-----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, FGFr1sjzTq70pK1FCbnUUT/83/uQBP5ecnRilDVBf7t1xcaZbChCzSOLPgt4vFNr 4uoRy0/3WaK+iSTN+A0olw== 0000950144-97-002708.txt : 19970324 0000950144-97-002708.hdr.sgml : 19970324 ACCESSION NUMBER: 0000950144-97-002708 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970321 SROS: AMEX SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SONAT INC CENTRAL INDEX KEY: 0000092236 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS TRANSMISSION [4922] IRS NUMBER: 630647939 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-07179 FILM NUMBER: 97560433 BUSINESS ADDRESS: STREET 1: 1900 FIFTH AVENUE NORTH CITY: BIRMINGHAM STATE: AL ZIP: 35203 BUSINESS PHONE: 2053253800 MAIL ADDRESS: STREET 1: PO BOX 2563 CITY: BIRMINGHAM STATE: AL ZIP: 35202 FORMER COMPANY: FORMER CONFORMED NAME: SOUTHERN NATURAL RESOURCES INC DATE OF NAME CHANGE: 19820305 10-K 1 SONAT INCORPORATED 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 [NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996] FOR THE TRANSITION PERIOD FROM________ TO________ Commission file number 1-7179 ------------------------ SONAT INC. (Exact name of registrant as specified in its charter) DELAWARE 63-0647939 (State or other jurisdiction of incorporation (I.R.S. Employer Identification No.) or organization)
AMSOUTH-SONAT TOWER BIRMINGHAM, ALABAMA 35203 TELEPHONE 205-325-3800 (Address of principal executive offices) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE ON TITLE OF EACH CLASS WHICH REGISTERED ------------------- ------------------------ Common Stock, $1.00 par value New York Stock Exchange, Inc. Pacific Stock Exchange, Inc.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE REGISTRANT, AS OF JANUARY 31, 1997 -- $4,599,759,442. NUMBER OF SHARES OF COMMON STOCK, $1.00 PAR VALUE, OUTSTANDING ON JANUARY 31, 1997 -- 86,417,161 DOCUMENTS INCORPORATED BY REFERENCE PORTIONS OF THE PROXY STATEMENT OF THE REGISTRANT DATED AS OF MARCH 19, 1997, 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, 1996
ITEM PAGE - ---- ------ PART I Item 1. Business.................................................... I-1 Exploration and Production.................................. I-2 Consolidated Wells and Acreage.............................. I-6 Consolidated Exploratory and Development Wells.............. I-6 Consolidated Net Production................................. 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-7 Customer Settlement......................................... I-8 Storage Fields.............................................. I-8 Markets -- Transportation and Sales......................... I-9 Markets -- System Expansions................................ I-10 Gas Supplies................................................ I-11 Potential Royalty Claims.................................... I-11 Sea Robin Pipeline Company.................................. I-11 South Georgia Natural Gas Company........................... I-12 Citrus Corp. ............................................... I-12 Florida Gas Transmission Company............................ I-12 Competition and Current Business Conditions................. I-13 Natural Gas and Electric Power Marketing.................... I-15 Sonat Energy Services Company............................... I-15 Sonat Marketing Company L.P. ............................... I-15 Sonat Public Service Company L.L.C. ........................ I-15 Sonat Power Marketing L.P. ................................. I-15 Sonat Power Inc. ........................................... I-15 Sonat Intrastate-Alabama Inc. .............................. I-16 Competition and Current Business Conditions................. I-16 Governmental Regulation..................................... I-16 Exploration and Production.................................. I-16 Transmission and Storage of Natural Gas..................... I-16 Rate and Regulatory Proceedings............................. I-17 Environmental Matters....................................... I-17 Forward-Looking Statements.................................. I-17 Item 2. Properties.................................................. I-18 Item 3. Legal Proceedings........................................... I-18 Item 4. Submission of Matters to a Vote of Security Holders......... I-19 Executive Officers of the Registrant........................ I-19
3
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-43 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-45 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" or the "Company") 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 the ninth largest independent oil and gas producer 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 47 percent of Sonat's consolidated operating income for 1996. 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 49 percent of Sonat's consolidated operating income for 1996. 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 AGL Resources, Inc., an unaffiliated company ("AGL Resources"). At year-end 1996 Marketing was one of the ten largest natural gas marketers in the United States. Energy Services owns 65 percent of Sonat Power Marketing L.P. ("Power Marketing"), which markets electric power throughout much of the United States. AGL Resources owns the other 35 percent of Power Marketing. Energy marketing activities contributed approximately three percent of Sonat's consolidated operating income for 1996, inclusive of the minority interests. Sonat was incorporated under the laws of Delaware in 1973 in connection with a reorganization of Southern. At March 1, 1997, Sonat and its subsidiaries employed approximately 1,940 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 also has offices in Tyler and Midland, Texas and Oklahoma City, Oklahoma. The oil and gas properties of Exploration are principally located onshore in the Southern coastal states, in various states in the Southwest and Midwest, and in federal waters offshore Louisiana and Texas. As of December 31, 1996, Exploration had operations or properties in 13 states. Exploration had working interests in approximately 2.4 million gross acres or 1.7 million net acres onshore as of December 31, 1996. 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, 50 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 2.0 trillion cubic feet of natural gas equivalent at the end of 1996. Approximately 85 percent of Exploration's proved reserves are natural gas. In 1996 Exploration focused more of its resources on development and exploratory drilling activities to more fully exploit the exploratory and development drilling prospects it has developed on the substantial acreage it had acquired. As a result, expenditures for exploration and development drilling activities in 1996 exceeded expenditures for producing property acquisitions for the first time in nine years. Exploration expects to focus more on exploratory and development drilling and expanding its land positions through leasing rather than on property acquisitions for future growth. In 1996 Exploration participated in the drilling of 315 development wells, of which 97 percent were successful. Exploration also participated in the drilling of 13 exploratory wells in 1996, eight of which were successful. Of the total of 328 wells in which Exploration participated in drilling in 1996, it operated 221. Exploration increased net proved reserves during 1996 by approximately 365 Bcf of natural gas equivalent through drilling and producing operations. Exploration is also continuing to expand and 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 49 horizontal wells in this trend during 1996, of which 47 were successful. During 1996 Exploration acquired approximately 110 Bcf of proved natural gas equivalent reserves in 44 separate transactions totaling $48 million, for an average acquisition cost of $.44 per thousand cubic feet equivalent. Through these acquisitions, Exploration increased its position in the Gulf of Mexico and North Louisiana. In July 1995 Exploration and Taurus Exploration U.S.A. Inc. ("Taurus"), a wholly owned subsidiary of Energen Corporation, an unaffiliated company, entered into an agreement pursuant to which Taurus joined Exploration in its regular oil and gas reserve acquisition program through December 31, 1998. Exploration anticipates that Taurus will invest up to $25 million to $50 million annually to acquire working interests. Pursuant to the agreement, Taurus may acquire up to a maximum of 40 percent of the working interest acquired by Exploration in property acquisitions that may be made during this period. Development drilling on the acquired properties could involve additional investment by Taurus. Exploration will operate all properties acquired. As of December 31, 1996, Exploration's net proved reserves totaled 51 million barrels of crude oil, condensate, and natural gas liquids and 1,692 Bcf of natural gas. As of December 31, 1995, Exploration's net proved reserves amounted to 44 million barrels of crude oil, condensate, and natural gas liquids and 1,506 Bcf of natural gas. For additional information concerning reserves, see Note 13 of the Notes to Consolidated Financial Statements in Part II of this report. I-2 6 Exploration's total exploration and production capital expenditures in 1996 were $368 million compared with $416 million in 1995. While Exploration will continue to make producing property acquisitions in 1997, it has shifted to a reserve replacement and growth strategy more focused on low-risk exploration and aggressive development drilling. Capital spending in 1997 is expected to be approximately $395 million. While maintaining an active drilling 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 nonstrategic oil and gas interests in 1996 in the states of Texas, Louisiana, Arkansas, Oklahoma, and the Gulf of Mexico. These properties were sold for a total of approximately $37 million and included net proved reserves of approximately 60 Bcf of 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. The following tables detail the gross lease acreage of both producing and nonproducing onshore properties and offshore lease blocks in which Exploration had an interest at December 31, 1996. The map following the tables generally depicts the areas in which Exploration had significant lease interests as of that date. I-3 7 SONAT EXPLORATION COMPANY ONSHORE GROSS LEASE ACREAGE
STATE PRODUCING NON-PRODUCING TOTAL - ----- --------- ------------- --------- Alabama................................................ 6,445 35,199 41,644 Arkansas............................................... 281,979 40,774 322,753 Louisiana.............................................. 168,140 661,161 829,301 Oklahoma............................................... 228,973 63,220 292,193 Texas.................................................. 348,566 497,841 846,407 Other.................................................. 24,932 3,198 28,130 --------- --------- --------- Total........................................ 1,059,035 1,301,393 2,360,428 ========= ========= =========
OFFSHORE GROSS LEASE BLOCKS
AREA PRODUCING NON-PRODUCING TOTAL - ---- --------- ------------- ----- Mustang Island.............................................. 3 2 5 High Island(1).............................................. 11 0 11 Sabine Pass................................................. 4 0 4 West Cameron(2)............................................. 14 0 14 East Cameron(3)............................................. 10 1 11 Eugene Island............................................... 4 0 4 Ship Shoal.................................................. 3 1 4 Mississippi Canyon(4)....................................... 4 0 4 -- - -- Total............................................. 53 4 57 == ==
- --------------- (1) In one of the producing blocks, High Island 139, Exploration only has an overriding interest. (2) 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. (3) In one of the producing blocks, East Cameron 33, Exploration only has an overriding interest. Exploration is not a lessee of two of the ten producing blocks, East Cameron 352 and 353, but these blocks have been unitized with a producing lease block in the area in which Exploration has a working interest. (4) Exploration is not a lessee of one of the four producing blocks (Mississippi Canyon 150), but this block has been unitized with the three producing lease blocks in the area in which Exploration has working interests. I-4 8 (MAP) I-5 9 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, 1996.
TOTAL NO. OF PRODUCTIVE NO. OF WELLS WELLS ------------ DEVELOPED UNDEVELOPED BEING OIL GAS ACRES ACRES DRILLED --- ----- --------- ----------- ------- Gross........................................ 228 2,841(1) 1,251,000 1,325,000 66 Net.......................................... 147 1,591 778,000 1,032,000 38
- --------------- (1) 124 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 1994 through 1996.
NET EXPLORATORY WELLS DRILLED NET DEVELOPMENT WELLS DRILLED ----------------------------- ----------------------------- 1994 1995 1996 1994 1995 1996 ------- ------- ------- ------- ------- ------- Productive............................ 0 0.50 6.39 180.00 187.05 205.69 Dry................................... 13.70 0 4.00 43.79 9.40 5.44
For information concerning Exploration's (i) capitalized costs of oil and gas producing activities, (ii) costs incurred in oil and gas producing activities, (iii) net revenues from oil and gas production, (iv) estimated proved oil and gas reserves, (v) estimated future oil and gas net revenues, and (vi) present value of estimated future net revenues from estimated production of proved oil and gas reserves, see Note 13 of the Notes to Consolidated Financial Statements in Part II of this report. The standardized measures of discounted future net cash flows relating to Exploration's oil (including condensate) and gas reserves are calculated as prescribed by Statement of Financial Accounting Standards No. 69. The standardized measures of Exploration's proved oil and gas reserves presented in Part II of this report do not represent Sonat's estimate of their fair market value and are not otherwise representative of the value thereof, but rather, as stipulated and required by the Financial Accounting Standards Board, are intended solely to assist financial statement users in making comparisons between companies. CONSOLIDATED NET PRODUCTION Exploration had interests in production from 2,957 producing wells onshore and 112 producing wells offshore as of December 31, 1996. 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 1994 to 1996 and the average sales prices for those years (including transfers). The average production (lifting) costs per unit of oil and gas was $.35 in 1996 and $.38 in each of 1995 and 1994. 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 73 percent of Exploration's revenues in 1996 and 57 percent in 1995. 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- I-6 10 market price volatility. See Note 3 of the Notes to Consolidated Financial Statements contained in Part II of this report. COMPETITION AND CURRENT BUSINESS CONDITIONS The oil and gas business is highly competitive in the search for and acquisition of additional reserves and in the marketing of oil and natural gas. Exploration's competitors include the major and intermediate size oil companies, independent oil and gas concerns, and individual producers or operators. Exploration's realized natural gas prices averaged $2.20 per thousand cubic feet in 1996, up from $1.52 in 1995. Oil and condensate prices were also higher in 1996, averaging $19.25 per barrel versus $17.61 per barrel in 1995. Exploration hedged a portion of its 1996 production, which reduced its realized price for natural gas and oil by $.10 per Mcf and $2.44 per Bbl, respectively. See Note 3 of the Notes to Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in Part II of this report for a discussion of oil and gas production hedged in the future. Exploration plans to spend approximately $395 million in capital expenditures in 1997, which includes allocations of approximately $257 million for development drilling, $86 million for exploration, including leasing and seismic, and $14 million for acquisitions. Actual expenditures for such activities may vary from these estimates for a number of reasons, including those discussed under the caption Forward-Looking Statements contained below in this Part I of this report. 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 9,055 miles of interstate 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-14. 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. Order No. 636 Restructuring. In 1992 the FERC issued its Order No. 636, 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, which included separating (unbundling) their sales, transportation, and storage services. Interstate pipeline companies, including Southern, incurred, and in certain limited instances are continuing to incur, certain costs ("transition costs") as a result of Order No. 636, the principal one being costs related to amendment or termination of, or purchases of gas at above-market prices under, existing gas purchase contracts, which are referred to as gas supply realignment ("GSR") costs. I-7 11 As of December 31, 1996, Southern had either paid or accrued $276 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, 1996, Southern had incurred $85 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 Order No. 636. Southern's customers had generally opposed its recovery of its GSR costs in these proceedings based on both eligibility and prudence grounds. Customer Settlement. In an order issued on September 29, 1995 (the "Settlement Order"), the FERC approved a comprehensive settlement (the "Customer Settlement") that is effective as to all of Southern's customers, except one customer representing approximately two percent of the firm transportation capacity on Southern's system. The Customer Settlement resolved all of Southern's previously pending rate proceedings and proceedings to recover GSR and other transition costs associated with the implementation of Order No. 636. The four major rate cases resolved by the Customer Settlement cover consecutive periods beginning September 1, 1989. In May 1996 the Customer Settlement became final, and Southern credited in the aggregate the full amount of Southern's rate reserves as of February 28, 1995, plus interest, less certain amounts withheld for potential refunds to contesting parties, to reduce the GSR costs borne by Southern's customers. The total credit recorded in May 1996 amounted to $164 million. Southern implemented reduced settlement rates 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, but requires Southern to file a new rate case no later than September 1, 1999. The Customer Settlement also provides for Southern to recover $363 million of GSR costs incurred or reserved as of December 31, 1996, and 50 percent of GSR costs that Southern may incur thereafter. The Company believes that future GSR costs that may be borne by it will not be material to its financial position or results of operations. Several parties that opposed the Customer Settlement had filed with the FERC requests for rehearing of the Settlement Order. On April 11, 1996, the FERC denied those requests for rehearing of the Settlement Order and also decided certain issues in prior rate proceedings that affect the contesting parties to the Customer Settlement (the "April 11 Order"). Pursuant to the April 11 Order, Southern made refunds to the contesting parties in May 1996 covering various rate periods from January 1, 1991, through December 31, 1995. Southern was adequately reserved for these refunds. The only issues remaining to be litigated at the FERC by the one remaining contesting party concern the recoverability of certain GSR and other transition costs under Order No. 636, which would not be material even if such issues were determined adversely to Southern. The contesting party, and one other entity that may potentially compete with Southern in providing storage services, have each appealed the April 11 Order and the Settlement Order to the D.C. Circuit Court of Appeals. Although there can be no assurances, the Company believes that the Settlement Order and the April 11 Order should be upheld on appeal. 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 had determined that additional working storage capacity could have been made available to its customers, it would have been required promptly to offer such capacity to them. In January of 1996 and 1997, however, Southern informed its customers that the results of its 1995 and 1996 reviews supported the reclassification and that Southern proposed no adjustment to the total level of working storage gas at Muldon. Consequently, 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. I-8 12 Bear Creek Storage Company ("Bear Creek"), an unincorporated joint venture between wholly owned subsidiaries of Southern and Tennessee Gas Pipeline Company ("Tennessee"), a subsidiary of El Paso Energy Corporation, an unaffiliated company, 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, Tennessee, 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, 1996, Bear Creek's gross facilities cost was $247,785,000, its net facilities cost was $154,388,000, and its participants' equity was $97,677,000. Southern had an investment in Bear Creek, including its equity in undistributed earnings, of $48,838,000 at December 31, 1996. 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. 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. 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 1996 Southern transported gas to nine gas distribution companies, to 101 municipal distributors and gas districts, to eight connecting interstate pipeline companies, and to 69 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 1996 for Southern and all of its subsidiaries were 983 Bcf, compared with transportation volumes in 1995 of 1,016 Bcf. Sales to distribution customers, including municipalities and gas districts, accounted for most of 1996 sales of 77 Bcf and 1995 sales of 93 Bcf. With the exception of eight Bcf of sales made by Sonat Intrastate-Alabama Inc., a wholly owned subsidiary of Southern prior to January 1, 1997, in each of 1996 and 1995, the volumes associated with the 1996 and 1995 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. Southern has firm transportation contracts with its largest customer, Atlanta Gas Light Company, and its subsidiary, Chattanooga Gas Company, for an aggregate of 787 million cubic feet per day under primary terms extending for various periods through February 28, 1999, to April 30, 2007. Alabama Gas Corporation, Southern's second largest customer, has executed firm transportation contracts for a total of 393 million cubic feet per day under primary terms extending for various periods through October 31, 1998, to October 31, 2008. Southern has firm transportation contracts with South Carolina Pipeline Corporation, its third largest customer, for a total of 188 million cubic feet per day under primary terms extending for various periods through March 31, 1999, to October 31, 2003. 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. I-9 13 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. 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 seven percent of Sonat's 1996 consolidated revenues. Atlanta was the only customer that accounted for as much as seven percent of Sonat's consolidated revenues for 1996. 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. Markets -- System Expansions. Southern is aggressively attempting to expand its pipeline system in its traditional market area and to connect new gas supplies. Southern received approval from the FERC in December 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 $16 million expansion project was November 1, 1996. 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 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 during the winter of 1997-98. The company that currently provides transportion service to the City of Huntsville has filed suit against Southern and Huntsville seeking to have Southern's service agreement with Huntsville set aside, alleging that the parties violated Alabama's competitive bid law since the contract was not subjected to competitive bidding in accordance with such law. Southern's position that the competitive bid law does not apply to the contract was upheld by the trial court, whose summary judgment decision in favor of Southern and the City of Huntsville is now on appeal to the Alabama Supreme Court. See Item 3. Legal Proceedings below. This company has also opposed the system expansion application at the FERC. Although there is no assurance that Southern will prevail in either forum, Southern believes that its position in the state court proceeding will be upheld and that the FERC should grant approval of its application. In October 1995 Southern received FERC approval for a production area expansion project with a capital cost of $14 million. Southern installed 9,400 horsepower of additional compression at its Toca, Louisiana compressor station south of New Orleans and 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 is supported by a 10-year firm transportation agreement with Shell Offshore Inc. The necessary compression facilities for this project have been completed, but certain of the receipt-point facilities are not expected to be completed before April 1, 1997. In early 1995 Southern initiated an open season to obtain customer commitments to expand its system in order to meet increased demand for natural gas in the Southeast. As a result of the open season, Southern executed contracts for additional firm transportation services totaling approximately 46 million cubic feet per day with 11 customers in Georgia and Tennessee. Southern filed an application for authorization to construct and operate the necessary facilities for this $36 million project in May 1996. If timely FERC approval is received, the in-service date for the firm transportation service is expected to be November 1997. I-10 14 In December 1996 Southern, Amoco Pipeline Company, and Shell Gas Pipeline Company announced their intent to construct the Destin Pipeline, a $300 million project that will begin offshore in Main Pass Block 260 and extend northward into Mississippi, intersecting five interstate pipelines, including Southern and Florida Gas. This pipeline will be owned equally by Southern and affiliates of Amoco Pipeline and Shell Gas Pipeline and will have one billion cubic feet of daily capacity when completed. Subject to receipt of the necessary FERC approval, construction is scheduled to begin in late 1997 and the system could begin service as early as mid-1998. When the system is completed, Southern will operate the pipeline. The execution of definitive agreements is expected to occur in early 1997. In December 1996 Southern also concluded a systemwide open season to obtain customer commitments to expand its system. Southern currently has received firm transportation commitments totaling 65 million cubic feet of natural gas per day from 15 customers in eastern Tennessee, Georgia, and Alabama and additional customers may join this project. Therefore, the capital investment associated with this project is uncertain. Additionally, existing customers will be given the option to release firm capacity that comes up for renewal during the next three years to meet the needs of this project. The necessary FERC approval will be sought in an application that is expected to be filed in May 1997, with the project scheduled to go in service in November 1998. Gas Supplies. During 1996 Southern reduced the number of its existing long-term gas supply contracts from 15 to seven. 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. 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 by 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 and one independent storage company. See the system map on page I-14. Sea Robin is a transportation-only pipeline that has restructured in compliance with FERC Order No. 636. Sea Robin transported approximately 243 Bcf of natural gas in 1996 compared to 302 Bcf in 1995. 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 was denied by the FERC on June 26, 1996. Sea Robin filed a petition with the Fifth Circuit Court of Appeals on August 15, 1996, for judicial review of the orders denying its petition. I-11 15 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. On August 2, 1996, the FERC issued an order on the complaint, instituting an investigation and hearing under Section 5 of the Natural Gas Act and requiring that an initial decision be issued by May 2, 1997. On December 31, 1996, Sea Robin filed a proposed settlement of the complaint proceeding pursuant to which it would voluntarily reduce its transportation rates by $.0042 per Dekatherm, calculated on a 100 percent load factor basis, effective January 1, 1997. The settlement is supported by the FERC Staff and one of two groups of active intervenors, but is opposed by the complainant shippers, who are the other group of active intervenors. By order dated February 7, 1997, the Presiding Administrative Law Judge certified the settlement to the FERC Commissioners. Sea Robin is unable to predict the outcome of this proceeding, but if the proposed settlement is not approved, any reduction in Sea Robin's rates can be implemented only on a prospective basis and any such change is not expected to be material to the Company's financial position or results of operations. 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-14. As described above, South Georgia has restructured pursuant to Order No. 636 and is a transportation-only pipeline. South Georgia transported approximately 37 Bcf of natural gas in 1996 compared to 38 Bcf in 1995. These South Georgia volumes are included within the Southern transportation volumes discussed earlier. 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. 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-14. Florida Gas is the primary pipeline transporter of natural gas in the state of Florida and the sole pipeline transporter to peninsular Florida. In 1996 Florida Gas transported 457 Bcf of natural gas, compared to 487 Bcf in 1995. 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. On March 1, 1995, Florida Gas placed in service 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. The FERC's Division of Audits ("DOA") has completed a compliance review of Florida Gas' books and records for the period January 1, 1991, through December 31, 1994. Pursuant to an agreement in principle among Florida Gas, FERC staff, and customer intervenors, Florida Gas filed a settlement agreement on July 30, 1996, which was approved by FERC order issued September 27, 1996. The settlement resolves all issues resulting from that audit and provides for a reduction of $18.75 million in Florida Gas' Account No. 101, Gas Plant in Service. The settlement is without prejudice to Florida Gas seeking FERC approval to recover the $18.75 million, which was required to be removed from its plant account, in the rate case filed by I-12 16 Florida Gas on August 30, 1996, in Docket No. RP96-366-000. The outcome of this matter cannot be determined at this time. Florida Gas' management believes, however, that the ultimate resolution of this settlement will not have a material adverse effect on its financial position or results of operations. 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. The DOA and the Enforcement Division of the FERC are also conducting a review of Florida Gas' books and records as to the construction costs of the Phase III expansion. Florida Gas' customers also have the right under general rate-making principles to challenge any of these costs as imprudently incurred. While Florida Gas' management believes that all costs were prudently and properly charged and incurred and that the results of these audits will not have a material adverse effect on its financial position or results of operations, it is possible that certain of the costs could be disallowed and that fines or penalties could be imposed. By order issued November 27, 1996, the FERC consolidated the Phase III construction review with Florida Gas' rate case in Docket No. RP96-366-000. At December 31, 1996, Citrus' gross pipeline and facilities cost was $2,790,000,000, and its net cost was $2,362,000,000. Sonat had an investment in Citrus, including its equity in undistributed earnings, of $342,797,000 at December 31, 1996. For additional information regarding Citrus, see Management's Discussion and Analysis of Financial Condition and Results of Operations contained in Part II of this report, and the Consolidated Financial Statements of Citrus contained in Part IV of this report. 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. 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 three largest customers are all 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-13 17 (MAP) I-14 18 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 Sonat's largely non-FERC-regulated companies engaged in unregulated natural gas and electric power marketing, power generation, and intrastate natural gas transmission. Sonat Marketing Company L.P. Marketing is one of the ten largest natural gas marketers in the United States. Its principal offices are in Birmingham, Alabama and Houston, Texas. It also has regional offices in Tyler, Texas, Oklahoma City, Oklahoma, Boston, Massachusetts, and Pittsburgh, Pennsylvania. Marketing plans to open offices in Atlanta, Georgia and Chicago, Illinois in 1997. 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 continued to expand its natural gas marketing business in 1996, when it sold 968 Bcf of natural gas compared to sales of 722 Bcf in 1995, which represented a 34-percent increase. 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 uses derivative financial instruments to manage the risks associated with its own trading activities and the price volatility associated with Exploration's natural gas and oil production. Sonat Public Service Company L.L.C. Sonat Public Service Company L.L.C. ("Sonat Public Service") was formed in December 1996 as a joint venture of Marketing and PSNC Production Corporation, a wholly owned subsidiary of Public Service Company of North Carolina, Inc., an unaffiliated company. Sonat Public Service, which is headquartered in Charlotte, North Carolina, markets natural gas and related services to small industrial and large commercial customers throughout the Mid-Atlantic region, including the District of Columbia and the states of North Carolina, South Carolina, Maryland, and Virginia. In addition, Sonat Public Service provides gas supply management services to municipalities in the Mid-Atlantic region. Sonat Power Marketing L.P. Power Marketing, which is headquartered in Birmingham, Alabama, 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. Power Marketing grew rapidly during 1996. It more than doubled its staff and increased its average trading volume from under five megawatts per hour at the end of 1995 to 530 megawatts per hour at the end of 1996. Power Marketing continues to focus its activities on increasing its wholesale business as retail opportunities are limited until state regulatory changes are made. 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, known as the Hunter's Point Project. If this project goes forward, a subsidiary of The AES Corporation would construct and operate the plant. Energy Services would be responsible for the negotiation of the gas supply and transportation contracts needed in connection with the project. Because of regulatory and other developments, the current outlook for and timing of this project are uncertain. If it were to go forward, this project would require an equity investment from Sonat in the range of approximately $10-15 million. I-15 19 Sonat Intrastate-Alabama Inc. Sonat Intrastate-Alabama Inc. ("SIA"), a wholly owned subsidiary of Energy Services, owns a 454-mile intrastate pipeline system extending from natural gas fields and coal seam gas production areas in the Black Warrior Basin in northwest and central Alabama to connections with customers in Alabama, as well as interconnections with three other pipelines, including Southern. See the system map on page I-14. SIA's throughput in 1996 was approximately 38 Bcf compared to 35 Bcf in 1995. 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 and 1996 evidenced a growing trend toward consolidation in the gas marketing industry. Marketing's operating income rose in 1996, with greater price volatility creating greater profit opportunities for marketers during the first quarter. During the remainder of 1996 competition was intense and margins declined accordingly. Marketing expects margins to remain under pressure in 1997. GOVERNMENTAL REGULATION EXPLORATION AND PRODUCTION The federal government and the states in which Exploration has oil and gas production and owns interests in producing properties regulate various matters affecting Exploration's oil and gas production, including the drilling and spacing of wells, conservation, forced pooling, and protection of correlative rights among interest owners. The operations of Exploration under federal oil and gas leases are subject to certain statutes and regulations of the U.S. Department of the Interior that currently impose liability upon lessees for the cost of clean-up of pollution resulting from their operations. Royalty obligations on all federal leases are regulated by the MMS, which has promulgated valuation guidelines for the payment of royalty by producers. To the extent the MMS finally determines valuation based on a method other than actual sales proceeds received, producers could be required to pay royalties at a rate higher than actual sales proceeds. Other federal, state, and local laws and regulations relating to the protection of the environment may affect Exploration's oil and gas operations, both directly and indirectly, through their effect on the construction and operation of facilities, drilling operations, production, or the delay or prevention of future offshore lease sales. Sonat maintains substantial insurance on behalf of Exploration for oil pollution liability. Exploration is also subject to various governmental safety regulations in the jurisdictions in which it operates. TRANSMISSION AND STORAGE OF NATURAL GAS Southern, its interstate transmission subsidiaries, and Florida Gas are 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"). The NGA, modified by the DOE Act, grants to the FERC authority to regulate the construction and operation of pipeline and related facilities utilized in the transportation and sale of natural gas in interstate commerce, including the extension, enlargement, or abandonment of such facilities. Southern, its interstate transmission subsidiaries, and Florida Gas hold required certificates of public convenience and necessity issued by the FERC authorizing them to construct and operate all pipelines, facilities, and properties now in operation for which certificates are required, and to transport and sell natural gas in interstate commerce. The FERC also has authority to regulate the transportation of natural gas in interstate commerce and the sale of natural gas in interstate commerce for resale. Although the FERC still retains jurisdiction over their resale rates, following the implementation of Order No. 636, Southern, Florida Gas, and other interstate pipeline companies are now permitted to charge market-based rates for gas sold in interstate commerce for resale. Gas sold by Marketing and other marketing companies is not regulated by the FERC. Transportation rates 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 I-16 20 interstate transmission subsidiaries, Florida Gas, and SIA file with the FERC applications for changes in their transportation rates and charges designed to allow them to recover fully their costs of providing such service to their customers, including a reasonable rate of return. 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 and LNG 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, Florida Gas, and SIA are subject to the Natural Gas Pipeline Safety Act of 1968, as amended, which regulates pipeline and LNG plant safety requirements, and to the National Environmental Policy Act and other environmental legislation. Each of them has a continuing program of inspection designed to keep all of their facilities in compliance with pollution control and pipeline safety requirements and believe that they are in substantial compliance with applicable requirements. Southern's capital expenditures to comply with environmental and pipeline safety regulations were approximately $8 million in both 1996 and 1995. Southern anticipates that such expenditures will be approximately $12 million in 1997. 