-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BcaaDfApq6c6x8WxgXWk3Q5ufy2FD8GlGtS5Ocwr7rBOP1Cavwr869vFbvdqiQwL /Hxag6AaFUc/sm9VOKaJmA== 0000950144-96-001074.txt : 19960322 0000950144-96-001074.hdr.sgml : 19960322 ACCESSION NUMBER: 0000950144-96-001074 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 22 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960321 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-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-07179 FILM NUMBER: 96536854 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-K405 1 SONAT FORM 10-K: 12/31/95 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, 1995 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. /X/ AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE REGISTRANT, AS OF JANUARY 31, 1996 -- $2,957,214,800. NUMBER OF SHARES OF COMMON STOCK, $1.00 PAR VALUE, OUTSTANDING ON JANUARY 31, 1996 -- 86,121,785 DOCUMENTS INCORPORATED BY REFERENCE PORTIONS OF THE PROXY STATEMENT OF THE REGISTRANT DATED AS OF MARCH 13, 1996, 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, 1995
ITEM PAGE - ---------- ------ PART I Item 1. Business................................................................. I-1 Exploration and Production............................................. I-2 Consolidated Net Production......................................... I-6 Consolidated Wells and Acreage...................................... I-6 Consolidated Exploratory and Development Wells...................... I-6 Competition and Current Business Conditions......................... I-7 Transmission and Storage of Natural Gas................................ I-7 Southern Natural Gas Company........................................ I-7 Order No. 636 Restructuring....................................... I-8 Customer Settlement............................................... I-8 Storage Fields.................................................... I-10 Markets -- Transportation and Sales............................... I-10 Gas Supplies...................................................... I-12 Potential Royalty Claims.......................................... I-13 Sea Robin Pipeline Company........................................ I-13 Sonat Intrastate-Alabama Inc. .................................... I-13 South Georgia Natural Gas Company................................. I-13 Southern Energy Company........................................... I-13 Citrus Corp......................................................... I-14 Florida Gas Transmission Company.................................. I-14 Competition and Current Business Conditions......................... I-15 Natural Gas and Electric Power Marketing............................... I-17 Sonat Energy Services Company....................................... I-17 Sonat Marketing Company L.P. ..................................... I-17 Sonat Power Marketing Inc. ....................................... I-17 Sonat Power Inc. ................................................. I-17 Competition and Current Business Conditions......................... I-18 Governmental Regulation................................................ I-18 Exploration and Production.......................................... I-18 Transmission and Storage of Natural Gas............................. I-18 Rate and Regulatory Proceedings................................... I-19 Environmental Matters.................................................. I-19 Forward Looking Statements............................................. I-19 Item 2. Properties............................................................... I-19 Item 3. Legal Proceedings........................................................ I-20 Item 4. Submission of Matters to a Vote of Security Holders...................... I-21 Executive Officers of the Registrant.................................................. I-21
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ITEM PAGE - ---------- ------ PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters................................................................ II-32 Item 6. Selected Financial Data.................................................. II-41 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................................... II-2 Item 8. Financial Statements and Supplementary Data.............................. II-17 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................................................. II-43 PART III Item 10. Directors and Executive Officers of the Registrant....................... III-1 Item 11. Executive Compensation................................................... III-1 Item 12. Security Ownership of Certain Beneficial Owners and Management........... III-1 Item 13. Certain Relationships and Related Transactions........................... III-1 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.......... IV-1
4 PART I ITEM 1. BUSINESS Sonat Inc. ("Sonat") is a diversified energy holding company. It is engaged through Sonat Exploration Company ("Exploration") in domestic oil and natural gas exploration and production, through Southern Natural Gas Company ("Southern") and Citrus Corp. ("Citrus") in the transmission and storage of natural gas, and through Sonat Energy Services Company ("Energy Services") in natural gas and electric power marketing. 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 12 percent of Sonat's consolidated operating income for 1995. Southern is a major transporter of natural gas to the southeastern United States. Its natural gas pipeline system extends primarily from gas producing areas of Texas and Louisiana, both onshore and offshore, to markets in a seven-state area of the Southeast. Sonat and Enron Corp., an unaffiliated company, each owns a one-half interest in Citrus, a holding company that owns 100 percent of Florida Gas Transmission Company ("Florida Gas"). Florida Gas is an interstate natural gas pipeline that serves electric generation, resale, and industrial markets in Florida. Natural gas transmission operations, excluding Citrus, contributed approximately 84 percent of Sonat's consolidated operating income for 1995. Sonat's share of Citrus' earnings are reflected in Equity in Earnings of Unconsolidated Affiliates. Energy Services' largest subsidiary, Sonat Marketing Company L.P. ("Marketing"), sells natural gas throughout much of the United States. Marketing is 65-percent owned by a subsidiary of Energy Services, with the remaining interest owned by a subsidiary of Atlanta Gas Light Company. It is responsible for the sale of most of Exploration's natural gas production and at year-end 1995 was the tenth largest natural gas marketer in the United States. In April 1995 Energy Services formed a new subsidiary, Sonat Power Marketing Inc. ("Power Marketing"), to market electric power. Energy marketing activities contributed approximately four percent of Sonat's consolidated operating income for 1995, inclusive of the minority interest. Sonat was incorporated under the laws of Delaware in 1973 in connection with a reorganization of Southern. At March 1, 1996, Sonat and its subsidiaries employed approximately 1,850 people. Sonat's principal executive offices are located at 1900 Fifth Avenue North, AmSouth-Sonat Tower, Birmingham, Alabama 35203, and its telephone number is (205) 325-3800. Additional business information is contained in Management's Discussion and Analysis of Financial Condition and Results of Operations and in the Notes to Consolidated Financial Statements in Part II of this report, which are incorporated herein by reference. Reference is made to Note 12 of the Notes to Consolidated Financial Statements contained in Part II of this report for further information with respect to the portions of Sonat's revenues, operating profit, and identifiable assets attributable to each of its business segments. I-1 5 EXPLORATION AND PRODUCTION Sonat is engaged in the exploration for and the acquisition, development, and production of oil and natural gas through its wholly owned subsidiary, Sonat Exploration Company, and its subsidiary companies (collectively referred to as "Exploration" unless the context indicates otherwise). Exploration's principal office is located in Houston, Texas. Exploration has regional offices in Tyler, Texas 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, 1995, Exploration had operations or properties in 13 states. Exploration had working interests in approximately 2.1 million gross acres or 1.4 million net acres onshore as of December 31, 1995. Of this onshore acreage, approximately 1.1 million gross or 600,000 net acres were producing oil or gas. In addition, as of such date, Exploration had a working interest in 53 federal offshore blocks in the Gulf of Mexico and one state offshore block, totaling approximately 200,000 gross acres or 100,000 net acres. Of these blocks, 45 were producing oil or gas. Beginning in 1988 Exploration implemented a strategy to acquire gas properties with significant development potential. As a result of this strategy, Exploration has increased its total proved reserves since that time from 250 billion cubic feet ("Bcf") of natural gas equivalent to approximately 1.8 trillion cubic feet of natural gas equivalent at the end of 1995. Approximately 85 percent of Exploration's proved reserves are natural gas. In 1995 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 1995 Exploration acquired approximately 350 Bcf of proved natural gas equivalent reserves in 59 separate transactions totaling $209 million, for an average acquisition cost of $.60 per thousand cubic feet equivalent. Through these acquisitions, Exploration increased its position in North Louisiana and the Texas Panhandle area. In July 1995 Exploration and Taurus Exploration U.S.A. Inc. ("Taurus"), a wholly owned subsidiary of Energen Corporation, entered into an agreement pursuant to which Taurus joined Exploration in its regular oil and gas reserve acquisition program through December 31, 1998. Taurus expects to invest $25 million to $50 million annually to acquire working interests up to a maximum of 40 percent of the working interest acquired by Exploration in property acquisitions made during this period. Development drilling on the acquired properties will involve additional investment by Taurus. Exploration will operate all properties acquired. Through March 1 Exploration has closed six acquisitions in 1996 for a total purchase price of approximately $34 million. Proved reserves added from these transactions are approximately 72 Bcf equivalent. The largest transaction was Exploration's acquisition for approximately $24 million of all the interests of Pennzoil Exploration and Production Company in five fields located in the Gulf of Mexico. Proved reserves from this acquisition are estimated at 46 Bcf equivalent. Pursuant to its arrangement with Taurus described above, Exploration will transfer a portion of the interests acquired from Pennzoil to Taurus in exchange for a proportionate share of the purchase price. Exploration will be the operator for all of the purchased properties. In 1995 Exploration continued its aggressive drilling program, participating in the drilling of 296 development wells, of which 97 percent were successful. Exploration also participated in the drilling of one exploratory well in 1995, which was successful. Of the total of 297 wells in which Exploration participated in drilling in 1995, it operated 180. Exploration increased net proved reserves during 1995 by approximately 269 Bcf of natural gas equivalent through drilling and producing operations. I-2 6 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 24 horizontal wells in this trend during 1995, all of which were successful. As of December 31, 1995, Exploration's net proved reserves totaled 44 million barrels of crude oil, condensate, and natural gas liquids and 1,506 Bcf of natural gas. As of December 31, 1994, Exploration's net proved reserves amounted to 32 million barrels of crude oil, condensate, and natural gas liquids and 1,367 Bcf of natural gas. For additional information concerning reserves, see Note 13 of the Notes to Consolidated Financial Statements in Part II of this report. Exploration's total exploration and production capital expenditures in 1995 were $416 million compared with $390 million in 1994. Exploration will continue to emphasize producing property acquisitions and development drilling in 1996, when capital spending is expected to be approximately $323 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 operating and other costs, Exploration disposed of certain non-strategic oil and gas interests in 1995 in the states of Arkansas, Colorado, Louisiana, and Texas. These properties were sold for a total of approximately $105 million and included net proved reserves of approximately 189 Bcf natural gas equivalent. Exploration expects that it will continue to upgrade its asset base through disposal of non-strategic properties in the future. Exploration relies on its own technical staff for the selection of its drilling prospects. Leases on desirable, nonproducing offshore prospects are typically acquired in federal and state waters by acquisition or through a competitive bidding process from the federal or state governments. Exploration has, and may in the future, bid with other companies for leases on prospective offshore acreage. Onshore leases are acquired by Exploration's staff and by independent lease brokers at the direction of Exploration's staff, through farmouts, through participation in prospects developed by others, or by acquisition. Exploration may, as it has in the past, enter into joint venture arrangements where exploration and development activity is performed on behalf of the joint venture by whichever company is designated as operator. Drilling for Exploration is conducted by independent drilling contractors. There have been no oil or gas reserve estimates filed or included in any reports to any federal agency within the last twelve months, except Form EIA-23 Annual Survey of Domestic Oil and Gas Reserves filed with the Federal Energy Regulatory Commission (the "FERC") and Form 9-1866 (Request for Reservoir Maximum Efficient Rate) filed with the Minerals Management Service of the U.S. Department of the Interior (the "MMS"). There are no material differences in the reserves reflected in such reports and the estimated reserves as reflected in Note 13 of the Notes to Consolidated Financial Statements in Part II of this report, except for differences resulting from actual production, acquisitions, property sales, and necessary reserve revisions and additions to reflect actual experience. Exploration's business is subject to all of the operating risks normally associated with the exploration for and production of oil and gas, including blowouts, cratering, pollution, and fires, each of which could result in damage to or destruction of oil and gas wells, formations, production facilities, or properties or in personal injury. Sonat maintains broad insurance coverage on behalf of Exploration with respect to losses resulting from these operating hazards. See "Governmental Regulation -- Exploration and Production" below for information concerning the effect of various laws and governmental regulations on Exploration's operations. 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, 1995. 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................................................ 84,634 38,998 123,632 Arkansas............................................... 293,307 34,299 327,606 Louisiana.............................................. 137,186 626,615 763,801 Oklahoma............................................... 221,397 69,452 290,849 Texas.................................................. 335,851 188,021 523,872 Other.................................................. 26,041 2,901 28,942 --------- ------------- --------- Total........................................... 1,098,416 960,286 2,058,702 ======== =========== ========
OFFSHORE GROSS LEASE BLOCKS
AREA PRODUCING NON-PRODUCING TOTAL - ------------------------------------------------------------ --------- ------------- ----- Mustang Island.............................................. 4 2 6 High Island................................................. 5 0 5 Sabine Pass................................................. 5 0 5 West Cameron(1)............................................. 14 0 14 East Cameron................................................ 9 2 11 Eugene Island(2)............................................ 3 1 4 Ship Shoal.................................................. 2 2 4 Main Pass................................................... 0 3 3 Mississippi Canyon(3)....................................... 4 0 4 ------- ----------- ---- Total.................................................. 46 10 56 ======= =========== ====
- --------------- (1) Exploration has a 12.5 percent working interest below 9,500 feet in West Cameron 290, which is one of the 14 producing blocks. In one of the producing blocks, West Cameron 421, Exploration only has an overriding interest. (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 (MAP) I-5 9 CONSOLIDATED NET PRODUCTION Exploration had interests in production from 2,929 producing wells onshore and 131 producing wells offshore as of December 31, 1995. 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 1993 to 1995 and the average sales prices for those years (including transfers). The average production (lifting) costs per unit of oil and gas was $.38 in each of 1995, 1994, and 1993. 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 57 percent of Exploration's revenues in 1995 and 65 percent in 1994. During 1993 Marketing entered into agreements with Exploration pursuant to which Marketing purchases substantially all of Exploration's natural gas production that is not sold under pre-existing term dedications. The purchase prices for natural gas covered by these agreements is based on representative index prices agreed upon by Exploration and Marketing as representing the market value of the gas. Exploration uses derivative transactions, including natural gas futures contracts, options on natural gas futures contracts, and oil and gas price swap agreements, as hedges for its production to reduce the risks associated with spot-market price volatility. See Note 3 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, 1995.
TOTAL NO. OF PRODUCTIVE NO. OF WELLS WELLS ------------- DEVELOPED UNDEVELOPED BEING OIL GAS ACRES ACRES DRILLED --- ----- --------- ----------- ------- Gross........................................ 360(1) 2,700(2) 1,292,357 1,007,424 98 Net.......................................... 242 1,528 765,465 815,706 64
- --------------- (1) One of these wells is a multiple completion. (2) 203 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 1993 through 1995.
NET EXPLORATORY NET DEVELOPMENT WELLS DRILLED WELLS DRILLED ----------------------- ---------------------------- 1993 1994 1995 1993 1994 1995 ---- ----- ---- ------ ------ ------ Productive.............................. 3.71 0 0.50 145.22 180.00 187.05 Dry..................................... 6.00 13.70 0 20.15 43.79 9.40
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, marketers, and individual producers or operators. Exploration's realized natural gas prices averaged $1.52 per thousand cubic feet in 1995, down from $1.83 in 1994. Oil and condensate prices were higher in 1995, averaging $17.61 per barrel versus $15.91 per barrel in 1994. Natural gas prices were depressed during most of 1995 as the 1994-95 winter season was mild and natural gas storage levels after the winter heating season were left much higher than the prior year. Natural gas prices rebounded sharply in late 1995, however, as winter weather caused local distribution companies to seek additional supplies of natural gas in order to preserve their storage supplies. In addition, natural gas drilling was down while demand was up from 1994 levels, thereby bringing supply and demand for natural gas closer into balance. Prices for natural gas began 1996 at levels significantly higher than during the same months in 1995 as cold winter weather created the need for additional gas supplies. Exploration hedged a substantial majority of its first quarter 1996 natural gas production at prices that were below the current spot market. Nevertheless, Exploration will realize a substantial increase in gas prices over the first quarter of 1995. A small portion of Exploration's natural gas production is hedged beyond the first quarter of 1996. Exploration is unable to predict price levels for oil or natural gas in 1996 or beyond, but if actual prices for 1996 continue at levels approximating the natural gas futures prices as of March 15, 1996, Exploration's profitability should improve in 1996 over 1995. TRANSMISSION AND STORAGE OF NATURAL GAS SOUTHERN NATURAL GAS COMPANY The principal business of Southern, which is a wholly owned subsidiary of Sonat, is the transmission of natural gas in interstate commerce. Southern, including its subsidiaries, owns 9,322 miles of interstate pipeline and 454 miles of intrastate pipeline. Its interstate pipeline system has a certificated daily delivery capacity of 2.4 billion cubic feet of natural gas. Southern's interstate pipeline system extends from gas fields in Texas, Louisiana, Mississippi, Alabama, and the Gulf of Mexico to markets in Louisiana, Mississippi, Alabama, Florida, Georgia, South Carolina, and Tennessee. Southern also has pipeline facilities offshore Texas connecting gas supplies to other pipelines that transport such gas to Southern's system. A map of Southern's pipeline system, including pipelines of its subsidiaries, as well as of the pipeline system of Florida Gas, appears on page I-16. Southern's interstate pipeline business is subject to regulation by the FERC, the U.S. Department of Energy's Economic Regulatory Administration (the "ERA"), and the U.S. Department of Transportation under the terms of the Natural Gas Policy Act of 1978 (the "NGPA"), the Natural Gas Act (the "NGA"), and various pipeline safety and environmental laws. See "Governmental Regulation--Transmission and Storage of Natural Gas" below for information concerning the regulation of natural gas transmission operations. Southern's business is subject to the usual operating risks associated with the transmission of natural gas through a pipeline system, which could result in property damage and personal injury. Southern has a comprehensive safety program to address these risks and has consistently ranked at or near the top of its industry peer group in safety performance. Sonat maintains broad insurance coverage on behalf of Southern insuring against financial loss resulting from these operating risks. I-7 11 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 provide services. 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. Various parties have appealed the Order to the Court of Appeals for the District of Columbia Circuit. 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. As of December 31, 1995, Southern had either paid or accrued $263 million in GSR costs (including interest) either to reduce significantly the price payable under or to terminate a number of gas supply contracts providing for payment of above-market prices. In addition to its GSR costs relating to termination or amendment of its remaining gas supply contracts, Southern has incurred and expects to continue to incur certain price differential GSR costs resulting from Southern's continued purchase of gas under its remaining supply contracts that provide for prices in excess of current market prices. As of December 31, 1995, Southern had incurred $83 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 had generally opposed 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. In an order issued on September 29, 1995 (the "Settlement Order"), the FERC approved a comprehensive settlement (the "Customer Settlement") that Southern had filed on March 15, 1995. Several parties that opposed the Customer Settlement have filed with the FERC requests for rehearing of the Settlement Order. The FERC has not yet ruled on those rehearing petitions. The Customer Settlement resolves, as to the parties supporting the settlement, all of Southern's pending rate proceedings and proceedings to recover GSR and other transition costs associated with the implementation of Order No. 636. The Customer Settlement was supported initially by Southern, the FERC staff, customers representing approximately 95 percent of the firm transportation capacity on Southern's system, and other parties. I-8 12 On November 20, 1995, Southern and one of the initial contesting parties to the Customer Settlement filed a settlement with the FERC pursuant to which that party became a supporting party to the Customer Settlement. The November 20 settlement, which was not opposed, was approved by the FERC on February 2, 1996. With that addition, the Customer Settlement is now supported by customers representing approximately 97 percent of the firm transportation capacity on Southern's system. The Customer Settlement resolves, as to the supporting parties, all issues in Southern's current and prior rate cases. These four major rate cases cover consecutive periods beginning September 1, 1989, January 1, 1991, September 1, 1992, and May 1, 1993, respectively. Southern will credit in the aggregate the full amount of Southern's rate reserves as of February 28, 1995 (approximately $155 million), less certain amounts withheld for potential rate refunds to contesting parties, to reduce the GSR costs borne by Southern's customers. Southern implemented reduced settlement rates for parties that supported the Customer Settlement effective March 1, 1995. The Customer Settlement provides that, except in certain limited circumstances, Southern will not file a general rate case to be effective prior to March 1, 1998. The Settlement Order also included authorizations for Southern to construct approximately $27 million of additional facilities to improve its existing level of transportation service and to expand service to Atlanta Gas Light Company and South Carolina Pipeline Corporation and its affiliate under firm contracts with terms of at least three years. In addition to approving the Customer Settlement, the Settlement Order decided on the merits all cost of service (including rate of return and the recovery of costs associated with Southern's Mississippi Canyon pipeline), cost allocation, and rate design issues in Southern's current rate case for the period beginning May 1, 1993. These rulings included a reversal of a 1994 administrative law judge determination that Southern could not include in its rates any portion of the approximately $45 million cost of a pipeline that Southern constructed in 1992 to connect gas reserves developed by Exxon Corporation in the Mississippi Canyon and Ewing Bank Area Blocks, offshore Louisiana. The Settlement Order also applied the merits determination concerning the recovery of Southern's Mississippi Canyon pipeline costs to the rate period beginning September 1, 1992. These determinations form the basis of FERC's approval of Southern's current rates to the contesting parties and refunds due them with respect to certain past rate periods. The contesting parties' requests for rehearing of the Settlement Order included challenges to many of the substantive rate determinations in the Settlement Order, such as the cost recovery of Southern's Mississippi Canyon pipeline, Southern's rate of return on equity, IT rate design, the appropriate IT and FT billing units used for designing rates, and the allocation of storage costs. Many of the other issues in the rate cases beginning September 1, 1989, January 1, 1991, and September 1, 1992, have previously been settled with the contesting parties. Thus, if the Customer Settlement and the rates determinations made in the Settlement Order are upheld on rehearing, there remains to be litigated, as to the contesting parties, the GSR cost recovery discussed below and only certain cost allocation and rate design issues, which would not be material even if such rate issues are determined adversely to Southern. The Customer Settlement continues to be contested by certain interruptible customers and firm customers representing approximately three percent of Southern's firm transportation capacity. The Settlement Order also permits the contesting parties to litigate the issue of the recovery of Southern's GSR and other Order No. 636 transition costs with the results to be applied only to such parties. The Settlement Order decided the level of Southern's rates to contesting parties for the period beginning March 1, 1995, and, as described above, ruled on numerous other rate issues for the pre-March 1, 1995, periods. In the event that the FERC on rehearing does not uphold the Customer Settlement and reverses or materially modifies its prior determinations of the substantive rate issues decided in the Settlement Order, then all parties would be permitted to challenge Southern's recovery of GSR and other transition costs and Southern's current rates would be affected by such ruling. In such event, Southern is unable to predict the outcome of any such transition costs recovery litigation or any modification of the FERC's prior rate determination, but the effect in the aggregate could be material. I-9 13 If the FERC denies the contesting parties' rehearing requests, the Settlement Order will be subject to appeal to the courts. Although there can be no assurances, Southern believes that rehearing of the Settlement Order, including the challenges to the rate determinations in that order, should be denied by the FERC and that the Settlement Order should be upheld on any judicial appeal. In accordance with the cost-sharing mechanism adopted in the Customer Settlement, pursuant to which Southern will absorb an agreed-upon portion of its total GSR costs, Southern is now at the level of GSR costs that requires it to absorb 50 percent of all additional GSR costs incurred. In the fourth quarter of 1994, Sonat recognized a $29 million charge associated with the Customer Settlement, which included anticipated amounts for GSR costs that Southern would not recover from its customers, and a $28 million charge for a provision relating to regulatory assets that may not be recovered as a result of the Customer Settlement, including amounts for a corporate restructuring undertaken in 1994. In the fourth quarter of 1995, Southern recognized an additional $11 million charge, reflecting expensed GSR costs not expected to be recovered from customers, based on its estimate of total GSR costs at December 31, 1995. The amount of GSR costs that Southern 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, contract renegotiations that have occurred, and price differential costs actually incurred, the amount of GSR costs was estimated at December 31, 1995, to be approximately $366 million on a present-value basis. Storage Fields. Southern owns and operates Muldon Storage Field ("Muldon"), a large underground natural gas storage field in Mississippi connected to its pipeline system. Based on operating experience, Southern had sought to have 21 Bcf of the certificated working storage capacity of Muldon reclassified to cushion gas, resulting in a certificated working storage capacity of 31 Bcf of gas. The FERC approved Southern's reclassification as part of the Customer Settlement. Southern agreed to review, in the fall of 1995 and 1996, the amount of storage at Muldon that had been reclassified to cushion gas and to report its conclusions to its customers. If, as a result of either review, Southern determines that additional working storage capacity may be made available to its customers, it must promptly offer such capacity to them. Otherwise, the reclassification of 21 Bcf of working storage gas to cushion gas at Muldon cannot be challenged until Southern files a new general rate case. In January 1996 Southern informed its customers that the results of its 1995 review supported the reclassification and that Southern proposed no adjustment to the total level of working storage gas at Muldon at this time. 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 65 Bcf of gas, half of which is committed to Southern. At December 31, 1995, Bear Creek's gross facilities cost was $247,329,000, its net facilities cost was $159,348,000, and its participants' equity was $96,008,000. Southern had an investment in Bear Creek, including its equity in undistributed earnings, of $48,004,000 at December 31, 1995. Under the terms of Order No. 636, effective November 1, 1993, Southern commenced providing contract storage services as part of its unbundled and restructured services. Consequently, most of Southern's working storage capacity at Muldon and its half of Bear Creek are now used for such services. Markets -- Transportation and Sales. As described above, effective November 1, 1993, Southern and South Georgia (collectively "Southern" unless the context indicates otherwise), restructured their services in compliance with FERC Order No. 636 by separating their transportation, storage, and merchant services. With the exception of some limited sales necessary to dispose of its gas supply remaining under contract, Southern essentially became solely a transporter of natural gas. Effective May 5, 1992, South Georgia had converted all its sales service to transportation-only service and Southern had begun to provide a gas sales service to South Georgia's former sales customers. I-10 14 Transportation service is rendered by Southern for its distribution customers, direct industrial customers and other end-users, gas producers, other gas pipelines, and gas marketing and trading companies. Southern provides transportation service in both its gas supply and market areas. During 1995 Southern transported gas to nine gas distribution companies, to 113 municipal distributors and gas districts, to eight connecting interstate pipeline companies, and to 56 industrial end-users. The principal industries served directly by Southern's pipeline system and indirectly through its customers' distribution systems include the chemical, pulp and paper, textile, primary metals, stone, clay, and glass industries. Transportation service is provided under rate schedules that are subject to FERC regulatory authority. Rates for transportation service depend on whether such service is on a firm or interruptible basis and the location of such service on Southern's pipeline system. Transportation rates for interruptible service (i.e., service of a lower priority than firm transportation) are charged for actual volumes transported. Firm transportation service also includes a reservation charge designed so that the customer pays for a significant portion of the service each month based on a transportation demand volume regardless of the actual volume transported. Rates for transportation service are discounted by Southern in individual instances to respond to competition in the markets it serves. Transportation volumes in 1995 for Southern and all of its subsidiaries were 1,016 Bcf, compared with transportation volumes in 1994 of 886 Bcf. Sales to distribution customers, including municipalities and gas districts, accounted for most of 1995 sales of 93 Bcf and 1994 sales of 103 Bcf. With the exception of eight Bcf of sales made by Sonat Intrastate-Alabama Inc. in 1995, the volumes associated with the 1995 and 1994 sales are not accounted for as sales volumes, but rather are included in transportation volumes because, as required by Order No. 636, all sales are now made at the receipt points where the gas enters Southern's pipeline system. Pursuant to the Customer Settlement, Southern's largest customer, Atlanta Gas Light Company, and its subsidiary, Chattanooga Gas Company, have amended their 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 will remain under its current term to April 30, 2007. Also pursuant to the Customer Settlement, South Carolina Pipeline Corporation has amended one of its firm transportation contracts totaling 28 million cubic feet per day to extend its primary term for a period of three years beginning March 1, 1995. Such extension is in addition to the remaining 160 million cubic feet per day of South Carolina's firm transportation services that remain in effect under terms extending from 1999 through 2003. Alabama Gas Corporation, Southern's second largest customer, had earlier executed firm transportation contracts for 393 million cubic feet per day under terms extending through October 31, 2008. Southern's other customers have contracted for firm transportation services for terms ranging from one to ten or more years. As a result, substantially all of the firm transportation capacity currently available in Southern's two largest market areas is fully subscribed. Sales by Southern of natural gas are anticipated to continue only until Southern's remaining supply contracts expire, are terminated, or are assigned. As a result of Order No. 636 Southern is attempting to terminate its remaining gas purchase contracts through which it had traditionally obtained its long-term gas supply. Some of these contracts contain clauses requiring Southern either to purchase minimum volumes of gas under the contract or to pay for it ("take-or-pay" clauses). Although the cost of gas under some of these contracts is in excess of current spot-market prices, Southern currently is incurring no take-or-pay liabilities under any of these contracts. Pending the termination of these remaining supply contracts, Southern sold a portion of its remaining gas supply to a number of its firm transportation customers under contracts that have been extended through November 30, 1997. The remainder of Southern's gas supply will continue to be sold on a month-to-month basis. Subject to the cost-sharing mechanism in the Customer Settlement described above, Southern will recover in accordance with the Customer Settlement or, pending final 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. I-11 15 Transportation and sales by Southern, combined with sales by Marketing, to one distribution customer, Atlanta Gas Light Company and its subsidiary, Chattanooga Gas Company, accounted for approximately 11 percent of Sonat's 1995 consolidated revenues. Atlanta was the only customer that accounted for ten percent or more of Sonat's consolidated revenues for 1995. Southern continues to pursue growth opportunities to expand its pipeline system in its traditional market area and to connect new gas supplies. Southern filed an application on January 24, 1996, with the FERC seeking approval to extend its pipeline system to provide firm gas transportation service to customers in North Alabama. Most of the proposed 76 million cubic feet per day expansion is supported by long-term firm transportation agreements with four customers, including the cities of Huntsville and Decatur, which have executed 20-year service agreements for 40 million cubic feet per day and 25 million cubic feet per day, respectively. The $53 million project includes 118 miles of new pipeline and additional compression on Southern's existing system. The proposed expansion, which requires FERC approval, is scheduled to be in service by November 1997. The company that currently provides transportation service to the city of Huntsville has filed suit against Southern and Huntsville seeking to have Southern's service agreement with Huntsville set aside as violative of Alabama's competitive bid laws and the Alabama Constitution. See Item 3. Legal Proceedings below. This company has also opposed the system expansion application at the FERC. Southern cannot predict the outcome of this litigation or the FERC proceeding. In April 1995 Southern received authorization from the FERC to construct a 21-mile pipeline extension to a delivery point near Chattanooga, Tennessee, to deliver natural gas to a group of new customers who signed 10-year contracts for firm transportation volumes totaling approximately 14 million cubic feet per day. This $11 million project was placed in service November 1, 1995. Southern also received approval from the FERC on December 5, 1995, to expand its north main pipeline system to provide approximately 27 million cubic feet per day of additional firm transportation. This increase in capacity is supported by 10-year firm transportation agreements with 15 customers in Alabama, Georgia, and Tennessee. The in-service date of this $13 million expansion project is expected to be November 1996. In addition, in October 1995 Southern received FERC approval for a production area expansion project with a capital cost of $15 million. Southern plans to install 9,400 horsepower of additional compression at its Toca, Louisiana compressor station south of New Orleans and to install certain receipt and delivery point facilities in order to increase its capacity to transport gas supplies on its offshore Louisiana supply system through Toca by 140 million cubic feet per day. This expansion, which is supported by a 10-year firm transportation agreement with Shell Offshore Inc., is expected to be in service in early 1997. In early 1995 Southern initiated an open season to obtain customer commitments to expand its system in order to meet the growing demand for natural gas in the Southeast. In the open season, Southern sought requests for additional firm transportation services. Southern received requests for additional firm transportation services in its largest market area totaling approximately 35 million cubic feet per day. Southern is studying the economic feasibility of an expansion of its system to serve these requests and anticipates that it will file an application for authorization to construct and operate the necessary facilities later this year. If FERC approval is received, the in-service date for the firm transportation service is expected to be November 1997. For additional information regarding Southern's transportation and sales of gas, see Management's Discussion and Analysis of Financial Condition and Results of Operations contained in Part II of this report. Gas Supplies. During 1995 Southern reduced the number of its existing long-term gas supply contracts from 31 to 15. As a result of the prohibition in Order No. 636 against interstate pipelines providing bundled merchant services, Southern does not anticipate at this time that it will enter into new gas purchase contracts in order to continue to provide a merchant sales service. Except for the sales of its remaining gas supply described above, Southern's participation in gas supply activities will be limited to the purchase and sale of minimal volumes of gas from time to time as may be required for system management purposes, and activities related to the attachment of new gas supplies to its system so that the shippers on Southern's system will have the opportunity to purchase those supplies in order to meet their requirements. I-12 16 Potential Royalty Claims. In connection with certain of its settlements of take-or-pay claims made by producers during the 1980s, Southern indemnified the producers against various potential claims related to the settlement that might be made by royalty owners. Southern has thus far been notified by several producers of potential royalty claims under the indemnity provisions of various settlement agreements. The claims for which Southern may have to indemnify these producers have been asserted by both private lessors with respect to onshore leases and the MMS with respect to federal offshore and Indian leases. Southern has spent approximately $1.2 million to date in settlement of claims of this type. Under the terms of a 1988 take-or-pay recovery settlement with Southern's customers, Southern is entitled to seek recovery of a portion of such costs related to federal offshore or Indian leases under the FERC's Order No. 500 cost-sharing procedures. The customers are entitled, however, to challenge any effort by Southern to recover those costs. Southern is unable to state whether any additional royalty claims based on Southern's indemnification provisions in its take-or-pay settlements will be asserted or to predict the outcome of any such claims or resulting litigation or of Southern's efforts to recover from its customers any amounts it may pay, but believes that these claims will not have a material adverse effect on Southern's financial condition or results of operations. Sea Robin Pipeline Company. Sea Robin Pipeline Company ("Sea Robin"), a wholly owned subsidiary of Southern, owns and operates a 438-mile pipeline system located in the Gulf of Mexico through which it gathers natural gas and condensate for others and delivers those products to shore for condensate removal and gas processing and redelivery to five downstream transmission pipelines. See the system map on page I-16. Sea Robin is a transportation-only pipeline that has restructured in compliance with FERC Order No. 636. Sea Robin transported approximately 302 Bcf of natural gas in 1995 compared to 282 Bcf in 1994. These Sea Robin volumes are included within the Southern transportation volumes discussed earlier. In January 1995 Sea Robin filed with the FERC a petition for a declaratory order that its pipeline system is engaged in the gathering of natural gas and is, therefore, exempt from FERC regulation under the Natural Gas Act. In June 1995 the FERC denied Sea Robin's petition on the basis that the primary function of the Sea Robin system is the interstate transportation of gas. Sea Robin's request for rehearing of that ruling is pending before the FERC. In addition to their protests in the gathering proceeding, several of the shippers on Sea Robin's pipeline system filed with the FERC in February 1995 a complaint against Sea Robin under Section 5 of the NGA claiming that Sea Robin's rates are unjust and unreasonable and should be reduced. In its answer, Sea Robin asked the FERC to dismiss the complaint or to find that its rates continue to be just and reasonable based on the data it presented. Any reduction in Sea Robin's rates as a result of this complaint 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 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-16. SIA's throughput in 1995 was approximately 28 Bcf compared to 38 Bcf in 1994. 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-16. As described above, South Georgia has restructured pursuant to Order No. 636 and is a transportation-only pipeline. South Georgia transported approximately 38 Bcf of natural gas in 1995 compared to 34 Bcf in 1994. 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. I-13 17 During 1995 Southern Energy conducted an open season seeking requests from customers for a new LNG service that would be provided through its LNG facilities in Savannah. Southern Energy is evaluating the requests received from potential customers during the open season to determine whether it is economically feasible to reactivate its LNG facilities. If sufficient commitments are obtained and the necessary regulatory approvals are received, the in-service date for the LNG service is expected to be in 1998. 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., an unaffiliated company, which owns the other 50 percent of Citrus. Florida Gas' approximately 4,500-mile pipeline system extends from south Texas to a point near Miami, Florida, with a certificated daily delivery capacity of 1.5 billion cubic feet per day. See the map on page I-16. Florida Gas is the primary pipeline transporter of natural gas in the state of Florida and the sole pipeline transporter to peninsular Florida. In 1995 Florida Gas transported 487 Bcf of natural gas, compared to 325 Bcf in 1994. 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 substantially all of its gas purchase contracts with a weighted average cost in excess of current spot-market prices for aggregate costs that are less than the $160 million maximum amount that it is entitled to recover from its customers pursuant to its 1993 restructuring settlement under Order No. 636. Florida Gas placed in service on March 1, 1995, a project known as the Phase III expansion, which increased its system capacity by 530 million cubic feet of gas per day to its current total of 1.5 Bcf per day. The project is fully subscribed by 31 customers under long-term service agreements, with over 60 percent of the capacity dedicated to the growing electric generation market in Florida. As part of Phase III, Florida Gas contracted for 100 million cubic feet per day of new firm transportation to be delivered from Southern's system. Also in connection with the expansion, Florida Gas acquired a 20-percent interest in an existing pipeline in the Mobile Bay area that has been expanded by over 300,000 Mcf per day and connected to Florida Gas' pipeline system. Primarily as a result of the delays and increased construction costs associated with weather and environmental problems, the $1 billion cost of the Phase III expansion project was more than the originally estimated cost of $900 million. While Florida Gas believes that all of the costs of the Phase III expansion were prudently incurred, Florida Gas' customers have the right under general rate-making principles to challenge any of these costs as imprudently incurred. The FERC's Division of Audits has completed a compliance review of Florida Gas' books and records for the period January 1, 1991, through December 31, 1994. Among other things, the FERC auditors have proposed adjustments to the capitalization by Florida Gas of Allowance for Funds Used During Construction ("AFUDC") during construction of its Phase III expansion facilities that, if made, would result in a reduction of earnings by Florida Gas of approximately $44 million after-tax. Management of Florida Gas has advised Sonat that it believes that its method of capitalizing AFUDC on Phase III was proper; however, the final outcome of this matter cannot be determined. At December 31, 1995, Citrus' gross pipeline and facilities cost was $2,797,051,000 and its net cost was $2,401,847,000. Sonat had an investment in Citrus, including its equity in undistributed earnings, of $319,896,000 at December 31, 1995. For additional information regarding Citrus, see Management's I-14 18 Discussion and Analysis of Financial Condition and Results of Operations contained in Part II of this report, and the Consolidated Financial Statements of Citrus contained in Part IV of this report. COMPETITION AND CURRENT BUSINESS CONDITIONS The natural gas transmission industry, although regulated, is very competitive. Since the mid-1980s customers have switched their volumes from a bundled merchant service to transportation service, acquiring gas supply under unregulated arrangements such as those provided by Marketing and Citrus Trading Corp. Southern competes with several pipelines for the transportation business of its customers and at times discounts its transportation rates in order to maintain market share. 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, has been at certain times in the past, and may be at times in the future, priced at or below the comparable price of natural gas in industrial and electric generation markets. Some parts of Southern's market area are also served by one or more other pipeline systems that can provide transportation as well as sales service in competition with Southern. Southern's two largest customers are both able to obtain a portion of their natural gas requirements through transportation by other pipelines. FERC's Order No. 636 mandates a rate design, known as straight-fixed-variable ("SFV"), that is designed to allow pipelines to recover substantially all fixed costs, a return on equity, and income taxes in the capacity reservation component of their rates. The firm transportation customers of Southern and Florida Gas (with the exception of certain small customers) must pay these reservation charges regardless of the volumes shipped. Accordingly, the SFV rate design should result in greater stability in the revenues, earnings, and cash flows of interstate pipelines, including Southern and Florida Gas, for the foreseeable future when compared to what was experienced prior to 1994. This is particularly true at Florida Gas, which faces intense competition in the Florida market from residual fuel oil that affects the volumes of gas it transports. I-15 19 (MAP) I-16 20 NATURAL GAS AND ELECTRIC POWER MARKETING SONAT ENERGY SERVICES COMPANY Energy Services, which is a wholly owned subsidiary of Sonat, acts as a holding company for three of Sonat's largely non-FERC-regulated companies engaged in unregulated natural gas marketing, electric power marketing, and power generation. Sonat Marketing Company L.P. Marketing is 65-percent owned by a wholly owned subsidiary of Energy Services, with the remaining interest owned by a wholly owned subsidiary of Atlanta Gas Light Company. Marketing's principal offices are in Birmingham, Alabama and Houston, Texas. It also has regional offices in Tyler, Texas and Oklahoma City, Oklahoma. It purchases natural gas from gas producers, interstate pipelines, and other marketing companies and resells the gas to industrial and commercial users, gas distribution companies, gas pipelines, and other marketing companies throughout the Gulf Coast, Southeast, Midwest, and Northeast United States. Marketing also offers a variety of risk-management, transportation, and storage services to its customers. Marketing continues to expand its natural gas marketing business. During 1995 Marketing sold 722 Bcf of natural gas compared to 1994 sales of 482 Bcf, which represented a 50-percent increase. Marketing's average daily sales volumes reached 2.3 Bcf of natural gas per day at the end of 1995 versus 1.6 Bcf per day at the end of 1994, making it the tenth largest natural gas marketer in the country. Much of this growth occurred in the Northeast and Midwest. These market areas now account for approximately 60 percent of Marketing's sales. Marketing is continuing its efforts to expand in these and other areas. Marketing purchases at index-based prices all of the natural gas production of Exploration that is not sold under pre-existing term dedications. Marketing remarkets this gas as part of its marketing operations. Marketing executes Exploration's risk management program as agent for Exploration. Sonat Power Marketing Inc. Sonat Power Marketing Inc. ("Power Marketing"), a wholly owned subsidiary of Energy Services, was formed in April 1995 to market electric power. Significant changes are under way in the electric industry that create new opportunities. The FERC has initiated, and more than half of the states are considering, regulatory changes to promote competition and give purchasers of electricity choices other than their traditional utilities, similar to the unbundling that occurred in natural gas with Order No. 636. Power Marketing was created to take advantage of these opportunities. Sonat and Atlanta Gas Light Company are engaged in discussions regarding the acquisition by Atlanta Gas Light of a 35-percent interest in Power Marketing. Power Marketing received its authorization to purchase and sell power in the wholesale electric power market at market-based rates from the FERC in August 1995. It began buying and selling power in November 1995. Power Marketing has entered into enabling agreements for purchases, sales, or transmission of power with more than 100 investor-owned utilities, municipal systems, and rural electric cooperative members. These agreements allow the companies to enter into power transactions on an hourly, daily, monthly, or yearly basis. Power Marketing is still building its staff and developing the infrastructure necessary for increased volumes of electricity trading. It is focusing its activities on increasing its wholesale business as retail opportunities are limited until regulatory changes are made. Power Marketing is also concentrating on leveraging relationships already established by Marketing. Its goal is to achieve an average trading volume of 500 megawatts per hour by the end of 1996. Sonat Power Inc. Sonat Power Inc. is a wholly owned subsidiary of Energy Services. In June 1992 Sonat and The AES Corporation announced the formation of a 50-50 joint venture, AES/Sonat Power, L.L.C., that will construct, own, and operate natural gas-fueled independent power and cogeneration plants in the United States, Canada, and Mexico. In January 1994 Pacific Gas and Electric Company announced that it would sign a contract with AES Pacific, Inc., an affiliate of AES/Sonat Power, to purchase power from a 221-megawatt natural gas-fueled power plant to be constructed in San Francisco. 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 I-17 21 currently planned to be completed by early 1999 and would require an equity investment from Sonat in the range of approximately $10-15 million. COMPETITION AND CURRENT BUSINESS CONDITIONS Competition in the gas marketing and power marketing businesses is intense and is expected to remain so due to the large number of industry participants, although 1995 evidenced a growing trend toward consolidation in the gas marketing industry. Marketing's operating income declined in 1995 as a result of lower margins due to increases in competitive pressure, a low gas price environment, and low price volatility. Market conditions have been much better thus far in 1996, with higher gas prices and greater price volatility creating greater profit opportunities for marketers. There is no assurance that current favorable market conditions will continue for the remainder of 1996. 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. The transportation rates charged by Sonat Texas Gathering Company, a wholly owned subsidiary of Exploration, on a small gathering system in South Texas that it operates, are regulated by the Texas Railroad Commission. TRANSMISSION AND STORAGE 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 I-18 22 resale. Gas sold by Marketing and other marketing companies is not regulated by the FERC. Transportation rates of interstate pipeline companies remain fully regulated. The maximum transportation rates for gas delivered by SIA into interstate commerce are also regulated by the FERC. As necessary, Southern, its 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. 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, including SIA, and Florida Gas are subject to the Natural Gas Pipeline Safety Act of 1968, as amended, which regulates pipeline and LNG plant safety requirements, and to the National Environmental Policy Act and other environmental legislation. Southern, its operating subsidiaries, and Florida Gas have a continuing program of inspection designed to keep all of their facilities in compliance with pollution control and pipeline safety requirements and believe that they are in substantial compliance with applicable requirements. Southern's capital expenditures to comply with environmental and pipeline safety regulations were approximately $8 million in 1995 compared to $13 million in 1994. Southern anticipates that such expenditures will be approximately $11 million in 1996. 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), which was approved by the FERC in a Settlement Order issued September 29, 1995 (described above), that would resolve all outstanding rate 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. FORWARD LOOKING STATEMENTS This report, including the information incorporated by reference herein, contains forward looking statements regarding Sonat's future plans, objectives, and expected performance. These statements are based on assumptions that Sonat believes are reasonable, but are subject to a wide range of risks, and there is no assurance that actual results may not differ materially. Important factors that could cause actual results to differ include changes in oil and gas prices and underlying demand, which would affect profitability and might cause Sonat to alter its plans, the timing and results of oil and gas drilling and acquisition programs, which determine production levels and reserves, the results of Sonat's hedging activities, and the success of management's cost reduction activities. Realization of Sonat's objectives and expected performance can also be adversely affected by the actions of customers and competitors, changes in governmental regulation of Sonat's businesses, and changes in general economic conditions and the state of domestic capital markets. ITEM 2. PROPERTIES A description of Sonat's and its subsidiaries' principal properties is included under Item 1. Business above and is hereby incorporated by reference herein. I-19 23 ITEM 3. LEGAL PROCEEDINGS For information regarding certain proceedings pending before federal regulatory agencies, see Note 9 of the Notes to Consolidated Financial Statements in Part II of this report. For information regarding various environmental matters relating to, or that could affect, Sonat or one or more of its subsidiaries, see Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II of this report under the caption "Environmental Issues." Arcadian Corporation v. Southern Natural Gas Company and Atlanta Gas Light Company was filed in January 1992 in the U.S. District Court for the Southern District of Georgia. This lawsuit was filed against Southern and Atlanta Gas Light Company ("Atlanta") for alleged violation of the antitrust laws in connection with Southern's refusal to provide direct service to the plaintiff, Arcadian Corporation ("Arcadian"). Arcadian claims actual damages of at least $15 million, which could be trebled under the antitrust laws. Southern and Arcadian executed an agreement settling this lawsuit on November 30, 1993. The settlement provides that the lawsuit will be dismissed with prejudice upon final, nonappealable approval by the FERC of the direct connection and transportation service requested by Arcadian. Pending such approval the lawsuit has been stayed. On May 12, 1994, the FERC issued an order granting such approval. Atlanta and others sought rehearing on the May 12 order. Atlanta also filed a petition for review of such order in the 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. Alabama-Tennessee Natural Gas Company v. Southern Natural Gas Company and City of Huntsville was filed in February 1996 in state court in Jefferson County, Alabama. In this lawsuit, Alabama-Tennessee Natural Gas Company, which currently provides natural gas transportation service to the city of Huntsville, Alabama, is seeking to have a 20-year service agreement Southern entered into with Huntsville to provide 40 million cubic feet per day of firm transportation service set aside as violative of Alabama's competitive bid laws and the Alabama Constitution. The service agreement with Huntsville supports a proposed 76 million cubic feet per day, $53 million expansion project for which Southern has filed an application seeking FERC approval. Management believes that Southern's service agreement with Huntsville is exempt from the Alabama competitive bid laws and Huntsville has previously requested and obtained an opinion of the Attorney General of Alabama to such effect. Management, however, is unable to predict the outcome of this litigation. A. L. Briggs, et al. v. Sonat Exploration Company, et al. was filed in October 1995 in state court in Panola County, Texas against Exploration and its wholly owned subsidiary, Stateline Gas Gathering Company, by nine royalty interest owners ("Plaintiffs"). The petition challenges the appropriateness of certain post-production charges (e.g., gathering, transportation, compression, and marketing) that had been deducted from Plaintiffs' proportionate share of the amount Exploration has realized upon the sale of gas attributable to their royalty interests and alleges numerous violations of law. Relief sought by Plaintiffs includes actual damages, damages under the Deceptive Trade Practices Act, exemplary damages, declaratory relief, an accounting, attorneys' fees, and prejudgment interest. The petition also requests the court to certify a nationwide class of plaintiffs. In an amended complaint Plaintiffs have also asserted that certain marketing fees deducted by Marketing in calculating the amount it paid Exploration for gas volumes purchased by Marketing since approximately July 1, 1992, are not authorized by law or the applicable leases, are not necessary, and have not been disclosed in accordance with law; and that Exploration has breached its contractual duties to royalty owners to obtain the highest sales price and to account to the royalty owners for their share of the proceeds attributable to the sale of Exploration's gas. Plaintiffs demanded that Exploration pay the proper amounts allegedly due them according to their respective leases, overriding royalty assignments, division orders, and operating agreements. Exploration intends to defend the litigation vigorously and to resist Plaintiffs' demands. Management is unable to predict the outcome of this litigation or the demands made by Plaintiffs or to estimate the amount or range of potential loss in the event of an unfavorable outcome. I-20 24 Sonat and its subsidiaries are involved in a number of other lawsuits, all of which have arisen in the ordinary course of business. Sonat does not believe that any ultimate liability resulting from any of these other pending lawsuits will have a material adverse effect on it. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Sonat did not submit any matter to a vote of its security holders during the fourth quarter of 1995. EXECUTIVE OFFICERS OF THE REGISTRANT
OFFICER OFFICE AGE - ----------------------------------- -------------------------------------------------- --- Ronald L. Kuehn, Jr. .............. Chairman of the Board, President, and Chief 60 Executive Officer Donald G. Russell.................. Executive Vice President 64 William A. Smith................... Executive Vice President 51 Richard B. Bates................... Senior Vice President 42 James E. Moylan, Jr. .............. Senior Vice President 45 James A. Rubright.................. Senior Vice President and General Counsel 49 Thomas W. Barker, Jr. ............. Vice President -- Finance and Treasurer 51 Beverley T. Krannich............... Vice President -- Human Resources and Secretary 45 William L. Johnson................. Controller 51
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. Donald G. Russell was elected Executive Vice President of Sonat effective January 1, 1991, and a Director of Sonat effective September 22, 1994, and currently serves in those capacities. Mr. Russell also serves as Chairman and Chief Executive Officer of Exploration. William A. Smith was elected Executive Vice President of Sonat effective March 1, 1991, and currently serves in that capacity. During the past five years Mr. Smith has served as an officer of Sonat, Exploration, Southern, and Energy Services. Richard B. Bates was elected Senior Vice President of Sonat effective May 1, 1995, and currently serves in that capacity. Mr. Bates has served as President of Energy Services and Marketing since January 1, 1994. During the past five years Mr. Bates has served as an officer of Exploration, Energy Services, and Marketing. James E. Moylan, Jr. was elected Senior Vice President of Sonat effective May 1, 1995, and currently serves in that capacity. Mr. Moylan has served as President of Southern since April 1, 1994. Mr. Moylan served as Vice President and Controller of Sonat from June 15, 1984, to April 1, 1994. James A. Rubright was elected Senior Vice President and General Counsel of Sonat effective April 1, 1995, and currently serves in that capacity. Mr. Rubright also serves as Executive Vice President and General Counsel of Exploration, Southern, and Energy Services and as the chief accounting officer of Sonat. During the five years prior to his election as Vice President and General Counsel of Sonat effective February 15, 1994, Mr. Rubright had been a member of the Atlanta, Georgia law firm of King & Spalding. Thomas W. Barker, Jr. was elected Vice President -- Finance of Sonat effective June 15, 1984, and Treasurer of Sonat effective January 1, 1990, and currently serves in those capacities. Mr. Barker also serves as I-21 25 Vice President -- Finance and Assistant Treasurer of Exploration and Treasurer of Southern and Energy Services. Beverley T. Krannich was elected Vice President -- Human Resources of Sonat effective June 1, 1987, and Secretary of Sonat effective May 11, 1984, and currently serves in those capacities. Ms. Krannich also serves as Vice President -- Human Resources of Exploration and Southern. William L. Johnson was elected Controller of Sonat effective August 1, 1995, and currently serves in that capacity. During the past five years Mr. Johnson has served as an officer of Sonat and Sonat Services Inc. I-22 26 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-41 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................................... II-2 Item 8. Financial Statements and Supplementary Data.............................. II-17 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................................................. II-43
--------------------- The financial data following on pages II-2 through II-42 is reproduced from, and the Table of Contents below is taken from, the Sonat Inc. Annual Report to Stockholders for 1995. 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.......................................................................... 27 Report of Management.................................................................. 41 Report of Ernst & Young LLP, Independent Auditors..................................... 41 Consolidated Financial Statements..................................................... 42 Consolidated Balance Sheets...................................................... 42 Consolidated Statements of Income................................................ 44 Consolidated Statements of Changes in Stockholders' Equity....................... 45 Consolidated Statements of Cash Flows............................................ 46 Notes to Consolidated Financial Statements............................................ 47 Selected Consolidated Financial Data.................................................. 66
II-1 27 Sonat Inc. and Subsidiaries - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- RESULTS OF OPERATIONS OPERATING INCOME Business segment operating results for Sonat Inc. and its subsidiaries (the Company) are presented in the table below. The table also shows unusual items that affect operating income and net income comparisons. Each significant unusual item is discussed in the respective segment discussions in the following pages. The table is presented because management believes this information enhances the analysis of results of operations.
