance its marketing of natural gas volumes acquired from unaffiliated producers. As a result of these efforts and due to increased purchasing from third parties, Sonat Marketing's average daily sales volumes at year-end 1994 were 1.6 billion cubic feet per day, versus 1.1 billion cubic feet per day at the end of 1993. Sonat Marketing uses derivative financial instruments to offer fixed price contracts to its suppliers and customers. (See Commodity Price Risk Management and Note 2 of the Notes to Consolidated Financial Statements.) Natural Gas Transmission and Marketing
Years Ended December 31, 1994 1993 1992 - ----------------------------------------------------------- (In Millions) Operating Income: Southern Natural Gas Company $ 93 $147 $151 Sonat Marketing Company 11 2 2 Other (4) (5) (2) ------------------------ Total Operating Income $100 $144 $151 ========================
Southern Natural Gas Company
Years Ended December 31, 1994 1993 1992 (In Millions) Revenues: Gas sales $234 $541 $489 Market transportation(1) 321 170 124 Supply transportation 37 50 51 Other(2) 173 72 65 ------------------------ Total Revenues 765 833 729 ------------------------ Costs and Expenses: Natural gas cost 229 364 270 Transition cost recovery and gas purchase contract settlement costs 116 52 52 Operating and maintenance(2) 189 103 88 General and administrative 72 85 79 Depreciation and amortization(1) 47 64 74 Taxes, other than income 19 18 15 ------------------------ 672 686 578 ------------------------ Operating Income $ 93 $147 $151 ------------------------ Equity in Earnings of Unconsolidated Affiliates $ 9 $ 9 $ 8 ------------------------ (Billion Cubic Feet) Volumes: Gas sales (excludes storage gas) - 73 109 Market transportation 551 435 391 ------------------------ Total Market Throughput 551 508 500 Supply transportation 335 328 342 ------------------------ Total Volumes 886 836 842 ======================== Transition Gas Sales 103 19 - ========================
(1) Southern's transportation revenues and depreciation expense in 1994 include a $16 million decrease reflecting a retroactive reduction in certain depreciation rates. (2) Southern's other revenue and operating and maintenance expense in 1994 include a $38 million adjustment related to the recognition of fuel revenue and expense. Citrus Corp.
Years Ended December 31, 1994 1993 1992 - ----------------------------------------------------------- (In Millions) ------------- Equity in Earnings (Loss) of Citrus Corp. $ 29 $ (6) $ (9) ------------------------ (Billion Cubic Feet) -------------------- Florida Gas Volumes (100%): Gas sales - 15 44 Market transportation 303 269 245 ------------------------ Total Market Throughput 303 284 289 Supply transportation 22 45 53 ------------------------ Total Volumes 325 329 342 ========================
II-4 32 Sonat Inc. and Subsidiaries Sonat Marketing Company
Years Ended December 31, 1994 1993 1992 - ----------------------------------------------------------- (In Millions) Revenues: Gas sales $926 $618 $341 Other 4 2 1 ------------------------ Total Revenues $930 $620 $342 ======================== Operating Income $ 11 $ 2 $ 2 ======================== (Billion Cubic Feet) -------------------- Gas Sales Volumes 482 285 178 ========================
1994 Versus 1993. Operating income for the Natural Gas Transmission and Marketing segment increased 9 percent excluding the effect of significant unusual items recognized by Southern in the fourth quarter of 1994. The increase was due to operations of both Southern and Sonat Marketing. The significant unusual items in 1994 included in operating and maintenance expense consisted of a $29 million charge associated with a comprehensive customer rate settlement that will be filed by Southern with the FERC in March 1995 (the Customer Settlement) and a $28 million provision relating to regulatory assets that will not be recovered as a result of the Customer Settlement, including amounts for a corporate restructuring undertaken in 1994. See Rate Matters for a discussion of the Customer Settlement. Southern Natural Gas-Excluding the unusual items discussed above, Southern's operating income for 1994 increased slightly when compared with 1993 as a result of higher transportation revenue resulting from the sale of unsubscribed firm transportation capacity and lower general and administrative costs. Southern's gas sales revenues and gas costs were down significantly in 1994 as a result of implementing Order No. 636 and primarily represent recognition of gas sales made from supply remaining under contract after the implementation of Order No. 636 (see Order No. 636 discussion below). The volumes associated with these sales are included in transportation volumes because, as required by Order No. 636, all sales are now made at the wellhead. Another factor in the decrease in revenues was the recovery of $42 million of Order No. 500 costs in 1993 revenues. Higher transportation revenues and volumes are a result of the shift from sales to transportation due to the implementation of Order No. 636. Other revenue also increased in 1994 due to the recovery of transition costs of $108 million related to the implementation of Order No. 636. General and administrative costs decreased primarily due to lower employee costs, including stock-based compensation expenses. Citrus-Equity in earnings of Citrus increased to $29 million from a loss of $6 million in 1993 due to the capitalization of financing costs (AFUDC) in 1994 related to the Phase III expansion project, lower depreciation due to an increase in the estimated useful life of the existing pipeline system, and higher margins on a gas supply contract with one of its major customers, which was restructured during 1994. This was partially offset by the favorable effect in 1993 of the sale of gas supply contracts at Citrus Marketing. Sonat Marketing-Operating income for Sonat Marketing was $11 million in 1994 as compared with $2 million in 1993. Sonat Marketing's sales volumes increased significantly over 1993 levels as a result of marketing Sonat Exploration's production for the entire period and increasing sales on interstate pipelines that serve the Midwest and Northeast markets through the purchase of additional third-party volumes. In addition, average margins per MMBtu have increased from $.03 in 1993 to $.05 in 1994 due to greater concentration on value-added services. 1993 Versus 1992. Operating results for the Natural Gas Transmission and Marketing segment were up slightly in 1993 excluding the effect of a $9.6 million settlement in 1992 relating to Southern Energy Company's (a subsidiary of Southern) idle liquefied natural gas facility. Southern Natural Gas-Excluding the unusual item discussed above, Southern's operating results were up 4 percent in 1993. Gas sales revenue and gas costs were abnormally high 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. 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. Citrus-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. The decline was offset, however, 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 II-5 33 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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. Sonat Marketing-Operating income for Sonat Marketing was $2 million in both 1993 and 1992. Sonat Marketing's sales revenues and volumes increased significantly over 1992 as a result of integrating the marketing of Sonat Exploration's production, which was completed in late 1993, and expanding activities on nonaffiliated pipelines through the purchase of additional third-party volumes. Increased expenses related to expanding operations offset the benefit of the revenue growth. ORDER NO. 636 In 1992 the FERC issued its Order No. 636 (the Order), which required interstate natural gas pipeline companies to make significant changes in the way they operate, including among other things, to: (1) separate (unbundle) their sales, transportation, and storage services; (2) provide a variety of transportation services, including a "no-notice" service pursuant to which the customer is entitled to receive gas from the pipeline to meet fluctuating requirements without having previously scheduled delivery of that gas; (3) adopt a straight-fixed-variable (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 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. 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. 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. Southern's largest customer, Atlanta Gas Light Company and its subsidiary, Chattanooga Gas Company (collectively Atlanta), signed firm transportation service agreements with transportation demands of 582 million cubic feet per day for a one-year term ending October 31, 1994, and 118 million cubic feet per day for a term extending until April 30, 2007. This represented an aggregate reduction of 100 million cubic feet per day from Atlanta's level of service prior to November 1, 1993. 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 for terms ranging from one to 10 or more years. Alabama Gas Corporation, Southern's second largest customer, executed firm transportation contracts for 393 million cubic feet per day under terms extending through October 31, 2008. Atlanta elected to renew its firm transportation service agreements with transportation demands of 582 million cubic feet per day, which expired October 31, 1994, for a one-year term beginning November 1, 1994. In September and October of 1994, Atlanta and South Carolina Pipeline Corporation (SCPL) executed three-year firm service agreements with transportation demands of an additional 100 million cubic feet per day and 28 million cubic feet per day, respectively. With these additional subscriptions, substantially all of Southern's firm market-area capacity currently available became fully subscribed. If the Customer Settlement (described in Note 9 of the Notes to Consolidated Financial Statements) becomes effective, Atlanta will amend its firm transportation contracts for an aggregate of 682 million cubic feet per day to extend the primary term for a period of three years beginning as of the date an interim rate reduction becomes effective, which will occur as of March 1, 1995. (See Note 9 of the Notes to Consolidated Financial Statements.) An additional 118 million cubic feet per day would remain under its current term to April 30, 2007. NATURAL GAS SALES AND SUPPLY Sales by Southern of natural gas are anticipated to continue until Southern's remaining gas supply contracts expire, are terminated, or are assigned. Southern is attempting to terminate its remaining gas supply contracts through which it had traditionally obtained its long-term gas supply. Some of these contracts contain clauses requiring Southern either to purchase minimum volumes of gas under the contract or to pay for it (take-or-pay clauses). Although Southern currently is incurring 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 II-6 34 Sonat Inc. and Subsidiaries remaining gas supply contracts, Southern sold 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. A portion of these sales agreements were extended for an additional one-year term, while the sales agreements with Atlanta were extended through March 31, 1995. Certain customers, including Atlanta, have advised Southern that if the Customer Settlement becomes effective, they will extend their sales agree- ments through November 30, 1997. The remainder of Southern's gas supply will continue to be sold on a month-to-month basis. As discussed in Note 9 of the Notes to Consolidated Financial Statements, Southern is incurring certain transition costs under the Order, primarily gas supply realignment (GSR) costs relating to existing gas purchase contracts. Southern's customers are contesting Southern's proceedings to recover its GSR costs on eligibility and prudence grounds and on the basis that Southern is precluded from recovering certain of such costs under a 1988 take-or-pay settlement that limited the amount of such costs that Southern could recover. In its Customer 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, recent contract renegotiations, and price differential costs actually incurred, the total amount of GSR costs are estimated to be approximately $328 million on a present-value basis. This amount includes the payments made or accrued through December 31, 1994, to amend or to terminate gas purchase contracts and price differential costs, and the $64 million cost that will be incurred under a settlement of existing contracts with Exxon Corporation (Exxon), which will become effective if the Customer Settlement becomes effective. These costs collectively total $288 million. Thus, Southern currently estimates it will ultimately pay an additional $40 million in GSR costs. These amounts do not include an additional $87 million in GSR costs that would be incurred if the settlement with Exxon does not become effective and Exxon prevails on its lawsuit regarding Southern's March 1, 1994, termination of a contract relating to Exxon's reserves in its Mississippi Canyon blocks. Subject to the cost-sharing mechanism in the Customer Settlement, pursuant to which Southern will absorb an agreed-upon portion of its total GSR costs, Southern will recover in accordance with the Customer Settlement or, pending approval of the Customer Settlement, will file to recover as a GSR cost pursuant to Order No. 636, the difference between the cost associated with the gas supply contracts and the revenue from the sales agreements and month-to-month sales as well as any cost previously incurred or to be incurred as a result of Order No. 636 to terminate or reduce the price under Southern's remaining contracts. If the Customer Settlement is not approved, Southern cannot predict the ultimate outcome of its Order No. 636 restructuring proceedings and its limited rate filings to recover its GSR costs. (See Rate Matters and Note 9 of the Notes to Consolidated Financial Statements.) Southern's purchase commitments under its remaining gas supply contracts for the years 1995 through 1999 are estimated as follows: Estimated Purchase Commitments
(In Millions) ------------- 1995 $67 1996 69 1997 69 1998 68 1999 53
These estimates are subject to significant uncertainty due both to the number of assumptions inherent in these estimates and to the wide range of possible outcomes for each assumption. None of the three major factors that determine purchase commitments (underlying reserves, future deliverability, and future price) is known today with certainty. These estimates also exclude estimated purchase commitments under certain contracts with Exxon that will be terminated if the Customer Settlement becomes effective. If the Customer Settlement does not become effective and Southern were therefore required to perform these contracts, and further assuming that Exxon were to prevail on its appeal of a summary judgment upholding the Company's termination of the Mississippi Canyon Contract, which is currently the subject of litigation between Exxon and Southern as described in Note 9 of the Notes to Consolidated Financial Statements, these estimates would increase by $170 million in 1995, $144 million in 1996, $57 million in 1997, $5 million in 1998, and $2 million in 1999. Of these amounts, $126 million in 1995 and 1996 and $49 million in 1997 is attributable to the Mississippi Canyon Contract. In addition, as part of its settlement with Exxon, which as noted is contingent on the effectiveness of the Customer Settlement, Southern and Exxon have agreed to terminate all their existing gas purchase contracts and to enter into two new gas purchase contracts having three-year terms and providing for market-based index prices (which would not constitute GSR costs). Therefore, if the Customer Settlement becomes effective, II-7 35 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) these estimates could increase by $108 million in 1995, $94 million in 1996, and $35 million in 1997 to include these two new contracts with Exxon. RATE MATTERS Several general rate changes have been implemented by Southern and remain subject to refund. If the Customer Settlement is approved by the FERC and becomes effective, all outstanding rate and Order No. 636 transition cost recovery proceedings would be resolved. The settlement would result in reducing Southern's filed rates to more competitive levels, would reduce somewhat reported revenues, and would reduce depreciation expense to approximately $40 million in 1995. Although Southern has been advised by customers representing more than 80% of its firm capacity that they intend to support the settlement, there is no assurance that the settlement will be approved by the FERC. (See Note 9 of the Notes to Consolidated Financial Statements for a discussion of the Customer Settlement and other rate matters.) CITRUS CORP. During 1994 Citrus had net income of $55 million compared with a loss of $16 million in 1993. This increase primarily resulted from AFUDC recognized on the Phase III expansion project, decreased depreciation due to an increase in the estimated useful life of the existing pipeline, and improved earnings on a gas supply contract with one of its major customers. These events, combined with Florida Gas' Order No. 636 restructuring and resultant conversion to an SFV rate methodology, are expected to result in stable revenues, earnings, and cash flow at Citrus, although at somewhat lower levels than in 1994 due to the completion of the Phase III expansion project and the resulting end of AFUDC recognition on the project combined with the use of levelized rates on the Phase III portion of the pipeline. Florida Gas has terminated its gas purchase contracts with a weighted average cost in excess of current spot-market prices and has negotiated a settlement with its customers and the FERC to recover 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. 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. Citrus obtains its own financing independent of its parent companies. Debt financing by Citrus with outside parties generally is nonrecourse to its parent companies. (See Note 5 of the Notes to Consolidated Financial Statements for a discussion of a Florida Gas financing.) In connection with the construction of the Phase III expansion, the Company made capital contributions to Citrus totaling $159 million. See Capital Expenditures below.
Years Ended December 31, 1994 1993 1992 - ----------------------------------------------------------- (In Millions) ------------- OTHER INCOME-EQUITY IN EARNINGS (LOSS) OF UNCONSOLIDATED AFFILIATES: Exploration and Production $ - $ 5 $2 Natural Gas Transmission and Marketing 38 2 (1) Other: Sonat Offshore Drilling Inc. 5 4 - Other 1 1 3 ----------------------- $44 $12 $ 4 =======================
Equity in earnings of unconsolidated affiliates in the Exploration and Production and Natural Gas Transmission and Marketing segments were discussed earlier. 1994 Versus 1993. Results reported for Sonat Offshore Drilling Inc. in the above table for 1993 are for the last seven months of the year, which is the period after the date of the initial public offering (IPO) of 60 percent of its common stock. Sonat Offshore's results on a 100 percent basis were $13 million and $17 million in 1994 and 1993, respectively. 1994 was lower primarily due to the inclusion in 1993 of $24 million ($16 million after-tax) of interest income relating to an IRS tax settlement for the years 1983 through 1985 and lower operating income from turnkey operations and dayrate operations in Brazil and the North Sea. These unfavorable items were partially offset by improved operating results in the U.S. Gulf of Mexico and Egypt and the acquisition of the remaining 52.5 percent of the Polar Pioneer in 1994. 1993 Versus 1992. On a 100 percent basis, Sonat Offshore's results were $17 million in 1993 compared with $84,000 in 1992. 1993 was higher due to the 1993 $24 million II-8 36 Sonat Inc. and Subsidiaries tax settlement mentioned above and to higher results in the Gulf of Mexico, Brazil and from turnkey operations for 1993.
Years Ended December 31, 1994 1993 1992 - ----------------------------------------------------------- (In Millions) ------------- OTHER INCOME-OTHER $16 $170 $18 -----------------------
1994 Versus 1993. Other income is down due to the $156 million pretax gain on the sale of 60 percent interest in Sonat Offshore in 1993. Exclusive of that gain, 1994 Other Income is higher due to the recognition of $4 million in gains on the disposal of assets compared with $1 million in 1993. 1993 Versus 1992. Other income increased in 1993 due to the $156 million pretax gain on the Sonat Offshore IPO. In addition, dividends on the Baker Hughes Incorporated preferred stock received in the sale of Teleco Oilfield Services Inc. (Teleco) in April 1992 contributed $12 million in 1993 versus $7 million in 1992. Also included in 1992 was a $9 million gain on the sale of oil and gas assets.
Years Ended December 31, 1994 1993 1992 - ----------------------------------------------------------- (In Millions) ------------- INTEREST EXPENSE, NET $(73) $(47) $(96) -------------------------
1994 Versus 1993. Net interest expense for 1994 included $10 million of favorable adjustments related to the settlement of the Company's federal income tax returns for the years 1986-1988. Net interest expense in 1993 included $31 million of favorable adjustments related to the settlement of the Company's 1983-1985 federal income tax returns and certain other tax issues. Excluding these adjustments, net interest expense increased from 1993 due to higher debt levels. 1993 Versus 1992. Net interest expense in 1993 included the $31 million in net interest income mentioned above. Otherwise, the decrease in interest expense in 1993 was due to lower debt levels and interest rates. Some higher rate debt was refinanced during 1993.
Years Ended December 31, 1994 1993 1992 - ----------------------------------------------------------- (In Millions) ------------- INCOME TAXES $16 $103 $36 -----------------------
1994 Versus 1993. Income tax expense in 1994 decreased as compared to 1993 due to lower pretax income (see 1993 explanation below). Both periods included favorable settlements relating to the examination of the Company's federal income tax returns which reduced reported income tax expense. Tax preference items were higher in 1994 compared to 1993 primarily due to higher dividend exclusions on unconsolidated equity investees partially offset by lower nonconventional fuel tax credits. 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.
Years Ended December 31, 1994 1993 1992 - ----------------------------------------------------------- (In Millions) ------------- NET INCOME FROM DISCONTINUED OPERATIONS $ - $ - $111 ------------------------
1992 primarily includes a $113 million gain on the sale of Teleco to Baker Hughes.
Years Ended December 31, 1994 1993 1992 - ----------------------------------------------------------- (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. LIQUIDITY AND CAPITAL RESOURCES CASH FLOWS
Years Ended December 31, 1994 1993 1992 - ----------------------------------------------------------- (In Millions) ------------- OPERATING ACTIVITIES $511 $454 $361 ------------------------
1994 Versus 1993. Net cash flows from operating activities were $57 million higher in 1994. The increase was primarily attributable to the $147 million change in gas supply realignment costs as a result of net recoveries of $19 million received in 1994 compared with net payments of $128 million in 1993. The $38 million increase in the change in accounts receivable in 1994 reflects the effect on 1993 accounts receivable of Sonat Offshore's turnkey operations in Mexico. The $47 million decrease in the change in inventories reflects the sale of storage gas inventory at Southern in 1993 pursuant to Order No. 636. The $52 million decrease in accrued interest and income taxes reflects recognition of the settlement of an examination of the Company's federal income tax returns and a prepayment of state taxes and related interest. In 1994 the Company completed II-9 37 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) recovery of its take-or-pay costs, resulting in the $33 million decrease in the change in take-or-pay recoveries when compared with 1993. The amount in Other in 1994 includes a $57 million provision for the Customer Settlement discussed in Note 9 of the Notes to Consolidated Financial Statements, while the amount in Other in 1993 reflects $52 million in accruals for GSR settlements. 1993 Versus 1992. Net cash provided by operating activities increased due to higher earnings at Sonat Exploration and receipt of $62 million for the settlement of an examination of the Company's federal income tax returns for the years 1983-1985. The $48 million increase in the change in inventories reflects the sale of storage gas inventory at Southern pursuant to Order No. 636. The $36 million net change in other current assets and liabilities reflects lower cash outflows in 1993 relating to gas imbalances. The $24 million decrease in the change in accounts receivable reflects the growth in 1993 of Sonat Offshore's receivables for turnkey operations in Mexico. The $51 million decrease in the change in accrued interest and income taxes reflects the effect of the disposition of Teleco.
Years Ended December 31, 1994 1993 1992 - ----------------------------------------------------------- (In Millions) ------------- Investing Activities $(601) $(189) $(30) --------------------------
1994 Versus 1993. The change in net cash used in investing activities reflects the equity investment in Citrus of $159 million made in 1994 and the approximately $340 million in net cash proceeds from the sale of Sonat Offshore common stock received in 1993. Slightly offsetting the increase is a $68 million reduction in capital expenditures for 1994. 1993 Versus 1992. Net cash used in investing activities increased $159 million in 1993. Capital expenditures of $516 million in 1993 were $291 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. Cash proceeds in 1992 included approximately $188 million from the sale of Teleco.