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, 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 resolves all of Southern's previously pending rate proceedings and proceedings to recover GSR and other transition costs associated with the implementation of Order No. 636, except for one contesting party that represents approximately two percent of Southern's firm transportation volumes. 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 From time to time the Company may make or publish forward-looking statements relating to such matters as anticipated financial performance, business plans and prospects, objectives, future projects, and similar matters. This report, including the information incorporated by reference herein, contains such forward-looking statements. These forward-looking statements are based on assumptions that the Company believes are reasonable. A variety of factors, however, could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. Important factors that could cause actual results to differ include the timing and extent of 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, the pace of deregulation of retail natural gas and electricity markets in the United States, 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. The success and growth of the Company's exploration and development programs are dependent upon a number of factors that cannot be predicted with certainty. These factors include the Company's ability to expand its leased land positions in desirable areas, which often are subject to intensely competitive leasing conditions such as currently exist in the Cotton Valley Reef Trend; the results of future wells, especially those in the Cotton Valley Reef Trend and the Austin Chalk, which are key prospective areas for the Company; and I-17 21 the ability of the Company to identify and precisely locate prospective geologic structures and to drill and successfully complete wells in those structures. In addition, the Company's expectations for continued growth in the Cotton Valley Reef Trend are based in part on seismic surveys. Some of the available data is based on 2D seismic surveys. While 2D seismic data is helpful in identifying prospects, there is no basis to predict how many prospects identified by 2D seismic data will be confirmed by 3D seismic surveys. The Company plans to drill only Reef prospects that are confirmed by 3D seismic data. Furthermore, 3D seismic data alone cannot confirm that economically productive hydrocarbons will be present in the reefs and current limitations on such technology are such that there is no assurance that the Company will be able to locate and penetrate the reef formations. In addition, in certain other areas, such as the Austin Chalk, the Company's exploratory and development activities are not aided by seismic data because of the nature of the targeted reservoirs. The success of the Company's expansion projects in its natural gas transmission segment is dependent on obtaining both the necessary number of customer commitments for a project and regulatory approval of the project, which may encounter opposition by the staff of the FERC, environmental groups, and other customers of the Company or its local distribution customers. The Company's regulated natural gas transmission subsidiaries recover substantially all of their fixed costs, a return on equity, and income taxes in the capacity reservation component of their firm transportation rates. There can be no assurance, however, that the existing customers of the Company's natural gas transmission subsidiaries will extend their firm service agreements at the same levels when their current service agreements expire. Competition in the Company's energy marketing segment is intense, which will affect the Company's efforts to expand its presence into other natural gas markets, including those in the north and midwest. There can be no assurance that the Company will achieve any additional strategic alliances with other gas or electric marketers, producers, generators, or local distribution companies or that any such additional alliances will be profitable. A factor in the level of margins achieved by marketers, both gas and electric, is market volatility, which cannot be predicted, and which may not recur in the future either with the same frequency or at the same level as it has in the past. ITEM 2. PROPERTIES A description of Sonat's and its subsidiaries' principal properties is included under Item 1. Business above and is hereby incorporated by reference herein. ITEM 3. LEGAL PROCEEDINGS For information regarding 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 11th Circuit Court of Appeals. The FERC denied the requests for rehearing in an order issued on November 26, 1996, and Atlanta and another customer have also filed petitions for review of that order in the 11th Circuit Court of Appeals. 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. I-18 22 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 January of 1996 Southern entered into a 20-year service agreement with the City of Huntsville, Alabama to provide 40 million cubic feet per day of firm transportation service. In its lawsuit, Alabama-Tennessee Natural Gas Company, which currently provides natural gas transportation service to Huntsville, is seeking to have this agreement set aside, alleging that the parties violated Alabama's competitive bid law since the contract was not subjected to competitive bidding in accordance with such law. 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. Southern's position was upheld by the trial court, whose summary judgment decision in favor of Southern and the City of Huntsville is now on appeal to the Alabama Supreme Court, which has granted expedited consideration to the appeal. Southern Natural Gas Company and its wholly owned subsidiary, Sea Robin Pipeline Company, are two of seventy defendants named in Jack J. Grynberg, ex rel. v. Alaska Pipeline Company, et al.,which was filed in the United States District Court for the District of Columbia. The defendants include substantially all of the interstate pipelines in the United States. Grynberg filed suit on behalf of the United States Government under 31 U.S.C. sec.3729, et seq., commonly known as the False Claims Act, alleging that the methods used by the defendants to measure the heating content and volume of natural gas purchased by them have caused producers of natural gas to underpay royalties owed by the producers to the United States. The complaint seeks recovery of actual damages based upon the unpaid royalties, the amount of which is not specified in the complaint. Such damages may be trebled under Section 3729. Southern and Sea Robin intend to defend the suit vigorously. The settlement in the case styled A. L. Briggs, et al. v. Sonat Exploration Company, et al., which was described in Item 1. Legal Proceedings in Part II of the Company's Report on Form 10-Q for the quarterly period ended September 30, 1996, became final on December 26, 1996, as a result of the passage of time. 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 1996. EXECUTIVE OFFICERS OF THE REGISTRANT
OFFICER OFFICE AGE ------- ------ --- Ronald L. Kuehn, Jr....................... Chairman of the Board, President and Chief 61 Executive Officer Donald G. Russell......................... Executive Vice President 65 William A. Smith.......................... Executive Vice President 52 Richard B. Bates.......................... Senior Vice President 43 James E. Moylan, Jr....................... Senior Vice President 46 James A. Rubright......................... Senior Vice President and General Counsel 50 Thomas W. Barker, Jr...................... Vice President -- Finance and Treasurer 52 Beverley T. Krannich...................... Vice President -- Human Resources and Secretary 46
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 I-19 23 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 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. I-20 24 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-43 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-45
--------------------- The financial data following on pages II-2 through II-44 is reproduced from, and the Table of Contents below is taken from, the Sonat Inc. Annual Report to Stockholders for 1996. 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........................................ 40 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........................ 68
II-1 25 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 in 1995 and 1994 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, 1996 1995 1994 - -------------------------------------------------------------- Operating Income: Exploration and Production $161.9 $ 23.0 $ 64.0 Natural Gas Transmission 165.6 158.3 88.4 Energy Marketing 10.2 6.5 11.9 Other 3.6 1.1 5.1 - ---------------------------------------------------------------- 341.3 188.9 169.4 - ---------------------------------------------------------------- Unusual Items (Expense) Income Included Above: Exploration and Production Termination of gas sales contracts - 37.5 - Asset impairment - (23.0) - Reduction in work force - - (1.9) Natural Gas Transmission Rate settlement and GSR costs - (11.1) (29.0) Reduction in work force and other - - (33.5) Other Reduction in work force - - (0.3) - --------------------------------------------------------------- - 3.4 (64.7) - --------------------------------------------------------------- Operating Income Excluding Unusual Items $341.3 $185.5 $234.1 ===============================================================
(In Millions, Except Per-Share Amounts) Years Ended December 31, 1996 1995 1994 - ----------------------------------------------------------------------- Net Income As Reported $201.2 $192.9 $141.4 - ----------------------------------------------------------------------- Unusual Items (Expense) Income Included Above: Exploration and Production Termination of gas sales contracts - 24.4 - Property sales - (20.0) - Sale of Sonat Offshore stock - 110.1 - Asset impairment - (14.9) - Loss on futures contracts - (5.5) - Reduction in work force - - (1.2) IRS settlement - - 8.1 Natural Gas Transmission Rate settlement and GSR costs - (6.8) (17.9) Reduction in work force and other - - (20.6) IRS settlement - - 1.8 Other Sale of Baker Hughes stock - (8.2) - IRS settlement - - 10.4 Reduction in work force - - (0.2) - ------------------------------------------------------------------------- - 79.1 (19.6) - ------------------------------------------------------------------------- Net Income Excluding Unusual Items $201.2 $113.8 $161.0 ========================================================================= Earnings Per Share of Common Stock $ 2.33 $ 2.24 $ 1.62 ========================================================================= Earnings Per Share of Common Stock Excluding Unusual Items $ 2.33 $ 1.32 $ 1.85 =========================================================================
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. From 1988 through 1995, Sonat Exploration's reserve growth strategy was based on acquiring properties that had additional exploitation drilling potential, developing those properties and conducting low-risk exploration activities. In 1996 the Company made a strategic shift to increase exploratory activity due to the size of the acreage position it has established II-2 27 26 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) - -------------------------------------------------------------------------------- and its increased use of technology, such as three-dimensional (3-D) seismic surveys. During 1996, Sonat Exploration added 364.8 billion cubic feet of natural gas equivalent (Bcfe) to proved reserves through its drilling program, including eight successful exploratory wells, which added proved reserves of 140.9 Bcfe. Most of the reserves added through exploration activities were from wells drilled in the Cotton Valley Pinnacle Reef trend in east Texas, an area showing significant growth potential for Sonat Exploration. Early in the second quarter of 1996, the Company had a significant find in Leon County, Texas, where it completed its first Cotton Valley Pinnacle Reef trend discovery, the Fountain No. 1 well, in which Sonat Exploration has a 64 percent working interest. In the third quarter, Sonat Exploration announced completion of its second discovery in the Reef trend, the Scurlock No. 1 well. Sonat Exploration has a 67 percent working interest in this well. During the fourth quarter, Sonat Exploration completed its most significant exploratory well in the Reef trend thus far, the Blanton No. 1. Sonat Exploration has a 100 percent working interest in this well. Sonat Exploration plans to drill at least 19 wells in the Cotton Valley Pinnacle Reef trend during 1997 and has increased the number of rigs drilling there to five rigs. Exploratory activity in the Pinnacle Reef trend added total proved reserves of 125.5 Bcfe in 1996. Sonat Exploration also completed two significant wells in High Island Block 39 in the Gulf of Mexico, one exploratory and one development. Total reserves added from these two wells in 1996 were 20.5 Bcfe. Sonat Exploration has a 100 percent working interest in these wells. Sonat Exploration maintained an active development drilling program in 1996, participating in the completion of 315 gross development wells of which 307 were successful. The eastern Austin Chalk trend was again the most active drilling area for Sonat Exploration. During 1996, Sonat Exploration more than doubled its drilling program in the area from three rigs to seven rigs and drilled 49 wells, of which 47 are commercial. The Company completed several acquisitions in 1996 at a net cost of $48.1 million that added 109.8 Bcfe. Sales of producing properties of $36.8 million during 1996 decreased proved reserves by 60.4 Bcfe. Total proved reserves at December 31, 1996, were 2.0 trillion cubic feet of natural gas equivalent, up 229.4 Bcfe from year-end 1995. Most of Sonat Exploration's natural gas production is sold to Sonat Marketing Company L.P. (Sonat Marketing), the Company's affiliate operating in the Energy Marketing segment. EXPLORATION AND PRODUCTION
(In Millions) Years Ended December 31, 1996 1995 1994 - ---------------------------------------------------------------- Revenues: Sales to others $155.3 $175.1 $ 145.1 Intersegment sales 410.4 228.4 267.6 - ----------------------------------------------------------------- Total Revenues 565.7 403.5 412.7 - ----------------------------------------------------------------- Costs and Expenses: Operating and maintenance 66.0 65.5 63.1 Exploration expense 21.7 9.1 12.2 General and administrative 53.9 48.4 45.7 Depreciation, depletion and amortization 236.4 239.2 206.8 Taxes, other than income 25.8 18.3 20.9 - ----------------------------------------------------------------- 403.8 380.5 348.7 - ----------------------------------------------------------------- Operating Income $161.9 $ 23.0 $ 64.0 ================================================================= Equity in Earnings of Unconsolidated Affiliates $ 0.4 $ 0.6 $ 0.2 ================================================================= Proved Reserves: Net gas (Bcf) 1,692 1,506 1,367 Net liquids (MBbls) 51,437 44,228 31,627 ================================================================= Net Sales Volumes: Gas (Bcf) 205 183 182 Oil and condensate (MBbls) 5,145 3,973 4,155 Natural gas liquids (MBbls) 2,161 1,496 1,227 ================================================================= Average Sales Prices: Gas ($/Mcf) $ 2.20 $ 1.52 $ 1.83 Oil and condensate ($/Bbl) 19.25 17.61 15.91 Natural gas liquids ($/Bbl) 12.03 9.29 8.90 =================================================================
1996 VERSUS 1995. Operating income increased $153.4 million, after excluding the recognition of $37.5 million of operating revenue from the termination of two long-term gas sales contracts and a $23.0 million charge to depreciation, depletion and amortization expense for an impairment pro- 28 II-3 27 Sonat Inc. and Subsidiaries vision related to the adoption of Statement of Financial Accounting Standards (SFAS) No. 121 in 1995. The increase was primarily due to higher natural gas prices. Increases in oil prices and gas and oil production also added substantially to operating results. Average realized natural gas prices increased to $2.20 per Mcf in 1996 from $1.52 per Mcf in 1995, an increase of 45 percent. Natural gas production increased by 12 percent in the current period. Realized oil prices rose to an average of $19.25 per barrel in 1996 from $17.61 per barrel in 1995, and oil and condensate production increased by 29 percent primarily due to the successful development drilling program in the Austin Chalk trend. Operating income for 1996 was reduced by the cost of the judgment and plaintiffs' attorney's fees in the total amount of $11.65 million for settlement of the Briggs, et al. v. Sonat Exploration litigation. Costs and expenses were higher in 1996, excluding the SFAS No. 121 adjustment, due to several factors. Exploration expense, which includes seismic, lease write-offs, dry hole costs and delay rentals, increased $12.6 million due to the higher level of exploration activity in 1996. General and administrative expense increased $5.5 million due to higher employee related costs, including stock-based compensation expense. Other tax expense increased $7.5 million due to higher severance taxes related to higher revenues. Depreciation, depletion and amortization expense increased $20.2 million, as higher production levels offset a lower amortization rate. 1995 VERSUS 1994. Absent the effect of the 1995 unusual items identified earlier, operating income decreased by $57.4 million primarily due to lower prices for natural gas. The average price for natural gas was 17 percent lower in 1995 compared to 1994, which reduced revenues by $57.8 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 Bcfe, compared with 214 Bcfe during 1994. Production in 1995 was restrained due to producing property sales and involuntary curtailments. Excluding the impairment provision in 1995, operating expenses increased slightly in 1995 compared to 1994. Operating and maintenance expenses were $2.4 million higher due to the acquisition of additional properties in early 1995. General and administrative expenses were $2.7 million higher due to an increase in stock-based compensation expense. Depreciation, depletion and amortization increased $9.4 million, excluding the impairment provision, primarily due to slightly higher production and a change in production mix with more production coming from fields with a higher amortization rate. HEDGING ACTIVITIES - Sonat Exploration, through Sonat Marketing, uses derivative financial instruments to manage the risks associated with price volatility for both its natural gas production and its oil production, which it sells in the spot market. (See Market Risk Management and Note 3 of the Notes to Consolidated Financial Statements.) Gains or losses experienced on Sonat Exploration's hedging transactions are offset by the related gains or losses recognized on the sale of the commodity. Natural gas revenues were reduced by $24.7 million in the 1996 period and increased by $3.0 million and $9.6 million in the 1995 and 1994 periods, respectively, relating to hedging activities. Oil revenues were reduced by $12.5 million in the 1996 period relating to hedging activities. The effect of hedging activities on oil revenues in the 1995 and 1994 periods was immaterial. A portion of Sonat Exploration's future production is hedged. Gas production in 1997 through 2000 in the aggregate amount of 218.1 TBtus is hedged at a weighted average price of $2.05 per MMBtu. Of this amount, 62.6 TBtu at a weighted average price of $2.11 relates to 1997 production, which represents approximately 26 percent of expected production. Oil production of approximately 1.3 million barrels, or 20 percent of expected production, is hedged in 1997 at a weighted average price of $20.63 per barrel. (See Note 3 of the Notes to Consolidated Financial Statements.) 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). II-4 29 28 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) - ------------------------------------------------------------------------------- Southern continues to pursue opportunities to expand its pipeline system in its traditional market area and to connect new gas supplies. In late 1995 Southern's East Tennessee expansion was placed in service. This $11 million project provides approximately 14 million cubic feet per day of firm transportation volumes to a group of new customers that signed 10-year contracts. Additionally, in November 1996, Southern placed in service a $16 million expansion providing approximately 27 million cubic feet per day of additional firm capacity to 15 customers in Alabama, Georgia and Tennessee. Southern also completed another project in 1996 that enhances its customers' ability to access new supplies being developed offshore Louisiana. This $14 million project added 140 million cubic feet per day of firm capacity, making it a very low-cost way for producers to transport their growing Gulf of Mexico natural gas production into the U.S. pipeline grid. Southern filed an application on January 24, 1996, with the Federal Energy Regulatory Commission (FERC) seeking approval to expand its pipeline system to provide firm gas transportation service to three existing customers and to two new customers in North Alabama. Most of the proposed 76-million-cubic-feet-per-day expansion is supported by long-term firm transportation agreements with 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 earliest in-service date for the proposed expansion, which requires FERC approval, would be November 1997. The company currently providing transportation service to the cities of Huntsville and Decatur has challenged this project in Alabama state court proceedings and with the FERC. Southern's position was upheld by the trial court in the state court proceedings, whose summary judgment decision in favor of Southern and the City of Huntsville is now on appeal to the Alabama Supreme Court, which has granted expedited consideration to the appeal. In May 1996, Southern filed an application with the FERC to expand its pipeline system in the eastern portion (Zone 3) of its market area. This $36 million expansion will enable Southern to provide additional firm transportation services totaling 46 million cubic feet per day to 11 customers in Georgia and Tennessee. If FERC approval is received, the in-service date for this firm transportation service is expected to be November 1997. In December 1996, Southern, Amoco Pipeline Company, and Shell Gas Pipeline Company announced their intent to construct the Destin Pipeline, a $300 million project that will begin offshore in Main Pass Block 260 and extend northward into Mississippi, intersecting five interstate pipelines, including Southern and Florida Gas Transmission Company. This pipeline will be owned equally by Southern and affiliates of Amoco Pipeline and Shell Gas Pipeline and will have one billion cubic feet of daily capacity when completed. Construction is scheduled to begin in late 1997, and the system could begin service as early as mid-1998, subject to necessary governmental approvals. When the system is completed, Southern will operate the pipeline. The execution of definitive agreements is expected to occur in early 1997. Southern currently has firm transportation commitments totaling 65 million cubic feet of natural gas per day from 15 customers in eastern Tennessee, Georgia and Alabama that will result in an expansion of its facilities that serve these areas. Additional customers may join this project, thus the capital investment associated with this project is uncertain. Additionally, existing customers will be given the option to release firm capacity that comes up for renewal during the next three years to meet the needs of this project. The necessary FERC approval will be sought in an application that is expected to be filed in May 1997, with the project scheduled to go in service in November 1998. Natural Gas Transmission
(In Millions) Years Ended December 31, 1996 1995 1994 - ------------------------------------------------------------------------------ Operating Income (Loss): Southern Natural Gas Company and subsidiaries $165.9 $159.1 $92.8 Other (0.3) (0.8) (4.4) - ------------------------------------------------------------------------------ Total Operating Income $165.6 $158.3 $88.4 ==============================================================================
30 II-5 29 Sonat Inc. and Subsidiaries Southern Natural Gas Company and Subsidiaries
(In Millions) Years Ended December 31, 1996 1995 1994 - ------------------------------------------------------------------------------ Revenues: Gas sales $210.0 $195.2 $233.7 Market transportation and storage 323.2 324.5 321.0 Supply transportation 46.6 50.6 36.8 Other 196.5 91.3 135.7 - ------------------------------------------------------------------------------ Total Revenues 776.3 661.6 727.2 - ------------------------------------------------------------------------------ Costs and Expenses: Natural gas cost 206.8 191.3 229.1 Transition cost recovery and natural gas purchase contract settlement costs 170.7 58.0 116.2 Operating and maintenance 83.9 96.1 151.7 General and administrative 82.6 85.4 72.0 Depreciation and amortization 48.3 52.3 46.6 Taxes, other than income 18.1 19.4 18.8 - ------------------------------------------------------------------------------- 610.4 502.5 634.4 - ------------------------------------------------------------------------------- Operating Income $165.9 $159.1 $ 92.8 =============================================================================== Equity in Earnings of Unconsolidated Affiliates $ 9.6 $ 9.4 $ 9.0 =============================================================================== (Billion Cubic Feet) Volumes (Note): Intrastate gas sales 8 8 - Market transportation 660 636 551 - ------------------------------------------------------------------------------- Total Market Throughput 668 644 551 Supply transportation 315 372 335 =============================================================================== Total Volumes 983 1,016 886 =============================================================================== Transition gas sales 69 85 103 ===============================================================================
Note: 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 volumes Citrus Corp.
(In Millions) Years Ended December 31, 1996 1995 1994 - ------------------------------------------------------------------------------- Equity in Earnings of Citrus Corp. $22.9 $28.2 $28.9 =============================================================================== Florida Gas Volumes (100%): Market transportation 428 461 303 Supply transportation 29 26 22 - ------------------------------------------------------------------------------- Total Volumes 457 487 325 ===============================================================================
1996 VERSUS 1995. Absent the effect of an unusual item (see discussion below), operating income for the Natural Gas Transmission segment decreased 2 percent in 1996 due to lower operating results at Southern. Southern Natural Gas - Operating income, excluding the unusual item discussed below, decreased slightly in 1996 primarily due to the receipt of incremental revenues in 1995 from the sale of firm transportation capacity prior to revised rates going into effect on March 1, 1995. Also included in 1995 are positive adjustments to reflect actual interruptible transportation revenue and cost recovery in the first year of post Order No. 636 operations, the reduction of a take-or-pay liability and the accrual of gas supply realignment (GSR) interest on larger recovery balances compared to 1996. These were partially offset by lower costs and additional firm transportation revenues in 1996. The unusual item in 1995 of $11.1 million increased operating and maintenance expense in recognition of Southern's share of GSR costs that were not recoverable. Southern's gas sales revenues and gas costs 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. Gas sales revenues and natural gas cost increased compared with the 1995 period reflecting higher gas prices on transition gas sales from supply remaining under contract. Other revenue and transition cost recovery in 1996 increased by $163.9 million as a result of the offset of rate reserves against GSR costs as provided in Southern's comprehensive customer rate settlement (the Customer Settlement). Otherwise, other revenue and transition cost recovery decreased primarily due to declining billings and lower recovery rates for GSR costs. The items discussed in this paragraph had no net impact on operating income. Certain other items affected operating income. Supply transportation revenues decreased due to lower supply-area transportation volumes resulting from lower throughput at II-6 31 30 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) - ------------------------------------------------------------------------------- Sea Robin. Operating and maintenance expense in 1995 included the $11.1 million of GSR expense which was discussed earlier. General and administrative expense decreased due to lower employee related expenses despite higher stock-based compensation expense. Depreciation and amortization decreased in 1996 primarily due to lower rates implemented March 1, 1995, as a part 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 flat compared to 1995. Citrus - Equity in earnings of Citrus was $5.3 million lower than in 1995. 1996 results reflect revenues and operating costs relating to the first full year of operation of the Phase III expansion project while 1995 results include accruing allowance for funds used during construction (AFUDC) for the first two months of the year and the AFUDC adjustment discussed below. Also contributing to the decline were lower margins due to lower interruptible transportation volumes as a result of lower prices from competing fuels and lower margins at Citrus' gas marketing affiliate. These were partly offset by a gain on the sale of facilities in 1996 and the effect of out-of-period expense adjustments in 1996 and 1995. 1995 VERSUS 1994. Absent the effect of the unusual items identified earlier, operating income of the Natural Gas Transmission segment increased by $18.5 million primarily due to improved operating results at Southern. Southern Natural Gas - Operating income, 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 $11.1 million increased operating and maintenance expense in recognition of Southern's share of GSR costs that was not recoverable. Unusual items included in Southern's 1994 operating expenses consisted of a $27.0 million charge associated with recognition of the Customer Settlement and a $33.5 million provision primarily relating to regulatory assets not recoverable as a result of the Customer Settlement, including $18.9 million attributable to a corporate restructuring undertaken in 1994. Market transportation and storage revenues increased in 1995 due in part to a $15.8 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 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 expense. Depreciation and amortization expense increased in 1995 due to the $15.8 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 the Company's share of earnings from Bear Creek, was essentially flat when comparing 1995 to 1994. Citrus - Equity in earnings of Citrus decreased slightly in 1995 to $28.2 million. Earnings were lower on the Phase III expansion project, excluding the $6.7 million effect of a positive adjustment to 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. 32 II-7 31 Sonat Inc. and Subsidiaries - -------------------------------------------------------------------------------- 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 has terminated or renegotiated to market pricing substantially all of its gas supply contracts through which it had historically obtained its long-term gas supply. Some of the remaining 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 85 percent of the purchase commitments in 1997 described below. Based on Southern's current expectations with respect to natural gas prices in the years following 1997, only a small amount of gas volumes are expected to be at prices above market. (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 is selling 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 1997 through 2001 are estimated as follows:
Estimated Purchase Commitments (In Millions) - ------------------------------------------------------------- 1997 $156 1998 21 1999 19 2000 17 2001 18 - -------------------------------------------------------------
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. RATE MATTERS The Customer Settlement resolves all of Southern's previously pending rate proceedings and proceedings to recover GSR and other transition costs associated with the implementation of Order No. 636, except for one contesting party that represents approximately 2 percent of Southern's firm transportation volumes. 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, but requires Southern to file a new rate case no later than September 1, 1999. (See Note 9 of the Notes to Consolidated Financial Statements for a discussion of the Customer Settlement and other rate matters.) ENERGY MARKETING Sonat Energy Services, through its subsidiaries, Sonat Marketing and Sonat Power Marketing L.P. (Sonat Power Marketing), conducts marketing business in the natural gas and electric industries, respectively. Sonat Marketing purchases and resells substantially all of Sonat Exploration Company's natural gas production. Sonat Marketing's business continued to grow rapidly in 1996. Total sales volumes grew 34 percent from 1995. This growth was achieved in large part by the Company's focus on its strategy of working closely with its customers and delivering outstanding customer service. Sonat Marketing is pursuing strategic alliances as a means of expanding its business. During 1996 it formed Sonat Public Service Company L.L.C., a joint venture between Sonat Marketing and PSNC Production Corporation. This new company combines Sonat Marketing's wholesale marketing expertise with Public Service of North Carolina's retail marketing skills in the mid-Atlantic region. Sonat Public Service will market natural gas and related services to small industrial and large commercial customers throughout the mid-Atlantic region, including the District of Columbia and the states of North Carolina, South Carolina, II-8 33 32 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) - -------------------------------------------------------------------------------- Maryland and Virginia. In addition, Sonat Public Service will provide gas supply management services to municipalities in the mid-Atlantic region. Sonat Marketing uses natural gas and oil futures contracts, options, and gas and oil price swap agreements to hedge the effects of market price volatility on its operating results. These instruments are used to lock in margins on Sonat Marketing's gas transactions. Sonat Marketing also uses futures to enable it to hedge fixed-price contracts to both its suppliers and its customers. (See Market Risk Management and Note 3 of the Notes to Consolidated Financial Statements.) In 1996, Sonat Power Marketing executed electric power purchase, sales and transmission agreements with numerous companies. Sonat Power Marketing has focused on expanding its wholesale electric business and it reached sales volumes of approximately 530 average megawatt hours at the end of the year. A subsidiary of AGL Resources Inc., which has a 35 percent ownership interest in Sonat Marketing, also acquired a 35 percent interest in Sonat Power Marketing in 1996. ENERGY MARKETING
(In Millions) Years Ended December 31, 1996 1995 1994 - ---------------------------------------------------------------------------------------- Revenues $2,592.7 $1,249.9 $942.2 ======================================================================================== Operating Income $ 10.2 $ 6.5 $ 11.9 ======================================================================================== Sonat Marketing Gas Sales Volumes (100%) (Billion Cubic Feet) 968 722 482 ======================================================================================== Sonat Power Marketing Sales Volumes (100%) (Thousands of Megawatt Hours) 2,969 4 - ========================================================================================
1996 VERSUS 1995. Operating income for 1996 increased $3.7 million over 1995 levels primarily due to much higher unit gas trading margins in the first quarter as a result of unusually cold weather in certain of Sonat Marketing's markets. This created intense demand for natural gas during peak periods resulting in a volatile price environment which created exceptional trading opportunities for Sonat Marketing. Since that time, unit trading margins have been lower. Additionally, general and administrative expense has increased due to growth in operations. Sonat Marketing's volumes increased primarily due to a concentration on growth and expansion of the Northeast and Mid-Continent regions. Sonat Power Marketing also experienced significant growth in 1996 and reached sales volumes as high as 636 average megawatt hours during the fourth quarter. However, Sonat Power Marketing's 1996 results were adversely impacted by start-up costs. 1995 VERSUS 1994. Operating income of $6.5 million was $5.4 million less than 1994 primarily due to lower margins in 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, the start up of Sonat Power Marketing and an increase in stock-based compensation expense also reduced operating income. ---------------------------- OTHER INCOME STATEMENT ITEMS
(In Millions) Years Ended December 31, 1996 1995 1994 - ----------------------------------------------------------------------------- OTHER INCOME (LOSS), NET: Equity in earnings of unconsolidated affiliates $34.2 $ 46.3 $44.3 Sale of subsidiary stock - 188.0 - Minority interest (4.9) (.9) - Other 6.5 (44.6) 16.4 - ----------------------------------------------------------------------------- $35.8 $188.8 $60.7 =============================================================================
1996 VERSUS 1995. The decrease in equity in earnings of unconsolidated affiliates reflects the absence of earnings from the Company's investment in Sonat Offshore Drilling Inc., the remaining interest of which was sold in July 1995, and a decrease in equity in earnings of Citrus (discussed earlier in the Natural Gas Transmission section). The 1995 period includes the gain from the Company's sale of its remaining interest in Sonat Offshore stock. (See Note 2 of the Notes to Consolidated Financial Statements.) Minority interest 34 II-9 33 Sonat Inc. and Subsidiaries - ------------------------------------------------------------------------------- represents AGL Resources' 35 percent share of earnings in Sonat Marketing and Sonat Power Marketing. Other for the 1996 period includes a $2.8 million net gain on the disposal of assets and a $3.9 million gain on partial termination of an interest rate swap in September 1996. The 1995 period includes a $28.7 million loss on the sale of oil and gas properties, a $13.0 million loss on the sale of the Company's investment in Baker Hughes Incorporated convertible preferred stock, and $6.0 million of dividends on the Baker Hughes stock. In addition, the month of December 1995 included an $8.4 million loss by Sonat Exploration 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. 1995 VERSUS 1994. The increase in equity in earnings of unconsolidated affiliates resulted from an improvement in operations at Sonat Offshore Drilling Components of Other Income in 1995 were discussed above. In 1994 Other includes $12.0 million of dividends on the Baker Hughes stock and a $3.6 million net gain on asset disposals.