(In Millions) - ---------------------------------------------------------------------- Years Ended December 31, 1995 1994 1993 - ---------------------------------------------------------------------- Operating Income (Loss): Exploration and Production $ 23 $ 64 $ 86 Natural Gas Transmission 158 88 145 Energy Marketing 7 12 (1) Other 1 5 3 - ---------------------------------------------------------------------- 189 169 233 - ---------------------------------------------------------------------- Unusual Items (Expense) Income Included Above: Exploration and Production Termination of gas sales contracts 37 - - Asset impairment (23) - - Reduction in force - (2) - Tax adjustments - - (1) Natural Gas Transmission Rate settlement and GSR costs (11) (29) - Reduction in force and other - (34) - Tax adjustments - - (2) Other Tax adjustments - - (1) - ---------------------------------------------------------------------- 3 (65) (4) - ---------------------------------------------------------------------- Operating Income Excluding Unusual Items $186 $234 $237 ======================================================================
(In Millions, Except Per-Share Amounts) - --------------------------------------------------------------------- Years Ended December 31, 1995 1994 1993 - --------------------------------------------------------------------- Net Income As Reported $193 $141 $261 - --------------------------------------------------------------------- Unusual Items (Expense) Income Included Above: Exploration and Production Termination of gas sales contracts 24 - - Property sales (20) - - Sale of Sonat Offshore stock 110 - - Asset impairment (15) - - Loss on futures contracts (5) - - Reduction in force - (1) - IRS settlement - 8 14 Natural Gas Transmission Rate settlement and GSR costs (7) (18) - Reduction in force and other - (21) - IRS settlement - 2 (5) Tax adjustments - - (3) Other Sale of Baker Hughes stock (8) - - IRS settlement - 10 12 Sale of Sonat Offshore stock - - 100 Tax adjustments - - (2) - -------------------------------------------------------------------- 79 (20) 116 - -------------------------------------------------------------------- Extraordinary Item - - (4) - -------------------------------------------------------------------- Net Income Excluding Unusual Items $ 114 $ 161 $ 149 ==================================================================== Earnings Per Share of Common Stock $2.24 $1.62 $3.01 ==================================================================== Earnings Per Share of Common Stock Excluding Unusual Items $1.32 $1.85 $1.72 ====================================================================
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 reserve and production growth through the acquisition of oil and gas properties with future development potential and low-risk exploration. Proved reserves have grown to approximately 1.8 trillion cubic feet of 27 II-2 28 Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) - -------------------------------------------------------------------------------- natural gas equivalent at December 31, 1995, from 250 billion cubic feet of natural gas equivalent since implementing this strategy in 1988. During 1995, Sonat Exploration acquired oil and gas interests and properties for a total of $209 million, which added proved reserves of approximately 350 billion cubic feet of natural gas equivalent. Through these acquisitions, Sonat Exploration increased its position in northern Louisiana and the Texas Panhandle area. Developmental drilling programs continue to be successful. During 1995, Sonat Exploration completed 296 gross development wells. Sonat Exploration increased net proved reserves by approximately 269 billion cubic feet of natural gas equivalent through drilling and producing operations. In order to focus its activities and minimize operating and other costs, Sonat Exploration disposed of certain non-strategic oil and gas interests during 1995 for approximately $105 million in the states of Arkansas, Colorado, Louisiana, and Texas and offshore Louisiana. Net proved reserves related to these properties were approximately 189 billion cubic feet of natural gas equivalent. Sonat Exploration expects that it will continue to upgrade its asset base through disposal of non-strategic properties in the future. The decline in natural gas prices that began in 1994 continued until the fourth quarter of 1995. As a consequence, Sonat Exploration's earnings and cash flow for 1995 were adversely impacted (see discussion below). Total capital expenditures for Sonat Exploration are expected to approximate $323 million in 1996. Sonat Exploration plans to increase its development and exploration activities in anticipation of natural gas prices being higher than the average 1995 levels. Approximately $186 million of the 1996 capital budget is expected to be spent on development expenditures, as compared to $177 million in 1995. In July 1995, Sonat Exploration and Taurus Exploration U.S.A. Inc. (Taurus), a wholly owned subsidiary of Energen Corporation, entered into an agreement pursuant to which Taurus joined Sonat Exploration in its regular oil and gas reserve acquisition program through December 31, 1998. Taurus expects to invest $25 million to $50 million annually to acquire working interest up to a maximum of 40 percent of the working interest acquired by Sonat Exploration in property acquisitions made during this period. Development drilling on the acquired properties will involve additional investment by Taurus. Sonat Exploration will operate all properties acquired. Natural gas production is marketed primarily in the spot-market by Sonat Marketing Company L.P. (Sonat Marketing), a 65 percent-owned subsidiary of the Company operating in the Energy Marketing segment. Sonat Exploration, through Sonat Marketing, uses derivative financial instruments to manage the risks associated with price volatility for its production. (See Other Income-Other, Market Risk Management and Note 3 of the Notes to Consolidated Financial Statements.) EXPLORATION AND PRODUCTION
(In Millions) - -------------------------------------------------------------------------- Years Ended December 31, 1995 1994 1993 - -------------------------------------------------------------------------- Revenues: Sales to others $ 175 $ 145 $ 198 Intersegment sales 228 268 155 - -------------------------------------------------------------------------- Total Revenues 403 413 353 - -------------------------------------------------------------------------- Costs and Expenses: Operating and maintenance 66 63 52 Exploration expense 9 12 7 General and administrative 48 46 43 Depreciation, depletion and amortization 239 207 149 Taxes, other than income 18 21 16 - -------------------------------------------------------------------------- 380 349 267 - -------------------------------------------------------------------------- Operating Income $ 23 $ 64 $ 86 ========================================================================== Equity in Earnings of Unconsolidated Affiliates $ 1 $ - $ 5 ========================================================================== Proved Reserves: Net gas (Bcf) 1,506 1,367 1,187 Net liquids (MBbls) 44,228 31,627 27,094 ========================================================================== Net Sales Volumes: Gas (Bcf) 183 182 150 Oil and condensate (MBbls) 3,973 4,155 3,052 Natural gas liquids (MBbls) 1,496 1,227 726 ========================================================================== Average Sales Prices: Gas ($/Mcf) $ 1.52 $ 1.83 $ 1.99 Oil and condensate ($/Bbl) 17.61 15.91 17.42 Natural gas liquids ($/Bbl) 9.29 8.90 7.96 ==========================================================================
28 II-3 29 Sonat Inc. and Subsidiaries - -------------------------------------------------------------------------------- 1995 VERSUS 1994. Absent the effect of the unusual items identified earlier, operating income decreased by $57 million primarily due to lower prices for natural gas. The price for natural gas averaged 17 percent lower in 1995 compared to 1994, which had the impact of lowering revenues by $58 million. Oil and condensate prices improved 11 percent to an average price of $17.61 per barrel in 1995. Total production during 1995 was 216 billion cubic feet of natural gas equivalent, compared with 214 billion cubic feet of natural gas equivalent during 1994. Production in 1995 was restrained due to producing property sales and involuntary curtailments. The Company's hedging program had the effect of increasing operating revenue in 1995 by $7.1 million (see Other Income-Other for a discussion of a loss related to natural gas futures contracts for 1996 periods that ceased to qualify for accounting as hedges). Two unusual items recognized in 1995 by Sonat Exploration affected revenues and operating expenses. Revenues included an unusual item of $37 million related to the termination of two long-term gas sales contracts. Depreciation, depletion and amortization expense included a $23 million impairment provision related to the adoption of Statement of Financial Accounting Standards (SFAS) No. 121. Excluding the impairment provision, operating expenses increased slightly in 1995 compared to 1994. Operating and maintenance expenses were higher due to the acquisition of additional properties in early 1995. General and administrative expenses were slightly higher than 1994 due to an increase in stock-based compensation expense. Depreciation, depletion and amortization increased from 1994 primarily due to slightly higher production and a change in production mix with more production coming from higher amortization fields. 1994 VERSUS 1993. Operating income for 1994 declined $21 million excluding unusual items when compared to 1993, primarily due to lower natural gas prices and higher expenses, particularly depreciation, depletion and amortization expense. Revenues for 1994 were up by $60 million over 1993 primarily due to a 21 percent increase in natural gas production and a 36 percent increase in oil and condensate production resulting from the acquisition and development program. Natural gas liquids production increased 69 percent over 1993, 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 million cubic feet compared to $2.06 for the fourth quarter of 1993, a 23 percent decrease. Depreciation, depletion and 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 production in 1994, which was predominantly oil, condensate and natural gas liquids. 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 in 1994 reflects Sonat Exploration's acquisition of the remaining interest in the Sonat/P Anadarko Limited Partnership in late 1993. NATURAL GAS TRANSMISSION The Company is engaged in the natural gas transmission business through Southern Natural Gas Company and its subsidiaries (Southern), and Citrus Corp. (a 50 percent-owned company). Southern continues to pursue opportunities to expand its pipeline system in its traditional market area and to connect new gas supplies. Southern filed an application on January 24, 1996, with the Federal Energy Regulatory Commission (FERC) seeking approval to extend its pipeline system to provide firm gas transportation service to customers in North Alabama. Most of the proposed 76-million-cubic-feet-per-day expansion is supported by long-term firm transportation agreements with four customers, including the cities of Huntsville and Decatur which have executed 20-year service agreements for 40 million cubic feet per day and 25 million cubic feet per day, respectively. The $53 million project includes 118 miles of new pipeline and additional compression on Southern's existing system. The proposed expansion, which requires FERC approval, is scheduled to be in service by November 1997. The company that currently provides transportation service to the city of Huntsville has filed suit against Southern and Huntsville seeking to have Southern's service agreement with Huntsville set aside as violative of 29 II-4 30 Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) - -------------------------------------------------------------------------------- Alabama's public bid laws and the Alabama Constitution. This company has also opposed the system expansion application at the FERC. Southern cannot predict the outcome of this litigation or the FERC proceeding. In April 1995, Southern received authorization from the FERC to construct a 21-mile pipeline extension to a delivery point near Chattanooga, Tennessee, to deliver natural gas to a group of new customers that signed 10-year contracts for firm transportation volumes totaling approximately 14 million cubic feet per day. This $11 million project was placed in service November 1, 1995. Southern also received approval from the FERC on December 5, 1995, to expand its north main pipeline system to provide approximately 27 million cubic feet per day of additional firm capacity. This project is supported by 10-year firm transportation agreements with 15 customers in Alabama, Georgia and Tennessee. The in-service date of this $13 million expansion project is expected to be November 1996. In addition, on October 16, 1995, Southern received FERC approval for a production-area expansion project with a capital cost of $15 million. Southern plans to install 9,400 horsepower of additional compression at its Toca, Louisiana, compressor station south of New Orleans and to install certain receipt and delivery point facilities in order to increase its capacity to transport gas supplies on its offshore Louisiana supply system through Toca by 140 million cubic feet per day. This expansion, which is supported by a 10-year firm transportation agreement with Shell Offshore Inc., is expected to be in service in early 1997. In early 1995, Southern initiated an open season to obtain customer commitments to expand its system in order to meet the growing demand for natural gas in the Southeast. In the open season, Southern sought requests for additional firm transportation services and for a new liquefied natural gas (LNG) service. Southern received requests for additional firm transportation services in its largest market area totaling approximately 35 million cubic feet per day. Southern is studying the economic feasibility of an expansion of its system to serve these requests and anticipates that it will file an application for authorization to construct and operate the necessary facilities later this year. If FERC approval is received, the in-service date for the firm transportation service is expected to be November 1997. Requests for LNG service are still being evaluated. If sufficient commitments are obtained and the necessary regulatory approvals are received, the in-service date for the LNG service is expected to be in 1998. The LNG service would be provided at an existing LNG storage terminal near Savannah, Georgia, that is owned by Southern Energy Company, a wholly owned subsidiary of Southern. The LNG facility was constructed in 1978 but was taken out of service in 1980. In January 1995, Sea Robin Pipeline Company, a wholly owned subsidiary of Southern, filed a petition with the FERC requesting it be declared an unregulated gas gathering system. In February 1995, several of Sea Robin's shippers filed with the FERC a complaint against Sea Robin under Section 5 of the Natural Gas Act claiming that Sea Robin's rates are unjust and unreasonable. The FERC denied Sea Robin's petition in an order issued on June 16, 1995. Sea Robin filed for rehearing of this denial on July 17, 1995. Sea Robin cannot predict the outcome of these proceedings. Florida Gas Transmission Company, a wholly owned subsidiary of Citrus, placed its Phase III expansion project into service on March 1, 1995, increasing its system capacity by 530 million cubic feet per day to 1.5 billion cubic feet per day. 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 this expansion, Florida Gas acquired an interest in an existing pipeline connected to its system in the Mobile Bay area that has been expanded to provide over 300 million cubic feet per day to Florida Gas. NATURAL GAS TRANSMISSION
(In Millions) - --------------------------------------------------------------------------- Years Ended December 31, 1995 1994 1993 - --------------------------------------------------------------------------- Operating Income (Loss): Southern Natural Gas Company $159 $93 $147 Other (1) (5) (2) - --------------------------------------------------------------------------- Total Operating Income $158 $88 $145 ===========================================================================
30 II-5 31 Sonat Inc. and Subsidiaries - ------------------------------------------------------------------ SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
(In Millions) - ------------------------------------------------------------------ Years Ended December 31, 1995 1994 1993 - ------------------------------------------------------------------ Revenues: Gas sales $195 $234 $541 Market transportation and storage(1) 325 321 170 Supply transportation 51 37 50 Other 91 135 72 - ------------------------------------------------------------------ Total Revenues 662 727 833 - ------------------------------------------------------------------ Costs and Expenses: Natural gas cost 191 229 364 Transition cost recovery and gas purchase contract settlement costs 58 116 52 Operating and maintenance 96 151 103 General and administrative 86 72 85 Depreciation and amortization(1) 52 47 64 Taxes, other than income 20 19 18 - ------------------------------------------------------------------ 503 634 686 - ------------------------------------------------------------------ Operating Income $159 $ 93 $147 ================================================================== Equity in Earnings of Unconsolidated Affiliates $ 9 $ 9 $ 9 ================================================================== (Billion Cubic Feet) - ------------------------------------------------------------------ Volumes(2): Intrastate gas sales 8 - - Interstate gas sales (excludes storage gas) - - 73 Market transportation 636 551 435 - ------------------------------------------------------------------ Total Market Throughput 644 551 508 Supply transportation 372 335 328 - ------------------------------------------------------------------ Total Volumes 1,016 886 836 ================================================================== Transition gas sales 85 103 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) Volumes for 1995 include 38 billion cubic feet of gas associated with three subsidiaries of Sonat Inc. that were transferred to Southern on January 1, 1995, which were not included in Southern's 1994 or 1993 volumes. CITRUS CORP.
(In Millions) - -------------------------------------------------------------------------- Years Ended December 31, 1995 1994 1993 - -------------------------------------------------------------------------- Equity in Earnings (Loss) of Citrus Corp. $ 28 $ 29 $ (6) ========================================================================== (Billion Cubic Feet) - -------------------------------------------------------------------------- Florida Gas Volumes (100%): Gas sales - - 15 Market transportation 461 303 269 - -------------------------------------------------------------------------- Total Market Throughput 461 303 284 Supply transportation 26 22 45 - -------------------------------------------------------------------------- Total Volumes 487 325 329 ==========================================================================
1995 VERSUS 1994. Absent the effect of the unusual items identified earlier, operating income increased by $18 million primarily due to improved operating results at Southern. SOUTHERN NATURAL GAS - Operating results, excluding the unusual items discussed below, increased 11 percent in 1995 due to lower operating expenses and the sale of previously unsubscribed firm transportation capacity. The unusual item in 1995 of $11 million increased operating and maintenance expense in recognition of Southern's share of gas supply realignment (GSR) costs that will not be recoverable. The unusual items in 1994 included in Southern's operating expenses consisted of a $27 million charge associated with recognition of the comprehensive customer rate settlement (the Customer Settlement) and a $34 million provision primarily relating to regulatory assets not recoverable as a result of the Customer Settlement, including $19 million attributable to a corporate restructuring undertaken in 1994. See Rate Matters for a discussion of the Customer Settlement. Southern's gas sales revenues and gas costs in 1995 and 1994 represent recognition of gas sales made from supply remaining under contract after the implementation of Order No. 636. The volumes associated with these sales are not accounted for as sales volumes, but rather are included in transportation volumes because all sales are now made at the wellhead, as required by Order No. 636. Market transportation and storage revenues increased in 1995 due in part to a $16 million revenue reserve provision in 1994 relating to a retroactive reduction in certain depreciation rates. The effect on operating revenue of this reduction was partially offset by lower settlement rates that were placed into effect on March 1, 1995. Supply transportation 31 II-6 32 Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) - -------------------------------------------------------------------------------- revenues increased 38 percent due to increased volumes under Southern's new transportation contract with Florida Gas. Other Revenue and Transition Cost Recovery decreased due to declining billings and lower recovery rates for GSR costs in 1995. Operating and maintenance expense, excluding the unusual items discussed above, decreased 6 percent in 1995 reflecting lower fuel costs and the impact of the 1994 fourth quarter restructuring. General and administrative expense increased 19 percent in 1995 primarily due to higher employee benefit expenses related to 1993 and 1994 special early retirement options (SEROs) and higher stock-based compensation. Depreciation and amortization expense increased in 1995 due to the $16 million retroactive adjustment in 1994 partially offset by lower depreciation rates as a result of the Customer Settlement. Equity in earnings of unconsolidated affiliates primarily represents the Company's share of earnings from Bear Creek Storage Company. Equity in earnings from Bear Creek was esentially flat when comparing 1995 to 1994. CITRUS - Equity in earnings of Citrus decreased slightly in 1995 to $28 million. Earnings were lower on the Phase III expansion project, excluding the effect of a $6.7 million positive effect of adjustments to allowance for funds used during construction (AFUDC) on Phase III in 1995, due to the completion of Phase III and the resulting end of AFUDC recognition on the project combined with the use of levelized rates on the Phase III portion of the pipeline. This was partially offset by higher margins at Citrus' gas marketing affiliate, including higher results on a gas supply contract with one of its major customers that was restructured during 1994. Throughput on the Florida Gas pipeline system increased 50 percent, reflecting the first 10 months of Phase III operations. 1994 VERSUS 1993. Exclusive of unusual items, operating income increased $4 million in 1994 due to improved operating results at Southern. SOUTHERN NATURAL GAS - Excluding unusual items, Southern's operating income for 1994 increased 3 percent when compared with 1993 as a result of higher transportation revenue resulting primarily 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. 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. Equity in earnings of Bear Creek for 1994 was unchanged from 1993. 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. TRANSPORTATION CONTRACTS Pursuant to the Customer Settlement (described in Note 9 of the Notes to Consolidated Financial Statements), Southern's largest customer, Atlanta Gas Light Company, and its subsidiary, Chattanooga Gas Company, have amended their 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 will remain under its current term to April 30, 2007. Also pursuant to the Customer Settlement, South Carolina Pipeline Corporation (SCPC) has amended one of its firm transportation contracts totaling 28 million cubic feet per day, to extend its primary term for a period of three years beginning March 1, 1995. Such extension is in addition to the remaining 160 million cubic feet per day of SCPC's firm transportation services that remain in effect under terms extending from 1999 through 2003. Alabama Gas Corporation, Southern's second largest customer, had earlier executed firm transportation contracts for 393 million cubic feet per day under terms extending through October 31, 2008. Southern's other customers have contracted for firm transportation services for terms ranging from one to ten or 32 II-7 33 Sonat Inc. and Subsidiaries - -------------------------------------------------------------------------------- more years. As a result, substantially all of the firm transportation capacity currently available in Southern's two largest market areas is fully subscribed. NATURAL GAS SALES AND SUPPLY Sales by Southern of natural gas are anticipated to continue only until Southern's remaining supply contracts expire, are terminated, or are assigned. As a result of Order No. 636, Southern is attempting to terminate its remaining 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 the cost of gas under some of these contracts is in excess of current spot-market prices, Southern currently is incurring no take-or-pay liabilities under any of these contracts. Two market-priced contracts entered into with Exxon Corporation in 1995 as part of a settlement of certain other gas purchase contracts account for 76 percent and 72 percent in 1996 and 1997, respectively, of the purchase commitments described below. Of such purchase commitments, the percent that is priced in excess of current spot-market prices is 19 percent in 1996, 23 percent in 1997, and substantially all of the volumes for years thereafter. (See Note 9 of the Notes to Consolidated Financial Statements for a discussion of price differential GSR costs.) Pending the termination of these remaining supply contracts, Southern has sold a portion of its remaining gas supply to a number of its firm transportation customers under contracts that have been extended through November 30, 1997. The remainder of Southern's gas supply will continue to be sold on a month-to-month basis. Southern's purchase commitments under its remaining gas supply contracts for the years 1996 through 2000 are estimated as follows:
(In Millions) - -------------------------------------------------------------------------------- Estimated Purchase Commitments - -------------------------------------------------------------------------------- 1996 $154 1997 137 1998 38 1999 35 2000 31 - --------------------------------------------------------------------------------
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. See Note 9 of the Notes to Consolidated Financial Statements for a discussion regarding Southern's rate proceedings to recover its GSR costs. RATE MATTERS The Customer Settlement resolves as to the parties supporting the settlement, all of Southern's pending rate proceedings and proceedings to recover GSR and other transition costs associated with the implementation of Order No. 636. The Customer Settlement resulted in reducing Southern's filed rates to more competitive levels, reduced somewhat reported revenues and reduced depreciation expense in 1995. Southern implemented reduced settlement rates for parties that supported the Customer Settlement effective March 1, 1995, pursuant to interim agreements with its customers pending final FERC action on petition for rehearing of the Customer Settlement filed by contesting parties. (See Note 9 of the Notes to Consolidated Financial Statements for a discussion of the Customer Settlement and other rate matters.) CITRUS CORP. The Florida Gas Phase III expansion project has been in operation since March 1995. The earnings of the Phase III expansion, combined with Florida Gas' Order No. 636 restructuring and Citrus' successful renegotiation in 1994 of an unfavorable contract with one of its major customers, should result in more stable revenues, earnings and cash flow at Citrus for the foreseeable future than experienced prior to 1994, but at lower levels than in 1994 and 1995. Florida Gas has terminated substantially all of its gas purchase contracts with a weighted average cost in excess of current spot-market prices for aggregate costs that are less than the $160 million maximum amount that it is entitled to recover from its customers pursuant to its 1993 restructuring settlement under Order No. 636. Citrus generally obtains its own financing independent of its parent companies. Current debt financing by Citrus with outside parties is nonrecourse to its parent companies. 33 II-8 34 Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) - -------------------------------------------------------------------------------- ENERGY MARKETING The Company's natural gas marketing business is conducted by Sonat Marketing Company L.P. (Sonat Marketing). Sonat Marketing is 65 percent owned by a subsidiary of Sonat Energy Services, a wholly owned subsidiary of the Company, with the remaining share owned by Atlanta Gas Light Company. (See Note 2 of the Notes to Consolidated Financial Statements.) Sonat Marketing's average daily sales volumes reached 2.3 billion cubic feet per day at the end of 1995 compared to 1.6 billion cubic feet per day at the end of 1994, primarily due to its rapid expansion into the Northeastern and Midwestern markets. Sonat Marketing markets almost all of the natural gas production of Sonat Exploration that is not sold under pre-existing term dedications, and executes Sonat Exploration's risk management program. Sonat Marketing uses natural gas futures contracts, options, and gas price swap agreements to hedge the effects of spot-market price volatility on its operating results. These instruments are used to lock in prices of Sonat Exploration's future production and margins on Sonat Marketing's gas transactions. Sonat Marketing also uses futures derivatives to enable it to offer fixed-price contracts to its suppliers and customers. (See Market Risk Management and Note 3 of the Notes to Consolidated Financial Statements.) In April 1995, Sonat Energy Services formed a new subsidiary, Sonat Power Marketing Inc., to market electric power. Sonat Power Marketing was authorized by the FERC in August 1995 to purchase and sell electricity in the wholesale power market at market-based rates. It offers services to utilities, municipalities and other electricity suppliers and remarketers. Sonat and Atlanta Gas Light Company are engaged in discussions regarding the acquisition by Atlanta Gas Light of a 35 percent interest in Sonat Power Marketing. ENERGY MARKETING
(In Millions) - -------------------------------------------------------------------------------- Years Ended December 31, 1995 1994 1993 - -------------------------------------------------------------------------------- Revenues: Sonat Marketing $1,250 $927 $620 Other - 15 15 - -------------------------------------------------------------------------------- Total Revenues $1,250 $942 $635 ================================================================================ Operating Income (Loss): Sonat Marketing $ 8 $ 11 $ 2 Other (1) 1 (3) - -------------------------------------------------------------------------------- $ 7 $ 12 $ (1) ================================================================================ (Billion Cubic Feet) - -------------------------------------------------------------------------------- Gas Sales Volumes 722 482 285 ================================================================================
Substantially all of the operations of the Energy Marketing segment are conducted through Sonat Marketing. Sonat Power Marketing's impact was immaterial in 1995. Pipeline subsidiaries that contributed in prior years were moved to the Natural Gas Transmission segment in 1995. 1995 VERSUS 1994. Sonat Marketing's operating income of $8 million was $3 million less than 1994. While sales volumes rose 50 percent to 722 billion cubic feet, margins were sharply lower ($.03 in 1995 compared to $.05 in 1994) due to the lower margins that were prevalent for gas marketers during most of 1995. In addition, certain transportation related margin opportunities available in early 1994 following the implementation of Order No. 636 became much more competitive and less profitable during late 1994 and 1995. Higher costs related to expanding operations and an increase in stock-based compensation expense also reduced operating income. 1994 VERSUS 1993. 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 Midwestern and Northeastern markets through the purchase of additional third-party volumes. In addition, average margins per MMBtu increased from $.03 in 1993 to $.05 in 1994 due to greater concentration on value-added services. 34 II-9 35 Sonat Inc. and Subsidiaries - -------------------------------------------------------------------------------- OTHER INCOME STATEMENT ITEMS
(In Millions) - ---------------------------------------------------------------------------- Years Ended December 31, 1995 1994 1993 - ---------------------------------------------------------------------------- OTHER INCOME - EQUITY IN EARNINGS OF UNCONSOLIDATED AFFILIATES: Exploration and Production $ 1 $ - $ 5 Natural Gas Transmission 37 38 2 Other 8 6 5 - ---------------------------------------------------------------------------- $ 46 $ 44 $ 12 ============================================================================
Equity in earnings of unconsolidated affiliates in the Exploration and Production and Natural Gas Transmission segments was discussed earlier. 1995 VERSUS 1994. The increase in Other reflects improved results for Sonat Offshore Drilling Inc. prior to its disposition. The Company disposed of its 40 percent ownership in Sonat Offshore on July 26, 1995. (See Note 2 of the Notes to Consolidated Financial Statements.) 1994 VERSUS 1993. Results reported for Sonat Offshore 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.
(In Millions) - --------------------------------------------------------------------- Years Ended December 31, 1995 1994 1993 - --------------------------------------------------------------------- OTHER INCOME (LOSS) - OTHER $(45) $16 $14
1995 VERSUS 1994. Other Income is down due to losses of $29 million on the sale of oil and gas properties in 1995 versus gains of $2 million in 1994, a loss of $13 million on the sale of the Company's investment in Baker Hughes Incorporated preferred stock in June 1995, and a loss by Sonat Exploration in December 1995 of $8 million on natural gas futures contracts that ceased to qualify for accounting as hedges due to the loss of correlation between the New York Mercantile Exchange (NYMEX) futures market for natural gas and the price of natural gas in certain parts of the country. In addition, 1995 reflects $6 million of dividends on the Baker Hughes stock versus $12 million in 1994 that are no longer being received and minority interest in earnings of Sonat Marketing of $.9 million. 1994 VERSUS 1993. Other Income increased in 1994 due to higher gains on the disposal of oil and gas properties by Sonat Exploration compared to 1993. Both periods reflect the receipt of $12 million in dividends on the Baker Hughes stock.
(In Millions) - ------------------------------------------------------------------------ Years Ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------ INTEREST EXPENSE, NET $90 $73 $47
1995 VERSUS 1994. Net interest expense for 1995 included a $4 million favorable adjustment on income tax related interest. 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. Excluding these adjustments, net interest expense on debt increased from 1994 due to higher average interest rates slightly offset by lower average debt levels. Interest on revenue reserves increased due to higher average reserve balances. 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 average debt levels.
(In Millions) - -------------------------------------------------------------------------- Years Ended December 31, 1995 1994 1993 - -------------------------------------------------------------------------- INCOME TAXES $ 95 $ 16 $ 103
1995 VERSUS 1994. Income tax expense in 1995 increased due to taxes from the gain on the sale of the Company's remaining interest in Sonat Offshore stock (see Note 2 of the Notes to Consolidated Financial Statements) and lower nonconventional fuel tax credits and other tax preference items. In addition, the 1994 period included a favorable settlement relating to the examination of the Company's federal income tax returns for 1986-1988 which reduced reported income tax expense. 35 II-10 36 Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) - -------------------------------------------------------------------------------- 1994 VERSUS 1993. Income tax expense in 1994 decreased as compared to 1993 due to lower pretax income. Pretax income in 1993 included the gain on the IPO of Sonat Offshore common stock. 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.
(In Millions) - ------------------------------------------------------------------------ Years Ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------ 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 71/4 Percent Zero Coupon, Subordinated Convertible Notes which were due September 6, 2005. LIQUIDITY AND CAPITAL RESOURCES CASH FLOWS
(In Millions) - --------------------------------------------------------------------------- Years Ended December 31, 1995 1994 1993 - --------------------------------------------------------------------------- OPERATING ACTIVITIES $184 $511 $454
1995 VERSUS 1994. Several factors contributed to the $327 million decrease in cash flows from operations in 1995 compared to 1994. A $45 million payment to Exxon and the funding of a $42 million GSR liability were the principal expenditures responsible for the $99 million change in net payments for gas supply realignment costs. On March 1, 1995, Southern implemented reduced rates and ceased collection of additional revenues, which is reflected in the $64 million reduction in cash flows from regulatory reserves. In 1994 Southern completed recovery of its take-or-pay costs, which resulted in the $19 million reduction in recoveries of take-or-pay costs. The growth in both accounts receivable and accounts payable is primarily attributable to the expanding business of Sonat Marketing. Cash flow from operations in 1995 was also negatively impacted by the payment of $112 million in taxes on the sale of the Company's remaining interest in Sonat Offshore stock. Partly offsetting was the recognition of $72 million of tax benefits consisting of the utilization of Section 29 tax credits and net operating losses. In addition, cash from operations was adversely affected by margin requirements of $23 million in December 1995 associated with the Company's hedging program and the rapid rise of futures prices for first quarter 1996 futures contracts. The caption Other in the Consolidated Statement of Cash Flows includes certain significant non-cash items that did not impact cash flow from operations. In 1995, Other includes $37 million related to the termination of two long-term gas sales contracts, while Other in 1994 includes a $57 million provision for the Customer Settlement discussed in Note 9 of the Notes to Consolidated Financial Statements. The remainder of the amount included in Other in 1995 is primarily certain transition costs deferred for collection in future periods. In addition to the Customer Settlement provision in 1994, Other includes a gas prepayment received by Sonat Exploration and deferred revenue credits. 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 Southern's GSR 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 Southern completed 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 the $57 million non-cash provision for the Customer Settlement, while the amount in Other in 1993 reflects $52 million in non-cash accruals for GSR settlements. The remainder of 1994 Other is primarily a gas prepayment and deferred transition costs. Another significant gas prepayment received by Sonat Exploration in 1993 accounts for most of the remaining amount in Other in the previous year. 36 II-11 37 Sonat Inc. and Subsidiaries - --------------------------------------------------------------------------------
(In Millions) - -------------------------------------------------------------------------------- Years Ended December 31, 1995 1994 1993 - -------------------------------------------------------------------------------- INVESTING ACTIVITIES $ 92 $(601) $(189)
1995 VERSUS 1994. Net cash from investing activities increased $693 million from 1994. The increase was attributable to the receipt of $326 million from the sale of the Company's remaining interest in Sonat Offshore stock, $167 million from the sale of four million shares of Baker Hughes convertible preferred stock, and $105 million in proceeds from the sale of Sonat Exploration properties. Also contributing to the increase were the net advances made to Citrus in 1994 of $159 million. Partially offsetting the increase was an increase in capital expenditures of $39 million. 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.