Years Ended December 31, 1994 1993 1992 - ----------------------------------------------------------- (In Millions) ------------- FINANCING ACTIVITIES $ 89 $(312) $(296) ------------------------
1994 Versus 1993. The change in cash flows from financing activities reflects increased borrowings in 1994 under Sonat's floating rate facilities compared with debt repayments in 1993. Borrowings in 1994 were primarily used for advances to Citrus and repayment of Southern's $100 million 9 5/8 Percent Notes. In 1993 the Company redeemed its 7 1/4 Percent Zero Coupon, Subordinated Convertible Notes and used cash from the Sonat Offshore IPO temporarily to repay borrowings under its credit agreements. 1993 Versus 1992. The net change in cash used in financing activities reflects a slight increase in debt repayments. CAPITAL EXPENDITURES Capital expenditures for the Company's business segments (excluding unconsolidated affiliates) were as follows:
Years Ended December 31, 1994 1993 1992 - ----------------------------------------------------------- (In Millions) ------------- Exploration and Production $390 $431 $156 Natural Gas Transmission and Marketing 54 61 44 Other 4 24 26 ------------------------ Total $448 $516 $226 ========================
The Company's share of capital expenditures by its unconsolidated affiliates were as follows:
Years Ended December 31, 1994 1993 1992 - ----------------------------------------------------------- (In Millions) ------------- Exploration and Production $ - $ 11 $ 37 Natural Gas Transmission and Marketing 398 18 12 Other 1 3 2 ------------------------ Total $399 $ 32 $ 51 ========================
The Company's capital expenditures (including its $70 million share of unconsolidated affiliates' expenditures) for 1995 are expected to be approximately $550 million. II-10 38 Sonat Inc. and Subsidiaries CAPITAL RESOURCES At December 31, 1994, the Company had lines of credit and revolving credit agreements with a total capacity of $1.05 billion. Of this amount, $475 million was available for borrowing. The amount available has been reduced by the $100 million of commercial paper outstanding to reflect the Company's policy that bank and commercial paper borrowings in the aggregate will not exceed the maximum amount available under its lines of credit and revolving credit agreements. On July 26, 1993, Sonat filed a shelf registration with the Securities and Exchange Commission (SEC) for up to $500 million in debt securities. The net proceeds from the sale of these debt securities are expected to be used for general corporate purposes, which may include refinancing of indebtedness, working capital increases, capital expenditures, possible future acquisitions, and redemption of securities. Southern also has a shelf registration with the SEC for up to $200 million in debt securities of which $100 million has been issued. On August 1, 1994, Sonat entered into a new 364-day revolving credit agreement with a group of banks. The revolving credit agreement provides for borrowings of up to $300 million through July 31, 1995. The Company expects to continue to use cash from operations and borrowings in the public or private markets or loans from affiliates to finance its capital and other corporate expenditures. In April 1994 the Board of Directors of the Company authorized the repurchase of up to two million shares of the Company's common stock. Purchases are being made from time-to-time in the open market or in privately negotiated transactions. Shares purchased under the authorization are expected to be reissued in connection with employee stock option and restricted stock programs. At December 31, 1994, 940,000 shares of common stock had been purchased under this program. Strong cash flow and borrowings in the public or private markets provide the Company with the means to fund operations and currently planned investment and capital expenditures. As discussed in Note 3 of the Notes to Consolidated Financial Statements, the Company holds four million shares of Baker Hughes preferred stock, as well as 11.3 million shares of Sonat Offshore common stock, both of which could be monetized. Capitalization Information
Years Ended December 31, 1994 1993 1992 - --------------------------------------------------------- Cash Flow from Operating Activities to Weighted Average Debt 44% 43% 29% Debt to Capitalization- End of Year 46% 42% 50% Book Value Per Share- End of Year $16.11 $15.64 $13.62 =========================
COMMODITY PRICE RISK MANAGEMENT Sonat Exploration and Sonat Marketing use natural gas futures contracts and options on gas futures and oil and gas price swap agreements to hedge the effects of spot-market price volatility on operating results. The Company's use of these instruments is implemented under a set of policies approved by the Board of Directors. These policies prohibit speculation, determine approval levels for each transaction, and set limits regarding volume relative to budgeted production or sales levels. All swap counterparties are approved by the Board, and volume limits are set for any single counterparty. Reports detailing each transaction and showing the Company's aggregate hedge position are prepared daily and distributed to management. In addition, all hedge activities are internally reviewed to ensure compliance with all policies. (See Note 2 of the Notes to Consolidated Financial Statements.) 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 pending customer settlement which will be filed by Southern in March 1995, if approved, would prohibit Southern from recovering higher costs of operations prior to March 1, 1998 (see Note 9 of the Notes to Consolidated Financial Statements). 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 and the interrelationship between oil, gas, and other energy prices. II-11 39 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) CORPORATE RESTRUCTURING In late 1994 and early 1995 the Company completed a reduction in staffing levels through a combination of special early retirement options (SERO) and involuntary terminations. The SEROs and terminations, which involved 340 employees, or approximately 15 percent of the Company's work force, occurred primarily in field locations, but also included significant reductions in office employees. The total cost of the program amounted to $21 million. The majority of the charge represented accelerated retirement costs, with the remainder being primarily cash severance payments. The Company anticipates the savings in 1995 from this program will approximate $12 million. ENVIRONMENTAL ISSUES Sonat Exploration, Southern, and their subsidiaries are subject to extensive federal, state, and local environmental laws and regulations that affect their operations. Governmental authorities may enforce these laws and regulations with a variety of civil and criminal enforcement measures, including monetary penalties, assessment and remediation requirements, and injunctions as to future activities. The use and disposal by Sonat Exploration, Southern, and their subsidiaries 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. The Environmental Protection Agency (EPA) has notified Sonat Exploration that it could become a potentially responsible party (PRP) at the D. L. Mud Superfund Site in Abbeyville Parish, Louisiana. Based on the information that it currently possesses, Sonat Exploration does not believe that any contribution will be sought from it with regard to this site and believes that, if it were named as a PRP, its status would be that of a de minimis contributor. Sonat Exploration has settled its potential liability at two other Superfund sites at which it had been named as a PRP in exchange for payments not material to it and, barring unexpected events, does not expect to have any further liability with regard to those sites. Southern was named by the EPA in October 1994 as a PRP at a Superfund site in Mississippi known as the Pike County Drum Site. In response to a request from the EPA, Southern provided the EPA with information concerning materials shipped to the site. The EPA advised Southern and the other PRPs in January 1995 that the cost to date of the response actions related to this site through EPA funding was approximately $330,000, and the EPA made demand on Southern and the other PRPs for payment of such amount plus applicable interest. In accordance with the procedures prescribed by the EPA, Southern has indicated to the EPA Southern's intent to participate in settlement negotiations relating to the allocation of such cost among all of the PRPs. Southern believes that, based on the nature and volume of materials that it shipped to this site and the information currently available to it, Southern should be a de minimis contributor to any settlement of such cost. In connection with the Superfund site in Alabama known as the Fuels and Chemicals Site, both Southern and a company in which a subsidiary of Sonat Exploration is a 50-percent shareholder, which were both named among the PRPs at this site, have signed an Administrative Order on Consent for Removal Action (AOC) with the EPA for removal actions at the site. To satisfy their obligations under the AOC, all of the signatory PRPs to the AOC have entered into an Indemnification, Reopener and Settlement Bank Fund Agreement (Indemnification Agreement) with one of the largest PRPs, who has agreed to undertake to perform all remedial actions required by the AOC and any additional response obligation required by the EPA or the Alabama Department of Environmental Management. In return for payments not material to Southern or Sonat Exploration, this PRP has agreed to indemnify the two Sonat entities against any further liability related to the AOC and a prior AOC dated July 20, 1993, (Phase I AOC) unless costs of complying with the AOC and the Phase I AOC exceed a specified amount. Based on the information that it currently possesses, Sonat does not expect the specified amount to be exceeded, unless tests that are being conducted indicate the presence of groundwater contamination at this site. II-12 40 Sonat Inc. and Subsidiaries Southern has settled its potential liability at three other Superfund sites, at two of which it had been named as a PRP, in exchange for payments not material to it and, barring unexpected events, does not expect to have any further liability with regard to any of the three sites. Liability for PRPs under CERCLA (and applicable state law) is joint and several among all PRPs. Although volumetric allocation is a factor in assessing liability, it is not necessarily determinative; thus, the ultimate liability at any of these sites could be substantially greater than the amounts described above. In the operation of their natural gas pipeline systems, Southern and its wholly owned subsidiary, South Georgia Natural Gas Company (South Georgia), have used, and continue to use at several locations, gas meters containing elemental mercury. Southern and South Georgia plan to remove all remaining mercury meters during the course of regularly scheduled facilities upgrades. Mercury and mercury meters are handled pursuant to procedures that are designed to protect employees and comply with Occupational Safety and Health Administration standards. It is generally believed in the natural gas pipeline industry that, in the course of normal maintenance and replacement operations, elemental mercury may have been released from mercury meters. Southern believes that its mercury meters may in the past have been the sources of small releases of elemental mercury. Southern intends to commence site characterization and, as appropriate, remediation of mercury-contaminated soil located in Louisiana during the first quarter of 1995. Southern expects to undertake the characterization and remediation of mercury-contaminated soil in its other states of operation beginning in 1996, subject to completion of work in Louisiana. Southern is unable to estimate with precision the cost of the characterization and remediation of mercury-contaminated soil at this time, because costs will vary based on a number of factors particular to each site and because regulatory standards for elemental mercury cleanup are uncertain at this time. Neither the EPA nor any state in which Southern operates has issued standards with respect to cleanup of mercury-contaminated soil; however, Southern has received informal guidance from the State of Louisiana with respect to cleanup standards in that state. Southern has budgeted the amount of $500,000 in 1995 for the characterization and remediation of mercury-contaminated soil in Louisiana and, based on the information that it currently possesses, believes that this amount may be sufficient to complete such characterization and remediation, subject to the actual extent of contamination discovered at any site. During the course of retirement and removal of certain field compressors, Southern discovered soil and groundwater contamination in the Logansport and Joaquin Fields, respectively, in the states of Louisiana and Texas. Although no link between Southern's operations and the groundwater contamination has been established, Southern notified the Louisiana Department of Environmental Quality (LDEQ) of this discovery because of a possibility that the groundwater contamination may be associated to some extent with Southern's past operations in the area. In November 1994 Southern received a request from the LDEQ for an Assessment Work Plan (the Plan) designed to determine the extent, source, and magnitude of soil and groundwater contamination discovered under Southern's field compressor locations, including evaluation procedures used to determine recommendations for remediation of soil and groundwater. Southern filed the Plan in December 1994. Southern expects that work under the Plan will commence during the first quarter of 1995, subject to review and approval of the Plan by the LDEQ. Southern believes that the cost to clean up any soil contamination at its field compressors will not be material. To date, Southern does not have in its possession sufficient information reasonably to estimate the cost, if any, that it may be required to bear for any cleanup of groundwater contamination. No reporting was required in Texas. II-13 41 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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, generally will seek recovery of such costs through rate filings, although no assurance can be given with regard to their ultimate recovery. As described in Note 9 of the Notes to Consolidated Financial Statements, however, Southern's proposed Customer Settlement, if approved, would prevent Southern from filing a general rate case to be effective prior to March 1, 1998. Sonat Exploration, Southern, and their subsidiaries are subject to the federal Clean Air Act (Clean Air Act), the federal Clean Air Act Amendments of 1990 (1990 Amendments), which added significantly to the existing requirements established by the Clean Air Act, and the state regulations and requirements promulgated thereunder (together the Clean Air Rules). The 1990 Amendments require that the EPA issue new regulations, mainly related to mobile sources, air toxicants, ozone non-attainment areas, acid rain, permitting, and enhanced monitoring. Southern operates three compressor stations in areas that do not meet the National Ambient Air Quality Standards (NAAQS) established under the Clean Air Act for ozone. Two of these stations are located in Louisiana and one is located in Alabama. The Clean Air Rules require Southern to submit an emissions control plan for nitrogen oxides (NOX) that may require the addition of emissions control technology at each of these stations. The LDEQ had previously instructed Southern to suspend the implementation of its Louisiana emissions control plans for NOX until September 1, 1994, because of the possibility that the emissions of NOX are not the cause of the area's failure to meet NAAQS. In a subsequent letter dated November 22, 1994, the LDEQ instructed Southern to suspend such implementation indefinitely pending the resolution of the LDEQ's request of the EPA for an exemption from the NOX Reasonably Available Control Technology (NOX RACT) requirements. The letter further advised that, upon receipt of such exemption, LDEQ intends to rescind the NOX RACT rules for this area entirely, in which case Southern would no longer be required to add emissions control technology for NOX for the affected facilities. Alabama regulators have not yet published specific emissions control requirements for NOX. Further, Alabama regulators have undertaken to have the area in which Southern's station is located recharacterized as meeting the NAAQS for NOX. Based on these actions, Southern does not currently know whether it will be required to implement emissions control plans for these stations. Based on Southern's projected cost of implementing its emissions control plans in Louisiana, its estimate of the possible cost of implementing a similar emissions control plan in Alabama, and its projected cost of complying with other applicable provisions of the Clean Air Rules, Southern currently estimates that the capital costs that it may incur to implement such plans and to comply with the Clean Air Rules could approximate $15 million. Based on information currently available, management believes that it is not reasonably likely that Sonat or any of its subsidiaries will incur liabilities as a result of the presently identified environmental contingencies in excess of the amounts specifically identified above in amounts 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 be material. 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. II-14 42 REPORT OF MANAGEMENT Sonat Inc. and Subsidiaries 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 LLP as independent auditors to audit the Company's consolidated financial statements and express their opinion thereon. Their audit is conducted in accordance with generally accepted auditing standards and includes a review and evaluation of the Company's internal accounting control systems and tests of transactions as they consider appropriate. The Report of Ernst & Young LLP, Independent Auditors, appears below. Internal audit activities are coordinated with the independent auditors to maximize audit effectiveness. The Audit Committee of the Board of Directors is composed solely of directors who are not active or retired officers or employees of the Company. It recommends a firm to serve as independent auditors of the Company, subject to nomination by the Board of Directors and election by the stockholders, 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 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. Ronald B. Pruet, Jr. - ----------------------------- Ronald B. Pruet, Jr. Vice President and Controller February 23, 1995 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders Sonat Inc. We have audited the accompanying consolidated balance sheets of Sonat Inc. and Subsidiaries as of December 31, 1994 and 1993, 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, 1994. 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, 1994 and 1993, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. Ernst & Young LLP Birmingham, Alabama January 19, 1995 II-15 43 CONSOLIDATED FINANCIAL STATEMENTS Sonat Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS
December 31, 1994 1993 - --------------------------------------------------------------------------------------------------------------------------- (In Thousands) -------------- ASSETS Current Assets: Cash and cash equivalents $ 9,131 $ 10,822 Accounts and notes receivable 279,553 256,925 Inventories (Note 4) 26,722 29,896 Gas imbalance receivables 35,091 43,867 Other 36,344 43,953 ------------------------------- Total Current Assets 386,841 385,463 ------------------------------- Investments and Advances: Unconsolidated affiliates (Note 5) 486,329 295,221 Other investments (Notes 2 and 3) 217,979 214,105 ------------------------------- 704,308 509,326 ------------------------------- Plant, Property and Equipment, successful efforts method of accounting used for oil and gas properties (Notes 6 and 13) 4,741,296 4,400,286 Less accumulated depreciation, depletion and amortization 2,497,691 2,313,168 ------------------------------- 2,243,605 2,087,118 ------------------------------- Deferred Charges: Gas supply realignment costs (Note 9) 160,850 179,586 Recoverable natural gas purchase contract settlement costs (Note 9) - 18,535 Other 35,082 33,969 ------------------------------- 195,932 232,090 ------------------------------- $3,530,686 $3,213,997 ===============================
See accompanying notes. II-16 44 CONSOLIDATED FINANCIAL STATEMENTS Sonat Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS
December 31, 1994 1993 - --------------------------------------------------------------------------------------------------------------------------- (In Thousands) -------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Long-term debt due within one year (Note 7) $ 19,250 $ 120,083 Unsecured notes (Note 7) 200,000 112,846 Accounts payable 208,751 193,383 Accrued income taxes 22,029 55,828 Accrued interest 36,825 49,853 Gas imbalance payables 42,975 59,144 Other 40,371 42,274 -------------------------------- Total Current Liabilities 570,201 633,411 -------------------------------- Long-Term Debt (Note 7) 963,378 741,161 -------------------------------- Deferred Credits and Other: Deferred income taxes (Note 8) 187,957 192,977 Reserves for regulatory matters (Note 9) 183,343 120,801 Other 233,921 162,432 -------------------------------- 605,221 476,210 -------------------------------- Commitments and Contingencies (Notes 5 and 9) Stockholders' Equity: Common stock, $1.00 par, 400,000,000 shares authorized; 87,252,015 and 87,157,982 shares issued in 1994 and 1993, respectively (Note 10) 87,252 87,158 Other capital 42,311 36,074 Retained earnings 1,287,339 1,239,983 -------------------------------- 1,416,902 1,363,215 Less treasury stock, 870,967 shares, at cost (25,016) - Total Stockholders' Equity 1,391,886 1,363,215 -------------------------------- $ 3,530,686 $ 3,213,997 ================================
See accompanying notes. II-17 45 CONSOLIDATED FINANCIAL STATEMENTS Sonat Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1994 1993 1992 - --------------------------------------------------------------------------------------------------------------------------- (In Thousands, Except Per-Share Amounts) ---------------------------------------- Revenues (Note 12) $1,773,927 $1,741,147 $1,484,423 ---------------------------------------------------- Costs and Expenses: Natural gas cost 795,025 794,254 532,595 Transition cost recovery and gas purchase contract settlement costs 116,159 51,827 52,314 Operating and maintenance 260,861 249,801 286,773 General and administrative 133,138 148,738 153,928 Depreciation, depletion and amortization 257,759 225,989 213,877 Taxes, other than income 41,546 37,623 33,845 ---------------------------------------------------- 1,604,488 1,508,232 1,273,332 ---------------------------------------------------- Operating Income 169,439 232,915 211,091 ---------------------------------------------------- Other Income, Net: Equity in earnings of unconsolidated affiliates (Note 5) 44,319 12,365 4,132 Sale of subsidiary stock (Note 3) - 155,836 - Other 16,348 13,884 17,904 ---------------------------------------------------- 60,667 182,085 22,036 ---------------------------------------------------- Interest: Interest income 7,403 39,331 10,735 Interest expense (86,982) (90,704) (115,515) Interest capitalized 6,692 4,101 8,422 ---------------------------------------------------- (72,887) (47,272) (96,358) ---------------------------------------------------- Income from Continuing Operations before Extraordinary Item and Income Taxes 157,219 367,728 136,769 Income Taxes (Note 8) 15,812 102,659 35,807 ---------------------------------------------------- Income from Continuing Operations before Extraordinary Item 141,407 265,069 100,962 Income from Discontinued Operations (Note 3) - - 111,447 Extraordinary Loss, Net of Income Tax Benefit of $1,972,000 (Note 7) - (3,829) - ---------------------------------------------------- Net Income $ 141,407 $ 261,240 $ 212,409 ==================================================== Earnings Per Share of Common Stock: (Note 10) Earnings from continuing operations before extraordinary item $ 1.62 $ 3.05 $ 1.17 Earnings from discontinued operations - - 1.30 Extraordinary loss - (.04) - ---------------------------------------------------- Earnings Per Share $ 1.62 $ 3.01 $ 2.47 ==================================================== Weighted Average Shares Outstanding (Note 10) 87,119 86,703 85,945 Dividends Paid Per Share (Note 10) $ 1.08 $ 1.04 $ 1.00 ====================================================
See accompanying notes. II-18 46 CONSOLIDATED FINANCIAL STATEMENTS Sonat Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------------ SHARES AMOUNT Shares Amount Shares Amount - ------------------------------------------------------------------------------------------------------------------------- (In Thousands) -------------- Common Stock, $1.00 Par, 400,000,000 Shares Authorized (Note 10): Balance at beginning of year 87,158 $ 87,158 86,077 $ 86,077 85,878 $ 85,878 Issued 94 94 1,081 1,081 199 199 ------------------------------------------------------------------------- Balance at end of year 87,252 87,252 87,158 87,158 86,077 86,077 ------------------------------------------------------------------------- Other Capital: Balance at beginning of year 36,074 17,339 14,397 Benefit plans 6,237 18,735 2,942 ------------------------------------------------------------------------- Balance at end of year 42,311 36,074 17,339 ------------------------------------------------------------------------- Retained Earnings: Balance at beginning of year 1,239,983 1,068,904 942,421 Net income 141,407 261,240 212,409 Cash dividends at $1.08 per share for 1994, $1.04 per share for 1993 and $1.00 per share for 1992 (94,051) (90,161) (85,926) ------------------------------------------------------------------------- Balance at end of year 1,287,339 1,239,983 1,068,904 ------------------------------------------------------------------------- Treasury Stock, at cost: Purchased (940) (27,005) - - - - Issued 69 1,989 - - - - ------------------------------------------------------------------------- Balance at end of year (871) (25,016) - - - - ------------------------------------------------------------------------- 86,381 $1,391,886 87,158 $1,363,215 86,077 $1,172,320 =========================================================================
See accompanying notes. II-19 47 CONSOLIDATED FINANCIAL STATEMENTS Sonat Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1994 1993 1992 - --------------------------------------------------------------------------------------------------------------------------- (In Thousands) -------------- Cash Flows from Operating Activities: Net income $ 141,407 $ 261,240 $ 212,409 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization 257,759 225,989 224,691 Deferred income taxes 1,607 49,635 20,479 Equity in (earnings) loss of unconsolidated affiliates, less distributions (31,740) 1,532 3,040 Gain on sale of subsidiary stock and disposal of assets (3,554) (158,592) (191,843) Reserves for regulatory matters 62,542 16,845 22,458 Gas supply realignment costs 18,736 (127,986) - Natural gas purchase contract settlement costs 18,535 51,947 52,619 Change in: Accounts receivable (22,533) (60,687) (36,302) Inventories 3,174 50,535 2,473 Accounts payable 15,368 44,921 27,312 Accrued interest and income taxes, net (46,758) 5,199 56,214 Other current assets 16,490 10,446 (21,243) Other current liabilities (18,072) (2,325) (7,099) Other 97,671 84,823 (4,467) ------------------------------------------------------ Net cash provided by operating activities 510,632 453,522 360,741 ------------------------------------------------------ Cash Flows from Investing Activities: Plant, property and equipment additions (448,314) (516,466) (225,766) Net proceeds from sale of subsidiary stock and disposal of assets 18,832 343,610 227,842 Investments in unconsolidated affiliates and other (171,660) (16,185) (32,114) ------------------------------------------------------ Net cash used in investing activities (601,142) (189,041) (30,038) ------------------------------------------------------ Cash Flows from Financing Activities: Proceeds from issuance of long-term debt 4,448,000 880,676 221,881 Payments of long-term debt (4,327,835) (1,237,694) (379,181) Changes in short-term borrowings 87,154 112,846 (59,792) ------------------------------------------------------ Net changes in debt 207,319 (244,172) (217,092) Dividends paid (94,051) (90,161) (85,926) Other (24,449) 22,667 6,653 ------------------------------------------------------ Net cash provided by (used in) financing activities 88,819 (311,666) (296,365) ------------------------------------------------------ Net Increase (Decrease) in Cash and Cash Equivalents (1,691) (47,185) 34,338 Cash and Cash Equivalents at Beginning of Year 10,822 58,007 23,669 ------------------------------------------------------ Cash and Cash Equivalents at End of Year $ 9,131 $ 10,822 $ 58,007 ====================================================== Supplemental Disclosures of Cash Flow Information Cash Paid for: Interest (net of amount capitalized) $ 80,310 $ 66,793 $ 78,555 Income taxes, net 44,061 71,398 16,643 ======================================================
See accompanying notes. II-20 48 Notes to Consolidated Financial Statements Sonat Inc. and Subsidiaries 1. BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES Business Description-The Consolidated Financial Statements of Sonat Inc. and its subsidiaries (the Company) reflect operations in the Exploration and Production and Natural Gas Transmission and Marketing segments. 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. For further description of business segments, see Note 12. For a description of financial instruments, credit risk and contingencies, see Notes 2 and 9. Principles of Consolidation-The Consolidated Financial Statements include the accounts of Sonat Inc. and its subsidiaries. Intercompany transactions and accounts have been eliminated in consolidation. The equity method of accounting is used for investments in affiliates owned 50 percent or less. Certain amounts in the 1993 and 1992 Consolidated Financial Statements have been reclassified to conform with the 1994 presentation. Cash Equivalents-Cash equivalents are typically money-market investments in the form of repurchase agreements, 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, 1994, inventories consist primarily of materials and supplies that are carried at cost. Gas Imbalance Receivables and Payables-Gas imbalances represent the difference between gas receipts from and gas deliveries to the Company's transportation and storage customers. Gas imbalances arise when these customers deliver more or less gas into the pipeline than they take out. Imbalances incurred prior to implementation of Order No. 636 are settled through exchange of gas. Imbalances incurred after implementation of Order No. 636 are settled monthly. Plant, Property and Equipment and Depreciation-Plant, property and equipment is carried at cost. The Company provides for depreciation on a composite or straight-line basis, except for oil and gas properties. (See Notes 6 and 13.) Revenue Recognition-Revenue is recognized in the Exploration and Production segment when deliveries of oil and natural gas are made. The Company's Natural Gas Transmission and Marketing segment recognizes revenue from both natural gas sales and transportation in the period the product is delivered or the service is provided. Reserves are provided on revenues collected subject to refund when appropriate. Revenues included in the Consolidated Statements of Income relating to the period when Sonat Offshore Drilling's operations were consolidated were recognized as earned based on contractual daily drilling rates, or on a per-well basis. (See Note 3.) Environmental Expenditures-The Company accrues for environmental liabilities when environmental assessments and/or remediation are probable and such costs to the Company can be reasonably estimated. Income Taxes-The Company follows a liability and asset approach in accounting for income taxes. Deferred tax liabilities and assets are determined using the tax rate for the period in which those amounts are expected to be paid or received. Issuance of Stock by Subsidiary-The Company follows an accounting policy of income statement recognition for issuances of stock by a subsidiary. 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 Consolidated 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. The dilutive effect of stock options is less than 3 percent and is therefore excluded from the computation. Derivative Financial Instruments-The Company follows hedge accounting for changes in the market value of derivative financial instruments. (See Note 2.) Gains and losses are included in deferred assets or liabilities, respectively, until they are recognized in revenue when the hedged transaction is recorded. 2. FINANCIAL INSTRUMENTS DERIVATIVE FINANCIAL INSTRUMENTS The Company through its subsidiaries (Sonat Exploration Company and Sonat Marketing Company) uses natural gas futures contracts, options on natural gas futures contracts, and oil and gas price swap agreements to reduce the effects of spot-market price volatility on operating results. All derivative transactions are identified with specific cash transactions or positions. Speculation in derivatives is prohibited by company policy. Futures-Natural gas futures contracts are traded on the New York Mercantile Exchange (NYMEX). Contracts are for fixed units of 10,000 MMBtu and #are available for up to 18 months in the future. Options on natural gas futures contracts are traded on the NYMEX. Brokers require both parties (buyers and sellers) to futures contracts to# deposit cash or other assets with a broker (the margin) at the time the contract is initiated. II-21 49 2. FINANCIAL INSTRUMENTS (Continued) Brokers mark open positions to market daily and require additional assets to be maintained on deposit when unrealized losses are experienced. Conversely, customers' accounts are credited when unrealized gains are experienced. This daily adjustment generally must be settled in cash or acceptable collateral, which serves to reduce credit risk. Maintenance of the deposit account can result in fluctuating cash requirements for both parties. At December 31, 1994, Sonat Marketing had $2.2 million on deposit with brokers for margin calls. Sonat Exploration uses futures contracts to lock in the price of a portion of its expected future natural gas and/or oil production when it believes that prices are at acceptable levels. Generally, contracts have been sold no more than six months into the future and by company policy cannot exceed 50 percent of budgeted monthly gas or oil production. At December 31, 1994, Sonat Exploration had no futures contracts open. Sonat Marketing buys and resells natural gas as part of its normal business operations. In situations where natural gas is not bought and sold simultaneously, Sonat Marketing will use futures contracts to reduce the risk of price changes. For example, Sonat Marketing may purchase certain natural gas volumes before a customer has been identified, then sell an equivalent volume in natural gas futures contracts or options on futures contracts to match the cash transaction. Futures transactions or options are generally one year or less in duration; however, two option agreements extend four and five years. Company policy limits futures contracts to 1,000 net contracts per month. At December 31, 1994, Sonat Marketing had a total of 282 net contracts open (2,270 long and 1,988 short futures contracts) and a marked-to-market loss of $2.6 million, $1.0 million of which will be realized in January 1995, the remainder representing unrealized losses on contracts that will mature in 1995. To date, option activity has not been significant. Swaps-Price swap agreements call for one party to make monthly payments to (or receive payments from) another party based upon the differential between a fixed and a variable price or two variable prices for a notional volume specified by the contract. Sonat Exploration and Sonat Marketing had a total of 16 price swap agreements at December 31, 1994, to exchange payments based on a total notional volume of 25,755,000 MMBtu of natural gas over periods ranging from one month to five years. The average price the Company paid was $1.56 per MMBtu and the average price the Company received was $1.63 per MMBtu for the 1994 period. The Company's credit exposure on swaps is limited to the value of swaps that are in a favorable position to the Company. At December 31, 1994, the market value of the Company's favorable swaps was $2.1 million. The net position of all swaps, both favorable and unfavorable, was $1.8 million favorable. The Company is exposed to credit loss in the event of nonperformance by counterparties on swap contracts. Company policy regarding derivative trading activity limits swap agreements to counterparties with appropriate credit standings that have been approved by the Board of Directors. OTHER FINANCIAL INSTRUMENTS The carrying amounts and fair values of the Company's financial instruments other than derivatives are as follows:
Carrying Fair December 31, 1994 Amounts Value - ----------------------------------------------------------- (In Thousands) ---------------------- Cash and Cash Equivalents $ 9,131 $ 9,131 Investment Securities: Non-current equity securities 180,000 150,000 Non-current debt securities 33,821 32,946 Gas Supply Realignment Costs 160,850 160,850 Unsecured Notes Payable 200,000 200,000 Long-Term Debt 982,628 987,506 December 31, 1993 Cash and Cash Equivalents $ 10,822 $ 10,822 Investment Securities: Non-current equity securities 180,000 180,000 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
The following methods and assumptions were used by the Company in estimating its fair value disclosures for balance sheet financial instruments: Cash and cash equivalents, gas supply realignment (GSR) costs, natural gas purchase contract settlement costs and unsecured notes payable: The carrying amount reported in the Consolidated Balance Sheet approximates its fair value. Investment securities: The fair value for equity securities is based upon an estimate received from an independent valuation consultant. The fair values for marketable debt securities are based on quoted market prices. Long-term debt: The fair values of the Company's long-term debt are based on quoted market values or estimated using discounted cash flow analyses, based on the Company's II-22 50 Sonat Inc. and Subsidiaries current incremental borrowing rates for similar types of borrowing arrangements. All of the Company's financial instruments are held for purposes other than trading. The Company's financial instruments that are exposed to concentrations of credit risk consist primarily of cash equivalents, investments, accounts receivableand GSR costs which the Company expects to recover from its customers. The Company's cash equivalents and short-term investments represent high-quality securities placed with various high investment grade institutions. This investment practice limits the Company's exposure to concentrations of credit risk. Accounts receivable of the Exploration and Production segment are primarily from joint-interest partners, oil and gas marketing companies and pipeline companies. Accounts receivable of the Natural Gas Transmission and Marketing segment relate to business conducted with gas distribution companies, municipalities, gas districts, industrial customers, and 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. 3. Changes in Operations Stock Sale by Subsidiary-On June 4, 1993, the IPO of approximately 60 percent 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 recognized an after-tax gain of $99.7 million, or $1.15 per share, from the combined transactions. At December 31, 1994, the Company held 11.3 million shares of Sonat Offshore common stock with a market value of $199.7 million. 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:
Year Ended December 31, 1992 - ----------------------------------------------------------- (In Thousands) -------------- Revenues $ 44,868 Loss Before Income Taxes $ (472) Income Taxes 166 Loss from Discontinued Operations (638) Net Gain on Disposal, Net of Income Taxes of $70,618,000 112,085 -------- Income from Discontinued Operations $111,447 ========
4. Inventories The table below shows the values of various categories of the Company's inventories by segment.
December 31, 1994 1993 - ----------------------------------------------------------- (In Thousands) ------------------ Exploration and Production: Materials and supplies $ 3,725 $ 4,050 Natural Gas Transmission and Marketing: Gas stored underground 1,695 1,829 Materials and supplies 21,267 23,945 ----------------- 22,962 25,774 ----------------- Other 35 72 ----------------- $26,722 $ 29,896 =================
5. Unconsolidated Affiliates At December 31, 1994, the Company's investments in unconsolidated affiliates totaled $486.3 million, and the Company's share of underlying equity in net assets of the investees was $552.7 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, 1994, the Company's cumulative equity in earnings of these unconsolidated affiliates was $222.1 million and cumulative dividends received from them totaled $146.2 million. II-23 51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. UNCONSOLIDATED AFFILIATES (CONTINUED) The following table presents the components of equity in earnings of unconsolidated affiliates.
Years Ended December 31, 1994 1993 1992 - ----------------------------------------------------------- (In Thousands) ---------------------------- COMPANY'S SHARE OF REPORTED EARNINGS (LOSSES) Exploration and Production: Sonat/P Anadarko $ - $ 4,163 $ 1,368 Other exploration and production affiliates 245 502 410 --------------------------- 245 4,665 1,778 --------------------------- Natural Gas Transmission and Marketing: Citrus Corp. 27,554 (8,066) (11,058) Amortization of Citrus basis difference 1,383 1,738 2,096 Bear Creek Storage 8,954 8,638 8,002 Other natural gas transmission and marketing affiliates (211) (121) 332 --------------------------- 37,680 2,189 (628) ---------------------------- Other: Sonat Offshore Drilling 5,049 4,497 - Other affiliates 1,345 1,014 2,982 --------------------------- 6,394 5,511 2,982 --------------------------- $44,319 $12,365 $ 4,132 ===========================
Exploration and Production Affiliate-Sonat Exploration had an initial 49 percent interest in Sonat/P Anadarko Limited Partnership (Sonat/P) which acquired oil and gas reserves in the Anadarko Basin of Oklahoma from Louisiana Land and Exploration Company in the third quarter of 1992. On October 4, 1993, Sonat Exploration acquired the remaining interest in Sonat/P not owned by it from Prudential Insurance Company (see Note 13). For the 1993 period prior to acquisition, Sonat/P had revenues of $16.3 million and reported earnings of $6.6 million. Sonat/P had revenues of $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 company 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, 1994 1993 1992 - ----------------------------------------------------------- (In Thousands) ---------------------------------- Revenues $477,462 $574,302 $550,139 Expenses: Natural gas cost 294,670 405,920 414,051 Operating expenses 71,871 71,754 70,170 Depreciation and amortization 63,737 59,896 51,502 Allowance for funds used during construction (87,908) (2,712) (1,042) Other expenses, net 45,496 50,935 50,728 Income taxes (benefits) 34,487 4,641 (13,153) --------------------------------- Income (Loss) Reported $ 55,109 $ (16,132) $(22,117) =================================
December 31, 1994 1993 - ----------------------------------------------------------- (In Thousands) ----------------------- ASSETS Current $ 154,596 $ 59,872 Net transmission plant and property 2,235,167 1,402,993 Other 139,035 110,405 ---------------------- $2,528,798 $1,573,270 ====================== LIABILITIES AND EQUITY Current $ 116,699 $ 417,689 Long-term debt and other liabilities 1,699,023 815,614 Stockholders' equity 713,076 339,967 ---------------------- $2,528,798 $1,573,270 ======================
The significant increase in allowance for funds used during construction relates to Florida Gas' Phase III expansion, a$1 billion expansion of its pipeline facilities that will increase the system throughput capacity by 57 percent. On November 7, 1994, Florida Gas issued $700 million of Senior Notes of various maturities ranging from three years to 30 years, with an average life of approximately 10 years. Proceeds from the Notes were primarily used to refund construction financing and funds advanced by Citrus' parent companies for construction of the Phase III expansion. The Notes are senior, unsecured obligations of Florida Gas, but Sonat provided indirect credit support in the form of a standby note purchase agreement to the extent of 50 percent of the outstanding Notes plus accrued interest in the event Florida Gas' largest customer exercises its right to terminate II-24 52 Sonat Inc. and Subsidiaries its Phase III service contracts as a result of the Phase III facilities not being in service by January 14, 1996. In addition, Sonat has agreed to provide funds required by Florida Gas for any interest payments due on the debt (to the extent of 50 percent of any such required amounts) prior to the attainment of the in-service date for the Phase III facilities. Once the in-service date of the Phase III facilities is attained, Sonat will be released from all obligations under the standby note purchase agreement and the Notes will be non-recourse except to Florida Gas. Phase III will go into service on March 1, 1995. In connection with the construction of the Phase III expansion, the Company made equity contributions to Citrus of $159 million during 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, 1994 1993 1992 - ----------------------------------------------------------- (In Thousands) --------------------------- Revenues $35,655 $36,566 $36,528 Expenses: Operating expenses 5,303 6,137 5,156 Depreciation 5,396 5,397 5,397 Other expenses, net 7,048 7,756 9,971 --------------------------- Income Reported $17,908 $17,276 $16,004 ===========================
December 31, 1994 1993 - ----------------------------------------------------------- (In Thousands) ------------------ ASSETS Current $ 6,968 $ 5,916 Net plant and property 164,257 169,521 Other 533 594 ------------------ $171,758 $176,031 ================== LIABILITIES AND EQUITY Current $ 8,356 $ 8,607 Long-term debt and other liabilities 69,587 76,517 Participants' equity 93,815 90,907 ------------------ $171,758 $176,031 ==================
Contract Drilling Affiliate-Since June 4, 1993, the Company has owned approximately 40 percent of Sonat Offshore, which provides offshore drilling services (see Note 3). The following is summarized financial information for Sonat Offshore.