(In Millions) Years Ended December 31, 1996 1995 1994 - ------------------------------------------------------------------------ Interest Expense, Net $82.8 $89.8 $72.9 - ------------------------------------------------------------------------
1996 VERSUS 1995. Net interest expense decreased in 1996 compared to 1995 due to lower average debt levels and lower average regulatory reserve balances at Southern. The 1995 period included a $4.4 million favorable adjustment on income tax related interest. 1995 VERSUS 1994. Net interest expense increased in 1995 compared to 1994 primarily due to higher average interest rates on outside borrowings and higher average regulatory reserve balances. The 1995 period included a $4.4 million favorable adjustment on income tax related interest, while 1994 included $9.5 million of favorable adjustments related to the settlement of the Company's federal income tax returns for the years 1986-1988.
(In Millions) Years Ended December 31, 1996 1995 1994 - ---------------------------------------------------------------------------- Income Taxes $93.1 $95.0 $15.8 - ----------------------------------------------------------------------------
1996 VERSUS 1995. Excluding income taxes associated with the unusual items in the 1995 period, primarily the gain on the sale of the Company's remaining interest in Sonat Offshore stock which was discussed earlier (see Note 2 of the Notes to Consolidated Financial Statements), income taxes increased due to higher pretax earnings and a decrease in tax preference items. 1995 Versus 1994. Income tax expense in 1995 increased due to taxes associated with unusual items, 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 the years 1986-1988 which reduced reported income tax expense. LIQUIDITY AND CAPITAL RESOURCES CASH FLOWS
(In Millions) Years Ended December 31, 1996 1995 1994 - --------------------------------------------------------------- Operating Activities $500.6 $184.3 $510.6 - ---------------------------------------------------------------
1996 VERSUS 1995. Cash flow from operations increased $316.3 million compared with the 1995 period primarily due to improved operating results at both Sonat Exploration and Sonat Marketing (discussed earlier in the operating sections). At Southern, net GSR recoveries in 1996 compared to net GSR payments in 1995 resulted in a $104.6 million improvement in cash flow from operations. Other than the net GSR recoveries/payments discussed above, both the change in GSR costs and the change in reserves for regulatory matters were attributable to recognition of the Customer Settlement in the second quarter of 1996 (see discussion earlier). The change in deferred income taxes reflects the deductibility of certain oil and gas drilling costs in the current period and the disposal of the Company's investment in Baker Hughes preferred stock in the 1995 period. II-10 35 34 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) - ------------------------------------------------------------------------------- The growth in accounts receivable and accounts payable is primarily attributable to higher natural gas prices and the expanding business of Sonat Marketing. The change in accrued interest and income taxes essentially reflects income tax deductions of GSR payments and tax refunds in the current period compared to income tax payments in 1995, including taxes on the Sonat Offshore stock disposition. Inventories increased primarily due to gas inventory purchases at Sonat Marketing and material purchases at Southern and Sonat Exploration. The change in other current assets and other current liabilities is primarily due to a decrease in gas imbalance receivables and payables, which occurred in the prior period. The caption Other in the Consolidated Statement of Cash Flows includes $32.9 million of accrual reversals in May 1996 related to the Customer Settlement and $13.1 million of exploration costs in the current period. In addition, the 1995 period includes $37.5 million from the termination of long-term gas sales contracts, as well as $13.5 million in transition costs deferred at Southern. 1995 VERSUS 1994. Several factors contributed to the $326.3 million decrease in cash flows from operations in 1995 compared to 1994. The $99.3 million change in net payments for GSR costs is primarily due to a $45.0 million payment to Exxon and the funding of a $42.3 million GSR liability in the current period compared to net recoveries of $18.7 million in the prior period. The $64.1 million change in reserves for regulatory matters reflects Southern's implementation of reduced rates and cessation of additional revenue collection on March 1, 1995. The change in take-or-pay costs reflects the completion of Southern's take-or-pay cost recovery in 1994. 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 $112.4 million in taxes on the sale of the Company's remaining interest in Sonat Offshore stock. Partly offsetting was the recognition of $72.1 million of tax benefits consisting of the utilization of Section 29 tax credits and net operating losses. In 1995, Other includes $37.5 million related to the termination of two long-term gas sales contracts, while Other in 1994 includes a $56.5 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.
(In Millions) Years Ended December 31, 1996 1995 1994 - -------------------------------------------------------------------------- Investing Activities $(482.5) $92.3 $(601.1) - --------------------------------------------------------------------------
1996 VERSUS 1995. Investing activities required $482.5 million of net cash in 1996 compared to providing $92.3 million in 1995, which included sources of cash from unusual items. In 1995, the Company received $326.0 million from the sale of its remaining interest in Sonat Offshore stock, $167.0 million from the sale of four million shares of Baker Hughes convertible preferred stock, and $105.1 million in proceeds from the sale of Sonat Exploration oil and gas properties. Capital expenditures (see table below) were higher in the 1996 period compared to the 1995 period primarily due to Southern's system expansion. 1995 VERSUS 1994. Investing activities provided $92.3 million of net cash in 1995 compared to using $601.1 million in 1994. The 1995 period included the unusual items discussed above. In addition, net advances of $159.0 million were made to Citrus in 1994. Capital expenditures were higher in the 1995 period compared to the 1994 period primarily due to increased acquisitions at Sonat Exploration and expansions at Southern. 36 II-11 35 Sonat Inc. and Subsidiaries - -------------------------------------------------------------------------------- Capital expenditures for the Company's business segments (excluding exploratory costs and unconsolidated affiliates) were as follows:
(In Millions) Years Ended December 31, 1996 1995 1994 - ------------------------------------------------------------------------- Exploration and Production $368.4 $416.2 $389.8 Natural Gas Transmission 130.4 62.7 51.2 Energy Marketing 4.7 2.8 3.2 Other 6.0 5.9 4.1 - ------------------------------------------------------------------------- Total $509.5 $487.6 $448.3 =========================================================================
The Company's share of capital expenditures by its unconsolidated affiliates were as follows:
(In Millions) Years Ended December 31, 1996 1995 1994 - ----------------------------------------------------------------------- Exploration and Production $ 0.3 $ 0.7 $ 0.1 Natural Gas Transmission 15.1 100.5 398.4 Other 0.5 0.5 0.5 - ----------------------------------------------------------------------- Total $15.9 $101.7 $399.0 ======================================================================= (In Millions) Years Ended December 31, 1996 1995 1994 - ----------------------------------------------------------------------- Financing Activities $(25.8) $(248.5) $88.8 - -----------------------------------------------------------------------
1996 VERSUS 1995. Net cash used in financing activities was $222.7 million less in the 1996 period compared to the 1995 period. A portion of the proceeds from the Sonat Offshore stock sale and the Baker Hughes stock sale were used to repay borrowings under Sonat's floating rate facilities in the 1995 period. The Company utilizes its $500 million long-term revolving credit agreement in managing its working capital requirements. During 1996, the Company borrowed $855.0 million and repaid $700.0 million under this agreement. 1995 VERSUS 1994. Net cash used in financing activities was $337.3 million higher in the 1995 period compared to the 1994 period, primarily due to repayments of floating rate facilities. Proceeds from the unusual items discussed above were used in the 1995 repayments. Other includes the $32.0 million contributed by Atlanta Gas Light as an investment in Sonat Marketing (see Note 2 of the Notes to Consolidated Financial Statements). CAPITAL RESOURCES At December 31, 1996, the Company had lines of credit and a revolving credit agreement with a total capacity of $750 million. Of this, $437 million was available. The Company has a 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, and, as a result, at that date the Company would not have deemed available under the lines of credit and the revolving credit agreement an amount equal to the $137 million of commercial paper then outstanding. Sonat has a shelf registration with the Securities and Exchange Commission (SEC) that provides for issuance of up to $500 million in debt securities of which $200 million has been issued. Southern also has a shelf registration with the SEC for up to $200 million in debt securities, of which $100 million has been issued. The Company has a stock repurchase program in effect through the end of 1997. As of December 31, 1996, the Company had remaining authority to purchase approximately one million shares of the Company's common stock. Shares purchased are intended for reissuance in connection with employee stock options and restricted stock programs. The Company believes that cash flow from operations and borrowings under its existing credit facilities and shelf registrations would 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 affects the operating results of Sonat Exploration and Sonat Marketing. The Company's use of derivatives to reduce the effect of this volatility is described in Note 3 of the Notes to Consolidated Financial Statements. 37 II-12 36 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) - -------------------------------------------------------------------------------- The Company also has exposure to financial market risks. In anticipation of a future borrowing, Southern had in effect at December 31, 1996, a forward rate agreement to hedge its interest rate risk (see Note 3 of the Notes to Consolidated Financial Statements). The Company's use of these derivative instruments is implemented under a set of policies approved by the Board of Directors. Speculative transactions using financial derivatives are prohibited. In the case of Sonat Exploration, these policies prohibit transactions not matched by physical commodity positions. For commodity price hedges, these policies set limits regarding volumes relative to budgeted production or sales levels. Sonat Marketing uses derivatives to hedge physical positions and is authorized to engage in financial transactions to support its customers' needs subject to a policy that limits the net positions to specific value at risk limits. Sonat Marketing's policy is to run substantially balanced books within these defined trading limits. Material forward rate agreements and swap counterparties are approved by the Board, and volume limits for swaps are set for any single counterparty. Reports detailing each transaction, mark to market and value at risk positions, are reviewed by 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. 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 has been notified that it is or may be a potentially responsible party (PRP) under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) in connection with three Superfund sites for which the amount of its liability has not been settled. In these cases, the Company has determined that the aggregate maximum amount of loss reasonably likely to be attributed to it, after giving effect to likely contributions by other PRPs, would not be material to its financial position or results of operations. However, liability for PRPs under CERCLA (and applicable state law) is joint and several among all PRPs. Although volumetric allocation is a factor in assessing liability, it is not necessarily determinative; thus, the ultimate liability at 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 subsidiaries, South Georgia Natural Gas Company and Sea Robin Pipeline Company, have used, and continue to use at several locations, gas meters containing elemental mercury. Southern, South Georgia and Sea Robin plan to remove all remaining mercury meters during the course of regularly scheduled facilities upgrades. Mercury and mercury meters are handled pursuant to procedures that are designed to protect employees and the environment and to comply with Occupational Safety and Health Administration standards. It is generally believed in the natural gas pipeline industry that, in the course of normal maintenance and replacement operations, elemental mercury may have been released from mercury 38 II-13 37 Sonat Inc. and Subsidiaries - -------------------------------------------------------------------------------- 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. Southern completed the characterization of its remaining 190 sites in Mississippi during 1996. Approximately 50 percent of the sites characterized in 1995 and 1996 across the pipeline systems of Southern and Sea Robin had detectable levels of mercury. Characterization of potential sites on the pipeline system of South Georgia has not commenced at this time. Southern will file copies of the characterization reports with the applicable state agencies upon their finalization. At this time, only the State of Georgia has issued formal guidelines for remediation of mercury sites, although the State of Louisiana has issued informal guidance. Southern is unable to estimate the cost of mercury remediation because costs will vary based on a number of factors particular to each site and because regulatory guidance is still uncertain for all sites. Based on its experience with other remediation projects, industry experience to date with remediation of mercury, and its characterization data, 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, South Georgia, and Sea Robin to be recoverable through rates since they are prudent costs incurred in the ordinary course of business and, accordingly, generally will seek recovery of such costs through rate filings, although no assurance can be given with regard to their ultimate recovery. 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. FORWARD LOOKING STATEMENTS Disclosures provided 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 success of the Company's exploratory drilling activities, the results of the Company's hedging activities, the success of management's cost reduction activities and the requirements to receive various government approvals to proceed with the expansion initiatives at Southern. 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. II-14 39 38 - -------------------------------------------------------------------------------- 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 on the facing page. Internal audit activities are coordinated with the independent auditors to maximize audit effectiveness. The Audit Committee of the Board of Directors is composed solely of directors who are not active or retired officers or employees of the Company. It recommends a firm to serve as independent auditors of the Company, subject to nomination by the Board of Directors and election by the stockholders, approves all audit and other professional services rendered by the independent auditors and regularly reviews their independence. The Audit Committee reviews and reports on significant accounting decisions and transactions and the scope and results of audits by the Company's internal auditing staff and the independent auditors. It reviews with management compliance with the Company's business ethics and conflict of interest policies and reviews with independent auditors the adequacy of the Company's internal 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 27, 1997 40 II-15 39 Sonat Inc. and Subsidiaries - -------------------------------------------------------------------------------- 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, 1996 and 1995, 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, 1996. 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, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP Birmingham, Alabama January 20, 1997 II-16 41 40
Consolidated Financial Statements Sonat Inc. and Subsidiaries - -------------------------------------------------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS (In Thousands) December 31, 1996 1995 - -------------------------------------------------------------------------------------------------------------------------- ASSETS Current Assets: Cash and cash equivalents $ 29,639 $ 37,289 Accounts receivable 577,717 327,697 Inventories (Note 4) 30,500 23,956 Gas imbalance receivables 21,694 16,556 Income taxes 2,163 12,979 Other 89,806 75,954 - -------------------------------------------------------------------------------------------------------------------------- Total Current Assets 751,519 494,431 - -------------------------------------------------------------------------------------------------------------------------- Investments and Advances: Unconsolidated affiliates (Note 5) 414,560 386,081 Other investments (Notes 2 and 3) 50,561 46,688 - -------------------------------------------------------------------------------------------------------------------------- 465,121 432,769 - -------------------------------------------------------------------------------------------------------------------------- Plant, Property and Equipment, successful efforts method of accounting used for oil and gas properties (Notes 6 and 13) 5,084,283 4,822,879 Less Accumulated Depreciation, Depletion and Amortization 2,650,419 2,545,320 - -------------------------------------------------------------------------------------------------------------------------- 2,433,864 2,277,559 - -------------------------------------------------------------------------------------------------------------------------- Deferred Charges and Other: Gas supply realignment costs (Note 9) 11,144 199,073 Other 113,011 107,609 - -------------------------------------------------------------------------------------------------------------------------- 124,155 306,682 - -------------------------------------------------------------------------------------------------------------------------- Total Assets $ 3,774,659 $ 3,511,441 ==========================================================================================================================
See accompanying notes. 42 II-17 41
Consolidated Financial Statements Sonat Inc. and Subsidiaries - --------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS (In Thousands) December 31, 1996 1995 - --------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Long-term debt due within one year (Note 7) $ 53,707 $ 18,750 Unsecured notes (Note 7) 158,030 218,900 Accounts payable 510,130 297,660 Accrued income taxes 26,726 10,579 Accrued interest 28,584 27,115 Gas imbalance payables 20,290 21,444 Other 51,370 45,677 - --------------------------------------------------------------------------------- Total Current Liabilities 848,837 640,125 - --------------------------------------------------------------------------------- Long-Term Debt (Note 7) 872,255 770,313 - --------------------------------------------------------------------------------- Deferred Credits and Other: Deferred income taxes (Note 8) 284,564 213,122 Reserves for regulatory matters (Note 9) 14,644 181,798 Other 169,995 223,441 - --------------------------------------------------------------------------------- 469,203 618,361 - --------------------------------------------------------------------------------- Commitments and Contingencies (Note 9) Stockholders' Equity: Common stock, $1.00 par; 400,000,000 shares authorized, 87,232,573 and 87,244,476 shares issued in 1996 and 1995, respectively (Note 10) 87,233 87,244 Other capital 31,648 39,795 Retained earnings 1,495,186 1,387,137 - --------------------------------------------------------------------------------- 1,614,067 1,514,176 Less treasury stock at cost, 830,908 and 1,077,480 shares in 1996 and 1995, respectively (Note 10) (29,703) (31,534) - --------------------------------------------------------------------------------- Total Stockholders' Equity 1,584,364 1,482,642 - --------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $3,774,659 $3,511,441 =================================================================================
See accompanying notes. II-18 43 42
Consolidated Financial Statements Sonat Inc. and Subsidiaries - ----------------------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF INCOME (In Thousands, Except Per-Share Amounts) Years Ended December 31, 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------- Revenues (Note 12) $3,394,898 $1,990,141 $1,735,967 - ----------------------------------------------------------------------------------------------------------------- Costs and Expenses: Natural gas cost 2,158,313 1,090,756 795,025 Transition cost recovery and natural gas purchase contract settlement costs 170,718 58,010 116,159 Electric power cost 65,699 88 - Operating and maintenance 172,762 171,885 222,901 General and administrative 150,490 140,511 133,138 Depreciation, depletion and amortization 288,192 298,714 257,759 Taxes, other than income 47,447 41,244 41,546 - ----------------------------------------------------------------------------------------------------------------- 3,053,621 1,801,208 1,566,528 - ----------------------------------------------------------------------------------------------------------------- Operating Income 341,277 188,933 169,439 - ----------------------------------------------------------------------------------------------------------------- Other Income (Loss), Net: Equity in earnings of unconsolidated affiliates (Note 5) 34,211 46,258 44,319 Sale of stock of subsidiary (Note 2) - 188,012 - Minority interest (4,907) (888) - Other 6,516 (44,590) 16,348 - ----------------------------------------------------------------------------------------------------------------- 35,820 188,792 60,667 - ----------------------------------------------------------------------------------------------------------------- Interest: Interest income 4,153 6,413 7,403 Interest expense (92,040) (102,797) (86,982) Interest capitalized 5,094 6,540 6,692 - ----------------------------------------------------------------------------------------------------------------- (82,793) (89,844) (72,887) - ----------------------------------------------------------------------------------------------------------------- Income Before Income Taxes 294,304 287,881 157,219 Income Tax Expense (Note 8) 93,115 94,993 15,812 - ----------------------------------------------------------------------------------------------------------------- Net Income $ 201,189 $ 192,888 $ 141,407 ================================================================================================================= Earnings Per Share of Common Stock (Note 10) $ 2.33 $ 2.24 $ 1.62 ================================================================================================================= Weighted Average Shares Outstanding (Note 10) 86,211 86,270 87,119 Dividends Paid Per Share (Note 10) $ 1.08 $ 1.08 $ 1.08 =================================================================================================================
See accompanying notes. 44 II-19 43
Consolidated Financial Statements Sonat Inc. and Subsidiaries - ---------------------------------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (In Thousands) 1996 1995 1994 -------------------- ------------------ -------------------- Years Ended December 31, Shares Amount Shares Amount Shares Amount - ---------------------------------------------------------------------------------------------------------------------------- Common Stock, $1.00 Par; 400,000,000 Shares Authorized (Note 10): Balance at beginning of year 87,244 $ 87,244 87,252 $ 87,252 87,158 $ 87,158 Issued (canceled) (11) (11) (8) (8) 94 94 - ---------------------------------------------------------------------------------------------------------------------------- Balance at end of year 87,233 87,233 87,244 87,244 87,252 87,252 - ---------------------------------------------------------------------------------------------------------------------------- Other Capital: Balance at beginning of year 39,795 42,311 36,074 Benefit plans transactions (8,147) (2,516) 6,237 - ---------------------------------------------------------------------------------------------------------------------------- Balance at end of year 31,648 39,795 42,311 - ---------------------------------------------------------------------------------------------------------------------------- Retained Earnings: Balance at beginning of year 1,387,137 1,287,339 1,239,983 Net income 201,189 192,888 141,407 Cash dividends at $1.08 per share (93,140) (93,090) (94,051) - ---------------------------------------------------------------------------------------------------------------------------- Balance at end of year 1,495,186 1,387,137 1,287,339 - ---------------------------------------------------------------------------------------------------------------------------- Treasury Stock, at cost: Balance at beginning of year (1,077) (31,534) (871) (25,016) - - Purchased (774) (30,914) (645) (19,230) (940) (27,005) Issued 1,020 32,745 439 12,712 69 1,989 - ---------------------------------------------------------------------------------------------------------------------------- Balance at end of year (831) (29,703) (1,077) (31,534) (871) (25,016) - ---------------------------------------------------------------------------------------------------------------------------- 86,402 $1,584,364 86,167 $1,482,642 86,381 $1,391,886 ============================================================================================================================
See accompanying notes. II-20 45 44
Consolidated Financial Statements Sonat Inc. and Subsidiaries - ----------------------------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) Years Ended December 31, 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net income $ 201,189 $ 192,888 $ 141,407 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization 288,192 298,714 257,759 Deferred income taxes 71,442 25,165 1,607 Equity in earnings of unconsolidated affiliates, less distributions (23,040) (34,265) (31,740) Gain on sale of stock of subsidiary and net loss on disposal of assets (3,377) (144,969) (3,554) Reserves for regulatory matters (167,154) (1,545) 62,542 Gas supply realignment costs 187,929 (38,223) 18,736 Funding of gas supply realignment cost liability - (42,330) - Natural gas purchase contract settlement costs - - 18,535 Change in: Accounts receivable (250,221) (72,610) (837) Inventories (6,544) 2,766 3,174 Accounts payable 212,470 85,516 15,368 Accrued interest and income taxes, net 28,490 (29,379) (46,758) Other current assets (19,019) 2,332 (5,206) Other current liabilities 4,567 (16,508) (18,072) Other (24,326) (43,218) 97,671 - ----------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 500,598 184,334 510,632 - ----------------------------------------------------------------------------------------------------------------------- Cash Flows from Investing Activities: Plant, property and equipment additions (509,534) (487,564) (448,314) Net proceeds from sale of subsidiary stock and disposal of assets 49,256 592,838 18,832 Investments in unconsolidated affiliates and other (22,209) (12,959) (171,660) - ----------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities (482,487) 92,315 (601,142) - ----------------------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities: Proceeds from issuance of long-term debt 855,776 3,103,000 4,448,000 Payments of long-term debt (718,877) (3,296,565) (4,327,835) Changes in short-term borrowings (60,870) 18,900 87,154 - ----------------------------------------------------------------------------------------------------------------------- Net changes in debt 76,029 (174,665) 207,319 Dividends paid (93,140) (93,090) (94,051) Other (8,650) 19,264 (24,449) - ----------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities (25,761) (248,491) 88,819 - ----------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Cash and Cash Equivalents (7,650) 28,158 (1,691) Cash and Csh Equivalents at Beginning of Year 37,289 9,131 10,822 - ----------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Year $ 29,639 $ 37,289 $ 9,131 ======================================================================================================================= Supplemental Disclosures of Cash Flow Information Cash Paid For: Interest (net of amount capitalized) $ 67,874 $ 81,900 $ 80,310 Income taxes, net (5,694) 96,455 44,061 =======================================================================================================================
See accompanying notes. 46 II-21 45 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 and electric power. 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 1995 and 1994 Consolidated Financial Statements have been reclassified to conform with the 1996 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, 1996, inventories consist primarily of materials and supplies and gas stored underground 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. 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 hedging activities are recognized in the same section of the Consolidated Statements of Cash Flows as the hedged transaction. Environmental Expenditures - The Company provides for environmental liabilities when environmental assessments and/or remediation are probable and such costs to the Company can be reasonably estimated. Accruals for environmental remediation liabilities are not material and have not been discounted. II-22 47 46 Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- (1) BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES (continued) Stock-Based Compensation - The Company follows the provisions of Accounting Principles Board Opinion (APB) No. 25 for its stock-based compensation awards (see Note 10). Issuance of Stock by Subsidiary - The Company follows an accounting policy of income statement recognition for issuances of stock by a subsidiary. Minority Interest - Minority interest in net income of subsidiaries is included as a component of Other Income (Loss), Net in the Consolidated Statements of Income. 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. 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. (2) CHANGES IN OPERATIONS Sonat Marketing Company L.P. (Sonat Marketing) was formed in September 1995 and is jointly owned by the Company and a subsidiary of AGL Resources Inc. Sonat's wholly owned subsidiary, Sonat Marketing Company, contributed all of its assets and liabilities except $32.0 million of accounts receivable and Atlanta Gas Light Company, another subsidiary of AGL Resources, contributed $32.0 million in cash to Sonat Marketing in exchange for a 35 percent ownership interest. AGL Resources has certain rights to resell to the Company is interest in Sonat Marketing, including a right until August 31, 2000, to receive the greater of fair market value or a formula price. The pretax gain on the transaction of approximately $23.4 million, which is included in Other Deferred Credits in the Consolidated Balance Sheet, has been deferred. In June 1995, the Company sold back to Baker Hughes Incorporated for $167.0 million the four million shares of Baker Hughes convertible perferred 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 after-tax loss of $8.2 million, or $.09 per share. In July 1995, the Company made a capital contribution of its remaining shares of Sonat Offshore Drilling Inc.'s 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 $326.0 million, which resulted in a pretax gain of $188.0 million. The Company realized an after-tax gain of $110.1 million, or $1.27 per share, on the transaction. In April 1995, Sonat Power Marketing Inc. was formed to market electric power. In the second quarter of 1996, AGL Resources acquired a 35 percent ownership interest in Sonat Power Marketing L.P., to which Sonat Power Marketing Inc. contributed all of its assets and liabilities. The transaction resulted in a $.5 million pretax gain, which is included in Other Income, Other in the Consolidated Statements of Income. (3) FINANCIAL INSTRUMENTS Derivative Financial Instruments The Company uses futures contracts, options and oil and natural gas price swap agreements to hedge its commodity price risk. Gains or losses experienced on hedging transactions are offset by the related gains or losses recognized on the sale of the commodity. Sonat Marketing performs all hedging activity for both its own account and for the account of Sonat Exploration. The financial results of any hedging activity for Sonat Exploration's account are passed through to Sonat Exploration. Prior to 1997, Sonat Marketing has used derivatives to hedge only physical transactions. In 1997 Sonat Marketing intends to engage in derivative transactions to meet its customer needs, subject to policies that limit the aggregate value at risk and mark to market positions of its trans- 48 II-23 47 actions and that require it to run substantially balanced books within these defined trading limits. Futures - Natural gas and oil futures contracts are traded on the New York Mercantile Exchange (NYMEX). Natural gas contracts are for fixed units of 10,000 MMBtu and are available for up to 36 months in the future. Oil futures are for fixed units of 1,000 barrels and are available for up to 34 months in the future. NYMEX requires both parties (buyers and sellers) to futures contracts to deposit cash or other assets (the margin) with a broker 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, 1996, the Company had net deposits of $22 million with brokers for margin calls, included in other current assets on the Consolidated Balance Sheet, of which $12.5 million was for Sonat Marketing's account and $9.5 million for Sonat Exploration's account. Sonat Marketing uses natural gas futures contracts to reduce exposure to price risk when gas is not bought and sold simultaneously. Sonat Exploration uses futures contracts to lock in the price for portions of its expected future natural gas production when it believes that prices are at acceptable levels. At December 31, 1996, Sonat Marketing and Sonat Exploration had the following open futures positions:
Open Deferred Gain Contracts or (Loss) ------------ ------------- Long (Short) (In Thousands) - ------------------------------------------------------------------------ Natural Gas Futures: For Marketing's account 1,303 $ 4,535 For Exploration's account (2,512) (10,053) - ------------------------------------------------------------------------ Total (1,209) $ (5,518) ======================================================================== Oil Futures: For Marketing's account - - For Exploration's account (1,290) (3,379) - ------------------------------------------------------------------------ Total (1,290) $ (3,379) ========================================================================
The above contracts will mature over 1997 and 1998. 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 Marketing uses swaps to lock in a margin on its gas transactions or to hedge exposure on swap agreements with Sonat Exploration. Sonat Exploration uses swap agreements to hedge exposure to changes in spot-market prices on the amount of production covered in the agreement. During 1996, Sonat Exploration had one oil price swap agreement and several gas price swap agreements in place. Starting in January 1997, Sonat Exploration has hedged various portions of its 1997 through 2000 production of oil and gas by entering into fixed price swaps with Sonat Marketing. Marketing has then hedged its risk from entering into these swaps by putting on futures positions and entering into offsetting swaps with third parties with aggregate volumes equal to its swaps with Sonat Exploration. At December 31, 1996, Sonat Marketing and Sonat Exploration had the following open swap positions:
Number of Fair Agreements Value Duration - ------------------------------------------------------------------------------------------ (In Thousands) Natural Gas Swaps: For Marketing's account 75 $ 17 1 month - 5 years For Exploration's account 34 (31,389) 1 year - 3 years - -------------------------------------------------------------- 109 $(31,372) ==========================================================================================
Options - Options can be exchange traded on the NYMEX or traded over the counter. Exchange traded options give the owner the right but not the obligation to a futures contract. Over the counter options give the owner the right but not the obligation to buy or sell an underlying commodity at a given price. At December 31, 1996, Sonat Marketing had only over the counter options. In order to meet the requirements of certain gas purchase agreements, Sonat Marketing has purchased puts of 33 TBtu and sold calls of 26 TBtu with a counterparty at zero cost. II-24 49 48 Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- (3) FINANCIAL INSTRUMENTS (Continued) Marketing also has sold puts for notional volumes of 5.5 TBtu. At December 31, 1996, the market value of these options was $1.9 million unfavorable. Credit Risk - Due to changes in market conditions the value of swaps and options can change in relation to their value to the Company. At December 31, 1996, the market value of the Company's in-the-money swaps was $3.6 million. The credit risk resulting from in-the-money swaps is monitored on a regular basis. Sonat Marketing has established policies and procedures to evaluate potential counterparties for credit worthiness before entering into over the counter swap and option agreements. Financial Risk On January 22, 1996, Southern Natural Gas Company (Southern) entered into a forward rate agreement to hedge the interest rate risk of an anticipated future borrowing under an existing shelf registration statement. The base 10 year treasury rate for this future borrowing was hedged at approximately 5.78 percent on a notional amount of $97.0 million. In September 1996, due to revised expectations of external financing requirements, 50 percent of the forward rate agreement was liquidated resulting in a gain of $3.9 million. At December 31, 1996, the fair market value of the remaining $48.5 million notional amount of this agreement was approximately $2.0 million. Other Financial Instruments The carrying amounts and fair values of the Company's financial instruments, other than derivatives, are as follows:
(In Thousands) December 31, 1996 Carrying Amounts Fair Value - --------------------------------------------------------------- Cash and Cash Equivalents $29,639 $29,639 Investment in Debt Securities 42,058 43,337 Gas Supply Realignment Costs 11,144 11,144 Unsecured Notes 158,030 158,030 Long-Term Debt 925,962 963,026 - ---------------------------------------------------------------
(In Thousands) December 31, 1995 Carrying 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 218,900 218,900 Long-Term Debt 789,063 862,123 - ----------------------------------------------------------------
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 - The carrying amount reported in the Consolidated Balance Sheets approximates its fair value. Investment in debt securities - 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 investment grade institutions. This investment practice limits the Company's exposure to concentrations of credit risk. Accounts receivable of the Exploration and Production segment are primarily from joint-interest partners, oil and gas marketing companies and pipeline companies. A majority of its revenues are from Sonat Marketing, which is headquartered in the Southeast. Accounts receivable of the Natural Gas Transmission segment relate to business conducted with gas distribution companies, municipalities, gas districts, industrial customers and interstate pipeline companies in the Southeast. Accounts receivable of the Energy Marketing segment relate to trading with other marketing companies, 50 II-25 49 Sonat Inc. and Subsidiaries - -------------------------------------------------------------------------------- industrial end users and local distribution companies, with primary concentration in the Gulf Coast, Southeastern, Northeastern and Midwestern markets. The Company performs ongoing credit evaluations of its customers' financial condition and, in some circumstances, requires collateral from its customers. Accounts receivable are stated net of valuation allowances of $9.7 million in 1996 and $10.2 million in 1995. (4) INVENTORIES The table below shows the values of various categories of the Company's inventories by segment.