(In Millions) - ------------------------------------------------------------------------- Years Ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------- FINANCING ACTIVITIES $(248) $ 89 $(312)
1995 VERSUS 1994. Sonat used $248 million of cash in its financing activities in 1995, primarily due to repayments of floating rate facilities. This represented a change of $337 million from the 1994 period. Proceeds from the Sonat Offshore stock sale and the Baker Hughes stock sale were used in the 1995 repayments. Other includes the $32 million contributed by Atlanta Gas Light as an investment in Sonat Marketing (see Note 2 of the Notes to Consolidated Financial Statements). The Company utilizes its $500 million long-term revolving credit agreement in managing its working capital requirements. During 1995, the Company borrowed $2.9 billion and repaid $3.3 billion under this agreement. 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 95/8 Percent Notes. CAPITAL EXPENDITURES Capital expenditures for the Company's business segments (excluding unconsolidated affiliates) were as follows:
(In Millions) - ------------------------------------------------------------------------- Years Ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------- Exploration and Production $ 416 $ 390 $ 431 Natural Gas Transmission 63 51 60 Energy Marketing 3 3 1 Other 6 4 24 - ------------------------------------------------------------------------- Total $ 488 $ 448 $ 516 =========================================================================
The Company's share of capital expenditures by its unconsolidated affiliates were as follows:
(In Millions) - ------------------------------------------------------------------------------- Years Ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------------- Exploration and Production $ 1 $ - $ 11 Natural Gas Transmission 100 398 18 Other 1 1 3 - ------------------------------------------------------------------------------- Total $ 102 $ 399 $ 32 ===============================================================================
The Company's capital expenditures (including its $13 million share of unconsolidated affiliates' expenditures) for 1996 are expected to be $457 million. CAPITAL RESOURCES At December 31, 1995, the Company had lines of credit and a revolving credit agreement with a total capacity of $750 million. Of this, $531 million was available. The amount available under the lines of credit has been reduced by the amount of commercial paper outstanding of $210 million 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 agreement. In 1993 Sonat filed a shelf registration with the Securities and Exchange Commission (SEC) for up to $500 million in debt securities. On June 12, 1995, Sonat issued $200 million of 67/8 Percent Notes due 2005 under this shelf registration, leaving $300 million unissued. The proceeds from the sale of the Notes were used to repay floating rate debt. Southern also has a shelf registration with the SEC for up to $200 million in debt securities, of which $100 million has been issued. Southern expects to issue the $100 million remaining under the shelf registration in either late 1996 or early 1997. Also, in October 1995 the Board of Directors of the 37 II-12 38 Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) - ------------------------------------------------------------------------------- Company extended the Company's stock repurchase program to April 30, 1997, and authorized the purchase of an additional one million shares of the Company's common stock. This brings the total number of shares authorized to three million shares. Through December 31, 1995, the Company has purchased 1,585,000 shares and will continue to purchase shares from time-to-time on the open market or in privately negotiated transactions. Shares purchased under the authorization are being reissued in connection with employee stock option and restricted stock programs. Cash flow from operations and borrowings in the public or private markets provide the Company with the means to fund operations and currently planned investment and capital expenditures. MARKET AND FINANCIAL RISK MANAGEMENT The Company's primary market risk exposure is the volatility of spot-market natural gas and oil prices, which affect operating results of Sonat Exploration and Sonat Marketing. Sonat Exploration, through Sonat Marketing, uses futures contracts, options, and oil and natural gas price swap agreements to hedge its commodity price risk. Sonat Exploration's hedging objective is to lock in the price of a portion of its expected oil and gas production when it believes that prices are at an acceptable level. Sonat Marketing uses derivative instruments to reduce the risk of price changes and location differences when it buys or sells natural gas. 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. The Company also has exposure to financial market risks. On January 22, 1996, Southern entered into a forward rate agreement to hedge the interest rate risk of an anticipated future borrowing under its shelf registration. The base treasury rate for this future borrowing has been hedged at approximately 5.78 percent. This is the first such hedge transaction for Southern. The Company's use of these derivative instruments is implemented under a set of policies approved by the Board of Directors. These policies prohibit speculative transactions not matched by physical commodity positions in the case of Sonat Exploration or corresponding trading positions in the case of Sonat Marketing and determine approval levels for each transaction. For commodity price hedges, these policies set limits regarding volumes 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 are distributed to management. In addition, all hedge activities are internally reviewed to ensure compliance with all policies. (See Note 3 of the Notes to Consolidated Financial Statements.) INFLATION AND THE EFFECT OF CHANGING ENERGY PRICES The rate of inflation in the United States has been moderate over the past several years and has not significantly affected the profitability of the Company. In prior periods of high general inflation, oil and gas prices generally increased at comparable rates; however, there is no assurance that this will be the case in the current environment or in possible future periods of high inflation. Southern's Customer Settlement prohibits it from filing a general rate case to be effective before March 1, 1998, which would be necessary for it to recover higher costs of operations (see Note 9 of the Notes to Consolidated Financial Statements). Margins in the Energy Marketing segment are highly sensitive to competitive pressures and may not reflect the effects of inflation. The results of operations in the Company's three major business segments will be affected by future changes in oil and gas prices and the interrelationship between oil, gas and other energy prices. CORPORATE RESTRUCTURING In late 1994 and early 1995, the Company completed a reduction in staffing levels through a combination of SEROs and involuntary terminations. The SEROs and terminations, which involved 340 employees, or approximately 15 percent of the Company's workforce, occurred primarily in field locations, but also included significant reductions in office employees. The total cost of the program, which was recognized in 1994, amounted to $21 million. The majority of the charge represented accelerated retirement costs, with the remainder being primarily cash severance payments. 38 II-13 39 Sonat Inc. and Subsidiaries - -------------------------------------------------------------------------------- ENVIRONMENTAL ISSUES Sonat Exploration, Southern, and their subsidiaries are subject to extensive federal, state and local environmental laws and regulations that affect their operations. Governmental authorities may enforce these laws and regulations with a variety of civil and criminal enforcement measures, including monetary penalties, assessment and remediation requirements, and injunctions as to future activities. Southern and Sonat Exploration have been notified that one of them is or may be a potentially responsible party (PRP) under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) in connection with a total of eight Superfund sites. In these cases, the Company has determined that the aggregate maximum amount of loss reasonably likely to be named by it, after giving effect to likely contributions by other PRPs would not be material to its financial position or results of operations. However, liability for PRPs under CERCLA (and applicable state law) is joint and several among all PRPs. Although volumetric allocation is a factor in assessing liability, it is not necessarily determinative; thus, the ultimate liability at any of these sites could be substantially greater than the maximum amounts estimated by the Company. In the operation of their natural gas pipeline systems, Southern and its wholly owned subsidiary, South Georgia Natural Gas Company, 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 the environment and to comply with Occupational Safety and Health Administration standards. It is generally believed in the natural gas pipeline industry that, in the course of normal maintenance and replacement operations, elemental mercury may have been released from mercury meters. Southern has determined that its pipeline meters may in the past have been the source of small releases of elemental mercury. As a result, Southern undertook the characterization of 443 sites across the system during 1995. Approximately 190 remaining sites are scheduled to be characterized in the first quarter of 1996, all of which are in Mississippi. After Southern evaluates the results of the characterization, it plans to remediate contaminated sites within Georgia during 1996, with remediation of sites elsewhere to be scheduled thereafter. Southern is unable to estimate the cost of mercury remediation because costs will vary based on a number of factors particular to each site and because regulatory standards for elemental mercury cleanup are uncertain at this time. Neither the Environmental Protection Agency nor any state in which Southern operates has yet issued cleanup levels or guidelines with respect to contamination from past releases or spills of mercury; however, Southern has received informal guidance from the State of Louisiana with respect to cleanup standards in that state that will also be used for remediation in other states absent specific guidelines. Based on its experience with other remediation projects, industry experience to date with remediation of mercury, and its preliminary analysis of the possible extent of the contamination, Southern believes that the cost of its characterization and remediation of any mercury contamination will not be material to its financial position or results of operations. Sonat Inc. generally considers environmental assessment and remediation costs and costs associated with compliance with environmental standards incurred by Southern 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 Customer Settlement prevents Southern from filing a general rate case to be effective prior to March 1, 1998. NEW ACCOUNTING PRONOUNCEMENTS In 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The Company elected to adopt the Statement's provisions in the fourth quarter of 1995 and recognized an impairment loss of $23 million on certain oil and gas properties in that period. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, which will become effective for years beginning after December 15, 1995. This Statement will require that financial statements include certain disclosures about stock-based employee 39 II-14 40 Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) - ------------------------------------------------------------------------------- compensation and allows, but does not require, a fair value-based method of accounting for such compensation. The Company believes that this fair value-based method of accounting, if adopted, would not have a material effect on the Consolidated Financial Statements. FORWARD LOOKING STATEMENTS The Management's Discussion and Analysis and the information provided elsewhere in this Annual Report contain forward looking statements regarding the Company's future plans, objectives, and expected performance. These statements are based on assumptions that the Company believes are reasonable, but are subject to a wide range of risks, and there is no assurance that actual results may not differ materially. Important factors that could cause actual results to differ include changes in oil and gas prices and underlying demand, which would affect profitability and might cause the Company to alter its plans, the timing and results of oil and gas drilling and acquisition programs, which determine production levels and reserves, the results of the Company's hedging activities, and the success of management's cost reduction activities. Realization of the Company's objectives and expected performance can also be adversely affected by the actions of customers and competitors, changes in governmental regulation of the Company's businesses, and changes in general economic conditions and the state of domestic capital markets. 40 II-15 41 Sonat Inc. and Subsidiaries - -------------------------------------------------------------------------------- REPORT OF MANAGEMENT - -------------------------------------------------------------------------------- Management of the Company is responsible for the preparation and integrity of all financial data included in this annual report. The Consolidated Financial Statements have been prepared in conformity with generally accepted accounting principles and necessarily include amounts based on estimates and judgments of management. The Company's accounting systems include controls designed to provide reasonable assurance that assets are safeguarded against loss or unauthorized use and that the financial records are adequate and reliable for preparation of financial statements and other financial data. The concept of reasonable assurance is based on the recognition that the cost of internal accounting controls should not exceed the related benefits. An integral part of the internal accounting controls is the selection, training and development of qualified accounting and internal audit personnel. The Company engages the firm of Ernst & Young LLP as independent auditors to audit the Company's Consolidated Financial Statements and express their opinion thereon. Their audit is conducted in accordance with generally accepted auditing standards and includes a review and evaluation of the Company's internal accounting control systems and other procedures as they consider appropriate. The Report of Ernst & Young LLP, Independent Auditors, appears 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, approves all audit and other professional services rendered by the independent auditors and regularly reviews their independence. The Audit Committee reviews and reports on significant accounting decisions and transactions and the scope and results of audits by the Company's internal auditing staff and the independent auditors. It reviews with management compliance with the Company's business ethics and conflict of interest policies and reviews with independent auditors the adequacy of the Company's internal accounting controls. The internal auditors and the independent auditors have free access to the Audit Committee, without management's presence, to discuss the Company's internal controls and the results of their audits. /s/ James A. Rubright James A. Rubright Senior Vice President and General Counsel February 22, 1996 - ----------------------------------------------------------------------------- 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, 1995 and 1994, 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, 1995. 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, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. As discussed in Note 1 to the Consolidated Financial Statements, in 1995 the Company adopted the provisions of Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. Ernst & Young LLP Birmingham, Alabama January 18, 1996 41 II-16 42 Consolidated Financial Statements Sonat Inc. and Subsidiaries - ------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS
(In Thousands) - --------------------------------------------------------------------------------------------------- December 31, 1995 1994 - --------------------------------------------------------------------------------------------------- ASSETS Current Assets: Cash and cash equivalents $ 37,289 $ 9,131 Accounts receivable 349,441 279,553 Inventories (Note 4) 23,956 26,722 Gas imbalance receivables 16,556 35,091 Federal income taxes 12,979 4,572 Other 54,210 31,772 - --------------------------------------------------------------------------------------------------- Total Current Assets 494,431 386,841 - --------------------------------------------------------------------------------------------------- Investments and Advances: Unconsolidated affiliates (Note 5) 386,081 486,329 Other investments (Notes 2 and 3) 46,688 217,979 - --------------------------------------------------------------------------------------------------- 432,769 704,308 - --------------------------------------------------------------------------------------------------- Plant, Property and Equipment, successful efforts method of accounting used for oil and gas properties (Notes 6 and 13) 4,822,879 4,741,296 Less Accumulated Depreciation, Depletion and Amortization 2,545,320 2,497,691 - --------------------------------------------------------------------------------------------------- 2,277,559 2,243,605 - --------------------------------------------------------------------------------------------------- Deferred Charges and Other: Gas supply realignment costs (Note 9) 199,073 160,850 Other 107,609 35,082 - --------------------------------------------------------------------------------------------------- 306,682 195,932 - --------------------------------------------------------------------------------------------------- $3,511,441 $3,530,686 ===================================================================================================
See accompanying notes. 42 II-17 43 Consolidated Financial Statements Sonat Inc. and Subsidiaries - ------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS
(In Thousands) - ------------------------------------------------------------------------------------------------------------ December 31, 1995 1994 - ------------------------------------------------------------------------------------------------------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Long-term debt due within one year (Note 7) $ 18,750 $ 19,250 Unsecured notes (Note 7) 218,900 200,000 Accounts payable 297,660 208,751 Accrued state income taxes 10,579 22,029 Accrued interest 27,115 36,825 Gas imbalance payables 21,444 42,975 Other 45,677 40,371 - ------------------------------------------------------------------------------------------------------------ Total Current Liabilities 640,125 570,201 - ------------------------------------------------------------------------------------------------------------ Long-Term Debt (Note 7) 770,313 963,378 - ------------------------------------------------------------------------------------------------------------ Deferred Credits and Other: Deferred income taxes (Note 8) 213,122 187,957 Reserves for regulatory matters (Note 9) 181,798 183,343 Other 223,441 233,921 - ------------------------------------------------------------------------------------------------------------ 618,361 605,221 - ------------------------------------------------------------------------------------------------------------ Commitments and Contingencies (Note 9) Stockholders' Equity: Common stock, $1.00 par, 400,000,000 shares authorized; 87,244,476 and 87,252,015 shares issued in 1995 and 1994, respectively (Note 10) 87,244 87,252 Other capital 39,795 42,311 Retained earnings 1,387,137 1,287,339 - ------------------------------------------------------------------------------------------------------------ 1,514,176 1,416,902 - ------------------------------------------------------------------------------------------------------------ Less treasury stock at cost, 1,077,480 and 870,967 shares in 1995 and 1994, respectively (Note 10) (31,534) (25,016) - ------------------------------------------------------------------------------------------------------------ Total Stockholders' Equity 1,482,642 1,391,886 - ------------------------------------------------------------------------------------------------------------ $3,511,441 $3,530,686 ============================================================================================================
See accompanying notes. 43 II-18 44 Consolidated Financial Statements Sonat Inc. and Subsidiaries - ------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per-Share Amounts) - ------------------------------------------------------------------------------------------------------------- Years Ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------- Revenues (Note 12) $1,990,141 $1,735,967 $1,741,147 - ------------------------------------------------------------------------------------------------------------- Costs and Expenses: Natural gas cost 1,090,756 795,025 794,254 Transition cost recovery and gas purchase contract settlement costs 58,010 116,159 51,827 Operating and maintenance 171,973 222,901 249,801 General and administrative 140,511 133,138 148,738 Depreciation, depletion and amortization 298,714 257,759 225,989 Taxes, other than income 41,244 41,546 37,623 - ------------------------------------------------------------------------------------------------------------- 1,801,208 1,566,528 1,508,232 - ------------------------------------------------------------------------------------------------------------- Operating Income 188,933 169,439 232,915 - ------------------------------------------------------------------------------------------------------------- Other Income (Loss), Net: Equity in earnings of unconsolidated affiliates (Note 5) 46,258 44,319 12,365 Sale of stock of subsidiary (Notes 2 and 5) 188,012 - 155,836 Other (45,478) 16,348 13,884 - ------------------------------------------------------------------------------------------------------------- 188,792 60,667 182,085 - ------------------------------------------------------------------------------------------------------------- Interest: Interest income 6,413 7,403 39,331 Interest expense (102,797) (86,982) (90,704) Interest capitalized 6,540 6,692 4,101 - ------------------------------------------------------------------------------------------------------------- (89,844) (72,887) (47,272) - ------------------------------------------------------------------------------------------------------------- Income before Extraordinary Item and Income Taxes 287,881 157,219 367,728 Income Taxes (Note 8) 94,993 15,812 102,659 - ------------------------------------------------------------------------------------------------------------- Income before Extraordinary Item 192,888 141,407 265,069 Extraordinary Loss, Net of Income Tax Benefit of $1,972,000 (Note 7) - - (3,829) - ------------------------------------------------------------------------------------------------------------- Net Income $ 192,888 $ 141,407 $ 261,240 ============================================================================================================= Earnings Per Share of Common Stock: (Note 10) Earnings before extraordinary item $ 2.24 $ 1.62 $ 3.05 Extraordinary loss - - (.04) - ------------------------------------------------------------------------------------------------------------- Earnings Per Share $ 2.24 $ 1.62 $ 3.01 ============================================================================================================= Weighted Average Shares Outstanding (Note 10) 86,270 87,119 86,703 Dividends Paid Per Share (Note 10) $ 1.08 $ 1.08 $ 1.04 =============================================================================================================
See accompanying notes. 44 II-19 45 Consolidated Financial Statements Sonat Inc. and Subsidiaries - ------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands) - ------------------------------------------------------------------------------------------------------------------- Years Ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------- Shares Amount Shares Amount Shares Amount - ------------------------------------------------------------------------------------------------------------------- Common Stock, $1.00 Par, 400,000,000 Shares Authorized (Note 10): Balance at beginning of year 87,252 $ 87,252 87,158 $ 87,158 86,077 $ 86,077 Issued (canceled) (8) (8) 94 94 1,081 1,081 - ------------------------------------------------------------------------------------------------------------------- Balance at end of year 87,244 87,244 87,252 87,252 87,158 87,158 - ------------------------------------------------------------------------------------------------------------------- Other Capital: Balance at beginning of years 42,311 36,074 17,339 Benefit plans transactions (2,516) 6,237 18,735 - ------------------------------------------------------------------------------------------------------------------- Balance at end of year 39,795 42,311 36,074 - ------------------------------------------------------------------------------------------------------------------- Retained Earnings: Balance at beginning of year 1,287,339 1,239,983 1,068,904 Net income 192,888 141,407 261,240 Cash dividends at $1.08 per share for 1995 and 1994, and $1.04 per share for 1993 (93,090) (94,051) (90,161) - ------------------------------------------------------------------------------------------------------------------- Balance at end of year 1,387,137 1,287,339 1,239,983 - ------------------------------------------------------------------------------------------------------------------- Treasury Stock, at cost: Balance at beginning of year (871) (25,016) - - - - Purchased (645) (19,230) (940) (27,005) - - Issued 439 12,712 69 1,989 - - - ------------------------------------------------------------------------------------------------------------------- Balance at end of year (1,077) (31,534) (871) (25,016) - - - ------------------------------------------------------------------------------------------------------------------- 86,167 $1,482,642 86,381 $1,391,886 87,158 $1,363,215 ===================================================================================================================
See accompanying notes. 45 II-20 46 Consolidated Financial Statements Sonat Inc. and Subsidiaries - ------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands) - ---------------------------------------------------------------------------------------------------------------- Years Ended December 31, 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net income $ 192,888 $ 141,407 $ 261,240 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization 298,714 257,759 225,989 Deferred income taxes 25,165 1,607 49,635 Equity in earnings of unconsolidated affiliates, less distributions (34,265) (31,740) 1,532 Gain on sale of stock of subsidiary and loss on disposal of assets (144,969) (3,554) (158,592) Reserves for regulatory matters (1,545) 62,542 16,845 Gas supply realignment costs (38,223) 18,736 (127,986) Funding of gas supply realignment cost liability (42,330) - - Natural gas purchase contract settlement costs - 18,535 51,947 Change in: Accounts receivable (66,470) (22,533) (60,687) Inventories 2,766 3,174 50,535 Accounts payable 85,516 15,368 44,921 Accrued interest and income taxes, net (29,379) (46,758) 5,199 Other current assets (3,808) 16,490 10,446 Other current liabilities (16,508) (18,072) (2,325) Other (43,218) 97,671 84,823 - ---------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 184,334 510,632 453,522 - ---------------------------------------------------------------------------------------------------------------- Cash Flows from Investing Activities: Plant, property and equipment additions (487,564) (448,314) (516,466) Net proceeds from sale of subsidiary stock and disposal of assets 592,838 18,832 343,610 Investments in unconsolidated affiliates and other (12,959) (171,660) (16,185) - ---------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities 92,315 (601,142) (189,041) - ---------------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities: Proceeds from issuance of long-term debt 3,103,000 4,448,000 880,676 Payments of long-term debt (3,296,565) (4,327,835) (1,237,694) Changes in short-term borrowings 18,900 87,154 112,846 - ---------------------------------------------------------------------------------------------------------------- Net changes in debt (174,665) 207,319 (244,172) Dividends paid (93,090) (94,051) (90,161) Other 19,264 (24,449) 22,667 - ---------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities (248,491) 88,819 (311,666) - ---------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Cash and Cash Equivalents 28,158 (1,691) (47,185) Cash and Cash Equivalents at Beginning of Year 9,131 10,822 58,007 - ---------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Year $ 37,289 $ 9,131 $ 10,822 ================================================================================================================ Supplemental Disclosures of Cash Flow Information Cash Paid For: Interest (net of amount capitalized) $ 81,900 $ 80,310 $ 66,793 Income taxes, net 96,455 44,061 71,398 ================================================================================================================
See accompanying notes. 46 II-21 47 Sonat Inc. and Subsidiaries - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES BUSINESS DESCRIPTION - The Consolidated Financial Statements of Sonat Inc. (Sonat) and its subsidiaries (the Company) reflect operations in the Exploration and Production, Natural Gas Transmission, and Energy Marketing segments. The Exploration and Production segment is engaged in exploration, development and production of domestic oil and natural gas. The Natural Gas Transmission segment is primarily engaged in the interstate transmission of natural gas. The Energy Marketing segment is primarily engaged in the marketing of natural gas. For further description of business segments, see Note 12. For a description of financial instruments, credit risk and contingencies, see Notes 3 and 9. PRINCIPLES OF CONSOLIDATION - The Consolidated Financial Statements include the accounts of Sonat and its subsidiaries. Intercompany transactions and accounts have been eliminated in consolidation. The equity method of accounting is used for investments in affiliates owned 50 percent or less. Certain amounts in the 1994 and 1993 Consolidated Financial Statements have been reclassified to conform with the 1995 presentation. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH EQUIVALENTS - Cash equivalents are typically money-market investments in the form of repurchase agreements, certificates of deposit and time deposits with maturities of three months or less at the time of purchase. These investments are accounted for at cost. INVENTORIES - At December 31, 1995, 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 segment recognizes revenue from natural gas transportation in the period the service is provided. Reserves are provided on revenues collected subject to refund when appropriate. Revenue is recognized in the Energy Marketing segment in the period the transaction occurs. ENVIRONMENTAL EXPENDITURES - The Company provides for environmental liabilities when environmental assessments and/or remediation are probable and such costs to the Company can be reasonably estimated. 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 (see Note 2). 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 3.) Gains and losses are included in deferred liabilities or assets, respectively, until they are recognized in operating revenue when the hedged transaction is recorded. If the derivative instrument ceases to qualify as a hedge for accounting purposes, the associated gain or loss is immediately recognized and included as a component of Other Income (Loss), Net in the Consolidated Statements of Income. Cash flows from operating activities are recognized in the same section of the Consolidated Statements of Cash Flows as the hedged transaction. NEW ACCOUNTING PRONOUNCEMENTS - In 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The Company elected to adopt the Statement's 47 II-22 48 Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 1. BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES (continued) provisions in the fourth quarter of 1995 and recognized a pretax impairment loss of $23 million on certain oil and gas properties in that period. (See Note 6.) In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, Accounting for Stock-Based Compensation, which will become effective for years beginning after December 15, 1995. This Statement will require that financial statements include certain disclosures about stock-based employee compensation and allows, but does not require, a fair value-based method of accounting for such compensation. The Company believes that this fair value-based method of accounting, if adopted, would not have a material effect on the Consolidated Financial Statements. 2. CHANGES IN OPERATIONS Sonat Marketing Company L.P. (Sonat Marketing) was formed in September 1995 and is jointly owned by the Company and Atlanta Gas Light Company (Atlanta). Sonat's wholly owned subsidiary, Sonat Marketing Company, contributed all of its assets and liabilities except $32 million of accounts receivable and Atlanta contributed $32 million in cash to Sonat Marketing in exchange for a 35 percent ownership interest. Atlanta has certain rights to resell to the Company its interest in Sonat Marketing, including a right until August 31, 2000, to receive the greater of fair market value or a formula price. As a result, the pretax gain on the transaction of approximately $23 million has been deferred. Minority interest in earnings of $.9 million is reflected in Other Income in the Consolidated Statements of Income. In June 1995, the Company sold back to Baker Hughes Incorporated for $167 million the four million shares of Baker Hughes convertible preferred stock that the Company received as partial consideration for its sale of Teleco Oilfield Services Inc. to Baker Hughes in 1992. The sale resulted in an $8 million after-tax loss, or $.09 per share. On June 4, 1993, the initial public offering (IPO) of approximately 60 percent of Sonat Offshore Drilling Inc.'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 $340 million. The Company recognized an after-tax gain of $99.7 million, or $1.15 per share, from the combined transactions. In July 1995, the Company made a capital contribution of its remaining shares of Sonat Offshore common stock to Sonat Exploration Company. On July 26, 1995, Sonat Exploration sold in an underwritten public offering these shares of Sonat Offshore common stock at $30.25 per share. The net proceeds after underwriters' discounts and commissions were $326 million, which resulted in a pretax gain of $188 million. The Company realized an after-tax gain of $110 million, or $1.27 per share, on the transaction. 3. FINANCIAL INSTRUMENTS DERIVATIVE FINANCIAL INSTRUMENTS The Company, through its subsidiary Sonat Marketing, uses natural gas futures contracts, options, and oil and gas price swap agreements to reduce the effects of spot-market commodity price volatility on operating results. The Sonat Board of Directors has established policies that prohibit speculation with derivatives and limit swap agreements to counterparties with appropriate credit standings that have been approved by the Sonat Board of Directors. The Sonat Board of Directors has a similar policy regarding financial derivatives and their use to hedge financial market risks. No such hedges were placed during 1995. The derivative instruments used to hedge commodity transactions have historically had high correlation with commodity prices and are expected to continue to do so. The correlation of indices and prices is regularly evaluated to ensure that the instruments continue to be effective hedges. In the event that correlation falls below allowable levels, the gains or losses associated with the hedging instruments are immediately recognized to the extent that correlation was lost. In the fourth quarter of 1995, Sonat Exploration recognized a pretax loss of $8.4 million due to the loss of correlation of the New York Mercantile Exchange (NYMEX) futures market for natural gas with the price for natural gas in certain parts of the country. The maturity of derivative instruments is timed to coincide with the hedged transaction. If the hedged transaction is terminated early or if an anticipated transaction fails to occur, the deferred gain or loss associated with the derivative instrument is recognized in the current period, and the hedge is closed. FUTURES - Natural gas futures contracts and options on natural gas futures contracts are traded on the NYMEX. Contracts are for fixed units of 10,000 MMBtu and are available for up to 36 months in the future. Sonat Marketing uses futures contracts to reduce exposure to price risk when gas is not bought and sold simultaneously. At December 31, 1995, Sonat Marketing had a total of 486 net contracts open (1,210 long and 724 short futures contracts) and a deferred gain of $1.0 million, representing unrealized gains on contracts that 48 II-23 49 Sonat Inc. and Subsidiaries - -------------------------------------------------------------------------------- will mature throughout 1996. Option activity during 1995 was immaterial. NYMEX requires 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. Brokers mark open positions to market daily and require additional assets to be maintained on deposit when significant unrealized losses are experienced or allow deposits to be reduced when unrealized gains are experienced. At December 31, 1995, Sonat Marketing had $11 million on deposit with brokers for margin calls. Sonat Exploration uses futures contracts to lock in the price for a portion of its expected future natural gas production when it believes that prices are at acceptable levels. The majority of the contracts have been sold no more than six months into the future. At December 31, 1995, Sonat Exploration had 3,266 short futures contracts open, all of which are traded by Sonat Marketing on Sonat Exploration's behalf. The related deferred loss is $11 million and relates to unrealized losses on contracts that will mature through October 1996. SWAPS - Price swap agreements call for one party to make monthly payments to (or receive payments from) another party based upon the differential between a fixed and a variable price (fixed-price swap) or two variable prices (basis swap) for a notional volume specified by the contract. Sonat Exploration uses swap agreements to hedge exposure to changes in spot-market prices on the amount of production covered in the agreement. Sonat Marketing uses swaps to lock in a margin on its gas transactions. Sonat Exploration has one swap price agreement for 1996 which hedges approximately 90 percent of its forecasted oil and condensate production from proven and behind pipe reserves and sets a fixed price of $18.00 per barrel. This swap is ineffective during days when the market price falls below $16.39 per barrel. Sonat Marketing had a total of nine fixed-price swap agreements and 40 variable-price swap agreements at December 31, 1995, to exchange payments based on a total notional volume of 74 TBtu of natural gas over periods ranging from one month to seven years. Sonat Marketing also has a gas price collar agreement which provides it a floor price of $1.80 on notional volumes of 52 TBtu and sets a ceiling price of $2.56 on notional volumes of 42 TBtu. In 1995, a gain of $5.2 million was recognized under this agreement. 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, 1995, the market value of the Company's fixed-price favorable swaps was $.3 million. The net position of all fixed-price swaps, both favorable and unfavorable, was $1.3 million unfavorable. The market value of the basis swaps is not material. The market value of the gas price collar agreement is $2.2 million unfavorable. OTHER FINANCIAL INSTRUMENTS The carrying amounts and fair values of the Company's financial instruments, other than derivatives, are as follows:
(In Thousands) - ------------------------------------------------------ Carrying December 31, 1995 Amounts Fair Value - ----------------------------------------------------- Cash and Cash Equivalents $37,289 $37,289 Investment in Debt Securities 38,944 39,098 Gas Supply Realignment Costs 199,073 199,073 Unsecured Notes Payable 218,900 218,900 Long-Term Debt 789,063 862,123 (In Thousands) - ----------------------------------------------------- Carrying December 31, 1994 Amounts Fair Value - ----------------------------------------------------- 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
The following methods and assumptions were used by the Company in estimating its fair value disclosures for balance sheet financial instruments: CASH AND CASH EQUIVALENTS, GAS SUPPLY REALIGNMENT (GSR) COSTS AND UNSECURED NOTES PAYABLE - The carrying amount reported in the Consolidated Balance Sheets approximates its fair value. INVESTMENT SECURITIES - The fair value for equity securities in 1994 was 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 current incremental borrowing rates for similar types of borrowing arrangements. All of the Company's financial instruments are held for purposes other than trading. The Company's financial instruments that are exposed to concentrations of credit risk consist primarily of cash equivalents, investments, accounts receivable and GSR costs which the Company expects to recover from its customers. The Company's cash equivalents and short-term investments represent securities placed with various high invest- 49 II-24 50 Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 3. FINANCIAL INSTRUMENTS (continued) ment 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 segment relate to business conducted with gas distribution companies, municipalities, gas districts, industrial customers and interstate pipeline companies in the Southeast. Accounts receivable of the Energy Marketing segment relate to trading with other marketing companies, industrial end users and local distribution companies, with primary concentration in the Southeastern, Northeastern and Midwestern markets. The Company performs ongoing credit evaluations of its customers' financial condition and, in some circumstances, requires collateral from its customers. Accounts receivable are stated net of valuation allowances of $10.2 million in 1995 and $9.1 million in 1994. 4. INVENTORIES The table below shows the values of various categories of the Company's inventories by segment.
(In Thousands) - -------------------------------------------------- December 31, 1995 1994 - -------------------------------------------------- Exploration and Production: Materials and supplies $ 2,311 $ 3,725 Natural Gas Transmission: Materials and supplies 21,625 21,267 Energy Marketing: Gas stored underground 19 1,695 Other 1 35 - -------------------------------------------------- $23,956 $26,722 ==================================================
5. UNCONSOLIDATED AFFILIATES At December 31, 1995, the Company's investments in unconsolidated affiliates totaled $386.1 million, and the Company's share of underlying equity in net assets of the investees was $449.5 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, 1995, the Company's cumulative equity in earnings of these unconsolidated affiliates was $252.1 million and cumulative dividends received from them totaled $153.4 million. The following table presents the components of equity in earnings of unconsolidated affiliates:
(In Thousands) - ----------------------------------------------------------- Years Ended December 31, 1995 1994 1993 - ----------------------------------------------------------- COMPANY'S SHARE OF REPORTED EARNINGS (LOSSES) Exploration and Production: Sonat/P Anadarko $ - $ - $ 4,163 Other 615 245 502 - ----------------------------------------------------------- 615 245 4,665 - ----------------------------------------------------------- Natural Gas Transmission: Citrus Corp. 26,813 27,554 (8,066) Amortization of Citrus basis difference 1,383 1,383 1,738 Bear Creek Storage 9,596 8,954 8,638 Other (239) (60) - - ----------------------------------------------------------- 37,553 37,831 2,310 - ----------------------------------------------------------- Energy Marketing (5) (151) (121) - ----------------------------------------------------------- Other: Sonat Offshore Drilling 6,734 5,049 4,497 Other 1,361 1,345 1,014 - ----------------------------------------------------------- 8,095 6,394 5,511 - ----------------------------------------------------------- $46,258 $44,319 $12,365 ===========================================================
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. NATURAL GAS TRANSMISSION 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. 50 II-25 51 Sonat Inc. and Subsidiaries - -------------------------------------------------------------------------------- The following is summarized financial information for Citrus:
(In Thousands) - ------------------------------------------------------------------- Years Ended December 31, 1995 1994 1993 - ------------------------------------------------------------------- Revenues $682,387 $477,462 $574,302 Expenses (Income): Natural gas cost 362,635 294,670 405,920 Operating expenses 94,647 71,871 71,754 Depreciation and amortization 81,227 63,737 59,896 Allowance for funds used during construction (41,881) (98,114) (2,712) Interest and other 98,315 55,702 50,935 Income taxes 33,818 34,487 4,641 - ------------------------------------------------------------------- Income (Loss) Reported $ 53,626 $ 55,109 $(16,132) ====================================================================
(In Thousands) - ------------------------------------------------------------------ December 31, 1995 1994 - ------------------------------------------------------------------ ASSETS Current $ 107,093 $ 161,779 Net transmission plant and property 2,401,847 2,235,137 Other 72,272 103,887 - ------------------------------------------------------------------ $2,581,212 $2,500,803 ================================================================== LIABILITIES AND EQUITY Current $ 186,943 $ 126,815 Long-term debt and other liabilities 1,627,567 1,660,912 Stockholders' equity 766,702 713,076 - ------------------------------------------------------------------ $2,581,212 $2,500,803 ==================================================================
Florida Gas' Phase III expansion, which began in 1994, was completed during February 1995, resulting in a significant decrease in allowance for funds used during construction in 1995. The following is summarized financial information for Bear Creek. No provision for income taxes has been included since its income taxes are paid directly by the joint-venture participants.
(In Thousands) - ------------------------------------------------------------ Years Ended December 31, 1995 1994 1993 - ------------------------------------------------------------ Revenues $36,167 $35,655 $36,566 Expenses: Operating expenses 5,408 5,303 6,137 Depreciation 5,399 5,396 5,397 Other expenses, net 6,167 7,048 7,756 - ------------------------------------------------------------ Income Reported $19,193 $17,908 $17,276 ============================================================ (In Thousands) - ------------------------------------------------------------ December 31, 1995 1994 - ------------------------------------------------------------ ASSETS Current $ 7,438 $ 6,968 Net plant and property 159,348 164,257 Other 434 533 - ------------------------------------------------------------ $167,220 $171,758 ============================================================ LIABILITIES AND EQUITY Current $ 8,554 $ 8,356 Long-term debt and other liabilities 62,658 69,587 Participants' equity 96,008 93,815 - ------------------------------------------------------------ $167,220 $171,758 ============================================================
On October 31, 1995, Southern executed a Capital Contribution Agreement in connection with the project financing for Bear Creek from The Prudential Insurance Company of America. In the event that Bear Creek does not refinance the remaining principal, this agreement provides that Southern and its partner will contribute $21 million each to Bear Creek on October 31, 2000, to provide funds to enable Bear Creek to make a principal payment due under the financing. CONTRACT DRILLING AFFILIATE - In June 1993, the Company reduced its ownership of Sonat Offshore, which provides offshore drilling services, from 100 percent to approximately 40 percent and subsequently accounted for its investment on the equity method. In July 1995, the Company disposed of its remaining shares of Sonat Offshore (see Notes 2 and 12). 6. PLANT, PROPERTY AND EQUIPMENT AND DEPRECIATION Plant, property and equipment, by business segment, is shown in the following table:
(In Thousands) - ------------------------------------------------------- December 31, 1995 1994 - ------------------------------------------------------- Exploration and Production $2,436,283 $2,383,355 Natural Gas Transmission 2,315,002 2,241,972 Energy Marketing 6,772 57,439 Other 64,822 58,530 - ------------------------------------------------------- $4,822,879 $4,741,296 =======================================================
Plant, property and equipment includes construction work in progress of $43.6 million and $37.5 million at December 31, 1995 and 1994, respectively. Plant, property and equipment also includes $130.2 million and $141.8 million of gas stored underground at December 31, 1995 and 1994, respectively. 51 II-26 52 Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 6. PLANT, PROPERTY AND EQUIPMENT AND DEPRECIATION (CONTINUED) The accumulated depreciation, depletion and amortization amounts, by business segment, are as follows:
(In Thousands) - ---------------------------------------------------------------------- December 31, 1995 1994 Exploration and Production $1,008,815 $ 991,621 Natural Gas Transmission 1,504,086 1,460,649 Energy Marketing 1,449 20,894 Other 30,970 24,527 - ---------------------------------------------------------------------- $2,545,320 $2,497,691 ======================================================================
The annual depreciation rates or useful productive lives, by business segment, are as follows:
- ------------------------------------------------------------ 1995 1994 1993 - ------------------------------------------------------------ Natural Gas Transmission: Mainline transmission property 2.8% 2.8% 2.8% Gas supply 4.4% 4.4% 5.1% Gas gathering 2.8% 2.8% 6.25% Underground storage facilities 3.3% 3.3% 3.3% Liquefied natural gas facilities 3.2% 3.2% 3.2% Other 3-20 yrs. 5-20 yrs. 5-20 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. Primarily due to downward reserve revisions for certain properties in its year-end reserve report, the Company, in accordance with SFAS No. 121, reevaluated the recorded value of its oil and gas assets. Based on this evaluation, the Company determined that assets with a net book value of $98 million were impaired and therefore adjusted their fair value by an estimate of future net cash flows discounted at a market rate of interest. This $23 million impairment adjustment is included in Depreciation, Depletion and Amortization on the 1995 Consolidated Statement of Income. 7. DEBT AND LINES OF CREDIT LONG-TERM DEBT - Long-term debt consisted of:
(In Thousands) - ------------------------------------------------------------------------------------------- December 31, 1995 1994 - ------------------------------------------------------------------------------------------- Sonat Inc. Revolving Credit Agreement at rates based on prime, international or money-market lending rates expiring on December 31, 1998 $ - $375,000 6-7/8% Notes due June 1, 2005 200,000 - 9-1/2% Notes due August 15, 1999 100,000 100,000 8.65% Notes due through July 29, 1997 18,572 27,857 9.41% Notes due July 29, 1997 35,000 35,000 9% Notes due May 1, 2001 100,000 100,000 8.24% Senior Notes due through December 31, 2000 10,900 13,900 Southern Natural Gas Company 7.85% Notes due January 15, 2002 100,000 100,000 8-5/8% Notes due May 1, 2002 100,000 100,000 8-7/8% Notes due February 15, 2001 100,000 100,000 South Georgia Natural Gas Company 9.85% Term Loan due through December 31, 1997 1,760 2,640 7.80% Term Loan due through December 31, 1997 800 1,200 Southern Energy Company Promissory Note (an effective rate of 6.75% at December 31, 1995) due through April 1999 20,000 25,000 Capital Leases 2,031 2,031 - ------------------------------------------------------------------------------------------- Total Outstanding 789,063 982,628 Less Long-Term Debt Due Within One Year 18,750 19,250 - ------------------------------------------------------------------------------------------- $770,313 $963,378 ===========================================================================================
52 II-27 53 Sonat Inc. and Subsidiaries - -------------------------------------------------------------------------------- Annual maturities of long-term debt at December 31, 1995, are as follows:
(In Thousands) - ---------------------------------------------- Years - ---------------------------------------------- 1996 $ 18,750 1997 53,257 1998 7,213 1999 107,224 2000 2,135 2001-2005 600,484 - ---------------------------------------------- $ 789,063 ==============================================
During 1995, Sonat borrowed $2.9 billion and repaid $3.3 billion under its long-term revolving credit agreement, resulting in no amounts outstanding and the full amount of $500 million available at December 31, 1995. Borrowings are available through December 31, 1998. On June 12, 1995, Sonat issued $200 million of 67/8 Percent Notes due June 1, 2005. The proceeds from the sale of the Notes were used to repay floating rate debt. UNSECURED NOTES - Loans outstanding under all short-term credit facilities are for a duration of less than three months. On July 30, 1995, Sonat's $300 million 364-day revolving credit agreement with several banks expired in accordance with the terms of the agreement and was not renewed. At December 31, 1994, $100 million was outstanding at a rate of 6.33 percent under this agreement. Sonat had $210 million and $100 million in commercial paper outstanding at an average rate of 6.12 percent and 6.30 percent at December 31, 1995 and 1994, respectively. On May 29, 1995, 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 28, 1996, 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, 1995, $8.9 million was outstanding under Sonat's agreement at a rate of 6.68 percent and no amounts were outstanding under Southern's agreement. At December 31, 1994, no amounts were outstanding under either agreement. EXTRAORDINARY ITEM - On March 15, 1993, Sonat redeemed all of its outstanding 71/4 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-tax of $3.8 million, or $.04 per share, on the redemption. 8. INCOME TAXES An analysis of the Company's income tax expense (benefit) is as follows:
(In Thousands) - ---------------------------------------------------------------------------- Years Ended December 31, 1995 1994 1993 - ---------------------------------------------------------------------------- Current: Federal $71,827 $ 4,619 $ 46,230 Foreign 44 - 3,305 State (2,043) 10,930 6,446 - ---------------------------------------------------------------------------- 69,828 15,549 55,981 - ---------------------------------------------------------------------------- Deferred: Federal 21,936 13,188 40,435 Foreign - - 649 State 3,229 (12,925) 5,594 - ---------------------------------------------------------------------------- 25,165 263 46,678 - ---------------------------------------------------------------------------- Income Tax Expense $94,993 $15,812 $102,659 ============================================================================
Net deferred tax liabilities are comprised of the following: (In Thousands) - ----------------------------------------------------------------------------------------------- December 31, 1995 1994 - ----------------------------------------------------------------------------------------------- Deferred Tax Liabilities: Depreciation $294,789 $279,619 GSR and other transition costs 26,052 3,067 Investments 4,003 58,841 Inventories 11,572 11,571 Other 2,261 2,686 - ----------------------------------------------------------------------------------------------- Total deferred tax liabilities 338,677 355,784 - ----------------------------------------------------------------------------------------------- Deferred Tax Assets: Revenue reserves 74,876 76,829 Non-conventional fuel tax credits 5,620 32,334 Employee benefits 11,084 11,880 Other accounting accruals 20,763 24,191 Interest on income taxes 3,700 6,047 Other 9,512 16,546 - ----------------------------------------------------------------------------------------------- Total deferred tax assets 125,555 167,827 - ----------------------------------------------------------------------------------------------- Net Deferred Tax Liabilities $213,122 $187,957 ===============================================================================================
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. 53 II-28 54 Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 8. INCOME TAXES (continued) Consolidated income tax expense is different from the amount computed by applying the U.S. federal income tax rate to income before income tax. The reasons for this difference are as follows:
(In Thousands) - ------------------------------------------------------------------------------------------- Years Ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------------------------- Income Tax Expense at Statutory Federal Income Tax Rates $100,758 $ 55,027 $128,705 Increases (Decreases) Resulting From: State income taxes, net of federal income tax benefit 771 (3,634) 4,899 Non-conventional fuel tax credits (11,380) (14,217) (19,242) Refunds and adjustment of accrued tax position 14,639 (7,881) (9,319) Dividend exclusion (11,248) (12,440) (2,412) Effect of change in statutory rate on deferred taxes - - 1,342 Other 1,453 (1,043) (1,314) - ------------------------------------------------------------------------------------------- Income Tax Expense $94,993 $ 15,812 $102,659 ===========================================================================================