Period of YEAR ENDED June 5- DECEMBER 31, December 31, 1994 1993 - ------------------------------------------------------------ (In Thousands) -------------- Revenues $242,953 $164,983 Expenses (Income): Operating expenses 197,550 132,523 Depreciation 24,506 12,082 Other (income) expenses, net 658 (931) Income taxes 7,524 10,036 ------------------------- Income Reported $ 12,715 $ 11,273 =========================
December 31, 1994 1993 - ----------------------------------------------------------- (In Thousands) -------------- ASSETS Current $127,683 $143,713 Net plant and property 326,064 259,527 Other 39,750 68,780 ------------------------ $493,497 $472,020 ======================== LIABILITIES AND EQUITY Current $ 48,487 $65,427 Long-term debt and other liabilities 123,863 92,287 Stockholders' equity 321,147 314,306 ------------------------ $493,497 $472,020 ========================
6. PLANT, PROPERTY AND EQUIPMENT AND DEPRECIATION Plant, property and equipment, by business segment, is shown in the following table.
December 31, 1994 1993 - ----------------------------------------------------------- (In Thousands) --------------------------- Exploration and Production $2,383,355 $2,077,854 Natural Gas Transmission and Marketing 2,299,411 2,261,020 Other 58,530 61,412 --------------------------- $4,741,296 $4,400,286 ===========================
II-25 53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. PLANT, PROPERTY AND EQUIPMENT AND DEPRECIATION (CONTINUED) Plant, property and equipment includes construction work in progress of $37.5 million and $56.0 million at December 31, 1994 and 1993, respectively. The accumulated depreciation, depletion and amortization amounts, by business segment, are as follows:
December 31, 1994 1993 - ----------------------------------------------------------- (In Thousands) ----------------------------- Exploration and Production $ 991,621 $ 853,634 Natural Gas Transmission and Marketing 1,481,543 1,437,739 Other 24,527 21,795 --------------------------- $2,497,691 $2,313,168 ===========================
The annual depreciation rates or useful productive lives, by business segment, are as follows:
1994 1993 1992 - -------------------------------------------------------------------- Natural Gas Transmission and Marketing: Mainline transmission property 2.8% 2.8% 2.8% Gas supply 4.4% 5.1% 5.1% Gas gathering 2.8% 6.25% 6.25% Underground storage facilities 3.3% 3.3% 3.3% Liquefied natural gas facilities 3.2% 3.2% 3.2% Other 5-20 yrs. 5-20 yrs. 5-25 yrs. =================================
The successful efforts method of accounting used for oil and gas properties in the Exploration and Production segment results in the cost of proved oil and gas properties and development dry holes being capitalized and amortized on a unit-of-production basis over the life of remaining proved reserves. Also included in amortization on a unit-of-production basis are the estimated future dismantlement and abandonment costs. In the third quarter of 1994, Southern Natural Gas Company adjusted its transportation revenue reserve and depreciation expense by $16 million reflecting a retroactive reduction in certain depreciation rates. The entry had no effect on net income. 7. LONG-TERM DEBT AND LINES OF CREDIT Long-Term Debt-Long-term debt consisted of:
December 31, 1994 1993 - ----------------------------------------------------------- (In Thousands) ----------------- Sonat Inc. Revolving Credit Agreement at rates based on prime, international or money-market lending rates (effective rate of 6.3% at December 31, 1994) due December 31, 1998 $375,000 $135,000 9-1/2% Notes due August 15, 1999 100,000 100,000 8.65% Notes due through July 29, 1997 27,857 37,143 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 December 31, 2000 13,900 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 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 2,640 3,520 7.80% Term Loan due through December 31, 1997 1,200 1,600 Southern Energy Company Promissory Note (an effective rate of 6.75% at December 31, 1994) due through April 1999 25,000 30,000 Capital Leases 2,031 1,581 -------------------- Total Outstanding 982,628 861,244 Less Long-Term Debt Due Within One Year 19,250 120,083 -------------------- $963,378 $741,161 ====================
Annual maturities of long-term debt at December 31, 1994, are as follows:
Years - ----------------------------------------------------------- (In Thousands) -------------- 1995 $ 19,250 1996 18,453 1997 52,869 1998 382,213 1999 107,224 2000-2002 402,619 -------- $982,628 ========
II-26 54 Sonat Inc. and Subsidiaries During 1994, Sonat borrowed $4.4 billion and repaid $4.2 billion under its long-term revolving credit agreement, which provides for periodic borrowings and repayments of up to $500 million through December 15, 1998. At December 31, 1994, $375 million was outstanding at a rate of 6.30 percent. On June 15, 1994, Southern's $100 million 9 5/8 Percent Notes matured and were redeemed. Funds were obtained by increased borrowings under Sonat's floating rate facilities. Lines of Credit and Credit Agreement-At December 31, 1994, the Company had available $475 million under its lines of credit and revolving credit agreements. The amount available has been reduced by the $100 million of commercial paper outstanding to reflect the Company's policy that bank and commercial paper borrowings in the aggregate will not exceed the maximum amount available under its lines of credit and revolving credit agreements. Loans outstanding under all short-term credit facilities are for a duration of less than three months. Short-Term Credit Facilities-On May 30, 1994, Sonat and Southern renewed their short-term lines of credit with several banks to provide for borrowings of $200 million and $50 million, respectively. Borrowings are available through May 29, 1995, in the form of unsecured promissory notes and bear interest at rates based on the banks' prevailing prime, international, or money-market lending rates. At December 31, 1994, no amounts were outstanding under either agreement. At December 31, 1993, $9 million was outstanding under the Sonat agreement at a rate of 3.38 percent, and no amounts were outstanding under the Southern agreement. On August 1, 1994, Sonat entered into a new 364-day revolving credit agreement with a group of banks. The revolving credit agreement provides for periodic borrowings of up to $300 million through July 31, 1995. 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, 1994, $100 million was outstanding at a rate of 6.33 percent under this agreement. Sonat had $100 million and $60 million in commercial paper outstanding at average rates of 6.30 percent and 3.64 percent at December 31, 1994 and 1993, respectively. Extraordinary Item-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 $200 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. 8. INCOME TAXES An analysis of the Company's income tax expense (benefit) on continuing operations is as follows:
Years Ended December 31, 1994 1993 1992 - ----------------------------------------------------------- (In Thousands) -------------- Current: Federal $ 4,619 $ 46,230 $(5,497) Foreign - 3,305 (651) State 10,930 6,446 10,245 ---------------------------- 15,549 55,981 4,097 ---------------------------- Deferred: Federal 13,188 40,435 35,074 Foreign - 649 (26) State (12,925) 5,594 (3,338) ---------------------------- 263 46,678 31,710 ---------------------------- Income Tax Expense on Continuing Operations $15,812 $102,659 $35,807 ============================
Net deferred tax liabilities are comprised of the following:
December 31, 1994 1993 - ----------------------------------------------------------- (In Thousands) ------------------ Deferred Tax Liabilities: Depreciation $277,856 $229,020 Investments 58,841 58,398 Inventories 11,571 10,513 Other 4,449 4,881 ------------------ Total deferred tax liabilities 352,717 302,812 ------------------ Deferred Tax Assets: Revenue reserves 76,829 45,997 Non-conventional fuel tax credits 32,334 24,856 Employee benefits 11,880 15,537 Other accounting accruals 24,191 4,433 Interest on income taxes 6,047 11,577 Other 13,479 7,435 ------------------ Total deferred tax assets 164,760 109,835 ------------------ Net Deferred Tax Liabilities $187,957 $192,977 ==================
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. II-27 55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. INCOME TAXES (Continued) 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:
Years Ended December 31, 1994 1993 1992 - ------------------------------------------------------------- (In Thousands) ---------------------------- Income Tax Expense at Statutory Federal Income Tax Rates $ 55,027 $128,705 $ 46,501 Increases (Decreases) Resulting from: State income taxes, net of federal income tax benefit (3,634) 4,899 4,940 Non-conventional fuel tax credits (14,217) (19,242) (13,998) Refunds and adjustment of accrued tax position (7,881) (9,319) (2,769) Dividend exclusion (12,440) (2,412) 708 Effect of change in statutory rate on deferred taxes - 1,342 - Other (1,043) (1,314) 425 ---------------------------- Income Tax Expense on Continuing Operations $ 15,812 $102,659 $ 35,807 ============================
The domestic and foreign components of income from continuing operations before income taxes are as follows:
Years Ended December 31, 1994 1993 1992 - ----------------------------------------------------------- (In Thousands) ---------------------------- Domestic $157,219 $360,771 $119,245 Foreign - 6,957 17,524 ---------------------------- Income from Continuing Operations before Income Taxes $157,219 $367,728 $136,769 ============================
9. COMMITMENTS AND CONTINGENCIES Rate Matters-Periodically, Southern and its subsidiaries make general rate filings with the Federal Energy Regulatory Commission (FERC) to provide for the recovery of cost of service and a return on equity. The FERC normally allows the filed rates to become effective, subject to refund, until it rules on the approved level of rates. Southern and its subsidiaries provide reserves relating to such amounts collected subject to refund, as appropriate, and make refunds upon establishment of the final rates. 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 that (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. Under the settlement, the FERC will decide the cost classification, cost allocation, and rate design issues based on written submissions of the parties and the existing record in the proceeding. By orders issued on December 16, 1993, and May 5, 1994, the FERC approved the settlement. One party has sought judicial review of these FERC orders. Southern cannot predict the outcome of this appeal. 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 that, if approved by the FERC, would resolve the throughput and certain cost of service issues. The cost allocation and rate design issues were consolidated with similar issues in Southern's rate proceeding filed May 1, 1993, which is described below, and will be resolved in that proceeding. This settlement was also approved by FERC orders issued on December 16, 1993, and May 5, 1994. One party has sought judicial review of these FERC orders as well. Southern also cannot predict the outcome of this appeal. On May 1, 1993, Southern implemented a general rate change, subject to refund, that 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 January 9, 1995, Southern filed a trial stipulation that resolved certain cost of service issues with the FERC staff in this proceeding. A hearing regarding all other outstanding issues concluded in February 1995. Southern cannot predict the outcome of this hearing. Southern will file with the FERC in March 1995 a Stipulation and Agreement that would settle all of Southern's pending rate (described above) and GSR cost recovery proceedings as described below (Customer Settlement). Southern has been advised that customers representing more than 80 percent of the pipeline's firm capacity intend to support the Customer Settlement. Pursuant to the Customer II-28 56 Sonat Inc. and Subsidiaries Settlement, which must be approved by the FERC, all issues in Southern's current and prior rate cases would be settled and Southern would credit against GSR costs incurred by Southern the full amount of Southern's rate reserves at February 28, 1995, which, as of December 31, 1994, were approximately $148 million. Such amount, less certain amounts withheld for potential rate refunds to parties, if any, that contest the Customer Settlement and certain amounts related to one specific contesting customer, will be credited in the aggregate to reduce the GSR costs borne by Southern's customers. Southern will implement the settlement rates for supporting parties on an interim basis, subject to reinstatement, which will become effective March 1, 1995, pending FERC consideration and approval of the Customer Settlement. The Customer Settlement provides that, except in certain limited circumstances, Southern will not file a general rate case to be effective prior to March 1, 1998. Southern's GSR costs are discussed below (see Order No. 636). The Company recognized a $29 million charge associated with the anticipated customer rate settlement, which includes anticipated amounts for GSR costs that Southern would not recover from its customers, and a $28 million provision relating to regulatory assets that will not be recovered as a result of the Customer Settlement, including amounts for a corporate restructuring undertaken in 1994. These charges resulted in the increase in "Other" in the Deferred Credits and Other section of the 1994 Consolidated Balance Sheet. It is possible that the Customer Settlement will be contested by certain of Southern's customers, in which case the Customer Settlement, if approved by the FERC, will become effective only as to supporting parties and Southern's rates and GSR costs applicable to the contesting parties would be determined by the outcome of Southern's pending rate and GSR proceedings. It is also possible that the Customer Settlement might not be approved by the FERC or, if approved, might be modified in a way unacceptable to Southern or its customers. Gas Purchase Contracts-Pursuant to a final and nonappealable FERC order, Southern has collected substantially all of its gas purchase contract settlement payments from its customers over a five-year period that ended on April 30, 1994. Southern currently is incurring no take-or-pay liabilities under its gas purchase contracts. Southern regularly evaluates its position relative to gas purchase contract matters, including the likelihood of loss from asserted or unasserted take-or-pay claims or above-market prices. When a loss is probable and the amount can be reasonably estimated, it is accrued. Order No. 636-In 1992 the FERC issued its Order No. 636 (the Order). The Order required significant changes in interstate natural gas pipeline services. Interstate pipeline companies, including Southern, are incurring certain costs (transition costs) as a result of the Order. The principal transition cost is related to amendment or termination of existing gas purchase contracts, which are referred to as gas supply realignment costs. The Order provided for the recovery of 100 percent of the GSR costs and other transition costs to the extent the pipeline can prove that they are eligible, that is, incurred as a result of customers' service choices in the implementation of the Order, and were incurred prudently. The prudence review will extend both to the prudence of the underlying gas purchase contracts, based on the circumstances that existed at the time the contracts were executed, and to the prudence of the amendments or terminations of the contracts. Numerous parties have appealed 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. 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 "price differential" 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 charge designed to collect the remaining 10 percent of such costs from Southern's interruptible transportation customers. These funding mechanismswill 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 charge after a period of two years. In addition, Southern's complianceplan 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 Southern's GSR costs based on both eligibility and prudence II-29 57 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. COMMITMENTS AND CONTINGENCIES (CONTINUED) grounds. 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 FERC's finding that the 1988 settlement is not a bar in general to the recovery as GSR costs of payments made to amend or to terminate these contracts does not prevent an eligibility challenge to specific payments, however, on the theory that they are actually take-or-pay costs that would have been unavoidable regardless of the Order. The December 16 order generally approved Southern's restructuring tariff submitted pursuant to the September 3 order. Various parties have sought judicial review of the September 3 and December 16 orders. As of December 31, 1994, Southern had either paid or accrued $134 million in GSR costs (including $4 million in interest) either to reduce significantly the price payable under or to terminate a number of gas supply contracts providing for payment of above-market prices. In addition, on February 17, 1995, Southern reached an agreement to incur $64 million in GSR costs to resolve its remaining high-cost supply contracts with Exxon Corporation (Exxon) that is conditioned upon the effectiveness of the Customer Settlement described above. Southern also has an agreement under which another high-cost contract price is reduced in exchange for monthly payments having a present value of approximately $44 million. Southern has received permission from the FERC to purchase an annuity in order to monetize this obligation. In addition to its GSR costs relating to termination or amendment of its remaining gas supply contracts, Southern has incurred and expects to continue to incur certain "price differential" GSR costs resulting from Southern's continued purchase of gas under its remaining supply contracts that provide for prices in excess of current market prices. As of December 31, 1994, Southern had incurred $69 million in price differential costs. Beginning in December 1993, Southern has made a number of filings with the FERC seeking to recover GSR costs paid through various periods prior to the filings. In each instance, the FERC has accepted Southern's filing subject to refund, and subject to a determination through a hearing before an administrative law judge regarding whether such costs were prudently incurred and are eligible for recovery under the Order. Southern's customers are opposing its recovery of its GSR costs in these proceedings based on both eligibility and prudence grounds. These proceedings, which have all been consolidated, are in the early stages of discovery and Southern cannot predict their outcome at this time. As described above, Southern's Customer Settlement would settle all of the proceedings pursuant to which Southern is seeking recovery of its GSR costs as well as all of its other outstanding rate proceedings. If the Customer Settlement is ultimately approved by the FERC, all challenges to the recovery of Southern's GSR costs would be resolved as to those customers supporting the Customer Settlement, including all issues related to eligibility and prudence. Additionally, Southern would absorb an agreed-upon portion of its total GSR costs, which was reflected in the provision for the Customer Settlement. As indicated above, it is possible that the Customer Settlement will be contested by certain of the customers on Southern's system and the possibility exists that the FERC may not approve the Customer Settlement or may modify it in a way unacceptable to Southern or its customers. In addition, Southern's GSR costs allocated to those customers who contest the Customer Settlement will remain subject to Southern's pending GSR cost recovery proceedings, where Southern anticipates that those customers will continue to challenge both the eligibility and prudence of such costs. In its Customer 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, recent contract renegotiations, and price differential costs actually incurred, the amount of GSR costs are estimated to be approximately $328 million. This amount includes the payments already made or accrued to amend or to terminate gas purchase contracts and price differential costs, and the $64 million cost that will be incurred under a settlement of existing contracts with Exxon, which will become effective if the Customer Settlement becomes effective. These costs collectively total $288 million. Thus, Southern currently estimates it will ultimately pay an additional $40 million in GSR costs. Until the Customer Settlement is approved, Southern plans to make additional rate filings quarterly to recover its price differential costs and any other GSR costs. Additionally, II-30 58 Sonat Inc. and Subsidiaries Southern will continue to make monthly filings designed to adjust the billing determinants and associated surcharges for its firm transportation customers to reflect changes in the level of systemwide contract demands and effective carrying charges that occur from time to time. Administrative Law Judge Ruling Concerning Recoverability of Investment in Offshore Gas Supply Facilities; Settlement with Exxon Corporation-In an initial decision issued on May 2, 1994, which Southern has appealed, an administrative law judge ruled, in a rate case Southern had filed before the FERC, that Southern could not include in its rates the approximately $45 million cost of certain pipeline facilities placed in service by Southern in 1992 to connect to its interstate pipeline system extensive new gas reserves being developed by Exxon in the Mississippi Canyon and Ewing Bank Area Blocks, offshore Louisiana (the Mississippi Canyon Facilities). The judge ruled that Southern's recovery of these costs was precluded by the 1988 settlement with Southern's customers that limits the amount of take-or-pay payments Southern may recover in its rates. The judge found that the cost of the facilities constitutes non-cash consideration to Exxon for a 1989 take-or-pay settlement and is therefore subject to the dollar "cap" on these payments contained in the 1988 settlement. Southern has previously recovered the maximum amount permitted by the 1988 settlement in its rates. Southern has appealed the administrative law judge's decision to the FERC but cannot predict the outcome of this appeal. The Customer Settlement provides that as to customers supporting the settlement, the costs of the Mississippi Canyon Facilities will be recovered by Southern on a rolled-in basis and the 1988 take-or-pay settlement cap will not preclude Southern's recovery of such costs. On February 17, 1995, Southern reached a settlement with Exxon pursuant to which, in return for an additional cash payment by Southern of $45 million, plus allowing Exxon to retain $19 million in price differential costs already paid to Exxon, all existing gas purchase contracts would be terminated, two new gas purchase contracts would be entered into having three-year terms and providing for market-based index prices, and a lawsuit regarding Southern's termination of the gas purchase contract covering gas reserves connected by the Mississippi Canyon Facilities (Mississippi Canyon Contract) would be dismissed. The settlement with Exxon is contingent on FERC approval of the Customer Settlement. If this settlement with Exxon does not become effective, total GSR costs under the Mississippi Canyon Contract through the scheduled renegotiation of its pricing provisions in 1997 are estimated to be approximately $125 million on a present-value basis, although such estimate is subject to significant uncertainty since the assumptions inherent in the estimate (including underlying reserves, future deliverability, and a range of estimated future gas market prices) are not known today with certainty and there is a wide range of possible outcomes for each assumption. In addition, Southern has given notice to Exxon that effective March 1, 1994, it has terminated the Mississippi Canyon Contract pursuant to certain provisions of the contract. Such termination, if effective, would reduce GSR costs associated with such contract to $14 million. Exxon has filed suit against Southern seeking a declaratory judgment that Southern does not have the right to terminate the contract or alternatively for damages of an unspecified amount arising out of the alleged repudiation or breach of the contract by Southern. The court entered a summary judgment order upholding Southern's termination of this contract, which Exxon has appealed to the Fifth Circuit Court of Appeals. Southern's customers are challenging the recovery of GSR costs attributable to such contract on eligibility and prudence grounds and on the basis that such costs also constitute non-cash consideration for the 1989 take-or-pay settlement with Exxon and thus are not recoverable due to the 1988 take-or-pay cost cap. If the settlement with Exxon does not become effective, Southern cannot predict the outcome of pending or future proceedings for the recovery of GSR costs related to the gas supplies connected by the Mississippi Canyon Facilities or its pending litigation with Exxon regarding Southern's notice of termination of the Mississippi Canyon Contract. 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, 1994 1993 1992 - ----------------------------------------------------------- (In Thousands) --------------------------- Non-Affiliated Operating Leases $12,731 $14,816 $16,962 Affiliated Operating Leases 3,669 3,589 3,482 --------------------------- $16,400 $18,405 $20,444 ===========================
At December 31, 1994, future minimum payments for non-cancelable operating leases for the years 1995 through 1999 are $9 million or less per year. II-31 59 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. CAPITAL STOCK On April 28, 1994, the shareholders of the Company approved an increase in the common stock shares authorized from 200 million to 400 million. Per share prices of the Company's common stock, based on the New York Stock Exchange listing of composite transactions, and dividends paid per common share for the last two years are summarized below. PRICE RANGE AND DIVIDENDS PAID PER COMMON SHARE (UNAUDITED)
Quarter 1994 1993 - ----------------------------------------------------------- Price Range High-Low First $33 -26 $28 11/16-21 5/8 Second 32 1/4-26 7/8 33 5/8-27 1/8 Third 34 7/8-30 1/4 35 13/16-32 1/8 Fourth 33 1/2-26 3/8 36 1/2-26 3/8 -------------------------------- Dividends Paid First $ .27 $ .25 Second .27 .25 Third .27 .27 Fourth .27 .27 -------------------------------- $ 1.08 $ 1.04 ================================ Shareholders of Record at Year-End 12,697 13,040 ================================
The Company had no restrictions on the payment of dividends at December 31, 1994. 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 this plan are redeemable at any time by the Company before February 3, 1996, the end of their 10-year term, so long as an entity has not acquired 20 percent or more of the Company. As of December 31, 1994, 92,556,554 shares of common stock were reserved for issuance under this plan. Executive Award Plan-The Company has an Executive Award Plan that provides awards to certain key employees in the form of stock options, restricted stock, and stock appreciation rights (SARs) in tandem with any or all stock options. In years prior to 1991, tax offset payments were generally provided in conjunction with these awards. SARs permit the holder of an exercisable option to surrender that option for an amount equal to the excess of the market price of the common stock on the date of exercise over the option price (appreciation). The appreciation is payable in cash, common stock, or a combination of both. SARs are subject to the same terms and conditions as the options to which they are related. No SARs have been issued since 1990. At December 31, 1994, 389,634 SARs were outstanding. The Company issued 72,700 shares of restricted stock to employees during 1994. 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, 1994, 51,998 of the 319,000 cumulative restricted shares issued have vested. The following table summarizes option activities in the Plan: NUMBER OF SHARES UNDER OPTION
Years Ended December 31, 1994 1993 1992 - --------------------------------------------------------------- Beginning of Year 3,518,595 3,889,154 3,191,082 Granted 990,700 989,700 956,200 Exercised (122,842) (1,332,661) (198,592) Forfeited (27,633) (27,598) (59,536) ---------------------------------------------- End of Year 4,358,820 3,518,595 3,889,154 ============================================== Exercisable 2,637,880 2,245,556 2,050,612 ============================================== Outstanding Option Prices $12.0625-30.00 $12.0625-30.00 $11.5625-26.0625 ============================================== Exercised Option Prices $12.0625-25.75 $12.0625-25.75 $11.5625-17.75 ============================================== Shares Authorized for Future Grants at Year-End 946,023 1,999,256 3,009,758 ==============================================
Stock-based employee compensation increased pretax income by $1.2 million in 1994 and decreased pretax income by $12.6 million and $9.3 million in 1993 and 1992, respectively. At December 31, 1994 and 1993, there were 10,000,000 shares of $1.00 par value Serial Preference Stock authorized, with none issued. Directors Restricted Stock Plan-The Company has a Restricted Stock Plan for non-employee members of the Board of Directors of Sonat Inc. Full rights vest over a maximum of five years. The Company issued 1,433 shares during 1994. At December 31, 1994, 18,660 of the 36,493 cumulative shares granted have vested. Treasury Stock-In April 1994 the Board of Directors of the Company authorized the repurchase of up to two million shares of the Company's common stock. Purchases are being made from time to time in the open market or in privately negotiated transactions. Shares purchased under the authorization are expected to be reissued in connection with employee stock option and restricted stock programs. At December 31, 1994, 940,000 shares of common stock had been purchased and 69,000 shares had been reissued under this program. II-32 60 Sonat Inc. and Subsidiaries 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 employees of the Company. A supplemental benefit plan (the Supplemental Plan) that provides retirement benefits in excess of those allowed under the Company's tax qualified retirement plan is also in effect for the Company. Benefits under the plans are based on a combination of years of service and a percentage of compensation. Benefits vest after a period of five years. 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. For the Supplemental Plan, Sonat retained the obligation to pay the benefit accrued through the date of the IPO for all of Sonat Offshore's current and retired employees. 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, 1994, this trust had assets with a fair market value of $32.9 million available to pay benefits. The Company's net periodic pension (income) cost included in continuing operations consists of the following components:
Years Ended December 31, 1994 1993 1992 - ----------------------------------------------------------- (In Thousands) ---------------------------- Service Cost-Benefits Earned during the Period $ 6,256 $ 9,722 $11,190 Interest Cost on Projected Benefit Obligation 24,407 25,246 27,101 Loss (Gain) on Assets 11,982 (60,558) (22,495) Net Amortization and Deferral (49,397) 29,607 (10,004) ---------------------------- $ (6,752) $ 4,017 $ 5,792 ============================
The change in the discount rate assumption in 1994 to 8.5 percent from 7.0 percent was the primary reason for the change in net periodic pension cost. The following table sets forth the assets and liabilities of the plans and the amount of the net pension asset or liability recognized in the Company's Consolidated Balance Sheets.