(In Thousands) December 31, 1996 1995 - ------------------------------------------------------------ Exploration and Production: Materials and supplies $ 2,358 $ 2,311 Natural Gas Transmission: Materials and supplies 24,197 21,625 Energy Marketing: Gas stored underground 3,938 19 Other 7 1 - ------------------------------------------------------------ $30,500 $23,956 ============================================================
(5) UNCONSOLIDATED AFFILIATES At December 31, 1996, the Company's investments in unconsolidated affiliates totaled $414.6 million, and the Company's share of underlying equity in net assets of the investees was $471.6 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, 1996, the Company's cumulative equity in earnings of these unconsolidated affiliates was $286.7 million and cumulative dividends received from them totaled $164.5 million. The following table presents the components of equity in earnings of unconsolidated affiliates:
(In Thousands) Years Ended December 31, 1996 1995 1994 - ----------------------------------------------------------------------------- Company's Share of Reported Earnings (Losses) Exploration and Production $ 408 $ 615 $ 245 - ----------------------------------------------------------------------------- Natural Gas Transmission: Citrus Corp. (including $1,383,000 of amorti- zation of basis difference in each year) 22,902 28,196 28,937 Bear Creek Storage 10,184 9,596 8,954 Other (554) (239) (60) - ----------------------------------------------------------------------------- 32,532 37,553 37,831 - ----------------------------------------------------------------------------- Energy Marketing 9 (5) (151) - ----------------------------------------------------------------------------- Other: Sonat Offshore Drilling - 6,734 5,049 Other 1,262 1,361 1,345 - ----------------------------------------------------------------------------- 1,262 8,095 6,394 - ----------------------------------------------------------------------------- $34,211 $46,258 $44,319 =============================================================================
Natural Gas Transmission Affiliates - Sonat owns 50 percent of Citrus, the parent company of Florida Gas Transmission Company. A subsidiary of Southern owns 50 percent of Bear Creek Storage Company, an underground gas storage company. The following is summarized financial information for Citrus:
(In Thousands) Years Ended December 31, 1996 1995 1994 - ----------------------------------------------------------- Revenues $ 769,335 $682,387 $477,462 Expenses (Income): Natural gas cost 428,842 362,635 294,670 Operating expenses 94,573 94,647 71,871 Depreciation and amortization 83,563 81,227 63,737 Allowance for funds used during construction 153 (42,804) (98,269) Interest and other 91,926 99,238 55,857 Income taxes 27,240 33,818 34,487 - ----------------------------------------------------------- Income Reported $ 43,038 $ 53,626 $ 55,109 ===========================================================
II-26 51 50 (5) UNCONSOLIDATED AFFILIATES (continued)
(In Thousands) December 31, 1996 1995 - ----------------------------------------------------------- ASSETS Current $ 107,045 $ 107,429 Net transmission plant and property 2,362,038 2,401,847 Other 96,069 72,272 - ----------------------------------------------------------- $2,565,152 $2,581,548 =========================================================== LIABILITIES AND EQUITY Current $ 211,228 $ 187,279 Long-term debt and other liabilities 1,544,184 1,627,567 Stockholders' equity 809,740 766,702 - ----------------------------------------------------------- $2,565,152 $2,581,548 ===========================================================
Florida Gas' Phase III expansion, which began in 1994, was completed during February 1995, resulting in a significant increase in revenues and costs and a 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, 1996 1995 1994 - ----------------------------------------------------------------------- Revenues $36,258 $36,167 $35,655 Expenses: Operating expenses 4,817 5,408 5,303 Depreciation 5,415 5,399 5,396 Other expenses, net 5,657 6,167 7,048 - ----------------------------------------------------------------------- Income Reported $20,369 $19,193 $17,908 =======================================================================
(In Thousands) December 31, 1996 1995 - ----------------------------------------------------------------------- ASSETS Current $ 7,205 $ 7,438 Net plant and property 154,388 159,348 Other 338 434 - ----------------------------------------------------------------------- $161,931 $167,220 ======================================================================= LIABILITIES AND EQUITY Current $ 8,525 $ 8,554 Long-term debt and other liabilities 55,729 62,658 Participants' equity 97,677 96,008 - ----------------------------------------------------------------------- $161,931 $167,220 =======================================================================
In 1995 Southern executed a Capital Contribution Agreement in connection with the project financing for Bear Creek from The Prudential Insurance Company of America. In the event that Bear Creek does not refinance the remaining principal, this agreement provides that Southern and its partner will contribute $21.0 million each to Bear Creek on October 31, 2000, to provide funds to enable Bear Creek to make a principal payment due under the financing. (6) PLANT, PROPERTY AND EQUIPMENT AND DEPRECIATION Plant, property and equipment, by business segment, is shown in the following table:
(In Thousands) December 31, 1996 1995 - --------------------------------------------------------------- Exploration and Production $2,579,740 $2,436,283 Natural Gas Transmission 2,422,845 2,315,002 Energy Marketing 11,508 6,772 Other 70,190 64,822 - --------------------------------------------------------------- $5,084,283 $4,822,879 ===============================================================
52 II-27 51 Sonat Inc. and Subsidiaries - -------------------------------------------------------------------------------- Plant, property and equipment includes construction work in progress of $108.0 million and $43.6 million at December 31, 1996 and 1995, respectively. Plant, property and equipment also includes $124.8 million and $130.2 million of gas stored underground at December 31, 1996 and 1995, respectively. The accumulated depreciation, depletion and amortization amounts, by business segment, are as follows:
(In Thousands) December 31, 1996 1995 - --------------------------------------------------------------- Exploration and Production $1,075,016 $1,008,815 Natural Gas Transmission 1,539,983 1,504,086 Energy Marketing 3,143 1,449 Other 32,277 30,970 - --------------------------------------------------------------- $2,650,419 $2,545,320 ===============================================================
The annual depreciation rates or useful productive lives, by business segment, are as follows:
1996 1995 1994 - -------------------------------------------------------------------------------- Natural Gas Transmission: Mainline transmission property 2.0% 2.8% 2.8% Gas supply 4.4% 4.4% 4.4% Gas gathering 2.8% 2.8% 2.8% Underground storage facilities 3.3% 3.3% 3.3% Liquefied natural gas facilities 3.2% 3.2% 3.2% Other 2-25 yrs. 3-20 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 1995 year-end reserve report, the Company, in accordance with Statement of Financial Accounting Standards (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 $23.0 million impairment adjustment is included in Depreciation, Depletion and Amortization in the 1995 Consolidated Statement of Income. II-28 53 52 Notes to Consolidated Financial Statements - ------------------------------------------------------------------------------- (7) DEBT AND LINES OF CREDIT Long-Term Debt - Long-term debt consists of:
(In Thousands) December 31, 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------ Sonat Inc. Revolving Credit Agreement at rates based on prime, international or money-market lending rates (an effective rate of 5.76% at December 31, 1996) expiring on June 30, 2001 $155,000 $ -- 6 7/8% Notes due June 1, 2005 200,000 200,000 9 1/2% Notes due August 15, 1999 100,000 100,000 8.65% Notes due through July 29, 1997 9,286 18,572 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 8,400 10,900 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 880 1,760 7.80% Term Loan due through December 31, 1997 400 800 Southern LNG Inc. Promissory Note (an effective rate of 6.75% at December 31, 1996 and 1995) due through April 1999 15,000 20,000 Capital Leases and Other 1,996 2,031 - ------------------------------------------------------------------------------------------------------------------------------ Total Outstanding 925,962 789,063 Less Long-Term Debt Due Within One Year 53,707 18,750 - ------------------------------------------------------------------------------------------------------------------------------ $872,255 $ 770,313 ==============================================================================================================================
Annual maturities of long-term debt at December 31, 1996, are as follows:
Years (In Thousands) - ------------------------------------ 1997 $ 53,707 1998 7,306 1999 107,315 2000 2,223 2001 355,233 2002-2005 400,178 - ------------------------------------ $925,962 ====================================
Sonat has a bank revolving credit agreement that provides for periodic borrowings and repayments of up to $500.0 million through June 30, 2001. Borrowings are supported by unsecured promissory notes that, at the option of the Company, will bear interest at the banks' prevailing prime or international lending rate, or such rates as the banks may competitively bid. During 1996, $855.0 million was borrowed and $700.0 million was repaid under the revolving credit agreement, resulting in $155.0 million outstanding at December 31, 1996, at a rate of 5.76 percent. Unsecured Notes - Loans outstanding under all short-term credit facilities are for a duration of less than three months. Sonat and Southern have available short-term lines of credit of $200.0 million and $50.0 million, respectively, for a period of 364 days. Borrowings are available through May 27, 1997, and are in the form of unsecured promissory notes that bear interest at rates based on the banks' prevailing prime, international or money-market lending rates. At December 31, 1996 and 1995, Sonat had $21.0 million and $8.9 million outstanding, respectively, at rates of 6.90 percent and 6.68 percent, respectively. At December 31, 1996 and 1995, no amounts were outstanding under Southern's agreement. Sonat had $137.0 million and $210.0 million, respectively, in commercial paper outstanding at average rates of 5.76 percent and 6.12 percent at December 31, 1996 and 1995, respectively. 54 II-29 53 Sonat Inc. and Subsidiaries - -------------------------------------------------------------------------------- (8) INCOME TAXES An analysis of the Company's income tax expense (benefit) is as follows:
(In Thousands) Years Ended December 31, 1996 1995 1994 - -------------------------------------------------------------------------------- Current: Federal $17,652 $71,871 $ 4,619 State 4,021 (2,043) 10,930 - -------------------------------------------------------------------------------- 21,673 69,828 15,549 - -------------------------------------------------------------------------------- Deferred: Federal 66,051 21,936 13,188 State 5,391 3,229 (12,925) - -------------------------------------------------------------------------------- 71,442 25,165 263 - -------------------------------------------------------------------------------- Income Tax Expense $93,115 $94,993 $15,812 ================================================================================
Net deferred tax liabilities are comprised of the following:
(In Thousands) December 31, 1996 1995 - ---------------------------------------------------------------- Deferred Tax Liabilities: Depreciation $330,047 $294,789 GSR and other transition costs -- 26,052 Inventories 11,572 11,572 Other 6,372 6,264 - ---------------------------------------------------------------- Total deferred tax liabilities 347,991 338,677 - ---------------------------------------------------------------- Deferred Tax Assets: GSR and other transition costs 13,228 -- Revenue reserves 4,681 74,876 Employee benefits 11,897 11,084 Other accounting accruals 16,705 20,763 Other 16,916 18,832 - ---------------------------------------------------------------- Total deferred tax assets 63,427 125,555 - ---------------------------------------------------------------- Net Deferred Tax Liabilities $284,564 $213,122 ================================================================
The Company has not provided a valuation allowance to offset deferred tax assets because, based on the weight of available evidence, it is more likely than not that all deferred tax assets will be realized. Consolidated income tax expense 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, 1996 1995 1994 - -------------------------------------------------------------------------------- Income Tax Expense at Statutory Federal Income Tax Rates $103,006 $100,758 $ 55,027 Increases (Decreases) Resulting From: State income taxes, net of federal income tax benefit 6,118 771 (3,634) Non-conventional fuel tax credits (9,465) (11,380) (14,217) Refunds and adjustment of accrued tax position 880 14,639 (7,881) Dividend exclusion (6,413) (11,248) (12,440) Other (1,011) 1,453 (1,043) - -------------------------------------------------------------------------------- Income Tax Expense $ 93,115 $ 94,993 $ 15,812 ================================================================================
(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. At December 31, 1996, Southern's rates are established by the Customer Settlement and a FERC order effective for parties contesting the Customer Settlement and are not subject to refund (see discussion below). Customer Settlement - 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 or have incurred certain costs (transition costs) as a result of the Order, the principal one being costs related to amendment or II-30 55 54 Notes to Consolidated Financial Statements - ------------------------------------------------------------------------------- 9 COMMITMENTS AND CONTINGENCIES (continued) termination of, or purchases of gas at above-market prices under, existing gas purchase contracts, which are referred to as gas supply realignment (GSR) costs. In an order issued on September 29, 1995, (the Settlement Order) the FERC approved a comprehensive settlement (the Customer Settlement) that is effective as to all Southern's customers, except one customer representing approximately 2 percent of the firm transportation capacity on Southern's system. The Customer Settlement resolved all of Southern's previously pending rate proceedings and proceedings to recover GSR and other transition costs associated with the implementation of Order No. 636. The four major rate cases resolved by the Customer Settlement cover consecutive periods beginning September 1, 1989. In May 1996, the Settlement became final and Southern credited in the aggregate the full amount of Southern's rate reserves as of February 28, 1995, plus interest, less certain amounts withheld for potential refunds to contesting parties, to reduce the GSR costs borne by Southern's customers. The total credit recorded in May 1996 amounted to $163.9 million. Southern implemented reduced settlement rates 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, but requires Southern to file a new rate case no later than September 1, 1999. The Settlement also provides for Southern to recover $363 million of GSR costs incurred or reserved as of December 31, 1996, and 50 percent of future GSR costs that Southern may incur thereafter, which future costs the Company believes will not be material to its financial position or results of operations. Several parties that opposed the Customer Settlement had filed with the FERC requests for rehearing of the Settlement Order. On April 11, 1996, the FERC denied those requests for rehearing of the Settlement Order and also decided certain issues in prior rate proceedings that affect the contesting parties to the Customer Settlement (April 11 Order). Pursuant to the April 11 Order, Southern made refunds to the contesting parties in May 1996 covering various rate periods from January 1, 1991, through December 31, 1995. Southern was adequately reserved for these refunds. The only issues remaining to be litigated at the FERC by the one remaining contesting party concern the recoverability of certain GSR and other transition costs under Order No. 636, which would not be material to the Company's financial position or results of operations even if such issues were determined adversely to Southern. The contesting party, and one other entity that may potentially compete with Southern in providing storage services, have each appealed the April 11 Order and the Settlement Order to the D.C. Circuit Court of Appeals. Although there can be no assurances, the Company believes that the Settlement Order and the April 11 Order should be upheld on appeal. 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 was denied by the FERC on June 26, 1996. Sea Robin filed on August 15, 1996, for judicial review of the orders denying its petition. 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. On August 2, 1996, the FERC issued an order on the complaint, instituting an investigation and hearing under Section 5 of the Natural Gas Act and requiring that an initial decision be issued by May 2, 1997. On December 31, 1996, Sea Robin filed a proposed settlement of the complaint proceeding pursuant to which it would voluntarily reduce its transportation rates by $.0042 per decatherm (Dth), calculated on a 100 percent load factor basis, effective January 1, 1997. The 56 II-31 55 Sonat Inc. and Subsidiaries - -------------------------------------------------------------------------------- settlement is supported by the staff of the FERC and one of two groups of active intervenors but is opposed by the complainant shippers. By order dated February 7, 1997, the Presiding Administrative Law Judge certified the settlement to the FERC Commissioners. Sea Robin is unable to predict the outcome of this proceeding, but, if the proposed settlement is not approved and a hearing is held, any reduction in Sea Robin's rates can be implemented only on a prospective basis and any such change is not expected to be material to the Company's financial position or results of operations. 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. 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, 1996 1995 1994 - -------------------------------------------------------------------------------- Non-Affiliated Operating Leases $18,149 $18,152 $18,709 Affiliated Operating Leases 3,680 3,635 3,669 - -------------------------------------------------------------------------------- $21,829 $21,787 $22,378 ================================================================================
At December 31, 1996, future minimum payments for non-cancelable operating leases for the years 1997 through 2001 are $9 million or less per year. Future minimum rentals to be received under subleases for the years 1997 through 2001 are approximately $1 million per year. 10 CAPITAL STOCK AND STOCK-BASED COMPENSATION Per share prices of the Company's common stock, based on the New York Stock Exchange listing of composite transactions, and dividends paid per common share for the last two years are summarized below. Price Range and Dividends Paid Per Common Share
(Unaudited) Quarter 1996 1995 - -------------------------------------------------------------------------------- Price Range High-Low First $37 1/4 - 31 1/8 $30 3/8 - 26 Second 45 3/8 - 36 1/8 33 - 29 3/4 Third 47 1/2 - 41 33 1/2 - 29 1/4 Fourth 54 3/4 - 44 1/8 36 1/4 - 27 3/4 ================================================================================ Dividends Paid First $ .27 $ .27 Second .27 .27 Third .27 .27 Fourth .27 .27 - -------------------------------------------------------------------------------- $ 1.08 $ 1.08 ================================================================================ Shareholders of Record at Year-End 12,020 12,928 ================================================================================
The Company had no restrictions on the payment of dividends at December 31, 1996. The Company has a Preference Share Rights Plan designed to protect the interest of stockholders in the event of a hostile attempt to take over the Company and to make it more difficult for a person to gain control of the Company in a manner or on terms not approved by the Board of Directors. The plan provides for the issuance of one right with respect to each outstanding share of common stock. The rights issued under the plan are redeemable at any time by the Company before their expiration on February 3, 2006, unless certain triggering events have occurred. The rights outstanding under the plan are exercisable for one one-hundredth of a share of Series A Participating Preference Stock, par value $1.00, with each share having substantially the rights and preferences of 100 shares of common stock. As of December 31, 1996, 1,000,000 shares of Series A Participating Preference stock were reserved for issuance under this plan. II-32 57 56 Notes to Consolidated Financial Statements - ------------------------------------------------------------------------------- 10 CAPITAL STOCK AND STOCK-BASED COMPENSATION (continued) Executive Award Plan - The Company has an Executive Award Plan that provides awards to certain key employees in the form of stock options, restricted stock and stock appreciation rights (SARs) in tandem with any or all stock options. In years prior to 1991, tax offset payments were generally provided in conjunction with these awards. SARs permit the holder of an exercisable option to surrender that option for an amount equal to the excess of the market price of the common stock on the date of exercise over the option price (appreciation). The appreciation is payable in cash, common stock or a combination of both. SARs are subject to the same terms and conditions as the options to which they are related. Commencing in November 1995, the Company has issued, in tandem with its regular stock options, SARs that are exercisable only in the event of a change in control (limited SARs). In November 1995, the Company also issued limited SARs to certain key employees with respect to all of their then outstanding options. No other SARs have been issued since 1990. At December 31, 1996, 249,334 SARs relating to the earlier periods were outstanding. All options granted since December 1992 have 10-year terms and vest and become fully exercisable at the end of 5 years of continued employment. Options issued after 1992 also contain an acceleration provision dependent upon a specified increase in the Company's stock price. Options granted prior to December 1992 vested over three years and had no accelerated vesting provisions. The Company issued 97,000 shares of restricted stock with a $52 market value to employees during 1996 and 35,700 shares with a $32.19 market value during 1995. At December 31, 1996, 104,498 of the 451,700 cumulative restricted shares issued have vested. A new plan was authorized during 1995 which made an additional four million shares available for issuance. The Company has elected to follow APB No. 25, Accounting for Stock Issued to Employees and related Interpretations in accounting for its employee stock options. Under APB No. 25, compensation expense is recognized for the difference between the option price and market value on the measurement date for variable stock option awards and restricted stock grants. No compensation expense is recognized for options Sonat issued after 1990 because the exercise price of the stock options equals the market price of the underlying stock on the date of grant. Stock-based compensation decreased pretax income by $13.2 million in 1996 and $7.9 million in 1995 and increased pretax income by $1.2 million in 1994. Pro forma information regarding net income and earnings per share is required by SFAS No. 123 and has been determined as if the Company had accounted for its employee stock options under the fair value method of the Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1996 and 1995, respectively: interest rates (zero-coupon U.S. government issues with a remaining life of six years) of 6.10 percent and 5.68 percent; dividend yields of 2.35 percent and 3.35 percent; volatility factors of the expected market price of the Company's common stock of .255 and .192; and a weighted-average expected life of the options of six years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. 58 II-33 57 Sonat Inc. and Subsidiaries - ------------------------------------------------------------------------------- The Company's pro forma information follows:
(In Thousands, Except Per-Share Amounts) Years Ended December 31, 1996 1995 - -------------------------------------------------------------------------------- Net Income As reported $201,189 $192,888 Pro forma 198,522 192,843 Earnings Per Share As reported $ 2.33 $ 2.24 Pro forma 2.30 2.24 - --------------------------------------------------------------------------------
For purposes of the pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period, which is five years for both awards. However, since all of the 1995 stock option grants vested under an accelerated vesting clause in 1996, the entire remaining cost for that award is reflected in 1996. Because the Company's stock options vest generally over five years and additional awards are typically made each year, the above pro forma disclosures are not likely to be representative of the effects on pro forma net income for future years. A summary of the Company's stock option activity and related information follows:
Years Ended December 31, 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ Weighted-Avg. Weighted-Avg. Weighted-Avg. Options Exercise Price Options Exercise Price Options Exercise Price ---------------------------------------------------------------------------------- Outstanding - Beginning of Year 4,578,600 $ 25.24 4,358,820 $ 23.52 3,518,595 $ 22.07 Granted 633,700 52.00 682,300 32.25 990,700 27.94 Exercised (1,013,954) 21.58 (450,020) 19.06 (122,842) 18.96 Forfeited (20,120) 31.81 (12,500) 27.33 (27,633) 18.55 - ------------------------------------------------------------------------------------------------------------------------------------ Outstanding - End of Year 4,178,226 30.16 4,578,600 25.24 4,358,820 23.52 ==================================================================================================================================== Exercisable - End of Year 3,544,526 26.26 2,566,520 21.55 2,637,880 20.07 ==================================================================================================================================== Shares Authorized for Future Grants 3,597,100 4,230,800 946,023 ==================================================================================================================================== Fair Value of Options Granted During the Year $ 14.87 $ 6.33 -- ====================================================================================================================================
The following table summarizes information about stock options outstanding at December 31, 1996:
Options Outstanding Options Exercisable - ----------------------------------------------------------------------------------------------------------------------------- Range of Exercise Number Outstanding Weighted Avg. Remaining Weighted-Avg. Number Weighted-Avg. Prices 12/31/96 Contractual Life Exercise Price Exercisable 12/31/96 Exercise Price - ----------------------------------------------------------------------------------------------------------------------------- $ 13.625 - $17.4375 536,051 4.1 $15.76 536,051 $ 15.76 $ 21.125 - $29.125 1,555,205 6.5 25.45 1,555,205 25.45 $ 30.00 - $32.25 1,453,270 7.8 30.99 1,453,270 30.99 $ 52.00 633,700 9.9 52.00 - 52.00 - ----------------------------------------------------------------------------------------------------------------------------- 4,178,226 3,544,526 =============================================================================================================================
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 no shares during 1996 and 967 shares during 1995 with a market value of $28.50 per share. At December 31, 1996, 28,260 of the 37,460 cumulative shares granted have vested. Treasury Stock - The Company has a stock repurchase program in effect through the end of 1997, which authorizes the purchase of approximately one million shares of the Company's common stock. Shares purchased are being reissued in connection with employee stock options and restricted stock programs. Serial Preference Stock - At December 31, 1996 and 1995, there were 10,000,000 shares of $1.00 par value Serial Preference Stock authorized, with none issued. II-34 59 58 Notes to Consolidated Financial Statements - ------------------------------------------------------------------------------- 11 RETIREMENT PLANS AND OTHER POSTEMPLOYMENT BENEFITS Retirement Plans - Sonat 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, 1996, this trust had assets with a fair market value of $37.5 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, 1996 1995 1994 - ------------------------------------------------------------------------------- Service Cost -Benefits Earned during the Period $ 8,818 $ 5,756 $ 6,256 Interest Cost on Projected Benefit Obligation 26,550 25,822 24,407 (Gain) Loss on Assets (46,475) (97,687) 11,982 Net Amortization and Deferral 7,945 61,307 (49,397) - -------------------------------------------------------------------------------- $ (3,162) $ (4,802) $ (6,752) ================================================================================