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. CUSTOMER SETTLEMENT - In an order issued on September 29, 1995 (the Settlement Order), the FERC approved a comprehensive settlement (the Customer Settlement) that Southern had filed on March 15, 1995. Several parties that opposed the Customer Settlement have filed with the FERC requests for rehearing of the Settlement Order. The FERC has not yet ruled on those rehearing petitions. The Customer Settlement resolves as to the parties supporting the settlement, all of Southern's pending rate proceedings and proceedings to recover GSR and other transition costs associated with the implementation of Order No. 636 (described below). The Customer Settlement was supported initially by Southern, the FERC staff, customers representing approximately 95 percent of the firm transportation capacity on Southern's system, and other parties. On November 20, 1995, Southern and one of the initial contesting parties to the Customer Settlement filed a settlement with the FERC pursuant to which that party became a supporting party to the Customer Settlement. The November 20 settlement, which was not opposed, was approved by the FERC on February 2, 1996. With that addition, the Customer Settlement is now supported by customers representing approximately 97 percent of the firm transportation capacity on Southern's system. The Customer Settlement resolves, as to the supporting parties, all issues in Southern's current and prior rate cases. These four major rate cases cover consecutive periods beginning September 1, 1989, January 1, 1991, September 1, 1992 and May 1, 1993, respectively. Southern will credit in the aggregate the full amount of Southern's rate reserves as of February 28, 1995 (approximately $155 million), less certain amounts withheld for potential rate refunds to contesting parties, to reduce the GSR costs borne by Southern's customers. Southern implemented reduced settlement rates for parties that supported the Customer Settlement effective March 1, 1995. The Customer Settlement provides that, except in certain limited circumstances, Southern will not file a general rate case to be effective prior to March 1, 1998. Southern's GSR costs are discussed below (see Order No. 636). The Settlement Order also included authorizations for Southern to construct approximately $27 million of additional facilities to improve its existing level of transportation service and to expand service to Atlanta Gas Light Company and South Carolina Pipeline Corporation and its affiliate under firm contracts with terms of at least three years. In addition to approving the Customer Settlement, the Settlement Order decided on the merits all cost of service (including rate of return and the recovery of costs associated with Southern's Mississippi Canyon pipeline), cost allocation, and rate design issues for Southern's current rate case for the period beginning May 1, 1993. These rulings included a reversal of a 1994 administrative law judge determination that Southern could not include in its rates any portion of the approximately $45 million cost of a pipeline that Southern constructed in 1992 to connect gas reserves developed by Exxon Corporation in the Mississippi Canyon and Ewing Bank Area Blocks, offshore Louisiana. The Settlement Order 54 II-29 55 Sonat Inc. and Subsidiaries - -------------------------------------------------------------------------------- also applied the merits determination concerning the recovery of Southern's Mississippi Canyon costs to the rate period beginning September 1, 1992. These determinations form the basis of FERC's approval of Southern's current rates to the contesting parties and refunds due them with respect to certain past rate periods. The contesting parties' requests for rehearing of the Settlement Order included challenges to many of the substantive rate determinations in the Settlement Order, such as the cost recovery of Southern's Mississippi Canyon pipeline, Southern's rate of return on equity, IT rate design, the appropriate IT and FT billing units used for designing rates, and the allocation of storage costs. Many of the other issues in the rate cases beginning September 1, 1989, January 1, 1991, and September 1, 1992, have previously been settled with the contesting parties. Thus, if the Customer Settlement and the rates determinations made in the Settlement Order are upheld on rehearing, there remains to be litigated, as to the contesting parties, the GSR cost recovery discussed below and only certain cost allocation and rate design issues, which would not be material even if such rate issues are determined adversely to Southern. The Customer Settlement continues to be contested by certain interruptible customers and firm customers representing approximately 3 percent of Southern's firm transportation capacity. The Settlement Order also permits the contesting parties to litigate the issue of the recovery of Southern's GSR and other Order No. 636 transition costs with the results to be applied only to such parties. The Settlement Order decided the level of Southern's rates to contesting parties for the period beginning March 1, 1995, and ruled on numerous other rate issues for the pre-March 1, 1995, periods. In the event that the FERC on rehearing does not uphold the Customer Settlement and reverses or materially modifies its prior determinations of the substantive rate issues decided in the Settlement Order, then all parties would be permitted to challenge Southern's recovery of GSR and other transition costs and Southern's current rates would be affected by such ruling. In such event, Southern is unable to predict the outcome of any such transition costs recovery litigation or any modification of the FERC's prior rate determination, but the effect in the aggregate could be material. If the FERC denies contesting parties' rehearing requests, the Settlement Order will be subject to appeal to the courts. Although there can be no assurances, the Company believes that rehearing of the Settlement Order, including the challenges to the rate determinations in that Order, should be denied by the FERC and that the Settlement Order should be upheld on any judicial appeal. In the fourth quarter of 1994, the Company recognized a $29 million charge associated with the Customer Settlement, which included anticipated amounts for costs that Southern would not recover from its customers, and also a $28 million charge for a provision relating to regulatory assets that may not be recovered as a result of the Customer Settlement, including amounts for a corporate restructuring undertaken in 1994. As discussed below, Southern also incurred an additional $11 million charge in the fourth quarter of 1995 related to GSR costs not expected to be recovered. SEA ROBIN - In January 1995, Sea Robin Pipeline Company, a subsidiary of Southern, filed with the FERC a petition for a declaratory ruling that the Sea Robin pipeline system is engaged in the gathering of natural gas and is, therefore, exempt from FERC regulation under the Natural Gas Act. In June 1995, the FERC denied Sea Robin's petition on the basis that the primary function of the Sea Robin system is the interstate transportation of gas. Sea Robin's request for rehearing of that ruling is pending before the FERC. Following the filing of Sea Robin's petition for a gathering exemption, several of the shippers on the Sea Robin system filed with the FERC in February 1995 a complaint against Sea Robin under Section 5 of the Natural Gas Act claiming that Sea Robin's rates are unjust and unreasonable. In its answer, Sea Robin asked the FERC to dismiss the complaint or to find that its rates continue to be just and reasonable based on the data it presented. Sea Robin is unable to predict the outcome of this proceeding, but any reduction in Sea Robin's rates as a result of this complaint could be implemented only on a prospective basis. GAS PURCHASE CONTRACTS - Southern currently is incurring no take-or-pay liabilities under its gas purchase contracts. Southern regularly evaluates its position relative to gas purchase contract matters, including the likelihood of loss from asserted or unasserted take-or-pay claims or above-market prices. When a loss is probable and the amount can be reasonably estimated, it is accrued. 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 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 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 amend- 55 II-30 56 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 9. COMMITMENTS AND CONTINGENCIES (continued) ments or terminations of the contracts. Various parties have appealed the Order to the Circuit Courts of Appeal. On February 17, 1995, Southern reached an agreement to resolve its remaining high-cost supply contracts with 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 became effective in October 1995 upon the Customer Settlement becoming effective. Additionally, Southern is a party to an agreement under which another high-cost contract price is reduced in exchange for monthly payments. Southern entered into a payment agreement on October 20, 1995, with a financial institution, pursuant to which Southern made a one-time payment of $42.3 million to the institution, which agreed to make these monthly payments. Including the above, as of December 31, 1995, Southern had either paid or accrued $263 million in GSR costs (including interest) either to reduce significantly the price payable under or to terminate a number of gas supply contracts providing for payment of above-market prices. In addition to its GSR costs relating to termination or amendment of its remaining gas purchase 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, 1995, Southern had incurred $83 million in price differential costs. As described above, Southern's Customer Settlement resolves 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. Additionally, Southern will absorb an agreed-upon portion of its total GSR costs, an estimate of which was reflected in the provision for the Customer Settlement made in the fourth quarter of 1994. In the fourth quarter of 1995, Southern expensed GSR costs not expected to be recovered from customers based on its estimate of total GSR costs at December 31, 1995. The amount of GSR costs that Southern 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, contract renegotiations that have occurred, and price differential costs actually incurred, the amount of GSR costs was estimated at December 31, 1995, to be approximately $366 million on a present-value basis. BRIGGS V. SONAT EXPLORATION - On October 9, 1995, a petition was filed against Sonat Exploration and its wholly owned subsidiary, Stateline Gas Gathering Company, by nine royalty interest owners (Plaintiffs) in a lawsuit styled A. L. Briggs, et al. v. Sonat Exploration Company, et al., in state court in Panola County, Texas. The petition challenges the appropriateness of certain post-production charges (e.g., gathering, transportation, and compression) that had been deducted from Plaintiffs' proportionate share of the amount Sonat Exploration has realized upon the sale of gas attributable to their royalty interest and alleges numerous violations of law. Relief sought by Plaintiffs includes actual damages, damages under the Deceptive Trade Practices Act, exemplary damages, declaratory relief, an accounting, attorneys' fees, and prejudgment interest. The petition also requests the court to certify a nationwide class of plaintiffs. In an amended complaint Plaintiffs have also asserted that certain marketing fees deducted by Sonat Marketing in calculating the amount it paid Sonat Exploration for gas volumes purchased by Sonat Marketing since approximately July 1, 1992, are not authorized by law or the applicable leases, are not necessary, and have not been disclosed in accordance with law; and that Sonat Exploration has breached its contractual duties to royalty owners to obtain the highest sales price and to account to the royalty owners for their share of the proceeds attributable to the sale of Sonat Exploration's gas. Plaintiffs demanded that Sonat Exploration pay the proper amounts allegedly due them according to their respective leases, overriding royalty assignments, division orders, and operating agreements. Sonat Exploration intends vigorously to defend the litigation and to resist Plaintiffs' demands. Management is unable to predict the outcome of this litigation or the demands made by Plaintiffs or to estimate the amount or range of potential loss in the event of an unfavorable outcome. FERC AUDIT OF FLORIDA GAS - The FERC's Division of Audits has completed a compliance review of Florida Gas' books and records for the period January 1, 1991, through December 31, 1994. Among other things, the FERC auditors have proposed adjustments to the capitalization by Florida Gas of AFUDC during construction of its Phase III expansion facilities that, if made, would result in a charge to earnings by Florida Gas of approximately $44 million after-tax. Management of Florida Gas has advised the Company that it believes that its method of capitalizing AFUDC on Phase III was proper; however, the final outcome of this matter cannot be determined. 56 II-31 57 Sonat Inc. and Subsidiaries - -------------------------------------------------------------------------------- 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
(In Thousands) - ---------------------------------------------------- Years Ended December 31, 1995 1994 1993 - ---------------------------------------------------- Non-Affiliated Operating Leases $18,152 $18,709 $16,892 Affiliated Operating Leases 3,635 3,669 3,589 - ---------------------------------------------------- $21,787 $22,378 $20,481 ====================================================
At December 31, 1995, future minimum payments for non-cancelable operating leases for the years 1996 through 2000 are $11 million or less per year. Future minimum rentals to be received under subleases for the years 1996 through 2000 are approximately $1 million per year. 10. CAPITAL STOCK 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 1995 1994 - --------------------------------------------------------- Price Range High-Low First $30 3/8 - 26 $33 - 26 Second 33 - 29 3/4 32 1/4 - 26 7/8 Third 33 1/2 - 29 1/4 34 7/8 - 30 1/4 Fourth 36 1/4 - 27 3/4 33 1/2 - 26 3/8 ========================================================= Dividends Paid First $ .27 $ .27 Second .27 .27 Third .27 .27 Fourth .27 .27 - --------------------------------------------------------- $ 1.08 $ 1.08 ========================================================= Shareholders of Record at Year-End 12,928 12,697 =========================================================
The Company had no restrictions on the payment of dividends at December 31, 1995. The Company has a Stockholder Rights Plan (the 1985 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 were 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, 1995, 95,350,681 shares of common stock were reserved for issuance under this plan. The Company has adopted a Stockholder Rights Plan under an agreement dated January 8, 1996, which has the same purposes as the 1985 Plan. The new plan provides for the issuance of one right with respect to each outstanding share of common stock upon the expiration of the rights outstanding under the 1985 Plan. The rights issued under the new plan are redeemable at any time by the Company before their expiration on February 3, 2006, unless certain triggering events have occurred. The rights outstanding under the plan are excercisable for one one-hundreth of a share of Series A Participating Preference Stock, par value $1.00, with each share having substantially the rights and preferences of 100 shares of common stock. 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. In November 1995, the Company issued, in tandem with its regular stock options, SARs that are exercisable only in the event of a change in control. No other SARs have been issued since 1990. At December 31, 1995, 340,234 SARs relating to the earlier periods were outstanding. The Company issued 35,700 shares of restricted stock to employees during 1995. 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, 1995, 71,698 of the 354,700 cumulative restricted shares issued have vested. A new plan was authorized during 1995 which made an additional four million shares available for issuance. 57 II-32 58 Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 10. CAPITAL STOCK (continued) The following table summarizes option activities in the Executive Award Plan: Number of Shares Under Option
(In Thousands) - -------------------------------------------------------------------------------------------- Years Ended December 31, 1995 1994 1993 - -------------------------------------------------------------------------------------------- Beginning of Year 4,358,820 3,518,595 3,889,154 Granted 682,300 990,700 989,700 Exercised (450,020) (122,842) (1,332,661) Forfeited (12,500) (27,633) (27,598) - -------------------------------------------------------------------------------------------- End of Year 4,578,600 4,358,820 3,518,595 ============================================================================================ Exercisable 2,566,520 2,637,880 2,245,556 ============================================================================================ Outstanding Option Prices $12.0625-32.25 $12.0625-30.00 $12.0625-30.00 ============================================================================================ Exercised Option Prices $12.0625-30.00 $12.0625-25.75 $12.0625-25.75 ============================================================================================ Shares Authorized for Future Grants at 4,230,800 946,023 1,999,256 Year-End ============================================================================================
Stock-based employee compensation decreased pretax income by $7.9 million in 1995, increased pretax income by $1.2 million in 1994 and decreased pretax income by $12.6 million in 1993. At December 31, 1995 and 1994, 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 the Company. Full rights vest over a maximum of five years. The Company issued 967 shares during 1995. At December 31, 1995, 23,293 of the 37,460 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. In October 1995, the Board of Directors of the Company extended the Company's stock repurchase program to April 30, 1997, and authorized the purchase of an additional one million shares of 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, 1995, 1,585,000 shares of common stock had been purchased and 508,000 shares had been reissued under this program. 11. RETIREMENT PLANS AND OTHER POSTEMPLOYMENT 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. The Company determines the amount of funding to the Retirement Plan on a year-to-year basis, with amounts consistent with minimum and maximum funding requirements established by various governmental bodies. Amounts are being placed in a trust established to provide benefits under the Supplemental Plan. However, this trust is not subject to any funding requirements. At December 31, 1995, this trust had assets with a fair market value of $35 million available to pay benefits. These assets are not considered plan assets under SFAS No. 87, Employers' Accounting for Pensions. The Company's net periodic pension (income) cost consists of the following components:
(In Thousands) - ------------------------------------------------------------ Years Ended December 31, 1995 1994 1993 - ------------------------------------------------------------ Service Cost - Benefits Earned during the Period $ 5,756 $ 6,256 $ 9,722 Interest Cost on Projected Benefit Obligation 25,822 24,407 25,246 (Gain) Loss on Assets (97,687) 11,982 (60,558) Net Amortization and Deferral 61,307 (49,397) 29,607 - ------------------------------------------------------------ $ (4,802) $ (6,752) $ 4,017 ============================================================
58 II-33 59 Sonat Inc. and Subsidiaries - -------------------------------------------------------------------------------- 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:
(In Thousands) - ------------------------------------------------------------------------------------------------------------------------- Plan with Obligations Plan with Obligations Less than Assets(1) in Excess of Assets(2) December 31, December 31, - ------------------------------------------------------------------------------------------------------------------------- 1995 1994 1995 1994 Actuarial Present Value of Benefit Obligations: Vested benefit obligations $282,993 $225,115 $ 25,552 $ 21,306 Non-vested benefit obligations 8,053 8,195 514 314 - ------------------------------------------------------------------------------------------------------------------------- Accumulated benefit obligations 291,046 233,310 26,066 21,620 Effect of projected future salary increases 54,911 39,102 15,176 9,470 - ------------------------------------------------------------------------------------------------------------------------- Projected benefit obligations 345,957 272,412 41,242 31,090 Plan Assets at Fair Value(3) 433,574 355,106 - - - ------------------------------------------------------------------------------------------------------------------------- Projected Benefit Obligations (in Excess of) or Less than Plan Assets 87,617 82,694 (41,242) (31,090) Unrecognized Net (Assets) or Obligations at Transition(4) (12,956) (14,686) 307 358 Unrecognized Net (Gain) Loss (68,075) (70,182) 12,788 5,286 Unrecognized Prior Service Cost 5,320 5,936 3,941 4,203 Net Unamortized Deferred Charge from Early Retirement Termination Benefits(5) 7,851 9,022 1,207 2,523 Adjustment Required to Recognize Minimum Pension Liability - - (1,861) - - ------------------------------------------------------------------------------------------------------------------------- Net Pension Asset (Liability) Recognized in the Consolidated Balance Sheets $ 19,757 $ 12,784 $(24,860) $(18,720) =========================================================================================================================
(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. The provisions of SFAS No. 87, require recognition in the balance sheet of an additional minimum liability and related intangible asset for pension plans with accumulated benefits in excess of plan assets. At December 31, 1995, an additional liability and intangible asset of $1.9 million is reflected in the Company's Consolidated Balance Sheet. The assumed rates used to measure the projected benefit obligations and the expected earnings of plan assets are:
- ------------------------------------------ Years Ended December 31, 1995 1994 1993 - ------------------------------------------ Weighted Average Discount Rate 7.0% 8.5% 7.0% Long-Term Rate of Return 9.5% 8.5% 9.0% Increase in Future Compensation Levels (Composite Rate): Retirement and Supplemental Plans 5.5% 5.5% 6.0% ==========================================
OTHER POSTEMPLOYMENT BENEFITS - The Company has plans that provide for postretirement health care and life insurance benefits to substantially all of its employees when they retire. The Company adopted 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 annual net periodic cost for postretirement health care and life insurance benefits consists of the following components:
(In Thousands) - --------------------------------------------------- Years Ended December 31, 1995 1994 1993 - --------------------------------------------------- Service Cost $ 1,672 $ 1,843 $ 2,109 Interest Cost 7,409 7,051 7,567 Return on Plan Assets (3,398) (428) (219) Net Amortization and Deferral 5,546 3,200 3,947 - --------------------------------------------------- $11,229 $11,666 $13,404 ===================================================
59 II-34 60 Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 11. RETIREMENT PLANS AND OTHER POSTEMPLOYMENT BENEFITS (continued) The Company funds postretirement health care benefits for employees of its regulated subsidiaries in an amount generally equal to the subsidiaries' annual SFAS No. 106 expense. The regulated subsidiaries currently recover their portion of postretirement expense through rates. The Company also funds its Retiree Life Insurance Plan for all its subsidiaries with the amount of funding determined on a year-to-year basis with the objective of having assets equal plan liabilities. The following table sets forth the funded status at December 31, 1995 and 1994, for the Company's postretirement health care and life insurance plans:
(In Thousands) - ------------------------------------------------------------ December 31, 1995 1994 - ------------------------------------------------------------ Accumulated Postretirement Benefit Obligation: Retirees $ 68,353 $ 61,226 Fully eligible active plan participants 5,446 9,055 Other active plan participants 23,503 22,711 - ------------------------------------------------------------ 97,302 92,992 Plan Assets at Fair Value(1) 24,352 17,030 - ------------------------------------------------------------ Accumulated Postretirement Benefit Obligation in Excess of Plan Assets (72,950) (75,962) Unrecognized Transition Obligation 61,140 65,142 Unrecognized Net Gain (7,465) (6,902) Net Unamortized Deferred Charge from Early Retirement Termination Benefits 8,299 10,232 - ------------------------------------------------------------ Accrued Postretirement Benefit Cost $(10,976) $ (7,490) ============================================================
(1) Retiree Medical Plan assets are comprised of equity securities, municipal tax exempt bonds and short-term investment funds. Retiree Life Insurance Plan assets are held in a life insurance reserve account, which consists primarily of fixed income securities. The assumed rates used to measure the projected benefit obligation and the expected earnings of plan assets are:
- ------------------------------------------- Years Ended December 31, 1995 1994 1993 - ------------------------------------------- Discount Rate 7.0% 8.5% 7.0% Long-Term Rate of Return: Medical assets 5.5% 5.5% 5.5% Life insurance assets 7.5% 8.5% 7.0% ===========================================
The rate of increase in the per capita costs of covered health care benefits is assumed to be 9 percent in 1996, decreasing gradually to 5 percent by the year 2000. Increasing the assumed health care cost trend rate by one percentage point would increase the accumulated postretirement benefit obligation as of December 31, 1995, by approximately $13.1 million and increase the service cost and interest cost components of the net periodic postretirement benefit cost by approximately $1.5 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 years ended December 31, 1995 and 1994, $1.0 million and $1.3 million of expense, respectively, 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 and involuntary terminations involving 340 employees. The total cost of the program in 1994 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. Essentially all of the terminations, voluntary and involuntary, were completed by the end of January 1995. 12. BUSINESS SEGMENT ANALYSIS The Company's consolidated financial statements reflect operations in three segments: Exploration and Production, Natural Gas Transmission and Energy Marketing. The Company is engaged in the exploration for and the acquisition, development and production of oil and natural gas through its Exploration and Production segment. The oil and gas properties of the Exploration and Production segment are located principally onshore in the Southern coastal states, in various states in the Southwest and Midwest, and in federal waters offshore Louisiana and Texas. It derives the majority of its revenues through sales to Sonat Marketing (included in the Energy Marketing segment). The principal business of the Natural Gas Transmission segment is the transmission of natural gas in interstate commerce. Its transmission systems are located in the Southeastern United States. It transports gas to gas distributing companies, municipalities and gas districts, connecting interstate pipeline companies and industrial end-users. The principal industries served directly by the natural gas transmission's pipeline system and indirectly through its resale customers' distribution systems include the chemical, pulp and 60 II-35 61 Sonat Inc. and Subsidiaries - -------------------------------------------------------------------------------- paper, textile, primary metals, stone, clay and glass industries. The Energy Marketing segment is engaged in natural gas and electric power marketing for industrial and commercial users, gas distribution companies, gas producers and gas pipelines throughout the Gulf Coast, Southeastern, Midwestern and Northeastern United States. 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 5.) Sonat Offshore's results prior to June 4, 1993, are reported in the Other Business segment. The Company's remaining shares of Sonat Offshore's common stock were sold in July 1995. The Company's share of Sonat Offshore's results from June 4, 1993, to July 26, 1995, is shown as equity in earnings of Sonat Offshore. The Company's only foreign operations were conducted by Sonat Offshore and were immaterial to the Company's results in 1993. The Company's results of operations, revenues from major customers, capital expenditures and assets by business segment are shown in the following tables. Intersegment sales are primarily gas sales by the Exploration and Production segment and are priced at market rates. 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
(In Thousands) - --------------------------------------------------------------------------------------------------- Years Ended December 31, 1995 1994 1993 - --------------------------------------------------------------------------------------------------- Revenues: Exploration and production $ 403,488 $ 412,750 $ 353,018 Natural gas transmission 661,597 727,179 832,649 Energy marketing 1,249,903 942,208 635,292 Other 37,122 7,585 113,902 Intersegment revenue (361,969) (353,755) (193,714) - --------------------------------------------------------------------------------------------------- $1,990,141 $1,735,967 $1,741,147 ================================================================================================== Depreciation, Depletion and Amortization: Exploration and production $ 239,167 $ 206,842 $ 149,179 Natural gas transmission 52,274 46,576 63,611 Energy marketing 955 2,954 2,837 Other, including depreciation of corporate equipment 6,318 1,387 10,362 - --------------------------------------------------------------------------------------------------- $ 298,714 $ 257,759 $ 225,989 ================================================================================================== Operating Profit: Exploration and production $ 22,967 $ 64,001 $ 86,474 Natural gas transmission 158,329 88,436 144,447 Energy marketing 6,510 11,901 (986) Other 2,317 2,852 4,477 - --------------------------------------------------------------------------------------------------- Operating profit 190,123 167,190 234,412 Corporate Expenses, Net (1,190) 2,249 (1,497) - --------------------------------------------------------------------------------------------------- Operating income 188,933 169,439 232,915 Equity in Earnings (Losses) of Unconsolidated Affiliates: Exploration and production 615 245 4,665 Natural gas transmission 37,553 37,831 2,310 Energy marketing (5) (151) (121) Other 8,095 6,394 5,511 Other Income, Net 142,534 16,348 169,720 Interest Expense, Net (89,844) (72,887) (47,272) - --------------------------------------------------------------------------------------------------- Income before Extraordinary Item and Income Taxes $ 287,881 $ 157,219 $ 367,728 ===================================================================================================
61 II-36 62 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 12. BUSINESS SEGMENT ANALYSIS (CONTINUED) Revenues from Major Customers
(In Thousands) - --------------------------------------------------------------- Years Ended December 31, 1995 1994 1993 - --------------------------------------------------------------- Atlanta Gas Light: Natural gas transmission $190,209 $250,932 $329,040 Energy marketing 38,342 39,926 35,177 - --------------------------------------------------------------- $228,551 $290,858 $364,217 =============================================================== Alabama Gas Corporation: Natural gas transmission $ 91,635 $118,975 $147,210 Energy marketing 50,134 59,556 57,348 - --------------------------------------------------------------- $141,769 $178,531 $204,558 ===============================================================
Both of the major customers or their affiliates participate with the Company in certain joint venture operations. 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
(In Thousands) - ------------------------------------------------------ Years Ended December 31, 1995 1994 1993 - ------------------------------------------------------ Consolidated: Exploration and production $416,158 $389,766 $430,852 Natural gas transmission 62,720 51,206 59,907 Energy marketing 2,758 3,200 1,105 Other 5,928 4,142 24,602 - ------------------------------------------------------ 487,564 448,314 516,466 - ------------------------------------------------------ Unconsolidated Affiliates (Company's Portion): Exploration and production 723 101 10,559 Natural gas transmission 100,489 398,389 18,516 Other 525 452 3,080 - ------------------------------------------------------ 101,737 398,942 32,155 - ------------------------------------------------------ $589,301 $847,256 $548,621 ======================================================
Identifiable assets by business segment are those assets that are used in the Company's operations in each business. Corporate assets are typically investments, cash and equipment. Assets by Business Segment
(In Thousands) - -------------------------------------------------------- December 31, 1995 1994 1993 - -------------------------------------------------------- Identifiable Assets: Exploration and production $1,592,399 $1,488,054 $1,308,189 Natural gas transmission 1,285,404 1,155,242 1,216,050 Energy marketing 261,751 189,651 184,746 Other 37,850 37,531 42,640 Adjustments and eliminations (103,579) (70,444) (86,159) - -------------------------------------------------------- 3,073,825 2,800,034 2,665,466 - -------------------------------------------------------- Investments in Unconsolidated Affiliates: Exploration and production 4,876 6,281 6,345 Natural gas transmission 368,527 338,608 149,276 Energy marketing 490 932 793 Other 12,188 140,508 138,807 - -------------------------------------------------------- 386,081 486,329 295,221 Corporate Assets 51,535 244,323 253,310 - -------------------------------------------------------- Total Assets $3,511,441 $3,530,686 $3,213,997 ========================================================
13. Oil and Gas Operations (Unaudited) At December 31, 1995, 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 Insurance Company whereby the partnership was subsequently dissolved. (See Note 5.) 62 II-37 63 Sonat Inc. and Subsidiaries - -------------------------------------------------------------------------------- Capitalized costs relating to oil and gas producing activities and related accumulated depreciation, depletion and amortization were as follows: Capitalized Costs
(In Thousands) - ------------------------------------------------------- December 31, 1995 1994 - ------------------------------------------------------- Oil and Gas Properties: Proved properties $2,336,264 $2,258,237 Unproved properties 100,019 125,118 - ------------------------------------------------------- 2,436,283 2,383,355 Less Accumulated Depreciation, Depletion and Amortization 1,008,815 991,621 - ------------------------------------------------------- $1,427,468 $1,391,734 =======================================================
Costs incurred in oil and gas producing activities were as follows: Costs Incurred
(In Thousands) - ------------------------------------------------------ Years Ended December 31, 1995 1994 1993 - ------------------------------------------------------ Property Acquisition Costs: Proved properties $208,866 $142,294 $211,933 Unproved properties 14,767 28,953 62,617 Exploration Costs 12,138 11,284 8,265 Development Costs 183,056 215,205 151,875 - ------------------------------------------------------ Total Costs $418,827 $397,736 $434,690 ======================================================= Sonat's Share of Sonat/P's Costs of Property Acquisition, Exploration, and Development $ - $ - $ 10,432 =======================================================
Net quantities of proved developed and undeveloped reserves of natural gas and crude oil, including condensate and natural gas liquids, and changes in such quantities were as follows: Reserve Data
- ---------------------------------------------------------------------------------------------------------- Liquids - Gas - Liquids - Gas - Liquids - Gas - Thousand Billion Thousand Billion Thousand Billion Bbls. Cu. Ft. Bbls. Cu. Ft. Bbls. Cu. Ft. - ---------------------------------------------------------------------------------------------------------- December 31, 1995 1994 1993 - --------------------------------------------------------------------------------------------------------- Proved (Developed and Undeveloped) Reserves, Net: Beginning of year 31,627 1,367.3 27,094 1,186.6 19,604 974.9 Revisions of previous estimates 998 48.4 (2,891) 31.3 2,410 (6.2) Transfer of Sonat/P reserves - - - - 426 39.5 Extensions, discoveries and other additions 6,774 173.8 4,876 107.2 2,470 68.7 Purchases of reserves in place 16,954 248.1 8,059 229.9 6,396 274.7 Sales of reserves in place (6,656) (149.0) (129) (6.0) (468) (18.9) Production (5,469) (183.1) (5,382) (181.7) (3,744) (146.1) - --------------------------------------------------------------------------------------------------------- End of Year 44,228 1,505.5 31,627 1,367.3 27,094 1,186.6 ========================================================================================================= Proved Developed Reserves: Beginning of year 22,269 1,001.0 19,776 899.6 15,304 696.5 End of year 25,613 1,060.1 22,269 1,001.0 19,776 899.6 ========================================================================================================= Sonat's Proportional Interest in: Production of Sonat/P - - - - 34 4.2 =========================================================================================================
63 II-38 64 Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 13. OIL AND GAS OPERATIONS (Unaudited) (continued) The significant changes to reserves, other than acquisitions, dispositions or production, are due to reservoir performance in existing fields, drilling of additional wells in existing fields and development of new fields in early 1995. 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, 1995. Results of operations from producing activities by fiscal year were as follows: RESULTS OF OPERATIONS
(In Thousands) - -------------------------------------------------------------------------- Years Ended December 31, 1995 1994 1993 - -------------------------------------------------------------------------- Net Revenues: Sales $175,032 $148,530 $200,143 Affiliated sales 228,456 264,220 151,987 - -------------------------------------------------------------------------- Total 403,488 412,750 352,130 Production Costs (81,046) (81,067) (64,548) Exploration Expenses (9,065) (12,181) (6,678) Depreciation, Depletion and Amortization (239,167) (206,842) (149,179) - -------------------------------------------------------------------------- 74,210 112,660 131,725 Income Tax Expense (14,730) (25,031) (27,066) - -------------------------------------------------------------------------- Results of Operations from Producing Activities (Excluding Corporate Overhead and Interest Costs) $ 59,480 $ 87,629 $104,659 ========================================================================== Sonat's Share of Sonat/P's Results of Operations for Producing Activities (before Tax) $ - $ - $ 4,900 ==========================================================================
The standarized measure of discounted future net cash flows relating to proved oil and gas reserves follows: STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
(In Thousands) - ------------------------------------------------------------------------ December 31, 1995 1994 1993 - ------------------------------------------------------------------------ Future Cash Inflows $3,562,789 $2,835,781 $3,051,484 Future Production and Development Costs (1,286,074) (1,200,581) (1,044,410) Future Income Tax Expenses (354,041) (83,931) (236,632) - ------------------------------------------------------------------------ Future Net Cash Flows 1,922,674 1,551,269 1,770,442 10% Annual Discount for Estimated Timing of Cash Flows (611,206) (465,469) (477,824) - ------------------------------------------------------------------------ Standardized Measure of Discounted Future Net Cash Flows $1,311,468 $1,085,800 $1,292,618 ==========================================================================
For the calculations in the preceding table, estimated future cash inflows from estimated future production of proved reserves were computed using realized oil and gas prices for the month of December of each respective year. 64 II-39 65 SONAT INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- 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, 1995 1994 1993 - -------------------------------------------------------------------------------------------------------- Sales and Transfers of Oil and Gas Produced, Net of Production Costs $(322,442) $(331,683) $(287,583) Net Changes in Prices and Production Costs 186,034 (327,290) (25,100) Extensions, Discoveries and Improved Recovery, Less Related Costs 176,080 104,554 87,185 Transfer of Sonat/P Reserves - - 44,209 Changes in Estimated Future Development Costs (15,362) (28,397) (17,179) Development Costs Incurred During the Period 103,138 68,945 47,278 Revisions of Previous Quantity Estimates 49,129 11,157 8,572 Accretion of Discount 105,288 129,974 103,689 Net Change in Income Taxes (180,223 40,039 (34,751) Purchases of Reserves in Place 333,260 160,335 317,764 Sales of Reserves in Place (155,952) (5,226) (17,159) Changes in Production Rates (Timing) and Other (53,282) (29,226) 68,220 - -------------------------------------------------------------------------------------------------------- $ 225,668 $(206,818) $ 295,145 ========================================================================================================
14. QUARTERLY RESULTS (Unaudited) Selected unaudited quarterly data is shown below:
(In Thousands, Except Per-Share Amounts) - -------------------------------------------------------------------------------------------- 1st 2nd 3rd 4th Quarter Quarter Quarter Quarter - -------------------------------------------------------------------------------------------- 1995(1)(3) Revenues $425,034 $476,344 $509,429 $579,334 Operating Income 55,120 77,740 35,204 20,869 Net Income 37,617 17,341 130,520 7,410 ============================================================================================ Earnings Per Share .44 .20 1.51 .09 ============================================================================================ 1994(2)(3) Revenues $479,507 $415,015 $411,765 $429,680 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 ============================================================================================
(1) Net income for the second quarter of 1995 includes a loss of $20.0 million, or $.23 per share, related to the sale of properties by the Company's exploration and production subsidiary; a a gain of $24.4 million, or $.28 per share, related to terminations of long-term gas sales contracts by the Company's exploration and production subsidiary; and a loss of $8.2 million or $.09 per share, related to the sale of the Company's investment in Baker Hughes Incorporated convertible preferred stock. Net income for the third quarter of 1995 includes income of $110.1 million, or $1.27 per share, related related to the sale of the Company's remaining shares of Sonat Offshore common stock. Net income for the fourth quarter of 1995 includes a loss of $15.0 million, or $.17 per share, related related to the impairment of oil and gas properties associated with the adoption of Statement of Financial Accounting Standards No. 121; a loss of $6.8 million, or $.08 per share, on unrecoverable gas contract realignment costs at Southern; and a loss of $5.5 million, or $.06 per share on natural gas future contracts that ceased accounting as hedges due to the decoupling of the NYMEX futures market for natural gas with the price of natural gas in certain parts of the country. (2) 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'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. (3) In accordance with a new FERC policy, certain fuel revenues and fuel operating costs have been netted. Therefore revenue and operating cost have been restated for 1995 and 1994. 65 II-40 66 - ------------------------------------------------------------------------------- SELECTED CONSOLIDATED FINANCIAL DATA
(In Millions, Except Per-Share Amounts) - ------------------------------------------------------------------------------------------------------------------------------ 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------------------ Revenues $ 1,990.1 $ 1,735.9 $1,741.1 $1,484.4 Costs and Expenses 1,801.2 1,566.5 1,508.2 1,273.3 - ------------------------------------------------------------------------------------------------------------------------------ Operating Income (Loss) 188.9 169.4 232.9 211.1 Other Income (Expense), Net(3) 188.8 60.7 182.1 22.0 Interest Expense, Net (89.8) (72.9) (47.3) (96.3) - ------------------------------------------------------------------------------------------------------------------------------ Income (Loss) from Continuing Operations before Extraordinary Item and Income Taxes 287.9 157.2 367.7 136.8 Income Taxes (Benefits) 95.0 15.8 102.7 35.8 - ------------------------------------------------------------------------------------------------------------------------------ Income (Loss) from Continuing Operations before Cumulative Effect of Accounting Changes 192.9 141.4 265.0 101.0 Income (Loss) from Discontinued Operations(1) - - - 111.4 Extraordinary Loss, Net of Tax(2) - - (3.8) - Cumulative Effect of Change in Method of Accounting for Investment Tax Credits - - - - Cumulative Effect of Change in Method of Accounting for Income Taxes - - - - - ----------------------------------------------------------------------------------------------------------------------------- Net Income (Loss) $ 192.9 $ 141.4 $ 261.2 $ 212.4 ============================================================================================================================= Earnings (Loss) Per Share from Continuing Operations before Extraordinary Item $ 2.24 $ 1.62 $ 3.05 $ 1.17 Earnings (Loss) Per Share $ 2.24 $ 1.62 $ 3.01 $ 2.47 Weighted Average Shares Outstanding (thousands) 86,270 87,119 86,703 85,945 Dividends Paid Per Share $ 1.08 $ 1.08 $ 1.04 $ 1.00 ============================================================================================================================== Assets $ 3,511.4 $ 3,530.7 $3,214.0 $3,165.3 Debt Maturing within One Year $ 237.7 $ 219.3 $ 232.9 $ 20.1 Long-Term Debt 770.3 963.4 741.2 1,175.7 Stockholders' Equity 1,482.6 1,391.9 1,363.2 1,172.3 - ----------------------------------------------------------------------------------------------------------------------------- Total Capitalization $ 2,490.6 $ 2,574.6 $2,337.3 $2,368.1 ==============================================================================================================================
NOTES: (1) Discontinued operations include the measurement-while-drilling businesses as of 1991 and the marine transportation and underwater services businesses as of 1986. (2) In March 1993, the Company recognized a loss on the redemption of the Company's 71/4 Percent Zero Coupon, Subordinated Convertible Notes, which were due September 6, 2005. (3) In June 1993, the Company reduced its ownership of Sonat Offshore from 100 percent to 40 percent. In July 1995, the Company disposed of its remaining shares of Sonat Offshore common stock. 66 II-41 67 Sonat Inc. and Subsidiaries - --------------------------------------------------------------------------------
(In Millions, Except Per-Share Amounts) - -------------------------------------------------------------------------------------------------- 1991 1990 1989 1988 1987 1986 1985 $1,421.0 $1,356.9 $1,659.2 $1,277.3 $1,344.9 $1,628.6 $2,258.6 1,217.5 1,192.2 1,481.4 1,142.4 1,176.5 1,929.3 2,225.2 - -------------------------------------------------------------------------------------------------- 203.5 164.7 177.8 134.9 168.4 (300.7) 33.4 14.7 69.8 47.1 12.5 41.5 118.1 5.2 (117.7) (102.6) (75.2) (54.4) (54.6) (77.9) (47.9) - -------------------------------------------------------------------------------------------------- 100.5 131.9 149.7 93.0 155.3 (260.5) (9.3) 22.6 40.7 54.1 40.5 85.2 (144.7) (13.0) - -------------------------------------------------------------------------------------------------- 77.9 91.2 95.6 52.5 70.1 (115.8) 3.7 (11.9) 2.7 (2.0) 2.2 24.9 (73.6) (14.1) - - - - - - - - - - - - - 62.4 - - - 13.1 - - - - -------------------------------------------------------------------------------------------------- $ 66.0 $ 93.9 $ 93.6 $ 67.8 $ 95.0 $ (189.4) $ 52.0 ================================================================================================== $ .91 $ 1.07 $ 1.17 $ .65 $ .87 $ (1.43) $ .05 $ .77 $ 1.10 $ 1.15 $ .83 $ 1.17 $ (2.34) $ .64 85,771 85,612 81,682 81,238 80,912 80,948 80,916 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ .9625 ================================================================================================== $3,208.5 $3,045.1 $2,892.3 $2,969.5 $3,074.4 $3,288.8 $3,413.2 $ 79.2 $ 63.1 $ 155.9 $ 50.4 $ 225.6 $ 104.6 $ 150.7 1,315.1 1,094.0 929.5 859.4 824.8 1,336.3 996.2 1,042.7 1,060.5 1,035.3 1,010.2 1,023.0 1,005.9 1,276.3 - -------------------------------------------------------------------------------------------------- $2,437.0 $2,217.6 $2,120.7 $1,920.0 $2,073.4 $2,446.8 $2,423.2 ==================================================================================================
67 II-42 68 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Sonat has not had a change in accountants within twenty-four months prior to the date of its most recent financial statements or in any period subsequent to such date. II-43 69 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information regarding the Directors and nominees for Director of Sonat required by Item 401 of Regulation S-K is presented under the heading "Election of Directors" in the Proxy Statement of Sonat Inc. dated as of March 13, 1996 (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 70 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Index to Financial Statements, Financial Statement Schedules, and Exhibits 1. FINANCIAL STATEMENTS
PAGE ------ Included in Part II of this report: Report of Ernst & Young LLP, Independent Auditors................................ II-16 Consolidated Balance Sheets at December 31, 1995 and 1994........................ II-17 Consolidated Statements of Income for the years ended December 31, 1995, 1994, and 1993...................................................................... II-19 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1995, 1994, and 1993............................................. II-20 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994, and 1993................................................................ II-21 Notes to Consolidated Financial Statements....................................... II-22
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, 1995 listed on Page IV-7............................. IV-7
Financial Statement Schedules have been omitted as not applicable or because the subject matter is either not present or is not present in amounts sufficient to require submission of the schedule, in accordance with the instructions contained in Regulation S-X, or the required information is included in the financial statements or notes thereto. Financial statements of 50-percent-or-less-owned companies and joint ventures, other than Citrus Corp., are not presented herein because such companies and joint ventures do not meet the significance test. 3. EXHIBITS(1)
EXHIBIT NUMBER EXHIBITS - -------- ----------------------------------------------------------------------------------- RESTATED CERTIFICATE OF INCORPORATION AND BY-LAWS 3-(a) Restated Certificate of Incorporation of Sonat Inc. (Restating the Certificate of Incorporation as in effect as of April 28, 1994) filed as Exhibit 3(a) to Form 10-Q of Sonat Inc. for the quarter ended March 31, 1994 3-(b) By-Laws of Sonat Inc. as amended and in effect December 1, 1995, filed herewith INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS 4.1 Rights Agreement dated as of January 8, 1996, between Sonat Inc. and Chemical Mellon Shareholder Services, L.L.C., as Rights Agent, with exhibits, filed as Exhibit 99 to Form 8-A of Sonat Inc. dated January 10, 1996 4.2 Form of Indenture dated June 1, 1986, from Sonat Inc. to Manufacturers Hanover Trust Company, Trustee, filed as Exhibit 4-(1) to Amendment No. 1 to Registration No. 33-5947 dated June 4, 1986
- --------------- (1) Sonat will furnish to requesting security holders any exhibit on this list upon the payment of a fee of $.10 per page up to a maximum of $5.00 per exhibit. Requests must be made in writing and should be addressed to Beverley T. Krannich, Secretary, Sonat Inc., P. O. Box 2563, Birmingham, Alabama 35202. IV-1 71
EXHIBIT NUMBER EXHIBITS - -------- ----------------------------------------------------------------------------------- 4.3 Form of Indenture dated June 1, 1987, from Southern Natural Gas Company to Manufacturers Hanover Trust Company, Trustee, filed as Exhibit 4-(1) to Registration No. 33-47266 of Southern Natural Gas Company dated April 16, 1992 4.4 $400 Million Note Agreement dated November 3, 1986, between Citrus Corp. and the Purchasers named therein, filed as Exhibit 4-(5) to Form 10-K of Sonat Inc. for the year 1990 4.5 Credit Agreement dated as of December 15, 1993, among Sonat Inc., the Banks named therein, and The Chase Manhattan Bank (National Association), Chemical Bank, and Morgan Guaranty Trust Company of New York, as Co-Agents, filed as Exhibit 4-(5) to Form 10-K of Sonat Inc. for the year 1993 4.6 Certificate of Designations of Series A Participating Preference Stock of Sonat Inc. dated January 8, 1996, as filed with the Secretary of State of the State of Delaware January 16, 1996, filed herewith PRINCIPAL SERVICE AGREEMENTS OF SOUTHERN NATURAL GAS COMPANY 10.1 Form of Service Agreements, Nos. 866940, 866941 and S10710, between Southern Natural Gas Company and Alabama Gas Corporation, effective November 1, 1993, filed as Exhibit 10-(2) to Form 10-Q of Sonat Inc. for the quarter ended September 30, 1993 10.2 Service Agreements (1) No. S10019, effective November 1, 1993, (2) Nos. 901710 and 901711, effective June 1, 1994, and No. 902516, effective October 1, 1994, (3) Amendatory Agreements dated March 1, 1995, to Service Agreements (Nos. 901710 and 902516), and (4) Amendatory Agreement dated February 1, 1996, to Service Agreement No. 901710, between Southern Natural Gas Company and South Carolina Pipeline Corporation, filed as (1) Exhibit 10-(3) to Form 10-Q of Sonat Inc. for the quarter ended September 30, 1993, (2) Exhibit 10.5 to Form 10-Q of Sonat Inc. for the quarter ended September 30, 1994, (3) Exhibit 10.4 to Form 10-Q of Sonat Inc. for the quarter ended March 31, 1995, and (4), which is filed herewith 10.3(a) Service Agreement No. 902470, effective September 1, 1994, between Southern Natural Gas Company and Atlanta Gas Light Company, filed as Exhibit 10.6 to Form 10-Q of Sonat Inc. for the quarter ended September 30, 1994 10.3(b) Service Agreement No. 904460, effective November 1, 1994, and (1) Amendatory Agreement dated June 1, 1995, between Southern Natural Gas Company and Atlanta Gas Light Company, filed as Exhibit 10.7 to Form 10-Q of Sonat Inc. for the quarter ended September 30, 1994, except (1), which was filed as Exhibit 10 to Form 10-Q of Sonat Inc. for the quarter ended September 30, 1995 10.3(c) Service Agreement No. 904461, effective November 1, 1994, between Southern Natural Gas Company and Atlanta Gas Light Company, filed as Exhibit 10.8 to Form 10-Q of Sonat Inc. for the quarter ended September 30, 1994 10.3(d) Service Agreement No. 904480, effective November 1, 1994, between Southern Natural Gas Company and Atlanta Gas Light Company, filed as Exhibit 10.9 to Form 10-Q of Sonat Inc. for the quarter ended September 30, 1994 10.3(e) Service Agreement No. 904481, effective November 1, 1994, between Southern Natural Gas Company and Atlanta Gas Light Company, filed as Exhibit 10.10 to Form 10-Q of Sonat Inc. for the quarter ended September 30, 1994 10.3(f) Service Agreement No. S20150, effective November 1, 1994, between Southern Natural Gas Company and Atlanta Gas Light Company, filed as Exhibit 10.11 to Form 10-Q of Sonat Inc. for the quarter ended September 30, 1994 10.3(g) Service Agreement No. S20140, effective November 1, 1994, between Southern Natural Gas Company and Atlanta Gas Light Company, filed as Exhibit 10.12 to Form 10-Q of Sonat Inc. for the quarter ended September 30, 1994
IV-2 72
EXHIBIT NUMBER EXHIBITS - -------- ----------------------------------------------------------------------------------- 10.3(h) Amendatory Agreement dated March 1, 1995, to Service Agreements (Nos. 904480, 904481, and S20140) between Southern Natural Gas Company and Atlanta Gas Light Company, filed as Exhibit 10.2 to Form 10-Q of Sonat Inc. for the quarter ended March 31, 1995 10.3(i) Amendatory Agreement dated March 1, 1995, to Service Agreements (No. 902470) and (Nos. 904460, 904461, and S20150) effective November 1, 1994, between Southern Natural Gas Company and Atlanta Gas Light Company, filed as Exhibit 10.3 to Form 10-Q of Sonat Inc. for the quarter ended March 31, 1995 COMPENSATION PLANS AND MANAGEMENT CONTRACTS 10.4 Supplemental Benefit Plan of Sonat Inc. as Amended and Restated effective February 25, 1993, (1) amendment dated April 28, 1994, and (2) amendment dated December 1, 1995, filed as Exhibit 10-(4) to Form 10-K of Sonat Inc. for year 1993, except (1), which was filed as Exhibit 10.2 to Form 10-Q of Sonat Inc. for quarter ended September 30, 1994, and (2), which is filed herewith 10.5 Executive Award Plan of Sonat Inc. as Amended and Restated as of December 1, 1995, filed herewith 10.6 Restricted Stock Plan for Directors of Sonat Inc. (as Amended and Restated as of September 15, 1993), and (1) amendment dated December 1, 1995, filed as Exhibit 10-(6) to Form 10-K of Sonat Inc. for the year 1993, except (1), which is filed herewith 10.7 Performance Award Plan of Sonat Inc. effective as of January 27, 1994, and (1) amendment dated December 1, 1995, filed as Exhibit 10-(7) to Form 10-K of Sonat Inc. for the year 1993, except (1), which is filed herewith 10.8 Cash Bonus Plan of Sonat Inc. effective as of January 27, 1994, and (1) amendment dated December 1, 1995, filed as Exhibit 10-(8) to Form 10-K of Sonat Inc. for the year 1993, except (1), which is filed herewith 10.9 Sonat Inc. Retirement Plan for Directors as Amended and Restated as of December 2, 1994, and (1) amendment dated December 1, 1995, filed as Exhibit 10.9 to Form 10-K of Sonat Inc. for the year 1994, except (1), which is filed herewith 10.10(a) Executive Severance Agreement dated December 1, 1995, between Sonat Inc. and Ronald L. Kuehn, Jr. and schedule identifying substantially identical Executive Severance Agreements between Sonat Inc. and other parties, filed herewith 10.10(b) Executive Severance Agreement dated December 1, 1995, between Sonat Inc. and Donald G. Russell, filed herewith 10.11 Directors' Fees Deferral Plan of Sonat Inc. effective as of August 15, 1985, filed as Exhibit 10-(14) to Form 10-K of Sonat Inc. for the year 1990 and amendment dated December 1, 1995, which is filed herewith 10.12 Indemnity Agreement dated December 4, 1987, between Sonat Inc. and Ronald L. Kuehn, Jr. and schedule identifying substantially identical indemnity agreements between Sonat Inc. and other directors of Sonat Inc. and (1) Indemnity Agreement dated September 1, 1994, between Sonat Inc. and Adrian M. Tocklin, (2) Indemnity Agreement dated September 22, 1994, between Sonat Inc. and Donald G. Russell, and (3) Indemnity Agreement dated November 1, 1995, between Sonat Inc. and Max L. Lukens, filed as Exhibit 10-(11) to Form 10-K of Sonat Inc. for the year 1992, except (1), which was filed as Exhibit 10.3 to Form 10-Q of Sonat Inc. for the quarter ended September 30, 1994, (2), which was filed as Exhibit 10.4 to Form 10-Q of Sonat Inc. for the quarter ended September 30, 1994, and (3), which is filed herewith 10.13 Trust Agreement dated December 19, 1986, between Sonat Inc. and AmSouth Bank N.A. for Section 415 Retirement Plan Benefits and Vesting Benefits under the Supplemental Benefit Plan and Early Retirement Benefits under the Executive Severance Agreements, filed as Exhibit 10-(15) to Form 10-K of Sonat Inc. for the year 1991
IV-3 73
EXHIBIT NUMBER EXHIBITS - -------- ----------------------------------------------------------------------------------- 10.14 Trust Agreement dated December 19, 1986, between Sonat Inc. and AmSouth Bank N.A. for Section 415 Stock Purchase Plan Benefits under the Supplemental Benefit Plan, filed as Exhibit 10- (16) to Form 10-K of Sonat Inc. for the year 1991 10.15 Trust Agreement dated December 19, 1986, between Sonat Inc. and AmSouth Bank N.A. for Benefits under the Retirement Plan for Directors, filed as Exhibit 10-(17) to Form 10-K of Sonat Inc. for the year 1991 10.16 Form of Sonat Inc. Executive Life Insurance Program Split Dollar Agreement, Collateral Assignment Agreement, and Program Description, each dated as of July 1, 1990, with (1) schedule identifying the persons participating in such Programs, filed as Exhibit 10-(20) to Form 10-K of Sonat Inc. for the year 1990, except (1), which is filed herewith OTHER MATERIAL CONTRACTS 10.17 Restated and Amended Joint Venture Agreement dated September 1, 1981, between Tennessee Storage Company and Southern Gas Storage Company forming Bear Creek Storage Company (with Appendices A-G), filed as Exhibit 10-(22) to Form 10-K of Sonat Inc. for the year 1991 10.18 Service Agreement dated June 1, 1981, with Bear Creek Storage Company, and FERC Gas Tariff of Bear Creek Storage Company, effective July 1, 1981, filed as Exhibit 10-(23) to Form 10-K of Sonat Inc. for the year 1991 10.19 Parents Agreement dated September 15, 1981, from Southern Natural Gas Company and Tenneco Inc. in favor of Manufacturers Hanover Trust Company and T. C. Crane, filed as Exhibit 10-(25) to Form 10-K of Sonat Inc. for the year 1991 10.20 Capital Stock Agreement among Sonat Inc., Enron Corp., Houston Natural Gas Corporation, and Citrus Corp. dated June 30, 1986, filed as Exhibit 10-(26) to Form 10-K of Sonat Inc. for the year 1991 10.21 Standby Note Purchase Agreement among Sonat Inc., Credit Lyonnais New York Branch, as Administrative Agent for the Banks party to the Revolving Credit Agreement with Citrus Corp., and Citrus Corp. dated December 23, 1993, and the $300 Million Revolving Credit Agreement dated as of December 23, 1993, among Citrus Corp., as Borrower, and The Banks named therein, as Banks, and Credit Lyonnais New York Branch and The Toronto-Dominion Bank, as Managing Agents, to which the Standby Note Purchase Agreement applies, filed as Exhibit 10-(23) to Form 10-K of Sonat Inc. for the year 1993 OTHER EXHIBITS 11 Sonat Inc. and Subsidiaries Computation of Earnings Per Share, filed herewith 12 Computation of Ratio of Earnings to Fixed Charges, filed herewith 21 Subsidiaries of Sonat Inc., filed herewith 22 Proxy Statement of Sonat Inc. dated as of March 13, 1996, which is not to be deemed "filed" as part of this Form 10-K, except to the extent incorporated by reference under Items 10, 11, 12 and 13 of Part III of this Form 10-K, filed herewith 23 Consent of Ernst & Young LLP, Independent Auditors, dated March 18, 1996, filed herewith 24 Powers of Attorney authorizing Ronald L. Kuehn, Jr.; Thomas W. Barker, Jr.; James A. Rubright; and John C. Griffin to sign the Sonat Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 1995, on behalf of certain directors and officers of the registrant, filed herewith 27 Financial Data Schedule for the period ended December 31, 1995, filed herewith