Plans with Plans with Obligations Obligations in Less than Assets(1) Excess of Assets(2) December 31, December 31, -------------------------------------- 1994 1993 1994 1993 - ------------------------------------------------------------------ (In Thousands) -------------------------------------- Actuarial Present Value of Benefit Obligations: Vested benefit obligations $225,115 $239,797 $21,306 $24,604 Non-vested benefit obligations 8,195 12,848 314 491 ------------------------------------- Accumulated benefit obligations 233,310 252,645 21,620 25,095 Effect of projected future salary increases 39,102 76,096 9,470 3,750 ------------------------------------- Projected benefit obligations 272,412 328,741 31,090 28,845 Plan Assets at Fair Value(3) 355,106 383,000 - - ------------------------------------- Projected Benefit Obligations (in Excess of) or Less than Plan Assets 82,694 54,259 (31,090) (28,845) Unrecognized Net (Assets) or Obligations at Transition(4) (14,686) (16,416) 358 409 Unrecognized Net (Gain) Loss (70,182) (50,542) 5,286 5,740 Unrecognized Prior Service Cost 5,936 9,150 4,203 2,698 Net Unamortized Deferred Charge from Early Retirement Termination Benefits(5) 9,022 5,401 2,523 984 ------------------------------------- Net Pension Asset (Liability) Recognized in the Consolidated Balance Sheets $ 12,784 $ 1,852 $(18,720)$(19,014) ======================================
(1) The Retirement Plan. (2) The Supplemental Plan. (3) Plan assets consist primarily of debt and equity securities, and investments in equity index and foreign index funds. (4) Amortization periods for unrecognized net (asset) or obligation are 16.5 years for the Retirement Plan and 15 years for the Supplemental Plan. (5) Amortization periods for early retirement termination benefits are 10 years for the Retirement Plan and five years for the Supplemental Plan. II-33 61 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. RETIREMENT PLANS AND OTHER POST EMPLOYMENT BENEFITS (CONTINUED) Until July 1993, the Company set aside assets in fixed income securities such that values of those assets equaled or exceeded 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, 1994 1993 1992 - --------------------------------------------------------- Weighted Average Discount Rate: Non-immunized obligations 8.5% 7.0% 7.0% Immunized obligations - - 7.4% Long-Term Rate of Return: Non-immunized assets 8.5% 9.0% 9.0% Immunized assets - - 7.4% Increase in Future Compensation Levels (Composite Rate): Retirement and Supplemental Plans 5.5% 6.0% 6.0% =====================
Other Post Employment Benefits-The Company has plans that provide for postretirement health care and life insurance benefits to substantially all of its employees when they retire. The Company adopted 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 benefits was recognized as the Company funded its Retiree Life Insurance Plan. With respect to the Sonat Offshore IPO, Sonat Offshore has 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 consists of the following components:
Years Ended December 31, 1994 1993 - ----------------------------------------------------------- (In Thousands) --------------------- Service Cost $ 1,843 $ 2,109 Interest Cost 7,051 7,567 Return on Plan Assets (428) (219) Net Amortization and Deferral 3,200 3,947 -------------------- $11,666 $13,404 ====================
Prior to the adoption of SFAS No. 106, the cost of providing health care and life insurance benefits was $5.1 million in 1992. 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' annual SFAS No. 106 expense. Southern implemented rates effective May 1, 1993, which provide for the recovery of its share of the postretirement expense. The following table sets forth the funded status at December 31, 1994 and 1993, for the Company's postretirement health care and life insurance plans:
December 31, 1994 1993 - ----------------------------------------------------------- (In Thousands) --------------------- Accumulated Postretirement Benefit Obligation: Retirees $ 61,226 $ 69,421 Fully eligible active plan participants 9,055 15,767 Other active plan participants 22,711 23,586 --------------------- 92,992 108,774 Plan Assets at Fair Value(1) 17,030 11,050 --------------------- Accumulated Postretirement Benefit Obligation in Excess of Plan Assets (75,962) (97,724) Unrecognized Transition Obligation 65,142 77,899 Unrecognized Net (Gain) Loss (6,902) 15,031 Net Unamortized Deferred Charge from Early Retirement Termination Benefits 10,232 - --------------------- Accrued Postretirement Benefit Cost $ (7,490) $ (4,794) ======================
(1) Plan assets are held in a life insurance reserve account which consists primarily of fixed income securities, and in equity securities, municipal tax exempt bonds, and short-term investment funds. II-34 62 Sonat Inc. and Subsidiaries The assumed rates used to measure the projected benefit obligation and the expected earnings of plan assets are:
Years Ended December 31, 1994 1993 - --------------------------------------------------------- Discount Rate 8.5% 7.0% Long-Term Rate of Return: Medical assets 5.5% 5.5% Life insurance assets 8.5% 7.0% ===============
The rate of increase in the per capita costs of covered health care benefits is assumed to be 11.6 percent in 1995, decreasing gradually to 6 percent by the year 2003. Increasing the assumed health care cost trend rate by 1 percentage point would increase the accumulated postretirement benefit obligation as of December 31, 1994, by approximately $4.9 million and increase the service cost and interest cost components of the net periodic postretirement benefit cost by approximately $.5 million. The Company sponsors a postemployment benefit plan that provides disability benefits to former or inactive employees, their beneficiaries, and covered dependents after employment but before retirement. The Company adopted SFAS No. 112, "Employers' Accounting for Postemployment Benefits" as of January 1, 1994. SFAS No. 112 requires companies to accrue a liability for employees' compensation for future absences if certain conditions are met. For the year ended December 31, 1994, $1.3 million of expense was recognized for this employee benefit plan. Corporate Restructuring-In late 1994 and early 1995 the Company completed a reduction in staffing levels in the office and field locations through a combination of special early retirement options (SERO) and involuntary terminations involving 340 employees. The total cost of the program amounted to $21.3 million, which included $3.1 million related to the qualified retirement plan, $10.8 million related to the postretirement plans, and $6.0 million of cash severance payments. Included in the cash severance amount was $2.0 million paid during 1994. All of the terminations, voluntary and involuntary, were completed by the end of January 1995. 12. BUSINESS SEGMENT AND GEOGRAPHIC AREA ANALYSIS The Company's operations, capital expenditures, and assets by business segment and geographic location are shown in the following tables. On June 4, 1993, the Company's ownership of Sonat Offshore, which provides offshore drilling services, was reduced from 100 percent to approximately 40 percent. (See Note 3.) Sonat Offshore's results prior to June 4, 1993, are reported in the Other Business segment. The Company's share of Sonat Offshore's results since June 4, 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. BUSINESS SEGMENT ANALYSIS
Years Ended December 31, 1994 1993 1992 - ---------------------------------------------------------------- (In Thousands) --------------------------------- Revenues: Exploration and production $ 412,750 $ 353,018 $ 279,161 Natural gas transmission and marketing 1,635,051 1,437,321 1,061,564 Other 7,585 113,902 222,405 Intersegment revenue (281,459) (163,094) (78,707) --------------------------------- $1,773,927 $1,741,147 $1,484,423 ================================= Depreciation, Depletion and Amortization Expense: Exploration and production $ 206,842 $ 149,179 $ 107,537 Natural gas transmission and marketing 49,530 66,448 76,335 Other, including depreciation of corporate equipment 1,387 10,362 30,005 --------------------------------- $ 257,759 $ 225,989 $ 213,877 ================================= Operating Profit: Exploration and production $ 64,001 $ 86,474 $ 54,033 Natural gas transmission and marketing 100,338 143,461 151,354 Other 2,851 4,477 7,383 --------------------------------- Operating profit 167,190 234,412 212,770 Corporate Expenses, Net 2,249 (1,497) (1,679) --------------------------------- Operating income 169,439 232,915 211,091 Equity in Earnings of Unconsolidated Affiliates: Exploration and production 245 4,665 1,778 Natural gas transmission and marketing 37,680 2,189 (628) Other 6,394 5,511 2,982 Other Income, Net 16,348 169,720 17,904 Interest Expense, Net (72,887) (47,272) (96,358) --------------------------------- Income from Continuing Operations before Extraordinary Item and Income Taxes $ 157,219 $ 367,728 $ 136,769 =================================
II-35 63 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. BUSINESS SEGMENT AND GEOGRAPHIC AREA ANALYSIS (Continued) Revenues from the Major Unaffiliated Customers of the Natural Gas Transmission & Marketing Segment
Years Ended December 31, 1994 1993 1992 - ----------------------------------------------------------- (In Thousands) ---------------------------- Atlanta Gas Light $290,858 $364,217 $312,361 Alabama Gas Corporation 178,531 204,558 161,779 ============================
Capital expenditures for unconsolidated affiliates are accounted for on the books of the unconsolidated affiliates and therefore are not reflected in the totals appearing in the Company's Consolidated Financial Statements. Capital Expenditures by Business Segment
Years Ended December 31, 1994 1993 1992 - ------------------------------------------------------------- (In Thousands) ---------------------------- Consolidated: Exploration and production $389,766 $430,852 $156,418 Natural gas transmission and marketing 54,406 61,012 43,796 Other 4,142 24,602 25,552 ---------------------------- 448,314 516,466 225,766 ---------------------------- Unconsolidated Affiliates (Company's Portion): Exploration and production 101 10,559 37,415 Natural gas transmission and marketing 398,389 18,516 11,988 Other 52 3,080 2,172 ---------------------------- 398,942 32,155 51,575 ---------------------------- $847,256 $548,621 $277,341 ============================
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, 1994 1993 1992 - ------------------------------------------------------------------ (In Thousands) ---------------------------------- Identifiable Assets: Exploration and production $1,488,054 $1,308,189 $1,034,678 Natural gas transmission and marketing 1,344,893 1,400,796 1,297,945 Other 37,531 42,640 367,704 Adjustments and eliminations (70,444) (86,159) (64,566) ---------------------------------- 2,800,034 2,665,466 2,635,761 ---------------------------------- Investments in Unconsolidated Affiliates: Exploration and production 6,281 6,345 26,898 Natural gas transmission and marketing 339,539 150,069 155,526 Other 140,508 138,807 73,263 ---------------------------------- 486,329 295,221 255,687 Corporate Assets 244,323 253,310 273,884 ---------------------------------- Total Assets $3,530,686 $3,213,997 $3,165,332 ==================================
Revenues and operating profit from continuing operations of domestic and foreign operations have been computed consistent with the methods previously discussed. II-36 64 Sonat Inc. and Subsidiaries 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, 1994 1993 1992 - --------------------------------------------------------------- (In Thousands) --------------------------------- Revenues: Domestic $1,773,927 $1,655,380 $1,322,064 Foreign - 85,767 162,359 --------------------------------- $1,773,927 $1,741,147 $1,484,423 ================================= Operating Profit: Domestic $ 167,190 $ 226,756 $ 202,276 Foreign - 7,656 10,494 --------------------------------- Operating profit 167,190 234,412 212,770 Corporate Expenses 2,249 (1,497) (1,679) ---------------------------------- Operating income 169,439 232,915 211,091 Equity in Earnings (Loss) of Unconsolidated Affiliates: Domestic 44,319 12,657 2,382 Foreign - (292) 1,750 Other Income, Net 16,348 169,720 17,904 Interest Expense, Net (72,887) (47,272) (96,358) --------------------------------- Income from Continuing Operations Before Extraordinary Item and Income Taxes $ 157,219 $ 367,728 $ 136,769 ================================= Identifiable Assets: Domestic $2,800,034 $2,665,466 $2,354,875 Foreign - - 280,886 --------------------------------- 2,800,034 2,665,466 2,635,761 --------------------------------- Investments in Unconsolidated Affiliates: Domestic 486,329 295,221 194,560 Foreign - - 61,127 --------------------------------- 486,329 295,221 255,687 Corporate Assets 244,323 253,310 273,884 --------------------------------- Total Assets $3,530,686 $3,213,997 $3,165,332 =================================
Foreign cash equivalents amounted to $18.4 million at December 31, 1992. There were no foreign cash equivalents at December 31, 1994 and 1993. 13. OIL AND GAS OPERATIONS (Unaudited) At December 31, 1994, the Company had interests in oil and gas properties that are located primarily in Texas, Louisiana, Arkansas, Oklahoma, Alabama, and offshore Louisiana and Texas in the Gulf of Mexico. The Company does not own or lease any oil and gas properties outside the United States. In October 1993, the Company acquired the remaining interest in Sonat/P not owned by it from Prudential InsuranceCompany whereby the partnership was subsequently dissolved. (See Note 5.) Capitalized costs relating to oil and gas producing activities and related accumulated depreciation, depletion and amortization were as follows: Capitalized Costs
December 31, 1994 1993 - ----------------------------------------------------------- (In Thousands) ---------------------- Oil and Gas Properties: Proved properties $2,258,237 $1,935,450 Unproved properties 125,118 142,404 ---------------------- 2,383,355 2,077,854 Less Accumulated Depreciation, Depletion and Amortization 991,621 853,634 ---------------------- $1,391,734 $1,224,220 ======================
Costs incurred in oil and gas producing activities were as follows: Costs Incurred
Years Ended December 31, 1994 1993 1992 - ----------------------------------------------------------- (In Thousands) ------------------------------- Property Acquisition Costs: Proved properties $142,294 $211,933 $ 14,253 Unproved properties 28,953 62,617 11,975 Exploration Costs 11,284 8,265 7,017 Development Costs 215,205 151,875 126,265 ------------------------------- Total Costs $397,736 $434,690 $159,510 =============================== Sonat's Share of Sonat/P's Costs of Property Acquisition, Exploration, and Development $ - $ 10,432 $ 37,053 ===============================
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: II-37 65 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. OIL AND GAS OPERATIONS (Unaudited) (Continued) Reserve Data
OIL- GAS- Oil- Gas- Oil- Gas- THOUSAND BILLION Thousand Billion Thousand Billion BBLS. CU. FT. Bbls. Cu. Ft. Bbls. Cu. Ft. - --------------------------------------------------------------------------------------- December 31, 1994 1993 1992 - --------------------------------------------------------------------------------------- Proved (Developed and Undeveloped) Reserves, Net: Beginning of year 27,094 1,186.6 19,604 974.9 19,125 1,077.9 Revisions of previous estimates (2,891) 31.3 2,410 (6.2) 1,987 1.1 Transfer of Sonat/P reserves - - 426 39.5 - - Extensions, discoveries and other additions 4,876 107.2 2,470 68.7 1,790 41.0 Purchases of reserves in place 8,059 229.9 6,396 274.7 525 34.6 Sales of reserves in place (129) (6.0) (468) (18.9) (735) (54.0) Production (5,382) (181.7) (3,744) (146.1) (3,088) (125.7) --------------------------------------------------------------- End of Year 31,627 1,367.3 27,094 1,186.6 19,604 974.9 =============================================================== Proved Developed Reserves: Beginning of year 19,776 899.6 15,304 696.5 15,745 658.7 End of year 22,269 1,001.0 19,776 899.6 15,304 696.5 =============================================================== Sonat's Proportional Interest in: Proved reserves of Sonat/P end of year - - - - 540 53.1 Production of Sonat/P - - 34 4.2 9 1.3 ===============================================================
The significant changes to reserves, other than acquisitions, dispositions or production, are due to reservoir performance in existing fields, drilling of additional wells in existing fields and development of new fields. In early 1995, Sonat Exploration announced two significant acquisitions of oil and gas producing properties, one in north Louisiana and the other in the Texas Panhandle area. These transactions of $158.3 million, which are not reflected in the above data, will add proved reserves of 188 billion cubic feet of natural gas and 11.2 million barrels of oil and condensate. There were no other events or major discoveries, favorable or adverse, that may be considered to have caused a significant change in the estimated proved reserves since December 31, 1994. Results of operations from producing activities by fiscal year were as follows: Results of Operations
Years Ended December 31, 1994 1993 1992 - ----------------------------------------------------------- (In Thousands) -------------------------------- Net Revenues: Sales $ 148,530 $ 200,143 $ 211,339 Affiliated sales 264,220 151,987 62,095 -------------------------------- Total 412,750 352,130 273,434 Production Costs (81,067) (64,548) (55,565) Exploration Expenses (12,181) (6,678) (5,125) Depreciation, Depletion and Amortization (206,842) (149,179) (107,537) -------------------------------- 112,660 131,725 105,207 Income Tax Expense (25,031) (27,066) (21,839) -------------------------------- Results of Operations from Producing Activities (Excluding Corporate Overhead and Interest Costs) $ 87,629 $ 104,659 $ 83,368 ================================ Sonat's Share of Sonat/P's Results of Operations for Producing Activities (before Tax) $ - $ 4,900 $ 1,689 ================================
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, 1994 1993 1992 - --------------------------------------------------------------- (In Thousands) ------------------------------------ Future Cash Inflows $ 2,835,781 $ 3,051,484 $2,483,976 Future Production and Development Costs (1,200,581) (1,044,410) (816,706) Future Income Tax Expenses (83,931) (236,632) (180,754) ------------------------------------ Future Net Cash Flows 1,551,269 1,770,442 1,486,516 10% Annual Discount for Estimated Timing of Cash Flows (465,469) (477,824) (489,043) ------------------------------------ Standardized Measure of Discounted Future Net Cash Flows $ 1,085,800 $ 1,292,618 $ 997,473 ==================================== Sonat's Share of Sonat/P's Standardized Measure of Discounted Future Net Cash Flows (before Tax) $ - $ - $ 48,677 =====================================
II-38 66 Sonat Inc. and Subsidiaries For the calculations in the preceding table, estimated future cash inflows from estimated future production of proved reserves were computed using realized oil and gas prices for each December. 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, 1994 1993 1992 - ----------------------------------------------------------- (In Thousands) -------------------------------- Sales and Transfers of Oil and Gas Produced, Net of Production Costs $(331,683) $(287,583) $(217,869) Net Changes in Prices and Production Costs (327,290) (25,100) 81,509 Extensions, Discoveries and Improved Recovery, Less Related Costs 104,554 87,185 44,226 Transfer of Sonat/P Reserves - 44,209 - Changes in Estimated Future Development Costs (28,397) (17,179) (527) Development Costs Incurred During the Period 68,945 47,278 52,817 Revisions of Previous Quantity Estimates 11,157 8,572 13,973 Accretion of Discount 129,974 103,689 102,663 Net Change in Income Taxes 40,039 (34,751) 13,767 Purchases of Reserves in Place 160,335 317,764 31,791 Sales of Reserves in Place (5,226) (17,159) (55,606) Changes in Production Rates (Timing) and Other (29,226) 68,220 (73,386) -------------------------------- $(206,818) $ 295,145 $ (6,642) ================================
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) ----------------------------------------- 1994(1) Revenues $479,507 $415,015 $411,765 $467,640 Operating Income (Loss) 76,699 52,505 49,203 (8,968) Net Income 49,610 34,541 35,292 21,964 ====================================== Earnings Per Share $ .57 $ .40 $ .40 $ .25 ====================================== 1993(2) 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 ======================================
(1) Net income for the fourth quarter of 1994 includes a gain of $20.3 million, or $.23 per share, related to the settlement of an examination of the Company's federal income tax returns for the years 1986 through 1988; a charge for Southern Natural's Rate Settlement of $17.9 million, or $.21 per share; and charges for a reduction in work force and other matters amounting to $22.0 million, or $.25 per share. (2) 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. II-39 67 Selected Consolidated Financial Data
1994 1993 1992 1991 - ---------------------------------------------------------------------------------------------------------------------------- (In Millions, Except Per-Share Amounts) --------------------------------------- Revenues $1,773.9 $1,741.1 $1,484.4 $1,421.0 Costs and Expenses 1,604.5 1,508.2 1,273.3 1,217.5 - ---------------------------------------------------------------------------------------------------------------------------- Operating Income (Loss) 169.4 232.9 211.1 203.5 Other Income (Expense), Net 60.7 182.1 22.0 14.7 Interest Expense, Net (72.9) (47.3) (96.3) (117.7) - ---------------------------------------------------------------------------------------------------------------------------- Income (Loss) from Continuing Operations before Extraordinary Item and Income Taxes 157.2 367.7 136.8 100.5 Income Taxes (Benefits) 15.8 102.7 35.8 22.6 - ---------------------------------------------------------------------------------------------------------------------------- Income (Loss) from Continuing Operations before Cumulative Effect of Accounting Changes 141.4 265.0 101.0 77.9 Income (Loss) from Discontinued Operations(1) - - 111.4 (11.9) Extraordinary Loss, Net of Tax(2) - (3.8) - - Cumulative Effect of Change in Method of Accounting for Investment Tax Credits - - - - Cumulative Effect of Change in Method of Accounting for Income Taxes - - - - - ---------------------------------------------------------------------------------------------------------------------------- Net Income (Loss) $ 141.4 $ 261.2 $ 212.4 $ 66.0 ============================================================================================================================ Earnings (Loss) Per Share from Continuing Operations before Extraordinary Item $ 1.62 $ 3.05 $ 1.17 $ .91 Earnings (Loss) Per Share $ 1.62 $ 3.01 $ 2.47 $ .77 Weighted Average Shares Outstanding (thousands) 87,119 86,703 85,945 85,771 Dividends Paid Per Share $ 1.08 $ 1.04 $ 1.00 $ 1.00 ============================================================================================================================ Assets $3,530.7 $3,214.0 $3,165.3 $3,208.5 Debt Maturing within One Year $ 219.3 $ 232.9 $ 20.1 $ 79.2 Long-Term Debt 963.4 741.2 1,175.7 1,315.1 Stockholders' Equity 1,391.9 1,363.2 1,172.3 1,042.7 - ---------------------------------------------------------------------------------------------------------------------------- Total Capitalization $2,574.6 $2,337.3 $2,368.1 $2,437.0 ============================================================================================================================
Notes: (1) 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. (2) 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. II-40 68
1990 1989 1988 1987 1986 1985 1984 - ---------------------------------------------------------------------------------------------------------------------------- (In Millions, Except Per-Share Amounts) - ---------------------------------------------------------------------------------------------------------------------------- $1,356.9 $1,659.2 $1,277.3 $1,344.9 $1,628.6 $2,258.6 $2,380.9 1,192.2 1,481.4 1,142.4 1,176.5 1,929.3 2,225.2 2,050.8 - ---------------------------------------------------------------------------------------------------------------------------- 164.7 177.8 134.9 168.4 (300.7) 33.4 330.1 69.8 47.1 12.5 41.5 118.1 5.2 (1.3) (102.6) (75.2) (54.4) (54.6) (77.9) (47.9) (30.0) - ----------------------------------------------------------------------------------------------------------------------------- 131.9 149.7 93.0 155.3 (260.5) (9.3) 298.8 40.7 54.1 40.5 85.2 (144.7) (13.0) 136.9 - ---------------------------------------------------------------------------------------------------------------------------- 91.2 95.6 52.5 70.1 (115.8) 3.7 161.9 2.7 (2.0) 2.2 24.9 (73.6) (14.1) 35.1 - - - - - - - - - - - - 62.4 - - - 13.1 - - - - - ---------------------------------------------------------------------------------------------------------------------------- $ 93.9 $ 93.6 $ 67.8 $ 95.0 $ (189.4) $ 52.0 $ 197.0 ============================================================================================================================ $ 1.07 $ 1.17 $ .65 $ .87 $ (1.43) $ .05 $ 2.00 $ 1.10 $ 1.15 $ .83 $ 1.17 $ (2.34) $ .64 $ 2.44 85,612 81,682 81,238 80,912 80,948 80,916 80,902 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ .9625 $ .85 ============================================================================================================================ $3,045.1 $2,892.3 $2,969.5 $3,074.4 $3,288.8 $3,413.2 $3,392.5 $ 63.1 $ 155.9 $ 50.4 $ 225.6 $ 104.6 $ 150.7 $ 20.1 1,094.0 929.5 859.4 824.8 1,336.3 996.2 810.8 1,060.5 1,035.3 1,010.2 1,023.0 1,005.9 1,276.3 1,301.5 - ---------------------------------------------------------------------------------------------------------------------------- $2,217.6 $2,120.7 $1,920.0 $2,073.4 $2,446.8 $2,423.2 $2,132.4 ============================================================================================================================
II-41 69 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-42 70 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 15, 1995 (the "Proxy Statement"), which information is hereby incorporated by reference herein. A copy of the Proxy Statement is filed as an exhibit to this report on Form 10-K. Information regarding the executive officers of Sonat is presented following Item 4 of this report, as permitted by General Instruction G(3) to Form 10-K and Instruction 3 to Item 401(b) of Regulation S-K. ITEM 11. EXECUTIVE COMPENSATION The information required by Item 402 of Regulation S-K regarding executive compensation is presented under the headings "Compensation of Outside Directors" and "Compensation of Executive Officers" in the Proxy Statement, which information is hereby incorporated by reference herein. Notwithstanding the foregoing, the information provided under the headings "Report of the Executive Compensation Committee" and "Performance Graph" in the Proxy Statement are not incorporated by reference herein. A copy of the Proxy Statement is filed as an exhibit to this report on Form 10-K. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information regarding the security ownership of certain beneficial owners and management required by Item 403 of Regulation S-K is presented under the heading "Ownership of Common Stock by Directors and Executive Officers" in the Proxy Statement, which information is hereby incorporated by reference herein. A copy of the Proxy Statement is filed as an exhibit to this report on Form 10-K. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information regarding certain relationships and related transactions required by Item 404 of Regulation S-K is presented under the heading "Certain Business Relationships and Transactions" in the Proxy Statement, which information is hereby incorporated by reference herein. A copy of the Proxy Statement is filed as an exhibit to this report on Form 10-K. III-1 71 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 LLP, Independent Auditors.................................. II-15 Consolidated Balance Sheets at December 31, 1994 and 1993.......................... II-16 Consolidated Statements of Income for the years ended December 31, 1994, 1993, and 1992............................................................................ II-18 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1994, 1993, and 1992............................................... II-19 Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1993, and 1992........................................................................ II-20 Notes to Consolidated Financial Statements......................................... II-21
2. FINANCIAL STATEMENT SCHEDULES
PAGE ----- Included in Part IV of this report: Consolidated Financial Statements of Citrus Corp. (50-percent-owned joint venture) at December 31, 1994, listed on Page IV-7....................................... IV-7
Financial Statement Schedules have been omitted because they are not applicable or because the subject matter is either not present or is not present in amounts sufficient to require submission of the schedule, in accordance with the instructions contained in Regulation S-X, or the required information is included in the financial statements or notes thereto. Financial statements of 50-percent-or-less-owned companies and joint ventures, other than Citrus Corp., are not presented herein because such companies and joint ventures do not meet the significance test. 3. EXHIBITS (1)
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-(a) to Form dated May 2, 1994 10-Q of Sonat Inc. for the quarter ended March 31, 1994 3-(b) By-Laws of Sonat Inc. as amended and in effect Filed as Exhibit 3-(2) to Form January 1, 1987 10-K of Sonat Inc. for the year 1991
- --------------- (1) Sonat will furnish to requesting security holders any exhibit on this list upon the payment of a fee of 10c 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 72
NUMBER DESCRIPTION METHOD OF FILING - ------ ----------------------------------------------------- ------------------------------ INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS 4.1 Rights Agreement dated January 23, 1986 between Sonat Filed as Exhibit 4-(1) to Form Inc. and Manufacturers Hanover Trust Company, as 10-K of Sonat Inc. for the Rights Agent, with exhibits, as amended by Amendment year 1991 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 Form between Citrus Corp. and the Purchasers named therein 10-K of Sonat Inc. for the year 1990 4.5 Credit Agreement dated as of December 15, 1993 among Filed as Exhibit 4-(5) to Form Sonat Inc., the Banks named therein, and The Chase 10-K of Sonat Inc. for the Manhattan Bank (National Association), Chemical Bank year 1993 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 Service Agreements Nos. 901710 and 901711, effective Filed as Exhibit 10.5 to Form June 1, 1994, and No. 902516, effective October 1, 10-Q of Sonat Inc. for the 1994, between Southern Natural Gas Company and South quarter ended September 30, Carolina Pipeline Corporation 1994 10.3(a) Service Agreement No. 902470, effective September 1, Filed as Exhibit 10.6 to Form 1994, between Southern Natural Gas Company and 10-Q of Sonat Inc. for the Atlanta Gas Light Company quarter ended September 30, 1994 10.3(b) Service Agreement No. 904460, effective November 1, Filed as Exhibit 10.7 to Form 1994, between Southern Natural Gas Company and 10-Q of Sonat Inc. for the Atlanta Gas Light Company quarter ended September 30, 1994 10.3(c) Service Agreement No. 904461, effective November 1, Filed as Exhibit 10.8 to Form 1994, between Southern Natural Gas Company and 10-Q of Sonat Inc. for the Atlanta Gas Light Company quarter ended September 30, 1994 10.3(d) Service Agreement No. 904480, effective November 1, Filed as Exhibit 10.9 to Form 1994, between Southern Natural Gas Company and 10-Q of Sonat Inc. for the Atlanta Gas Light Company quarter ended September 30, 1994
IV-2 73
NUMBER DESCRIPTION METHOD OF FILING - ------ ----------------------------------------------------- ------------------------------ 10.3(e) Service Agreement No. 904481, effective November 1, Filed as Exhibit 10.10 to Form 1994, between Southern Natural Gas Company and 10-Q of Sonat Inc. for the Atlanta Gas Light Company quarter ended September 30, 1994 10.3(f) Service Agreement No. S20150, effective November 1, Filed as Exhibit 10.11 to Form 1994, between Southern Natural Gas Company and 10-Q of Sonat Inc. for the Atlanta Gas Light Company quarter ended September 30, 1994 10.3(g) Service Agreement No. S20140, effective November 1, Filed as Exhibit 10.12 to Form 1994, between Southern Natural Gas Company and 10-Q of Sonat Inc. for the Atlanta Gas Light Company quarter ended September 30, 1994 COMPENSATION PLANS AND MANAGEMENT CONTRACTS 10.4 Supplemental Benefit Plan of Sonat Inc. as Amended Filed as Exhibit 10-(4) to and Restated effective February 25, 1993, and (1) Form 10-K of Sonat Inc. for amendment dated April 28, 1994 year 1993, except (1) which was filed as Exhibit 10.2 to Form 10-Q of Sonat Inc. for quarter ended September 30, 1994 10.5 Executive Award Plan of Sonat Inc. as Amended and Filed as Exhibit 10-(5) to Restated as of December 3, 1993 Form 10-K of Sonat Inc. for the year 1993 10.6 Restricted Stock Plan for Directors of Sonat Inc. (as Filed as Exhibit 10-(6) to Amended and Restated as of September 15, 1993) Form 10-K of Sonat Inc. for the year 1993 10.7 Performance Award Plan of Sonat Inc. effective as of Filed as Exhibit 10-(7) to January 27, 1994 Form 10-K of Sonat Inc. for the year 1993 10.8 Cash Bonus Plan of Sonat Inc. effective as of January Filed as Exhibit 10-(8) to 27, 1994 Form 10-K of Sonat Inc. for the year 1993 10.9 Sonat Inc. Retirement Plan for Directors as Amended Filed herewith and Restated as of December 2, 1994 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. and which was filed as Exhibit other parties 10-(10) to Form 10-K of Sonat Inc. for the year 1993 10.11 Directors' Fees Deferral Plan of Sonat Inc. effective Filed as Exhibit 10-(14) to as of August 15, 1985 Form 10-K of Sonat Inc. for the year 1990