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, --------------------------------------------------- 1996 1995 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- Actuarial Present Value of Benefit Obligations: Vested benefit obligations $ 281,818 $ 282,993 $ 26,778 $ 25,552 Non-vested benefit obligations 8,149 8,053 532 514 - ----------------------------------------------------------------------------------------------------------------------------------- Accumulated benefit obligations 289,967 291,046 27,310 26,066 Effect of projected future salary increases 58,271 54,911 11,277 15,176 - ----------------------------------------------------------------------------------------------------------------------------------- Projected benefit obligations 348,238 345,957 38,587 41,242 Plan Assets at Fair Value (3) 461,299 433,574 -- -- - ----------------------------------------------------------------------------------------------------------------------------------- Projected Benefit Obligations (in Excess of) or Less than Plan Assets 113,061 87,617 (38,587) (41,242) Unrecognized Net (Assets) or Obligations at Transition (4) (11,226) (12,956) 256 307 Unrecognized Net (Gain) Loss (5) (86,441) (68,075) 6,763 12,788 Unrecognized Prior Service Cost 4,853 5,320 3,540 3,941 Net Unamortized Deferred Charge from Early Retirement Termination Benefits (6) 5,966 7,851 -- 1,207 Adjustment Required to Recognize Minimum Pension Liability -- -- -- (1,861) - ----------------------------------------------------------------------------------------------------------------------------------- Net Pension Asset (Liability) Recognized in the Consolidated Balance Sheets 26,213 $ 19,757 $(28,028) $(24,860) ===================================================================================================================================
(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 at transition are 16.5 years for the Retirement Plan and 15 years for the Supplemental Plan. (5) Amortization periods for unrecognized net (gain) loss are approximately 16 years for the Retirement Plan and 16.4 and 14.2 years for the Supplemental Plan for 1996 and 1995, respectively. (6) Amortization periods for early retirement termination benefits are 10 years for the Retirement Plan and five years for the Supplemental Plan. 60 II-35 59 Sonat Inc. and Subsidiaries - ------------------------------------------------------------------------------- No amount of additional minimum liability is required for 1996 under the provisions of SFAS No. 87. The amount of additional minimum liability required for 1995 was $1.9 million. The assumed rates used to measure the projected benefit obligations and the expected earnings of plan assets are:
Years Ended December 31, 1996 1995 1994 - -------------------------------------------------------------------- Weighted Average Discount Rate 7.0% 7.0% 8.5% Long-Term Rate of Return 9.5% 9.5% 8.5% Increase in Future Compensation Levels (Composite Rate): Retirement and Supplemental Plans 5.0% 5.5% 5.5% =====================================================================
Other Postemployment Benefits - The Company has plans that provide for postretirement health care and life insurance benefits to substantially all of its employees when they retire. The Company accrues the cost of postretirement health care and life insurance benefits within the employees' active service periods. The Company has elected to amortize the transition obligation over a 20-year period. The annual net periodic cost for postretirement health care and life insurance benefits consists of the following components:
(In Thousands) Years Ended December 31, 1996 1995 1994 - -------------------------------------------------------------- Service Cost $ 2,161 $ 1,672 $ 1,843 Interest Cost 6,387 7,409 7,051 Return on Plan Assets (3,922) (3,398) (428) Net Amortization and Deferral 5,535 5,546 3,200 - -------------------------------------------------------------- $ 10,161 $ 11,229 $ 11,666 ==============================================================
The Company funds postretirement health care benefits for employees of its regulated subsidiaries in an amount generally equal to the subsidiaries' annual 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, 1996 and 1995, for the Company's postretirement health care and life insurance plans:
(In Thousands) December 31, 1996 1995 - -------------------------------------------------------------------- Accumulated Postretirement Benefit Obligation: Retirees $ 63,750 $ 68,353 Fully eligible active plan participants 5,221 5,446 Other active plan participants 26,056 23,503 - -------------------------------------------------------------------- 95,027 97,302 Plan Assets at Fair Value (1) 32,595 24,352 - -------------------------------------------------------------------- Accumulated Postretirement Benefit Obligation in Excess of Plan Assets (62,432) (72,950) Unrecognized Transition Obligation 57,544 61,140 Unrecognized Net Gain(2) (15,013) (7,465) Net Unamortized Deferred Charge from Early Retirement Termination Benefits 6,265 8,299 - -------------------------------------------------------------------- Accrued Postretirement Benefit Cost $(13,636) $(10,976) ====================================================================
(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. (2) Amortization periods for unrecognized net gain are 15.4 and 15.7 years for 1996 and 1995, respectively. The assumed rates used to measure the projected benefit obligation and the expected earnings of plan assets are:
Years Ended December 31, 1996 1995 1994 - ------------------------------------------------------- Discount Rate 7.0% 7.0% 8.5% Long-Term Rate of Return: Medical assets 5.5% 5.5% 5.5% Life insurance assets 7.5% 7.5% 8.5% ========================================================
The rate of increase in the per capita costs of covered health care benefits is assumed to be 8 percent in 1997, 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, 1996, by approximately $12.7 mil- II-36 61 60 Notes to Consolidated Financial Statements - ------------------------------------------------------------------------------- 11 RETIREMENT PLANS AND OTHER POSTEMPLOYMENT BENEFITS (continued) lion and increase the service cost and interest cost components of the net periodic postretirement benefit cost by approximately $1.5 million. 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. Transportation service is provided for its distribution customers, direct industrial customers and other end-users, gas producers, other gas pipelines, and gas marketing and trading companies. It provides transportation service in both its gas supply and market areas. The principal industries served directly by the natural gas transmission's pipeline system and indirectly through its distribution customers' systems include the chemical, pulp and paper, textile, primary metals, stone, clay and glass industries. The Energy Marketing segment is engaged primarily in natural gas and electric power marketing for industrial and commercial users, gas distribution companies and gas producers throughout the Gulf Coast, Southeastern, Midwestern and Northeastern United States. 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. The Company has no foreign operations. 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. Minority interest is included in Other Income, Net. 62 II-37 61 Sonat Inc. and Subsidiaries - ------------------------------------------------------------------------------- BUSINESS SEGMENT ANALYSIS
(In Thousands) Years Ended December 31, 1996 1995 1994 - -------------------------------------------------------------------------------------------------------------- Revenues: Exploration and production $ 565,654 $ 403,488 $ 412,750 Natural gas transmission 776,311 661,597 727,179 Energy marketing 2,592,703 1,249,903 942,208 Other 44,352 37,122 7,585 Intersegment revenue (584,122) (361,969) (353,755) - -------------------------------------------------------------------------------------------------------------- $ 3,394,898 $ 1,990,141 $ 1,735,967 ============================================================================================================== Depreciation, Depletion and Amortization: Exploration and production $ 236,419 $ 239,167 $ 206,842 Natural gas transmission 48,293 52,274 46,576 Energy marketing 1,729 955 2,954 Other, including depreciation of corporate equipment 1,751 6,318 1,387 - -------------------------------------------------------------------------------------------------------------- $ 288,192 $ 298,714 $ 257,759 ============================================================================================================== Operating Profit: Exploration and production $ 161,893 $ 22,967 $ 64,001 Natural gas transmission 165,587 158,329 88,436 Energy marketing 10,184 6,510 11,901 Other 3,981 2,317 2,852 - -------------------------------------------------------------------------------------------------------------- Operating profit 341,645 190,123 167,190 Corporate Expenses, Net (368) (1,190) 2,249 - -------------------------------------------------------------------------------------------------------------- Operating income 341,277 188,933 169,439 Equity in Earnings (Losses) of Unconsolidated Affiliates: Exploration and production 408 615 245 Natural gas transmission 32,532 37,553 37,831 Energy marketing 9 (5) (151) Other 1,262 8,095 6,394 Other Income, Net 1,609 142,534 16,348 Interest Expense, Net (82,793) (89,844) (72,887) - -------------------------------------------------------------------------------------------------------------- Income Before Income Taxes $ 294,304 $ 287,881 $ 157,219 ==============================================================================================================
Revenues from Major Customers
(In Thousands) Years Ended December 31, 1996 1995 1994 - ----------------------------------------------------------------------- Atlanta Gas Light: Natural gas transmission $180,051 $190,209 $250,932 Energy marketing 54,191 38,342 39,926 - ----------------------------------------------------------------------- $234,242 $228,551 290,858 ======================================================================= Alabama Gas Corporation: Natural gas transmission $ 82,120 $ 91,635 $118,975 Energy marketing 86,062 50,134 59,556 - ----------------------------------------------------------------------- $168,182 $141,769 $178,531 =======================================================================
Both of the major customers or their affiliates participate with the Company in certain joint venture operations. II-38 63 62 Notes to Consolidated Financial Statements - ------------------------------------------------------------------------------- (12) BUSINESS SEGMENT ANALYSIS (continued) 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, 1996 1995 1994 - -------------------------------------------------------------------------------------------------- Consolidated: Exploration and production (excluding exploratory costs) $368,423 $416,158 $389,766 Natural gas transmission 130,417 62,720 51,206 Energy marketing 4,736 2,758 3,200 Other 5,958 5,928 4,142 - -------------------------------------------------------------------------------------------------- 509,534 487,564 448,314 - -------------------------------------------------------------------------------------------------- Unconsolidated Affiliates (Company's Portion): Exploration and production 222 723 101 Natural gas transmission 15,138 100,489 398,389 Other 490 525 452 - -------------------------------------------------------------------------------------------------- 15,850 101,737 398,942 - -------------------------------------------------------------------------------------------------- $525,384 $589,301 $847,256 ==================================================================================================
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, 1996 1995 1994 - -------------------------------------------------------------------------------------------------- Identifiable Assets: Exploration and production $1,705,504 $1,592,399 $1,488,054 Natural gas transmission 1,181,440 1,285,404 1,155,242 Energy marketing 524,768 261,751 189,651 Other 41,449 37,850 37,531 Adjustments and eliminations (156,140) (103,579) (70,444) - -------------------------------------------------------------------------------------------------- 3,297,021 3,073,825 2,800,034 - -------------------------------------------------------------------------------------------------- Investments in Unconsolidated Affiliates: Exploration and production 5,255 4,876 6,281 Natural gas transmission 392,180 368,527 338,608 Energy marketing 5,457 490 932 Other 11,668 12,188 140,508 - -------------------------------------------------------------------------------------------------- 414,560 386,081 486,329 Corporate Assets 63,078 51,535 244,323 - -------------------------------------------------------------------------------------------------- Total Assets $3,774,659 $3,511,441 $3,530,686 ==================================================================================================
64 II-39 63 Sonat Inc. and Subsidiaries - ------------------------------------------------------------------------------- (13) OIL AND GAS OPERATIONS (UNAUDITED) At December 31, 1996, the Company had interests in oil and gas properties that are located primarily in Texas, Oklahoma, Louisiana, Arkansas, Alabama, and offshore Louisiana and Texas in the Gulf of Mexico. The Company does not own or lease any oil and gas properties outside the United States. Capitalized costs relating to oil and gas producing activities and related accumulated depreciation, depletion and amortization were as follows: Capitalized Costs
(In Thousands) December 31, 1996 1995 - ---------------------------------------------------------------- Oil and Gas Properties: Proved properties $2,461,709 $2,336,264 Unproved properties 118,031 100,019 - ---------------------------------------------------------------- 2,579,740 2,436,283 Less Accumulated Depreciation, Depletion and Amortization 1,075,016 1,008,815 - ---------------------------------------------------------------- $1,504,724 $1,427,468 ================================================================
Costs incurred in oil and gas producing activities, whether capitalized or expensed, were as follows: Costs Incurred
(In Thousands) Years Ended December 31, 1996 1995 1994 - ------------------------------------------------------------------ Property Acquisition Costs: Proved properties $ 48,118 $208,866 $142,294 Unproved properties 44,623 14,767 28,953 Exploration Costs 41,728 12,138 11,284 Development Costs 244,008 183,056 215,205 - ------------------------------------------------------------------ Total Costs $378,477 $418,827 $397,736 ==================================================================
Net quantities of proved developed and undeveloped reserves of natural gas and crude oil, including condensate and natural gas liquids, and changes in such quantities were as follows: Reserve Data
December 31, 1996 1995 - ------------------------------------------------------------------------------------------------------------- Liquids Gas Liquids Gas (MBbls) (Bcf) (MBbls) (Bcf) - ------------------------------------------------------------------------------------------------------------- Proved (Developed and Undeveloped) Reserves, Net: Beginning of year 44,228 1,505.5 31,627 1,367.3 Revisions of previous estimates 3,106 50.2 998 48.4 Extensions, discoveries and other additions 11,597 295.2 6,774 173.8 Purchases of reserves in place 1,536 100.6 16,954 248.1 Sales of reserves in place (1,724) (55.1) (6,656) (149.0) Production (7,306) (204.8) (5,469) (183.1) - ------------------------------------------------------------------------------------------------------------- End of Year 51,437 1,691.6 44,228 1,505.5 - ------------------------------------------------------------------------------------------------------------- Proved Developed Reserves: Beginning of year 25,613 1,060.1 22,269 1,001.0 End of year 28,961 1,188.3 25,613 1,060.1 =============================================================================================================
December 31, 1994 - -------------------------------------------------------------------------------------- Liquids Gas (MBbls) (Bcf) - -------------------------------------------------------------------------------------- Proved (Developed and Undeveloped) Reserves, Net: Beginning of year 27,094 1,186.6 Revisions of previous estimates (2,891) 31.3 Extensions, discoveries and other additions 4,876 107.2 Purchases of reserves in place 8,059 229.9 Sales of reserves in place (129) (6.0) Production (5,382) (181.7) - -------------------------------------------------------------------------------------- End of Year 31,627 1,367.3 - -------------------------------------------------------------------------------------- Proved Developed Reserves: Beginning of year 19,776 899.6 End of year 22,269 1,001.0 ======================================================================================
MBbls - Thousands of barrels Bcf - Billion cubic feet II-40 65 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. 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, 1996. Results of operations from producing activities by fiscal year were as follows: Results of Operations
(In Thousands) Years Ended December 31, 1996 1995 1994 - ------------------------------------------------------------------------- Net Revenues: Sales $ 155,274 $ 175,032 $ 148,530 Affiliated sales 410,380 228,456 264,220 - ------------------------------------------------------------------------- Total 565,654 403,488 412,750 Production Costs (88,036) (81,046) (81,067) Exploration Expenses (21,669) (9,065) (12,181) Depreciation, Depletion and Amortization (236,419) (239,167) (206,842) - ------------------------------------------------------------------------- 219,530 74,210 112,660 Income Tax Expense (67,454) (14,730) (25,031) - ------------------------------------------------------------------------- Results of Operations from Producing Activities (Excluding Corporate Overhead and Interest Costs) $ 152,076 $ 59,480 $ 87,629 =========================================================================
The standardized measure of discounted future net cash flows relating to proved oil and gas reserves follows: Standardized Measure of Discounted Future Net Cash Flows
(In Thousands) December 31, 1996 1995 1994 - -------------------------------------------------------------------------- Future Cash Inflows $ 7,041,438 $ 3,562,789 $ 2,835,781 Future Production and Development Costs (1,627,378) (1,286,074) (1,200,581) Future Income Tax Expenses (1,407,017) (354,041) (83,931) - -------------------------------------------------------------------------- Future Net Cash Flows 4,007,043 1,922,674 1,551,269 10% Annual Discount for Estimated Timing of Cash Flows (1,313,286) (611,206) (465,469) - -------------------------------------------------------------------------- Standardized Measure of Discounted Future Net Cash Flows $ 2,693,757 $ 1,311,468 $ 1,085,800 ==========================================================================
For the calculations in the preceding table, estimated future cash inflows from estimated future production of proved reserves were computed using realized oil and gas prices for the month of December of each respective year. The following are the principal sources of change in the standardized measure of discounted future net cash flows: Changes in Standardized Measure of Discounted Future Net Cash Flows
(In Thousands) Years Ended December 31, 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------- Sales and Transfers of Oil and Gas Produced, Net of Production Costs $ (477,618) $(322,442) $(331,683) Net Changes in Prices and Production Costs 1,412,485 186,034 (327,290) Extensions, Discoveries and Improved Recovery, Less Related Costs 664,888 176,080 104,554 Changes in Estimated Future Development Costs 269 (15,362) (28,397) Development Costs Incurred During the Period 107,158 103,138 68,945 Revisions of Previous Quantity Estimates 125,181 49,129 11,157 Accretion of Discount 145,877 105,288 129,974 Net Change in Income Taxes (683,539) (180,223) 40,039 Purchases of Reserves in Place 199,532 333,260 160,335 Sales of Reserves in Place (126,557) (155,952) (5,226) Changes in Production Rates (Timing) and Other 14,613 (53,282) (29,226) - ------------------------------------------------------------------------------------------------------------------ $ 1,382,289 $ 225,668 $(206,818) ==================================================================================================================
66 II-41 65 Sonat Inc. and Subsidiaries - ------------------------------------------------------------------------------- (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 - ------------------------------------------------------------------------ 1996 Revenues $734,406 $847,151 $788,161 $1,025,180 Operating Income 83,231 74,241 75,160 108,645 Net Income 45,569 40,595 48,034 66,991 - ------------------------------------------------------------------------ Earnings Per Share $ .53 $ .47 $ .56 $ .78 - ------------------------------------------------------------------------ 1995(1) 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 - ------------------------------------------------------------------------
(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 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 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 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 futures contracts that ceased to qualify for 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. II-42 67 66 Notes to Consolidated Financial Statements - ------------------------------------------------------------------------------- SELECTED CONSOLIDATED FINANCIAL DATA
(In Millions, Except Per-Share Amounts) 1996 1995 1994 1993 1992 - --------------------------------------------------------------------------------------------------------------------------------- Revenues $3,394.9 $1,990.1 $1,735.9 $1,741.1 $1,484.4 Costs and Expenses 3,053.6 1,801.2 1,566.5 1,508.2 1,273.3 - --------------------------------------------------------------------------------------------------------------------------------- Operating Income (Loss) 341.3 188.9 169.4 232.9 211.1 Other Income, Net (3) 35.8 188.8 60.7 182.1 22.0 Interest Expense, Net (82.8) (89.8) (72.9) (47.3) (96.3) - --------------------------------------------------------------------------------------------------------------------------------- Income (Loss) from Continuing Operations before Extraordinary Item and Income Taxes 294.3 287.9 157.2 367.7 136.8 Income Taxes (Benefits) 93.1 95.0 15.8 102.7 35.8 - --------------------------------------------------------------------------------------------------------------------------------- Income (Loss) from Continuing Operations before Cumulative Effect of Accounting Changes 201.2 192.9 141.4 265.0 101.0 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 Income Taxes -- -- -- -- -- - --------------------------------------------------------------------------------------------------------------------------------- Net Income (Loss) $ 201.2 $ 192.9 $ 141.4 $ 261.2 $ 212.4 ================================================================================================================================= Earnings (Loss) Per Share from Continuing Operations before Extraordinary Item $ 2.33 $ 2.24 $ 1.62 $ 3.05 $ 1.17 Earnings (Loss) Per Share $ 2.33 $ 2.24 $ 1.62 $ 3.01 $ 2.47 Weighted Average Shares Outstanding (thousands) 86,211 86,270 87,119 86,703 85,945 Dividends Paid Per Share $ 1.08 $ 1.08 $ 1.08 $ 1.04 $ 1.00 ================================================================================================================================= Assets $3,774.7 $3,511.4 $3,530.7 $3,214.0 $3,165.3 Debt Maturing within One Year $ 211.7 $ 237.7 $ 219.3 $ 232.9 $ 20.1 Long-Term Debt 872.3 770.3 963.4 741.2 1,175.7 Stockholders Equity 1,584.4 1,482.6 1,391.9 1,363.2 1,172.3 - --------------------------------------------------------------------------------------------------------------------------------- Total Capitalization $2,668.4 $2,490.6 $2,574.6 $2,337.3 $2,368.1 =================================================================================================================================
Notes: (1) Discontinued operations include the measurement-while-drilling business 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. 68 II-43 67 Sonat Inc. and Subsidiaries - --------------------------------------------------------------------------------
(In Millions, Except Per-Share Amounts) 1991 1990 1989 1988 1987 1986 - ------------------------------------------------------------------------------------------------------------------------------- Revenues $1,421.0 $ 1,356.9 $1,659.2 $1,277.3 $ 1,344.9 1,628.6 Costs and Expenses 1,217.5 1,192.2 1,481.4 1,142.4 1,176.5 1,929.3 - ------------------------------------------------------------------------------------------------------------------------------- Operating Income (Loss) 203.5 164.7 177.8 134.9 168.4 (300.7) Other Income, Net (3) 14.7 69.8 47.1 12.5 41.5 118.1 Interest Expense, Net (117.7) (102.6) (75.2) (54.4) (54.6) (77.9) - ------------------------------------------------------------------------------------------------------------------------------- Income (Loss) from Continuing Operations before Extraordinary Item and Income Taxes 100.5 131.9 149.7 93.0 155.3 (260.5) Income Taxes (Benefits) 22.6 40.7 54.1 40.5 85.2 (144.7) - ------------------------------------------------------------------------------------------------------------------------------- Income (Loss) from Continuing Operations before Cumulative Effect of Accounting Changes 77.9 91.2 95.6 52.5 70.1 (115.8) Income (Loss) from Discontinued Operations (1) (11.9) 2.7 (2.0) 2.2 24.9 (73.6) Extraordinary Loss, Net of Tax (2) -- -- -- -- -- -- Cumulative Effect of Change in Method of Accounting for Income Taxes -- -- -- 13.1 -- -- - ------------------------------------------------------------------------------------------------------------------------------- Net Income (Loss) $ 66.0 $ 93.9 $ 93.6 $ 67.8 $ 95.0 $ (189.4) =============================================================================================================================== Earnings (Loss) Per Share from Continuing Operations before Extraordinary Item $ .91 $ 1.07 $ 1.17 $ .65 $ .87 $ (1.43) Earnings (Loss) Per Share $ .77 $ 1.10 $ 1.15 $ .83 $ 1.17 $ (2.34) Weighted Average Shares Outstanding (thousands) 85,771 85,612 81,682 81,238 80,912 80,948 Dividends Paid Per Share $ 1.00 $ 1.00 1.00 $ 1.00 $ 1.00 $ 1.00 =============================================================================================================================== Assets $3,208.5 $ 3,045.1 $2,892.3 $2,969.5 $ 3,074.4 $3,288.8 Debt Maturing within One Year $ 79.2 $ 63.1 $ 155.9 $ 50.4 $ 225.6 $ 104.6 Long-Term Debt 1,315.1 1,094.0 929.5 859.4 824.8 1,336.3 Stockholders Equity 1,042.7 1,060.5 1,035.3 1,010.2 1,023.0 1,005.9 - ------------------------------------------------------------------------------------------------------------------------------- Total Capitalization $2,437.0 $ 2,217.6 $2,120.7 $1,920.0 $ 2,073.4 $2,446.8 ===============================================================================================================================
II-44 69 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-45 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 19, 1997 (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, 1996 and 1995................................................... II-17 Consolidated Statements of Income for the years ended December 31, 1996, 1995, and 1994...................... II-19 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1996, 1995, and 1994................................................... II-20 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995, and 1994...................... 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, 1996, listed on Page IV-6.................................... IV-6
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 as Exhibit 3-(b) to Form 10-K of Sonat Inc. for the year 1995 INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS 4.1 Rights Agreement dated as of January 8, 1996, between Sonat Inc. and Chemical Mellon Shareholder Services, L.L.C., as Rights Agent, with exhibits, filed as Exhibit 99 to Form 8-A of Sonat Inc. dated January 10, 1996
- --------------- (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 Beverly T. Krannich, Secretary, Sonat Inc., P.O. Box 2563, Birmingham, Alabama 35202. IV-1 71