Exhibits listed above that have heretofore been filed with the Securities and Exchange Commission, which were physically filed as noted above, are hereby incorporated herein by reference pursuant to Rule 12b-32 under the Securities Exchange Act of 1934 and made a part hereof with the same effect as if filed herewith. IV-4 74 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, 1995. (c) Exhibits Exhibits required by Item 601 of Regulation S-K have been filed electronically with this report on Form 10-K. IV-5 75 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. SONAT INC. By: /s/ RONALD L. KUEHN, JR. ------------------------------------ RONALD L. KUEHN, JR. CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER Dated: March 21, 1996 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 21, 1996 - --------------------------------------------- President and Chief (RONALD L. KUEHN, JR.) Executive Officer (ii) Principal Financial Officer: /s/ THOMAS W. BARKER, JR. Vice President -- Finance March 21, 1996 - --------------------------------------------- and Treasurer (THOMAS W. BARKER, JR.) Principal Accounting Officer: /s/ JAMES A. RUBRIGHT Senior Vice President March 21, 1996 - --------------------------------------------- and General Counsel (JAMES A. RUBRIGHT) (iii) Directors:* RONALD L. KUEHN, JR. JOHN J. PHELAN, JR. WILLIAM O. BOURKE JEROME J. RICHARDSON JOHN J. CREEDON DONALD G. RUSSELL ROBERTO C. GOIZUETA L. EDWIN SMART ROBERT J. LANIGAN ADRIAN M. TOCKLIN MAX L. LUKENS JAMES B. WILLIAMS CHARLES MARSHALL JOE B. WYATT BENJAMIN F. PAYTON *Signed on behalf of each of these persons: By /s/ JAMES A. RUBRIGHT ------------------------------------------ JAMES A. RUBRIGHT SENIOR VICE PRESIDENT AND GENERAL COUNSEL AS AUTHORIZED BY CERTAIN POWERS OF ATTORNEY DATED FEBRUARY 22, 1996, AND ONE DATED FEBRUARY 27, 1996, ALL OF WHICH ARE FILED HEREWITH AS EXHIBIT 24
IV-6 76 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 77 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, 1995 and 1994, 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, 1995. 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, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Ernst & Young LLP Birmingham, Alabama February 29, 1996 IV-8 78 CITRUS CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
- ---------------------------------------------------------------------------------------------------------- December 31, ------------- (In Thousands) 1995 1994 - ---------------------------------------------------------------------------------------------------------- ASSETS Current Assets Cash $ 2,985 $ 78,068 Trade and other receivables Customers, net 62,296 45,628 Affiliated companies 385 752 Contract reformation costs, net 33,584 29,749 Commodity adjustment costs 5,411 5,399 Materials and supplies 2,379 1,955 Other 53 228 ------------ ------------ Total Current Assets 107,093 161,779 ------------ ------------ Deferred Charges Unamortized debt expense 8,737 9,736 Contract reformation costs, net - 32,832 Commodity adjustment costs 40,217 45,628 Other 23,318 15,691 ------------ ------------ Total Deferred Charges 72,272 103,887 ------------ ------------ Property, Plant and Equipment, at cost 2,797,051 2,593,533 Less - accumulated depreciation and amortization 395,204 358,396 ------------ ------------ Net Property, Plant and Equipment 2,401,847 2,235,137 ------------ ------------ TOTAL ASSETS $ 2,581,212 $2,500,803 - ------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. IV-9 79 CITRUS CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
- ----------------------------------------------------------------------------------------------------------- December 31, ------------- (In Thousands) 1995 1994 - ----------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Notes payable to banks $ 70,000 $ - Accounts payable Trade 43,172 36,015 Affiliated companies 7,727 27,018 Accrued liabilities Interest 18,088 18,342 Income taxes 2,065 4,856 Other taxes 3,381 1,341 TCR deferred revenues 37,392 21,258 Other 5,118 17,985 ----------- ----------- Total Current Liabilities 186,943 126,815 ----------- ----------- Long-Term Debt 1,125,000 1,125,000 ----------- ----------- Deferred Credits Deferred income taxes 466,030 444,250 TCR deferred revenues - 45,034 Other 36,537 46,628 ----------- ----------- Total Deferred Credits 502,567 535,912 ----------- ----------- Commitments and Contingencies (Notes 8 and 9) Stockholders' Equity Common stock, $1 par value; 1,000 shares authorized, issued and outstanding 1 1 Additional paid-in capital 634,271 634,271 Retained earnings 132,430 78,804 ----------- ----------- Total Stockholders' Equity 766,702 713,076 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,581,212 $ 2,500,803 - ------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. IV-10 80 CITRUS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
- ------------------------------------------------------------------------------------------------------------------ Years Ended December 31, ------------------------- (In Thousands) 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------ Revenues Gas sales $377,218 $305,350 $407,977 Gas transportation 305,169 172,112 141,725 Other - - 24,600 -------- -------- -------- 682,387 477,462 574,302 -------- -------- -------- Costs and Expenses Natural gas purchased 362,635 294,670 405,920 Operations and maintenance 79,880 63,365 63,228 Depreciation and amortization 81,227 63,737 59,896 Taxes - other than income taxes 14,767 8,506 8,526 -------- -------- -------- 538,509 430,278 537,570 -------- -------- -------- Operating Income 143,878 47,184 36,732 -------- -------- -------- Other Income (Expense) Interest expense, net (98,887) (55,760) (51,842) Allowance for funds used during construction 41,881 98,114 2,712 Other, net 572 58 907 -------- -------- -------- (56,434) 42,412 (48,223) -------- -------- -------- Income (Loss) Before Income Taxes 87,444 89,596 (11,491) Income Tax Expense 33,818 34,487 4,641 -------- -------- -------- Net Income (Loss) 53,626 55,109 (16,132) Retained Earnings, Beginning of Year 78,804 23,695 39,827 -------- -------- -------- Retained Earnings, End of Year $132,430 $ 78,804 $ 23,695 - ------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. IV-11 81 CITRUS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------------------- Years Ended December 31, ------------------------- (In Thousands) 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------- Cash Flows From Operating Activities Net income (loss) $ 53,626 $ 55,109 $ (16,132) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities Depreciation and amortization 81,227 63,737 59,896 Deferred income taxes 21,780 25,577 4,641 Allowance for funds used during construction (41,881) (98,114) (2,712) Changes in assets and liabilities Trade and other receivables (16,301) (1,494) 9,763 Materials and supplies (424) 3,326 4,270 Accounts payable (12,134) (29,421) 11,040 Accrued liabilities (1,005) 13,230 771 Other current assets and liabilities (12,692) 9,081 (3,175) Contract reformation settlements and adjustments (3,917) (8,169) (18,802) Other, net (18,599) (49,960) (22,442) ---------- ----------- ----------- Net Cash Provided by (Used in) Operating Activities 49,680 (17,098) 27,118 ---------- ----------- ----------- Cash Flows From Investing Activities Additions to property, plant and equipment (208,627) (855,832) (110,615) Allowance for funds used during construction 41,881 98,114 2,712 Disposition of property, plant and equipment, net 883 (2,024) (696) ---------- ----------- ----------- Net Cash Used in Investing Activities (165,863) (759,742) (108,599) ---------- ----------- ----------- Cash Flows From Financing Activities Short-term bank borrowings, net 70,000 (275,000) 120,000 Proceeds from issuance of long-term debt - 790,000 - Payment of long-term debt - (90,000) (30,000) TCR sale proceeds - 86,313 - TCR remittances (28,900) (20,021) - Hedging proceeds - 36,161 - Equity contribution from stockholders - 318,000 - ---------- ----------- ----------- Net Cash Provided by Financing Activities 41,100 845,453 90,000 ---------- ----------- ----------- Increase (Decrease) in Cash and Cash Equivalents (75,083) 68,613 8,519 Cash and Cash Equivalents, Beginning of Year 78,068 9,455 936 ---------- ----------- ----------- Cash and Cash Equivalents, End of Year $ 2,985 $ 78,068 $ 9,455 - ------------------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements. Additional cash flow information: The company made the following interest and income tax payments: Interest (net of amounts capitalized) $ 104,348 $ 58,180 $ 54,510 Income taxes paid (received) 14,160 4,054 (2,149)
IV-12 82 CITRUS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) REPORTING ENTITY Citrus Corp. (the Company), a holding company formed in 1986, owns 100% of the stock of Florida Gas Transmission Company (Transmission) 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 extending from South Texas to South Florida, is engaged in the interstate transmission of natural gas and is subject to the jurisdiction of the Federal Energy Regulatory Commission (FERC). Trading is engaged in the sale of natural gas primarily to Florida Power & Light Co., a large electric utility in the state of Florida, to local distribution customers, and to end users, the majority of which are in the state of Florida. (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. Interest-rate swaps made in 1994 have been closed and the termination gain has been deferred in other deferred credits in the consolidated balance sheets to be amortized against interest expense over the portion of the debt agreement associated with the swaps. Fees associated with these transactions have been expensed as incurred. DEPRECIATION, AMORTIZATION AND MAINTENANCE POLICIES - The Company amortizes that portion of its investment in Transmission and other subsidiaries which is in excess of historical cost (acquisition adjustment) on a straight-line basis at an annual rate of 1.9% based upon the estimated remaining useful life of the pipeline system. Transmission has provided for depreciation of assets on a straight-line basis at an annual composite rate of 1.41%, .75% and 3.06% for 1995, 1994 and 1993, 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 83 (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 required Trading to make approximately $55 million in deposits on the customers behalf over sixteen months. Trading is amortizing the total amounts paid on a volumetric basis over the term of the new agreement. Amortization of these payments is included in depreciation and amortization expense. Transmission amortizes contract reformation costs based on volume deliveries and FERC-approved recovery rates. Such amortization is included in depreciation and amortization expense. Transmission charges to maintenance the costs of repairs and renewal of items determined to be less than units of property. Costs of replacements and renewals of units of property are capitalized. The original costs of units of property retired are charged to the depreciation reserves, net of salvage and removal costs. INCOME TAXES - The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards (SFAS) No. 109. SFAS No. 109 provides for an asset and liability approach 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. USE OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. (3) LONG-TERM DEBT AND OTHER FINANCING ARRANGEMENTS Long-term debt outstanding at December 31, 1995 and 1994 was as follows (in thousands): Citrus Corp. ------------ 11.10% Notes due 1998-2006 $ 175,000 8.49% Notes due 2007-2009 90,000 ------------ 265,000 ------------ Transmission ------------ 7.75% Notes due 1997 100,000 9.30% Notes due 1998 25,000 8.14% Notes due 1999 200,000 9.75% Notes due 1999-2008 65,000 8.63% Notes due 2004 250,000 10.11% Notes due 2009-2013 70,000 9.19% Notes due 2005-2024 150,000 ------------ 860,000 ------------ Total Long-Term Debt $ 1,125,000 ============
IV-14 84 (3) LONG-TERM DEBT AND OTHER FINANCING ARRANGEMENTS (continued) Annual maturities and sinking fund requirements on long-term debt outstanding as of December 31, 1995 were as follows (in thousands):
Year Amount ---- ------ 1996 -- 1997 100,000 1998 44,250 1999 225,750 2000 25,750 Thereafter 729,250 ------------ $ 1,125,000 ============
The Company has a note agreement that contains certain restrictions which, among other things, limit the incurrence of additional debt, the sale of assets and the payment of dividends. The agreements relating to Transmission's promissory notes include, among other things, restrictions as to the payment of dividends. The Company had no committed lines of credit at December 31, 1995. Transmission has a committed line of credit of $70.0 million at an average rate of 6.26% which was fully utilized at December 31, 1995, and uncommitted facilities for up to $30.0 million which were available at December 31, 1995. In April 1994, Transmission entered into an agreement in which it transferred the rights to future cash flows from collections of certain transportation surcharge receivables relating to the recovery of contract reformation costs. Transmission received $86.3 million relating to the transfer of rights to future cash flows. The Company's TCR revenues on the consolidated balance sheets are collateralized by transportation surcharge receivables included in contract reformation costs. (4) INCOME TAXES The principal components of the Company's net deferred income tax liabilities at December 31, 1995 and 1994 are as follows (in thousands):
1995 1994 ----------- ----------- Deferred income tax assets Net operating loss carryforward $ 498 $ 5,013 Other 21,595 29,077 ----------- ----------- 22,093 34,090 ----------- ----------- Deferred income tax liabilities Depreciation and amortization 460,058 436,712 Contract reformation costs 23,500 37,181 Other 4,565 4,447 ----------- ----------- 488,123 478,340 ----------- ----------- Net deferred income tax liabilities $ 466,030 $ 444,250 =========== ===========
IV-15 85 (4) INCOME TAXES (continued) Total income tax expense for the years ended December 31, 1995, 1994 and 1993 is summarized as follows (in thousands):
1995 1994 1993 ------- ------- --------- Payable currently Federal $10,138 $ 7,000 $ -- State 1,900 1,910 -- ------- ------- --------- 12,038 8,910 -- ------- ------- --------- Payment deferred Federal 18,867 21,882 (5,091) State 2,913 3,695 (347) ------- ------- --------- 21,780 25,577 (5,438) ------- ------- --------- Effect of tax rate increase on deferred tax liability -- -- 10,079 ------- ------- --------- Total income tax expense $33,818 $34,487 $ 4,641 ======= ======= =========
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, 1995, 1994 and 1993 are as follows (in thousands):
1995 1994 1993 -------- ---------- --------- Statutory federal income tax provision $ 30,605 $ 31,359 $ (4,022) Net state income taxes 3,128 3,063 (226) Tax rate increase -- -- 10,079 Revision of prior years' tax estimates -- -- (1,200) Other 85 65 10 -------- ---------- --------- Income tax expense $ 33,818 $ 34,487 $ 4,641 ======== ========== =========
The Company has a consolidated net operating loss (NOL) carryforward for tax purposes of approximately $1.3 million. The NOL will be available until 2008, at which time it will expire. The Company also has an alternative minimum tax (AMT) credit of approximately $17.5 million which can be used to offset regular income taxes payable in future years. The AMT credit has an indefinite carryforward period. For financial statement purposes, the Company has recognized the benefit of the NOL and AMT credit carryforward as a reduction of deferred tax liabilities. (5) EMPLOYEE BENEFIT PLANS The employees of Citrus Corp. and its subsidiaries are covered under Enron's employee benefit plans. Enron maintains a retirement plan (the Enron Plan) which is a noncontributory defined benefit plan covering substantially all employees in the United States and certain employees in foreign countries. Through December 31, 1994, participants in the Enron Plan with five years or more of service were entitled to retirement benefits based on a formula that uses a percentage of final average pay and years of service. In connection with a change to the retirement benefit formula, Enron amended the Enron Plan in 1995 providing, among other things, that all employees became fully vested in retirement benefits earned through December 31, 1994. The formula in place prior to January 1, 1995 was suspended and replaced with a benefit accrual of 5% of annual base pay. Pension expenses charged by Enron were immaterial for 1995, 1994 and 1993. IV-16 86 (5) EMPLOYEE BENEFIT PLANS (continued) Enron also maintains a noncontributory employee stock ownership plan (ESOP) which covers all eligible employees. Allocations to individual employees' retirement accounts within the ESOP offset a portion of benefits earned under the Enron Plan to the extent allocations to the individual employees' retirement accounts within the ESOP exceed accrued benefits under the Enron Plan. At December 31, 1995, all shares included in the ESOP had been allocated to the employee accounts. As of September 30, 1995, 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 greater than the plan net assets by approximately $19.3 million. The assumed discount rate and rate of return on plan assets used in determining the actuarial present value of projected plan benefits were 7.5% and 10.5%, respectively. The assumed rate of increase in wages was 4.0%. In addition to providing pension benefits, Enron also provides certain 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, Citrus adopted the provisions of SFAS No. 106 "Employers Accounting for Postretirement Benefits Other Than Pensions" (SFAS 106). SFAS 106 requires that employers providing postretirement benefits accrue those costs over the service lives of the employees expected to be eligible to receive such benefits. Citrus 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 $.9, $.8 and $.7 million for 1995, 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 7.5% discount rate and a health care cost trend rate of 11.7% in 1995 decreasing to 5% by the year 2006 and beyond. The APBO exceeded plan assets by $120.8 million as of its most recent valuation date of December 31, 1995. (6) MAJOR CUSTOMERS Revenues from individual customers exceeding 10% of total revenues for the years ended December 31, 1995, 1994 and 1993 were approximately as follows (in thousands):
Customers 1995 1994 1993 --------- ------------- --------- ----------- Florida Power & Light Co. $ 343,000 $ 267,000 $ 263,000 Enron Capital and Trade Resources 65,000 -- --
At December 31, 1995, the Company's subsidiaries had receivables of approximately $30.9 and $4.5 million from Florida Power & Light Co. and Enron Capital and Trade Resources, respectively. (7) RELATED PARTY TRANSACTIONS The Company incurs certain corporate administrative expenses including employee benefit costs from Enron and its affiliates. The Company was charged approximately $11.6, $17.4 and $14.8 million for these expenses for the years ended December 31, 1995, 1994 and 1993, respectively. IV-17 87 (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 $66.1, $9.1 and $13.0 million for the years ended December 31, 1995, 1994 and 1993, respectively. The Company's subsidiaries purchased gas from affiliates of Sonat of approximately $84.1, $22.0 and $10.8 million for the years ended December 31, 1995, 1994 and 1993, respectively. The Company's subsidiaries also purchased gas from affiliates of Enron of approximately $186.7, $139.4 and $31.1 million for the years ended December 31, 1995, 1994 and 1993, 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. By order issued May 31, 1995, the FERC authorized Transmission to eliminate this volumetric surcharge and recover any remaining Southern Fixed Charges balances pursuant to mutually agreed-upon arrangements between Transmission and its customers with remaining balances. All such balances have been resolved. The Company has been authorized by the FERC to recover certain transition costs incurred through the reformation of gas supply contracts related to the Company's jurisdictional sales services. On November 1, 1993, the Company's Order No. 636 restructuring settlement went into effect. In addition to the existing recovery mechanism, the settlement allows the Company to recover 100% of any transition payments from $106 million up to $160 million. Furthermore, 75% of payments after the $160 million level would be recoverable. The Company has certain gas purchase contracts which provide for take-or-pay obligations which have not yet been terminated. Certain suppliers have made claims for payment under the take-or-pay provision of these contracts. As the Company completes the termination of its remaining gas purchase contracts, it is possible that additional payments to suppliers may be made to resolve these contract issues. To the extent additional payments are made, the Company believes that these costs will be 100% recoverable through existing tariff mechanisms. 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, as well as certain operational tariff modifications. 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. An Interim Stipulation and Agreement was reached on March 23, 1995 that, among other things, provided for: 1) the suspension of the procedural schedule while Transmission and the other parties to the proceeding undertook negotiations with respect to the proposed operational modifications, and 2) the agreement that Transmission would not move into effect the new rates pending such negotiations. On August 24, 1995, a Settlement was filed resolving all issues in the proceeding and resulted in the withdrawal of the rate increase initially proposed on December 30, 1994. The Settlement became effective December 1, 1995 pursuant to Commission order issued October 11, 1995. As a result of the August 24, 1995 Settlement and the Settlement filed August 25, 1992, in Docket Nos. CP92-182, et al, Transmission will make a Section 4 rate filing for both its pre-expansion system and the Phase III expansion on or before September 1, 1996. IV-18 88 (9) COMMITMENTS AND CONTINGENCIES The FERC's Division of Audits completed a compliance review of Transmission's books and records for the period of January 1, 1991 through December 31, 1994. Among other things, the FERC auditors questioned certain aspects of Transmission's procedures for accounting for the costs of financing Transmission's Phase III expansion facilities and have proposed adjustments totaling $44 million after tax to the capitalization by Transmission of AFUDC of its Phase III expansion facilities. The Company's management believes that the method of capitalizing AFUDC was proper; however, the final outcome of this matter can not be determined. (10) CONCENTRATIONS OF CREDIT RISK AND OTHER FINANCIAL INSTRUMENTS The Company and its subsidiaries have a concentration of customers in the electric and gas utility industries. These concentrations of customers may impact the Company's overall exposure to credit risk, either positively or negatively, in that the customers may be similarly affected by changes in economic or other conditions. Credit losses incurred on receivables in these industries compare favorably to losses experienced in the Company's receivable portfolio as a whole. The Company and its subsidiaries also have a concentration of customers located in the southeastern United States, primarily within the state of Florida. Receivables are generally not collateralized. The Company's management believes that the portfolio of receivables, which includes local distribution companies and municipalities, is well diversified and that such diversification minimizes any potential credit risk. The carrying amounts and fair value of the Company's financial instruments at December 31, 1995 and 1994, are as follows (in thousands):
1995 1994 -------------------------- --------------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value -------------------------- --------------------------- Contract reformation costs, net $ 33,584 $ 33,584 $ 62,581 $ 62,581 TCR deferred revenues 37,392 37,392 66,292 66,292 Notes payable to banks 70,000 70,000 -- -- Long-term debt 1,125,000 1,325,276 1,125,000 1,156,375
The carrying amount of contract reformation costs, notes payable 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 provided a hedge on 41,000 MMBtu of natural gas and 5,000 barrels of residual fuel oil per day. The agreement required 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 swap agreement expired July 31, 1995. Additionally, in May 1994, the Company entered into an offsetting swap agreement with an affiliate of Enron, the term of which coincided with the remaining life of the previously referenced swap and also expired July 31, 1995. The Company's after-tax results of operations for the years ended December 31, 1995, 1994 and 1993 included net gains of $.3, $5.5 ($2.4 million of this amount is from an affiliate of Enron) and $4.6 million, respectively, related to these agreements. Under the swap agreements, Trading effectively paid a fixed price of $13.75 per barrel and received a fixed price of $20.135 per barrel for residual fuel, and paid a fixed price of $2.381 per mcf and received a fixed price of $2.042 mcf for natural gas. IV-19 89 APPENDIX TO ANNUAL REPORT ON FORM 10-K OF SONAT INC. FOR THE YEAR ENDED DECEMBER 31, 1995 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-16 Map of the Southeastern United States showing the approximate location of the pipeline systems of Southern, Sea Robin, SIA, South Georgia, and Florida Gas (as described on pages I-7, I-13, I-13, I-13, and I-14, respectively), the underground storage facilities of Southern (as described on page I-10), and Southern Energy's LNG terminal (as discussed on page I-13).
EX-3.B 2 BY-LAWS OF SONAT INCORPORATION 1 EXHIBIT 3-(b) BY-LAWS OF SONAT INC. AMENDED AND IN EFFECT DECEMBER 1, 1995 ARTICLE 1 STOCKHOLDERS SECTION 1. ANNUAL MEETING. The annual meeting of stockholders for the purpose of electing directors and an Auditor and of transacting such other business as may come before it shall be held at such time as may be specified by resolution of the Board of Directors. SECTION 2. SPECIAL MEETINGS. Special meetings of the stockholders may be called in the manner provided in Section (6), Article FIFTH of the Certificate of Incorporation. SECTION 3. PLACE OF MEETING. Every meeting of the stockholders shall be held at the principal office of the Corporation in the City of Birmingham, Alabama; except that the Board of Directors may provide for the holding of any meeting of the stockholders at such other place, within or without the State of Alabama, as the Board shall by resolution determine. SECTION 4. NOTICE OF MEETINGS. It shall be the duty of the Secretary or an Assistant Secretary to cause a notice of each meeting of the stockholders of the Corporation to be mailed at least ten and not sooner than fifty days before the meeting, unless a different period is prescribed by law, to each stockholder entitled to vote at such meeting at his address as it appears upon the books of the Corporation. Unless the Certificate of Incorporation otherwise provides, any previously scheduled meeting of the stockholders may be postponed and any special meeting of the stockholders may be cancelled, by resolution of the Board of Directors upon public notice given prior to the date previously scheduled for such meeting of stockholders. SECTION 5. QUORUM. At any meeting of the stockholders, the holders present in person or by proxy of a majority of the outstanding shares of capital stock entitled to vote shall constitute a quorum of the stockholders for all purposes (unless the representation of a larger number of shares shall be required by law or by the Certificate of Incorporation, in which case the representation of the number of shares so required shall constitute a quorum). 2 The Chairman of the meeting or a majority of the shares so represented may adjourn the meeting from time to time, whether or not there is such a quorum. No notice of the time and place of adjourned meetings need be given except as required by law. SECTION 6. ORGANIZATION AND CONDUCT OF MEETINGS. The Chairman of the Board shall call meetings of stockholders to order and shall act as Chairman of such meetings. In the absence of the Chairman of the Board at any meeting, the President or, in his absence, any Vice President designated by the Board to perform the duties of the Chairman of the Board shall act as Chairman. In the absence of the Chairman of the Board, the President and any such Vice President at any meeting, the holders of a majority of the shares of capital stock entitled to vote present in person or by proxy at such meeting shall elect a Chairman. The Secretary of the Corporation shall act as Secretary of all meetings of the stockholders; but, in the absence of the Secretary, the Chairman may appoint any person to act as Secretary of the meeting. It shall be the duty of the Secretary to prepare and make, at least ten days before every meeting of stockholders, a complete list of stockholders entitled to vote at said meeting, arranged in alphabetical order and showing the address of each stockholder and the number of shares registered in his name. Such list shall be open to the examination of any stockholder for any purpose germane to the meeting, during ordinary business hours, for the ten days preceding the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. Proceedings at every meeting of stockholders shall, at the election of the Chairman, comply with Roberts' Rules of Order (latest published edition). SECTION 7. NOTICE OF STOCKHOLDER BUSINESS. All business properly brought before an annual meeting shall be transacted at such meeting. Business shall be deemed properly brought only if it is (i) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (ii) otherwise properly brought before the meeting by or at the direction of the Board of Directors or (iii) brought before the meeting by a stockholder of record entitled to vote at such meeting if written notice of such stockholder's intent to bring such business before such meeting is delivered to, or mailed, postage prepaid, and received by, the Secretary of the Corporation at the principal executive offices of the Corporation not later than the close of business on the 60th day nor earlier than the close of business on the 90th day prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the - 2 - 3 date of the annual meeting is more than 30 days before or more than 60 days after such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the close of business on the 90th day prior to such annual meeting and not later than the close of business on the later of the 60th day prior to such annual meeting or the 10th day following the day on which public announcement of a meeting date is first made by the Corporation (the "Notice Deadline"). For purposes of this By-Law, and Section 2 of Article II hereof, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). In no event shall the public announcement of an adjournment of an annual meeting commence a new time period for the giving of a stockholder's notice as described above. Each notice given by such stockholder shall set forth: (A) a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and the beneficial owner, if any, on whose behalf the proposal is made; (B) a representation that the stockholder giving the notice is a holder of record of stock of the Corporation 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 of such meeting) and intends to appear in person or by proxy at such meeting to propose such business; (C) any material interest of the stockholder or such beneficial owner in such business; and (D) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the proposal is made (i) the name and address of such stockholder, as they appear on the Corporation's books, and of such beneficial owner and (ii) the class and the number of shares of the Corporation which are owned beneficially and of record by such stockholder and such beneficial owner. The Chairman of the meeting may refuse to transact any business at any meeting made without compliance with the foregoing procedure. SECTION 8. VOTING. Subject to the provisions of the Certificate of Incorporation or of law, every holder of common stock of the Corporation which is entitled to vote shall be entitled to one vote for each share of such stock registered in the name of such stockholder upon the books of the Corporation. Subject to the provisions of the Certificate of Incorporation or of law, every holder of a share of Serial Preference Stock of each series of the Corporation which is entitled to vote shall be entitled to the number of votes specified in the resolutions adopted by the Board of Directors providing for the issue of such series for each share of Serial Preference Stock of such series registered in the name of such stockholder upon the books of the Corporation. Shares of common stock and Serial Preference Stock may be voted in person or by proxy, but no proxy shall be voted on after three years from its date, unless the proxy provides for a longer - 3 - 4 period. All elections for directors shall be decided by plurality vote; all other questions shall be decided by majority vote of the holders of shares of capital stock entitled to vote who are present in person or by proxy, except as otherwise provided in Article VII of these By-Laws, the Certificate of Incorporation or the laws of the State of Delaware. ARTICLE II BOARD OF DIRECTORS SECTION 1. NUMBER AND TERM OF OFFICE. The business and affairs of the Corporation shall be managed by or under the direction of a Board of Directors, the number of such directors to be determined solely by resolution of the Board of Directors, acting by not less than a majority of the directors then in office (subject to the provisions of Section (1), Article FIFTH of the Certificate of Incorporation). Each director shall be elected to a three-year term of office (subject to the provisions of Sections (2) and (7), Article FIFTH of the Certificate of Incorporation and Section 3 of this Article) to serve until his successor shall have been elected and shall have qualified (subject to the provisions of Section (A)(7), Article FOURTH of the Certificate of Incorporation). SECTION 2. NOTIFICATION OF NOMINATIONS. Subject to the rights of the holders of any one or more series of Serial Preference Stock then outstanding, nominations for the election of directors may be made by the Board of Directors or by any stockholder entitled to vote for the election of directors. Any stockholder entitled to vote for the election of directors at an annual meeting or a special meeting called for the purpose of electing directors may nominate persons for election as directors at such meeting only if written notice of such stockholder's intent to make such nomination is delivered to, or mailed, postage prepaid, and received by, the Secretary of the Corporation at the principal executive offices of the Corporation, in the case of an annual meeting, not later than the Notice Deadline, and in the case of a special meeting of stockholders at which directors are to be elected pursuant to the Corporation's notice of meeting, not earlier than the close of business on the 90th day prior to such special meeting and not later than the close of business on the later of the 60th day prior to such special meeting or the 10th day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. Notwithstanding the immediately preceding sentence, in the event that the number of directors to be elected to the Board of Directors of the Corporation is increased and there is no public announcement by the Corporation naming all of the nominees for director or specifying the size of the increased Board of Directors at least 70 days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice required by this By-Law shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to - 4 - 5 the Secretary at the principal executive offices of the Corporation not later than the close of business on the 10th day following the day on which such public announcement is first made by the Corporation. In no event shall the public announcement of an adjournment of an annual or special meeting commence a new time period for the giving of a stockholder's notice as described above. Each notice given by such stockholder shall set forth: (A) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nominations are made (i) the name and address of such stockholder, as they appear on the Corporation's books, and of such beneficial owner and (ii) the class and number of shares of the Corporation which are owned beneficially and of record by such stockholder and such beneficial owner; (B) a representation that the stockholder is a holder of record of stock of the Corporation 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 or beneficial owner and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder or beneficial owner; (D) as to each person whom the stockholder proposes to nominate for election or re-election as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Exchange Act and Rule 14a-11 thereunder; and (E) the consent of each nominee to be named in the proxy statement as a nominee and to serve as a director of the Corporation if so elected. The Chairman of the meeting may refuse to acknowledge the nomination of any person made without compliance with the foregoing procedure. SECTION 3. VACANCIES AND REMOVAL. Vacancies occurring in the Board of Directors shall be filled as provided in Section (3), Article FIFTH of the Certificate of Incorporation. The removal of any director or the entire Board of Directors shall be as provided in Section (7), Article FIFTH of the Certificate of Incorporation. SECTION 4. PLACE OF MEETING, ETC. The Board of Directors may hold its meetings and may have an office and keep the books of the Corporation (except as may be otherwise provided by law) in such place or places in the State of Delaware or outside the State of Delaware as the Board from time to time shall determine. SECTION 5. REGULAR MEETINGS. Regular meetings of the Board of Directors shall be held at such times and places as the Board shall determine. No notice shall be required for any regular meeting of the Board of Directors; but a notice of the - 5 - 6 fixing or changing of the time or place of regular meetings shall be mailed to every director at least five days before the first meeting held pursuant to the notice. SECTION 6. SPECIAL MEETINGS. Special meetings of the Board of Directors shall be held whenever called by the direction of the Chairman of the Board, the President, or by not less than one-third of the directors in office at the time. The Secretary or an Assistant Secretary shall give notice to each director of the time and place of holding each special meeting by mailing the notice at least thirty-six hours before the meeting or by causing the same to be transmitted by other means at least twenty-four hours before the meeting. Unless otherwise indicated in the notice thereof, any and all business may be transacted at any special meeting, subject to the provisions of Article VII of these By-Laws. SECTION 7. QUORUM. A quorum for the transaction of business shall consist of no fewer than one-half of the total number of directors, and except as otherwise provided in the Certificate of Incorporation or in these By-Laws, the act of a majority of the directors present at any meeting of the Board of Directors at which a quorum is present shall be the act of the Board of Directors. If at any meeting of said Board there be less than a quorum present, a majority of those present may adjourn the meeting from time to time, and no notice need be given of any such adjourned session of the meeting. SECTION 8. COMPENSATION OF DIRECTORS. The amount, if any, which each director shall be entitled to receive as compensation for his services as such shall be fixed from time to time by resolution of the Board of Directors. If any director shall serve as a member of any committee of the Board or perform special services at the instance of the Board, such director may be paid such additional compensation as the Board of Directors may determine. Each director shall be entitled to reimbursement for traveling expenses incurred by him in attending any meeting of the Board of Directors or of a committee. Such compensation and reimbursement shall be payable even though there be an adjournment because of the absence of a quorum. SECTION 9. CONDUCT OF MEETINGS. At all meetings of the Board of Directors business shall be transacted in such order as the Board may determine. The Chairman of the Board shall preside at all meetings of the Board of Directors. In the absence of the Chairman of the Board, the President shall preside at all meetings of the Board of Directors. In the absence of the President, a Chairman of the meeting shall be elected from the directors present. The Secretary of the Corporation shall act as Secretary of all meetings of the directors, but in the absence of the Secretary, the Chairman of the meeting may appoint any person to act as Secretary of the meeting. - 6 - 7 SECTION 10. ACTION WITHOUT MEETING. Nothing contained in the By-Laws shall be deemed to restrict the power of the directors or members of any committee to take any action required or permitted to be taken by them, without a meeting, in accordance with applicable provisions of law. SECTION 11. CONTRACTS. No contract or other transaction between the Corporation and one or more of the directors or officers, or between the Corporation and any other corporation, partnership, association, or other organization in which one or more of the directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board of Directors or committee thereof which authorizes the contract or transaction, or solely because his or their votes are counted for such purpose, if (1) the material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board of Directors or the committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (2) the material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the shareholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the shareholders; or (3) the contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified, by the Board of Directors, a committee thereof, or the shareholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction. The Board of Directors of the Corporation in its discretion may submit for approval, ratification or confirmation by the stockholders any contract, transaction or act of the Board of Directors or any committee thereof or of any officer, agent or employee of the Corporation, and any such contract, transaction or act which shall have been so approved, ratified or confirmed by the holders of a majority of the issued and outstanding stock entitled to vote shall be as valid and binding upon the Corporation and upon the stockholders thereof as though it had been approved and ratified by each and every stockholder of the Corporation. ARTICLE III COMMITTEES The Board of Directors may by resolution or resolutions passed by a majority of the whole Board designate one or more committees, each committee to consist of two or more of the directors of the Corporation, which to the extent provided in - 7 - 8 the resolution or resolutions shall have and may exercise the powers of the Board of Directors in the management of the business and affairs of the Corporation, and may have power to authorize the seal of the Corporation to be affixed to all papers which may require it. Such committee or committees shall have such name or names as may be determined from time to time by resolution or resolutions adopted by the Board of Directors. If provision be made for any such committee or committees, the members thereof shall be appointed by the Board of Directors and shall serve during the pleasure of the Board of Directors. A majority of the members of a committee shall constitute a quorum for the transaction of business. The Board of Directors may designate one or more directors of the Corporation as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee and who, in such event, shall be counted in determining the presence of a quorum. Vacancies in such committees shall be filled by the Board of Directors; provided, however, that in the absence or disqualification of any member of such committee or committees, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. The Board of Directors may at its pleasure discontinue any such committee or committees. ARTICLE IV OFFICERS SECTION 1. OFFICERS. The officers of the Corporation shall be a Chairman of he Board, a President, a Chief Financial Officer, one or more Vice Presidents (one President), a Treasurer and a Secretary, each of whom shall be elected by the Board of Directors. The Board of Directors may from time to time appoint such other officers, including Vice Chairmen, Assistant Vice Presidents, Comptroller, Assistant Treasurers, Assistant Comptrollers, Assistant Secretaries and officers of divisions of the Corporation, as the Board may deem advisable, and such officers shall have such authority and shall perform such duties as from time to time may be prescribed by the Board of Directors. In the event of an office becoming vacant due to removal, resignation or other reason, the Board of Directors may fill the vacancy at such time as it may determine. The Chairman of the Board shall be a member of the Board of Directors; the other officers may but need not be directors. Except where otherwise expressly provided in a written contract duly authorized by the Board of Directors, all officers, agents and employees shall be subject to removal at any time by the affirmative vote of a majority of the directors in office at the time. Any agent or employee other than one elected or appointed by the Board of Directors shall also be subject to removal at any time by the officer or by the committee appointing him. - 8 - 9 In addition to the powers and duties of the officers of the Corporation as set forth in these By-Laws, the officers shall have such authority and shall perform such duties as from time to time may be determined by the Board of Directors. SECTION 2. THE CHAIRMAN OF THE BOARD. The Chairman of the Board shall preside at all meetings of stockholders and at all meetings of the Board of Directors. The Chairman of the Board shall perform such other duties as shall from time to time be assigned to him by these By-Laws, the Board of Directors or the President. In the absence of the Chairman of the Board or in the event that the office is for any reason vacant, the President shall perform all duties of the Chairman of the Board, including presiding at all meetings of stockholders and at all meetings of the Board of Directors. SECTION 3. THE PRESIDENT. The President shall be the chief executive officer of the Corporation and, subject only to the control of the Board of Directors, shall have general management and control of its affairs and business, shall perform all other duties and exercise all other powers commonly incident to his office, or which are or may at any time be authorized or required by law. In the event that the President is unavailable or incapacitated, either the Chairman of the Board or, upon designation by the Board of Directors, a Vice President designated by the Board, shall perform the duties of the President. SECTION 4. THE CHIEF FINANCIAL OFFICER. The Chief Financial Officer (who may have such additional titles as shall from time to time be assigned to him by these By-Laws or by the Board of Directors) shall be the principal financial officer of the Corporation and shall have such powers and perform such duties as shall from time to time be assigned to him by these By-Laws, the Board of Directors or the President. SECTION 5. THE VICE PRESIDENTS. Each Vice President shall have such powers and perform such duties as shall from time to time be assigned to him by these By-Laws or by the Board of Directors and shall have and may exercise such powers of the President as may from time to time be assigned to him by the President. SECTION 6. THE TREASURER. The Treasurer shall have custody of all the funds and securities of the Corporation which may come into his hands, and shall deposit the same with such bank or banks or other depositary or depositaries as the Board of Directors from time to time shall determine; he may endorse on behalf of the Corporation for collection checks, notes and other obligations and shall deposit the same to the credit of the Corporation in such bank or banks or depositary or depositaries as the Board of Directors may designate; he may sign all receipts and vouchers for payments made to the Corporation; he may sign with the Chairman of the Board or the President or a Vice President certificates for - 9 - 10 shares of the capital stock; he shall enter or cause to be entered regularly in the books of the Corporation kept for the purpose full and accurate accounts of all moneys received and paid on account of the Corporation and whenever required by the Board of Directors shall render statements of such accounts; he shall, at all reasonable times, exhibit his books and accounts to the Auditor or to any director of the Corporation upon application at the office of the Corporation during business hours; and he shall perform all acts incident to the office of Treasurer, subject to the control of the Board of Directors. SECTION 7. THE SECRETARY. The Secretary shall keep in books provided for that purpose the minutes of all meetings of the Board of Directors and of all committees of the Board of Directors and the minutes of all meetings of the stockholders; he shall attend to the giving or serving of all notices of the Corporation; he may sign with the Chairman of the Board or the President or a Vice President, in the name of the Corporation, all contracts when authorized so to do either generally or in specific instances by the Board of Directors or by any committee of the Board of Directors having the requisite authority and, when so ordered by the Board of Directors or such committee, he shall affix the seal of the Corporation thereto; he may sign with the Chairman of the Board, the President or a Vice President certificates for shares of the capital stock; he shall have charge of the stock certificate books, transfer books and stock ledgers and such other books and papers as the Board of Directors shall direct, all of which shall at all reasonable times be open to the examination of the Auditor or any director, upon application at the office of the Corporation during business hours; and he shall in general perform all the duties incident to the office of Secretary, subject to the control of the Board of Directors. SECTION 8. GIVING OF BOND BY OFFICERS. Any officer of the Corporation, if required to do so by the Board of Directors, shall furnish a bond to the Corporation for the faithful performance of his duties, in such penalties and with such conditions and security or surety or sureties as the Board shall require. SECTION 9. VOTING UPON STOCKS. Unless otherwise ordered by the Board of Directors, the Chairman of the Board or the President, or any other officer of the Corporation designated by the Chairman of the Board or the President, shall have full power and authority on behalf of the Corporation to attend and to act and to vote in person or by proxy at any meeting of the holders of securities of any corporation in which the Corporation may own or hold stock or other securities, and at any such meeting shall possess and may exercise in person or by proxy any and all rights, powers and privileges incident to the ownership of such stock or other securities which the Corporation, as the owner or holder thereof, might have possessed and exercised if present. The Chairman of the Board, the President or any other officer of the Corporation designated by the Chairman of the Board or the President, may also execute and deliver on behalf of the Corporation powers of attorney, proxies, waivers of notice and other instruments relating to the stocks - 10 - 11 or securities owned or held by the Corporation. The Board of Directors may, from time to time, by resolution confer like powers upon any other person or persons. SECTION 10. COMPENSATION OF OFFICERS. The officers of the Corporation shall be entitled to receive such compensation for their services as shall from time to time be determined by the Board of Directors. ARTICLE V CAPITAL STOCK - SEAL - FISCAL YEAR SECTION 1. CERTIFICATES FOR SHARES. The certificates for shares of the capital stock of the Corporation shall be in such form as is prescribed by law and approved by the Board of Directors. SECTION 2. LOST, STOLEN, OR DESTROYED CERTIFICATES. Any person claiming a stock certificate in lieu of one alleged to have been lost, stolen or destroyed shall give the Corporation or its agent an affidavit as to his ownership of the certificate and of the facts which go to prove that it has been lost, stolen or destroyed. If required by the Board of Directors, he also shall give the Corporation a bond, in such form as may be approved by the Board of Directors, sufficient to indemnify the Corporation against any claim that may be made against it or on account of the alleged loss, theft or destruction of the certificate or the issuance of a new certificate. SECTION 3. TRANSFER OF SHARES. Shares of the capital stock of the Corporation shall be transferred on the books of the Corporation by the holder thereof in person or by his attorney duly authorized in writing, upon surrender and cancellation of certificates for the number of shares to be transferred, except as provided in the preceding section. Books for the transfer of shares of the capital stock shall be kept by the Corporation or by one or more transfer agents appointed by it. SECTION 4. REGULATIONS. The Board of Directors shall have power and authority to make such rules and regulations as it may deem expedient concerning the issue, transfer and registration of certificates for shares of the capital stock of the Corporation. SECTION 5. FIXING OF RECORD DATES. The powers of the Board of Directors with respect to the fixing of record dates shall be as provided by the laws of the State of Delaware at the time in effect. SECTION 6. CORPORATE SEAL. The Board of Directors shall provide a suitable seal, containing the name of the Corporation, which seal shall be in the charge of the Secretary. If and when so directed by the Board of Directors, a duplicate of - 11 - 12 the seal may be kept and be used by any officer of the Corporation designated by said Board. SECTION 7. FISCAL YEAR. The fiscal year of the Corporation shall begin on the first day of January in each year and terminate on the thirty-first day of December in each year. ARTICLE VI MISCELLANEOUS PROVISIONS SECTION 1. CHECKS, NOTES, CONTRACTS, ETC. Checks and other orders for the payment of money shall be signed by such person or persons as the Board of Directors shall from time to time by resolution determine. Contracts and other instruments or documents may be signed in the name of the Corporation by the Chairman of the Board or the President or by any other officer authorized to sign such contract, instrument or document by the Board of Directors, and such authority may be general or confined to specific instances. Checks and other orders for the payment of money made payable to the Corporation may be endorsed for deposit to the credit of the Corporation, with a depositary authorized by resolution of the Board of Directors, by the Chief Financial Officer or Treasurer or such other persons as the Board of Directors may from time to time by resolution determine. SECTION 2. LOANS. No loans and no renewals of any loans shall be contracted on behalf of the Corporation except as authorized by the Board of Directors. When authorized so to do by the Board of Directors, any officer or agent of the Corporation may effect loans and advances for the Corporation from any bank, trust company or other institution or from any firm, corporation or individual, and for such loans and advances may make, execute and deliver promissory notes, bonds or other evidences of indebtedness of the Corporation. When authorized so to do by the Board of Directors, any officer or agent of the Corporation may pledge, hypothecate or transfer, as security for the payment of any and all loans, advances, indebtedness and liabilities of the Corporation, any and all stocks, securities and other personal property at any time held by the Corporation, and to that end may endorse, assign and deliver the same. Such authority may be general or confined to specific instances. SECTION 3. WAIVERS OF NOTICE. Whenever notice is required to be given under any provision of law or of the Certificate of Incorporation or of these By-Laws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting of stockholders or of directors or of a - 12 - 13 committee shall constitute waiver of notice of such meeting, except where otherwise provided by law. ARTICLE VII AMENDMENTS The By-Laws and any amendments thereof may be altered, amended, changed or repealed, or new By-Laws may be adopted, by the Board of Directors at any regular or special meeting by the affirmative vote of all the members of the Board, or at any regular or special meeting the notice of which shall have stated the amendment of the By-Laws as one of the purposes of the meeting, by the affirmative vote of a majority of all the members of said Board; but these By-Laws and any amendments thereof, including By-Laws adopted by the Board of Directors, may be altered, amended, changed or repealed and other By-Laws may be enacted by the stockholders in accordance with the provisions of Section (10), Article FIFTH of the Certificate of Incorporation. - 13 - EX-4.6 3 CERTIFICATE OF DESIGNATION 1 EXHIBIT 4.6 CERTIFICATE OF DESIGNATIONS of SERIES A PARTICIPATING PREFERENCE STOCK of SONAT INC. (Pursuant to Section 151 of the Delaware General Corporation Law) Sonat Inc., a corporation organized and existing under the General Corporation Law of the State of Delaware (hereinafter called the "Corporation"), hereby certifies that the following resolution was adopted by the Board of Directors of the Corporation as required by Section 151 of the General Corporation Law at a meeting duly called and held on December 1, 1995: RESOLVED, that pursuant to the authority granted to and vested in the Board of Directors of this Corporation (hereinafter called the "Board of Directors" or the "Board") in accordance with the provisions of the Restated Certificate of Incorporation, the Board of Directors hereby creates a series of Serial Preference Stock, par value $1.00 per share (the "Preference Stock"), of the Corporation and hereby states the designation and number of shares, and fixes the relative rights, preferences, and limitations thereof, in addition to the provisions set forth in the Restated Certificate of Incorporation of the Corporation which are applicable to Preference Stock of all series as follows: Series A Participating Preference Stock: Section I. Designation and Amount. The shares of such series shall be designated as "Series A Participating Preference Stock" (the "Series A Preference Stock") and the number of shares constituting the Series A Preference Stock shall be 1,000,000. Such number of shares may be increased or decreased by resolution of the Board of Directors; provided, that no decrease shall reduce the number of shares of Series A Preference Stock to a number less than the number of shares then outstanding plus the number of shares reserved for issuance upon the exercise of outstanding options, rights or warrants or upon the conversion of any outstanding securities issued by the Corporation convertible into Series A Preference Stock. Section II. Dividends and Distributions. 2 A. Subject to the rights of the holders of any shares of any series of Preference Stock (or any similar stock) ranking prior and superior to the Series A Preference Stock with respect to dividends, the holders of shares of Series A Preference Stock, in preference to the holders of Common Stock, par value $l.00 per share (the "Common Stock"), of the Corporation, and of any other junior stock, shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the first day of March, June, September and December in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Preference Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $l or (b) subject to the provision for adjustment hereinafter set forth, 100 times the aggregate per share amount of all cash dividends, and 100 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions, other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock since the immediately preceding Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Preference Stock. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount to which holders of shares of Series A Preference Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. B. The Corporation shall declare a dividend or distribution on the Series A Preference Stock as provided in paragraph (A) of this Section immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $1 per share on the Series A Preference Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. C. Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Preference Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which 3 case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Preference Stock entitled-to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Preference Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Preference Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be not more than 60 days prior to the date fixed for the payment thereof. Section III. Voting Rights. The holders of shares of Series A Preference Stock shall have the following voting rights: A. Subject to the provision for adjustment hereinafter set forth, each share of Series A Preference Stock shall entitle the holder thereof to 100 votes on all matters submitted to a vote of the stockholders of the Corporation. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the number of votes per share to which holders of shares of Series A Preference Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. B. Except as otherwise provided herein, in any other Certificate of Designations creating a series of Preference Stock or any similar stock, or by law, the holders of shares of Series A Preference Stock and the holders of shares of Common Stock and any other capital stock of the Corporation having general voting rights shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation. C. Except as set forth in the Restated Certificate of Incorporation or herein, or as otherwise provided by law, holders of Series A Preference Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. 4 Section IV. Reacquired Shares. Any shares of Series A Preference Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preference Stock and may be reissued as part of a new series of Preference Stock subject to the conditions and restrictions on issuance set forth herein, in the Restated Certificate of Incorporation, or in any other Certificate of Designations creating a series of Preference Stock or any similar stock or as otherwise required by law. Section V. Liquidation, Dissolution or Winding Up. Upon any liquidation, dissolution or winding up of the Corporation, no distribution shall be made (1) to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preference Stock unless, prior thereto, the holders of shares of Series A Preference Stock shall have received $100 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, provided that the holders of shares of Series A Preference Stock shall be entitled to receive an aggregate amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount to be distributed per share to holders of shares of Common Stock, or (2) to the holders of shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preference Stock, except distributions made ratably on the Series A Preference Stock and all such parity stock in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the aggregate amount to which holders of shares of Series A Preference Stock were entitled immediately prior to such event under the proviso in clause (l) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section VI. Consolidation. Merger etc. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case each share of Series A Preference Stock shall at the same time be similarly exchanged or changed into an amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock 5 payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series A Preference Stock shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section VII. No Redemption. The shares of Series A Preference Stock shall not be redeemable. Section VIII. Rank. The Series A Preference Stock shall be of equal rank in respect of the preference as to dividends and to payments upon the liquidation, dissolution or winding up, whether voluntary or involuntary, of the Corporation, with all shares of Preference Stock of all series. Section IX. Amendment. The Restated Certificate of Incorporation of the Corporation shall not be amended in any manner which would materially alter or change the powers, preferences or special rights of the Series A Preference Stock so as to affect them adversely without the affirmative vote of the holders of at least two-thirds of the outstanding shares of Series A Preference Stock, voting together as a single class. IN WITNESS WHEREOF, this Certificate of Designations is executed on behalf of the Corporation by its Chairman of the Board and attested by its Secretary this 8th day of January, 1996. /s/ Ronald L. Kuehn, Jr. Chairman of the Board Attest: /s/ Beverly T. Krannich Secretary EX-10.2 4 AMENDATORY AGREEMENT 1 EXHIBIT 10.2 AMENDATORY AGREEMENT This amendment is entered into this 1st day of February, 1996, between SOUTHERN NATURAL GAS COMPANY ("Company") and SOUTH CAROLINA PIPELINE CORPORATION ("Shipper"). W I T N E S S E T H: WHEREAS, Company and Shipper are parties to a firm transportation agreement dated June 1, 1994, as amended, (#901710) for an aggregate Transportation Demand of 77,217 Mcf per day ("FT Agreement"); WHEREAS, on January 19, 1996, Company posted a notice on its electronic bulletin board soliciting capacity for a proposed expansion of its pipeline system; and WHEREAS, by letter dated January 30, 1996, Shipper notified Company that it desires to extend the term of the FT Agreement to March 31, 1999, for 55,000 Mcf per day of Transportation Demand. NOW THEREFORE, in consideration for the premises and the mutual promises and covenants contained herein, the parties agree as follows: 1. Section 4.1 of the FT Agreement shall be deleted in its entirety and the following Section 4.1 substituted therefor: 4.1 Subject to the provisions hereof, this Agreement shall become effective as of the date first hereinabove written and shall be in full force and effect for a primary term through the following dates: October 31, 2003, for 17,217 Mcf per day of Transportation Demand, October 31, 2000, for 5,000 Mcf per day of Transportation Demand, and March 31, 1999 for 55,000 Mcf per day of Transportation Demand; and shall continue and remain in force and effect for successive terms of one year each after the end of each primary term for the specified volume, unless and until cancelled with respect to the associated volume by either party giving 180 days written notice to the other party prior to the end of the specified primary term or any yearly extension thereof. 2 Amendatory Agreement Page 2 2. Except as provided herein, the FT Agreement shall remain in full force and effect as written. 3. This Amendment is subject to all applicable, valid laws, orders, rules and regulations of any governmental entity having jurisdiction over the parties or the subject matter hereof. WHEREFORE, the parties have executed this Amendment through their duly authorized representatives to be effective as of the date first written above. ATTEST: SOUTHERN NATURAL GAS COMPANY By: /s/ R. David Hendrickson By: /s/ James E. Moylan, Jr. ---------------------------- ---------------------------- Title: Secretary Title: President ---------------------------- ---------------------------- ATTEST: SOUTH CAROLINA PIPELINE CORPORATION By: /s/ Dara A. Davis By: /s/ H. Thomas Arthur ---------------------------- --------------------------- Title:Assistant Secretary Title: Vice President and ---------------------------- General Counsel --------------------------- EX-10.4 5 AMENDMENT TO SONAT SUPPLEMENTAL BENEFIT PLAN 1 EXHIBIT 10.4 AMENDMENT TO THE SONAT INC. SUPPLEMENTAL BENEFIT PLAN Sonat Inc. hereby amends the Sonat Inc. Supplemental Benefit Plan (the "Plan") as follows, effective as of December 1, 1995: 1. Section 4.3 of the Plan is hereby amended to read in its entirety as follows: 4.3 DEFINITION OF CHANGE OF CONTROL A "Change of Control" shall mean: (i) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934 (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (1) the then outstanding shares of common stock of the Company (the "Outstanding Common Stock") or (2) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Voting Securities"); provided, however, that for purposes of this subsection (i), the following acquisitions shall not constitute a Change of Control: (A) any acquisition directly from the Company, (B) any acquisition by the Company, (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (D) any acquisition by any corporation pursuant to a transaction which complies with clauses (A), (B) and (C) of subsection (iii); or (ii) Individuals who, as of December 1, 1995, constitute the Board of Directors (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board of Directors; provided, however, that any individual becoming a director subsequent to such date whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board of Directors; or 2 (iii) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination"), in each case, unless, following such Business Combination, (A) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Common Stock and Outstanding Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination, of the Outstanding Common Stock and Outstanding Voting Securities, as the case may be, (B) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (C) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board of Directors, providing for such Business Combination. IN WITNESS WHEREOF, Sonat Inc. has executed this document as of December 1, 1995. SONAT INC. by: /s/ Ronald L. Kuehn, Jr. ------------------------- Ronald L. Kuehn, Jr. Chairman of the Board, President and Chief Executive Officer EX-10.5 6 EXECUTIVE AWARD PLAN 1 EXHIBIT 10.5 EXECUTIVE AWARD PLAN OF SONAT INC. (AS AMENDED AND RESTATED AS OF DECEMBER 1, 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 "Exchange Act"). The Committee shall have authority to interpret conclusively the provisions of the Plan, to adopt such rules and regulations for carrying out the Plan as it may deem advisable, to decide conclusively all questions of fact arising in the application of the Plan, and to make all other determinations necessary or advisable for the administration of the Plan. All decisions and acts of the Committee shall be final and binding upon all affected Plan participants. (b) The Committee shall meet once each fiscal year, and at such additional times as it may determine or at the request of the chief executive officer of the 2 Company, to designate the eligible employees, if any, to be granted awards under the Plan and the type and amount of such awards and the time when awards will be granted. All awards granted under the Plan shall be on the terms and subject to the conditions hereinafter provided. 1.3 ELIGIBLE PARTICIPANTS Key employees, including officers, of the Company and its subsidiaries, and of partnerships or joint ventures in which the Company and its subsidiaries have a significant ownership interest as determined by the Committee (all of such subsidiaries, partnerships and joint ventures being referred to as "Subsidiaries") shall be eligible to participate in the Plan. Directors who are not employees of the Company or its Subsidiaries shall not be eligible to participate in the Plan. 1.4 AWARDS UNDER THE PLAN Awards under the Plan may be in the form of (i) Options to purchase shares of Common Stock, (ii) Stock Appreciation Rights and Limited Stock Appreciation Rights which may be issued in tandem with such Options, (iii) shares of Restricted Stock, and (iv) Supplemental Payments which may be awarded with respect to Options, Stock Appreciation Rights, Limited Stock Appreciation Rights, and Restricted Stock, or (v) any combination of the foregoing. 1.5 SHARES SUBJECT TO THE PLAN The aggregate number of shares of Common Stock which may be issued with respect to Options or Restricted Stock granted after April 27, 1995 (including Stock Appreciation Rights, Limited Stock Appreciation Rights and Supplemental Payments related thereto) shall not exceed (i) 4,000,000 shares plus (ii) the number of shares previously authorized for use in the Plan which have not been issued or have again become available for grants pursuant to the following paragraph. At no time shall the number of shares issued plus the number of shares subject to outstanding awards under the Plan exceed the number of shares that may be issued under the Plan. Options with respect to more than 250,000 shares of Common Stock shall not be granted to any optionee in any 12-month period. Shares distributed pursuant to the Plan may consist of authorized but unissued shares or treasury shares of the Company, as shall be determined from time to time by the Board of Directors. If any Option under the Plan shall expire, terminate or be cancelled (except upon the holder's exercise of a related Stock Appreciation Right or Limited Stock Appreciation Right) for any reason without having been exercised in full, or if any shares of Restricted Stock shall be forfeited to the Company, the unexercised Options and forfeited shares of Restricted Stock shall not count against the above limit and shall again become available for grants under the Plan (regardless of whether the -2- 3 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. -3- 4 (e) Nontransferability of Options. No Option or any interest therein shall be transferable by the optionee other than by will or by the laws of descent and distribution. During an optionee's lifetime, all Options shall be exercisable only by such optionee or by the guardian or legal representative of the optionee. (f) Shareholder Rights. The holder of an Option shall, as such, have none of the rights of a shareholder. (g) Termination of Employment. The Committee shall have discretion to specify in the Option grant or an amendment thereof, provisions with respect to the period, not extending beyond the term of the Option, during which the Option may be exercised following the optionee's termination of employment. (h) Change of Control. Notwithstanding the exercisability schedule governing any Option, upon the occurrence of a Change of Control (as defined in Section 4.9(a)) all Options outstanding at the time of such Change of Control and held by optionees who are employees of the Company or its Subsidiaries at the time of the Change of Control shall become immediately exercisable and, unless the optionee agrees otherwise in writing, shall remain exercisable for a period of three years following the optionee's termination of employment or such longer period as may be provided in the Option, but in no event beyond the term of the Option established pursuant to Section 2.1(b). 2.2 STOCK APPRECIATION RIGHTS IN TANDEM WITH OPTIONS (a) The Committee may, either at the time of grant of an Option or at any time during the term of the Option, grant Stock Appreciation Rights or Limited Stock Appreciation Rights with respect to all or any portion of the shares of Common Stock covered by such Option. A Stock Appreciation Right may be exercised at any time the Option to which it relates is then exercisable. A Limited Stock Appreciation Right may be exercised only within 60 days after the occurrence of an SAR Change of Control (as defined in Section 4.9(b)). A Stock Appreciation Right or a Limited Stock Appreciation Right may only be exercised to the extent the Option to which it relates is exercisable, and shall be subject to the conditions applicable to such Option. When a Stock Appreciation Right or Limited Stock Appreciation Right is exercised, the Option to which it relates shall cease to be exercisable to the extent of the number of shares with respect to which the Stock Appreciation Right or Limited Stock Appreciation Right is exercised. Similarly, when an Option is exercised, the Stock Appreciation Rights or Limited Stock Appreciation Rights relating to the shares covered by such Option exercise shall terminate. Any Stock Appreciation Right which is outstanding on the last day of the term of the related Option (as determined pursuant to Section 2.1(b)) shall be automatically exercised on such date for cash without any action by the optionee. -4- 5 (b) Upon exercise of a Stock Appreciation Right, the holder shall receive, for each share with respect to which the Stock Appreciation Right is exercised, an amount (the "Appreciation") equal to the difference between the option price per share of the Option to which the Stock Appreciation Right relates and the fair market value (as determined by the Committee) of a share of Common Stock on the date of exercise of the Stock Appreciation Right. The Appreciation shall be payable in cash, Common Stock, or a combination of both, at the option of the Committee, and shall be paid within 30 days of the exercise of the Stock Appreciation Right. (c) Notwithstanding the foregoing, if a Stock Appreciation Right is exercised within 60 days after the occurrence of an SAR Change of Control, (i) the Appreciation and any Supplemental Payment (as defined in Section 2.3) to which the holder is entitled shall be payable solely in cash if the Stock Appreciation Right has been outstanding at least six months and solely in Common Stock in all other cases, and (ii) in addition to the Appreciation and the Supplemental Payment (if any), the holder shall receive (in cash, if the Stock Appreciation Right has been outstanding for at least six months, and in Common Stock in all other cases) (1) the amount by which the greater of (a) the highest market price per share of Common Stock during the 60-day period preceding exercise of the Stock Appreciation Right or (b) the highest price per share of Common Stock (or the cash-equivalent thereof as determined by the Board of Directors) paid by an acquiring person during the 60-day period preceding an SAR Change of Control, exceeds the fair market value of a share of Common Stock on the date of exercise of the Stock Appreciation Right, plus (2) if the holder is entitled to a Supplemental Payment, an additional payment, calculated under the same formula as used for calculating such holder's Supplemental Payment, with respect to the amount referred to in clause (1) of this sentence. (d) Upon exercise of a Limited Stock Appreciation Right, the holder shall receive, for each share with respect to which the Limited Stock Appreciation Right is exercised, the sum of (i) the Appreciation, as defined in Section 2.2(b); (ii) any Supplemental Payment (as defined in Section 2.3) to which the holder is entitled with respect to the Appreciation; (iii) the amount by which the greater of (a) the highest market price per share of Common Stock during the 60-day period preceding exercise of the Limited Stock Appreciation Right or (b) the highest price per share of Common Stock (or the cash-equivalent thereof as determined by the Board of Directors) paid by an acquiring person during the 60-day period preceding an SAR Change of Control, exceeds the fair market value of a share of Common Stock on the date of exercise of the Limited Stock Appreciation Right; and (iv) if the holder is entitled to a Supplemental Payment, an additional payment, calculated under the same formula as used for calculating such holder's Supplemental Payment, with respect to the amount referred to in clause (iii) of this sentence. All of such amounts shall be paid within 30 days of the exercise of the Limited Stock Appreciation Right, and shall be paid solely in cash if the Limited Stock Appreciation Right has been outstanding at least six months, and solely in Common Stock in all other cases. -5- 6 2.3 SUPPLEMENTAL PAYMENT ON EXERCISE OF OPTIONS OR STOCK APPRECIATION RIGHTS The Committee, either at the time of grant or at the time of exercise of any Option or related Stock Appreciation Right or Limited Stock Appreciation Right, may provide for a supplemental payment (the "Supplemental Payment") by the Company to the optionee with respect to the exercise of any Option or related Stock Appreciation Right or Limited Stock Appreciation Right. The Supplemental Payment shall be in the amount specified by the Committee, which shall not exceed, but may be equal to, the amount necessary to pay the federal income tax payable with respect to both exercise of the Option or related Stock Appreciation Right or Limited Stock Appreciation Right and receipt of the Supplemental Payment, assuming the optionee is taxed at the maximum effective federal income tax rate applicable thereto. The Supplemental Payment shall be paid in cash, Common Stock, or a combination of both, at the option of the Committee. The Supplemental Payment shall be paid within 30 days of the date of exercise of an Option or Stock Appreciation Right or Limited Stock Appreciation Right (or, if later, within 30 days of the date on which income is recognized for federal income tax purposes with respect to such exercise). 2.4 STATUTORY OPTIONS Subject to the limitations on Option terms set forth in Section 2.1, the Committee shall have the authority to grant (i) incentive stock options within the meaning of Section 422 of the Code and (ii) Options containing such terms and conditions as shall be required to qualify such Options for preferential tax treatment under the Code as in effect at the time of such grant. Options granted pursuant to this Section 2.4 may contain such other terms and conditions permitted by Article II of this Plan as the Committee, in its discretion, may from time to time determine (including, without limitation, provision for Stock Appreciation Rights, Limited Stock Appreciation Rights and Supplemental Payments), to the extent that such terms and conditions do not cause the Options to lose their preferential tax treatment. To the extent the Code and Regulations promulgated thereunder require a plan to contain specified provisions in order to qualify options for preferential tax treatment, such provisions shall be deemed to be stated in this Plan. III. RESTRICTED STOCK 3.1 TERMS AND CONDITIONS OF RESTRICTED STOCK AWARDS Subject to the following provisions, all awards of Restricted Stock shall be in such form and shall have such terms and conditions as the Committee, in its discretion, may from time to time determine: -6- 7 (a) The Restricted Stock award shall specify the number of shares of Restricted Stock to be awarded, the price, if any, to be paid by the recipient of the Restricted Stock, and the date or dates on which the Restricted Stock will vest. The vesting of Restricted Stock may be conditioned upon the completion of a specified period of service with the Company or its Subsidiaries, upon the attainment of specified performance goals, or upon such other criteria as the Committee may determine in its sole discretion. (b) Stock certificates representing the Restricted Stock granted to an employee shall be registered in the employee's name. Such certificates shall either be held by the Company on behalf of the employee, or delivered to the employee bearing a legend to restrict transfer of the certificate until the Restricted Stock has vested, as determined by the Committee. The Committee shall determine whether the employee shall have the right to vote and/or receive dividends on the Restricted Stock before it has vested. No share of Restricted Stock may be sold, transferred, assigned, or pledged by the employee until such share has vested in accordance with the terms of the Restricted Stock award. In the event of an employee's termination of employment before all of his Restricted Stock has vested, or in the event other conditions to the vesting of Restricted Stock have not been satisfied prior to any deadline for the satisfaction of such conditions set forth in the award, the shares of Restricted Stock which have not vested shall be forfeited and any purchase price paid by the employee shall be returned to the employee. At the time Restricted Stock vests (and, if the employee has been issued legended certificates of Restricted Stock, upon the return of such certificates to the Company), a certificate for such vested shares shall be delivered to the employee (or the beneficiary designated by the employee in the event of death), free of all restrictions. (c) Notwithstanding the vesting conditions set forth in the Restricted Stock award, (i) the Committee may in its discretion accelerate the vesting of Restricted Stock at any time, and (ii) all shares of Restricted Stock shall vest upon a Change of Control of the Company. 3.2 SUPPLEMENTAL PAYMENT ON VESTING OF RESTRICTED STOCK The Committee, either at the time of grant or at the time of vesting of Restricted Stock, may provide for a Supplemental Payment by the Company to the employee in an amount specified by the Committee which shall not exceed, but may be equal to, the amount necessary to pay the federal income tax payable with respect to both the vesting of the Restricted Stock and receipt of the Supplemental Payment, assuming the employee is taxed at the maximum effective federal income tax rate applicable thereto and has not elected to recognize income with respect to the Restricted Stock before the date such Restricted Stock vests. The Supplemental -7- 8 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. -8- 9 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. -9- 10 4.8 NO GUARANTEE OF EMPLOYMENT The grant of an award under the Plan shall not constitute an assurance of continued employment for any period. 4.9 CHANGE OF CONTROL (a) A "Change of Control" shall mean: (i) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (1) the then outstanding shares of common stock of the Company (the "Outstanding Common Stock") or (2) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Voting Securities"); provided, however, that for purposes of this subsection (i), the following acquisitions shall not constitute a Change of Control: (A) any acquisition directly from the Company, (B) any acquisition by the Company, (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (D) any acquisition by any corporation pursuant to a transaction which complies with clauses (A), (B) and (C) of subsection (iii); or (ii) Individuals who, as of December 1, 1995, constitute the Board of Directors (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board of Directors; provided, however, that any individual becoming a director subsequent to such date whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board of Directors; or (iii) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination"), in each case, unless, following such Business Combination, (A) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Common Stock and Outstanding Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the -10- 11 then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination, of the Outstanding Common Stock and Outstanding Voting Securities, as the case may be, (B) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (C) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board of Directors, providing for such Business Combination. (b) An "SAR Change of Control" shall be deemed to have occurred if: (i) any "person" (as defined in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934, as in effect on March 1, 1985) is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934 as in effect on March 1, 1985) of securities of the Company representing 35% or more of the voting power of the outstanding securities of the Company having the right under ordinary circumstances to vote at an election of the Board of Directors, (ii) there shall occur a change in the composition of a majority of the Board of Directors within any period of three consecutive years which change shall not have been approved by a majority of the Board of Directors as constituted immediately prior to the commencement of such period, or (iii) at any meeting of the stockholders of the Company called for the purpose of electing directors, all persons nominated by the Board of Directors for election as directors shall fail to be elected. 4.10 DURATION AND TERMINATION (a) The Plan shall be of unlimited duration. Notwithstanding the foregoing, no incentive stock option (within the meaning of Section 422 of the Code) shall be -11- 12 granted under the Plan after April 26, 2005, but awards granted prior to such date may extend beyond such date, and the terms of this Plan shall continue to apply to all awards granted hereunder. (b) The Board of Directors may discontinue or terminate the Plan at any time. Such action shall not impair any of the rights of any holder of any award outstanding on the date of the Plan's discontinuance or termination without the holder's written consent. This document incorporates into a single document the provisions of the Plan as amended and restated as of December 1, 1995. IN WITNESS WHEREOF, this document has been executed as of December 1, 1995. SONAT INC. by: /s/ Ronald L. Kuehn, Jr. ------------------------ Ronald L. Kuehn, Jr. Chairman of the Board, President and Chief Executive Officer -12- EX-10.6 7 AMEND. TO RESTRICTED STK. PLAN 1 EXHIBIT 10.6 AMENDMENT TO THE RESTRICTED STOCK PLAN FOR DIRECTORS OF SONAT INC. Sonat Inc. hereby amends the Restricted Stock Plan for Directors of Sonat Inc. (the "Plan") as follows, effective as of December 1, 1995: 1. Section 13 of the Plan is hereby amended to read in its entirety as follows: 13. CHANGE OF CONTROL A "Change of Control" shall mean: (i) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934 (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (1) the then outstanding shares of common stock of the Company (the "Outstanding Common Stock") or (2) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Voting Securities"); provided, however, that for purposes of this subsection (i), the following acquisitions shall not constitute a Change of Control: (A) any acquisition directly from the Company, (B) any acquisition by the Company, (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (D) any acquisition by any corporation pursuant to a transaction which complies with clauses (A), (B) and (C) of subsection (iii); or (ii) Individuals who, as of December 1, 1995, constitute the Board of Directors (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board of Directors; provided, however, that any individual becoming a director subsequent to such date whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or 2 other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board of Directors; or (iii) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination"), in each case, unless, following such Business Combination, (A) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Common Stock and Outstanding Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination, of the Outstanding Common Stock and Outstanding Voting Securities, as the case may be, (B) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (C) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board of Directors, providing for such Business Combination. IN WITNESS WHEREOF, Sonat Inc. has executed this document as of December 1, 1995. SONAT INC. By: /s/ Ronald L. Kuehn, Jr. -------------------------------- Ronald L. Kuehn, Jr. Chairman of the Board, President and Chief Executive Officer EX-10.7 8 AMEND. TO PERFORMANCE AWARD PLAN 1 EXHIBIT 10.7 AMENDMENT TO THE PERFORMANCE AWARD PLAN OF SONAT INC. Sonat Inc. hereby amends the Performance Award Plan of Sonat Inc. (the "Plan") as follows, effective as of December 1, 1995: 1. Section 3.6 of the Plan is hereby amended to read in its entirety as follows: 3.6 CHANGE OF CONTROL A "Change of Control" shall mean: (i) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934 (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (1) the then outstanding shares of common stock of the Company (the "Outstanding Common Stock") or (2) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Voting Securities"); provided, however, that for purposes of this subsection (i), the following acquisitions shall not constitute a Change of Control: (A) any acquisition directly from the Company, (B) any acquisition by the Company, (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (D) any acquisition by any corporation pursuant to a transaction which complies with clauses (A), (B) and (C) of subsection (iii); or (ii) Individuals who, as of December 1, 1995, constitute the Board of Directors (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board of Directors; provided, however, that any individual becoming a director subsequent to such date whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened 2 solicitation of proxies or consents by or on behalf of a Person other than the Board of Directors; or (iii) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination"), in each case, unless, following such Business Combination, (A) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Common Stock and Outstanding Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination, of the Outstanding Common Stock and Outstanding Voting Securities, as the case may be, (B) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (C) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board of Directors, providing for such Business Combination. IN WITNESS WHEREOF, Sonat Inc. has executed this document as of December 1, 1995. SONAT INC. by: /s/ Ronald L. Kuehn, Jr. ------------------------ Ronald L. Kuehn, Jr. Chairman of the Board, President and Chief Executive Officer EX-10.8 9 AMEND. TO CASH BONUS PLAN 1 EXHIBIT 10.8 AMENDMENT TO THE CASH BONUS PLAN OF SONAT INC. Sonat Inc. hereby amends the Cash Bonus Plan of Sonat Inc. (the "Plan") as follows, effective as of December 1, 1995: 1. Section 4.6 of the Plan is hereby amended to read in its entirety as follows: 4.6 CHANGE OF CONTROL A "Change of Control" shall mean: (i) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934 (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (1) the then outstanding shares of common stock of the Company (the "Outstanding Common Stock") or (2) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Voting Securities"); provided, however, that for purposes of this subsection (i), the following acquisitions shall not constitute a Change of Control: (A) any acquisition directly from the Company, (B) any acquisition by the Company, (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (D) any acquisition by any corporation pursuant to a transaction which complies with clauses (A), (B) and (C) of subsection (iii); or (ii) Individuals who, as of December 1, 1995, constitute the Board of Directors (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board of Directors; provided, however, that any individual becoming a director subsequent to such date whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened 2 solicitation of proxies or consents by or on behalf of a Person other than the Board of Directors; or (iii) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination"), in each case, unless, following such Business Combination, (A) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Common Stock and Outstanding Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination, of the Outstanding Common Stock and Outstanding Voting Securities, as the case may be, (B) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (C) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board of Directors, providing for such Business Combination. IN WITNESS WHEREOF, Sonat Inc. has executed this document as of December 1, 1995. SONAT INC. by: /s/ Ronald L. Kuehn, Jr. ------------------------ Ronald L. Kuehn, Jr. Chairman of the Board, President and Chief Executive Officer EX-10.9 10 AMENED.TO RETIREMENT PLAN FOR DIRECTORS 1 EXHIBIT 10.9 AMENDMENT TO THE SONAT INC. RETIREMENT PLAN FOR DIRECTORS Sonat Inc. hereby amends the Sonat Inc. Retirement Plan for Directors (the "Plan") as follows, effective as of December 1, 1995: 1. Paragraph 8 of the Plan is hereby amended to read in its entirety as follows: 8. CHANGE OF CONTROL A "Change of Control" shall mean: (i) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934 (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (1) the then outstanding shares of common stock of the Company (the "Outstanding Common Stock") or (2) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Voting Securities"); provided, however, that for purposes of this subsection (i), the following acquisitions shall not constitute a Change of Control: (A) any acquisition directly from the Company, (B) any acquisition by the Company, (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (D) any acquisition by any corporation pursuant to a transaction which complies with clauses (A), (B) and (C) of subsection (iii); or (ii) Individuals who, as of December 1, 1995, constitute the Board of Directors (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board of Directors; provided, however, that any individual becoming a director subsequent to such date whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened 2 solicitation of proxies or consents by or on behalf of a Person other than the Board of Directors; or (iii) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination"), in each case, unless, following such Business Combination, (A) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Common Stock and Outstanding Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination, of the Outstanding Common Stock and Outstanding Voting Securities, as the case may be, (B) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (C) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board of Directors, providing for such Business Combination. IN WITNESS WHEREOF, Sonat Inc. has executed this document as of December 1, 1995. SONAT INC. by: /s/ Ronald L. Kuehn, Jr. ------------------------ Ronald L. Kuehn, Jr. Chairman of the Board, President and Chief Executive Officer EX-10.10A 11 EXECUTIVE SEVERANCE AGREEMENT RONALD L. KUEHN 1 EXHIBIT 10.10a EXECUTIVE SEVERANCE AGREEMENT, dated as of December 1, 1995, by and between Sonat Inc., a Delaware corporation ("Sonat"), and Ronald L. Kuehn, Jr. ("Executive"). WHEREAS, the Executive Compensation Committee of the Board of Directors of Sonat has recommended, and the Board of Directors has approved, that Sonat enter into severance agreements with key executives of Sonat who are from time to time designated by the Executive Compensation Committee; WHEREAS, Executive is a key executive of Sonat and has been selected by the Executive Compensation Committee and the Board of Directors to enter into a severance agreement with Sonat; WHEREAS, should Sonat become subject to any proposed or threatened Change of Control (as hereinafter defined), the Board of Directors believes it imperative that Sonat and the Board of Directors be able to rely upon Executive to continue in his position, and that Sonat be able to receive and rely upon his advice, if requested, as to the best interests of Sonat and its stockholders without concern that he might be distracted by the personal uncertainties and risks created by such a proposal or threat; and WHEREAS, should Sonat receive any such proposals, in addition to Executive's regular duties, he may be called upon to assist in the assessment of such proposals, advise management and the Board of Directors as to whether such proposals would be in the best interests of Sonat and its stockholders, and to take such other actions as the Board of Directors might determine to be appropriate; NOW, THEREFORE, Sonat and Executive agree as follows: 1. SERVICES DURING CERTAIN EVENTS. In the event a third person begins a tender or exchange offer, circulates a proxy to stockholders, or takes other steps to effect a Change of Control, Executive agrees that he will not voluntarily leave the employ of Sonat, and will render the services contemplated in the recitals to this Agreement, until the third person has abandoned or terminated his efforts to effect a Change of Control or until a Change of Control has occurred. 2. TERMINATION FOLLOWING CHANGE OF CONTROL. Except as provided in Section 4 hereof, Sonat will provide or cause to be provided to Executive the rights and benefits described in Section 3 hereof in the event that Executive's employment by Sonat is terminated: 2 (a) at any time within three years following a Change of Control by Sonat for reasons other than for "cause" (as such term is defined in Section 4 hereof) or other than as a consequence of Executive's death, permanent disability or retirement at or after the normal retirement date as provided under the Sonat Inc. Retirement Plan (the "Retirement Plan") as in effect immediately preceding such date ("Normal Retirement Date"); (b) at any time within three years following a Change of Control by Executive following the occurrence of any of the following events without Executive's written consent: (i) the assignment of Executive to any duties or responsibilities that are inconsistent with his position, duties, responsibilities or status immediately preceding such Change of Control, or a change in his reporting responsibilities or titles in effect at such time resulting in a reduction of his responsibilities or position at Sonat; (ii) the reduction of Executive's annual salary (including any deferred portions thereof) or level of benefits or supplemental compensation; or (iii) the transfer of Executive to a location requiring a change in his residence or a material increase in the amount of travel normally required of Executive in connection with his employment by Sonat; or (c) by Executive for any reason during the 30-day period immediately following the first anniversary of the date of the Change of Control. For purposes of this Agreement, "Change of Control" shall mean: A. The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13(d)-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of common stock of Sonat (the "Outstanding Common Stock") or (ii) the combined voting power of the then outstanding voting securities of Sonat entitled to vote generally in the election of directors (the "Outstanding Voting Securities"); provided, however, that for purposes of this subsection A, the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from Sonat, (ii) any acquisition by Sonat, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by Sonat or any corporation controlled by Sonat or (iv) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection C; or -2- 3 B. Individuals who, as of the date hereof, constitute the Board of Directors (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board of Directors; provided, however that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by Sonat's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board of Directors; or C. Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of Sonat (a "Business Combination"), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Common Stock and Outstanding Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns Sonat or all or substantially all of Sonat's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination, of the Outstanding Common Stock and Outstanding Voting Securities, as the case may be, (ii) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of Sonat or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board of Directors, providing for such Business Combination. 3. RIGHTS AND BENEFITS UPON TERMINATION. In the event of the termination of Executive's employment under any of the circumstances set forth in Section 2 hereof ("Termination"), Sonat agrees to provide or cause to be provided to Executive the following rights and benefits: -3- 4 (A) SALARY AND OTHER PAYMENT AT TERMINATION. Executive shall be entitled to receive within 30 days of Termination a lump-sum payment in cash in the amount of three times Executive's highest Earnings (as such term is defined in this Section 3(a)) with respect to any 12 consecutive month period during the three years ending with the date of Termination; provided, however, that if there are fewer than 36 months remaining from the date of Termination to Executive's Normal Retirement Date, the amount calculated pursuant to this paragraph will be reduced by multiplying such amount by a fraction, the numerator of which is the number of months (including any fraction of a month) so remaining to Executive's Normal Retirement Date and the denominator of which is 36. For purposes of this Agreement, "Earnings" shall mean the sum of (1) all base pay (including Before-Tax Contributions (as defined in Sonat's Savings Plan) made on behalf of Executive under Sonat's Savings Plan, and before-tax contributions by Executive to a plan established under Section 125 of the Internal Revenue Code, as amended (the "Code"), and sponsored by Sonat), overtime, cash bonuses (including bonuses paid under Sonat's Performance Award Plan, Cash Bonus Plan, Performance Award and Cash Bonus Plan, and All-Employee Incentive Program) and commissions paid to Executive for personal service rendered to Sonat and its subsidiaries and (2) workers' compensation payments or other comparable payments required to be made by law, received in lieu of base pay, but only to the extent that such payments do not exceed the rate of base pay of Executive immediately prior to the commencement of such payments. Notwithstanding the provisions of the foregoing sentence, Earnings shall not include (1) severance pay, bonuses, workers' compensation payments, payment for unused vacation, and payments similar to any of the foregoing, received after or on account of Executive's Termination, (2) any income attributable to restricted stock, options, stock appreciation rights, supplemental payments, or dividends on restricted stock, acquired pursuant to Sonat's Executive Award Plan, or (3) any Choice Dollars (as defined in Sonat's Choice Benefits Plan) allocated to Executive under Sonat's Choice Benefits Plan, regardless of whether any Choice Dollars are paid to Executive in cash. (B) RETIREMENT BENEFITS. If Executive (i) has at Termination attained the age of 50 and (ii) at Termination is not otherwise entitled to receive an early retirement benefit under the terms of a qualified retirement plan of Sonat or its subsidiaries, Sonat shall pay in cash to Executive a monthly benefit for life (a "Severance Retirement Benefit") in an amount equal to the difference between (i) the monthly benefit calculated under the early retirement provisions of the Retirement Plan (as in effect immediately prior to the Change of Control), using the early retirement benefit reduction factors applicable as of the later of -4- 5 age 55 or the Executive's actual age at his date of Termination, and (ii) the monthly benefit payable to Executive under the Retirement Plan (as in effect on the date of Executive's Termination), assuming the following for purposes of clauses (i) and (ii): (A) the benefit is payable in the form of a single life annuity as of the later of the date Executive attains age 55 and the date of Termination; (B) the benefit is calculated based on Executive's actual service and actual earnings history at the date of Termination; (C) Executive is fully vested in the benefit; and (D) the benefit is calculated under the assumption that Code Sections 401(a)(17) and 415 are nonexistent and the provisions of the Retirement Plan incorporating such Sections are inoperative. The Severance Retirement Benefit shall be paid commencing on the first day of the month following the later of the date Executive attains age 55 and the date of Termination, and shall not be affected by the settlement option or date of commencement of any benefits actually payable under the Retirement Plan or the Sonat Inc. Supplemental Benefit Plan. (C) SURVIVORS' BENEFITS. If Executive is entitled to receive a Severance Retirement Benefit under Section 3(b) and Executive is survived by one or more Eligible Family Members (as such term is defined in the Retirement Plan as in effect immediately prior to the Change of Control), Sonat shall pay in cash to each such Eligible Family Member a monthly survivors' benefit (the "Severance Survivors' Benefit") in an amount equal to the excess of (i) over (ii), where (i) is the monthly survivors benefit that would have been payable to such Eligible Family Member under the Retirement Plan (as in effect immediately prior to the Change of Control) with respect to Executive if Executive's retirement benefit were calculated under the early retirement provisions of such plan, using the early retirement benefit reduction factors applicable as of the later of age 55 or Executive's actual age at his date of Termination, and assuming (A) the retirement benefit is payable in the form of a single life annuity as of the later of the date Executive attains age 55 and the date of Termination; (B) the retirement benefit is calculated based on Executive's actual service and actual earnings history at the date of Termination; (C) Executive is fully vested in the retirement benefit; and (D) the retirement benefit is calculated under the assumption that Code Sections 401(a)(17) and 415 are nonexistent and the provisions of the Retirement Plan incorporating such Sections are inoperative; and (ii) is the amount actually paid to such Eligible Family Member for such month as a Survivors' Benefit under the Retirement Plan and as an Excess Retirement Plan Benefit under the Sonat Inc. Supplemental Benefit Plan. -5- 6 Payment of the Severance Survivors' Benefit shall commence on the first day of the month following the death of Executive. (D) INSURANCE AND OTHER SPECIAL BENEFITS. To the extent Executive is eligible thereunder, Executive shall continue to be covered by the life and dependent life insurance, medical and dental insurance, and accident and disability insurance plans of Sonat and its subsidiaries or any successor plan or program in effect at Termination for employees in the same class or category as Executive, subject to the terms of such plans and to Executive's making any required contributions thereto. In the event Executive is ineligible to continue to be so covered under the terms of any such benefit plan or program, or, in the event Executive is eligible but the benefits applicable to Executive are not substantially equivalent to the benefits applicable to Executive immediately prior to Termination, then, for a period of 36 months following Termination (or until Executive's Normal Retirement Date, whichever is sooner), Sonat shall provide such substantially equivalent benefits, or such additional benefits as may be necessary to make the benefits applicable to Executive substantially equivalent to those in effect before Termination, through other sources; provided, however, that if during such period Executive should enter into the employ of another company or firm which provides substantially similar benefit coverage, Executive's participation in the comparable benefit provided by Sonat either directly or through such other sources shall cease. Nothing contained in this paragraph shall be deemed to require or permit termination or restriction of Executive's coverage under any plan or program of Sonat or any of its subsidiaries or any successor plan or program thereto to which Executive is entitled under the terms of such plan or program, whether at the end of the aforementioned 36-month period or at any other time. (E) RELOCATION ASSISTANCE. Should Executive move his residence in order to pursue other business opportunities within three years of the date of Termination (or until his Normal Retirement Date, whichever is sooner), Sonat shall reimburse him for any expenses incurred in that relocation (including taxes payable on the reimbursement) which are not reimbursed by another employer; provided, however, that Executive shall be entitled to such reimbursement with respect to only one such relocation, it being agreed that in the event of more than one such relocation, Executive shall be entitled to specify the relocation for which reimbursement hereunder is to be made. Benefits under this provision will include the assistance, at no cost to Executive, in selling his home and other assistance which was customarily provided to executives transferred within Sonat or between Sonat and its subsidiaries prior to the Change of Control. (F) OTHER BENEFITS PLANS. The specific arrangements referred to in this Section 3 are not intended to exclude Executive's participation in other benefit -6- 7 plans in which Executive currently participates or which are available to executive personnel generally in the class or category of Executive or to preclude other compensation or benefits as may be authorized by the Board of Directors from time to time. (G) DUTY TO MITIGATE. Executive's entitlement to benefits hereunder shall not be governed by any duty to mitigate his damages by seeking further employment nor offset by any compensation which he may receive from future employment. (H) PAYMENT OBLIGATIONS ABSOLUTE. Sonat's obligation to pay or cause to be paid to Executive the benefits and to make the arrangements provided in this Section 3 shall be absolute and unconditional and shall not be affected by any circumstances, including, without limitation, any setoff, counterclaim, recoupment, defense or other right, which Sonat may have against Executive or anyone else. All amounts payable by or on behalf of Sonat hereunder shall be paid without notice or demand. Each and every payment made hereunder by or on behalf of Sonat shall be final and Sonat and its subsidiaries shall not, for any reason whatsoever, seek to recover all or any part of such payment from Executive or from whomever shall be entitled thereto. 4. CONDITIONS TO THE OBLIGATIONS OF SONAT. Sonat shall have no obligation to provide or cause to be provided to Executive the rights and benefits described in Section 3 hereof if either of the following events shall occur: (A) TERMINATION FOR CAUSE. Sonat shall terminate Executive's employment for "cause". For purposes of this Agreement, termination of employment for "cause" shall mean termination solely for dishonesty, conviction of a felony, or willful unauthorized disclosure of confidential information of Sonat. (B) RESIGNATION AS DIRECTOR. Executive shall not, promptly after Termination and upon receiving a written request to do so, resign as a director and/or officer of each subsidiary and affiliate of Sonat of which he is then serving as a director and/or officer. 5. CONFIDENTIALITY; NON-SOLICITATION; COOPERATION. (A) CONFIDENTIALITY. Executive agrees that at all times following Termination, he will not, without the prior written consent of Sonat, disclose to any person, firm or corporation any confidential information of Sonat or its subsidiaries which is now known to him or which hereafter may become known to him as a result of his employment or association with Sonat and which could be helpful to a competitor, unless such disclosure is required under the terms of a valid and effective subpoena -7- 8 or order issued by a court or governmental body; provided, however, that the foregoing shall not apply to confidential information which becomes publicly disseminated by means other than a breach of this Agreement. (B) NON-SOLICITATION. Executive agrees that for a period of three years following the date of Termination (or until Executive's Normal Retirement Date, whichever is sooner) he will not induce, either directly or indirectly, any employee of senior to manager level of Sonat or any of its subsidiaries to terminate his or her employment. (C) COOPERATION. Executive agrees that, at all times following Termination, he will furnish such information and render such assistance and cooperation as may reasonably be requested in connection with any litigation or legal proceedings concerning Sonat or any of its subsidiaries (other than any legal proceedings concerning Executive's employment). In connection with such cooperation, Sonat will pay or reimburse Executive for reasonable expenses. (D) REMEDIES FOR BREACH. It is recognized that damages in the event of breach of this Section 5 by Executive would be difficult, if not impossible, to ascertain, and it is therefore agreed that Sonat, in addition to and without limiting any other remedy or right it may have, shall have the right to an injunction or other equitable relief in any court of competent jurisdiction, enjoining any such breach, and Executive hereby waives any and all defenses he may have on the ground of lack of jurisdiction or competence of the court to grant such an injunction or other equitable relief. The existence of this right shall not preclude Sonat from pursuing any other rights and remedies at law or in equity which Sonat may have. 6. CERTAIN ADDITIONAL PAYMENTS BY SONAT. (a) Anything in this Agreement to the contrary notwithstanding and except as set forth below, in the event it shall be determined that any payment or distribution by Sonat to or for the benefit of Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 6) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by Executive of all federal income taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any federal income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. Notwithstanding the foregoing provisions of this Section 6(a), if it shall be determined that Executive is entitled to a Gross-Up -8- 9 Payment, but that Executive, after taking into account the Payments and the Gross-Up Payment, would not receive a net after-tax benefit of at least $50,000 (taking into account both federal income taxes and any Excise Tax) as compared to the net after-tax proceeds to Executive resulting from an elimination of the Gross-Up Payment and a reduction of the Payments, in the aggregate, to an amount (the "Reduced Amount") such that the receipt of Payments would not give rise to any Excise Tax, then no Gross-Up Payment shall be made to Executive and the Payments, in the aggregate, shall be reduced to the Reduced Amount. (b) Subject to the provisions of Section 6(c), all determinations required to be made under this Section 6, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Ernst & Young LLP or such other certified public accounting firm as may be designated by Executive (the "Accounting Firm"), which shall provide detailed supporting calculations both to Sonat and Executive within 15 business days of the receipt of notice from Executive that there has been a Payment or such earlier time as is requested by Sonat. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting a Change of Control, Executive shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by Sonat. Any Gross-Up Payment shall be paid by Sonat to Executive within five days of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon Sonat and Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by Sonat should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that Sonat exhausts its remedies pursuant to Section 6(c) and Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by Sonat to or for the benefit of Executive. (c) Executive shall notify Sonat in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by Sonat of a Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after Executive is informed in writing of such claim and shall apprise Sonat of the nature of such claim and the date on which such claim is requested to be paid. Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to Sonat (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If Sonat notifies Executive in writing prior to the expiration of such period that it desires to contest such claim, Executive shall: -9- 10 (i) give Sonat any information reasonably requested by Sonat relating to such claim, (ii) take such action in connection with contesting such claim as Sonat shall reasonably request in writing from time to time, including without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by Sonat, (iii) cooperate with Sonat in good faith in order effectively to contest such claim, and (iv) permit Sonat to participate in any proceedings relating to such claim; provided, however, that Sonat shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold Executive harmless, on an after-tax basis, for any Excise Tax or federal income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 6(c), Sonat shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct Executive to pay the tax claimed and sue for a refund or to contest the claim in any permissible manner, and Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as Sonat shall determine; provided, however, that if Sonat directs Executive to pay such claim and sue for a refund, Sonat shall advance the amount of such payment to Executive, on an interest-free basis, and shall indemnify and hold Executive harmless on an after-tax basis, from any Excise Tax or federal income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, Sonat's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder, and Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by Executive of an amount advanced by Sonat pursuant to Section 6(c), Executive becomes entitled to receive any refund with respect to such claim, Executive shall (subject to Sonat's complying with the requirements of Section 6(c)) promptly pay to Sonat the amount of such refund -10- 11 (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by Executive of an amount advanced by Sonat pursuant to Section 6(c), a determination is made that Executive shall not be entitled to any refund with respect to such claim and Sonat does not notify Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 7. TERM OF AGREEMENT. This Agreement shall terminate on April 30, 1996; provided, however, that this Agreement shall automatically renew for successive one-year terms unless the Board of Directors notifies Executive in writing at least 30 days prior to an April 30 expiration date that it does not desire to renew the Agreement for an additional term; and provided further, however, that this Agreement shall terminate prior to April 30, 1996 or, in the event of a renewal of this Agreement, any subsequent April 30, if and when the Executive Compensation Committee determines that Executive is no longer a key executive for purposes of being a party to an executive severance agreement with Sonat and so notifies Executive, except that such determination shall not be made, and if made shall have no effect, (i) within three years after a Change of Control or (ii) during any period of time when Sonat has reason to believe that any third person has begun a tender or exchange offer, circulated a proxy to stockholders, or taken other steps or formulated plans to effect a Change of Control, such period of time to end when, in the opinion of the Executive Compensation Committee, the third person has abandoned or terminated his efforts or plans to effect a Change of Control. 