IV-3 74
NUMBER DESCRIPTION METHOD OF FILING - ------ ----------------------------------------------------- ------------------------------ 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, except (1) agreements between Sonat Inc. and other directors of which was filed as Exhibit Sonat Inc. and (1) Indemnity Agreement dated 10.3 to Form 10-Q of Sonat September 1, 1994 between Sonat Inc. and Adrian M. Inc. for the quarter ended Tocklin, and (2) Indemnity Agreement dated September September 30, 1994, and (2) 22, 1994 between Sonat Inc. and Donald G. Russell which was filed as Exhibit 10.4 to Form 10-Q of Sonat Inc. for the quarter ended September 30, 1994 10.13 Trust Agreement dated December 19, 1986 between Sonat Filed as Exhibit 10-(15) to Inc. and AmSouth Bank N.A. for Section 415 Retirement Form 10-K of Sonat Inc. for Plan Benefits and Vesting Benefits under the the year 1991 Supplemental Benefit Plan and Early Retirement Benefits under the Executive Severance Agreements 10.14 Trust Agreement dated December 19, 1986 between Sonat Filed as Exhibit 10-(16) to Inc. and AmSouth Bank N.A. for Section 415 Stock Form 10-K of Sonat Inc. for Purchase Plan Benefits under the Supplemental Benefit the year 1991 Plan 10.15 Trust Agreement dated December 19, 1986 between Sonat Filed as Exhibit 10-(17) to Inc. and AmSouth Bank N.A. for Benefits under the Form 10-K of Sonat Inc. for 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) which July 1, 1990, with (1) schedule identifying the is filed as Exhibit 10-(16) to persons participating in such Programs Form 10-K of Sonat Inc. for the year 1993 OTHER MATERIAL CONTRACTS 10.17 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) 10.18 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 10.19 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 10.20 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
IV-4 75
NUMBER DESCRIPTION METHOD OF FILING - ------ ----------------------------------------------------- ------------------------------ 10.21 Standby Note Purchase Agreement among Sonat Inc., Filed as Exhibit 10-(23) to Credit Lyonnais New York Branch, as Administrative Form 10-K of Sonat Inc. for Agent for the Banks party to the Revolving Credit the year 1993 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 Sonat Inc. and Subsidiaries Computation of Earnings Filed herewith Per Share 12 Computation of Ratio of Earnings to Fixed Charges Filed herewith 21 Subsidiaries of Sonat Inc. Filed herewith 22 Proxy Statement of Sonat Inc. dated as of March 15, Filed herewith 1995 (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 1994) 23 Consent of Ernst & Young LLP, Independent Auditors Filed herewith dated March 24, 1995 24 Powers of Attorney authorizing Ronald L. Kuehn, Jr.; Filed herewith Thomas W. Barker, Jr.; James A. Rubright; Ronald B. Pruet; and John C. Griffin to sign the Sonat Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 1994, on behalf of certain directors and officers of the registrant 27 Financial Data Schedule for the period ended December Filed electronically with the 31, 1994 Securities and Exchange Commission
Exhibits listed above that have heretofore been filed with the Securities and Exchange Commission, which were physically filed as noted above, are incorporated herein by reference pursuant to Rule 12b-32 under the Securities Exchange Act of 1934 and made a part hereof with the same effect as if filed herewith. Certain instruments relating to long-term debt of Sonat and its subsidiaries have not been filed as exhibits since the total amount of securities authorized under any such instrument does not exceed ten percent of the total assets of Sonat and its subsidiaries on a consolidated basis. Sonat agrees to furnish a copy of each such instrument to the Commission upon request. (b) Reports on Form 8-K There were no reports on Form 8-K filed during the quarter ended December 31, 1994. (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 76 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 28, 1995 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: /s/ RONALD L. KUEHN, JR. Chairman of the Board March 28, 1995 - ----------------------------------------------- President and Chief RONALD L. KUEHN, JR. Executive Officer (ii) Principal Financial Officer: /s/ THOMAS W. BARKER, JR. Vice President -- Finance and March 28, 1995 - ----------------------------------------------- Treasurer THOMAS W. BARKER, JR. Principal Accounting Officer: /s/ RONALD B. PRUET, JR. Vice President and Controller March 28, 1995 - ----------------------------------------------- RONALD B. PRUET, JR. (iii) Directors:* RONALD L. KUEHN, JR. WILLIAM O. BOURKE JOHN J. CREEDON ROBERTO C. GOIZUETA ROBERT J. LANIGAN CHARLES MARSHALL BENJAMIN F. PAYTON JOHN J. PHELAN, JR. JEROME J. RICHARDSON DONALD G. RUSSELL L. EDWIN SMART ADRIAN M. TOCKLIN JAMES B. WILLIAMS JOE B. WYATT *Signed on behalf of each of these persons: By /s/ JAMES A. RUBRIGHT -------------------------------------------- JAMES A. RUBRIGHT VICE PRESIDENT AND GENERAL COUNSEL AS AUTHORIZED BY CERTAIN POWERS OF ATTORNEY DATED FEBRUARY 23, 1995, AND ONE DATED MARCH 4, 1995 ALL OF WHICH ARE FILED HEREWITH AS EXHIBIT 24
IV-6 77 CITRUS CORP. AND SUBSIDIARIES TABLE OF CONTENTS
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Report of Ernst & Young LLP, Independent Auditors IV-8 CONSOLIDATED FINANCIAL STATEMENTS Consolidated Balance Sheets - Assets IV-9 Consolidated Balance Sheets - Liabilities and Stockholders' Equity IV-10 Consolidated Statements of Operations and Retained Earnings IV-11 Consolidated Statements of Cash Flows IV-12 Notes to Consolidated Financial Statements IV-13
IV-7 78 Report of Ernst & Young LLP, Independent Auditors Board of Directors Citrus Corp. We have audited the accompanying consolidated balance sheets of Citrus Corp. and Subsidiaries as of December 31, 1994 and 1993, 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, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Citrus Corp. and Subsidiaries at December 31, 1994 and 1993, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. Ernst & Young LLP Birmingham, Alabama February 24, 1995 IV-8 79 CITRUS CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
- ----------------------------------------------------------------------------------- December 31, ----------------------- (In Thousands) 1994 1993 - ----------------------------------------------------------------------------------- ASSETS Current Assets Cash and cash equivalents $ 78,068 $ 9,455 Trade and other receivables Customers, net 45,628 42,869 Affiliated companies 752 2,017 Contract reformation costs, net 29,749 33,919 Commodity adjustment costs 5,399 -- Materials and supplies 1,955 5,281 Other 228 250 ----------------------- Total Current Assets 161,779 93,791 ----------------------- Deferred Charges Unamortized debt expense 9,736 3,243 Contract reformation costs, net 32,832 54,412 Commodity adjustment costs 45,628 -- Other 15,691 18,831 ----------------------- Total Deferred Charges 103,887 76,486 ----------------------- Property, Plant and Equipment, at cost 2,593,533 1,737,701 Less - accumulated depreciation and amortization 358,396 334,708 ----------------------- Net Property, Plant and Equipment 2,235,137 1,402,993 ----------------------- TOTAL ASSETS $2,500,803 $1,573,270 - -----------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. IV-9 80 CITRUS CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
- ----------------------------------------------------------------------------------------------- December 31, ----------------------- (In Thousands) 1994 1993 - ----------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Notes payable to banks and current maturities of long-term debt $ -- $ 305,000 Accounts payable Trade 36,015 44,383 Affiliated companies 27,018 48,071 Accrued liabilities Interest 18,342 9,951 Income taxes 4,856 -- Other taxes 1,341 1,358 TCR deferred revenues 21,258 -- Other 17,985 8,926 ----------------------- Total Current Liabilities 126,815 417,689 ----------------------- Long-Term Debt 1,125,000 395,000 Deferred Credits Deferred income taxes 444,250 418,673 TCR deferred revenues 45,034 -- Other 46,628 1,941 ----------------------- Total Deferred Credits 535,912 420,614 ----------------------- Commitments and Contingencies (Notes 8 and 9) Stockholders' Equity Common stock, $1 par value; 1,000 shares authorized, issued and outstanding 1 1 Additional paid-in capital 634,271 316,271 Retained earnings 78,804 23,695 ----------------------- Total Stockholders' Equity 713,076 339,967 ----------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,500,803 $1,573,270 - -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. IV-10 81 CITRUS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
- ------------------------------------------------------------------------------------ Years Ended December 31, ----------------------------------- (In Thousands) 1994 1993 1992 - ------------------------------------------------------------------------------------ Revenues Gas sales $ 305,350 $ 407,977 $ 434,153 Gas transportation 172,112 141,725 115,986 Other -- 24,600 -- ----------------------------------- 477,462 574,302 550,139 ----------------------------------- Costs and Expenses Natural gas purchased 294,670 405,920 402,711 Operations and maintenance 63,365 63,228 62,016 Depreciation and amortization 63,737 59,896 62,842 Taxes-other than income taxes 8,506 8,526 8,154 ----------------------------------- 430,278 537,570 535,723 ----------------------------------- Operating Income 47,184 36,732 14,416 ----------------------------------- Other Income (Expense) Interest expense, net (55,760) (51,842) (51,993) Allowance for funds used during construction 98,114 2,712 1,042 Other, net 58 907 1,265 ----------------------------------- 42,412 (48,223) (49,686) ----------------------------------- Income (Loss) Before Income Tax 89,596 (11,491) (35,270) Income Tax Expense (Benefit) 34,487 4,641 (13,153) ----------------------------------- Net Income (Loss) 55,109 (16,132) (22,117) Retained Earnings, Beginning of Year 23,695 39,827 61,944 ----------------------------------- Retained Earnings, End of Year $ 78,804 $ 23,695 $ 39,827 - ------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. IV-11 82 CITRUS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------ Years Ended December 31, ----------------------------------- (In Thousands) 1994 1993 1992 - ------------------------------------------------------------------------------------------------------ Cash Flows From Operating Activities Net Income (Loss) $ 55,109 $ (16,132) $ (22,117) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities Depreciation and amortization 63,737 59,896 62,842 Deferred income taxes 25,577 4,641 (9,941) Allowance for funds used during construction (98,114) (2,712) (1,042) Changes in assets and liabilities Trade and other receivables (1,494) 9,763 (4,196) Materials and supplies 3,326 4,270 2,859 Accounts payable (29,421) 11,040 (41,116) Accrued liabilities 13,230 771 (93) Other current assets and liabilities 9,081 (3,175) (1,357) Contract reformation settlements and adjustments (8,169) (18,802) (68,751) Other, net (49,960) (22,442) 5,541 ----------------------------------- Net Cash Provided by (Used in) Operating Activities (17,098) 27,118 (77,371) ----------------------------------- Cash Flows From Investing Activities Additions to property, plant and equipment (855,832) (110,615) (23,731) Allowance for funds used during construction 98,114 2,712 1,042 Disposition of property, plant and equipment, net (2,024) (696) 491 ----------------------------------- Net Cash Used in Investing Activities (759,742) (108,599) (22,198) ----------------------------------- Cash Flows From Financing Activities Short-term bank borrowings, net (275,000) 120,000 129,800 Proceeds from issuance of long-term debt 790,000 -- -- Payment of long-term debt (90,000) (30,000) (30,000) TCR proceeds 86,313 -- -- TCR payments (20,021) -- -- Hedging proceeds 36,161 -- -- Equity contribution from shareholders 318,000 -- -- ----------------------------------- Net Cash Provided by Financing Activities 845,453 90,000 99,800 ----------------------------------- Increase in Cash and Cash Equivalents 68,613 8,519 231 Cash and Cash Equivalents, Beginning of Year 9,455 936 705 ----------------------------------- Cash and Cash Equivalents, End of Year $ 78,068 $ 9,455 $ 936 - ------------------------------------------------------------------------------------------------------ Additional cash flow information The Company made the following interest and income tax payments: Interest (net of amounts capitalized) $ 58,180 $ 54,510 $ 55,377 Income taxes paid (received) 4,054 (2,149) (2,064)
The accompanying notes are an integral part of these consolidated financial statements. IV-12 83 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) and Citrus Trading Corp. (Trading). The stock of the Company is owned 50% by Sonat Inc. (Sonat) and 50% by Houston Pipe Line Company, a subsidiary of Enron Corp. (Enron). Transmission, an interstate gas pipeline, 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 & Light Co., a large electric utility in the state of Florida, to local distribution customers, and to end users. (2) SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions and accounts have been eliminated in consolidation. CASH AND CASH EQUIVALENTS - The Company considers as cash equivalents all highly liquid short-term investments with original maturities of three months or less. These investments are accounted for at cost, which approximates estimated fair value. MATERIALS AND SUPPLIES - Materials and supplies are valued at actual cost. Materials transferred out of warehouses are priced out at average cost. ACCOUNTING FOR PRICE RISK MANAGEMENT ACTIVITIES - To manage the risks of price fluctuations, Trading follows the practice of entering into swap agreements in certain energy products. All related gains and losses are recognized currently in income as adjustments to costs and expenses. Trading uses the settlement method of accounting for its commodity swaps and the Company uses the deferral method for its interest-rate swaps. Commodity swaps are settled monthly and gains and losses are recognized immediately. The effects of commodity swaps are recorded as an adjustment to natural gas purchased. The current year interest-rate swaps have been closed and the termination gain has been deferred in other deferred credits in the consolidated balance sheet at December 31, 1994, to be amortized against interest expense over the portion of the debt agreement associated with the swaps. Fees associated with these transactions have been expensed as incurred. DEPRECIATION, AMORTIZATION AND MAINTENANCE POLICIES - The Company amortizes that portion of its investment in Transmission and other subsidiaries which is in excess of historical cost (acquisition adjustment) on a straight-line basis at an annual rate of 1.9% based upon the estimated remaining useful life of the pipeline system. Transmission has provided for depreciation of assets on a straight-line basis at an annual composite rate of .75%, 3.06% and 3.16% for 1994, 1993 and 1992, respectively. Depreciation rates are based on the estimated useful lives of the individual assets. In 1994, Transmission changed its depreciation rate applicable to its mainline transportation assets to better reflect its remaining useful life. The effect of the change was a reduction in depreciation and amortization expense of $13.3 million in 1994. During the third quarter of 1993, the Company changed its depreciation rate applicable to the acquisition adjustment to better reflect its remaining useful life. The effect of the change was a reduction in depreciation and amortization expense of $5.6 million in 1993. IV-13 84 (2) SIGNIFICANT ACCOUNTING POLICIES (continued) In 1994, Trading entered into an agreement with a major customer which provides significant future benefits over previous gas sales contracts. The agreement requires Trading to make approximately $55 million in deposits on the customers behalf over sixteen months ending in August 1995. Trading is amortizing the total amounts paid on a volumetric basis over the term of the new agreement. Amortization of these payments is included in depreciation and amortization expense. Transmission amortizes contract reformation costs based on volume deliveries and FERC-approved recovery rates. Such amortization is included in depreciation and amortization expense. 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 accounts for income taxes under the provisions of Statement of Financial Accounting Standards (SFAS) No. 109. SFAS No. 109 provides for an asset and liability approach for accounting for income taxes. Under this approach, deferred tax assets and liabilities are recognized based on anticipated future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax bases. RECLASSIFICATIONS - Certain items on the consolidated financial statements have been reclassified in 1993 and 1992 to conform with the 1994 presentation. (3) LONG-TERM DEBT AND OTHER FINANCING ARRANGEMENTS Long-term debt outstanding at December 31, 1994 and 1993 was as follows (in thousands):
Citrus Corp. 1994 1993 ------------ ---------- ---------- 11.10% Notes due 1998-2006 $ 175,000 $ 175,000 9.70% Notes due 1994-1996 -- 90,000 8.49% Notes due 2007-2009 90,000 -- ---------- ---------- 265,000 265,000 ---------- ---------- Transmission ------------ 7.75% Notes due 1997 100,000 -- 9.30% Notes due 1998 25,000 25,000 8.14% Notes due 1999 200,000 -- 9.75% Notes due 1999-2008 65,000 65,000 8.63% Notes due 2004 250,000 -- 10.11% Notes due 2009-2013 70,000 70,000 9.19% Notes due 2005-2024 150,000 -- ---------- ---------- 860,000 160,000 ---------- ---------- Total Long-Term Debt 1,125,000 425,000 Less Current Maturities -- 30,000 ---------- ---------- Total Long-Term Debt, Net of Current Maturities $1,125,000 $ 395,000 ========== ==========
IV-14 85 (3) LONG-TERM DEBT AND OTHER FINANCING ARRANGEMENTS (continued) Annual maturities and sinking fund requirements on long-term debt outstanding as of December 31, 1994 were as follows (in thousands):
Year Amount ---- ---------- 1995 $ -- 1996 -- 1997 100,000 1998 44,250 1999 225,750 Thereafter 755,000 ---------- $1,125,000 ==========
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. The Company had no committed lines of credit at December 31, 1994. Transmission has a committed line of credit of $70.0 million and uncommitted bid note facilities for up to $45.0 million, all of which were available at December 31, 1994. In April 1994, Transmission entered into an agreement in which it transferred the rights to future cash flows from collections of certain transportation surcharge receivables relating to the recovery of contract reformation costs. Transmission received $86.3 million relating to the transfer of rights to future cash flows. The Company's TCR deferred revenues on the consolidated balance sheet at December 31, 1994 are collateralized by transportation surcharge receivables included in contract reformation costs. (4) INCOME TAXES The principal components of the Company's net deferred income tax liabilities at December 31, 1994 and 1993 are as follows (in thousands):
1994 1993 --------- --------- Deferred income tax assets Net operating loss carryforward $ 5,013 $ 24,928 Other 29,077 5,568 --------- --------- 34,090 30,496 --------- --------- Deferred income tax liabilities Depreciation and amortization 436,712 420,155 Contract reformation costs 37,181 25,713 Other 4,447 3,301 --------- --------- 478,340 449,169 --------- --------- Net deferred income tax liabilities $ 444,250 $ 418,673 ========= =========
IV-15 86 (4) INCOME TAXES (continued) Total income tax expense (benefit) for the years ended December 31, 1994, 1993 and 1992 is summarized as follows (in thousands):
1994 1993 1992 -------- -------- -------- Payable currently Federal $ 7,000 $ -- $ (2,758) State 1,910 -- -- -------- -------- -------- 8,910 -- (2,758) -------- -------- -------- Payment deferred Federal 21,882 (5,091) (8,604) State 3,695 (347) (1,791) -------- -------- -------- 25,577 (5,438) (10,395) -------- -------- -------- Effect of tax rate increase on deferred tax liability -- 10,079 -- -------- -------- -------- Total income tax expense (benefit) $ 34,487 $ 4,641 $(13,153) ======== ======== ========
The differences between taxes computed at the U.S. federal statutory rate and the Company's effective tax rate for the years ended December 31, 1994, 1993 and 1992 are as follows (in thousands):
1994 1993 1992 -------- -------- -------- Statutory federal income tax provision $ 31,359 $ (4,022) $(11,992) Net state income taxes 3,063 (226) (1,183) Tax rate increase -- 10,079 -- Revision of prior years' tax estimates -- (1,200) -- Other 65 10 22 -------- -------- -------- Income tax expense (benefit) $ 34,487 $ 4,641 $(13,153) ======== ======== ========
The Company has a consolidated net operating loss carryforward for tax purposes of approximately $13 million. This loss carryforward will be available until 2008, at which time it will begin to expire. For financial statement purposes, the Company has recognized the benefit of this loss carryforward by a reduction of deferred tax liabilities. (5) EMPLOYEE BENEFIT PLANS Enron maintains a retirement plan (the Enron Plan) which is a noncontributory defined benefit plan covering substantially all employees in the United States and certain employees in foreign countries. Through December 31, 1994, participants in the Enron Plan with five years or more of service are entitled to retirement benefits based on a formula that uses a percentage of final average pay and years of service. Pension expenses charged to the Company by Enron were $.2, $.4 and $.3 million for 1994, 1993 and 1992, respectively. Enron amended the Enron Plan providing, among other things, that all employees become fully vested in retirement benefits earned through December 31, 1994, and effective January 1, 1995, temporarily suspended accruals under the Enron Plan in connection with Enron's decision to change the benefits formula effective January 1, 1996. IV-16 87 (5) EMPLOYEE BENEFIT PLANS (continued) Enron maintains a noncontributory employee stock ownership plan (ESOP) which covers all eligible employees. Allocations to individual employees' retirement accounts within the ESOP offset a portion of benefits earned under the Enron Plan. To the extent allocations to the individual employees' retirement account within the ESOP exceed accrued benefits under the Enron Plan at the date of retirement, the individual employees receive the additional shares. As of September 30, 1994, the most recent valuation date, the actuarial present value of projected plan benefit obligations for the Enron Plan in which the employees of the Company participate was less than the plan net assets by approximately $18.9 million. The assumed discount rate and rate of return on plan assets used in determining the actuarial present value of projected plan benefits were 8.0% and 10.5%, respectively. The assumed rate of increase in wages was 4.0%. In addition to providing pension benefits, Enron also provides certain health care and life insurance benefits to eligible employees (and their eligible surviving spouses) who retire under the Enron Plan. Benefits are provided under the provisions of a contributory defined dollar benefit plan. Effective January 1, 1993, Enron adopted the provisions of SFAS No. 106 "Employers Accounting for Postretirement Benefits Other Than Pensions". SFAS No. 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. Enron has elected the prospective transition approach and is amortizing the transition obligation which existed at January 1, 1993, over a period of approximately 19 years. The Company's net periodic postretirement benefit cost charged by Enron were $.8 and $.7 million for 1994 and 1993, respectively, substantially all of which relates to Transmission and is expected to be recovered through rates. The measurement of the accumulated postretirement benefit obligation (APBO) assumes a 8% discount rate and a health care cost trend rate of 12.3% in 1994 decreasing to 5% by the year 2006 and beyond. The APBO exceeded plan assets by $103.6 million as of its most recent valuation date of December 31, 1994. (6) MAJOR CUSTOMERS Revenues from individual customers exceeding 10% of total revenues for the years ended December 31, 1994, 1993 and 1992 were approximately as follows (in thousands):
Customers 1994 1993 1992 --------- -------- -------- -------- Florida Power & Light Co. $267,000 $263,000 $269,000 Peoples Gas System, Inc. 36,000 55,000 65,000
At December 31, 1994, the Company's subsidiaries had receivables of approximately $19.6 and $3.0 million from Florida Power & Light Co. 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 $17.4, $14.8 and $12.1 million for these expenses for the years ended December 31, 1994, 1993 and 1992, respectively. IV-17 88 (7) RELATED PARTY TRANSACTIONS (continued) The Company's subsidiaries provide natural gas sales and transport services to Enron and Sonat affiliates at rates equal to rates charged to non-affiliated customers in the same class of service. Revenues related to these services amounted to approximately $9.1, $13.0 and $4.3 million for the years ended December 31, 1994, 1993 and 1992, respectively. The Company's subsidiaries purchased gas from affiliates of Sonat of approximately $22.0, $10.8 and $8.8 million for the years ended December 31, 1994, 1993 and 1992, respectively. The Company's subsidiaries also purchased gas from affiliates of Enron of approximately $139.4, $31.1 and $41.4 million for the years ended December 31, 1994, 1993 and 1992, respectively. The Company has an agreement with an affiliate of Enron in which the affiliate manages the operations of Trading in exchange for a $1.2 million annual fee. (8) RATE MATTERS Transmission was authorized by the FERC in April 1989, to recover via a volumetric surcharge certain take-or-pay buy-out and buy-down costs billed by Southern Natural Gas Company (Southern Fixed Charges) and paid by Transmission. On May 31, 1994, the Southern Fixed Charges billed to Transmission ceased. Transmission's recovery mechanism was suspended effective June 1, 1994, pending a determination of the status of actual collections and remaining balances to be refunded to or collected from Transmission's customers. On September 12, 1994, Transmission filed tariff sheets to reinstate its flow-through billing mechanism effective November 1, 1994. The September 12 filing included schedules detailing the outstanding Southern Fixed Charge account balances owed Transmission at May 31, 1994, by customer, totaling approximately $7.2 million. In an order issued October 28, 1994, the FERC accepted the tariff sheets, subject to refund and conditions, and directed Transmission to provide additional information and documentation. Supplemental filings were made November 14, 1994, to comply with the October 28 order and to correct certain minor errors contained in the September 12 filing. Several parties have requested rehearing of the October 28 order. These requests are currently pending before the FERC. Transmission has been authorized by the FERC to recover certain transition costs incurred through the reformation of gas supply contracts related to Transmission's former sales services. The Order No. 636 restructuring settlement, effective November 1, 1993, allows Transmission to recover 100% of any such transition costs between $106 million and $160 million and 75% of payments exceeding $160 million. Transmission has made payments totaling $134 million through December 31, 1994. It is possible that additional payments to suppliers may be made to resolve gas purchase contract issues. However, to the extent additional payments are made, management believes that these costs will be 100% recoverable through Transmission's existing tariff mechanisms. By orders issued January 15, 1993, April 21, 1993 and September 15, 1993, the FERC approved the Stipulation and Agreement filed in Docket Nos. CP92-182, et al. on August 25, 1992 and authorized Transmission to construct and operate a major expansion of its system (Phase III Expansion). These orders also authorized Transmission to provide firm transportation service through the expanded capacity pursuant to a new firm transportation rate schedule, FTS-2. Construction was completed and service under FTS-2 commenced March 1, 1995. On December 30, 1994, Transmission made a Section 4 rate filing proposing an increase in its annual revenues, exclusive of the Phase III Expansion, of approximately $9.7 million. In an order issued January 31, 1995, the FERC accepted and suspended the filing to be effective July 1, 1995, subject to refund and certain conditions. IV-18 89 (9) COMMITMENTS AND CONTINGENCIES In late 1994, the FERC's Division of Audits completed a compliance review of Transmission's books and records for the time periods January 1, 1991 through December 31, 1993. Among other things, the FERC auditors questioned certain aspects of Transmission's procedures for accounting for the costs of financing Transmission's Phase III expansion facilities. The Company's management does not believe ultimate resolution of these compliance issues will have a material effect on the Company's results of operations or financial position. (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 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, 1994 and 1993, are as follows (in thousands):
1994 1993 ----------------------- ----------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value ---------- ---------- ---------- ---------- Contract reformation costs $ 62,581 $ 62,581 $ 88,331 $ 88,331 Notes payable to banks -- -- 275,000 275,000 TCR deferred revenues 66,292 66,292 -- -- Long-term debt (including current maturities) 1,125,000 1,156,375 425,000 512,532
The carrying amount of contract reformation costs, notes payable to banks and TCR deferred revenues reasonably approximate their fair value. The fair value of long-term debt is based upon market quotations of similar debt at interest rates currently available. (11) PRICE RISK MANAGEMENT In August 1990, Trading entered into a price swap agreement to effectively manage approximately 10% of the market risk caused by fluctuations in the price of natural gas and residual fuel oil. The agreement provides a hedge on 41,000 MMBtu of natural gas and 5,000 barrels of residual fuel oil per day. The agreement requires Trading to make payments to (or receive payments from) the other party based upon the differential between a fixed and a floating price for natural gas and residual fuel oil as specified in the agreement. The current swap agreement is effective for a period of five years beginning August 1, 1990. Additionally, in May 1994, the Company entered into an offsetting swap agreement with an affiliate of Enron, the term of which coincides with the remaining life of the previously referenced swap. IV-19 90 (11) PRICE RISK MANAGEMENT (continued) The Company's after-tax results of operations for the years ended December 31, 1994, 1993 and 1992 included net gains of $5.5 ($2.4 million of this amount is from an affiliate of Enron), $4.6 and $1.1 million, respectively, related to these agreements. Under the swap agreements, Trading effectively pays a fixed price of $13.75 per barrel and receives a fixed price of $20.135 per barrel for residual fuel, and pays a fixed price of $2.381 per mcf and receives a fixed price of $2.042 mcf for natural gas. The Company entered into two off-balance-sheet transactions involving interest-rate swaps in 1994. The Company's objective in managing interest rate exposure was to control interest rate risk associated with its then anticipated $700 million private debt placement for construction of Phase III facilities. Management's strategy with regards to interest-rate swaps was to limit the impact of changes in interest rates on this specific private debt placement only. The Company's interest-rate swaps modified the interest characteristics of the then anticipated private debt placement from an unknown to a fixed-basis interest rate. These agreements involved the placement of a fixed rate on anticipated tranches of the principal amount of the debt without an exchange of the underlying principal amount. The approximately $36 million differential paid to the Company was received in November 1994, when the Company effected the placement of the debt and closed out the swaps. The Company is exposed to credit loss in the event of nonperformance by counterparties on interest-rate and commodity swaps. The counterparty involved in the interest-rate swap has already performed and the Company does not anticipate nonperformance by other counterparties. The amount of such exposure is generally the unrealized gain on such contracts. IV-20 91 APPENDIX TO ANNUAL REPORT ON FORM 10-K OF SONAT INC. FOR THE YEAR ENDED DECEMBER 31, 1994 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-18 Map of the Southeastern United States showing the approximate location of the pipeline systems of Southern and Florida Gas (including Phase III) (as described on pages I-7, I-14, I-15, and I-16), the underground storage facilities of Southern (as described on page I-7), and Southern Energy's LNG terminal (as discussed on page I-15).