EXHIBIT NUMBER EXHIBITS - ------- -------- 4.2 (a) Form of Indenture dated June 1, 1986, from Sonat Inc. to Manufacturers Hanover Trust Company, Trustee, as amended by (1) First Supplemental Indenture dated June 1, 1995, between Sonat Inc. and Chemical Bank, successor by merger to Manufacturers Hanover Trust Company, as Trustee, filed as Exhibit 4-(1) to Amendment No. 1 to Registration Statement No. 33-5947 dated June 4, 1986, except (1), which was filed as Exhibit 4-(1) to Form 8-K of Sonat Inc. dated June 6, 1995 4.2 (b) Specimen Note of Sonat Inc. for the $200 million 6 7/8% Notes due June 1, 2005, issued under Registration Statement No 33-62166, filed as Exhibit 4-(2) to Form 8-K of Sonat Inc. dated June 6, 1995 4.2 (c) Specimen Note of Sonat Inc. for the $100 million 9 1/2% Notes due August 15, 1999, issued under Registration Statement No 33-5947, filed herewith 4.2 (d) Specimen Note of Sonat Inc. for the $100 million 9% Notes due May 1, 2001, issued under Registration Statement No 33-5947, filed as Exhibit 4-(2) to Form 8-K of Sonat Inc. dated April 30, 1991 4.3 (a) 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 Statement No. 33-47266 of Southern Natural Gas Company dated April 16, 1992 4.3 (b) Specimen Note of Southern Natural Gas Company for the $100 million 8 7/8% Notes due February 15, 2001, issued under Registration Statement No 33-16190, filed as Exhibit 4-(2) to Form 8-K of Southern Natural Gas Company dated February 7, 1991 4.3 (c) Specimen Note of Southern Natural Gas Company for the $100 million 7.85% Notes due January 15, 2002, issued under Registration Statement No 33-16190, filed as Exhibit 4-(2) to Form 8-K of Southern Natural Gas Company dated January 14, 1992 4.3 (d) Specimen Note of Southern Natural Gas Company for the $100 million 8 5/8% Notes due May 1, 2002, issued under Registration Statement No 33-47266, filed herewith 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 June 1, 1996, among Sonat Inc., the Banks named therein, and The Chase Manhattan Bank (National Association), and Morgan Guaranty Trust Company of New York, as Co-Agents, filed as Exhibit 4 to Form 10-Q of Sonat Inc. for the quarter ended June 30, 1996 4.6 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 as Exhibit 4.6 to Form 10-K of Sonat Inc. for the year 1995 COMPENSATION PLANS AND MANAGEMENT CONTRACTS 10.1 Supplemental Benefit Plan of Sonat Inc. as Amended and Restated effective January 1, 1995, and (1) amendment dated December 1, 1995, filed herewith 10.2 Executive Award Plan of Sonat Inc. as Amended and Restated as of December 1, 1995, (corrected on December 4, 1996), and (1) amendment dated December 6, 1996, filed herewith 10.3 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 was filed as Exhibit 10.6 to Form 10-K of Sonat Inc. for the year 1995 10.4 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 was filed as Exhibit 10.7 to Form 10-K of Sonat Inc. for the year 1995 10.5 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 was filed as Exhibit 10.8 to Form 10-K of Sonat Inc. for the year 1995
IV-2 72
EXHIBIT NUMBER EXHIBITS - ------- -------- 10.6 Sonat Inc. Retirement Plan for Directors as Amended and Restated as of December 2, 1994, and (1) amendment dated December 1, 1995, filed as Exhibit 10.9 to Form 10-K of Sonat Inc. for the year 1994, except (1), which was filed as Exhibit 10.9 to Form 10-K of Sonat Inc. for the year 1995 10.7 Executive Severance Agreement dated 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 as Exhibit 10.10(a) to Form 10-K of Sonat for the year 1995 10.8 Executive Severance Agreement dated December 1, 1995, between Sonat Inc. and Donald G. Russell, filed as Exhibit 10.10(b) to Form 10-K of Sonat Inc. for the year 1995 10.9 Directors' Fees Deferral Plan of Sonat Inc. -- Summary dated January 1, 1997, filed herewith 10.10 Indemnity Agreement dated December 4, 1987, between Sonat Inc. and Ronald L. Kuehn, Jr. and schedule identifying substantially identical indemnity agreements between Sonat Inc. and other directors of Sonat Inc. and (1) Indemnity Agreement dated September 1, 1994, between Sonat Inc. and Adrian M. Tocklin, (2) Indemnity Agreement dated 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 was filed as Exhibit 10.12 to Form 10-K of Sonat Inc. for the year 1995 10.11 Trust Agreement dated December 19, 1986, between Sonat Inc. and AmSouth Bank N.A. for Section 415 Retirement Plan Benefits and Vesting Benefits under the Supplemental Benefit Plan and Early Retirement Benefits under the Executive Severance Agreements, filed as Exhibit 10-(15) to Form 10-K of Sonat Inc. for the year 1991 10.12 Trust Agreement dated December 19, 1986, between Sonat Inc. and AmSouth Bank N.A. for Section 415 Stock Purchase Plan Benefits under the Supplemental Benefit Plan, filed as Exhibit 10-(16) to Form 10-K of Sonat Inc. for the year 1991 10.13 Trust Agreement dated December 19, 1986, between Sonat Inc. and AmSouth Bank N.A. for Benefits under the Retirement Plan for Directors, filed as Exhibit 10-(17) to Form 10-K of Sonat Inc. for the year 1991 10.14 Form of Sonat Inc. Executive Life Insurance Program Split Dollar Agreement, Collateral Assignment Agreement, and Program Description, each dated as of July 1, 1990, with (1) schedule identifying the persons participating in such Programs, filed as Exhibit 10-(20) to Form 10-K of Sonat Inc. for the year 1990, except (1), which was filed as Exhibit 10.16 to Form 10-K of Sonat Inc. for the year 1995 10.15 Sonat Inc. Deferred Compensation Plan -- Plan Summary dated March 1, 1997, filed herewith OTHER MATERIAL CONTRACTS 10.16 Capital Stock Agreement among Sonat Inc., Enron Corp., Houston Natural Gas Corporation, and Citrus Corp. dated June 30, 1986, filed as Exhibit 10-(26) to Form 10-K of Sonat Inc. for the year 1991
IV-3 73
EXHIBIT NUMBER EXHIBITS ------- -------- 10.17 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 19, 1997, 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, 1997, 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, 1996, on behalf of certain directors and officers of the registrant, filed herewith 27 Financial Data Schedule for the period ended December 31, 1996 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. 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, 1996. (c) Exhibits Exhibits required by Item 601 of Regulation S-K have been filed electronically with this report on Form 10-K. IV-4 74 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, 1997 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, 1997 - ----------------------------------------------------- President and Chief (RONALD L. KUEHN, JR.) Executive Officer (ii) Principal Financial Officer: /s/ THOMAS W. BARKER, JR. Vice President -- Finance March 21, 1997 - ----------------------------------------------------- and Treasurer (THOMAS W. BARKER, JR.) Principal Accounting Officer: /s/ JAMES A. RUBRIGHT Senior Vice President and March 21, 1997 - ----------------------------------------------------- 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 ADRIAN M. TOCKLIN ROBERT J. LANIGAN JAMES B. WILLIAMS MAX L. LUKENS JOE B. WYATT CHARLES MARSHALL BENJAMIN F. PAYTON *Signed on behalf of each of these persons and on his behalf:
By /s/ JAMES A. RUBRIGHT -------------------------------------------------------- JAMES A. RUBRIGHT SENIOR VICE PRESIDENT AND GENERAL COUNSEL AS AUTHORIZED BY CERTAIN POWERS OF ATTORNEY DATED FEBRUARY 27, 1997, ALL OF WHICH ARE FILED HEREWITH AS EXHIBIT 24 IV-5 75 CITRUS CORP. AND SUBSIDIARIES TABLE OF CONTENTS Report of Ernst & Young LLP, Independent Auditors
Report of Ernst & Young LLP, Independent Auditors IV-7 Consolidated Financial Statements Consolidated Balance Sheets - Assets IV-8 Consolidated Balance Sheets - Liabilities and Stockholders' Equity IV-9 Consolidated Statements of Income and Retained Earnings IV-10 Consolidated Statements of Cash Flows IV-11 Notes to Consolidated Financial Statements IV-12
IV-6 76 Report of Independent Auditors Board of Directors Citrus Corp. We have audited the accompanying consolidated balance sheets of Citrus Corp. and Subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income and retained earnings and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Citrus Corp. and Subsidiaries at December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Birmingham, Alabama February 28, 1997 /s/ Ernst & Young, LLP ---------------------- Ernst & Young, LLP IV-7 77 CITRUS CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
- ---------------------------------------------------------------------------------- December 31, ------------------------- (In Thousands) 1996 1995 - ---------------------------------------------------------------------------------- ASSETS Current Assets Cash $ 16,063 $ 2,985 Trade and other receivables Customers, net 69,599 62,349 Affiliated companies 98 385 Contract reformation costs, net 7,078 33,584 Commodity adjustment costs 5,519 5,411 Materials and supplies 2,557 2,379 Other 6,131 336 ------------------------- Total Current Assets 107,045 107,429 ------------------------- Deferred Charges Unamortized debt expense 7,356 8,737 Commodity adjustment costs 34,698 40,217 Other 54,015 23,318 ------------------------- Total Deferred Charges 96,069 72,272 ------------------------- Property, Plant and Equipment, at cost 2,790,210 2,797,051 Less - accumulated depreciation and amortization 428,172 395,204 ------------------------- Net Property, Plant and Equipment 2,362,038 2,401,847 ------------------------- TOTAL ASSETS $2,565,152 $2,581,548 - ----------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. IV-8 78 CITRUS CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------- December 31, ------------------------- (In Thousands) 1996 1995 --------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Notes payable to banks $ 15,000 $ 70,000 Long-term debt due within one year 100,000 -- Accounts payable Trade 29,351 43,172 Affiliated companies 28,920 7,719 Accrued liabilities Interest 18,296 18,088 Income taxes -- 2,065 Other taxes 4,695 3,381 TCR deferred revenues 6,256 37,392 Other 8,710 5,462 ------------------------- Total Current Liabilities 211,228 187,279 ------------------------- Long-Term Debt 1,025,000 1,125,000 ------------------------- Deferred Credits Deferred income taxes 474,569 466,030 Other 44,615 36,537 ------------------------- Total Deferred Credits 519,184 502,567 ------------------------- 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 175,468 132,430 ------------------------- Total Stockholders' Equity 809,740 766,702 ------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,565,152 $2,581,548 - -----------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. IV-9 79 CITRUS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
- ---------------------------------------------------------------------------------------------- Years Ended December 31, --------------------------------------------- (In Thousands) 1996 1995 1994 - ---------------------------------------------------------------------------------------------- Revenues Gas sales $444,623 $377,218 $305,350 Gas transportation 324,712 305,169 172,112 --------------------------------------------- 769,335 682,387 477,462 --------------------------------------------- Costs and Expenses Natural gas purchased 428,842 362,635 294,670 Operations and maintenance 74,413 79,880 63,365 Depreciation 26,651 22,850 2,348 Amortization 56,912 58,377 61,389 Taxes - other than income taxes 20,160 14,767 8,506 --------------------------------------------- 606,978 538,509 430,278 --------------------------------------------- Operating Income 162,357 143,878 47,184 --------------------------------------------- Other Income (Expense) Interest expense, net (97,363) (98,887) (55,760) Allowance for funds used during construction (153) 42,804 98,269 Other, net 5,437 (351) (97) --------------------------------------------- (92,079) (56,434) 42,412 --------------------------------------------- Income Before Income Taxes 70,278 87,444 89,596 Income Tax Expense 27,240 33,818 34,487 --------------------------------------------- Net Income 43,038 53,626 55,109 Retained Earnings, Beginning of Year 132,430 78,804 23,695 --------------------------------------------- Retained Earnings, End of Year $175,468 $132,430 $78,804 - ----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. IV-10 80 CITRUS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, -------------------------------------- (In Thousands) 1996 1995 1994 - -------------------------------------------------------------------------------------------- Cash Flows From Operating Activities Net income $43,038 $ 53,626 $ 55,109 Adjustments to reconcile net income to net cash provided by (used in) operating activities Depreciation and amortization 83,563 81,227 63,737 Deferred income taxes 8,539 21,780 25,577 Allowance for funds used during construction 153 (42,804) (98,269) Gain on sale of assets (7,181) -- -- Changes in assets and liabilities Trade and other receivables (6,963) (16,301) (1,494) Materials and supplies (178) (424) 3,326 Accounts payable 7,380 (12,199) (29,421) Accrued liabilities (543) (1,005) 13,230 Other current assets and liabilities (2,547) (12,639) 9,081 Contract reformation settlements and adjustments (4,931) (3,917) (8,169) Other, net (2,225) (18,587) (49,960) -------------------------------------- Net Cash Provided by (Used in) Operating Activities 118,105 48,757 (17,253) -------------------------------------- Cash Flows From Investing Activities Additions to property, plant and equipment (29,000) (208,627) (855,832) Allowance for funds used during construction (153) 42,804 98,269 Net proceeds from sale of assets 7,181 -- -- Disposition of property, plant and equipment, net 3,081 883 (2,024) -------------------------------------- Net Cash Used in Investing Activities (18,891) (164,940) (759,587) -------------------------------------- Cash Flows From Financing Activities Short-term bank borrowings, net (55,000) 70,000 (275,000) Proceeds from issuance of long-term debt -- -- 790,000 Payment of long-term debt -- -- (90,000) TCR sale proceeds -- -- 86,313 TCR remittances (31,136) (28,900) (20,021) Hedging proceeds -- -- 36,161 Equity contribution from stockholders -- -- 318,000 -------------------------------------- Net Cash Provided by (Used in) Financing Activities (86,136) 41,100 845,453 -------------------------------------- Increase (Decrease) in Cash and Cash Equivalents 13,078 (75,083) 68,613 Cash and Cash Equivalents, Beginning of Year 2,985 78,068 9,455 -------------------------------------- Cash and Cash Equivalents, End of Year $ 16,063 $ 2,985 $ 78,068 - -------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements. Additional cash flow information: Interest (net of amounts capitalized) $103,902 $104,348 $ 58,180 Income taxes paid (received) 20,766 14,160 4,054
IV-11 81 CITRUS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) REPORTING ENTITY Citrus Corp. (the Company), a holding company formed in 1986, owns 100% of the stock of Florida Gas Transmission Company (Transmission), Citrus Trading Corp. (Trading) and Citrus Energy Services, Inc. (CESI). The stock of the Company is owned 50% by Sonat Inc. (Sonat) and 50% by Houston Pipe Line Company, a subsidiary of Enron Corp. (Enron). Transmission, an interstate gas pipeline extending from South Texas to South Florida, is engaged in the interstate transmission of natural gas and is subject to the jurisdiction of the Federal Energy Regulatory Commission (FERC). Trading is engaged in the sale of natural gas primarily to Florida Power & Light Co., a large electric utility in the state of Florida, to local distribution customers, and to end users, the majority of which are in the state of Florida. CESI began operations in February 1996 and provides construction, operations and maintenance services primarily to customers of Transmission and Trading. (2) SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions and accounts have been eliminated in consolidation. CASH AND CASH EQUIVALENTS - The Company considers as cash equivalents all highly liquid short-term investments with maturities of three months or less at the time of purchase. These investments are accounted for at cost, which approximates estimated fair value. MATERIALS AND SUPPLIES - Materials and supplies are valued at actual cost. Materials transferred out of warehouses are priced out at average cost. REVENUE RECOGNITION - Gas sales revenue is recognized when gas is sold. Gas transportation revenue is recognized when the service is provided. ACCOUNTING FOR PRICE RISK MANAGEMENT ACTIVITIES - To manage the risks of price fluctuations, Trading, from time to time, has entered into swap agreements in certain energy products. All related gains and losses are recognized currently in income as adjustments to costs and expenses. Trading uses the settlement method of accounting for its commodity swaps 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, none of which has been material for any of the periods presented, 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. ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION - The allowance for funds used during construction consists, in general, of the net cost of borrowed and equity funds used for construction purposes and a reasonable rate on other funds when so used. The allowance is determined by applying the capitalization rate to construction work orders. Capitalization begins at the time the Company begins the continuous accumulation of costs in a construction work order on a planned progressive basis and ends when the facilities are placed in service. IV-12 82 CITRUS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (2) SIGNIFICANT ACCOUNTING POLICIES (continued) 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 1.45%, 1.41% and .75% for 1996, 1995 and 1994, 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. 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 firm contract quantities and 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 to accounting for income taxes. Under this approach, deferred tax assets and liabilities are recognized based on anticipated future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax bases. USE OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. IMPAIRMENT OF LONG-LIVED ASSETS - In March 1995, the Financial Accounting Standards Board issued SFAS No. 121 - "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which requires, among other things, that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company's adoption of SFAS No. 121 in 1996 did not have a material impact on its financial position or results of operations. RECLASSIFICATIONS - Certain amounts in the consolidated financial statements have been reclassified in 1995 and 1994 to conform with the 1996 presentation. IV-13 83 CITRUS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (3) LONG-TERM DEBT AND OTHER FINANCING ARRANGEMENTS Long-term debt outstanding at December 31, 1996 and 1995 was as follows (in thousands):
1996 1995 ------------- ------------- Citrus Corp. - ------------ 11.10% Notes due 1998-2006 $ 175,000 $ 175,000 8.49% Notes due 2007-2009 90,000 90,000 ------------- ------------- 265,000 265,000 ------------- ------------- Transmission - ------------ 7. 75% Notes due 1997 100,000 100,000 9. 30% Notes due 1998 25,000 25,000 8. 14% Notes due 1999 200,000 200,000 9. 75% Notes due 1999-2008 65,000 65,000 8. 63% Notes due 2004 250,000 250,000 10.11% Notes due 2009-2013 70,000 70,000 9. 19% Notes due 2005-2024 150,000 150,000 ------------- ------------- 860,000 860,000 ------------- ------------- Total Outstanding 1,125,000 1,125,000 Less Long-Term Debt Due Within One Year 100,000 -- ------------- ------------- $1,025,000 $1,125,000 ============= =============
Annual maturities and sinking fund requirements on long-term debt outstanding as of December 31, 1996 were as follows (in thousands):
Year Amount - ---- ---------- 1997 $ 100,000 1998 44,250 1999 225,750 2000 25,750 2001 25,750 Thereafter 703,500 ---------- $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, 1996. Transmission has a committed line of credit of $70.0 million of which $15.0 million was outstanding with a rate of 5.80% at December 31, 1996, and uncommitted facilities for up to $50.0 million which were available at December 31, 1996. 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. IV-14 84 CITRUS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (4) INCOME TAXES The principal components of the Company's net deferred income tax liabilities at December 31, 1996 and 1995 are as follows (in thousands):
1996 1995 -------- -------- Deferred income tax assets Net operating loss carryforward $ -- $ 498 Other 24,334 21,595 -------- -------- 24,334 22,093 -------- -------- Deferred income tax liabilities Depreciation and amortization 478,506 460,058 Contract reformation costs 15,211 23,500 Other 5,186 4,565 -------- -------- 498,903 488,123 -------- -------- Net deferred income tax liabilities $474,569 $466,030 ======== ========
Total income tax expense for the years ended December 31, 1996, 1995 and 1994 is summarized as follows (in thousands):
1996 1995 1994 ------- ------- ------- Payable currently Federal $15,445 $10,138 $ 7,000 State 3,256 1,900 1,910 ------- ------- ------- 18,701 12,038 8,910 ------- ------- ------- Payment deferred Federal 7,847 18,867 21,882 State 692 2,913 3,695 ------- ------- ------- 8,539 21,780 25,577 ------- ------- ------- Total income tax expense $27,240 $33,818 $34,487 ======= ======= =======
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, 1996, 1995 and 1994 are as follows (in thousands):
1996 1995 1994 ------- ------- ------- Statutory federal income tax provision $24,597 $30,605 $31,359 Net state income taxes 2,566 3,128 3,063 Other 77 85 65 ------- ------- ------- Income tax expense $27,240 $33,818 $34,487 ======= ======= =======
The Company has an alternative minimum tax (AMT) credit of approximately $15 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 AMT credit carryforward as a reduction of deferred tax liabilities. 85 CITRUS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (5) EMPLOYEE BENEFIT PLANS The employees of the Company and its subsidiaries are covered under Enron's employee benefit plans. Enron maintains a retirement plan (the Enron Plan) which is a noncontributory defined benefit plan covering substantially all employees in the United States and certain employees in foreign countries. Through December 31, 1994, participants in the Enron Plan with five years or more of service were entitled to retirement benefits in the form of an annuity 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 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 in the form of a cash balance of 5% of annual base pay. Pension expenses charged by Enron were immaterial for 1996, 1995 and 1994. As of September 30, 1996, the most recent valuation date, the plan net assets for the Enron Plan in which the employees of the Company participate was greater than the actuarial present value of projected plan benefit obligations by approximately $5 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 medical, dental and life insurance benefits to eligible employees and their eligible dependents. Benefits are provided under the provisions of a contributory defined dollar benefit plan. The Company accounts for postretirement benefit costs over the service lives of the employees expected to be eligible to receive such benefits. The Company is amortizing the transition obligation which existed at January 1, 1993, over a period of approximately 19 years. The Company's net periodic postretirement benefit cost charged by Enron was $1.5, $.9 and $.8 million for 1996, 1995 and 1994, 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% in 1996 decreasing to 5% over 9 years. The APBO exceeded plan assets by $129 million as of its most recent valuation date of December 31, 1996. 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. All shares included in the ESOP have been allocated to the employee accounts. IV-16 86 CITRUS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (6) MAJOR CUSTOMERS Revenues from individual customers exceeding 10% of total revenues for the years ended December 31, 1996, 1995 and 1994 were approximately as follows (in thousands):
Customers 1996 1995 1994 --------- -------- -------- -------- Florida Power & Light Co. $466,000 $343,000 $267,000 Enron Capital and Trade Resources 19,000 65,000 --
At December 31, 1996, the Company's subsidiaries had receivables of approximately $45.7 and $6.1 million from Florida Power & Light Company 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 $11.9, $11.6 and $17.4 million for these expenses for the years ended December 31, 1996, 1995 and 1994, respectively. The Company's subsidiaries provide natural gas sales and transport services to Enron and Sonat affiliates at rates equal to rates charged to non-affiliated customers in the same class of service. Revenues related to these services amounted to approximately $19.8, $66.1 and $9.1 million for the years ended December 31, 1996, 1995 and 1994, respectively. The Company's subsidiaries purchased gas from affiliates of Sonat of approximately $139.8, $84.1 and $22.0 million for the years ended December 31, 1996, 1995 and 1994, respectively. The Company's subsidiaries also purchased gas from affiliates of Enron of approximately $252.6, $186.7 and $139.4 million for the years ended December 31, 1996, 1995 and 1994, 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 has been authorized by the FERC to recover certain transition costs incurred through the reformation of gas purchase contracts related to Transmission's jurisdictional sales services. On November 1, 1993, Transmission's Order No. 636 restructuring settlement went into effect. The settlement allows Transmission 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. Transmission has no gas purchase contracts with accrued take-or-pay obligations which have not yet been terminated. As the remaining purchase contracts expire or are terminated and Transmission completes making settlement payments to suppliers, it will file for recovery of such amounts. Management believes that these costs will be 100% recoverable through existing tariff mechanisms. IV-17 87 CITRUS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (8) RATE MATTERS (continued) On August 30, 1996, Transmission made a Section 4 rate filing in Docket No. RP96-366-000 proposing an increase in annual revenues of approximately $27.4 million for service on the pre-expansion system and approximately $8.2 million for service on the Phase III expansion system. In an order issued September 30, 1996, the FERC accepted and suspended the filing to be effective March 1, 1997, subject to refund and certain conditions. By order issued November 27, 1996, certain audit and investigation matters (see Note 9) were consolidated with the rate case. Pursuant to a revised procedural schedule issued December 19, 1996, a hearing will commence on January 13, 1998, if no settlement is reached. (9) COMMITMENTS AND CONTINGENCIES The FERC's Division of Audits (DOA) completed a compliance review of Transmission's books and records for the period of January 1, 1991 through December 31, 1994. Among other things, the FERC auditors questioned certain aspects of Transmission's procedures for accounting for the costs of financing Transmission's Phase III expansion facilities and proposed adjustments to the amount of AFUDC capitalized during construction of its Phase III expansion facilities. Pursuant to an agreement among Transmission, FERC staff and customer intervenors, Transmission filed a settlement agreement on July 30, 1996, which was approved by FERC order issued September 27, 1996. The settlement provided for a reduction of $18.75 million in its Gas Plant in Service account. In addition, the settlement provided that Transmission would restructure its capital accounts by removing approximately $348 million of excess donated capital on its books related to the Phase III construction. As required under the settlement, Transmission debited its Donations Received from Stockholders account and credited its Notes Receivable from Associated Companies Account. The settlement is without prejudice to Transmission seeking Commission approval to recover the $18.75 million, required to be removed from its plant account, in the rate case filed by Transmission on August 30, 1996. The DOA is conducting a review of Transmission's books and records as to the construction costs of the Phase III expansion. There has been no indication at this point that the auditors have found any costs not properly charged. The FERC's Division of Enforcement (DOE) is conducting an informal investigation as to the possible non-compliance with certain environmental conditions attached to the FERC certificate authorizing the Phase III expansion. DOE has not informed the Company's management of the identification of costs not properly recoverable by Transmission. By order issued November 27, 1996, the FERC consolidated the Phase III cost audit and the DOE informal investigation with Transmission's rate case in Docket No. RP96-366-000. Discovery is underway, and the Company's management believes settlement discussions will begin in a few months. The outcome of these matters cannot be determined at this time; however, management believes that the ultimate resolution of these matters will not have a material adverse effect on the Company's financial position or results of operations. IV-18 88 CITRUS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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, 1996 and 1995 are as follows (in thousands):
1996 1995 ------------------------ ------------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value ------------------------ ------------------------- Cash and cash equivalents $ 16,063 $ 16,063 $ 2,985 $ 2,985 Contract reformation costs, net 7,078 7,078 33,584 33,584 TCR deferred revenues 6,256 6,256 37,392 37,392 Notes payable to banks 15,000 15,000 70,000 70,000 Long-term debt 1,125,000 1,245,688 1,125,000 1,325,276
The carrying amount of cash and cash equivalents, contract reformation costs, TCR deferred revenues and notes payable reasonably approximate their fair value. The fair value of long-term debt is based upon market quotations of similar debt at interest rates currently available. IV-19 89 APPENDIX TO ANNUAL REPORT ON FORM 10-K OF SONAT INC. FOR THE YEAR ENDED DECEMBER 31, 1996 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-14 Map of the Southeastern United States showing the approximate location of the pipeline systems of Southern, Florida Gas, and SIA (as described on pages I-7, I-12, and I-16, respectively), and the underground storage facilities of Southern (as described on page I-8 and I-9).