8. EXPENSES. Sonat shall pay or reimburse Executive for all costs and expenses, including, without limitation, court costs and attorneys' fees, incurred by Executive as a result of any claim, action or proceeding (including, without limitation, a claim, action or proceeding by Executive against Sonat) arising out of, or challenging the validity or enforceability of, this Agreement or any provision hereof. 9. MISCELLANEOUS. (A) ASSIGNMENT. No right, benefit or interest hereunder shall be subject to assignment, anticipation, alienation, sale, encumbrance, charge, pledge, hypothecation or set-off in respect of any claim, debt or obligation, or to execution, attachment, levy or similar process; provided, however, that Executive may assign any right, benefit or interest hereunder if such assignment is permitted under the terms of any plan or policy of insurance or annuity contract governing such right, benefit or interest. (B) CONSTRUCTION OF AGREEMENT. Nothing in this Agreement shall be construed to amend any provision of any plan or policy of Sonat. This Agreement is -11- 12 not, and nothing herein shall be deemed to create, a commitment of continued employment of Executive by Sonat or any of its subsidiaries. (C) AMENDMENT. This Agreement may not be amended, modified or cancelled except by written agreement of the parties. (D) WAIVER. No provision of this Agreement may be waived except by a writing signed by the party to be bound thereby. Executive may at any time or from time to time waive any or all of the rights and benefits provided for herein which have not been received by Executive at the time of such waiver. In addition, prior to the last day of the calendar year in which Executive's Termination occurs, Executive may waive any or all rights and benefits provided for herein which have been received by Executive; provided that prior to the end of such year Executive repays to Sonat (or, if the benefit was received from an employee benefit plan trust, to such trust) the amount of the benefit received together with interest thereon at the minimum rate required to avoid imputed income. Any waiver of benefits pursuant to this paragraph shall be irrevocable. If Executive waives a right or benefit provided for herein and such waiver is determined by the Internal Revenue Service not to be effective, Sonat shall indemnify Executive for any federal income and excise taxes he incurs as a result of that determination, so as to put Executive in the position he would have been in had the waiver been given effect. (E) SEVERABILITY. In the event that any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, the remaining provisions of this Agreement shall remain in full force and effect to the fullest extent permitted by law. (F) SUCCESSORS. This Agreement shall be binding upon and inure to the benefit of Executive and his personal representative and heirs, and Sonat and any successor organization or organizations which shall succeed to substantially all of the business and property of Sonat, whether by means of merger, consolidation, acquisition of substantially all of the assets of Sonat or otherwise, including by operation of law. (G) TAXES. Any payment or delivery required under this Agreement shall be subject to all requirements of the law with regard to withholding of taxes, filing, making of reports and the like, and Sonat shall use its best efforts to satisfy promptly all such requirements. (H) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE. -12- 13 (I) ENTIRE AGREEMENT. This Agreement sets forth the entire agreement and understanding of the parties hereto with respect to the matters covered hereby. IN WITNESS WHEREOF, the parties have executed this Agreement as of the 1st day of December, 1995. SONAT INC. by: /s/ William A. Smith ------------------------ William A. Smith Executive Vice President /s/ Ronald L. Kuehn, Jr. ------------------------ Ronald L. Kuehn, Jr. -13- 14 SCHEDULE SONAT INC. EXECUTIVES SIGNING NEW SEVERANCE AGREEMENTS The following executives of Sonat Inc. executed severance agreements substantially identical to the Executive Severance Agreements dated December 1, 1995, between Sonat Inc. and Ronald L. Kuehn, Jr.: Thomas W. Barker, Jr. Richard B. Bates Beverley T. Krannich James E. Moylan, Jr. James A. Rubright William A. Smith EX-10.10B 12 EXECUTIVE SEVERANCE AGREEMENT DONALD G. RUSSELL 1 EXHIBIT 10.10B EXECUTIVE SEVERANCE AGREEMENT, dated as of December 1, 1995, by and between Sonat Inc., a Delaware corporation ("Sonat"), and Donald G. Russell ("Executive"). WHEREAS, the Executive Compensation Committee of the Board of Directors of Sonat has recommended, and the Board of Directors has approved, that Sonat enter into severance agreements with key executives of Sonat who are from time to time designated by the Executive Compensation Committee; WHEREAS, Executive is a key executive of Sonat and has been selected by the Executive Compensation Committee and the Board of Directors to enter into a severance agreement with Sonat; WHEREAS, should Sonat become subject to any proposed or threatened Change of Control (as hereinafter defined), the Board of Directors believes it imperative that Sonat and the Board of Directors be able to rely upon Executive to continue in his position, and that Sonat be able to receive and rely upon his advice, if requested, as to the best interests of Sonat and its stockholders without concern that he might be distracted by the personal uncertainties and risks created by such a proposal or threat; and WHEREAS, should Sonat receive any such proposals, in addition to Executive's regular duties, he may be called upon to assist in the assessment of such proposals, advise management and the Board of Directors as to whether such proposals would be in the best interests of Sonat and its stockholders, and to take such other actions as the Board of Directors might determine to be appropriate; NOW, THEREFORE, Sonat and Executive agree as follows: 1. SERVICES DURING CERTAIN EVENTS. In the event a third person begins a tender or exchange offer, circulates a proxy to stockholders, or takes other steps to effect a Change of Control, Executive agrees that he will not voluntarily leave the employ of Sonat, and will render the services contemplated in the recitals to this Agreement, until the third person has abandoned or terminated his efforts to effect a Change of Control or until a Change of Control has occurred. 2. TERMINATION FOLLOWING CHANGE OF CONTROL. Except as provided in Section 4 hereof, Sonat will provide or cause to be provided to Executive the rights and benefits described in Section 3 hereof in the event that Executive's employment by Sonat is terminated: 2 (a) at any time within three years following a Change of Control by Sonat for reasons other than for "cause" (as such term is defined in Section 4 hereof) or other than as a consequence of Executive's death, permanent disability or retirement at or after the Executive attains age 67 ("Normal Retirement Date") as provided under the Sonat Inc. Retirement Plan (the "Retirement Plan"); (b) at any time within three years following a Change of Control by Executive following the occurrence of any of the following events without Executive's written consent: (i) the assignment of Executive to any duties or responsibilities that are inconsistent with his position, duties, responsibilities or status immediately preceding such Change of Control, or a change in his reporting responsibilities or titles in effect at such time resulting in a reduction of his responsibilities or position at Sonat; (ii) the reduction of Executive's annual salary (including any deferred portions thereof) or level of benefits or supplemental compensation; or (iii) the transfer of Executive to a location requiring a change in his residence or a material increase in the amount of travel normally required of Executive in connection with his employment by Sonat; or (c) by Executive for any reason during the 30-day period immediately following the first anniversary of the date of the Change of Control. For purposes of this Agreement, "Change of Control" shall mean: A. The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13(d)-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of common stock of Sonat (the "Outstanding Common Stock") or (ii) the combined voting power of the then outstanding voting securities of Sonat entitled to vote generally in the election of directors (the "Outstanding Voting Securities"); provided, however, that for purposes of this subsection A, the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from Sonat, (ii) any acquisition by Sonat, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by Sonat or any corporation controlled by Sonat or (iv) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection C; or -2- 3 B. Individuals who, as of the date hereof, constitute the Board of Directors (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board of Directors; provided, however that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by Sonat's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board of Directors; or C. Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of Sonat (a "Business Combination"), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Common Stock and Outstanding Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns Sonat or all or substantially all of Sonat's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination, of the Outstanding Common Stock and Outstanding Voting Securities, as the case may be, (ii) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of Sonat or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board of Directors, providing for such Business Combination. 3. RIGHTS AND BENEFITS UPON TERMINATION. In the event of the termination of Executive's employment under any of the circumstances set forth in Section 2 hereof ("Termination"), Sonat agrees to provide or cause to be provided to Executive the following rights and benefits: -3- 4 (A) SALARY AND OTHER PAYMENT AT TERMINATION. Executive shall be entitled to receive within 30 days of Termination a lump-sum payment in cash in the amount of three times Executive's highest Earnings (as such term is defined in this Section 3(a)) with respect to any 12 consecutive month period during the three years ending with the date of Termination; provided, however, that if there are fewer than 36 months remaining from the date of Termination to Executive's Normal Retirement Date, the amount calculated pursuant to this paragraph will be reduced by multiplying such amount by a fraction, the numerator of which is the number of months (including any fraction of a month) so remaining to Executive's Normal Retirement Date and the denominator of which is 36. For purposes of this Agreement, "Earnings" shall mean the sum of (1) all base pay (including Before-Tax Contributions (as defined in Sonat's Savings Plan) made on behalf of Executive under Sonat's Savings Plan, and before-tax contributions by Executive to a plan established under Section 125 of the Internal Revenue Code, as amended (the "Code"), and sponsored by Sonat), overtime, cash bonuses (including bonuses paid under Sonat's Performance Award Plan, Cash Bonus Plan, Performance Award and Cash Bonus Plan, and All-Employee Incentive Program) and commissions paid to Executive for personal service rendered to Sonat and its subsidiaries and (2) workers' compensation payments or other comparable payments required to be made by law, received in lieu of base pay, but only to the extent that such payments do not exceed the rate of base pay of Executive immediately prior to the commencement of such payments. Notwithstanding the provisions of the foregoing sentence, Earnings shall not include (1) severance pay, bonuses, workers' compensation payments, payment for unused vacation, and payments similar to any of the foregoing, received after or on account of Executive's Termination, (2) any income attributable to restricted stock, options, stock appreciation rights, supplemental payments, or dividends on restricted stock, acquired pursuant to Sonat's Executive Award Plan, or (3) any Choice Dollars (as defined in Sonat's Choice Benefits Plan) allocated to Executive under Sonat's Choice Benefits Plan, regardless of whether any Choice Dollars are paid to Executive in cash. (B) RETIREMENT BENEFITS. If Executive (i) has at Termination attained the age of 50 and (ii) at Termination is not otherwise entitled to receive an early retirement benefit under the terms of a qualified retirement plan of Sonat or its subsidiaries, Sonat shall pay in cash to Executive a monthly benefit for life (a "Severance Retirement Benefit") in an amount equal to the difference between (i) the monthly benefit calculated under the early retirement provisions of the Retirement Plan (as in effect immediately prior to the Change of Control), using the early retirement benefit reduction factors applicable as of the later of -4- 5 age 55 or the Executive's actual age at his date of Termination, and (ii) the monthly benefit payable to Executive under the Retirement Plan (as in effect on the date of Executive's Termination), assuming the following for purposes of clauses (i) and (ii): (A) the benefit is payable in the form of a single life annuity as of the later of the date Executive attains age 55 and the date of Termination; (B) the benefit is calculated based on Executive's actual service and actual earnings history at the date of Termination; (C) Executive is fully vested in the benefit; and (D) the benefit is calculated under the assumption that Code Sections 401(a)(17) and 415 are nonexistent and the provisions of the Retirement Plan incorporating such Sections are inoperative. The Severance Retirement Benefit shall be paid commencing on the first day of the month following the later of the date Executive attains age 55 and the date of Termination, and shall not be affected by the settlement option or date of commencement of any benefits actually payable under the Retirement Plan or the Sonat Inc. Supplemental Benefit Plan. (C) SURVIVORS' BENEFITS. If Executive is entitled to receive a Severance Retirement Benefit under Section 3(b) and Executive is survived by one or more Eligible Family Members (as such term is defined in the Retirement Plan as in effect immediately prior to the Change of Control), Sonat shall pay in cash to each such Eligible Family Member a monthly survivors' benefit (the "Severance Survivors' Benefit") in an amount equal to the excess of (i) over (ii), where (i) is the monthly survivors benefit that would have been payable to such Eligible Family Member under the Retirement Plan (as in effect immediately prior to the Change of Control) with respect to Executive if Executive's retirement benefit were calculated under the early retirement provisions of such plan, using the early retirement benefit reduction factors applicable as of the later of age 55 or Executive's actual age at his date of Termination, and assuming (A) the retirement benefit is payable in the form of a single life annuity as of the later of the date Executive attains age 55 and the date of Termination; (B) the retirement benefit is calculated based on Executive's actual service and actual earnings history at the date of Termination; (C) Executive is fully vested in the retirement benefit; and (D) the retirement benefit is calculated under the assumption that Code Sections 401(a)(17) and 415 are nonexistent and the provisions of the Retirement Plan incorporating such Sections are inoperative; and (ii) is the amount actually paid to such Eligible Family Member for such month as a Survivors' Benefit under the Retirement Plan and as an Excess Retirement Plan Benefit under the Sonat Inc. Supplemental Benefit Plan. -5- 6 Payment of the Severance Survivors' Benefit shall commence on the first day of the month following the death of Executive. (D) INSURANCE AND OTHER SPECIAL BENEFITS. To the extent Executive is eligible thereunder, Executive shall continue to be covered by the life and dependent life insurance, medical and dental insurance, and accident and disability insurance plans of Sonat and its subsidiaries or any successor plan or program in effect at Termination for employees in the same class or category as Executive, subject to the terms of such plans and to Executive's making any required contributions thereto. In the event Executive is ineligible to continue to be so covered under the terms of any such benefit plan or program, or, in the event Executive is eligible but the benefits applicable to Executive are not substantially equivalent to the benefits applicable to Executive immediately prior to Termination, then, for a period of 36 months following Termination (or until Executive's Normal Retirement Date, whichever is sooner), Sonat shall provide such substantially equivalent benefits, or such additional benefits as may be necessary to make the benefits applicable to Executive substantially equivalent to those in effect before Termination, through other sources; provided, however, that if during such period Executive should enter into the employ of another company or firm which provides substantially similar benefit coverage, Executive's participation in the comparable benefit provided by Sonat either directly or through such other sources shall cease. Nothing contained in this paragraph shall be deemed to require or permit termination or restriction of Executive's coverage under any plan or program of Sonat or any of its subsidiaries or any successor plan or program thereto to which Executive is entitled under the terms of such plan or program, whether at the end of the aforementioned 36-month period or at any other time. (E) RELOCATION ASSISTANCE. Should Executive move his residence in order to pursue other business opportunities within three years of the date of Termination (or until his Normal Retirement Date, whichever is sooner), Sonat shall reimburse him for any expenses incurred in that relocation (including taxes payable on the reimbursement) which are not reimbursed by another employer; provided, however, that Executive shall be entitled to such reimbursement with respect to only one such relocation, it being agreed that in the event of more than one such relocation, Executive shall be entitled to specify the relocation for which reimbursement hereunder is to be made. Benefits under this provision will include the assistance, at no cost to Executive, in selling his home and other assistance which was customarily provided to executives transferred within Sonat or between Sonat and its subsidiaries prior to the Change of Control. (F) OTHER BENEFITS PLANS. The specific arrangements referred to in this Section 3 are not intended to exclude Executive's participation in other benefit -6- 7 plans in which Executive currently participates or which are available to executive personnel generally in the class or category of Executive or to preclude other compensation or benefits as may be authorized by the Board of Directors from time to time. (G) DUTY TO MITIGATE. Executive's entitlement to benefits hereunder shall not be governed by any duty to mitigate his damages by seeking further employment nor offset by any compensation which he may receive from future employment. (H) PAYMENT OBLIGATIONS ABSOLUTE. Sonat's obligation to pay or cause to be paid to Executive the benefits and to make the arrangements provided in this Section 3 shall be absolute and unconditional and shall not be affected by any circumstances, including, without limitation, any setoff, counterclaim, recoupment, defense or other right, which Sonat may have against Executive or anyone else. All amounts payable by or on behalf of Sonat hereunder shall be paid without notice or demand. Each and every payment made hereunder by or on behalf of Sonat shall be final and Sonat and its subsidiaries shall not, for any reason whatsoever, seek to recover all or any part of such payment from Executive or from whomever shall be entitled thereto. 4. CONDITIONS TO THE OBLIGATIONS OF SONAT. Sonat shall have no obligation to provide or cause to be provided to Executive the rights and benefits described in Section 3 hereof if either of the following events shall occur: (A) TERMINATION FOR CAUSE. Sonat shall terminate Executive's employment for "cause". For purposes of this Agreement, termination of employment for "cause" shall mean termination solely for dishonesty, conviction of a felony, or willful unauthorized disclosure of confidential information of Sonat. (B) RESIGNATION AS DIRECTOR. Executive shall not, promptly after Termination and upon receiving a written request to do so, resign as a director and/or officer of each subsidiary and affiliate of Sonat of which he is then serving as a director and/or officer. 5. CONFIDENTIALITY; NON-SOLICITATION; COOPERATION. (A) CONFIDENTIALITY. Executive agrees that at all times following Termination, he will not, without the prior written consent of Sonat, disclose to any person, firm or corporation any confidential information of Sonat or its subsidiaries which is now known to him or which hereafter may become known to him as a result of his employment or association with Sonat and which could be helpful to a competitor, unless such disclosure is required under the terms of a valid and effective subpoena -7- 8 or order issued by a court or governmental body; provided, however, that the foregoing shall not apply to confidential information which becomes publicly disseminated by means other than a breach of this Agreement. (B) NON-SOLICITATION. Executive agrees that for a period of three years following the date of Termination (or until Executive's Normal Retirement Date, whichever is sooner) he will not induce, either directly or indirectly, any employee of senior to manager level of Sonat or any of its subsidiaries to terminate his or her employment. (C) COOPERATION. Executive agrees that, at all times following Termination, he will furnish such information and render such assistance and cooperation as may reasonably be requested in connection with any litigation or legal proceedings concerning Sonat or any of its subsidiaries (other than any legal proceedings concerning Executive's employment). In connection with such cooperation, Sonat will pay or reimburse Executive for reasonable expenses. (D) REMEDIES FOR BREACH. It is recognized that damages in the event of breach of this Section 5 by Executive would be difficult, if not impossible, to ascertain, and it is therefore agreed that Sonat, in addition to and without limiting any other remedy or right it may have, shall have the right to an injunction or other equitable relief in any court of competent jurisdiction, enjoining any such breach, and Executive hereby waives any and all defenses he may have on the ground of lack of jurisdiction or competence of the court to grant such an injunction or other equitable relief. The existence of this right shall not preclude Sonat from pursuing any other rights and remedies at law or in equity which Sonat may have. 6. CERTAIN ADDITIONAL PAYMENTS BY SONAT. (a) Anything in this Agreement to the contrary notwithstanding and except as set forth below, in the event it shall be determined that any payment or distribution by Sonat to or for the benefit of Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 6) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by Executive of all federal income taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any federal income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. Notwithstanding the foregoing provisions of this Section 6(a), if it shall be determined that Executive is entitled to a Gross-Up -8- 9 Payment, but that Executive, after taking into account the Payments and the Gross-Up Payment, would not receive a net after-tax benefit of at least $50,000 (taking into account both federal income taxes and any Excise Tax) as compared to the net after-tax proceeds to Executive resulting from an elimination of the Gross-Up Payment and a reduction of the Payments, in the aggregate, to an amount (the "Reduced Amount") such that the receipt of Payments would not give rise to any Excise Tax, then no Gross-Up Payment shall be made to Executive and the Payments, in the aggregate, shall be reduced to the Reduced Amount. (b) Subject to the provisions of Section 6(c), all determinations required to be made under this Section 6, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Ernst & Young LLP or such other certified public accounting firm as may be designated by Executive (the "Accounting Firm"), which shall provide detailed supporting calculations both to Sonat and Executive within 15 business days of the receipt of notice from Executive that there has been a Payment or such earlier time as is requested by Sonat. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting a Change of Control, Executive shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by Sonat. Any Gross-Up Payment shall be paid by Sonat to Executive within five days of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon Sonat and Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by Sonat should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that Sonat exhausts its remedies pursuant to Section 6(c) and Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by Sonat to or for the benefit of Executive. (c) Executive shall notify Sonat in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by Sonat of a Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after Executive is informed in writing of such claim and shall apprise Sonat of the nature of such claim and the date on which such claim is requested to be paid. Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to Sonat (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If Sonat notifies Executive in writing prior to the expiration of such period that it desires to contest such claim, Executive shall: -9- 10 (i) give Sonat any information reasonably requested by Sonat relating to such claim, (ii) take such action in connection with contesting such claim as Sonat shall reasonably request in writing from time to time, including without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by Sonat, (iii) cooperate with Sonat in good faith in order effectively to contest such claim, and (iv) permit Sonat to participate in any proceedings relating to such claim; provided, however, that Sonat shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold Executive harmless, on an after-tax basis, for any Excise Tax or federal income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 6(c), Sonat shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct Executive to pay the tax claimed and sue for a refund or to contest the claim in any permissible manner, and Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as Sonat shall determine; provided, however, that if Sonat directs Executive to pay such claim and sue for a refund, Sonat shall advance the amount of such payment to Executive, on an interest-free basis, and shall indemnify and hold Executive harmless on an after-tax basis, from any Excise Tax or federal income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, Sonat's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder, and Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by Executive of an amount advanced by Sonat pursuant to Section 6(c), Executive becomes entitled to receive any refund with respect to such claim, Executive shall (subject to Sonat's complying with the requirements of Section 6(c)) promptly pay to Sonat the amount of such refund -10- 11 (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by Executive of an amount advanced by Sonat pursuant to Section 6(c), a determination is made that Executive shall not be entitled to any refund with respect to such claim and Sonat does not notify Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 7. TERM OF AGREEMENT. This Agreement shall terminate on April 30, 1996; provided, however, that this Agreement shall automatically renew for successive one-year terms unless the Board of Directors notifies Executive in writing at least 30 days prior to an April 30 expiration date that it does not desire to renew the Agreement for an additional term; and provided further, however, that this Agreement shall terminate prior to April 30, 1996 or, in the event of a renewal of this Agreement, any subsequent April 30, if and when the Executive Compensation Committee determines that Executive is no longer a key executive for purposes of being a party to an executive severance agreement with Sonat and so notifies Executive, except that such determination shall not be made, and if made shall have no effect, (i) within three years after a Change of Control or (ii) during any period of time when Sonat has reason to believe that any third person has begun a tender or exchange offer, circulated a proxy to stockholders, or taken other steps or formulated plans to effect a Change of Control, such period of time to end when, in the opinion of the Executive Compensation Committee, the third person has abandoned or terminated his efforts or plans to effect a Change of Control. 8. EXPENSES. Sonat shall pay or reimburse Executive for all costs and expenses, including, without limitation, court costs and attorneys' fees, incurred by Executive as a result of any claim, action or proceeding (including, without limitation, a claim, action or proceeding by Executive against Sonat) arising out of, or challenging the validity or enforceability of, this Agreement or any provision hereof. 9. MISCELLANEOUS. (A) ASSIGNMENT. No right, benefit or interest hereunder shall be subject to assignment, anticipation, alienation, sale, encumbrance, charge, pledge, hypothecation or set-off in respect of any claim, debt or obligation, or to execution, attachment, levy or similar process; provided, however, that Executive may assign any right, benefit or interest hereunder if such assignment is permitted under the terms of any plan or policy of insurance or annuity contract governing such right, benefit or interest. (B) CONSTRUCTION OF AGREEMENT. Nothing in this Agreement shall be construed to amend any provision of any plan or policy of Sonat. This Agreement is -11- 12 not, and nothing herein shall be deemed to create, a commitment of continued employment of Executive by Sonat or any of its subsidiaries. (C) AMENDMENT. This Agreement may not be amended, modified or cancelled except by written agreement of the parties. (D) WAIVER. No provision of this Agreement may be waived except by a writing signed by the party to be bound thereby. Executive may at any time or from time to time waive any or all of the rights and benefits provided for herein which have not been received by Executive at the time of such waiver. In addition, prior to the last day of the calendar year in which Executive's Termination occurs, Executive may waive any or all rights and benefits provided for herein which have been received by Executive; provided that prior to the end of such year Executive repays to Sonat (or, if the benefit was received from an employee benefit plan trust, to such trust) the amount of the benefit received together with interest thereon at the minimum rate required to avoid imputed income. Any waiver of benefits pursuant to this paragraph shall be irrevocable. If Executive waives a right or benefit provided for herein and such waiver is determined by the Internal Revenue Service not to be effective, Sonat shall indemnify Executive for any federal income and excise taxes he incurs as a result of that determination, so as to put Executive in the position he would have been in had the waiver been given effect. (E) SEVERABILITY. In the event that any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, the remaining provisions of this Agreement shall remain in full force and effect to the fullest extent permitted by law. (F) SUCCESSORS. This Agreement shall be binding upon and inure to the benefit of Executive and his personal representative and heirs, and Sonat and any successor organization or organizations which shall succeed to substantially all of the business and property of Sonat, whether by means of merger, consolidation, acquisition of substantially all of the assets of Sonat or otherwise, including by operation of law. (G) TAXES. Any payment or delivery required under this Agreement shall be subject to all requirements of the law with regard to withholding of taxes, filing, making of reports and the like, and Sonat shall use its best efforts to satisfy promptly all such requirements. (H) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE. -12- 13 (I) ENTIRE AGREEMENT. This Agreement sets forth the entire agreement and understanding of the parties hereto with respect to the matters covered hereby. IN WITNESS WHEREOF, the parties have executed this Agreement as of the 1st day of December, 1995. SONAT INC. By: /s/ Ronald L. Kuehn, Jr. ------------------------ Ronald L. Kuehn, Jr. Chairman of the Board, President and Chief Executive Officer /s/ Donald G. Russell ------------------------ Donald G. Russell -13- EX-10.11 13 AMEND. TO DIRECTOR'S FEE DEFERRAL PLAN 1 EXHIBIT 10.11 AMENDMENT TO THE SONAT INC. DIRECTOR'S FEES DEFERRAL PLAN Sonat Inc. hereby amends the Sonat Inc. Director's Fees Deferral Plan (the "Plan") as follows, effective as of December 1, 1995: 1. The definition of "Change of Control" in the Plan is hereby amended to read in its entirety as follows: A "Change of Control" shall mean: (i) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934 (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (1) the then outstanding shares of common stock of the Company (the "Outstanding Common Stock") or (2) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Voting Securities"); provided, however, that for purposes of this subsection (i), the following acquisitions shall not constitute a Change of Control: (A) any acquisition directly from the Company, (B) any acquisition by the Company, (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (D) any acquisition by any corporation pursuant to a transaction which complies with clauses (A), (B) and (C) of subsection (iii); or (ii) Individuals who, as of December 1, 1995, constitute the Board of Directors (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board of Directors; provided, however, that any individual becoming a director subsequent to such date whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board of Directors; or 2 (iii) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination"), in each case, unless, following such Business Combination, (A) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Common Stock and Outstanding Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination, of the Outstanding Common Stock and Outstanding Voting Securities, as the case may be, (B) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (C) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board of Directors, providing for such Business Combination. IN WITNESS WHEREOF, Sonat Inc. has executed this document as of December 1, 1995. SONAT INC. by: /s/ Ronald L. Kuehn, Jr. ------------------------ Ronald L. Kuehn, Jr. Chairman of the Board, President and Chief Executive Officer EX-10.12 14 INDEMNITY AGREEMENT 1 EXHIBIT 10.12 INDEMNITY AGREEMENT AGREEMENT, dated as of November 1, 1995, by and between Sonat Inc. (the "Company") and the undersigned director of the Company (the "Director"). The Company's Certificate of Incorporation provides that the Company shall indemnify the Directors to the full extent permitted by the laws of the State of Delaware as from time to time in effect. Section 145 of the General Corporation Law of Delaware (relating to the indemnification of officers, directors, employees and agents) provides that the indemnification afforded by that section shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any by-law, agreement, vote of stockholders or disinterested directors or otherwise. Section 145 also expressly empowers the Company to purchase and maintain insurance on behalf of the Director. In exercising the discretion with respect to indemnification given it by the Company's Certificate of Incorporation, the Board of Directors of the Company has considered the following, among other factors: (a) It is essential to the Company to attract and retain as directors the most capable persons available. (b) The substantial increase in corporate litigation that may subject directors to litigation costs and risks and the recent limitations on the availability of director's liability insurance have made and will make it increasingly difficult for the Company to attract and retain such persons. (c) When obtainable, insurance policies relating to indemnification are often subject to retentions by the insured, co-insurance requirements, exclusions and other limitations on coverage. 2 2. In view of the foregoing and the fact that the Director is rendering valuable services to the Company and desires to continue to provide such services provided he receives assurance that the Company will indemnify him to the full extent permitted by its Certificate of Incorporation, the Board of Directors has determined to provide such assurance. In consideration of the Director's continued service to the Company, the Company hereby agrees with the Director as follows: Section 1. General Right to Indemnification. Notwithstanding any other provision of this Agreement except for Section 8, the Company shall indemnify the Director to the full extent permitted by the laws of the State of Delaware as from time to time in effect. Without limiting the generality of the foregoing, the Company shall indemnify the Director in accordance with the provisions set forth below. Section 2. Actions, Suits or Proceedings Other Than by or in the Right of the Company. The Company shall indemnify the Director in the event that he was or is a party or is threatened to be made a party to, or otherwise requires representation by counsel in connection with, any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Company) by reason of the fact that he is or was or has agreed to become a director, officer, employee or agent of the Company, or is or was serving or has agreed to serve as a director, officer, employee or agent of any corporation, partnership, joint venture or other entity of which the Company owns 50% or more of the voting or equity interest (an "Affiliate") or any employee benefit plan of the Company or an Affiliate, or by reason of any action alleged to have been taken or omitted in such capacity, against costs, charges, expenses (including attorneys' fees), 3 3. judgments, fines and amounts paid in settlement actually and reasonably incurred by him or on his behalf in connection with such action, suit or proceeding and any appeal therefrom, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the Director did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. Section 3. Actions or Suits by or in the Right of the Company. The Company shall indemnify the Director in the event that he was or is a party or is threatened to be made a party to, or otherwise requires representation by counsel in connection with, any threatened, pending or completed action or suit by or in the right of the Company to procure a judgment in its favor by reason of the fact that he is or was or has agreed to become a director, officer, employee or agent of the Company, or is or was serving or has agreed to serve as a director, officer, employee or agent of any Affiliate or any employee benefit plan of the Company or an Affiliate, or by reason of any action alleged to have been taken or omitted in such capacity, against costs, charges and expenses (including attorneys' fees) actually and reasonably incurred by him or on his behalf in connection with the defense or settlement of such action or suit and any appeal therefrom, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company except that no indemnification shall be made in 4 4. respect of any claim, issue or matter as to which such Director shall have been adjudged to be liable to the Company unless and only to the extent that the Court of Chancery of Delaware or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of such liability but in view of all the circumstances of the case, such Director is fairly and reasonably entitled to indemnity for such costs, charges and expenses which the Court of Chancery or such other court shall deem proper. Section 4. Indemnification for Costs, Charges and Expenses of Successful Party. Notwithstanding the other provisions of this Agreement, to the extent that the Director has been successful on the merits or otherwise, including, without limitation, the dismissal of an action without prejudice, in defense of any action, suit or proceeding covered by this Agreement, or in defense of any claim, issue or matter therein, he shall be indemnified against all costs, charges and expenses (including attorneys' fees) actually and reasonably incurred by him or on his behalf in connection therewith. Section 5. Adverse Finding. Any indemnification under Sections 2 and 3 of this Agreement (unless ordered by a court) shall be paid by the Company, in accordance with the procedures set forth in Section 7 of this Agreement, unless a determination is made within the 90-day period set forth in Section 7 (A) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (B) if such a quorum is not obtainable, or, even if obtainable a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (C) by the stockholders, that indemnification of the Director is not proper in the circumstances because he has not met the applicable standard of conduct set forth in Sections 2 and 3 of this Agreement. 5 5. Section 6. Advances. Costs, charges, expenses (including attorneys' fees), judgments, fines and amounts paid in settlement incurred by the Director covered by Sections 1 and 2 of this Agreement in defending any pending, threatened or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, and costs, charges and expenses (including attorneys' fees) incurred by the Director covered by Section 3 of this Agreement in defending an action by or in the right of the Company shall be paid by the Company in advance of the determination of the Director's entitlement to indemnification promptly upon receipt by the Company of evidence of the Director's obligation to pay such costs, charges, expenses, judgments, fines or amounts paid in settlement (as the case may be); provided, however, that such payment shall be made in advance of the determination of the Director's entitlement to indemnification only with the undertaking of the Director (which the Director hereby gives) that the Director shall repay all amounts so advanced in the event that it shall ultimately be determined that the Director is not entitled to be indemnified by the Company as authorized in this Agreement. The Board of Directors may, upon approval of the Director, authorize the Company's counsel to represent the Director, in any action, suit or proceeding, whether or not the Company is a party to such action, suit or proceeding. Section 7. Procedure for Indemnification. After the final disposition of any action, suit or proceeding covered by this Agreement, the Director shall send to the Company a written request for any indemnification sought under this Agreement. No later than 90 days following receipt by the Company of such request, the Company shall cause the indemnification provided hereunder to be authorized and paid, unless during such 90-day period, with respect to indemnification under Section 1 of this Agreement, a finding by the Company that the 6 6. indemnification requested is not permitted by the laws of the State of Delaware then in effect is made and with respect to indemnification under Section 2 or 3 of this Agreement, the adverse finding described in Section 5 of this Agreement is made pursuant to such Section. The burden of proving that such standard has not been met shall be on the Company. The Director shall be given an opportunity to be heard and to present evidence on his behalf in connection with consideration by the Board of Directors, independent legal counsel, or the stockholders, as the case may be, of any findings required by applicable law. If the Company (A) does not pay the indemnification requested by the Director within 90 days after the receipt of such request, or (B) does not pay promptly an advance in accordance with Section 6, the Director's right to indemnification or to any advance and the Company's right to the repayment of any advance shall be enforceable in any court of competent jurisdiction. In any such action, neither the failure of the Company (including its Board of Directors, its independent legal counsel, and its stockholders) to have made a determination prior to the commencement of such action that indemnification of the Director is proper in the circumstances because he has met the applicable standard of conduct set forth in Section 2 or 3 of this Agreement, nor the fact that the Company has made an adverse finding pursuant to Section 5 of this Agreement, shall be a defense to the action or create a presumption that the Director has not met the applicable standard of conduct. However, it shall be a defense to the action (other than an action brought to enforce a claim for an advance) if it is established that the Director has not met the applicable standard of conduct set forth in Section 2 or 3 of this Agreement. The Director's costs and expenses (including attorneys' fees) incurred in connection with successfully establishing his right to indemnification (including his right to indemnification in the event he shall have been adjudged to be liable to the 7 7. Company under Section 3 of this Agreement) or any advance, in whole or in part, in any such action shall also be indemnified by the Company. Any action instituted by the Company or by the Director under this Agreement may be maintained as to the Company and the Director in any court of competent jurisdiction, including but not limited to the courts of the State of Delaware. The Company and the Director each consents to the exercise of jurisdiction over it or him, as the case may be, by the Court of Chancery of Delaware. Section 8. Voluntary Proceedings. The Company shall not indemnify the Director or pay any advance to the Director in connection with any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, voluntarily commenced by such Director against the Company, any affiliate or any other director, officer, employee or agent of the Company or any Affiliate or any employee benefit plan of the Company or an Affiliate unless the institution of such action, suit or proceeding was authorized prior to its commencement by a majority vote of the Board of Directors or the Director is successful on the merits in such action, suit or proceeding. Section 9. Notice to Company. The Director must provide prompt written notice to the Company of any pending or threatened action, suit or proceeding in connection with which the Director may assert a right to be indemnified hereunder; however, failure to provide such notice shall not be construed as a waiver of any right to an advance or indemnification hereunder. Section 10. Other Rights; Continuation of Right to Indemnification. The indemnification and advances provided by this Agreement shall not be deemed exclusive of any other rights to which a Director seeking indemnification may be entitled under any law (common or 8 8. statutory), provision of the Company's Certificate of Incorporation or By-Laws, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding office or while employed by or acting as agent for the Company, and shall continue as to a person who has ceased to be a Director, and shall inure to the benefit of the estate, heirs, executors and administrators of the Director. Section 11. Amendments. This Agreement may not be amended without the agreement in writing of the Company and the Director. Section 12. Savings Clause. If this Agreement or any portion hereof shall be deemed invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby, and the Company shall nevertheless indemnify the Director as to costs, charges and expenses (including attorneys' fees), judgments, fines and amounts paid in settlement with respect to any action, suit or proceeding, whether civil, criminal, administrative or investigative, including an action by or in the right of the to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated and to the full extent permitted by applicable law. Section 13. Survival Clause. The Company acknowledges that in continuing to provide services to the Company, the Director is relying on this Agreement. Accordingly, the Company agrees that its obligations hereunder will survive (a) any actual or purported termination of this Agreement by the Company or its successors or assigns whether by operation of law or otherwise, and (b) termination of the Director's services to the Company, whether such services were terminated by the Company or the Director, with respect to any 9 9. claim, action, suit or proceeding covered by Section 1, 2 or 3 hereof, whether or not such claim is made or action, suit or proceeding is threatened or commenced before or after the actual or purported termination of this Agreement or the termination of the Director's services to the Company. Section 14. Successors and Assigns. This Agreement shall be binding on the successors and assigns of the Company whether by operation of law or otherwise and shall inure to the benefit of the estate, heirs and personal representatives of the Director. Section 15. Governing Law. This Agreement shall be governed in all respects, including validity, interpretation and effect, by the laws of the State of Delaware (without giving effect to the provisions thereof relating to conflicts of law). IN WITNESS WHEREOF, this Agreement has been executed by the parties thereto, in the case of the Company, by a duly authorized officer thereof on its behalf. SONAT INC. By: /s/ Ronald L. Kuehn, Jr. ------------------------ Ronald L. Kuehn, Jr. Chairman of the Board, President and Chief Executive Officer /s/ Max L. Lukens ------------------------ Max L. Lukens Signature page of Indemnity Agreement dated as of November 1, 1995, between Sonat Inc. and above named Director. EX-10.16 15 SCHEDULE OF PARTICIPANTS 1 EXHIBIT 10.16 SCHEDULE OF PARTICIPANTS SONAT INC. EXECUTIVE LIFE INSURANCE PROGRAMS The following are participants in the Sonat Inc. Executive Life Insurance Programs, form of which is filed as Exhibit 10-(20) to the Sonat Inc. Annual Report of Form 10-K for the year ended December 31, 1990: Thomas W. Barker, Jr. Richard B. Bates Beverley T. Krannich Ronald L. Kuehn, Jr. James E. Moylan, Jr. James A. Rubright Donald G. Russell William A. Smith EX-11 16 COMPUTATION OF EARNINGS 1 Exhibit 11 SONAT INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE
Years Ended December 31, ---------------------------- 1995 1994 1993 -------- -------- -------- (In Thousands Except Per-Share Amounts) Primary Earnings Per Share (1) Earnings: Income before Extraordinary Item $192,888 $141,407 $265,069 Extraordinary Loss - - (3,829) -------- -------- -------- Net Income $192,888 $141,407 $261,240 ======== ======== ======== Common Stock and Common Stock Equivalents: Weighted Average Number of Shares of Common Stock Outstanding 86,270 87,119 86,703 Common Stock Equivalents Applicable to Outstanding Stock Options 832 951 994 -------- -------- -------- Weighted Average Number of Shares of Common Stock and Common Stock Equivalents Outstanding 87,102 88,070 87,697 ======== ======== ======== Primary Earnings Per Share: Income before Extraordinary Item $ 2.21 $ 1.61 $ 3.02 Extraordinary Loss - - (.04) -------- -------- -------- $ 2.21 $ 1.61 $ 2.98 ======== ======== ========
(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 17 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, 1995 1994 1993 1992 1991 -------- -------- -------- -------- -------- (In Thousands) Earnings from Continuing Operations: Income before income taxes $282,497 $154,871 $364,198 $133,728 $ 98,374 Fixed charges (see computation below) 165,154 127,909 129,160 156,428 175,980 Less allowance for interest capitalized (6,540) (6,692) (4,101) (8,422) (7,951) -------- -------- -------- -------- -------- Total Earnings Available for Fixed Charges $441,111 $276,088 $489,257 $281,734 $266,403 ======== ======== ======== ======== ======== Fixed Charges: Interest expense before deducting interest capitalized $157,653 $120,295 $122,204 $149,165 $168,510 Rentals(b) 7,501 7,614 6,956 7,263 7,470 -------- -------- -------- -------- -------- $165,154 $127,909 $129,160 $156,428 $175,980 ======== ======== ======== ======== ======== Ratio of Earnings to Fixed Charges 2.7 2.2 3.8 1.8 1.5 ======== ======== ======== ======== ========
- ----------- (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 18 SUBSIDIARIES OF SONAT 1 EXHIBIT 21 SUBSIDIARIES OF SONAT INC. AS OF JANUARY 1, 1996
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 AMERICAS INC. Delaware 100% SONAT ENERGY SERVICES COMPANY Delaware 100% Sonat Marketing Company Delaware 100% Sonat Marketing Company L. P.(c) Delaware 65% JV Trading Inc. (d) Delaware 100% Keystone Trading Company Delaware 100% Vail Trading Company Delaware 100% Sonat Power Inc. (e) Delaware 100% Pacific Gas Power Inc. Delaware 100% Sonat Power Marketing Inc. Delaware 100% SONAT EXPLORATION COMPANY (f) Delaware 100% Field Gas Gathering Inc. 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.) Sonat Texas Gathering Company Delaware 100% Sonat Oil Transmission Inc. Delaware 100% Stateline Gas Gathering Company Delaware 100% SONAT SERVICES INC. Alabama l00% Sonat Services (D.C.) Inc. Delaware 100% SOUTHERN NATURAL GAS COMPANY Delaware 100% Peninsula Pipeline Company Delaware 100% Sonat Gathering Company Delaware 100% Sonat Intrastate-Alabama Inc. Alabama 100% Sonat Ventures Inc. (g)(h) Delaware 100% Sonat NGV Technology Inc. (i) Delaware 100% South Georgia Natural Gas Company Delaware l00% Southern Deepwater Pipeline Company (j) Delaware l00% Southern Energy Company Delaware l00% Southern Gas Storage Company (k) Delaware l00% Southern Offshore Pipeline Company (j) Delaware 100% THE SONAT FOUNDATION INC. Alabama 100%
- 2 - 3 Notes (a) Citrus Corp. owns 100 percent of the stock of Florida Gas Transmission Company, Florida Intrastate Pipeline Company, Citrus Trading Corp., Citrus Industrial Sales Company, Citrus Energy Services, Inc. and Citrus Interstate Pipeline Company. Houston Natural Gas Company, a wholly owned subsidiary of Enron Corp., owns the remaining 50 percent of Citrus Corp. (b) SNT Realty Inc. has a 50-percent interest in Fifth Avenue Realty Company, an unincorporated joint venture, the remaining 50 percent of which is owned by AmSouth Bank N.A. (c) Sonat Marketing Company is a 65-percent participant and General Partner in Sonat Marketing Company L. P., a limited partnership; the remaining 35-percent interest is held by AGL Energy Services, Inc., a wholly owned subsidiary of Atlanta Gas Light Company, as the Limited Partner. (d) JV Trading Inc. has a 50-percent partnership interest in Seminole Gas Marketing; the remaining 50-percent partnership interest of which is held by Suwannee Gas Marketing, Inc., a subsidiary of Lykes Energy, Inc. (e) Sonat Power Inc. is a 50-percent participant in AES/Sonat Power L.L.C., a limited liability company, the remaining 50-percent interest of which is held by AES Gas Power, Inc., a wholly owned subsidiary of The AES Corporation. (f) Sonat Exploration Company has a 50-percent interest in Black Warrior Methane Corp. and Black Warrior Transmission Corp., the remaining 50 percent of each being owned by Jim Walter Resources, Inc. (g) Sonat Ventures Inc. is a 50-percent participant in Monarch CNG, an Alabama general partnership, the remaining 50-percent interest of which is held by Midtown NGV, Inc., a subsidiary of Energen Corporation. (h) Sonat Ventures Inc. is a 50-percent participant in Florida Natural Fuels, Ltd., a Florida limited partnership, the remaining 50-percent interest of which is held by Suwannee Gas Marketing, Inc., a subsidiary of Lykes Energy, Inc. (i) Sonat NGV Technology Inc. is a one-third participant in NGV Southeast Technology Center, L.L.C., a Georgia limited liability company, the remaining interests of which are held by Georgia Energy Company, a subsidiary of Atlanta Gas Light Company, and Natural Gas Vehicle Development Company Southeast, Inc., a subsidiary of NGV Systems, Inc. (j) Southern Deepwater Pipeline Company and Southern Offshore Pipeline Company each have a 50-percent interest in Sea Robin Pipeline Company, an unincorporated joint venture. (k) Southern Gas Storage Company has a 50-percent interest in Bear Creek Storage Company, an unincorporated joint venture, the remaining 50 percent of which is owned by Tennessee Storage Company, a wholly owned subsidiary of Tenneco Inc. Bear Creek Storage Company has a l00-percent interest in Bear Creek Capital Corporation. - 3 - EX-22 19 PROXY STATEMENT OF SONAT 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 25, 1996 To Our Stockholders: The Annual Meeting of Stockholders of Sonat Inc., a Delaware corporation, will be held at the AmSouth Upper Lobby Auditorium, AmSouth/Harbert Plaza, Birmingham, Alabama at 9:00 a.m., local time, on Thursday, April 25, 1996, for the following purposes: 1. To elect five Directors as members of the Board of Directors of the Company, to serve until the 1999 Annual Meeting of Stockholders and until their respective successors have been duly elected and qualified. 2. To elect an Auditor of the Company for the ensuing year. The Board of Directors of the Company has recommended Ernst & Young LLP, the present Auditor, for election as Auditor (Proposal No. 1). 3. To transact such other business as may properly be brought before the meeting. Only holders of Common Stock of record at the close of business on March 8, 1996, 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, [SIG] BEVERLEY T. KRANNICH Secretary Birmingham, Alabama March 13, 1996 - -------------------------------------------------------------------------------- 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 25, 1996 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 25, 1996 at 9:00 a.m. at the AmSouth Upper Lobby Auditorium, AmSouth/Harbert Plaza, Birmingham, Alabama. Mailing of the Proxy Statement and the accompanying proxy card to the stockholders is expected to commence on or about March 18, 1996. VOTING SECURITIES As of January 31, 1996, the Company had outstanding 85,966,323 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 8, 1996, as the record date for the determination of stockholders entitled to notice of, and to vote at, the Annual Meeting. THE PROXY If a proxy is executed properly by a stockholder and is not revoked, it will be voted at the Annual Meeting in the manner specified on the proxy, or if no manner is specified, it will be voted "FOR" the election of the five nominees for Director and "FOR" Proposal No. l. The submission of an executed proxy will not affect a stockholder's right to attend, and to vote in person at, the Annual Meeting. A stockholder who executes a proxy may revoke it at any time before it is voted by filing a written revocation with the Secretary of the Company, executing a proxy bearing a later date or attending and voting in person at the Annual Meeting. THE BOARD OF DIRECTORS URGES YOU TO SIGN, DATE AND RETURN THE ENCLOSED PROXY IN THE ENCLOSED RETURN ENVELOPE. ELECTION OF DIRECTORS The Company's Restated Certificate of Incorporation provides for the classification of the Board of Directors into three classes (Class I, Class II and Class III). Five Class I Directors are to be elected at the Annual Meeting of Stockholders to serve for a three-year term and until the election and qualification of their respective successors in office. The five nominees for election as Class I Directors are William O. Bourke, Roberto C. Goizueta, Ronald L. Kuehn, Jr., Robert J. Lanigan and Charles Marshall. Each of the nominees has been previously elected as a Director by the stockholders. In the event that any of the nominees becomes unavailable for any reason, which is not anticipated, the Board of Directors in its discretion may, unless it has taken appropriate action to provide for a lesser number of Directors, designate a substitute nominee, in which event, pursuant to the accompanying proxy, votes will be cast for such substitute nominee. THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" WILLIAM O. BOURKE, ROBERTO C. GOIZUETA, RONALD L. KUEHN, JR., ROBERT J. LANIGAN AND CHARLES MARSHALL AS CLASS I DIRECTORS. 3 NOMINEES FOR DIRECTOR -- CLASS I -- TERMS TO EXPIRE 1999 WILLIAM O. BOURKE, age 68, is Chairman of the Executive Committee of - ----------------------- the Board of Directors and a Director of Reynolds Metals Company, an PHOTO aluminum and consumer products company. He has served as a Director of the Company since 1990. Mr. Bourke is also a Director of Merrill - ----------------------- Lynch & Co., Inc. 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 64, is Chairman of the Board and Chief - ----------------------- Executive Officer of The Coca-Cola Company, the principal business PHOTO of which is the manufacture of soft drinks. He has served as a Director of the Company since 1981. Mr. Goizueta is also a Director - ----------------------- of Eastman Kodak Company, Ford Motor Company, SunTrust Banks, Inc., SunTrust Banks of Georgia, Inc. and SunTrust Bank, Atlanta and a member of the Board of Trustees of Emory University. During the past five years, Mr. Goizueta has served as an executive officer of The Coca-Cola Company. - ---------------------------------------------------------------------------------------------- RONALD L. KUEHN, JR., age 60, is Chairman of the Board, President - ----------------------- and Chief Executive Officer of the Company. He has served as a PHOTO Director of the Company since 1981. Mr. Kuehn is also a Director of 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. - ----------------------------------------------------------------------------------------------