EX-10.9 2 RETIREMENT PLAN 1 EXHIBIT 10.9 SONAT INC. RETIREMENT PLAN FOR DIRECTORS (as amended and restated as of December 2, 1994) 1. PURPOSE The Sonat Inc. Retirement Plan for Directors (the "Plan") is intended to advance the best interests of Sonat Inc. (the "Company") by providing retirement income to eligible directors of the Company, thereby enabling the Company to attract and retain high caliber persons to serve as directors. The Plan is also intended to enhance the ability of directors to evaluate the best interests of the Company and its stockholders in the event of a proposed or threatened Change in Control (as defined in Paragraph 8) by minimizing the personal uncertainties and risks created by such a proposal or threat. 2. ELIGIBILITY Eligible directors are directors of the Company who during some portion of the time of their service as directors were not officers of the Company or any of its subsidiaries. Such directors shall be entitled to the retirement income described in Paragraph 4 or 5 (as the case may be) upon their ceasing to serve as a director of the Company (hereinafter referred to as "retirement") under any of the following circumstances: (a) at any time after reaching age 70; 2 (b) at any time after having completed five years of service as an outside director; (c) upon becoming permanently disabled, as determined by the Board of Directors in its sole judgment; (d) death; or (e) at any time following a Change in Control. Notwithstanding the foregoing, no director shall be an eligible director or entitled to retirement income under the Plan if (a) such director is removed from the Board of Directors for cause (which shall mean only dishonesty, conviction of a felony, or wilful unauthorized disclosure of confidential information), or (b) the retirement of such director occurs prior to January 1, 1985 unless such retirement follows a Change in Control. 3. DETERMINATION OF FORM OF PAYMENT If an eligible director's date of retirement occurred prior to December 2, 1994, such director's retirement income shall be paid in the manner provided for in the Plan prior to such date. If an eligible director's date of retirement occurred on or after December 2, 1994, such director's retirement income shall be paid as a lump-sum payment as provided in Paragraph 4 below ("Lump-Sum Payment") unless, at least twelve full calendar months before the date of the director's retirement, the director filed with the Company an irrevocable written election to have such retirement income paid as a term-certain annuity as provided for in Paragraph 5 below ("Term-Certain Annuity"), in which case such income shall be paid as specified in such election. - 2 - 3 4. AMOUNT AND PAYMENT OF RETIREMENT INCOME AS LUMP-SUM FORM PAYMENT Upon the retirement of an eligible director who is entitled to receive his retirement income as a Lump-Sum Payment, the Company will pay to such eligible director (or his beneficiary, in the event of his death) retirement income in the form of a cash lump-sum payment equal to the "present value" (calculated as of the date of payment) of a series of payments equal to the "quarterly retainer," based on the assumption that the quarterly retainer is paid quarterly, commencing with the beginning of the calendar quarter next following the date of the director's retirement, for a period of time equal to the "service period." For purposes of this Paragraph 4 and Paragraph 5: (a) "present value" shall be calculated using a discount rate equal to the yield on new 7-12 year AA-rated general obligation tax-exempt bonds as determined by Merrill Lynch & Co. (or its affiliates) and published in The Wall Street Journal (or other financial publication) on the second preceding business day before the first business day of the calendar quarter next following the date of the director's retirement (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 such second preceding business day, the discount rate shall be the yield on substantially similar securities on such - 3 - 4 second preceding business day as determined by AmSouth Bank N.A. upon the request of the director or his beneficiary (as the case may be). (b) "quarterly retainer" shall mean one-fourth of the basic annual retainer (excluding fees and special retainers paid for meetings and Board Committee appointments) in effect for directors on the date of the director's retirement. (c) "service period" shall mean the total of the number of whole calendar quarters of service by such director on the Board of Directors of the Company and service by such director prior to May 25, 1973 on the Board of Directors of Southern Natural Gas Company during which period such director was not an officer of the Company or any of its subsidiaries; provided, however, that if a director's retirement or election as an officer occurs prior to the end of a calendar quarter, for purposes of this Paragraph 4 he will be deemed to have served as a non-officer director until the end of such quarter. The cash lump-sum payment calculated and made pursuant to this Paragraph 4 shall be paid on the first business day of the calendar quarter next following the date of the director's retirement. 5. AMOUNT AND PAYMENT OF RETIREMENT INCOME PAID AS TERM-CERTAIN ANNUITY Upon the retirement of an eligible director who is entitled to receive his retirement income as a Term-Certain Annuity, the Company will pay to such eligible director (or his beneficiary, in the event of his death) retirement income in the form of a series of - 4 - 5 substantially equal payments for the number of whole calendar quarters (not to exceed the service period) elected by the director as provided in Paragraph 3. Such series of payments shall have a present value equal to that of the Lump-Sum Payment. Payments shall be made quarterly, commencing with the first business day of the calendar quarter next following the date of the director's retirement. 6. BENEFICIARIES A director shall be entitled to designate a beneficiary (and to change such beneficiary from time to time) for payment of retirement income under this Plan in the event of the director's death. If no beneficiary has been designated, the director's estate shall be deemed the beneficiary. 7. FUNDING AND ASSIGNMENT The Plan shall not be funded. Retirement income under the Plan shall be paid from the general assets of the Company, and may not be assigned or transferred by a director or his beneficiary. 8. CHANGE IN CONTROL A "Change in Control" shall be deemed to have occurred if: (a) any "person" (as defined in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934, as in effect on May 1, 1984 (the "Exchange Act")) is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act) of securities of the Company representing 35% or more of the voting power of the outstanding securities of the Company - 5 - 6 having the right under ordinary circumstances to vote at an election of the Board of Directors; (b) 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 (c) 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. 9. EFFECTIVE DATE The Plan became effective as of July 26, 1984. Effective September 26, 1991, the Plan was amended to provide for payment of retiremnt income as a Lump-Sum Payment for directors in receipt of a retirement income under this Plan on such date and for eligible directors who retired after such date. Effective February 25, 1993, the Plan was amended to provide for payment of retirement income as either a Lump-Sum Payment or as a Service Period Annuity (as defined). Effective December 2, 1994, the Plan was amended to provide for payment of retirement income as either a Lump-Sum Payment or as a Term-Certain Annuity. 10. AMENDMENT The Board of Directors may amend the Plan from time to time and may discontinue the Plan at any time, but no amendment or discontinuance of the Plan shall adversely - 6 - 7 affect any rights under the Plan of any former director who at the time is entitled to receive retirement income or any director who at the time would be entitled to receive retirement income if such director had ceased to serve as a director immediately prior to such amendment or discontinuance. IN WITNESS WHEREOF, pursuant to authorization by the Board of Directors of Sonat Inc., Sonat Inc. has caused this amendment and restatement of the Plan to be executed as of December 2, 1994. SONAT INC. BY: /s/ Beverley T. Krannich ------------------------------------------ Beverley T. Krannich Vice President-Human Resources and Secretary - 7 - EX-11 3 COMPUTATION OF EARNINGS PER SHARE 1 Exhibit 11 SONAT INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE
Years Ended December 31, --------------------------------- 1994 1993 1992 ---- ---- ---- (In Thousands Except Per-Share Amounts) Primary Earnings Per Share (1) -------------------------- Earnings: Income from Continuing Operations before Extraordinary Item $141,407 $265,069 $100,962 Income from Discontinued Operations - - 111,447 Extraordinary Loss - (3,829) - -------- -------- -------- Net Income $141,407 $261,240 $212,409 ======== ======== ======== Common Stock and Common Stock Equivalents: Weighted Average Number of Shares of Common Stock Outstanding 87,119 86,703 85,945 Common Stock Equivalents Applicable to Outstanding Stock Options 951 994 414 -------- -------- -------- Weighted Average Number of Shares of Common Stock and Common Stock Equivalents Outstanding 88,070 87,697 86,359 ======== ======== ======== Primary Earnings Per Share: Income from Continuing Operations before Extraordinary Item $ 1.61 $ 3.02 $ 1.17 Income from Discontinued Operations - - 1.29 Extraordinary Loss - (.04) - -------- -------- -------- $ 1.61 $ 2.98 $ 2.46 ======== ======== ========
(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 4 COMPUTATION OF RATIO OF EARNINGS 1 EXHIBIT 12 SONAT INC. AND SUBSIDIARIES COMPUTATION OF RATIOS OF EARNINGS FROM CONTINUING OPERATIONS TO FIXED CHARGES TOTAL ENTERPRISE (A)
Years Ended December 31, ------------------------------------------------------------------------ 1994 1993 1992 1991 1990 ---- ---- ---- ---- ---- (In Thousands) Earnings from Continuing Operations: Income before income taxes $154,871 $364,198 $133,728 $ 98,374 $127,811 Fixed charges (see computation below) 125,916 128,468 156,428 175,980 165,021 Less allowance for interest capitalized (6,692) (4,101) (8,422) (7,951) (6,184) -------- -------- -------- -------- -------- Total Earnings Available for Fixed Charges $274,095 $488,565 $281,734 $266,403 $286,648 ======== ======== ======== ======== ======== Fixed Charges: Interest expense before deducting interest capitalized $120,295 $122,204 $149,165 $168,510 $158,550 Rentals(b) 5,621 6,264 7,263 7,470 6,471 -------- -------- -------- -------- -------- $125,916 $128,468 $156,428 $175,980 $165,021 ======== ======== ======== ======== ======== Ratio of Earnings to Fixed Charges 2.2 3.8 1.8 1.5 1.7 ======== ======== ======== ======== ========
- ---------------- (a) Amounts include the Company's portion of the captions as they relate to persons accounted for by the equity method. (b) These amounts represent 1/3 of rentals which approximate the interest factor applicable to such rentals of the Company and its subsidiaries and continuing joint ventures. EX-21 5 SUBSIDIARIES OF SONAT INC. 1 EXHIBIT 21 SUBSIDIARIES OF SONAT INC. -------------------------- AS OF JANUARY 1, 1995 ---------------------
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% SNT REALTY INC. (b) Alabama 100% SONAT ENERGY SERVICES COMPANY Delaware 100% Sonat Marketing Company Delaware 100% Keystone Trading Company Delaware 100% JV Trading Inc. Delaware 100% Vail Trading Company Delaware 100% Sonat Power Inc. (c) Delaware 100% Pacific Gas Power Inc. Delaware 100% SONAT EXPLORATION COMPANY Delaware 100% Crosstex Pipeline, Inc. Texas 100% Field Gas Gathering Inc. Delaware 100% Sonat Coal Gas Inc. (d) Delaware 100% Sonat Minerals Inc. Delaware 100% Sonat Minerals Leasing Inc. 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 (cont'd.) 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% Sonat Gathering Company Delaware 100% Sonat Intrastate-Alabama Inc. Alabama 100% Sonat Ventures Inc. (e) Delaware 100% Sonat NGV Technology Inc. (f) Delaware 100% South Georgia Natural Gas Company Delaware 100% Southern Deepwater Pipeline Company (g) Delaware 100% Southern Energy Company Delaware 100% Southern Gas Storage Company (h) Delaware 100% Southern Offshore Pipeline Company (g) 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 - --------------- --------------- ------------ SONAT OFFSHORE DRILLING INC. (i) Delaware 39.7% Arcade Drilling as. (j) Norway 24.9% EPN-Sonat, S.A. de C.V. (k) Mexico 49% Sonat Norwegian Ventures Inc. Delaware 100% Sonat Offshore Norway Inc. (l) Delaware 100% ASIE Sonat Offshore Sdn. Bhd. (m) Malaysia 49% Sonat Brasocean Servicos de Perfuracoes Ltd. Brazil 100% Sonat Offshore do Brasil Perfuracoes Maritimas Ltda. Brazil 100% Sonat Offshore USA Inc. Delaware 100% Sonat Offshore Ventures, Inc. Delaware 100% Sonat Offshore (U.K.) Inc. Delaware 100% Sonat Servicos Maritimas Limitada Brazil 100% Sonat Turnkey Drilling Inc. (n) Delaware 100%
- 3 - 4 Notes - ----- (a) Citrus Corp. owns 100 percent of the stock of Florida Gas Transmission Company, Florida Intrastate Pipeline Company, Citrus Trading Corp., Citrus Industrial Sales Company and Citrus Interstate Pipeline Company. 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) Sonat Power Inc. has a 50-percent interest in AES/Sonat Power, L.L.C., a Virginia limited liability company, the remaining 50- percent interest of which is held by The AES Corp. (d) 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. (e) Sonat Ventures Inc. ("Ventures") is a 50-percent participant in Florida Natural Fuels Ltd., a Florida limited partnership, the remaining 50-percent interest of which is held by Suwannee Gas Marketing Inc., a wholly owned subsidiary of Peoples Gas System, Inc. Florida Natural Fuels Ltd. has a 67-percent interest in Amoco/Florida Natural Fuels Partnership, a Florida general partnership, the remaining 33-percent interest of which is held by Amoco Oil Company. Ventures is also a 50-percent participant in Monarch CNG, an unincorporated joint venture, the remaining 50 percent of which is held by Midtown NGV, Inc., a wholly owned subsidiary of Alabama Gas Corporation. (f) Sonat NGV Technology Inc. is a 33-percent participant in NGV Southeast Technologies Center, L.L.C., a Georgia limited liability company, the remaining interests of which are equally held by Georgia Energy Company, a wholly owned subsidiary of Atlanta Gas Light Company, and Natural Gas Vehicles Development Company Southeast, Inc., a wholly owned subsidiary of Natural Gas Vehicles Development Company, Inc. (g) Southern Deepwater Pipeline Company and Southern Offshore Pipeline Company each have a 50-percent interest in Sea Robin Pipeline Company, an unincorporated joint venture. (h) Southern Gas Storage Company has a 50-percent interest in Bear Creek Storage Company, an unincorporated joint venture, the remaining 50 percent of which is owned by Tenneco Inc. through its wholly owned subsidiary, Tennessee Storage Company. Bear Creek Storage Company owns 100 percent of the stock of Bear Creek Capital Corporation. (i) Sonat Inc. owns approximately 11,252,300 shares of 39.7 percent of the common stock of Sonat Offshore Drilling Inc. ("Offshore"). The remainder of the - 4 - 5 (i) Sonat Inc. owns approximately 11,252,300 shares of 39.7 percent of the common stock of Sonat Offshore Drilling Inc. ("Offshore"). The remainder of the common stock of Offshore is listed on the New York Stock Exchange and is publicly traded. (j) Reading & Bates Corporation owns 73.1 percent of Arcada Drilling as. and the remaining two percent is owned by a number of different persons. (k) The remaining 51-percent interest in EPN-Sonat, S.A. de C.V. is held by EPN, S.A. de C.V., a Mexican industrial company. (l) Sonat Offshore Norway Inc. has a 47.5 percent interest in Partrederiet Polar Frontier Drilling, a 40-percent interest in Polar A/S, and a 47.5-percent interest in Polar Frontier Drilling A/S, all of which are Norwegian joint venture partnerships. (m) The remaining interest in ASIE Sonat Offshore Sdn. Bhd., a Malaysian joint venture, is owned by ASIE Sdn. Bhd. (n) Sonat Turnkey Drilling Inc. has a 50-percent interest in Offshore Turnkey Ventures, a Texas partnership, the remaining 50 percent of which is held by Petroleum Engineers International Inc. - 5 - EX-22 6 PROXY STATEMENT OF SONAT INC. 1 EXHIBIT 22 SONAT INC. P. O. BOX 2563, BIRMINGHAM, ALABAMA 35202 TELEPHONE: (205) 325-3800 - -------------------------------------------------------------------------------- NOTICE OF ANNUAL MEETING OF STOCKHOLDERS TO BE HELD APRIL 27, 1995 To Our Stockholders: The Annual Meeting of Stockholders of Sonat Inc., a Delaware corporation, will be held at the Ballroom, The Ritz-Carlton Houston, 1919 Briar Oaks Lane, Houston, Texas at 9:00 a.m., local time, on Thursday, April 27, 1995, for the following purposes: 1. To elect four Directors as members of the Board of Directors of the Company, to serve until the 1998 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 a proposed amendment and restatement of the Executive Award Plan as outlined in the accompanying Proxy Statement and set forth in Exhibit A thereto (Proposal No. 2). 4. To approve a Restricted Stock Grant Program under the Executive Award Plan (Proposal No. 3). 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 10, 1995, 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, BEVERLEY T. KRANNICH Secretary Birmingham, Alabama March 15, 1995 - -------------------------------------------------------------------------------- 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 27, 1995 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 27, 1995 at 9:00 a.m. at the Ballroom, The Ritz-Carlton Houston, 1919 Briar Oaks Lane, Houston, Texas. Mailing of the Proxy Statement and the accompanying proxy card to the stockholders is expected to commence on or about March 17, 1995. VOTING SECURITIES As of January 31, 1995, the Company had outstanding 86,351,011 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 10, 1995, as the record date for the determination of stockholders entitled to notice of, and to vote at, the Annual Meeting. THE PROXY If a proxy is executed properly by a stockholder and is not revoked, it will be voted at the Annual Meeting in the manner specified on the proxy, or if no manner is specified, it will be voted "FOR" the election of the four nominees for Director and "FOR" Proposal No. 1, 2 and 3. The submission of an executed proxy will not affect a stockholder's right to attend, and to vote in person at, the Annual Meeting. A stockholder who executes a proxy may revoke it at any time before it is voted by filing a written revocation with the Secretary of the Company, executing a proxy bearing a later date or attending and voting in person at the Annual Meeting. THE BOARD OF DIRECTORS URGES YOU TO SIGN, DATE AND RETURN THE ENCLOSED PROXY IN THE ENCLOSED RETURN ENVELOPE. ELECTION OF DIRECTORS The Company's Restated Certificate of Incorporation provides for the classification of the Board of Directors into three classes (Class I, Class II and Class III). Four Class III 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 four nominees for election as Class III Directors are John J. Creedon, Benjamin F. Payton, John J. Phelan, Jr. and L. Edwin Smart. 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. Pursuant to the Board's retirement policy, Mr. Creedon would retire from the Board on the date of the 1997 Annual Meeting of Stockholders, and Mr. Smart would retire from the Board on the date of the 1996 Annual Meeting of Stockholders. Upon the retirement of a Director, the Board has the authority to fill the vacancy on the Board for the remainder of such Director's term. THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" JOHN J. CREEDON, BENJAMIN F. PAYTON, JOHN J. PHELAN, JR. AND L. EDWIN SMART AS CLASS III DIRECTORS. 3 NOMINEES FOR DIRECTOR -- CLASS III -- TERMS TO EXPIRE 1998 - ----------------------- JOHN J. CREEDON, age 70, 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 [PHOTO] Corporation, Praxair, Inc., Rockwell International Corporation and Union Carbide Corporation. Prior to his retirement, Mr. Creedon served as Chief Executive Officer and as Chairman of the Executive Committee of the Board of Directors of Metropolitan Life Insurance Company. - ----------------------- - ------------------------------------------------------------------------------------------------ - ----------------------- BENJAMIN F. PAYTON, age 62, is President of Tuskegee University, a position he has held during the past five years. He has served as a Director of the Company since 1992. Dr. Payton is also a Director of [PHOTO] AmSouth Bancorporation, ITT Corporation, Liberty Corporation, Morrison's, Inc., Praxair, Inc. and ITT Sheraton Corporation. - ----------------------- - ------------------------------------------------------------------------------------------------ - ----------------------- JOHN J. PHELAN, JR., age 63, 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 Director of Avon Products, Inc., Eastman Kodak Company, Merrill [PHOTO] 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. - ----------------------- - ------------------------------------------------------------------------------------------------
2 4 - ----------------------- L. EDWIN SMART, age 71, 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 [PHOTO] of 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. - ----------------------- CONTINUING DIRECTORS -- CLASS I -- TERMS EXPIRING 1996 - ----------------------- WILLIAM O. BOURKE, age 67, 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 [PHOTO] 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 63, 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 [PHOTO] 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. - ----------------------- - ------------------------------------------------------------------------------------------------
3 5 - ----------------------- RONALD L. KUEHN, JR., age 59, 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 [PHOTO] 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. - ----------------------- - ----------------------------------------------------------------------------------------------- - ----------------------- ROBERT J. LANIGAN, age 66, 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 [PHOTO] a Director of the Company since 1983. Mr. Lanigan is also a Director of Chrysler Corporation, Sonat Offshore Drilling Inc., The Coleman Company, 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 65, 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 [PHOTO] of Ceridian Corporation, GATX Corporation, Hartmarx Corporation, Sundstrand Corporation and Zenith Electronics Corporation. Prior to his retirement in June 1989, Mr. Marshall served as an executive officer of American Telephone and Telegraph Company. - ----------------------- - -----------------------------------------------------------------------------------------------
4 6 CONTINUING DIRECTORS -- CLASS II -- TERMS EXPIRING 1997 - ----------------------- JEROME J. RICHARDSON, age 58, is Chairman of the Board 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 [PHOTO] 1991. Mr. Richardson is also a Director of NCAA Foundation and Isotechnologies, Inc., Owner- Founder of the 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. - ----------------------- - ------------------------------------------------------------------------------------------------- - ----------------------- DONALD G. RUSSELL, age 63, is Executive Vice President of the Company and Chairman of the Board and Chief Executive Officer of Sonat Exploration Company (a wholly-owned subsidiary of the [PHOTO] Company). On September 22, 1994, he was elected as a Director by the Board of Directors, effective as of September 22, 1994. Mr. Russell is also a Director of Grant Geophysical, Inc. and Sonat Offshore Drilling Inc. During the past five years, Mr. Russell has served as an executive officer of the Company and Sonat Exploration Company. - ----------------------- - ------------------------------------------------------------------------------------------------- - ----------------------- ADRIAN M. TOCKLIN, age 43, is President and Chief Operating Officer and a Director of The Continental Corporation, the principal business of which is property and casualty insurance. On July 28, [PHOTO] 1994, she was elected as a Director by the Board of Directors, effective as of September 1, 1994. During the past five years, Ms. Tocklin has served as an executive officer of The Continental Corporation. - ----------------------- - -------------------------------------------------------------------------------------------------
5 7 - ----------------------- JAMES B. WILLIAMS, age 61, 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 [PHOTO] of The Coca-Cola Company, Federal Reserve Bank of Atlanta, Genuine 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 59, 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 [PHOTO] 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. - ----------------------- - -------------------------------------------------------------------------------------------------
BOARD MEETINGS AND COMMITTEES During 1994 the Board of Directors held ten regular and special meetings. The Board has established Committees which assist the Board in the discharge of its responsibilities. Each Director attended at least 75% of the meetings of the Board and the Committees on which he served, except Mr. Phelan, who attended 74% of such meetings. Audit Committee. The Audit Committee reviews and reports to the Board the scope and results of audits by the Auditor and the Company's internal auditing staff, and reviews with the Auditor the adequacy of the Company's system of internal controls. It reviews transactions between the Company and its Directors and officers and Company policies with respect thereto, and compliance with the Company's business ethics and conflict of interest policies. The Committee also recommends a firm of certified public accountants to serve as Auditor of the Company (subject to nomination by the Board and election by the stockholders), authorizes all audit and other professional services rendered by the Auditor and periodically reviews the independence of the Auditor. Membership on the Audit Committee is restricted to those Directors who are not active or retired officers or employees of the Company. The Company's policy on Audit Committee membership complies with the Audit Committee Policy Statement adopted by the New York Stock Exchange. The current members of the Committee are Mr. Creedon, Chairman, and Mr. Goizueta, Mr. Phelan, Mr. Richardson, Ms. Tocklin and Mr. Wyatt. The Committee met three times during 1994. Committee on Directors. The Committee on Directors makes recommendations to the Board with respect to the size and composition of the Board, Board retirement and tenure policies, and Director compensation. It also reviews the qualifications of potential candidates for the Board of Directors, evaluates the performance of incumbent Directors and recommends to the Board nominees to be elected at the Annual Meeting of Stockholders. The current members of the Committee are Mr. Marshall, 6 8 Chairman, and Mr. Bourke, Dr. Payton, Mr. Phelan, Mr. Richardson and Mr. Williams. The Committee met five times during 1994. The Committee on Directors will consider nominees for Director recommended by stockholders. Such recommendations should be submitted in writing, accompanied by a resume of the nominee's qualifications and business experience and a signed statement of the proposed candidate consenting to be named as a candidate and, if nominated and elected, to serve as a Director, and addressed to the offices of the Company to the attention of Beverley T. Krannich, Secretary. Employee Benefits Committee. The Employee Benefits Committee periodically reviews the status of the Company's employee benefit programs and the performance of the managers of the funded programs. To assist in its review, the Committee meets periodically with the chairmen of the administrative and benefit asset committees of each of the funded plans. The current members of the Committee are Mr. Wyatt, Chairman, and Mr. Lanigan, Mr. Marshall, Dr. Payton, Ms. Tocklin and Mr. Williams. The Committee met twice during 1994. Executive Compensation Committee. The Executive Compensation Committee reviews and makes recommendations to the Board with respect to the Company's overall executive compensation policy. The Committee also reviews and approves the compensation of the officers of the Company and makes awards under the Executive Award Plan, Performance Award Plan and Cash Bonus Plan. Membership on the Executive Compensation Committee is restricted to Directors who are not active or retired officers or employees of the Company. The current members of the Committee are Mr. Goizueta, Chairman, and Mr. Bourke, Mr. Lanigan, Mr. Smart and Mr. Wyatt. The Committee met five times during 1994. Finance Committee. The Finance Committee approves long-term financial policies and annual financial plans, significant capital expenditures, insurance programs and investment policies of the Company. It also makes recommendations to the Board concerning dividend policy, the issuance and terms of debt and equity securities and the establishment of bank lines of credit. The current members of the Committee are Mr. Williams, Chairman, and Mr. Creedon, Mr. Goizueta, Mr. Lanigan, Mr. Richardson and Mr. Smart. The Committee met three times during 1994. Public Affairs Committee. The Public Affairs Committee reviews the Company's policies and practices which address issues of social and public concern, such as government affairs, the environment, energy conservation and charitable contributions. It also reviews stockholder relations and considers stockholder proposals and matters of corporate governance. The current members of the Committee are Mr. Smart, Chairman, and Mr. Bourke, Mr. Creedon, Mr. Marshall, Dr. Payton, Mr. Phelan and Ms. Tocklin. The Committee met three times during 1994. Strategic Planning Committee. The Strategic Planning Committee assists in the formulation of the business strategies of the Company and its subsidiaries and reviews the Company's management succession plan. The current members of the Committee are Mr. Lanigan, Chairman, and Mr. Bourke, Mr. Creedon, Mr. Goizueta, Mr. Marshall, Dr. Payton, Mr. Phelan, Mr. Richardson, Mr. Smart, Ms. Tocklin, Mr. Williams and Mr. Wyatt. The Committee met twice during 1994. COMPENSATION OF OUTSIDE DIRECTORS FEES AND RETAINERS. Each non-employee Director of the Company receives a quarterly retainer of $8,250 ($9,500 for Committee Chairmen) and a fee of $1,250 for each Board meeting and each Board Committee meeting attended, plus incurred expenses where appropriate. Pursuant to the Director's Fees Deferral Plan, a Director may elect to defer receipt of some or all of the Director's fees and retainer. All amounts deferred are credited to the Director's account under the Plan. The Director may invest the Plan balance in "phantom" investments in the Company's common stock and five mutual funds. The Director may choose to have the account balance distributed in a lump sum or in annual installments, commencing upon termination of service as a Director. 7 9 RETIREMENT PLAN FOR DIRECTORS. Directors of the Company who during some portion of their service as Directors were not officers of the Company or its subsidiaries are participants in the Retirement Plan for Directors. An eligible Director who ceases being a Director after reaching age 70, completing five years of service as a non-employee Director or as a result of death or permanent disability, will receive a retirement benefit from the Plan. The Director may choose to have such benefit paid as either (1) a cash lump sum in an amount equal to the value of a series of quarterly payments equal to the retainer (as of the date of the Director's retirement) for the period the Director served as a non-employee Director of the Company (or its predecessor, Southern Natural Gas Company) or (2) in a series of quarterly payments with a value equal to such lump-sum payment. RESTRICTED STOCK PLAN FOR DIRECTORS. Each non-employee Director of the Company is a participant in the Restricted Stock Plan for Directors. Each such Director who was a member of the Board of Directors on April 22, 1993 (the effective date of the Plan, as amended and restated) was granted 2,000 shares of restricted stock on such date, except that each Director who is scheduled to retire from the Board under the Board's retirement policy prior to April 1, 1998 (the Plan's termination date) was granted 400 shares of restricted stock for each remaining year of service as a Director. The Plan provides that 400 shares granted to each Director will vest on April 1 of each of the years 1994 through 1998. Each person who first becomes a non-employee Director after April 22, 1993 will be granted 33.33 shares of restricted stock for each calendar month or fraction thereof from the Director's election as a non-employee Director to the following March 31 (rounded to the nearest whole share), plus 400 shares for each subsequent Plan Year (April 1 -- March 31) until the earlier of April 1, 1998 or the Director's scheduled retirement date. The product of 33.33 shares times the number of full and partial calendar months from the Director's election as a non-employee Director to the following March 31 (rounded to the nearest whole share) will vest on the April 1 following such election, and 400 shares will vest on each April 1 thereafter through April 1, 1998. All shares of restricted stock will vest immediately upon the Director's death or disability. At the time the restricted stock vests, the Director will receive a cash tax-offset "supplemental payment" in an amount equal to the amount necessary to pay the federal income tax payable with respect to both the vesting of restricted stock and receipt of the supplemental payment, assuming the Director is taxed at the maximum effective federal income tax rate. If a Director leaves the Board of Directors before all of the Director's shares of restricted stock have vested, the unvested shares will be forfeited. 8 10 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, 1995.