EX-4.2.C 2 SPECIMEN NOTE OF SONAT INC. 1 EXHIBIT 4.2(c) [Form of Face of Note] $_____________ No._______ SONAT INC. 9 1/2 % Note due August 15, 1999 SONAT INC., a corporation duly organized and existing under the laws of the State of Delaware (herein referred to as the "Company", which term shall also include any successor corporation), for value received, hereby promises pay to _______________, or registered assigns, at the office or agency of the Company in the Borough of Manhattan, The City of New York, the principal sum ______________ Dollars on August 15, 1999, in such coin or currency if the -- United States of Americas as at the time of payment shall be legal tender for the payment of public and private debts, and to pay interest on said principal sum at the rate of 9 1/2 % per annum, at said office or agency, in like coin or currency, from the February 15 or August 15, as the case may be, next preceding the date hereof to which interest has been paid (unless the date hereof is a February 15 or August 15 to which interest has been paid, in which case from the date hereof, or unless no interest has been paid hereon, in which case from August 15, 1989, or unless the date hereof is between April 15 or October 15, as the case may be, and the following February 1 or August 1, in which case from such February 15 or August 15, provided, however, that if the Company shall default in payment of the interest due on such February 15 or August 15, then from the next preceding date to which interest has been paid or if no interest has been paid on the Notes, then from August 15, 1989) semi-annually on February 15 or August 15 of each year, beginning on February 15, 1990, until said principal sum shall have become due and payable, and similarly to pay interest at the same rate per annum on any overdue principal and (to the extent that payment of such interest is enforceable under applicable law) on any overdue installment of interest. The interest so payable on any February 15 or August 15 will, subject to certain exceptions provided in the Indenture referred to on the reverse hereof, be paid to the person in whose name this Note is registered at the close of business on the February 1 or August 1, as the case may be, next preceding such February 15 or August 15 and may, at the Company's option, be paid by check to such person mailed to the address shown on the Note register. The provisions of this Note are continued on the reverse hereof and such continued provisions shall for all purposes have the same effect as though fully set forth at this place. 2 This Note shall not be valid or become obligatory for any purpose until the certificate of authentication heron shall have been signed by the Trustee under the aforesaid Indenture. WITNESS the facsimile seal of the Company and the facsimile signatures of its duly authorized officers. Dated: SONAT INC. By ________________________________ Chairman of the Board ATTESTED: By ________________________ Secretary Trustee's Certificate of Authentication This is one of the Securities of the series designated herein referred to in the within-mentioned Indenture. MANUFACTURERS HANOVER TRUST COMPANY, as Trustee By _____________________________ Authorized Officer 3 [Form of Reverse of Note] SONAT INC. 9 1/2 % Note due August 15, 1999 This Note is one of a duly authorized issue of debentures, notes or other evidences of indebtedness of the Company (herein referred to as the "Securities") of the series hereinafter specified, all issued or to be issued under and pursuant to an indenture dated as of June 1, 1987 (herein referred to as the "Indenture"), duly executed and delivered by the Company to MANUFACTURERS HANOVER TRUST COMPANY, Trustee, a corporation organized and existing under the laws of the State of New York (hereinafter referred to as the "Trustee"). Reference is made to the Indenture and all indentures supplemental thereto for a description of the rights, limitations of the rights, obligations, duties and immunities thereunder of the Trustee, the Company and the Holders of the Securities and of the terms upon which the Securities are, and are to be, authenticated and delivered. The Securities may be issued in one or more series, which different series may be issued in various aggregate principal amounts, may mature at different times, may bear interest (if any) at different rates, may be subject to different redemption or sinking fund provisions (if any), may be subject to different covenants and Events of Default and may otherwise vary as in the Indenture provided. This Note is one of the series designated as the 9 1/2% Notes due August 15, 1999 of the Company (herein referred to as the "Notes") limited in aggregate principal amount to $100,000,000. In case an Event of Default, as defined in the Indenture, with respect to the Notes shall have occurred and be continuing, the principal of all of the Notes and the occurred interest thereon my be declared, and upon such declaration shall become, due and payable, and such declaration may in certain events be rescinded by the Holders of a majority in aggregate principal amount of the Notes at the time Outstanding, in the manner, with the effect and subject to the conditions provided in the Indenture. The Indenture also provides that the Holders of the majority in aggregate principal amount of the Notes at the time Outstanding may waive (with certain exceptions) any past default under the Indenture and its consequences. The Indenture contains provisions permitting the Company and the Trustee, with the consent of the Holders of a majority in aggregate principal amount of the Securities at the time Outstanding of each series to be affected, evidenced as in the Indenture provided, to execute supplemental indentures adding any provisions to or changing in any manner or eliminating any of the provisions of the Indenture or of any supplemental indenture or modifying in any manner the rights of the Holders of the Securities of each such series; provided, however, that no such supplemental indenture shall (i) change the stated maturity date of any Security, or reduce the rate or change the time of payment of interest thereon, or reduce the principal amount 4 thereof or any premium thereon, or make the principal thereof or any premium or interest thereon payable in any coin or currency other than that hereinbefore provided, without the consent of the Holder of such Security, or (ii) reduce the aforesaid percentage of Securities, the Holders of which are required to consent to any such supplemental indenture, without the consent of the Holders of all Securities affected thereby. Any such waiver or consent by the Holder of this Note (unless effectively revoked as provided in the Indenture) shall be conclusive and binding upon such Holder and upon all future Holders and owners of this Note and of any Notes issued in exchange herefor or in lieu hereof, irrespective of whether any notation of such waiver or consent is made upon this Note. No reference herein to the Indenture and no provision of this Notes or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and interest on this Note at the time and place and at the rate and in the coin or currency herein prescribed. In the event of the consolidation or merger of the obligor hereon into, or the sale or conveyance of its property as an entirety or substantially as an entirety to, a successor corporation in accordance with the provisions of the Indenture, such successor corporation shall be fully substituted for the predecessor corporation as obligor heron; and in the case of any such sale or conveyance, such predecessor corporation shall be released from its liability as such obligor, all as more fully set forth in the Indenture. The Notes are issuable in registered form without coupons in denominations of $1,000 and any integral multiples thereof. At the Principal Office of the Trustee in said Borough of Manhattan and in the manner and subject to the limitations provided in the Indenture and upon payment of a sum sufficient to cover any tax or governmental charge that may be imposed in relation thereto, Notes of any denomination may be exchanged for a like aggregate principal amount of Notes of any other authorized denomination or denominations. The Notes may not be redeemed prior to maturity. The Indenture contains provisions for defeasance at any time of (a) the entire indebtedness of the Company on this Note and (b) a restrictive covenant and the related Events of Default, upon compliance by the Company with certain conditions set forth therein, which provisions apply to this Note. This Note is transferable by the registered Holder hereof in person or by his attorney duly authorized in writing at the Principal Office of the Trustee in said Borough of Manhattan, but only in the manner and subject to the limitations provide in the Indenture and upon payment of a sum sufficient to cover any tax or governmental charge that may be imposed in relation thereto, and upon surrender and cancellation of this Note. Upon any such transfer a new Note or Notes of authorized denominations, for the same aggregate principal amount, will be issued to the transferee in exchange herefor. 5 Prior to due presentment for registration of transfer of any Note, the Company, the Trustee, any Paying Agent and any Note registrar may deem and treat the person in whose name this Notes registered as the absolute owner hereof for the purpose of receiving payment as herein provided and for all other purposes whether or not this Note be overdue and notwithstanding any notation of ownership or other writing hereon made by anyone other than the Company or any Note registrar, and neither the Company, the Trustee, any Paying Agent nor any Note registrar shall be affected by notice to the contrary. No recourse shall be had for the payment of the principal of or the interest on this Note, or for any claim based hereon, or otherwise in respect hereof, or based on or in respect of the Indenture or any indenture supplemental thereto, against any incorporator, stockholder, officer or director, as such, past, present or future, of the Company or of any successor corporation, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise, all such liability being, by the acceptance hereof and as part of the consideration for the issue hereof, expressly waived and released. Terms used herein which are defined in the Indenture shall have the respective meanings assigned thereto in the Indenture. EX-4.3.D 3 SPECIMEN NOTE OF SOUTHERN NATURAL GAS COMPANY 1 EXHIBIT 4.3(d) [Form of Face of Note] $_____________ No.________ SOUTHERN NATURAL GASCOMPANY 8 5/8% Note due May 1, 2002 SOUTHERN NATURAL GAS COMPANY, a corporation duly organized and existing under the laws of the State of Delaware (herein referred to as the "Company", which term shall also include any successor corporation), for value received, hereby promises to pay to _______________, or registered assigns, at the office or agency of the Company in the Borough of Manhattan, The City of New York, the principal sum of ______________ Dollars on May 1, 2002, in such coin or currency if the United States of Americas as at the time of payment shall be legal tender for the payment of public and private debts, and to pay interest on said principal sum at the rate of 8 5/8 % per annum, at said office or agency, in like coin or currency, from the May 1 or November 1, as the case may be, next preceding the date hereof to which interest has been paid (unless the date hereof is a May 1 or November 1 to which interest has been paid, in which case from the date hereof, or unless no interest has been paid hereon, in which case from May 1, 1992, or unless the date hereof is between April 15 or October 15, as the case may be, and the following May 1 or November 1, in which case from such May 1 or November 1, provided, however, that if the Company shall default in payment of the interest due on such May 1 or November 1, then from the next preceding date to which interest has been paid or if no interest has been paid on the Notes, then from May 1, 1992) semi-annually on May 1 or November 1 of each year, beginning on November 1, 1992, until said principal sum shall have become due and payable, and similarly to pay interest at the same rate per annum on any overdue principal and (to the extent that payment of such interest is enforceable under applicable law) on any overdue installment of interest. The interest so payable on any May 1 or November 1 will, subject to certain exceptions provided in the Indenture referred to on the reverse hereof, be paid to the person in whose name this Note is registered at the close of business on the April 15 or October 15, as the case may be, next preceding such May 1 or November 1 and may, at the Company's option, be paid by check to such person mailed to the address shown on the Note register. The provisions of this Note are continued on the reverse hereof and such continued provisions shall for all purposes have the same effect as though fully set forth at this place. 2 This Note shall not be valid or become obligatory for any purpose until the certificate of authentication heron shall have been signed by the Trustee under the aforesaid Indenture. WITNESS the facsimile seal of the Company and the facsimile signatures of its duly authorized officers. Dated: SOUTHERN NATURAL GAS COMPANY By ________________________________ Chairman of the Board ATTESTED: By ________________________ Secretary Trustee's Certificate of Authentication This is one of the Securities of the series designated herein referred to in the within-mentioned Indenture. MANUFACTURERS HANOVER TRUST COMPANY, as Trustee By _____________________________ Authorized Officer 3 [Form of Reverse of Note] SOUTHERN NATURAL GAS COMPANY 8 5/8% Note due May 1, 2002 (continued) This Note is one of a duly authorized issue of debentures, notes or other evidences of indebtedness of the Company (herein referred to as the "Securities") of the series hereinafter specified, all issued or to be issued under and pursuant to an indenture dated as of June 1, 1987 (herein referred to as the "Indenture"), duly executed and delivered by the Company to MANUFACTURERS HANOVER TRUST COMPANY, Trustee, a corporation organized and existing under the laws of the State of New York (hereinafter referred to as the "Trustee"). Reference is made to the Indenture and all indentures supplemental thereto for a description of the rights, limitations of the rights, obligations, duties and immunities thereunder of the Trustee, the Company and the Holders of the Securities and of the terms upon which the Securities are, and are to be, authenticated and delivered. The Securities may be issued in one or more series, which different series may be issued in various aggregate principal amounts, may mature at different times, may bear interest (if any) at different rates, may be subject to different redemption or sinking fund provisions (if any), may be subject to different covenants and Events of Default and may otherwise vary as in the Indenture provided. This Note is one of the series designated as the 8 5/8% Notes due May 1, 2002 of the Company (herein referred to as the "Notes") limited in aggregate principal amount to $100,000,000. In case an Event of Default, as defined in the Indenture, with respect to the Notes shall have occurred and be continuing, the principal of all of the Notes and the occurred interest thereon my be declared, and upon such declaration shall become, due and payable, and such declaration may in certain events be rescinded by the Holders of a majority in aggregate principal amount of the Notes at the time Outstanding, in the manner, with the effect and subject to the conditions provided in the Indenture. The Indenture also provides that the Holders of the majority in aggregate principal amount of the Notes at the time Outstanding may waive (with certain exceptions) any past default under the Indenture and its consequences. The Indenture contains provisions permitting the Company and the Trustee, with the consent of the Holders of a majority in aggregate principal amount of the Securities at the time Outstanding of each series to be affected, evidenced as in the Indenture provided, to execute supplemental indentures adding any provisions to or changing in any manner or eliminating any of the provisions of the Indenture or of any supplemental indenture or modifying in any manner the rights of the Holders of the Securities of each such series; provided, however, that no such 4 supplemental indenture shall (i) change the stated maturity date of any Security, or reduce the rate or change the time of payment of interest thereon, or reduce the principal amount thereof or any premium thereon, or make the principal thereof or any premium or interest thereon payable in any coin or currency other than that hereinbefore provided, without the consent of the Holder of such Security, or (ii) reduce the aforesaid percentage of Securities, the Holders of which are required to consent to any such supplemental indenture, without the consent of the Holders of all Securities affected thereby. Any such waiver or consent by the Holder of this Note (unless effectively revoked as provided in the Indenture) shall be conclusive and binding upon such Holder and upon all future Holders and owners of this Note and of any Notes issued in exchange herefor or in lieu hereof, irrespective of whether any notation of such waiver or consent is made upon this Note. No reference herein to the Indenture and no provision of this Notes or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and interest on this Note at the time and place and at the rate and in the coin or currency herein prescribed. In the event of the consolidation or merger of the obligor hereon into, or the sale or conveyance of its property as an entirety or substantially as an entirety to, a successor corporation in accordance with the provisions of the Indenture, such successor corporation shall be fully substituted for the predecessor corporation as obligor heron; and in the case of any such sale or conveyance, such predecessor corporation shall be released from its liability as such obligor, all as more fully set forth in the Indenture. The Notes are issuable in registered form without coupons in denominations of $1,000 and any integral multiples thereof. At the Principal Office of the Trustee in said Borough of Manhattan and in the manner and subject to the limitations provided in the Indenture and upon payment of a sum sufficient to cover any tax or governmental charge that may be imposed in relation thereto, Notes of any denomination may be exchanged for a like aggregate principal amount of Notes of any other authorized denomination or denominations. The Notes may not be redeemed prior to maturity. The Indenture contains provisions for defeasance at any time of (a) the entire indebtedness of the Company on this Note and (b) a restrictive covenant and the related Events of Default, upon compliance by the Company with certain conditions set forth therein, which provisions apply to this Note. This Note is transferable by the registered Holder hereof in person or by his attorney duly authorized in writing at the Principal Office of the Trustee in said Borough of Manhattan, but only in the manner and subject to the limitations provide in the Indenture and upon payment of a sum sufficient to cover any tax or governmental charge that may be imposed in relation thereto, and upon surrender and cancellation of this Note. 5 Upon any such transfer a new Note or Notes of authorized denominations, for the same aggregate principal amount, will be issued to the transferee in exchange herefor. Prior to due presentment for registration of transfer of any Note, the Company, the Trustee, any Paying Agent and any Note registrar may deem and treat the person in whose name this Notes registered as the absolute owner hereof for the purpose of receiving payment as herein provided and for all other purposes whether or not this Note be overdue and notwithstanding any notation of ownership or other writing hereon made by anyone other than the Company or any Note registrar, and neither the Company, the Trustee, any Paying Agent nor any Note registrar shall be affected by notice to the contrary. No recourse shall be had for the payment of the principal of or the interest on this Note, or for any claim based hereon, or otherwise in respect hereof, or based on or in respect of the Indenture or any indenture supplemental thereto, against any incorporator, stockholder, officer or director, as such, past, present or future, of the Company or of any successor corporation, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise, all such liability being, by the acceptance hereof and as part of the consideration for the issue hereof, expressly waived and released. Terms used herein which are defined in the Indenture shall have the respective meanings assigned thereto in the Indenture. EX-10.1 4 SUPPLEMENTAL BENEFIT PLAN OF SONAT INC. 1 EXHIBIT 10.1 SONAT INC. SUPPLEMENTAL BENEFIT PLAN (AS AMENDED AND RESTATED EFFECTIVE JANUARY 1, 1995) ARTICLE I - PURPOSE AND HISTORY 1.1 PURPOSE This Supplemental Benefit Plan, as amended and restated herein (the "Plan"), is adopted by Sonat Inc. (the "Company") on its own behalf and on behalf of its subsidiaries and affiliates (the "Employers") which are participating companies in the Sonat Inc. Retirement Plan (the "Retirement Plan") and/or the Sonat Savings Plan (formerly the Sonat Inc. Stock Purchase Plan) (the "Savings Plan"). The purposes of this Plan are: (i) To provide benefits ("Excess Retirement Plan Benefits") in excess of the limitations imposed by Sections 401(a)(9), 401(a)(17), 415, and/or the incidental benefit requirements of the Internal Revenue Code of 1986, as amended (the "Code"), on the Retirement Plan. (ii) To provide benefits ("Vesting Benefits") to certain employees whose rights to Vested Benefits have not vested under Article 5 of the Retirement Plan in the event that their employment is terminated after a Change of Control (as defined in Section 4.3 below). (iii) To provide benefits ("Excess Savings Plan Benefits") to employees whose ability to make employee contributions or to receive employer contributions to the Savings Plan is limited by Sections 401(a)(17), 401(m), and/or 415 of the Code. 2 2 1.2 HISTORY OF THE PLAN The Plan was adopted on July 28, 1983, as an amendment and restatement of the Company's Supplemental Pension Plan, which was adopted effective January 1, 1976. The Plan was amended and restated as of January 1, 1985 in order to (1) provide certain "Excess Disability Benefits", (2) conform the references in the Plan to the provisions of the Retirement Plan and the Sonat Inc. Stock Purchase Plan as in effect on the date thereof, and (3) clarify the meaning and intent of the Plan. The Plan was amended and restated as of January 1, 1987 in order to (1) provide that Excess Retirement Plan Benefits and Excess Savings Plan Benefits include benefits in excess of the limitations imposed by Section 401(a)(17) of the Code (as well as Section 415 of the Code) on the Retirement Plan and Savings Plan, (2) provide as Excess Savings Plan Benefits matching contributions on amounts an employee is unable to contribute to the Savings Plan by reason of the limitations imposed by Sections 401(a)(17), 401(m), and/or 415 of the Code, (3) modify the time of commencement and form in which Excess Retirement Plan Benefits, Excess Savings Plan Benefits and Vesting Benefits are paid, (4) provide for the accelerated distribution of Excess Savings Plan Benefits in the event of a Participant's Termination of Employment following a Change of Control (as defined herein) and (5) transfer the provisions and obligations relating to Excess Disability Benefits from this Plan to the Sonat Inc. Supplemental Disability Plan (the "Supplemental Disability Plan"). The Plan was amended effective as of September 6, 1989 to reflect an amendment to the Retirement Plan permitting participants to elect that benefits payable to a child be instead payable to a trust for the benefit of such child. The Plan was amended and restated as of December 1, 1991 in order to further modify the time of commencement and form in which Excess Retirement Plan Benefits, Excess Savings Plan Benefits and Vesting Benefits are paid. The Plan was amended and restated effective as of February 25, 1993 in order to provide flexibility to participants as to the time of commencement and form in which Excess Retirement Plan Benefits and Excess Savings Plan Benefits are paid. 3 3 The Plan was amended effective as of July 1, 1993 to clarify the provisions applicable to employees of Sonat Offshore Drilling Inc. ("SODI") and its subsidiaries whose benefits under the Retirement Plan and the Savings Plan were transferred to plans established by SODI following the initial public offering of SODI common stock ("SODI Employees"). The Plan was amended effective as of April 28, 1994 to change the interest rate used for purposes of the definition of Actuarial Equivalent. The Plan is amended and restated as of the date hereof in order to (1) provide that amounts credited as Excess Savings Plan Benefits will be deemed invested in phantom shares of common stock of the Company and/or phantom shares of certain mutual funds, and (2) permit the payment of Excess Retirement Plan Benefits to a trust for the benefit of one or more children of the participant. ARTICLE II - EXCESS RETIREMENT PLAN BENEFITS 2.1 ELIGIBILITY Each employee whose Retirement Benefit or Vested Benefit from the Retirement Plan is limited by Code Sections 401(a)(17) and/or 415 and the incorporation of those limitations in the Retirement Plan or whose Survivors Benefits under the Retirement Plan are limited by Code Section 401(a)(9) or the incidental benefit requirements of the Code and the incorporation of such limitations in the Retirement Plan (a "Participant") shall be entitled to Excess Retirement Plan Benefits under this Plan, regardless of whether such Participant has received notice that he or she is so entitled. All capitalized terms used in this Article II and not defined in this Plan shall have the meanings ascribed thereto in the Retirement Plan. 2.2 DETERMINATION OF APPLICABLE FORM OF BENEFIT If a Participant's date of Termination of Continuous Employment occurred prior to December 1, 1991, such Participant's Excess Retirement Plan Benefits shall be paid in annuity form as provided in Section 2.4 below ("Annuity Form"). If a Participant's date 4 4 of Termination of Continuous Employment occurred on or after December 1, 1991, such Participant's Excess Retirement Plan Benefits shall be paid in lump sum form as provided in Section 2.3 below ("Lump Sum Form") unless, at least twelve full calendar months before the date of the Participant's Termination of Continuous Employment, the Participant filed with the Company an irrevocable written election to have such benefits paid in Annuity Form, in which case such benefits shall be paid in Annuity Form. Notwithstanding any other provision of the Plan, a Participant's election with respect to the portion of his or her Excess Retirement Plan Benefit attributable to his or her retirement benefit shall determine the Form in which the portion of such benefit attributable to any related survivor benefit is paid. 2.3 LUMP SUM FORM The following provisions of this Section 2.3 apply to Excess Retirement Plan Benefits which are paid in Lump Sum Form. (a) BENEFIT UPON TERMINATION OF CONTINUOUS EMPLOYMENT. Upon the Termination of Continuous Employment (other than death) of a Participant who is entitled to a Retirement Benefit or a Vested Benefit and whose Excess Retirement Plan Benefits are payable in Lump Sum Form, such Participant shall be entitled to an Excess Retirement Plan Benefit, payable in the form of a cash lump sum, that is equal to the sum of: (1) the "Actuarial Equivalent" (as defined in Section 2.3(d) below) of the excess, if any, of (i) the amount that hypothetically would have been payable to the Participant as a Retirement Benefit or a Vested Benefit, as the case may be, under the Retirement Plan if Sections 401(a)(17) and 415 of the Code were nonexistent and the provisions of the Retirement Plan incorporating the limitations contained in Sections 401(a)(17) and 415 of the Code were inoperative, over (ii) the amount which hypothetically would have been payable to the Participant as a Retirement Benefit or Vested Benefit, as the case may be, 5 5 under the Retirement Plan upon application of the actual terms of the Retirement Plan, assuming that for purposes of clauses (i) and (ii) the Participant elected to receive such Benefit in the form of a single life annuity commencing on the earliest date on which the Participant may commence receipt of his Retirement Benefit or Vested Benefit, as the case may be, under the terms of the Retirement Plan; plus (2) if the Participant is entitled to a Retirement Benefit and has an Eligible Spouse (as defined in Section 2.3(e) below) on the date of such Termination of Continuous Employment, the Actuarial Equivalent of the excess, if any, of (i) the amount that hypothetically would have been payable to the Eligible Spouse as a Survivors Benefit under the Retirement Plan upon the death of the Participant if Sections 401(a)(17) and 415 of the Code were nonexistent and Section 7.10 and the provisions of the Retirement Plan incorporating the limitations contained in Sections 401(a)(17) and 415 of the Code were inoperative, over (ii) the amount which hypothetically would have been payable to the Eligible Spouse as a Survivors Benefit under the Retirement Plan upon application of the actual terms of the Retirement Plan, with such excess to be valued as a reversionary annuity, payable immediately upon the death of the Participant, using the interest rate and mortality table set forth in Section 2.3(d). Such cash lump-sum payment shall be paid as soon as practicable (and within 30 days) after the Participant's Termination of Continuous Employment. (b) CERTAIN SURVIVOR BENEFITS. Upon the death of a Participant whose Excess Retirement Plan Benefits are payable in Lump Sum Form, either (1) after the Participant's Termination of Continuous Employment (if such Participant was entitled to a Retirement Benefit and did not have an Eligible Spouse at the date of such Termination of Continuous Employment), or 6 6 (2) prior to the Participant's Termination of Continuous Employment, his or her Eligible Spouse (or, if the Participant has no Eligible Spouse at the date of death, each of the Participant's Eligible Children) shall be entitled to an Excess Retirement Plan Benefit, payable in the form of a cash lump sum, that is equal to the Actuarial Equivalent of the excess, if any, of (i) the amount that hypothetically would have been payable to the Eligible Spouse or such Eligible Child (as the case may be) as a Survivors Benefit under the Retirement Plan upon the death of the Participant if Sections 401(a)(17) and 415 of the Code were nonexistent and Section 7.10 and the provisions of the Retirement Plan incorporating the limitations contained in Section 401(a)(17) and 415 of the Code were inoperative, over (ii) the amount actually payable to the Eligible Spouse or such Eligible Child (as the case may be) as a Survivors Benefit under the Retirement Plan upon application of the actual terms of the Retirement Plan. Such lump-sum payment shall be paid as soon as practicable (and within 30 days) after the Participant's death. (c) ADDITIONAL SURVIVORS BENEFITS TO ELIGIBLE CHILDREN. If the Participant's Eligible Spouse dies after the date of death of the Participant, the Participant's Eligible Children shall each be entitled to an Excess Retirement Plan Benefit, payable in the form of a cash lump sum, that is equal to the Actuarial Equivalent of the excess, if any, of (i) the amount that hypothetically would have been payable to such Eligible Child as a Survivors Benefit under the Retirement Plan if Sections 401(a)(17) and 415 of the Code were nonexistent and Section 7.10 and the provisions of the Retirement Plan incorporating the limitations contained in Section 401(a)(17) and 415 of the Code were inoperative, over (ii) the amount actually payable to such Eligible Child as a Survivors Benefit under the Retirement Plan. Such cash lump-sum payment shall be paid as soon as practicable (and within 30 days) after the Eligible Spouse's death. (d) DEFINITION OF ACTUARIAL EQUIVALENT. For purposes of Section 2.3 and Section 4.2, "Actuarial Equivalent" shall mean a benefit actuarially equal in value to the 7 7 value of a given benefit in a given form or schedule, based upon (1) the 1983 Group Annuity Mortality Table (or, if different, the mortality table or tables used to calculate Actuarial Equivalents under the Retirement Plan as of the date on which an Actuarial Equivalent is being determined under this Plan) and (2) an interest rate equal to the yield on new 7-12 year AA-rated general obligation tax-exempt bonds as determined by Merrill Lynch & Co. (or its affiliates) and published in The Wall Street Journal (or other financial publication) on the business day immediately preceding the date of the Participant's Termination of Continuous Employment (for calculation of Actuarial Equivalents under Sections 2.3(a) and 4.2 of this Plan), the date of the Participant's death (for calculation of Actuarial Equivalents under Section 2.3(b) of this Plan), or the date of the Participant's Eligible Spouse's death (for calculation of Actuarial Equivalents under Section 2.3(c) of this Plan) (or, if such yield is not so determined and published on such business day, on the most immediately preceding day on which such yield was so determined and published); provided, however, that if such yield has not been so determined and published within 90 days prior to the date of the Participant's Termination of Continuous Employment or death or the date of the Participant's Eligible Spouse's death (as the case may be), the interest rate shall be the yield on substantially similar securities on the business day preceding the applicable date as determined by AmSouth Bank N.A. upon the request of either the Company or the Participant, Eligible Spouse or Eligible Child (as the case may be). Notwithstanding the preceding provisions of this Section 2.3(d), if the only Survivors Benefit to which an Eligible Spouse is entitled under the Retirement Plan is an ERISA Preretirement Survivor Annuity, determination of Actuarial Equivalent under Section 2.3(b) shall be based upon the assumption that payment of the amounts described in clauses (i) and (ii) of Section 2.3(b) commence on the first day of the month immediately following the later of the date on which the Participant would have attained age 55 or the Participant's date of death. (e) DEFINITION OF ELIGIBLE SPOUSE. For purposes of Section 2.3, "Eligible Spouse" shall mean the person who was married to the Participant under the laws of 8 8 the State where the marriage was contracted throughout the one year period ending on the earlier of the date on which the Participant has a Termination of Continuous Employment or the date of the Participant's death. If the Participant does not have an Eligible Spouse on the date of Termination of Continuous Employment, the person who was married to the Participant under the laws of the State where the marriage was contracted throughout the one year period ending on the date of the Participant's death shall be the Participant's Eligible Spouse. In no event may a Participant have more than one Eligible Spouse under this Plan. 2.4 ANNUITY FORM The following provisions of this Section 2.4 apply to Excess Retirement Plan Benefits which are paid in Annuity Form. (a) RETIREMENT ANNUITY. Each Participant who is entitled to a Retirement Benefit or a Vested Benefit and whose Excess Retirement Plan Benefits are payable in Annuity Form shall be entitled to Excess Retirement Plan Benefits equal to the excess, if any, of (i) the amount that hypothetically would have been payable to the Participant as a Retirement Benefit or a Vested Benefit, as the case may be, under the Retirement Plan (after any increases in Retirement Benefits or Vested Benefits payable generally under the Company's retirement program which take effect after the Participant's Termination of Continuous Employment) if Sections 401(a)(17) and 415 of the Code were nonexistent and the provisions of the Retirement Plan incorporating the limitations contained in Sections 401(a)(17) and 415 of the Code were inoperative, over (ii) the amount which hypothetically would have been payable to the Participant as a Retirement Benefit or Vested Benefit, as the case may be, under the Retirement Plan upon application of the actual terms of the Retirement Plan, assuming that for purposes of clauses (i) and (ii) the Participant elected to receive such Benefit in the form of a single life annuity commencing on the date on which the Participant actually commences receipt of his Retirement Benefit or Vested Benefit, as the case may be, 9 9 under the Retirement Plan. Excess Retirement Plan Benefits shall be paid commencing at the time and in the form provided below: (i) If the Participant is entitled to a Retirement Benefit under the Retirement Plan, the Participant's Excess Retirement Plan Benefit shall be payable to the Participant in the form of a single life annuity, in monthly installments commencing (A) on the Participant's early or normal retirement date, as the case may be, under the Retirement Plan; or (B) in the case of a Participant entitled to a Projected Retirement Benefit, upon his or her Termination of Continuous Employment. (ii) If the Participant is entitled to a Vested Benefit under the Retirement Plan, the amount of the Participant's Excess Retirement Plan Benefit shall be calculated using the Retirement Plan's early benefit commencement factors (which are incorporated in the Retirement Plan's definition of Actuarial Equivalent) and the Section 415 limits which apply for the benefit commencement date elected by the Participant under the Retirement Plan. However, payment of such Excess Retirement Plan Benefit shall not commence until the first day of the month following the Participant's attainment of normal retirement age. Such Benefit shall be payable (1) to the Participant in the form of a single life annuity if the Participant does not have a Spouse at the time the Excess Retirement Plan Benefit commences, and (2) to the Participant and his or her Spouse in the form of a 50% joint and survivor annuity if the Participant has a Spouse at the time the Excess Retirement Plan Benefit commences. (iii) If payment of the Participant's Vested Benefit under the Retirement Plan commences prior to the first day of the month following the 10 10 Participant's attainment of normal retirement age, the Company shall create and maintain on its books an account for such Participant (the "Vested Benefits Account") to which the Company shall credit the following amounts. At the beginning of each month beginning with the first month for which the Participant receives a Vested Benefit under the Retirement Plan and ending with the month in which the Participant attains normal retirement age, the Company shall credit the Vested Benefits Account with an amount equal to the amount of the Excess Retirement Plan Benefit calculated under Section 2.4(a)(ii) above. At the end of each calendar quarter beginning with the first calendar quarter in which an amount is credited pursuant to the preceding sentence and ending with the calendar quarter referred to in the following sentence, the Company shall also credit to such Vested Benefits Account a sum which is equal to the product of (i) the average balance in such Account for the calendar quarter (without regard to any debits made at the end of the calendar quarter) times (ii) one-fourth of the annual prime rate for corporate borrowers quoted by The Chase Manhattan Bank, N.A. at the beginning of the calendar quarter. At the end of the calendar quarter in which occurs the earlier of the Participant's attainment of normal retirement age or the Participant's death, the Company shall debit the Participant's Vested Benefits Account and pay to such Participant (or in the event of the Participant's death, to his or her Beneficiary) the entire balance in such Account. (b) SURVIVOR ANNUITY. Each Eligible Family Member of a Participant under the Retirement Plan shall be entitled to Excess Retirement Plan Benefits equal to the excess, if any, of (i) the amount that hypothetically would have been payable to the Eligible Family Member as a Survivors Benefit under the Retirement Plan (after any 11 11 increases in Survivors Benefits payable generally under the Company's retirement program which take effect after the Participant's death) if Sections 401(a)(17) and 415 of the Code were nonexistent and Section 7.10 and the provisions of the Retirement Plan incorporating the limitations contained in Section 401(a)(17) and 415 of the Code were inoperative, over (ii) the amount actually payable to the Eligible Family Member as a Survivors Benefit under the Retirement Plan. Excess Retirement Plan Benefits shall be paid to the Eligible Family Members, commencing on the first day of the month following the death of the Participant, as follows: (i) If the Participant's Eligible Family Members include an Eligible Spouse (which term, for purposes of this Section 2.4, shall have the meaning set forth in the Retirement Plan), the Excess Retirement Plan Benefits for such Eligible Family Members shall be payable to such Eligible Spouse until such person dies or is no longer an Eligible Spouse. (ii) If Excess Retirement Plan Benefits cease to be payable to an Eligible Spouse, or in the event there is no Eligible Spouse at the date of the Participant's death, the Excess Retirement Plan Benefits otherwise payable to such Eligible Spouse shall be payable to an Eligible Child, until the earlier of the death of such Eligible Child or the date on which he or she ceases to be an Eligible Child, with such Benefits to be divided equally among the Eligible Children in the event that there is more than one Eligible Child. In the event there is more than one Eligible Child and Excess Retirement Plan Benefits cease with respect to one Eligible Child, each subsequent payment of Excess Retirement Plan Benefits will be divided equally among the remaining Eligible Children. 