2 4 ROBERT J. LANIGAN, age 67, is Chairman Emeritus of the Board of - ----------------------- Directors of Owens-Illinois, Inc., the principal business of which PHOTO is the manufacture and sale of packaging products. He has served as a Director of the Company since 1983. Mr. Lanigan is also a Director - ----------------------- of Chrysler Corporation,The Coleman Company, Inc., Sonat Offshore Drilling Inc. and The Dun & Bradstreet Corporation. During the past five years prior to his appointment to his current position, Mr. Lanigan served as an executive officer of Owens-Illinois, Inc. - ---------------------------------------------------------------------------------------------- CHARLES MARSHALL, age 66, is the former Vice Chairman of the Board - ----------------------- of American Telephone and Telegraph Company. He has served as a PHOTO Director of the Company since 1982. Mr. Marshall is also a Director of Ceridian Corporation, GATX Corporation, Hartmarx Corporation and - ----------------------- Sundstrand Corporation. Prior to his retirement, Mr. Marshall served as an executive officer of American Telephone and Telegraph Company. - ----------------------------------------------------------------------------------------------
CONTINUING DIRECTORS -- CLASS II -- TERMS TO EXPIRE 1997 JEROME J. RICHARDSON, age 59, is Owner/Founder of the NFL Carolina - ----------------------- Panthers. He has served as a Director of the Company since 1991. Mr. PHOTO Richardson is also a Director of NCAA Foundation and Comp Containment Inc., a trustee of Wofford College and a Member of the - ----------------------- Board of Visitors of Duke University Medical Center. During the past five years prior to his retirement in May 1995, Mr. Richardson served as an executive officer of Flagstar Companies, Inc. and Flagstar Corporation. - ----------------------------------------------------------------------------------------------
3 5 DONALD G. RUSSELL, age 64, is Executive Vice President of the - ----------------------- Company and Chairman of the Board and Chief Executive Officer of PHOTO Sonat Exploration Company (a wholly-owned subsidiary of the 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 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 44, is President -- Diversified Operations of - ----------------------- CNA Insurance Companies, the principal business of which is property PHOTO and casualty insurance. On July 28, 1994, she was elected as a Director by the Board of Directors, effective as of September 1, - ----------------------- 1994. She is also Director and Chairman of the Board of First Insurance Company of Hawaii. Ms. Tocklin was President and a Director of The Continental Corporation until its merger with CNA Insurance Companies in May 1995. During the past five years, Ms. Tocklin has served as an executive officer of The Continental Corporation and CNA Insurance Companies. - ---------------------------------------------------------------------------------------------- JAMES B. WILLIAMS, age 62, is Chairman of the Board and Chief - ----------------------- Executive Officer of SunTrust Banks, Inc. He has served as a PHOTO Director of the Company since 1987. Mr. Williams is also a Director of The Coca-Cola Company, Federal Reserve Bank of Atlanta, Genuine - ----------------------- Parts Company, Georgia-Pacific Corporation, Rollins, Inc. and RPC, Inc. During the past five years, Mr. Williams has served as an executive officer of SunTrust Banks, Inc. and certain of its subsidiaries. - ----------------------------------------------------------------------------------------------
4 6 JOE B. WYATT, age 60, is Chancellor, Chief Executive Officer and - ----------------------- Trustee of Vanderbilt University, a position he has held during the PHOTO past five years. He has served as a Director of the Company since 1984. Chancellor Wyatt is also a Director of Advanced Network & - ----------------------- Services, Inc., Ingram Industries, Inc., Reynolds Metals Company and University Research Association, and a Trustee of EDUCOM, Inc. - ----------------------------------------------------------------------------------------------
CONTINUING DIRECTORS -- CLASS III -- TERMS TO EXPIRE 1998 JOHN J. CREEDON, age 71, is the former President and Chief Executive - ----------------------- Officer of Metropolitan Life Insurance Company. He has served as a PHOTO Director of the Company since 1987. Mr. Creedon is also a Director of Metropolitan Life Insurance Company, 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. - ---------------------------------------------------------------------------------------------- MAX L. LUKENS, age 47, is President and Chief Operating Officer of - ----------------------- Baker Hughes Incorporated, the principal business of which is the PHOTO provision of products and services to the petroleum and continuous process industries. On September 28, 1995, he was elected as a - ----------------------- Director by the Board of Directors, effective as of November 1, 1995. He is also a Director of Baker Hughes Incorporated and Sonat Offshore Drilling Inc. During the past five years, Mr. Lukens has served as an executive officer of Baker Hughes Incorporated. - ----------------------------------------------------------------------------------------------
5 7 BENJAMIN F. PAYTON, age 63, is President of Tuskegee University, a - ----------------------- position he has held during the past five years. He has served as a PHOTO Director of the Company since 1992. Dr. Payton is also a Director of AmSouth Bancorporation, ITT Corporation, Liberty Corporation, - ----------------------- Morrison's, Inc., Praxair, Inc., Ruby Tuesday, Inc. and ITT Sheraton Corporation. - ---------------------------------------------------------------------------------------------- JOHN J. PHELAN, JR., age 64, is the former Chairman of the Board and - ----------------------- Chief Executive Officer of the New York Stock Exchange. He has PHOTO served as a Director of the Company since 1990. Mr. Phelan is also a Director of Eastman Kodak Company, Merrill Lynch & Co., Inc. and - ----------------------- Metropolitan Life Insurance Company and a Senior Advisor to The Boston Consulting Group. Prior to his retirement in December 1990, Mr. Phelan served as Chairman of the Board and Chief Executive Officer of the New York Stock Exchange. - ----------------------------------------------------------------------------------------------
L. Edwin Smart, who is currently a Class III Director, will retire from the Board of Directors on April 25, 1996, in accordance with the Board's retirement policy. BOARD MEETINGS AND COMMITTEES During 1995 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 the Director served. Audit Committee. The Audit Committee reviews and reports to the Board the scope and results of audits by the Auditor and the Company's internal auditing staff, and reviews with the Auditor the 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 1995. 6 8 Committee on Directors. The Committee on Directors makes recommendations to the Board with respect to the size and composition of the Board, Board retirement and tenure policies, and Director compensation. It also reviews the qualifications of potential candidates for the Board of Directors, evaluates the performance of incumbent Directors and recommends to the Board nominees to be elected at the Annual Meeting of Stockholders. The current members of the Committee are Mr. Marshall, Chairman, and Mr. Bourke, Dr. Payton, Mr. Phelan, Mr. Richardson and Mr. Williams. The Committee met six times during 1995. The Committee on Directors will consider nominees for Director recommended by stockholders. Such recommendations should be submitted in writing, accompanied by a resume of the nominee's qualifications and business experience and a signed statement of the proposed candidate consenting to be named as a candidate and, if nominated and elected, to serve as a Director, and addressed to the offices of the Company to the attention of Beverley T. Krannich, Secretary. Employee Benefits Committee. The Employee Benefits Committee periodically reviews the status of the Company's employee benefit programs and the performance of the managers of the funded programs. To assist in its review, the Committee meets periodically with the chairman of the administrative committee of the 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 1995. Executive Compensation Committee. The Executive Compensation Committee reviews and makes recommendations to the Board with respect to the Company's overall executive compensation policy. The Committee also reviews and approves the compensation of the officers of the Company and makes awards under the Executive Award Plan, Performance Award Plan and Cash Bonus Plan. Membership on the Executive Compensation Committee is restricted to Directors who are not active or retired officers or employees of the Company. The current members of the Committee are Mr. Goizueta, Chairman, and Mr. Bourke, Mr. Lanigan, Mr. Lukens, Mr. Smart and Mr. Wyatt. The Committee met five times during 1995. Finance Committee. The Finance Committee approves long-term financial policies and annual financial plans, significant capital expenditures, insurance programs and investment policies of the Company. It also makes recommendations to the Board concerning dividend policy, the issuance and terms of debt and equity securities and the establishment of bank lines of credit. The current members of the Committee are Mr. Williams, Chairman, and Mr. Creedon, Mr. Goizueta, Mr. Lanigan, Mr. Lukens, Mr. Richardson and Mr. Smart. The Committee met three times during 1995. 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 twice during 1995. Strategic Planning Committee. The Strategic Planning Committee assists in the formulation of the business strategies of the Company and its subsidiaries and reviews the Company's management succession plan. The current members of the Committee are Mr. Lanigan, Chairman, and Mr. Bourke, Mr. Creedon, Mr. Goizueta, Mr. Lukens, Mr. Marshall, Dr. Payton, Mr. Phelan, Mr. Richardson, Mr. Smart, Ms. Tocklin, Mr. Williams and Mr. Wyatt. The Committee met four times during 1995. 7 9 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. 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. 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, 1996. 8 10
AMOUNT AND NATURE OF NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) --------------------------------------------------------- ----------------------- Richard B. Bates......................................... 45,234(2) William O. Bourke........................................ 5,000 John J. Creedon.......................................... 13,900(3) Roberto C. Goizueta...................................... 3,600 Ronald L. Kuehn, Jr...................................... 672,045(2 and 4) Robert J. Lanigan........................................ 6,040 Max L. Lukens............................................ 967 Charles Marshall......................................... 7,600 James E. Moylan, Jr...................................... 64,934(2 and 5) Benjamin F. Payton....................................... 2,546 John J. Phelan, Jr....................................... 2,660 Jerome J. Richardson..................................... 5,050 James A. Rubright........................................ 33,307(2) Donald G. Russell........................................ 207,376(2) L. Edwin Smart........................................... 3,600 William A. Smith......................................... 217,415(2) 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)........................................... 1,410,154(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, 1996, each such individual beneficially owned less than 0.8% 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 1.6% of the outstanding shares of the Company's Common Stock. The number of shares shown includes 1,200 shares of restricted stock for each of Mr. Bourke, Mr. Goizueta, Mr. Lanigan, Mr. Marshall, Dr. Payton, Mr. Phelan, Mr. Richardson, Ms. Tocklin, Mr. Williams and Mr. Wyatt, 967 shares of restricted stock for Mr. Lukens, 800 shares of restricted stock for Mr. Creedon, and 400 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, 1996. 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, 1996, 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, 7,256 phantom shares; Mr. Kuehn, 11,615 phantom shares; Mr. Marshall, 1,840 phantom shares; Mr. Russell, 5,969 phantom shares; Ms. Tocklin, 696 phantom shares; and Mr. Williams, 2,427 phantom shares. NOTE 2: The number of shares shown for Messrs. Bates, Kuehn, Moylan, Rubright, Russell and Smith includes 8,100 shares, 95,200 shares, 9,500 shares, 11,700 shares, 32,000 shares and 14,300 shares, respectively, of restricted stock granted under the Company's Executive Award Plan, which shares had not vested as of January 31, 1996. 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 9 11 disposition of, such shares until such shares are vested pursuant to the terms of such plan. The number of shares shown for Messrs. Bates, Kuehn, Moylan, Rubright, Russell and Smith also includes (a) 7,570 shares, 44,781 shares, 9,713 shares, 107 shares, 10,180 shares and 15,281 shares, respectively, held by the Trustee under the Company's Savings Plan as of January 31, 1996; and (b) 26,800 shares, 510,000 shares, 43,800 shares, 21,500 shares, 160,200 shares and 175,000 shares, respectively, covered by options under the Company's Executive Award Plan which were exercisable within sixty days after January 31, 1996. NOTE 3: The number of shares shown for Mr. Creedon includes 3,200 shares held in trusts for two of his children, of which shares he disclaims any beneficial ownership. NOTE 4: The number of shares shown for Mr. Kuehn includes 8,500 shares owned by his wife, 20 shares owned by his children, and 1,500 shares held in trust for one of his children, of which shares he disclaims any beneficial ownership. NOTE 5: The number of shares shown for Mr. Moylan includes 1,237 shares owned by his wife, of which shares he disclaims any beneficial ownership. NOTE 6: The number of shares shown for Ms. Tocklin includes 100 shares owned by her husband, of which shares she disclaims any beneficial ownership. NOTE 7: The number of shares shown includes 182,100 shares of restricted stock granted under the Company's Executive Award Plan, which shares had not vested as of January 31, 1996; 104,642 shares held by the Trustee under the Company's Savings Plan as of January 31, 1996; 1,004,740 shares covered by options under the Company's Executive Award Plan which were exercisable within sixty days after January 31, 1996; and 14,167 shares of restricted stock granted under the Company's Restricted Stock Plan for Directors, which shares had not vested as of January 31, 1996. CERTAIN BUSINESS RELATIONSHIPS AND TRANSACTIONS James B. Williams, a Director of the Company, is Chairman and Chief Executive Officer of SunTrust Banks, Inc. ("SunTrust"). SunTrust Bank, Atlanta, a subsidiary of SunTrust ("SunTrust Atlanta"), has extended a short-term credit facility to the Company permitting the borrowing of $25,000,000. During 1995, there were periodic borrowings and repayments under this facility and, at December 31, 1995, there was $8,900,000 principal amount outstanding thereunder. In addition, the Company, one of its wholly-owned subsidiaries and one of its affiliates were permitted to borrow an aggregate of $47,926,000 pursuant to long-term loan agreements, and were indebted to SunTrust Atlanta in the principal amount thereunder of an aggregate of $12,926,000 at December 31, 1995. A subsidiary of SunTrust also serves as an investment manager for trusts that fund the Company's retirement and retiree medical benefits programs. In October 1995, Southern Natural Gas Company, a wholly-owned subsidiary of the Company ("Southern Natural"), and SunTrust entered into a Payment Agreement pursuant to which SunTrust, in exchange for a payment from Southern Natural of $42,300,000, will make monthly payments to one of Southern Natural's suppliers through December 2001 in settlement of certain of Southern Natural's gas purchase obligations. The Board of Directors believes that the terms of the Payment Agreement are fair and reasonable and as favorable as those which could have been obtained from unrelated third parties. 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 nonemployee Directors, administers the Company's executive compensation 10 12 program. The Committee's primary responsibility is to ensure that the executive compensation program furthers the interests of the Company and its stockholders. The Company's executive compensation program has three principal objectives: (1) to attract and retain a highly qualified and motivated management team; (2) to appropriately reward individual executives for their contributions to the attainment of the Company's key strategic goals; and (3) to link the interests of executives and stockholders through stock-based plans and performance measures. The Committee meets with outside consultants at least annually to evaluate the Company's performance against the performance of a peer group of companies and to review and compare the level of compensation paid or awarded to key executives to the compensation practices of the peer group. The peer group used for determining 1995 compensation for corporate executives consisted 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 oilfield services (the "Corporate Peer Group"). The aggregate asset mix of the companies included in the Corporate Peer Group approximated 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 oilfield services. 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 1995 were slightly above 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 5.9%, effective April 1, 1995. Mr. Kuehn has been in his current position for approximately 11 1/2 years and his salary for 1995 was above the median of the Corporate Peer Group. ANNUAL CASH BONUS INCENTIVES. Annual cash bonus incentive opportunities are awarded each year. The amount of an executive's bonus opportunity (which is expressed as a percentage of base salary) is dependent primarily upon such individual's position and responsibilities and bonus opportunities provided to comparable positions within the Corporate Peer Group or other relevant peer group. At the beginning of each year, the Committee reviews and approves annual performance goals. Shortly after the end of the year, the Committee determines the appropriate bonus payout levels based on the degree to which these goals have been achieved. The annual incentive 11 13 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 1995 bonus opportunity was based on the level of achievement of certain financial goals, corporate and subsidiary goals, and individual goals, as described below. The goals for each executive's bonus opportunity were weighted as follows: financial goals -- 40% for Mr. Kuehn and 30-40% for the other named executive officers; corporate and subsidiary goals -- 45% for Mr. Kuehn and 45-55% for the other named executive officers; and individual goals -- 15% for all executives. The financial goals included in the 1995 bonus opportunities were the Company's 1995 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 corporate and subsidiary goals included in the 1995 bonus opportunities included earnings goals, operating, marketing and strategic goals relating to each major business segment, and goals relating to safety and the environment, human resources, and corporate citizenship. When appropriate, an executive's goals focused on the company for which he was primarily employed. Achievement of many of the goals was determined by quantitative or objective measures, while other goals were subjective in nature. Each executive's 1995 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 1996, the Committee reviewed in detail the extent to which the 1995 performance goals had been achieved. The Company's EPS was below the minimum payout level, 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 was 93% of the bonus opportunity for the cash flow return on assets goal; no payout was made with respect to the bonus opportunity for the EPS goal. The level of achievement of corporate and subsidiary goals varied considerably among the Company's business segments. The Sonat Pipeline Group significantly exceeded its earnings target, while Sonat Exploration Company and Sonat Marketing Company had earnings below the minimum target levels. In general, there was substantial achievement of most of the other corporate and subsidiary goals. The payout percentage for corporate and subsidiary goals ranged from 62% to 89%. Including individual performance, the total bonus payout percentages under the 1995 annual incentive program ranged from 52% to 95%. Mr. Kuehn's total bonus payout percentage for 1995 was 65% 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 November 12 14 1995. In addition, the Committee may make special awards to individual executives during the year on a discretionary basis. In 1995, 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 1995, the Company's weighted annualized three-year total stockholder return was at the median of the Corporate Peer Group. The November 1995 long-term incentive grants were designed to reflect that performance and to result in long-term compensation at the median 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 November 1995, Mr. Kuehn was awarded stock options and restricted stock as a part of the annual program. As discussed above, the amount of this award was intended to compensate Mr. Kuehn for the performance of the Company's stock as compared to the Corporate Peer Group and to result in long-term compensation at the median of the Corporate Peer Group. STOCK OWNERSHIP GUIDELINES. The Committee has established guidelines designed to encourage key executives of the Company and its subsidiaries to attain specified levels of stock ownership over a five-year period. Stock ownership goals are based on the value of the Company's stock, and are expressed as a multiple of the executive's base salary. The Committee periodically reviews the guidelines and the executives' progress toward attaining the stock ownership goals. POLICY WITH RESPECT TO SECTION 162(m). Section 162(m) of the Internal Revenue Code limits the tax deduction that the Company or its subsidiaries can take with respect to the compensation of certain executive officers, unless the compensation is "performance-based." The Committee expects that all income recognized by executive officers with respect to restricted stock and stock options granted under the Executive Award Plan, and the portion of the Company's annual cash bonus program that is based on objective financial and operating measures, will qualify as performance-based compensation. The Committee feels that it should not use only mechanical formulas in carrying out its responsibilities for compensating the Company's management. Therefore, the Committee currently intends to continue to make cash bonus payments that are based on the achievement of subjective, non-quantifiable goals, and that may therefore not qualify as performance-based compensation. The Committee believes that these Company, subsidiary and individual goals, while not properly measurable by the kind of quantifiable targets that are required to qualify compensation as performance-based, are important to the long-term financial success of the Company and to its stockholders. CONCLUSION. The Committee believes that the executive compensation philosophy that it has adopted effectively serves the interests of the stockholders and the Company. It is the Committee's intention that the pay delivered to executives be commensurate with Company performance. Roberto C. Goizueta William O. Bourke Robert J. Lanigan Max L. Lukens L. Edwin Smart Joe B. Wyatt
13 15 SUMMARY COMPENSATION TABLE The following table shows, for the fiscal years ending December 31, 1993, 1994 and 1995, the cash compensation paid by the Company, and a summary of certain other compensation paid or accrued for such years, to certain of the Company's executive officers (as determined pursuant to the rules of the Securities and Exchange Commission) (the "named executive officers") for service in all capacities with the Company and its subsidiaries. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARDS ANNUAL COMPENSATION -------------------------------- ----------------------------------------- SECURITIES OTHER RESTRICTED UNDERLYING ALL OTHER NAME AND ANNUAL STOCK OPTIONS/ COMPENSATION PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION AWARDS(1) SARS (2) - ---------------------------------------------------------------------------------------------------------------------------- Ronald L. Kuehn, Jr., 1995 $710,000 $418,600 $332,396(3) $306,375(4) 79,200 $108,107 Director, Chairman of 1994 $660,000 $450,000 $ 0 $459,938(5) 112,000 $110,064 the Board, President and 1993 $590,000 $504,600 $300,362(3) $420,000(6) 110,000 $113,528 Chief Executive Officer Richard B. Bates, 1995 $222,500 $ 84,900 $ 0 $ 74,175(4) 18,000 $ 26,100 Senior Vice President 1994 $208,750 $121,400 $ 0 $ 91,988(5) 22,000 $ 25,362 1993 $182,500 $ 93,000 $ 83,758(3) $ 75,000(6) 21,000 $ 13,534 James E. Moylan, Jr., 1995 $226,250 $131,100 $ 0 $ 74,175(4) 18,000 $ 27,284 Senior Vice President 1994 $200,000 $114,300 $ 0 $ 91,988(5) 22,000 $ 25,525 1993 $151,875 $ 65,500 $410,888 $ 75,000(6) 21,000 $ 18,467 James A. Rubright, 1995 $287,750 $117,100 $ 0 $ 74,175(4) 18,000 $ 40,534 Senior Vice President 1994 $240,625 $130,600 $115,572(8) $268,275(5 & 9) 67,500 $ 35,813 and General Counsel(7) Donald G. Russell, 1995 $465,750 $184,400 $ 0 $161,250(4) 45,000 $ 39,588 Executive Vice President 1994 $430,000 $250,000 $ 0 $278,750(5) 66,000 $ 71,165 1993 $362,500 $250,000 $649,292(3) $300,000(6) 65,000 $102,687 William A. Smith, 1995 $361,250 $135,300 $188,043(10) $ 74,175(4) 18,000 $ 45,560 Executive Vice President 1994 $342,000 $200,000 $ 44,000(11) $167,250(5) 45,000 $ 44,439 1993 $313,500 $200,000 $530,865(3) $180,000(6) 45,000 $ 41,440
NOTE 1: The amount shown represents the dollar value of restricted stock awards made during the year, calculated by multiplying the closing price of unrestricted shares of the Company's Common Stock on the date of grant by the number of shares awarded. Dividends are paid on all shares of restricted stock. All shares of restricted stock generally vest at the earlier of age 65 (age 67, with respect to the shares granted to Mr. Russell) or 10 years from the date of grant, unless the average closing price of the Company's Common Stock achieves certain specified levels, in which case vesting of such shares is accelerated. All shares of restricted stock that have not previously vested are generally forfeited upon termination of employment, unless such termination occurs either by reason of death or disability or for the convenience of the Company (as determined by the Executive Compensation Committee). All shares of restricted stock that have not previously vested will immediately vest upon a "Change of Control" of the Company, as described under "Compensation Upon Change of Control" below. The number of shares of restricted stock held by the named executive officers as of December 31, 1995, and the value of such shares (calculated by multiplying the closing price of unrestricted shares of the Company's Common Stock on December 31, 1995 ($35.625) by the number of shares held on such date) is as follows: Mr. Kuehn, 95,200 shares, $3,391,500; Mr. Bates, 8,100 shares, $288,563; Mr. Moylan, 9,500 shares, $338,438; Mr. Rubright, 11,700 shares, $416,813; Mr. Russell, 32,000 shares, $1,140,000; and Mr. Smith, 14,300 shares, $509,438. NOTE 2: With respect to 1995, represents the following amounts for each of Messrs. Kuehn, Bates, Moylan, Rubright, Russell and Smith, respectively: (1) Company matching contributions to the trust established under the Company's Savings Plan -- $12,750, $12,750, $12,750, $5,862, 14 16 $12,750 and $12,750; (2) Company contributions to the Savings Plan accounts under the Company's Supplemental Benefit Plan -- $45,050, $6,163, $6,481, $18,597, $26,838 and $17,956; 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 -- $50,307, $7,187, $8,053, $16,075, $0 and $14,854. NOTE 3: Represents the amount of tax-offset "supplemental payments" paid upon the exercise of stock options (or tandem stock appreciation rights) granted under the Company's Executive Award Plan. NOTE 4: Represents the value of 9,500 shares, 2,300 shares, 2,300 shares, 2,300 shares, 5,000 shares and 2,300 shares of restricted stock granted on November 30, 1995, to Messrs. Kuehn, Bates, Moylan, Rubright, Russell and Smith, respectively. NOTE 5: Includes the value of 16,500 shares, 3,300 shares, 3,300 shares, 4,400 shares, 10,000 shares and 6,000 shares of restricted stock granted on December 1, 1994 to Messrs. Kuehn, Bates, Moylan, Rubright, Russell and Smith, respectively. NOTE 6: Represents the value of 14,000 shares, 2,500 shares, 2,500 shares, 10,000 shares and 6,000 shares of restricted stock granted on December 2, 1993 to Messrs. Kuehn, Bates, Moylan, Russell and Smith, respectively. NOTE 7: Mr. Rubright was employed by the Company as Vice President and General Counsel on February 15, 1994. NOTE 8: Includes (a) relocation allowances, related to Mr. Rubright's move from Atlanta, Georgia to Birmingham, Alabama, of $89,317 in excess of relocation allowances normally provided under Company policy, and (b) tax-reimbursement payments of $26,255 made with respect to such reimbursement allowances. NOTE 9: Includes the value of 5,000 shares of restricted stock granted to Mr. Rubright on January 26, 1994 (contingent upon his commencement of employment with the Company on February 15, 1994). NOTE 10: Includes (a) a $119,353 tax-offset "supplemental payment" paid upon the exercise of stock options granted under the Company's Executive Award Plan, (b) $59,663 for housing allowances and moving expenses related to Mr. Smith's relocation from Birmingham, Alabama to Houston, Texas, and (c) tax-reimbursement payments of $9,027 made with respect to such moving expenses. NOTE 11: Represents a $44,000 housing allowance related to Mr. Smith's relocation from Birmingham, Alabama to Houston, Texas. 15 17 OPTION GRANT TABLE The following table contains certain information with respect to stock options (and tandem stock appreciation rights that become exercisable only upon certain change of control events ("Limited SARs")) granted in 1995 under the Company's Executive Award Plan to the named executive officers. OPTION/SAR GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION FOR OPTION TERM (10 INDIVIDUAL GRANTS YEARS) -------------------------------------------------------- ------------------------------------ NUMBER OF % OF TOTAL 5% 10% SECURITIES OPTIONS/SARS (RESULTING (RESULTING UNDERLYING GRANTED TO EXERCISE COMPANY STOCK COMPANY STOCK OPTIONS/SARS EMPLOYEES IN PRICE EXPIRATION PRICE OF PRICE OF NAME GRANTED(1) 1995 ($/SHARE)(2) DATE(3) $52.53)(4) $83.65)(4) - ----------------------------- ------------- ------------- ------------- ----------- ----------------- ----------------- All Stockholders............. -- -- -- -- $ 1,743,397,030 $ 4,418,669,002 Ronald L. Kuehn, Jr.......... 79,200 11.6% $ 32.25 11/29/05 $ 1,606,176 $ 4,070,880 Richard B. Bates............. 18,000 2.6% $ 32.25 11/29/05 $ 365,040 $ 925,200 James E. Moylan, Jr.......... 18,000 2.6% $ 32.25 11/29/05 $ 365,040 $ 925,200 James A. Rubright............ 18,000 2.6% $ 32.25 11/29/05 $ 365,040 $ 925,200 Donald G. Russell............ 45,000 6.6% $ 32.25 11/29/05 $ 912,600 $ 2,313,000 William A. Smith............. 18,000 2.6% $ 32.25 11/29/05 $ 365,040 $ 925,200 Named Executive Officers' Potential Realizable Value as a % of All Stockholders' Potential Realizable Value 0.23% 0.23%
NOTE 1: All stock options shown in the table were granted on November 30, 1995. Each stock option was granted with a tandem Limited SAR that may be exercised only within 60 days after an SAR Change of Control (as defined under "Compensation Upon Change of Control" below). On November 30, 1995, the named executive officers were also granted Limited SARs in tandem with all then-outstanding previously-granted stock options. For more information on Limited SARs, see "Compensation Upon Change of Control" below. The stock options (and tandem Limited SARs) shown in the table become exercisable in equal installments on each of the first five anniversaries of the date of grant, provided that the entire grant will become immediately exercisable if, during any 10 business day period ending prior to November 30, 2000, the average of the closing prices of the Company's Common Stock during such period is at least $48.375. Any stock options (and tandem Limited SARs) that have not previously become exercisable are generally forfeited upon termination of employment, unless such termination occurs by reason of retirement after age 65 (age 67 for Mr. Russell), death, disability or for the convenience of the Company (as determined by the Executive Compensation Committee). Any options (and tandem Limited SARs) held by then-current employees will become immediately exercisable in the event of a "Change of Control" of the Company, as described under "Compensation Upon Change of Control" below. NOTE 2: The exercise price equals the closing price of the Company's Common Stock on the date of grant. NOTE 3: The stock options (and tandem Limited SARs) are subject to termination prior to their expiration date in the event of termination of employment. NOTE 4: The Resulting Company Stock Price shown in the table equals the price the Company's Common Stock would attain at the end of the option's 10-year term if the price of the Company's Common Stock appreciated from the date of stock option grant at a rate of 5% or 10% per year (as the case may be). The potential realizable values shown represent the difference between the $52.53 or $83.65 Resulting Company Stock Price (as the case may be) and the $32.25 exercise price, multiplied by (a) for all stockholders, the number of outstanding shares of the Company's Common Stock as of December 31, 1995, and (b) for each named executive officer, the number of options granted. 16 18 AGGREGATED OPTION/SAR EXERCISES AND FISCAL YEAR-END OPTION/SAR VALUE TABLE The following table shows certain information with respect to the named executive officers concerning the exercise of stock options (or stock appreciation rights ("SARs") granted in tandem therewith) during 1995 and unexercised stock options (and tandem SARs) held as of December 31, 1995.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUES ------------------------------------------------------------------------------ NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED, SHARES UNEXERCISED OPTIONS/SARS IN-THE-MONEY OPTIONS/SARS ACQUIRED AT FISCAL YEAR END(1) AT FISCAL YEAR END(2) ON VALUE ------------------------ --------------------------- NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ------------------------ --------- ----------- ---------- ------------ ----------- ------------- Ronald L. Kuehn, Jr..... 50,000 $ 482,500 510,000 234,800 $ 8,637,075 $ 1,332,950 Richard B. Bates........ 7,333 $ 109,536 26,800 48,200 $ 238,100 $ 268,025 James E. Moylan, Jr..... 0 $ 0 43,800 48,200 $ 542,350 $ 268,025 James A. Rubright....... 0 $ 0 13,500 72,000 $ 94,625 $ 439,250 Donald G. Russell....... 0 $ 0 160,200 136,800 $ 2,015,362 $ 780,450 William A. Smith........ 18,000 $ 173,250 175,000 81,000 $ 2,682,562 $ 491,625
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 $35.625 (the closing price of the Company's Common Stock on December 31, 1995) and the exercise price of the stock option. Such value does not include the value of any tax-offset supplemental payments. DEFINED BENEFIT PLANS Employees and officers of the Company and participating subsidiaries are participants in the Company's Retirement Plan. In general, annual retirement benefits are based on average covered compensation for the highest five consecutive years of the final ten years of employment. Covered compensation under the Retirement Plan currently includes salaries and amounts paid under the Performance Award Plan and the Cash Bonus Plan (reported in the Summary Compensation Table); covered compensation does not include amounts relating to the grant or vesting of restricted stock, the exercise of stock options and SARs, and receipt of supplemental payments under the Executive Award Plan, or to employer contributions under the Savings Plan or the Supplemental Benefit Plan. The maximum annual retirement benefit is 65% of the participant's average covered compensation minus 50% of his primary social security benefit. Participants accrue benefits under the following formula: (a) 2.4% of average covered compensation minus 2.0% of primary social security benefits for each year of service 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. 17 19 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 1995 the federal tax laws limited annual benefits under the Retirement Plan to $120,000 (subject to reduction in certain circumstances), and required the Retirement Plan to disregard any portion of the participant's 1995 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 1995 COVERED RETIREMENT BENEFIT NAME SERVICE(1) COMPENSATION(2) AT AGE 65(3) - ---------------------------------------- ----------- ---------------- ------------------ Ronald L. Kuehn, Jr..................... 25.4 $1,160,000 $742,400 Richard B. Bates........................ 10.8 $ 343,900 $222,159 James E. Moylan, Jr..................... 19.5 $ 340,550 $221,358 James A. Rubright....................... 1.8 $ 418,350 $156,881 Donald G. Russell....................... 7.9 $ 715,750 $138,856 William A. Smith........................ 25.7 $ 561,110 $364,722
NOTE 1: The number of years of credited service under the Retirement Plan and Supplemental Benefit Plan as of December 31, 1995. NOTE 2: The amount of covered compensation under the Retirement Plan and Supplemental Benefit Plan during 1995. 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 1995 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, 1995, with the cumulative total return of two indices during such period. COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL STOCKHOLDER RETURN SONAT INC.; STANDARD & POOR'S 500 STOCK INDEX; STANDARD & POOR'S NATURAL GAS DISTRIBUTION/PIPELINE GROUP(1)
MEASUREMENT PERIOD S&P NATURAL (FISCAL YEAR COVERED) SONAT INC. S&P 500 GAS 12/31/90 100.00 100.00 100.00 12/31/91 74.09 130.34 87.7 12/31/92 113.78 140.25 96.16 12/31/93 141.18 154.32 114.09 12/31/94 142.00 156.42 108.91 12/31/95 186.87 214.99 153.87
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, 1990, 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., ONEOK Inc., Pacific Enterprises, Panhandle Eastern Corporation, Peoples Energy Corporation, Sonat Inc. and The Williams Companies Inc. COMPENSATION UPON CHANGE OF CONTROL Certain of the Company's benefit plans provide for the acceleration of certain benefits in the event of a "Change of Control" of the Company. Under such plans, a Change of Control will be deemed to have occurred if (1) any person or group becomes the owner of (or obtains the right to acquire) 20% or more of the Company's common stock or outstanding voting securities (with certain exceptions, as set forth in the plans); (2) the individuals who, as of December 1, 1995, constituted the Board of Directors (the "Incumbent Board"), cease to be at least a majority of the Board of Directors (but including as Incumbent Board members, except as otherwise provided, any director whose election or nomination was approved by the Incumbent Board); or (3) there is consummation of a reorganization, consolidation or merger involving the Company, or sale of all or 19 21 substantially all of the Company's assets, unless the stockholders and Board of Directors of the Company before the transaction control the resulting company after the transaction. Any outside Director who is eligible for a retirement benefit under the Retirement Plan for Directors will receive such benefit (regardless of whether he has met the other eligibility requirements of the Plan) in the event he ceases to be a Director following a Change of Control. A Director 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. 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. On November 30, 1995, the named executive officers were granted Limited SARs in tandem with all outstanding options under the Executive Award Plan. Upon exercise of a Limited SAR or an SAR within 60 days after an SAR Change of Control (as defined below), the executive officer would receive the difference between (1) the greater of (a) the highest price of the Company's Common Stock during the 60-day period before exercise of the Limited SAR or SAR and (b) the highest price paid for a share of the Company's Common Stock by an acquiring person during the 60-day period before the SAR Change of Control and (2) the exercise price of the Limited SAR or SAR. An "SAR Change of Control" is deemed to have occurred if (1) any person or group acquires (or obtains the right to acquire) beneficial ownership of 35% or more of the Company's voting securities, (2) there is a change in the composition of a majority of the Company's Board of Directors within any period of three consecutive years which change was not approved by a majority of the Board as constituted immediately prior to the commencement of such three-year period or (3) at any meeting of stockholders of the Company called for the purpose of electing Directors the entire slate nominated by the Board of Directors fails to be elected. EXECUTIVE SEVERANCE AGREEMENTS The Company has Executive Severance Agreements with Messrs. Kuehn, Bates, Moylan, Rubright, Russell and Smith. These agreements provide that if the executive officer's employment is terminated either (1) within three years after a Change of Control (as defined above), either (a) by the Company for reasons other than dishonesty, conviction of a felony or willful unauthorized disclosure of confidential information or other than as a consequence of death, disability or retirement at normal retirement age (age 65 except for Mr. Russell, for whom normal retirement age is age 67) or (b) by the executive officer for reasons relating to a diminution of responsibilities or compensation or relocation requiring a change in residence or a significant increase in travel, or (2) by the executive officer for any reason during the 30-day period immediately following the first anniversary of the Change of Control, he will receive: (1) a lump sum payment equal to three times his highest earnings (defined to include those items described as covered compensation under the Retirement Plan) during any 12-month period during the three years preceding the termination (such lump sum payment to be reduced pro rata to the extent there are less than 36 months until the 20 22 officer reaches normal retirement age); (2) life, medical, and accident and disability insurance as provided in the Company's insurance programs or, in certain circumstances, substantially equivalent insurance to be provided by the Company for a period of 36 months after termination of employment (or until normal retirement age, whichever is sooner); and (3) for an executive officer who has reached age 50 and is not otherwise entitled to an early retirement benefit under the terms of a qualified retirement plan of the Company or its subsidiaries, an annual benefit equal to the amount such officer would have received had he been entitled to an early retirement benefit (reduced by any benefits payable to him under such retirement plan and the Supplemental Benefit Plan), and a 75% survivors benefit with respect to such early retirement benefit. The Executive Severance Agreements also provide that if the executive officer receives payments that would be subject to the tax imposed by Section 4999 of the Internal Revenue Code, the executive shall be entitled to receive an additional payment in an amount necessary to put the executive officer in the same after-tax position as if such tax had not been imposed. Assuming that the executive officers terminated employment on January 31, 1996, 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, $3,509,384 in cash and $0 in retirement benefits; Mr. Bates, $1,044,200 in cash and $0 in retirement benefits; Mr. Moylan, $1,075,800 in cash and $0 in retirement benefits; Mr. Rubright, $1,266,922 in cash and $0 in retirement benefits; Mr. Russell, $2,146,680 in cash and $6,321 in retirement benefits; and Mr. Smith, $1,699,590 in cash and $65,103 in retirement benefits. The Executive Severance Agreements provide that the executive officer may not voluntarily leave the employ of the Company if a third party attempts to effect a Change of Control until such third party abandons such attempt or a Change of Control has occurred. The Agreements renew automatically for one-year terms unless terminated at the end of any term by the Board of Directors. The Agreements shall also terminate if the Executive Compensation Committee determines that the executive officer is no longer a key employee, unless a Change of Control is threatened at the time or has occurred within the past three years. 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. 21 23 ELECTION OF AUDITOR (PROPOSAL NO. 1) Ernst & Young LLP has been nominated for election as Auditor of the Company. The Restated Certificate of Incorporation provides that no other person shall be eligible for election as Auditor unless notice of intention to nominate such person has been given to the Company not less than ten days before the Annual Meeting. A representative of Ernst & Young LLP will be present at the Annual Meeting with the opportunity to make a statement if such representative desires to do so and will be available to respond to appropriate questions. THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF ERNST & YOUNG LLP AS AUDITOR (PROPOSAL NO. 1). OTHER MATTERS PROPOSALS OF STOCKHOLDERS STOCKHOLDER PROPOSALS IN THE COMPANY'S PROXY STATEMENT. In order for proposals by stockholders to be considered for inclusion in the proxy statement and form of proxy relating to the 1997 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 15, 1996. STOCKHOLDER PROPOSALS TO BE PRESENTED AT MEETINGS. A stockholder who desires to propose any business at an annual meeting of stockholders must give the Secretary of the Company written notice which is received not later than the close of business on the 60th day nor earlier than the close of business on the 90th day before the first anniversary of the preceding year's annual meeting (the "Notice Deadline"). (Special notice provisions apply if the date of the annual meeting is more than 30 days before or more than 60 days after such anniversary date.) Adjournment of an annual meeting shall not commence a new Notice Deadline. The stockholder's notice must set forth (a) a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and the beneficial owner, if any, on whose behalf the proposal is made; (b) a representation that the stockholder is a holder of record of stock of the Company entitled to vote at such meeting (or if the record date for such meeting is subsequent to the date required for such stockholder notice, a representation that the stockholder is a holder of record at the time of such notice and intends to be a holder of record on the record date for such meeting) and intends to appear in person or by proxy at such meeting to propose such business; (c) any material interest of the stockholder in such business; and (d) for both the stockholder giving notice and the beneficial owner, if any, on whose behalf the proposal is made (1) the name and address of such stockholder and beneficial owner and (2) the class and number of shares owned beneficially and of record by such stockholder and beneficial owner. STOCKHOLDER NOMINATIONS FOR DIRECTORS. A stockholder who desires to nominate Directors at a meeting of stockholders must give the Secretary of the Company written notice within the Notice Deadline (for an annual meeting) or, for a special meeting at which directors are to be elected pursuant to the Company's notice of meeting, not earlier than the close of business on the 90th day before such special meeting and not later than the close of business on the later of the 60th day before such special meeting or the 10th day after the date public announcement is made of the date of the special meeting and the nominees proposed by the Board of Directors to be elected at such meeting. The stockholder's notice must set forth (a) the name and address of the stockholder giving the notice and of the beneficial owner, if any, on whose behalf the nominations are made; (b) the class and number of shares owned beneficially and of record by such stockholder and such beneficial owner; (c) a representation that the stockholder is a holder of record of stock of the Company entitled to vote at such meeting (or if the record date for such meeting is subsequent to 22 24 the date required for such stockholder notice, a representation that the stockholder is a holder of record at the time of such notice and intends to be a holder of record on the record date for such meeting) and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (d) a description of all arrangements or understandings between the stockholder or beneficial owner and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made; (e) such other information regarding each nominee proposed by such stockholder as would have been required to be disclosed in solicitation of proxies for election of directors pursuant to the proxy rules of the Securities and Exchange Commission; and (f) the consent of each nominee to be named in the proxy statement as a nominee and to serve as a Director of the Company if so elected. The Chairman of the meeting may refuse to transact any business or to acknowledge the nomination of any person if a stockholder has failed to comply with the foregoing procedures. A copy of the Company's By-Laws may be obtained from the Company upon written request to the Company at its principal place of business. INSTITUTIONAL OWNERSHIP OF COMMON STOCK The table below sets forth, as of January 31, 1996, certain information with respect to each person or entity known by the Company to be the beneficial owner of more than 5% of the Company's Common Stock.
NAME AND ADDRESS OF TITLE OF NUMBER OF SHARES PERCENT BENEFICIAL OWNER CLASS BENEFICIALLY OWNED OF CLASS - ------------------------------------ ------------- ----------------------- -------- The Prudential Insurance Company of America Prudential Plaza Newark, New Jersey 07102.......... Common Stock 4,786,833 5.6 %
In a report on Schedule 13G filed with the Securities and Exchange Commission with respect to the ownership of the Company's Common Stock as of December 31, 1995, The Prudential Insurance Company of America stated that such stock was acquired in the ordinary course of business and was not acquired for the purpose of changing or influencing the control of the Company and was not acquired in connection with or as a participant in any transaction having such a purpose or effect. VOTING AT THE ANNUAL MEETING The presence, in person or by proxy, of the holders of a majority of the Company's Common Stock is necessary to constitute a quorum at the Annual Meeting or any adjournment thereof. The vote required for the election of Directors and the approval of the other matters scheduled for a vote at the Annual Meeting is controlled by the provisions of the Company's Charter and By-Laws and the Delaware General Corporation Law. Directors are elected by a plurality vote. Approval of Proposal No. 1 would require a plurality vote. Broker "non-votes" (shares not voted on a matter because a nominee holding shares for a beneficial owner neither receives voting instructions from such beneficial owner nor has discretionary voting power with respect thereto) shall not have an effect on the vote at the Annual Meeting. The vote will be tabulated by an independent tabulator and the results of such vote will be certified by independent inspectors of election. SOLICITATION OF PROXIES The Company will bear the costs of solicitation of proxies. Officers and regular employees of the Company may solicit proxies by mail, telephone, telegraph and personal interview. In addition, the Company has retained D. F. King & Co., Inc. to assist in the solicitation of proxies, and 23 25 anticipates that the fees that it will incur for this service, excluding out-of-pocket expenses, will not exceed $20,000. 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. The Company is not aware that any matters other than those mentioned above will be presented for action at the 1996 Annual Meeting, but if any other matters do properly come before the meeting, the persons named as proxies will vote upon such matters in accordance with their best judgment. Please complete, sign, date and return the enclosed proxy card promptly. SONAT INC. Beverley T. Krannich SECRETARY Birmingham, Alabama March 13, 1996 24 EX-23 20 CONSENT OF INDEPENDENT AUDITORS 1 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in (i) the Registration Statement (Form S-8, No. 33-64367) pertaining to the Sonat Inc. Executive Award Plan and 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 and Form S-3, No. 33-5947) of Sonat Inc. and the related Prospectus and Prospectus Supplement of our report dated January 18, 1996, with respect to the consolidated financial statements of Sonat Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 1995. ERNST & YOUNG LLP Birmingham, Alabama March 18, 1996 EX-24 21 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.; 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, 1995, 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 22nd day of February, 1996. 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.; 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, 1995, 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 22nd day of February, 1996. 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.; 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, 1995, 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 22nd day of February, 1996. John J. Creedon 4 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of Sonat Inc., does hereby constitute and appoint Ronald L. Kuehn, Jr.; Thomas W. Barker, Jr.; James 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, 1995, 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 22nd day of February, 1996. Roberto C. Goizueta 5 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of Sonat Inc., does hereby constitute and appoint Ronald L. Kuehn, Jr.; Thomas W. Barker, Jr.; James 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, 1995, 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 22nd day of February, 1996. Robert J. Lanigan 6 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of Sonat Inc., does hereby constitute and appoint Ronald L. Kuehn, Jr.; Thomas W. Barker, Jr.; James 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, 1995, 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 22nd day of February, 1996. Max L. Lukens 7 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of Sonat Inc., does hereby constitute and appoint Ronald L. Kuehn, Jr.; Thomas W. Barker, Jr.; James A. Rubright and John C. Griffin, and each of them, his true and lawful attorneys to execute in his name (whether on behalf of Sonat Inc. or as a director of Sonat Inc.) the Sonat Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 1995, 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 22nd day of February, 1996. Charles Marshall 8 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of Sonat Inc., does hereby constitute and appoint Ronald L. Kuehn, Jr.; Thomas W. Barker, Jr.; James 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, 1995, 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 22nd day of February, 1996. Benjamin F. Payton 9 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of Sonat Inc., does hereby constitute and appoint Ronald L. Kuehn, Jr.; Thomas W. Barker, Jr.; James 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, 1995, 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 22nd day of February, 1996. John J. Phelan, Jr. 10 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of Sonat Inc., does hereby constitute and appoint Ronald L. Kuehn, Jr.; Thomas W. Barker, Jr.; James 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, 1995, 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 22nd day of February, 1996. Jerome J. Richardson 11 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer and director of Sonat Inc., does hereby constitute and appoint Ronald L. Kuehn, Jr.; Thomas W. Barker, Jr.; James A. Rubright and John C. Griffin, and each of them, his true and lawful attorneys to execute in his name (whether on behalf of Sonat Inc. or as an Officer or director of Sonat Inc.) the Sonat Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 1995, 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 22nd day of February, 1996. Donald G. Russell 12 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of Sonat Inc., does hereby constitute and appoint Ronald L. Kuehn, Jr.; Thomas W. Barker, Jr.; James A. Rubright and John C. Griffin, and each of them, his true and lawful attorneys to execute in his name (whether on behalf of Sonat Inc. or as a director of Sonat Inc.) the Sonat Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 1995, 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 22nd day of February, 1996. L. Edwin Smart 13 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of Sonat Inc., does hereby constitute and appoint Ronald L. Kuehn, Jr.; Thomas W. Barker, Jr.; James A. Rubright and John C. Griffin, and each of them, his true and lawful attorneys to execute in his name (whether on behalf of Sonat Inc. or as a director of Sonat Inc.) the Sonat Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 1995, 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 22nd day of February, 1996. Adrian M. Tocklin 14 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of Sonat Inc., does hereby constitute and appoint Ronald L. Kuehn, Jr.; Thomas W. Barker, Jr.; James A. Rubright and John C. Griffin, and each of them, his true and lawful attorneys to execute in his name (whether on behalf of Sonat Inc. or as a director of Sonat Inc.) the Sonat Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 1995, 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 22nd day of February, 1996. James B. Williams 15 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of Sonat Inc., does hereby constitute and appoint Ronald L. Kuehn, Jr.; Thomas W. Barker, Jr.; James A. Rubright and John C. Griffin, and each of them, his true and lawful attorneys to execute in his name (whether on behalf of Sonat Inc. or as a director of Sonat Inc.) the Sonat Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 1995, and any and all amendments thereto to be filed with the Securities and Exchange Commission pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 and to file the same, with all exhibits thereto, and any other documents in connection therewith, with the Securities and Exchange Commission. The undersigned does hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. Each of such attorneys shall have and may exercise all powers to act hereunder with or without the others. IN WITNESS WHEREOF, the undersigned has signed his name hereto as of the 27th day of February, 1996. Joe B. Wyatt EX-27 22 FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1995 DEC-31-1995 37,289 0 349,441 0 23,956 494,431 4,822,879 2,545,320 3,511,441 640,125 770,313 0 0 87,244 1,395,398 3,511,441 1,360,342 1,990,141 1,090,756 1,320,739 298,714 0 96,257 287,881 94,993 192,888 0 0 0 192,888 2.24 2.24
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