AMOUNT AND NATURE OF NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) ------------------------------------------------------- ----------------------- William O. Bourke...................................... 5,000 John J. Creedon........................................ 13,900(2) Roberto C. Goizueta.................................... 3,600 Ronald L. Kuehn, Jr. .................................. 669,409(3 and 4) Robert J. Lanigan...................................... 6,040 Charles Marshall....................................... 7,600 James E. Moylan, Jr. .................................. 54,362(3) Benjamin F. Payton..................................... 2,461 John J. Phelan, Jr. ................................... 2,660 Jerome J. Richardson................................... 4,882(5) James A. Rubright...................................... 17,400(3) Donald G. Russell...................................... 175,212(3) L. Edwin Smart......................................... 3,600 William A. Smith....................................... 198,677(3) Adrian M. Tocklin...................................... 1,633(6) James B. Williams...................................... 15,200 Joe B. Wyatt........................................... 3,200 All Present Directors and Executive Officers as a Group (21 persons)......................................... 1,349,953(7)
NOTE 1: Each Director and executive officer has sole voting power and sole investment power with respect to all shares beneficially owned by such individual, unless otherwise indicated. As of January 31, 1995, each such individual beneficially owned less than 0.80% of the outstanding shares of Common Stock of the Company, and all present Directors and executive officers of the Company as a group, consisting of 21 persons, beneficially owned 1.56% of the outstanding shares of the Company's Common Stock. The number of shares shown includes 1,600 shares of restricted stock for each of Messrs. Bourke, Goizueta, Lanigan, Marshall, Payton, Phelan, Richardson, Williams and Wyatt, 1,433 shares of restricted stock for Ms. Tocklin, 1,200 shares of restricted stock for Mr. Creedon, and 800 shares of restricted stock for Mr. Smart, granted under the Company's Restricted Stock Plan for Directors, which shares had not vested as of January 31, 1995. Such persons have the power to vote and receive dividends on such shares, but do not have the power to dispose of, or to direct the disposition of, such shares until such shares are vested pursuant to the terms of such plan. In addition to the shares of Common Stock shown above, as of January 31, 1995, the following individuals also held the following number of "phantom" shares of the Company's Common Stock under the Company's Supplemental Benefit Plan (with respect to Messrs. Kuehn and Russell) or Director's Fees Deferral Plan (with respect to the other named individuals): Mr. Creedon, 5,127 phantom shares; Mr. Kuehn, 10,501 phantom shares; Mr. Marshall, 348 phantom shares; Mr. Russell, 4,928 phantom shares; Ms. Tocklin, 672 phantom shares; and Mr. Williams, 480 phantom shares. NOTE 2: 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 3: The number of shares shown for Messrs. Kuehn, Moylan, Rubright, Russell and Smith includes 85,700 shares, 7,200 shares, 9,400 shares, 27,000 shares and 17,000 shares, respectively, of restricted stock granted under the Company's Executive Award Plan, which shares had not vested as of 9 11 January 31, 1995. 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. Kuehn, Moylan, Rubright, Russell and Smith also includes (a) 43,565 shares, 9,041 shares, 0 shares, 9,216 shares and 14,771 shares, respectively, held by the Trustee under the Company's Savings Plan as of January 31, 1995; and (b) 515,600 shares, 35,200 shares, 8,000 shares, 134,000 shares and 157,000 shares, respectively, covered by options under the Company's Executive Award Plan which were exercisable within sixty days after January 31, 1995. NOTE 4: The number of shares shown for Mr. Kuehn includes 7,500 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 5: Mr. Richardson filed a late report to the Securities and Exchange Commission with respect to shares purchased through the automatic quarterly reinvestments of dividends under the Company's Automatic Dividend Reinvestment Service during 1991-1993. NOTE 6: The number of shares shown for Ms. Tocklin includes 100 shares owned by her husband, of which shares she disclaims any beneficial ownership. Ms. Tocklin filed a late report to the Securities and Exchange Commission with respect to her initial ownership of shares of the Company's Common Stock. NOTE 7: The number of shares shown includes 167,700 shares of restricted stock granted under the Company's Executive Award Plan, which shares had not vested as of January 31, 1995; 104,655 shares held by the Trustee under the Company's Savings Plan as of January 31, 1995; 958,967 shares covered by options under the Company's Executive Award Plan which were exercisable within sixty days after January 31, 1995; and 17,833 shares of restricted stock granted under the Company's Restricted Stock Plan for Directors, which shares had not vested as of January 31, 1995. 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 short-term credit facilities to the Company and one of its affiliates permitting the borrowing of an aggregate of $48,400,000. During 1994, there were periodic borrowings and repayments under these facilities and, at December 31, 1994, there was $6,700,000 principal amount outstanding thereunder. In addition, the Company and one of its wholly-owned subsidiaries were permitted to borrow an aggregate of $38,800,000 pursuant to long-term loan agreements, and were indebted to Trust Company in the principal amount thereunder of an aggregate of $38,800,000 at December 31, 1994. A subsidiary of Trust Company also serves as an 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 10 12 executives for their contributions to the attainment of the Company's key strategic goals; and (3) to link the interests of executives and stockholders through stock-based plans and performance measures. The Committee meets with outside consultants at least annually to evaluate the Company's performance against the performance of a peer group of companies and to review and compare the level of compensation paid or awarded to key executives to the compensation practices of the peer group. The peer group used for determining 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 19 of this Proxy Statement is not used to determine the compensation of executives, because that group's aggregate asset mix does not include an appropriate weighting for exploration and production and 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 1994 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 13%, effective April 1, 1994. Mr. Kuehn has been in his current position for approximately 10 1/2 years and his salary for 1994 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 1994 bonus opportunity was based on the level of achievement of certain financial goals, corporate and subsidiary goals, and individual goals, as described below. The 11 13 goals for each executive's bonus opportunity were weighted as follows: financial goals -- 40% for Mr. Kuehn and 25-30% for the other named executive officers; company and subsidiary goals -- 45% for Mr. Kuehn and 55-60% for the other named executive officers; and individual goals -- 15% for all executives. The financial goals included in the 1994 bonus opportunities were the Company's 1994 earnings per share ("EPS") as compared to EPS targets established by the Committee, and the Company's five-year average cash flow return on assets as compared to that of the Corporate Peer Group. In general, these goals were weighted equally. Payout of the EPS goal was based on comparison of actual EPS and the EPS targets, provided that a minimum level of EPS was required for any payout to be made. The payout of the cash flow return on assets goal was based on the Company's absolute ranking within the Corporate Peer Group and its performance against the mean of the Corporate Peer Group. The company and subsidiary goals included in the 1994 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 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 1994 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 1995, the Committee reviewed in detail the extent to which the 1994 performance goals had been achieved. The Company's EPS was below the EPS target, while cash flow return on assets was in the upper quartile of the Corporate Peer Group and significantly above the mean for the Corporate Peer Group. The payout percentage for these financial goals was 84% of the bonus opportunity for the EPS goal and 95% of the bonus opportunity for the cash flow return on assets goal. The Company and its subsidiaries also substantially achieved key company and subsidiary goals relating to oil and gas production and reserve replacement, pipeline restructuring, oil and gas marketing, and the environment. Goals relating to subsidiary earnings were also substantially achieved, with the exception of the earnings goal of Sonat Exploration Company (which was not achieved due to decreases in natural gas prices during 1994). The payout percentages for Company and subsidiary goals ranged from 84% to 95% of the bonus opportunity for these goals. Mr. Kuehn's total bonus payout percentage for 1994 was 82.7% of his bonus opportunity. LONG-TERM STOCK INCENTIVES. The long-term stock incentives component of the Company's executive compensation program is designed to align executive and stockholder interests by rewarding executives for the attainment of stock price appreciation and total stockholder returns. As a general rule, the Committee administers the long-term stock incentive program through annual grants of stock options and restricted stock to certain executive officers of the Company and its major operating subsidiaries. Awards under the annual grant program were made in December 1994. In addition, the Committee may make special awards to individual executives during the year on a discretionary basis. In 1994, the number of stock options and restricted shares granted to each executive officer as part of the annual grant program was determined primarily by individual position and responsibilities, compensation survey data of the Company's Corporate Peer Group, and the Company's three-year total stockholder return (considering stock price appreciation and reinvestment of dividends, and weighted for most recent performance) as compared to the total stockholder return of the Corporate Peer Group. The amount of an executive's annual long-term incentive grant was expressed as a percentage of base salary. The percentage used for each executive was tied to the Company's total stockholder return as compared to that of the Corporate Peer Group. In 1994, the Company's weighted annualized three-year total 12 14 stockholder return was substantially above that of the Corporate Peer Group. The December 1994 long-term incentive grants were designed to reflect that performance and to result in long-term compensation in the upper quartile of the Corporate Peer Group. For purposes of determining the value of long-term incentive compensation, an independent compensation consulting firm uses a modified Black-Scholes option pricing model to value stock options granted by the Company and the companies in the Corporate Peer Group. Similarly, the consulting firm values restricted share grants based on the present value of the shares on the date of grant (taking into account the vesting schedules of the grants and projected executive turnover). The Committee may adjust the grants to take into account individual performance and the number of options and restricted shares previously granted to the executive. In December 1994, 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. 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 and operating measures, and the restricted stock grant program, have been modified in an effort to qualify compensation thereunder as performance-based. The Committee feels that it should not totally relinquish its responsibility for compensating management to mechanical formulas. Therefore, the Committee currently intends to continue to make cash bonus payments that are based on the achievement of subjective, non-quantifiable goals, and that may therefore not qualify as performance-based compensation. The Committee believes that these Company, subsidiary and individual goals, while not properly measurable by the kind of quantifiable targets that are required to qualify compensation as performance-based, are important to the long-term financial success of the Company and to its stockholders. CONCLUSION. The Committee believes that the executive compensation philosophy that it has adopted effectively serves the interests of the stockholders and the Company. It is the Committee's intention that the pay delivered to executives be commensurate with Company performance. Roberto C. Goizueta William O. Bourke Robert J. Lanigan L. Edwin Smart Joe B. Wyatt 13 15 SUMMARY COMPENSATION TABLE The following table shows, for the fiscal years ending December 31, 1992, 1993 and 1994 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 ANNUAL COMPENSATION COMPENSATION AWARDS ---------------------------------- ----------------------------- OTHER ANNUAL RESTRICTED SECURITIES ALL OTHER NAME AND COMPENSATION STOCK UNDERLYING COMPENSATION PRINCIPAL POSITION YEAR SALARY BONUS (1) AWARDS (2) OPTIONS/SARS (3) - ------------------------ ----- --------- --------- ------------ ---------- ------------ ------------ Ronald L. Kuehn, Jr., 1994 $ 660,000 $ 450,000 $ 0 $ 459,938(4) 112,000 $103,689 Director, Chairman of 1993 $ 590,000 $ 504,600 $300,362 $ 420,000(5) 110,000 $113,528 the Board, President and 1992 $ 560,000 $ 455,000 $ 0 $1,071,100(6 & 7) 91,600 $117,801 Chief Executive Officer James E. Moylan, Jr., 1994 $ 200,000 $ 114,300 $ 0 $ 91,988(4) 22,000 $ 18,875 President of 1993 $ 151,875 $ 65,500 $410,888 $ 75,000(5) 21,000 $ 18,467 Southern Natural 1992 $ 142,500 $ 59,700 $ 563 $ 29,575(7) 9,000 $ 16,589 Gas Company(8) James A. Rubright, 1994 $ 240,625 $ 130,600 $115,572 $ 268,275(4 & 10) 67,500 $ 35,813 Vice President and General Counsel(9) Donald G. Russell, 1994 $ 430,000 $ 250,000 $ 0 $ 278,750(4) 66,000 $ 64,790 Executive Vice President 1993 $ 362,500 $ 250,000 $649,292 $ 300,000(5) 65,000 $102,687 1992 $ 340,000 $ 218,000 $ 705 $ 147,875(7) 40,000 $ 70,240 William A. Smith, 1994 $ 342,000 $ 200,000 $ 0 $ 167,250(4) 45,000 $ 38,064 Executive Vice President 1993 $ 313,500 $ 200,000 $530,865 $ 180,000(5) 45,000 $ 41,440 1992 $ 300,000 $ 180,000 $ 1,339 $ 105,625(7) 32,000 $ 38,271
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. The amount shown for Mr. Rubright includes (a) relocation allowances, related to Mr. Rubright's move from Atlanta, Georgia to Birmingham, Alabama, of $89,317 in excess of relocation allowances normally provided under Company policy, and (b) tax reimbursement payments of $26,255 made with respect to such reimbursement allowances. NOTE 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 generally vest at the earlier of age 65 (age 67, with respect to the shares granted to Mr. Russell) or 10 years from the date of grant, unless the average closing price of the Company's Common Stock achieves certain specified levels, in which case vesting of such shares is accelerated. All shares of restricted stock that have not previously vested are generally forfeited upon termination of employment, unless such termination occurs either by reason of death or disability or for the convenience of the Company (as determined by the Executive Compensation Committee). All shares of restricted stock that have not previously vested will immediately vest upon a "Change of Control" of the Company, as described under "Compensation Upon Change of Control" below. The number of shares of restricted stock held by the named executive officers as of December 31, 1994, and the value of such shares (calculated by multiplying the closing price of unrestricted shares of the Company's Common Stock on December 31, 1994 by the number of shares held on such date) is as follows: Mr. Kuehn, 85,700 shares, $2,399,600; Mr. Moylan, 7,200 shares, $201,600; Mr. Rubright, 9,400 shares, $263,200; Mr. Russell, 27,000 shares, $756,000; and Mr. Smith, 17,000 shares, $476,000. 14 16 NOTE 3: With respect to 1994, represents the following amounts for each of Messrs. Kuehn, Moylan, Rubright, Russell and Smith, respectively: (1) Company matching contributions to the trust established under the Company's Savings Plan -- $6,375, $6,649, $0, $6,375 and $6,375; (2) Company contributions to the Savings Plan accounts under the Company's Supplemental Benefit Plan -- $43,350, $4,250, $19,479, $23,800 and $16,320; 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 -- $53,964, $7,976, $16,334, $34,615 and $15,369. NOTE 4: Includes the value of 16,500 shares, 3,300 shares, 4,400 shares, 10,000 shares and 6,000 shares of restricted stock granted on December 1, 1994 to Messrs. Kuehn, Moylan, Rubright, Russell and Smith, respectively. NOTE 5: Represents the value of 14,000 shares, 2,500 shares, 10,000 shares and 6,000 shares of restricted stock granted on December 2, 1993 to Messrs. Kuehn, Moylan, Russell and Smith, respectively. NOTE 6: Includes the value of 40,000 shares of restricted stock granted to Mr. Kuehn on May 28, 1992. Such shares were granted in recognition of Mr. Kuehn's performance with respect to the sale of an oilfield services subsidiary. NOTE 7: Includes the value of 15,200 shares, 1,400 shares, 7,000 shares and 5,000 shares of restricted stock granted on December 3, 1992 to Messrs. Kuehn, Moylan, Russell and Smith, respectively. NOTE 8: Mr. Moylan served as Vice President and Controller of the Company from January 1, 1992 until March 31, 1994. NOTE 9: Mr. Rubright was employed by the Company as Vice President and General Counsel effective as of February 15, 1994. NOTE 10: Includes the value of 5,000 shares of restricted stock granted to Mr. Rubright on January 26, 1994 (contingent upon his commencement of employment with the Company on February 15, 1994). 15 17 OPTION GRANT TABLE The following table contains certain information with respect to stock options granted in 1994 under the Company's Executive Award Plan to the named executive officers. OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS ----------------------------------------------------- POTENTIAL REALIZABLE VALUE AT NUMBER OF % OF TOTAL ASSUMED ANNUAL RATES OF SECURITIES OPTIONS/SARS STOCK PRICE APPRECIATION FOR UNDERLYING GRANTED TO EXERCISE OPTION TERM (10 YEARS) OPTIONS/SARS EMPLOYEES PRICE EXPIRATION -------------------------------- NAME GRANTED (1) IN 1994 ($/SHARE) (2) DATE (3) 5% (4) 10% (4) - -------------------------- ------------ ------------ ------------- ---------- -------------- -------------- All Stockholders.......... -- -- -- -- $1,521,302,302 $3,854,226,105 Ronald L. Kuehn, Jr. ..... 112,000(5) 11.3% $27.875 11/30/04 $ 1,963,920 $ 4,975,600 James E. Moylan, Jr. ..... 22,000(5) 2.2% $27.875 11/30/04 $ 385,770 $ 977,350 James A. Rubright......... 40,000(6) 4.0% $29.125 1/25/04 $ 732,600 $ 1,856,600 James A. Rubright ........ 27,500(5) 2.8% $27.875 11/30/04 $ 482,213 $ 1,221,688 Donald G. Russell......... 66,000(5) 6.7% $27.875 11/30/04 $ 1,157,310 $ 2,932,050 William A. Smith.......... 45,000(5) 4.5% $27.875 11/30/04 $ 789,075 $ 1,999,125 Named Executive Officers' Potential Realizable Value as a % of All Stockholders' Potential Realizable Value -- December 1, 1994 Option Grant 0.31% 0.31%
NOTE 1: Any stock options that have not previously become exercisable (as described at notes 5 and 6) are generally forfeited upon termination of employment, unless such termination occurs by reason of retirement after age 65, death, 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 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: For each named executive officer, the potential realizable values shown represent the difference between the Resulting Company Stock Price for the option (as described below) and the exercise price of the option, multiplied by the number of options granted to such executive officer. For all stockholders, the potential realizable values shown represent the difference between the Resulting Company Stock Price for the options granted on December 1, 1994 and the exercise price of such options, multiplied by the number of outstanding shares of the Company's Common Stock as of December 31, 1994. The Resulting Company Stock Price for an option equals the price the Company's Common Stock would attain at the end of the option's 10-year term if the price of the Company's Common Stock appreciated from the date of stock option grant at a rate of 5% or 10% per year (as the case may be). The Resulting Company Stock Prices are as follows: (1) for the options granted to all named executive officers on December 1, 1994, $45.41 (5% annual stock price appreciation) and $72.30 (10% annual stock price appreciation) and (2) for the options granted to Mr. Rubright on January 26, 1994, $47.44 (5% annual stock price appreciation) and $75.54 (10% annual stock price appreciation). NOTE 5: Represents stock options granted on December 1, 1994. 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 16 18 prior to December 1, 1999, the average of the closing prices of the Company's Common Stock during such period is at least $41.813. NOTE 6: Represents stock options granted to Mr. Rubright on January 26, 1994 (contingent upon his commencement of employment with the Company on February 15, 1994). The stock options become exercisable in five equal installments beginning on February 15, 1995, provided that the entire option grant will become immediately exercisable if, during any 10 business day period ending prior to February 15, 1999, the average of the closing prices of the Company's Common Stock during such period is at least $43.688. 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 unexercised stock options (or stock appreciation rights ("SARs") granted in tandem therewith) held as of December 31, 1994. None of the named executive officers exercised stock options (or tandem SARs) during 1994.
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 AT FISCAL YEAR END (1) AT FISCAL YEAR END (2) --------------------------- --------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - -------------------------------------------- ----------- ------------- ----------- ------------- Ronald L. Kuehn, Jr. ....................... 515,600 200,000 $ 5,345,625 $14,000 James E. Moylan, Jr. ....................... 35,200 38,800 $ 224,625 $ 2,750 James A. Rubright........................... 0 67,500 $ 0 $ 3,438 Donald G. Russell........................... 134,000 118,000 $ 832,500 $ 8,250 William A. Smith............................ 175,000 81,000 $ 1,567,563 $ 5,625
NOTE 1: Certain stock options granted before December 6, 1991, were granted with tandem SARs. Each stock option granted before December 6, 1991 was granted with a tax-offset "supplemental payment" payable upon the exercise of the stock option (or tandem SAR). The amount of the supplemental payment is the amount necessary to pay the federal income tax payable with respect to both (1) exercise of the stock option (or tandem SAR) and (2) receipt of the supplemental payment, based on the assumption that the participant is taxed at the maximum effective federal income tax rate applicable to such income. NOTE 2: The value of each unexercised in-the-money stock option (or tandem SAR) is equal to the difference between $28.00 (the closing price of the Company's Common Stock on December 31, 1994) and the exercise price of the stock option. Such value does not include the value of any tax-offset supplemental payments. DEFINED BENEFIT PLANS Employees and officers of the Company and participating subsidiaries are participants in the Company's Retirement Plan. In general, annual retirement benefits are based on average covered compensation for the highest five consecutive years of the final ten years of employment. Covered compensation under the Retirement Plan currently includes salaries and amounts paid under the Performance Award Plan and the Cash Bonus Plan (reported in the Summary Compensation Table) 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 17 19 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. 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 1994 the federal tax laws limited annual benefits under the Retirement Plan to $118,800 (subject to reduction in certain circumstances), and required the Retirement Plan to disregard any portion of the participant's 1994 compensation in excess of $150,000. A participant may choose to have benefits under the Plan paid either as a life annuity or in a cash lump sum upon termination of employment. The following table sets forth information with respect to the named executive officers concerning the benefits payable under the Retirement Plan and Supplemental Benefit Plan. DEFINED BENEFIT PLAN TABLE
CURRENT ESTIMATED ANNUAL YEARS OF 1994 COVERED RETIREMENT NAME SERVICE (1) COMPENSATION (2) BENEFIT AT AGE 65 (3) - ---------------------------------------------- ----------- ---------------- --------------------- Ronald L. Kuehn, Jr........................... 24.4 $1,164,600 $ 745,344 James E. Moylan, Jr........................... 18.5 $ 265,500 $ 172,575 James A. Rubright............................. 0.8 $ 405,600 $ 152,100 Donald G. Russell............................. 6.9 $ 680,000 $ 131,920 William A. Smith.............................. 24.7 $ 546,000 $ 354,900
NOTE 1: The number of years of credited service under the Retirement Plan and Supplemental Benefit Plan as of December 31, 1994. NOTE 2: The amount of covered compensation under the Retirement Plan and Supplemental Benefit Plan during 1994. 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 1994 covered compensation, and calculated prior to the offset for primary social security benefits). 18 20 PERFORMANCE GRAPH The following graph compares the cumulative total stockholder return on the Company's Common Stock for the five-year period ending December 31, 1994, 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) [GRAPH]
MEASUREMENT PERIOD S&P NATURAL (FISCAL YEAR COVERED) SONAT INC. S&P 500 GAS 12/31/89 100.00 100.00 100.00 12/31/90 100.09 96.89 87.55 12/31/91 74.16 126.28 76.23 12/31/92 113.88 135.88 84.19 12/31/93 141.31 149.52 99.89 12/31/94 142.13 151.55 95.35
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, 1989, and that all dividends were reinvested. NOTE 1: The Standard & Poor's Natural Gas Distribution/Pipeline Group consists of the following companies: The Coastal Corporation, Columbia Gas System, Inc., Consolidated Natural Gas Company, Eastern Enterprises, Enron Corp., Ensearch Corporation, NICOR Inc., NorAm Energy Corp. (formerly Arkla, Inc.), ONEOK Inc., Pacific Enterprises, Panhandle Eastern Corporation, Peoples Energy Corporation, Sonat Inc., Transco Energy Company and The Williams Companies Inc. COMPENSATION UPON CHANGE OF CONTROL Certain of the Company's benefit plans provide for the acceleration of certain benefits in the event of a "Change of Control" of the Company. Under such plans, a Change of Control will be deemed to have occurred if (1) any person or group 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) 19 21 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. 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 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, Rubright, 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, 1995, 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, $3,493,800 in cash and $0 in retirement benefits; Mr. Rubright, $1,185,598 in cash and $0 in retirement benefits; Mr. Russell, 1,316,112 in cash and $11,153 in retirement benefits; and Mr. Smith, $1,646,000 in cash and $60,312 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 20 22 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. L) 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. L). AMENDMENT AND RESTATEMENT OF EXECUTIVE AWARD PLAN (PROPOSAL NO. 2) The Executive Award Plan was adopted in 1981 and amended and restated in 1985, 1988 and 1991, in each case with the approval of stockholders. The Plan was amended without shareholder approval in 1992 and 1993 to limit the number of stock options that may be granted to any employee in any 12-month period, to reflect the two-for-one split of the Company's Common Stock that was effective as of September 15, 1993, and to make various technical amendments. The Plan is intended to enable the Company to attract, motivate and retain key employees of outstanding ability. The Board of Directors believes that the Plan is accomplishing its purpose. However, the Board believes that in order to carry out the purposes of the Plan it is necessary to amend the Plan to increase the number of shares available for issuance and to make certain technical amendments. Accordingly, at its January 26, 1995 meeting, the Board of Directors took action to submit to stockholders, for their approval at the 1995 Annual Meeting of Stockholders, the amendment and restatement of the Plan. The amendments approved by the Board are (1) increasing the number of shares which may be issued under the Plan by 4,000,000, (2) extending the period during which incentive stock options may be granted, and (3) adopting certain technical amendments regarding the manner of determining the number of shares available under the Plan. Approval of the Plan as amended and restated will also constitute approval of the amendments previously adopted by the Board of Directors. PRINCIPAL PROVISIONS OF THE EXECUTIVE AWARD PLAN The following summary of the Plan, as amended and restated effective as of April 27, 1995, is qualified by reference to the full text of the Plan which is attached as Exhibit A to this Proxy Statement. GENERAL PROVISIONS The Plan is administered by the Executive Compensation Committee of the Board of Directors consisting of at least three Directors, all of whom are "disinterested" within the meaning of Rule 16b-3 21 23 under the Securities Exchange Act of 1934. The Committee designates the key employees of the Company and its subsidiaries and affiliated companies to be granted awards and the type and amount of awards to be granted. Officers of the Company are eligible to participate in the Plan. Directors who are not officers or employees are not eligible. Approximately 170 current employees have received awards under the Plan. It is estimated that the total number of key employees who are eligible to receive awards under the Plan would not at present exceed 250. The aggregate number of shares of Common Stock which may be issued under the Plan with respect to awards granted after April 27, 1995 may not exceed 4,000,000, plus any unused shares which were previously authorized by stockholders (numbering 946,023 as of January 31, 1995). Unused shares which were authorized under the Plan as in effect on April 25, 1985 will not be available for issuance with respect to awards granted after April 24, 1995. Cash supplemental payments will not count against these limits. Lapsed, forfeited or cancelled awards will not count against these limits and can be regranted under the Plan (regardless of whether the recipient received dividends or other economic benefits with respect to the awards); however, the cancellation of an option upon exercise of the related stock appreciation right will count against these limits. If the exercise price of an option is paid in Common Stock or if shares are withheld from payment of an award to satisfy tax obligations with respect to the award, such shares will also not count against the above limits. Options with respect to more than 250,000 shares of Common Stock may not be granted to any employee in any 12-month period. The shares issued under the Plan may be issued from shares held in treasury or from authorized but unissued shares. On April 28, 1994, the Board of Directors authorized the Company to repurchase before May 1, 1996, up to 2,000,000 shares of the Company's Common Stock, for the purpose of having such shares available for issuance under the Plan. As of February 15, 1995, 1,039,900 shares had been repurchased under the stock repurchase program (of which shares 148,467 shares have been subsequently reissued under the Plan). The Company intends to repurchase additional shares under this program when, in its judgment, it is appropriate to do so. TYPES OF AWARDS The Plan authorizes the granting of the following types of awards: 1. Stock Options. The Committee is authorized to determine the terms and conditions of all option grants, subject to the limitations that the option price per share may not be less than the fair market value of a share of Common Stock on the date of grant, and the term of an option may not be longer than ten years. The Plan authorizes the Committee to specify the manner of payment of the option price. Payment may be made in cash or in any other manner specified by the Committee (which may include payment in Common Stock of the Company). The Committee may permit payment to be made by way of successive, automatic applications of shares received upon exercise of a portion of the option to satisfy the exercise price for additional portions of the option, a payment method known as "pyramiding". The Committee may also permit arrangements with a brokerage firm whereby shares issuable upon exercise of an option would be sold by the broker and the proceeds used to pay the option price, a payment method known as "cashless exercise". The Committee is authorized to specify the period, if any, over which options become exercisable, and to accelerate the exercisability of options on a case by case basis at any time. The Committee is also authorized to specify the period during which options may be exercised following an employee's termination of employment, and to extend such period on a case by case basis. All options heretofore granted under the Plan have been non-qualified options for federal income tax purposes. Although the Company presently intends to continue granting non-qualified options, the Plan also authorizes the grant of incentive stock options and any other form of tax-favored options that may in the future be included in the Internal Revenue Code (the "Code"). 22 24 2. Stock Appreciation Rights. The Committee is authorized to grant stock appreciation rights ("SARs") in tandem with options under the Plan. An SAR can be exercised only to the extent the option with respect to which it is granted is not exercised, and is subject to the same terms and conditions as the option to which it is related. Any SAR which is outstanding on the last day of the term of the related option will be automatically exercised on such date for cash. Upon exercise of an SAR the holder is entitled to receive, for each share with respect to which the SAR is exercised, an amount (the "appreciation") equal to the difference between the option price of the related option and the fair market value of a share of Common Stock on the date of exercise of the SAR. The appreciation is payable in cash, Common Stock, or a combination of both, as determined by the Committee. 3. Restricted Stock. The Committee is authorized to award restricted stock under the Plan subject to such terms and conditions as the Committee may determine in its sole discretion. The Committee has authority to determine 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, upon the attainment of specified performance goals, or upon such other criteria as the Committee may determine. The Plan gives the Committee discretion to accelerate the vesting of restricted stock on a case by case basis at any time. The Committee also has authority to determine whether the employee will have the right to vote and/or receive dividends on shares of restricted stock, and whether the certificates for such shares will be held by the Company or delivered to the employee bearing legends to restrict their transfer. Stock certificates representing the restricted stock granted to an eligible employee will be registered in the employee's name. However, 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 will be forfeited and any purchase price paid by the employee will be returned to the employee. At the time restricted stock vests, a certificate for such vested shares will be delivered to the employee (or the beneficiary designated by the employee, in the event of death), free of all restrictions. The Committee has adopted a Restricted Stock Grant Program (the "Program") pursuant to which the grant of restricted stock is contingent upon the attainment of objective performance goals set by the Committee. Shares awarded under the Program will be issued under the Plan, and will be subject to the Plan's limitations on the number of shares issuable. The Program is being separately submitted for shareholder approval to qualify awards under the Program as "performance-based" for purposes of Section 162(m) of the Code. (See "Approval of Restricted Stock Grant Program (Proposal No. 3)" below.) The adoption of the Program does not limit the Committee's ability to make other grants of restricted stock under the Plan. 4. Supplemental Payments. The Committee is authorized to provide for a "supplemental payment" by the Company to an option holder in connection with the exercise of an option or SAR, and to a holder of restricted stock in connection with the vesting of such restricted stock. The amount of the supplemental payment is subject to the discretion of the Committee, but can be no greater than the amount necessary to pay the federal income tax payable with respect to both (1) exercise of the option or tandem SAR, or vesting of the restricted stock, and (2) receipt of the supplemental payment, based on the assumption that the participant is taxed at the maximum effective federal income tax rate applicable to such income. Due to variations in the actual tax rates applicable to employees, the benefit of the supplemental payment may not correspond to the actual tax liability of the employee. A supplemental payment can be awarded at either the time of grant or of exercise of an option or SAR, and at either the time of grant or of vesting of restricted stock. 23 25 Supplemental payments are payable in cash or Common Stock, at the discretion of the Committee. It is contemplated that as a general matter the payment would be made in cash. PROVISIONS RELATING TO A CHANGE OF CONTROL The Plan provides for certain benefits in the event of a "Change of Control" of the Company. A "Change of Control" is deemed to have occurred if (1) any person or group acquires (or obtains the right to acquire) beneficial ownership of 35% or more of the Company's voting securities, (2) there is a change in the composition of a majority of the Company's Board of Directors within any period of three consecutive years which change was not approved by a majority of the Board as constituted immediately prior to the commencement of such three-year period, or (3) at any meeting of stockholders of the Company called for the purpose of electing Directors the entire slate nominated by the Board of Directors fails to be elected. Upon the occurrence of a Change of Control all outstanding shares of restricted stock will immediately vest, and all outstanding options (and tandem SARs) held by then-current employees will become immediately exercisable and will remain exercisable for three years following the employee's termination of employment or such longer period as may be provided in the option (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 the exercise of the SAR, plus, if the holder is entitled to a supplemental payment on the SAR, a supplemental payment on such excess. OTHER PROVISIONS The Plan permits employees who do not receive a cash supplemental payment with respect to an award to satisfy all or a portion of their federal, state, and local tax liability with respect to the award by having the Company withhold from the shares otherwise deliverable to such employee shares having a value equal to the tax liability to be so satisfied. Employees who receive a cash supplemental payment will have their tax withholding obligation satisfied out of such supplemental payment. In the event of specified changes in the Company's capital structure, the Committee will have the power to adjust the number and kind of shares authorized by the Plan (including any limitations on individual awards) and the number, option price or kinds of shares covered by outstanding awards, and to make such other adjustments in awards under the Plan as it deems appropriate. The Board of Directors may amend the Plan without shareholder approval, unless such approval is required by law or stock exchange requirements. The Committee may amend any grant under the Plan, including currently outstanding options, to include any provision which, at the time of such amendment, is authorized under the terms of the Plan, except that no award can be modified in a manner unfavorable to the holder without the written consent of the holder. In addition, the Committee may, without shareholder approval, cancel an option or other award granted under the Plan and grant a new option or award to the employee on more favorable terms and conditions than the cancelled award. The Plan shall continue in effect for an unlimited period, but may be terminated by the Board of Directors in its discretion at any time. No incentive stock options may be granted under the Plan after April 26, 2005. FEDERAL INCOME TAX CONSEQUENCES Under the Code and Treasury Regulations currently in effect, the grant of a non-qualified stock option, SAR, or right to a supplemental payment is not taxable. The entire amount received upon exercise of an SAR or as a supplemental payment will be taxed as ordinary income to the recipient. 24 26 If a non-qualified option is exercised, the option spread (i.e., the difference between the option price and the fair market value of the shares) on the income recognition date (defined below) will be taxed as ordinary income to the option holder as of such income recognition date. An employee who receives stock upon the exercise of an SAR or as a supplemental payment will recognize income in the amount of the fair market value of such stock on the income recognition date. For these purposes, the income recognition date is the date of exercise of an option or SAR (or of receipt of a supplemental payment), except that for officers subject to Section 16(b) of the Securities Exchange Act of 1934 ("Section 16(b)") who exercise an option within six months of the date of grant the income recognition date is the date six months after such grant unless the officer elects to recognize income as of the date of exercise. If an option is granted which is designated as an incentive stock option ("ISO") under Section 422 of the Code, an optionee will not recognize any income upon the exercise of such option prior to termination of employment or within specified periods (generally three months) thereafter. However, the option spread on the date of exercise will constitute an item of tax preference which may cause an employee to be subject to the alternative minimum tax. If the optionee does not dispose of the shares received upon exercise of an ISO before the end of the required holding periods (two years from the option grant and one year from exercise), any gain recognized by the option holder on the sale or exchange of the shares will be treated as long-term capital gain. If the shares acquired upon the exercise of an ISO are disposed of before the end of such holding periods, the optionee will recognize ordinary income in an amount equal to the lesser of (1) the option spread on the income recognition date, or (2) the excess of the amount received upon disposition of the shares over the option price. Any excess of the amount received upon disposition of the shares over the value of the shares on the income recognition date will be taxed as a long-term or short-term capital gain, depending on whether the shares were held for more than one year. Generally, and except as noted below, the grant of restricted stock is not taxable. Instead, at the time restricted stock vests, an employee will recognize ordinary income equal to (1) the excess of the fair market value of such restricted stock on the date the shares vest over (2) the price, if any, paid for the restricted stock. Dividends paid on the shares before they vest will be taxed as additional compensation to the employee. An employee may, however, elect to recognize income as of the date of grant of the restricted stock, in an amount equal to (1) the excess of the fair market value of the restricted stock on the date of grant over (2) the price, if any, paid for the restricted stock. Such employee will not recognize a loss for tax purposes in the event of a subsequent forfeiture of the shares. In most cases, the basis in shares acquired upon exercise of a non-qualified option or SAR or as restricted stock or a supplemental payment will be equal to the fair market value of the shares on the employee's income recognition date, and the holding period for determining gains and losses on a subsequent disposition of such shares will begin on such date. As a general rule, the Company or one of its subsidiaries will be entitled to a deduction for federal income tax purposes at the same time and in the same amount that an employee recognizes ordinary income from awards under the Plan, to the extent such income is considered reasonable compensation under the Code. However, Section 162(m) of the Code limits to $1 million the annual tax deduction that the Company and its subsidiaries can take with respect to the compensation of each of certain executive officers unless the compensation qualifies as "performance-based" or certain other exemptions apply. The Company believes that all compensation recognized with respect to options granted under the Plan will be deemed performance-based under Section 162(m) of the Code, and that all compensation recognized with respect to restricted stock granted under the Plan pursuant to the Restricted Stock Grant Program will be deemed performance-based if the Program is approved by the stockholders. Neither the Company nor any subsidiary will be entitled to a deduction with respect to payments to employees which are contingent upon a change of control if such payments are deemed to constitute "excess parachute payments" pursuant to Section 280G of the Code and do not qualify as reasonable compensation pursuant to that Section; such payments will subject the recipients to a 20% excise tax. 25 27 ADDITIONAL INFORMATION If the stockholders do not approve the Plan as amended and restated, the Company intends to continue to grant awards under the Plan as currently in effect (to the extent shares are available for grant under the Plan), or as may be amended from time to time by the Board of Directors to the extent such amendments do not require stockholder approval. Because the granting of awards under the Plan is discretionary, it is not possible to state which employees will be granted awards, or the amount or type of awards that would have been granted to particular individuals or in the aggregate had the Plan, as proposed to be amended, been in effect during 1994. See the Summary Compensation Table on page 14 above for information as to the awards actually granted during the last three years under the Plan as then in effect. The last sale price of Common Stock of the Company on the consolidated transactions reporting system on March 1, 1995 was $28.625 per share. THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF THE EXECUTIVE AWARD PLAN AS AMENDED AND RESTATED (PROPOSAL NO. 2). APPROVAL OF RESTRICTED STOCK GRANT PROGRAM (PROPOSAL NO. 3) Since 1992 the Executive Compensation Committee of the Company's Board of Directors (the "Committee") has granted restricted stock awards under the Company's Executive Award Plan (the "Plan") based on the Company's total shareholder return as compared to the total shareholder return of a peer group of companies. In 1993, the Internal Revenue Code was amended by the addition of Section 162(m), which limits to $1 million the annual 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)) or certain other exemptions apply. Among the requirements for performance-based compensation are that the compensation be paid based solely on the attainment of objective performance goals established by a committee of outside directors, and that the material terms under which the compensation is to be paid be disclosed to and approved by stockholders. Following the adoption of Section 162(m), the Committee formalized its prior practice by adopting a Restricted Stock Grant Program (the "Program") which continued to satisfy the objective performance goal requirement of Section 162(m). In order to satisfy the shareholder approval requirement of Section 162(m), on January 26, 1995, the Board took action to submit the Program for stockholder approval at the 1995 Annual Meeting of Stockholders. Stockholder approval of the Program would enable the shares of restricted stock granted under the Program to qualify as performance-based for purposes of Section 162(m) and therefore to continue to be deductible by the Company without regard to the deduction limit otherwise imposed by Section 162(m). In January 1995 the Board also took action to amend the Plan (subject to shareholder approval) to, among other things, increase the number of shares issuable under the Plan. (See "Amendment and Restatement of Executive Award Plan (Proposal No. 2)" above.) While approval of the Program is not conditioned on approval of the Plan as amended and restated, because shares granted under the Program are issued under the Plan, failure to increase the number of shares issuable under the Plan will effectively limit the number of shares that can be granted under the Program. PRINCIPAL PROVISIONS OF THE RESTRICTED STOCK GRANT PROGRAM The purpose of the Program is to further the purposes of the Plan by providing a means to award restricted stock in a manner that results in performance-based compensation under Section 162(m). The Program determines only the number of shares of restricted stock which are awarded. All terms of the restricted stock (including the vesting provisions thereof), and all provisions with respect to the 26 28 administration of awards granted under the Program, are set forth in the Plan, the full text of which, as proposed to be amended, is set forth as Exhibit A to this Proxy Statement. ADMINISTRATION. The Program is administered by the Committee, the members of which are "disinterested" within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934. The provisions of the Plan regarding administration and the powers of the Committee also apply to the Program. ELIGIBILITY. Eligibility for the Program is limited to officers of the Company and certain subsidiaries who hold positions of Vice President and above. Directors who are not officers of the Company and its subsidiaries are not eligible to participate. As of January 31, 1995, approximately 22 current employees have received grants under the Program. It is estimated that the total number of employees who are eligible to participate in the Program would not at present exceed 40. DETERMINATION OF SIZE OF GRANT. The number of shares of restricted stock to be granted to an eligible employee under the Program is determined pursuant to a formula that measures the total shareholder return of the Company relative to the total shareholder returns of a peer group of companies selected by the Committee. For a given grant of restricted stock, the annual total shareholder returns for the Company and each company in the peer group are first calculated for each of the last three years. The average total shareholder return for the peer group for each year is determined by adjusting the annual returns of each company to reflect the capitalization of the various companies in the peer group. The total shareholder returns for the Company and the peer group are also weighted to give the most weight to the most recent year, and the least weight to the earliest of the three years. The extent to which the Company's weighted total shareholder return exceeds that of the peer group determines the maximum dollar value of the award (which is expressed as a different percentage of base pay for each category of officer). The maximum dollar value of an award cannot exceed $1,920,000. The applicable dollar amount is converted into shares by dividing it by 66% of the market price of the Company's Common Stock (to reflect the reduction in value due to the forfeitable nature of the restricted shares). Notwithstanding the results of the calculation, no more than 100,000 shares of restricted stock may be issued to any employee under the Program in any year. The Committee may reduce the number of shares of restricted stock granted below the number of shares calculated under the Program's formula. AMENDMENT AND TERMINATION. The Committee may amend the Program from time to time without stockholder approval except as required to satisfy Section 162(m). The Program shall continue in effect for an unlimited period, but may be terminated by the Committee or the Board of Directors, in its discretion, at any time. ADDITIONAL INFORMATION If the stockholders do not approve the Program, further awards would not be made under the Program, but the Committee would retain the ability to make other grants of restricted stock under the Plan. However, such grants would not satisfy the performance-based compensation requirements of Section 162(m), and income attributable to such awards would be included in the determination of whether an executive officer's compensation exceeded the annual limit imposed by Section 162(m). BENEFITS UNDER THE PROGRAM It is not possible to specify the number of shares of restricted stock to be granted to particular individuals under the Program, since the maximum size of each grant under the Program will be determined by the total shareholder return of the Company and of the companies in the peer group (subject to an overall annual limit of 100,000 shares of restricted stock per participant). The following 27 29 table sets forth the number of shares of restricted stock granted under the Program in 1994 for the persons indicated below. NEW PLAN BENEFITS RESTRICTED STOCK GRANT PROGRAM
1994 GRANT NAME AND POSITION (NUMBER OF SHARES) --------------------------------------------------------------- ------------------ Ronald L. Kuehn, Jr. .......................................... 16,500 Chairman of the Board, President and Chief Executive Officer James E. Moylan, Jr. .......................................... 3,300 President of Southern Natural Gas Company James A. Rubright.............................................. 4,400 Vice President and General Counsel Donald G. Russell.............................................. 10,000 Executive Vice President William A. Smith............................................... 6,000 Executive Vice President Current Executive Officer Group................................ 48,600 (9 persons) Non-Executive Director Group................................... 0 (12 persons) Non-Executive Officer Employee Group........................... 19,100 (13 persons)
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF THE RESTRICTED STOCK GRANT PROGRAM (PROPOSAL NO. 3). 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 1996 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 17, 1995. 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 28 30 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. 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. 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 and 3 would each 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. Broker "non-votes" (shares not voted on a matter because a nominee holding shares for a beneficial owner neither receives voting instructions from such beneficial owner nor has discretionary voting power with respect thereto) shall not have an effect on the vote at the Annual Meeting. Abstentions shall have the effect of a vote against Proposal No. 2 and 3. 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. ------------------------ 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. 29 31 The Company is not aware that any matters other than those mentioned above will be presented for action at the 1995 Annual Meeting, but if any other matters do properly come before the meeting, the persons named as proxies will vote upon such matters in accordance with their best judgment. Please complete, sign, date and return the enclosed proxy card promptly. SONAT INC. /s/ Beverley T. Krannich ------------------------ Beverley T. Krannich Secretary Birmingham, Alabama March 15, 1995 30 32 EXHIBIT A EXECUTIVE AWARD PLAN OF SONAT INC. (AS AMENDED AND RESTATED AS OF APRIL 27, 1995) I. GENERAL 1.1 PURPOSE OF THE PLAN The Executive Award Plan (the "Plan") of Sonat Inc. (the "Company") is intended to advance the best interests of the Company and its subsidiaries by providing key employees with additional incentives through the grant of options ("Options") to purchase shares of Common Stock of the Company ("Common Stock") and through the award of shares of restricted Common Stock ("Restricted Stock"), thereby increasing the personal stake of such employees in the continued success and growth of the Company and encouraging them to remain in the employ of the Company. The Plan was adopted effective May 1, 1981, and has been amended at various times. The provisions of the Plan as hereby amended and restated may, at the discretion of the Committee referred to below, be made available to all grants outstanding on the effective date of this Amendment and Restatement, and all awards granted after such date, except that no such provision shall alter any outstanding grant in a manner unfavorable to the holder thereof without the written consent of the holder. 1.2 ADMINISTRATION OF THE PLAN (a) The Plan shall be administered by the Executive Compensation Committee or other designated committee (the "Committee") of the Board of Directors of the Company (the "Board of Directors") which shall consist of at least three Directors all of whom are not eligible to participate in the Plan and are "disinterested" within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934. The Committee shall have authority to interpret conclusively the provisions of the Plan, to adopt such rules and regulations for carrying out the Plan as it may deem advisable, to decide conclusively all questions of fact arising in the application of the Plan, and to make all other determinations necessary or advisable for the administration of the Plan. All decisions and acts of the Committee shall be final and binding upon all affected Plan participants. (b) The Committee shall meet once each fiscal year, and at such additional times as it may determine or at the request of the chief executive officer of the Company, to designate the eligible employees, if any, to be granted awards under the Plan and the type and amount of such awards and the time when awards will be granted. All awards granted under the Plan shall be on the terms and subject to the conditions hereinafter provided. 1.3 ELIGIBLE PARTICIPANTS Key employees, including officers, of the Company and its subsidiaries, and of partnerships or joint ventures in which the Company and its subsidiaries have a significant ownership interest as determined by the Committee (all of such subsidiaries, partnerships and joint ventures being referred to as "Subsidiaries") shall be eligible to participate in the Plan. Directors who are not employees of the Company or its Subsidiaries shall not be eligible to participate in the Plan. 1.4 AWARDS UNDER THE PLAN Awards under the Plan may be in the form of (i) Options to purchase shares of Common Stock, (ii) Stock Appreciation Rights issued in tandem with such Options, (iii) shares of Restricted Stock, (iv) Supplemental Payments with respect to Options, Stock Appreciation Rights and Restricted Stock, or (v) any combination of the foregoing. A-1 33 1.5 SHARES SUBJECT TO THE PLAN The aggregate number of shares of Common Stock which may be issued with respect to Options or Restricted Stock granted after April 27, 1995 (including Stock Appreciation Rights 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 (regardless of whether the holder of such Options or shares received dividends or other economic benefits with respect to such Options or shares). Shares of Common Stock equal in number to the shares surrendered in payment of the option price, and shares of Common Stock which are withheld in order to satisfy federal, state or local tax liability, shall not count against the above limit and shall again become available for grants under the Plan. Notwithstanding the foregoing, any shares which were authorized for issuance under the Plan as in effect on April 25, 1985 shall not be available for issuance with respect to awards granted after April 24, 1995. 1.6 OTHER COMPENSATION PROGRAMS The existence and terms of the Plan shall not limit the authority of the Board of Directors in compensating employees of the Company and its subsidiaries in such other forms and amounts, including compensation pursuant to any other plans as may be currently in effect or adopted in the future, as it may determine from time to time. II. STOCK OPTIONS 2.1 TERMS AND CONDITIONS OF OPTIONS Subject to the following provisions, all Options granted under the Plan shall be in such form and shall have such terms and conditions as the Committee, in its discretion, may from time to time determine. (a) Option Price. The option price per share shall not be less than the fair market value of the Common Stock (as determined by the Committee) on the date the Option is granted. (b) Term of Option. The term of an Option shall not exceed ten years from the date of grant, and, notwithstanding any other provision of this Plan, no Option shall be exercised after the expiration of its term. (c) Exercise of Options. Options shall be exercisable at such time or times and subject to such terms and conditions as the Committee shall specify in the Option grant. The Committee shall have discretion to at any time declare all or any portion of the Options held by any optionee to be immediately exercisable. An Option may be exercised in accordance with its terms as to any or all shares purchasable thereunder. (d) Payment for Shares. Payment for shares as to which an Option is exercised shall be made in such manner and at such time or times as shall be provided by the Committee in the Option grant. Payment may be made in cash or in such other manner as the Committee in its discretion may authorize. A-2 34 (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 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. A-3 35 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 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 A-4 36 certificates to the Company), a certificate for such vested shares shall be delivered to the employee (or the beneficiary designated by the employee in the event of death), free of all restrictions. (c) Notwithstanding the vesting conditions set forth in the Restricted Stock award, (i) the Committee may in its discretion accelerate the vesting of Restricted Stock at any time, and (ii) all shares of Restricted Stock shall vest upon a Change of Control of the Company. 3.2 SUPPLEMENTAL PAYMENT ON VESTING OF RESTRICTED STOCK The Committee, either at the time of grant or at the time of vesting of Restricted Stock, may provide for a Supplemental Payment by the Company to the employee in an amount specified by the Committee which shall not exceed, but may be equal to, the amount necessary to pay the federal income tax payable with respect to both the vesting of the Restricted Stock and receipt of the Supplemental Payment, assuming the employee is taxed at the maximum effective federal income tax rate applicable thereto and has not elected to recognize income with respect to the Restricted Stock before the date such Restricted Stock vests. The Supplemental Payment shall be paid within 30 days of each date that Restricted Stock vests. The Supplemental Payment shall be paid in cash or Common Stock, in the discretion of the Committee, except that in the event of a Change of Control the Supplemental Payment shall be paid in cash. IV. ADDITIONAL PROVISIONS 4.1 GENERAL RESTRICTIONS Each award under the Plan shall be subject to the requirement that, if at any time the Committee shall determine that (i) the listing, registration or qualification of the shares of Common Stock subject or related thereto upon any securities exchange or under any state or federal law, or (ii) the consent or approval of any government regulatory body, or (iii) an agreement by the recipient of an award with respect to the disposition of shares of Common Stock is necessary or desirable (in connection with any requirement or interpretation of any federal or state securities law, rule or regulation) as a condition of, or in connection with, the granting of such award or the issuance, purchase or delivery of shares of Common Stock thereunder, such award may not be consummated in whole or in part unless such listing, registration, qualification, consent, approval or agreement shall have been effected or obtained free of any conditions not acceptable to the Committee. 4.2 ADJUSTMENTS FOR CHANGES IN CAPITALIZATION In the event of a reorganization, recapitalization, stock split, stock dividend, combination of shares, rights offer, liquidation, dissolution, merger, consolidation, spin-off, sale of assets, payment of an extraordinary cash dividend, or any other change in or affecting the corporate structure or capitalization of the Company, the Committee shall make appropriate adjustment in the number and kind of shares authorized by the Plan (including any limitations on individual awards), in the number, price or kind of shares covered by the awards and in any outstanding awards under the Plan. 4.3 AMENDMENTS (a) The Board of Directors may amend the Plan from time to time. No such amendment shall require approval by the stockholders unless stockholder approval is required by applicable law or stock exchange requirements. (b) The Committee shall have the authority to amend any grant to include any provision which, at the time of such amendment, is authorized under the terms of the Plan; however, no outstanding award may be revoked or altered in a manner unfavorable to the holder without the written consent of the holder. A-5 37 4.4 CANCELLATION OF AWARDS Any award granted under the Plan may be cancelled at any time with the consent of the holder and a new award may be granted to such holder in lieu thereof, which award may, in the discretion of the Committee, be on more favorable terms and conditions than the cancelled award. 4.5 WITHHOLDING (a) Whenever the Company proposes or is required to issue or transfer shares of Common Stock under the Plan, the Company shall have the right to require the holder to remit to the Company an amount sufficient to satisfy any federal, state or local withholding tax liability prior to the delivery of any certificate for such shares. Whenever under the Plan payments are to be made in cash, such payments shall be net of an amount sufficient to satisfy any federal, state or local withholding tax liability. (b) An employee entitled to receive Common Stock under the Plan who has not received a cash Supplemental Payment may elect to have the federal, state and local tax liability (or a specified portion thereof) with respect to such Common Stock satisfied by having the Company withhold from the shares otherwise deliverable to the employee shares of Common Stock having a value equal to the amount of the tax liability to be satisfied with respect to the Common Stock. An election to have all or a portion of the tax liability satisfied using Common Stock shall comply with such requirements as may be imposed by the Committee and shall be subject to the disapproval of the Committee (expressed either prior to or within two days after the making of such election). 4.6 NON-ASSIGNABILITY Except as expressly provided in the Plan, no award under the Plan shall be assignable or transferable by the holder thereof except by will or by the laws of descent and distribution. During the life of the holder, awards under the Plan shall be exercisable only by such holder or by the guardian or legal representative of such holder. 4.7 NON-UNIFORM DETERMINATIONS Determinations by the Committee under the Plan (including, without limitation, determinations of the persons to receive awards; the form, amount and timing of such awards; the terms and provisions of such awards and the agreements evidencing same; and provisions with respect to termination of employment) need not be uniform and may be made by it selectively among persons who receive, or are eligible to receive, awards under the Plan, whether or not such persons are similarly situated. 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 A-6 38 (iii) at any meeting of the stockholders of the Company called for the purpose of electing directors, all persons nominated by the Board of Directors for election as directors shall fail to be elected. 4.10 DURATION AND TERMINATION (a) The Plan shall be of unlimited duration. Notwithstanding the foregoing, no incentive stock option (within the meaning of Section 422 of the Code) shall be granted under the Plan after April 26, 2005, but awards granted prior to such date may extend beyond such date, and the terms of this Plan shall continue to apply to all awards granted hereunder. (b) The Board of Directors may discontinue or terminate the Plan at any time. Such action shall not impair any of the rights of any holder of any award 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 December 3, 1993, (b) amends the Plan to increase the number of shares available for issuance by 4,000,000, (c) extends the period during which incentive stock options may be granted under the Plan, and (d) makes certain technical amendments regarding the manner of determining the number of shares available under the Plan. A-7 EX-23 7 CONSENT OF ERNST & YOUNG 1 EXHIBIT 23 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; (ii) the Registration Statement (Form S-8, No. 33- 50142) pertaining to the Sonat Savings Plan and the related Prospectus; and (iii) the Registration Statement (Form S-3, No. 33-62166) of Sonat Inc. and the related Prospectus and Prospectus Supplement of our report dated January 19, 1995, with respect to the consolidated financial statements of Sonat Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 1994. /s/ Ernst & Young LLP ERNST & YOUNG LLP Birmingham, Alabama March 24, 1995 EX-24 8 POWERS OF ATTORNEY 1 EXHIBIT 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer and director of Sonat Inc., does hereby constitute and appoint Ronald L. Kuehn, Jr.; Thomas W. Barker, Jr.; Ronald B. Pruet, 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, 1994, and any and all amendments thereto to be filed with the Securities and Exchange Commission pursuant to Section 13 and 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 23rd day of February, 1995. /s/ Ronald L. Kuehn, Jr. ---------------------------- Ronald L. Kuehn, Jr. 2 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of Sonat Inc., does hereby constitute and appoint Ronald L. Kuehn, Jr.; Thomas W. Barker, Jr.; Ronald B. Pruet, 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, 1994, 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 23rd day of February, 1995. /s/ William O. Bourke ------------------------------- William O. Bourke 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.; Ronald B. Pruet, 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, 1994, 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 23rd day of February, 1995. /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.; Ronald B. Pruet, 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, 1994, 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 23rd day of February, 1995. /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.; Ronald B. Pruet, 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, 1994, 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 23rd day of February, 1995. /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.; Ronald B. Pruet, 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, 1994, 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 23rd day of February, 1995. /s/ Charles Marshall ------------------------------ Charles Marshall 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.; Ronald B. Pruet, 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, 1994, 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 4th day of March, 1995. /s/ Benjamin F. Payton -------------------------------- Benjamin F. Payton 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.; Ronald B. Pruet, 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, 1994, 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 23rd day of February, 1995. /s/ John J. Phelan, Jr. --------------------------------- John J. Phelan, Jr. 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.; Ronald B. Pruet, 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, 1994, 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 23rd day of February, 1995. /s/ Jerome J. Richardson ----------------------------------- Jerome J. Richardson 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.; Ronald B. Pruet, 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, 1994, 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 23rd day of February, 1995. /s/ Donald G. Russell ------------------------------- Donald G. Russell 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.; Ronald B. Pruet, 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, 1994, 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 23rd day of February, 1995. /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.; Ronald B. Pruet, 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, 1994, 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 23rd day of February, 1995. /s/ Adrian M. Tocklin ------------------------------- Adrian M. Tocklin 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.; Ronald B. Pruet, 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, 1994, 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 23rd day of February, 1995. /s/ James B. Williams ------------------------------- James B. Williams 14 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of Sonat Inc., does hereby constitute and appoint Ronald L. Kuehn, Jr.; Thomas W. Barker, Jr.; Ronald B. Pruet, 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, 1994, 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 23rd day of February, 1995. /s/ Joe B. Wyatt -------------------------- Joe B. Wyatt EX-27 9 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1994 DEC-31-1994 9131 0 279553 0 26722 386841 4741296 2497691 3530686 570201 963378 87252 0 0 1304634 3530686 1112479 1773927 795025 1172045 257759 0 80290 157219 15812 141407 0 0 0 141407 1.62 1.62
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