12 12 Notwithstanding the preceding provisions of this Section 2.4(b), if the only Survivor's Benefit to which the Eligible Family Member is entitled under the Retirement Plan is an ERISA Preretirement Survivor Annuity, (i) payment of the Excess Retirement Plan Benefits shall commence on the first day of the month immediately following the later of the date on which the Participant would have attained age 55 or the Participant's date of death, and (ii) the Excess Retirement Plan Benefits shall cease to be payable upon the death of the Eligible Spouse. 2.5 DEFINITION OF ELIGIBLE CHILD For purposes of Section 2.3 and 2.4, the term "Eligible Child" shall mean the deceased Participant's Eligible Child (as defined in the Retirement Plan). However, if the Participant has so elected under the Retirement Plan, payments which otherwise would be made to an Eligible Child shall be made to an Eligible Trust (as defined in the Retirement Plan). Notwithstanding the Participant's election to have payments made to a trust, if the Administrative Committee of the Retirement Plan determines that the trust is not an Eligible Trust at the time payment to such trust is to be made, such payment shall not be made to the trust and shall instead be made directly to the Participant's Eligible Child. 2.6 PROVISIONS REGARDING SODI EMPLOYEES (a) For purposes of Article II, all references to the Retirement Plan as it relates to SODI Employees (as defined in Section 1.2) shall be deemed to refer to such plan as in effect on June 30, 1993. In no event shall SODI Employees accrue benefits under Article II of this Plan after June 30, 1993 (unless rehired by the Company). (b) For purposes of determining the timing of benefit payments under this Plan, SODI Employees shall not be deemed to have incurred a Termination of Continuous Employment by virtue of the initial public offering of SODI common stock, but shall instead be deemed to have incurred a Termination of Continuous Employment 13 13 upon the termination of their employment with SODI and its subsidiaries (as defined for purposes of the SODI retirement plan). (c) Retirement, Vested and Survivor Benefits of SODI Employees under this Plan shall be determined based on the SODI Employee's accrued retirement or vested benefit, as the case may be (under the Retirement Plan and this Plan), as of June 30, 1993 and the maximum dollar limit under Code Section 415(b) and the defined benefit fraction under Code Section 415(e) applicable as of June 30, 1993. In addition, where the SODI Employee's Termination of Continuous Employment occurs before the SODI Employee has attained age 65, the benefits payable under this Plan shall be determined as follows. (1) In the case of a SODI Employee who is eligible for early retirement under the Retirement Plan on the date of his or her Termination of Continuous Employment, the Participant's benefit accrued as of June 30, 1993 (under both the Retirement Plan and this Plan) payable at age 65 shall first be reduced to the date of the Participant's Termination of Continuous Employment using the early retirement factors in the Retirement Plan as in effect on June 30, 1993, and from this amount there shall be subtracted the amount of the Participant's June 30, 1993 accrued benefit payable under the Retirement Plan, calculated using the Code Section 415 limits in effect on June 30, 1993 as adjusted to reflect early commencement of the benefit on the date of the Participant's Termination of Continuous Employment. (2) In the case of a SODI Employee who is not eligible for early retirement under the Retirement Plan on the date of his or her Termination of Continuous Employment, the Participant's benefit accrued as of June 30, 1993 (under both the Retirement Plan and this Plan) payable at age 65 shall first be reduced to the earliest date when the Participant may commence receipt of his benefit under the Retirement Plan, using the factors in the Retirement Plan as in effect on June 30, 1993 for determining the actuarial equivalent of the Participant's vested benefit (as set forth in such plan's definition of Actuarial 14 14 Equivalent), and from this amount there shall be subtracted the amount of the Participant's June 30, 1993 accrued benefit payable under the Retirement Plan, calculated using the Code Section 415 limits in effect on June 30, 1993 as adjusted to reflect early commencement of the benefit on the earliest date when the Participant may commence receipt of his benefit under the Retirement Plan. Notwithstanding any other provision of this Plan, Survivors Benefits of SODI Employees who die after June 30, 1993 shall be determined by reference to the Survivors Benefits payable under the Sonat Offshore Retirement Plan rather than the Retirement Plan. (d) For purposes of Section 2.2, a SODI Employee's election to have Excess Retirement Plan Benefits paid in Annuity Form which is filed with SODI at least twelve full calendar months before such Participant's Termination of Continuous Employment shall be deemed an election filed with the Company to have benefits under this Plan paid in Annuity Form. ARTICLE III - EXCESS SAVINGS PLAN BENEFITS 3.1 ELIGIBILITY Each employee on whose behalf Company Matching Contributions to the Savings Plan are limited by Sections 401(a)(17), 401(m), and/or 415 of the Code and the incorporation of those limitations in the Savings Plan (a "Participant") shall be entitled to Excess Savings Plan Benefits under this Plan, regardless of whether such Participant has received notice that he or she is so entitled. In addition, each Participant whose ability to make aggregate Before-Tax and After-Tax Contributions to the Savings Plan is limited by Sections 401(a)(17), 401(m), and/or 415 of the Code and the incorporation of those limitations in the Savings Plan shall be entitled to Excess Savings Plan Benefits under this Plan, regardless of whether such Participant has received notice that he or she is so entitled. All capitalized terms used in this Article III 15 15 and not defined in this Plan shall have the meanings ascribed thereto in the Savings Plan. 3.2 CREDITS TO ACCOUNT (a) CREDIT OF CONTRIBUTIONS. The Company shall create and maintain on its books two accounts for each Participant (the "Diversifiable Account" and the "Non-Diversifiable Account", respectively, which are collectively referred to as the "Accounts") to which it shall credit (i) the amount of any Company Matching Contributions which are not paid to the Savings Plan by virtue of the limitations of Sections 401(a)(17), 401(m), and/or 415 of the Code and the incorporation of those limitations in the Savings Plan, plus (ii) the amount of any Company Matching Contributions that would have been made under the Plan (but for the limitations of Sections 401(a)(17), 401(m), and/or 415 of the Code and the incorporation of those limitations in the Savings Plan) had the Participant contributed the Before-Tax and After-Tax Contributions which he or she elected to contribute but was precluded from contributing by virtue of the limitations of Sections 401(a)(17), 401(m), and/or 415 of the Code and the incorporation of those limitations in the Savings Plan. Such amounts, if any, shall be credited at such time after the end of each pay period as Company Matching Contributions for such pay period are paid to the Savings Plan. Prior to January 1, 1995 all amounts credited under this Article III shall be credited as provided in Section 3.2 (b). Beginning January 1, 1995 all amounts credited under this Article III shall be credited as provided in Section 3.2 (c). The Accounts shall be debited upon payment to the Participant as provided in Section 3.4. The amount of a Participant's Excess Savings Plan Benefits shall be equal to the fair market value of his or her Accounts, as determined pursuant to Section 3.2 (d). (b) CREDITING BEFORE JANUARY 1, 1995. All amounts credited prior to January 1, 1995 shall be credited to the Diversifiable Account. At the end of each calendar quarter prior to January 1, 1995, regardless of whether any other credits are then made to the Diversifiable Account or whether the Participant is then in the employ 16 16 of the Employers, the Company shall also credit to the Diversifiable Account a sum which is equal to the product of (i) the average balance in the Diversifiable Account for the quarter (without regard to any debits made at the end of such quarter) times (ii) one-fourth of the annual prime rate for corporate borrowers quoted by The Chase Manhattan Bank, N.A. at the beginning of the quarter. (c) CREDITING BEGINNING JANUARY 1, 1995. Beginning January 1, 1995, 50% of each amount credited on behalf of a Participant pursuant to Section 3.2 (a) shall be credited to the Non-Diversifiable Account. All amounts in the Non-Diversifiable Account shall be credited to a subaccount that is deemed invested in Common Stock of the Company (a "Phantom Stock Subaccount"). The remaining 50% of each amount credited on behalf of the Participant pursuant to Section 3.2 (a), plus all amounts credited to the Participant's Account as of January 1, 1995, shall be credited to the Diversifiable Account. All amounts in the Diversifiable Account shall be credited, at the direction of the Participant (but subject to the restrictions of Section 3.3), to one or more of (i) a Phantom Stock Subaccount, or (ii) a subaccount which is deemed invested in one of the mutual fund investments designated by the Company (each of such subaccounts referred to as a "Phantom Mutual Fund Subaccount"). In each case, the Participant's Phantom Stock Subaccount and each Phantom Mutual Fund Subaccount shall be credited with the number of phantom shares (including fractional shares) equal to the number of shares (of Common Stock or of such mutual fund, as the case may be) which could have been purchased with the dollar amount to be credited, valued at the fair market value of such share as of the close of business on the business day such amounts are credited. At the time that any dividends are paid on the Common Stock or the applicable mutual fund, as the case may be, there shall be credited to the Participant's Phantom Stock Subaccount or Phantom Mutual Fund Subaccount, as the case may be, a number of phantom shares (including fractional shares) equal to the result obtained by multiplying (i) the number of phantom shares credited to the Participant's Phantom Stock Subaccount or Phantom Mutual Fund Subaccount, as the case may be, on the applicable dividend record date, by (ii) the amount of the dividend 17 17 per share, and dividing such product by (iii) the fair market value of a share as of the close of business on the dividend payment date. (d) DETERMINATION OF FAIR MARKET VALUE. The fair market value of the Participant's Phantom Stock Subaccount or a Phantom Mutual Fund Subaccount, as the case may be, on any given date shall be determined by multiplying (i) the number of phantom shares credited to such subaccount on such date, by (ii) the fair market value of a share (of Common Stock or of such mutual fund, as the case may be) as of the close of business on such date. 3.3 INVESTMENT ELECTIONS AND TRANSFERS (a) NEW CONTRIBUTIONS TO DIVERSIFIABLE ACCOUNT. At any time prior to the start of a calendar quarter, a Participant may file an election with the Company (in the manner and subject to any limitations specified by the Company) to designate the phantom subaccounts to which new contributions to the Participant's Diversifiable Account shall be credited. All amounts credited to the Participant's Diversifiable Account on or after the first day of such calendar quarter shall be credited in accordance with such election. The Participant may file a new election at any time (in the manner and subject to any limitations specified by the Company), which shall take effect beginning with the first day of the next calendar quarter. If a Participant fails to file an election form, all amounts credited to the Participant's Diversifiable Account as of January 1, 1995 and all amounts subsequently credited to such Account prior to the effective date of a properly-filed election form shall be credited as phantom shares of the Fidelity Retirement Government Money-Market Portfolio. (b) TRANSFERS WITHIN DIVERSIFIABLE ACCOUNT. A Participant may at any time file an election with the Company (in the manner and subject to any limitations specified by the Company) to transfer a portion of his or her Diversifiable Account from one Phantom Mutual Fund Subaccount to another, or from a Phantom Mutual Fund Subaccount to the Phantom Stock Subaccount. Transfers shall be made as of the first 18 18 business day of any calendar quarter for all transfer elections received by the Company in the preceding calendar quarter, based on the respective fair market values of the respective phantom shares at the close of business on such first business day of the calendar quarter. No transfers out of a Participant's Phantom Stock Subaccount shall be permitted prior to the time set forth in Section 3.3 (c). (c) TRANSFERS OUT OF PHANTOM STOCK SUBACCOUNT OF DIVERSIFIABLE ACCOUNT. A Participant shall have the right to transfer all or a portion of the amount credited to the Phantom Stock Subaccount of his or her Diversifiable Account out of such Subaccount and into one or more Phantom Mutual Fund Subaccounts (in the manner and subject to any limitations specified by the Company) beginning on the first day of the calendar quarter that is at least six months after the later of (i) the date of the Participant's Termination of Employment or (ii) the date the Participant is no longer subject to Section 16 of the Securities Exchange Act of 1934. (d) NON-DIVERSIFIABLE ACCOUNT. All amounts credited to a Participant's Non-Diversifiable Account shall be credited to a Phantom Stock Subaccount. Transfers out of such Subaccount shall not be permitted. 3.4 PAYMENT OF ACCOUNTS Upon a Participant's Termination of Employment, the Company shall debit his or her Accounts and pay to such Participant (or in the event of the Participant's death, to his or her Beneficiary) amounts at the times determined pursuant to this Section 3.4. (a) CASH LUMP SUM. Except as provided in Section 3.4(b) or 3.4(c) below, upon a Participant's Termination of Employment, there shall be paid to the Participant in a cash lump sum on (or as soon as practicable after) the first business day of the calendar quarter following his or her Termination of Employment an amount equal to the sum of: (i) the value of the Participant's Accounts, as determined below, plus (ii) the amount of any Company Matching Contributions that would have been credited to the 19 19 Accounts under Section 3.2 for pay periods beginning before the Participant's Termination of Employment if such Company Matching Contributions have not yet been credited at the time of valuation of the Participant's Accounts. For purposes of determining the value of a Participant's Accounts pursuant to this Section 3.4 (a), (i) phantom shares in each of the Phantom Mutual Fund Subaccounts shall be valued as of the business day that is two business days before the date the payment is due, and (ii) phantom shares in the Phantom Stock Subaccount shall be valued based on the average of the closing prices of the Company's Common Stock on the ten business days ending two business days before the payment is due. (b) INSTALLMENTS. If, at least twelve full calendar months before the date of the Participant's Termination of Employment, the Participant filed with the Company an irrevocable written election to have all or any designated portion of his or her Accounts paid in installments, payment of such Participant's Accounts (or designated portion thereof) shall be made in such number of annual installments (to a maximum of 15) as shall have been designated by the Participant in the written election referred to above. Payment of the first installment shall be made on (or as soon as practicable after) the first business day of the calendar quarter following the Participant's Termination of Employment. Each subsequent installment shall be paid on the anniversary of the first day of such calendar quarter (or, if such day is not a business day, on the next business day thereafter). Each installment shall be in an amount equal to (i) the value of the Participant's Accounts at the time of payment of such installment, as determined below, divided by (ii) the number of installments remaining to be paid (including the installment about to be paid), and shall be made on pro rata basis from the Participant's Accounts and Subaccounts. For purposes of determining the value of an installment of a Participant's Accounts pursuant to this Section 3.4 (b), (i) phantom shares in each of the Phantom Mutual Fund Subaccounts shall be valued as of the business day that is two business days before the date payment of the installment is due, and (ii) phantom shares in the Phantom Stock Subaccounts shall be valued based on the average of the 20 20 closing prices of the Company's Common Stock on the ten business days ending two business days before the date payment of the installment is due. (c) PRIOR ELECTIONS. Notwithstanding the provisions of Sections 3.4 (a) and (b), any election made by a Participant prior to February 25, 1993 to have payment of all or a portion of his or her Accounts made in installments shall be irrevocable. In the event that no election is in effect for a given year after 1983 and prior to 1988, the Participant shall be deemed to have elected installment payments for such year for purposes of the preceding sentence. The provisions of Sections 3.4 (a) and (b) shall apply with respect to any portion of the Participant's Accounts which was distributable in the form of a lump sum pursuant to a Participant's election or Plan provision which became effective prior to February 25, 1993. 3.5 CHANGE OF CONTROL PROVISIONS Notwithstanding a Participant's election or the provisions of Section 3.4, in the event of a Participant's Termination of Employment within three years following a Change of Control (as defined in Section 4.3 below), then there shall be paid to the Participant in a cash lump sum, as soon as practicable (and within 30 days) after his or her Termination of Employment an amount equal to the sum of (i) the value of the Participant's Accounts, as determined below, plus (ii) the amount of any Company Matching Contributions that would have been credited to the Accounts under Section 3.2 for pay periods beginning before the Participant's Termination of Employment if such Company Matching Contributions have not yet been credited at the time of valuation of the Participant's Accounts. For purposes of determining the value of a Participant's Accounts pursuant to this Section 3.5, (i) phantom shares in each of the Phantom Mutual Fund Subaccounts shall be valued as of the business day that is two business days before the date of payment, and (ii) phantom shares in the Phantom Stock Subaccounts shall be valued based on the average of the closing prices of the Company's Common Stock on the ten business days ending two business days before the date of payment. 21 21 3.6 BENEFICIARY For purposes of this Article III, "Beneficiary" shall mean (i) the person, persons or entity designated by a Participant to receive Excess Savings Plan Benefits in the event of the Participant's death, or (ii) if the Participant has made no such designation, his or her Beneficiary under the Savings Plan. 3.7 ANTIDILUTION ADJUSTMENTS In the event of a reorganization, recapitalization, stock split, stock dividend, combination of shares, rights offer, liquidation, dissolution, merger, consolidation, spin-off, sale of assets, or other change in or affecting the corporate structure or capitalization of the Company, the Executive Compensation Committee or other designated committee of the Board of Directors of the Company consisting solely of "disinterested" directors within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934 (the "Committee") shall make appropriate adjustment to the Phantom Stock Subaccounts of Participants so that the phantom shares in such subaccounts shall be treated as if they were actual shares of Common Stock. In the event the Common Stock is converted into cash, the phantom shares in the Phantom Stock Subaccounts shall similarly be converted into cash as of the same date, and shall automatically be credited as phantom shares of the Fidelity Government Money-Market Portfolio (or such other Phantom Mutual Fund Subaccount as may be designated by the Committee). In the event the Common Stock is converted into other securities or property, the value of such securities and property shall be determined by AmSouth Bank NA, and the Phantom Stock Subaccounts shall be converted into cash of the same value and credited as phantom shares of the Fidelity Government Money-Market Portfolio (or such other Phantom Mutual Fund Subaccount as may be designated by the Committee). 22 22 3.8 PROVISIONS REGARDING SODI EMPLOYEES SODI Employees (as defined in Section 1.2) shall not be deemed to have incurred a Termination of Employment by virtue of the initial public offering of SODI common stock, but shall instead be deemed to have incurred a Termination of Employment upon the termination of their employment with SODI and its subsidiaries (as defined for purposes of the SODI savings plan). In no event shall SODI Employees accrue benefits under Article III of this Plan after June 30, 1993 (unless rehired by the Company), but Accounts established pursuant to Article III hereof shall continue to be credited with interest as provided in Section 3.2(b). ARTICLE IV - VESTING BENEFITS 4.1 ELIGIBILITY Each employee who has had a Termination of Continuous Employment and who is a member of the Vesting Group (as defined in Section 4.4 below) (a "Participant") shall be entitled to Vesting Benefits hereunder, regardless of whether such Participant has received notice that he or she is so entitled, but only if a Change of Control (as defined in Section 4.3 below) has occurred while he or she is employed by one of the Employers and is a member of the Vesting Group. All capitalized terms used in this Article IV and not defined in this Plan shall have the meanings ascribed thereto in the Retirement Plan. 4.2 AMOUNT AND FORM OF VESTING BENEFIT Each Participant shall be entitled to a Vesting Benefit, payable in the form of a cash lump sum, that is equal in amount to the Actuarial Equivalent (as defined in Section 2.3(d) above) of the excess, if any, of (i) the amount hypothetically payable to the Participant as a Vested Benefit under the Retirement Plan if (x) Section 5.01 of the Retirement Plan were hypothetically amended to provide a Vesting Date based on a period of Vesting Service equivalent to the actual Vesting Service of the Participant, 23 23 and (y) Sections 401(a)(17) and 415 of the Code were nonexistent and the provisions of the Retirement Plan incorporating the limitations contained in Sections 401(a)(17) and 415 of the Code were inoperative, over (ii) the amount payable as a Vested Benefit under the Retirement Plan, assuming for purposes of clauses (i) and (ii) that the Participant commenced receiving benefits under such clause in the form of a single life annuity on the earliest date on which the Participant could have commenced receipt of a Vested Benefit under the Retirement Plan (had he or she been entitled to such Benefit). The grant of Vesting Benefits shall not increase the Participant's Credited Service under the Retirement Plan. Such cash lump-sum payment shall be paid as soon as practicable (and within 30 days) after the Participant's Termination of Continuous Employment. 4.3 DEFINITION OF CHANGE OF CONTROL A "Change of Control" shall be deemed to have occurred if: (i) any "person" (as defined in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934, as in effect as of May 3, 1984) is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934, as such Rules were in effect as of May 3, 1984) of securities of the Company representing 35% or more of the voting power of the outstanding securities of the Company having the right under ordinary circumstances to vote at an election of the Board of Directors, (ii) there shall occur a change in the composition of a majority of the Board of Directors of the Company within any period of three consecutive years which change shall not have been approved by a majority of the Board of Directors of the Company as constituted immediately prior to the commencement of such period, or 24 24 (iii) at any meeting of the stockholders of the Company called for the purpose of electing directors, all persons nominated by the Board of Directors for election as directors shall fail to be elected. 4.4 DEFINITION OF VESTING GROUP An employee shall be deemed to be a member of the Vesting Group if, immediately prior to the occurrence of a Change of Control, he or she (1) is a participant in the Retirement Plan, (2) is employed as an officer by an Employing Company (as defined in the Retirement Plan) and (3) is not fully vested under the Retirement Plan. ARTICLE V - FUNDING 5.1. UNFUNDED PLAN The Plan shall be unfunded, and the entire cost of the benefits and administration of the Plan shall be borne by the Company. ARTICLE VI - MISCELLANEOUS 6.1 EFFECT OF IRS DETERMINATION If any amounts whose distribution is deferred pursuant to the Plan are found in a "determination" (within the meaning of Section 1313(a) of the Code) to have been includible in gross income by a Participant prior to payment of such amounts under the Plan, such amounts shall be immediately paid to such Participant notwithstanding the Participant's election or any other provision of the Plan. 6.2 AMENDMENT The Company intends to maintain the Plan in force indefinitely, but necessarily reserves the right by action of its Board of Directors to amend or discontinue the Plan at 25 25 any time, provided that (i) no amendment or discontinuance of the Plan shall diminish in any way payments under this Plan due thereafter under rights created or grants made before such amendment or discontinuance and (ii) rights created or grants made before such amendment or discontinuation shall continue in force and effect and shall continue to accrue as though no amendment or discontinuation of this Plan had occurred. 6.3 EXCESS DISABILITY BENEFITS The Excess Disability Benefits formerly provided under this Plan are instead payable under the Supplemental Disability Plan to the full extent that they formerly would have been payable under this Plan. To the extent that a benefit is payable pursuant to the Supplemental Disability Plan it shall not be payable under this Plan, and to the extent that a benefit is payable pursuant to this Plan it shall not be payable under the Supplemental Disability Plan. 6.4 NON-ALIENATION; TAX WITHHOLDING No benefit payable under this Plan shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, garnishment, encumbrance, or charge; provided, however, that taxes may be withheld from benefit payments to the extent required by any federal, state or local law or regulation. 6.5 NO RIGHT TO CONTINUED EMPLOYMENT Participation in the Plan shall not give any employee the right to be retained in the employ of the Employers. 6.6 DEFINITION OF PARTICIPANT Any employee who is a "Participant" under any Section of this Plan shall not be deemed to be a "Participant" under any other Section unless he or she also satisfies the definition of "Participant" under such other Section. Any Plan provision to the contrary notwithstanding, an employee shall not be a "Participant" under any Section of this Plan unless either (i) the employee is a member of a select group of management 26 26 or highly compensated employees (as provided in Section 201(b) of the Employee Retirement Income Security Act of 1974, as amended), or (ii) the benefits under this Plan are provided solely by virtue of the limitations of Section 415 of the Code and the incorporation of those limitations in the Retirement Plan or the Savings Plan, as the case may be. 6.7 PLAN ADMINISTRATION AND INTERPRETATION The administration of the Plan and the exclusive power to interpret it is vested in the Employee Benefits Committee of the Board of Directors of the Company. The Employee Benefits Committee may delegate any or all of its duties and responsibilities hereunder to the Administrative Committee of the Retirement Plan. 6.8 SUBSIDIARIES AND AFFILIATES Each subsidiary or affiliate of the Company which the Company has designated as a participating company in the Retirement Plan and/or the Savings Plan with respect to its employees shall automatically be deemed to have adopted this Plan; provided however, that if the terms of the Retirement Plan or the Savings Plan with respect to such subsidiary or affiliate are different from those applicable to the Company, such difference or differences shall be given effect in applying this Plan. References herein to the Retirement Plan or the Savings Plan shall be in regard to such plan as amended from time to time. 6.9 MINORS AND INCOMPETENTS If a person entitled to benefits under this Plan is a minor or is physically unable or mentally incompetent to receive such benefits and to execute a valid release therefor, the Plan may pay such benefits to the guardian or representative of such person or the individual or institution maintaining custody of such person (provided that such payment shall be made for and applied to the benefit of the person entitled thereto), and the release of such guardian, representative, individual or institution shall be a valid and complete discharge for payment of such benefit. 27 27 6.10 CHOICE OF LAW THIS PLAN SHALL BE INTERPRETED PURSUANT TO THE LAWS OF THE STATE OF ALABAMA, WITHOUT GIVING EFFECT TO ITS CONFLICTS OF LAWS PRINCIPLES. IN WITNESS WHEREOF, Sonat Inc. has caused this Plan as amended and restated hereby to be executed as of January 1, 1995. By: /s/ Ronald L. Kuehn, Jr. ------------------------ 28 28 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 29 29 (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. -------------------------------- Chairman of the Board, President and Chief Executive Officer EX-10.2 5 EXECUTIVE AWARD PLAN OF SONAT INC. 1 EXHIBIT 10.2 EXECUTIVE AWARD PLAN OF SONAT INC. (AS AMENDED AND RESTATED AS OF DECEMBER 1, 1995) (CORRECTED ON DECEMBER 4, 1996) I. GENERAL 1.1 PURPOSE OF THE PLAN The Executive Award Plan (the "Plan") of Sonat Inc. (the "Company") is intended to advance the best interests of the Company and its subsidiaries by providing key employees with additional incentives through the grant of options ("Options") to purchase shares of Common Stock of the Company ("Common Stock") and through the award of shares of restricted Common Stock ("Restricted Stock"), thereby increasing the personal stake of such employees in the continued success and growth of the Company and encouraging them to remain in the employ of the Company. The Plan was adopted effective May 1, 1981, and has been amended at various times. The provisions of the Plan as hereby amended and restated may, at the discretion of the Committee referred to below, be made available to all grants outstanding on the effective date of this Amendment and Restatement, and all awards granted after such date, except that no such provision shall alter any outstanding grant in a manner unfavorable to the holder thereof without the written consent of the holder. 1.2 ADMINISTRATION OF THE PLAN (a) The Plan shall be administered by the Executive Compensation Committee or other designated committee (the "Committee") of the Board of Directors of the Company (the "Board of Directors") which shall consist of at least three Directors all of whom are not eligible to participate in the Plan and are "disinterested" within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934 (the "Exchange Act"). The Committee shall have authority to interpret conclusively the provisions of the Plan, to adopt such rules and regulations for carrying out the Plan as it may deem advisable, to decide conclusively all questions of fact arising in the application of the Plan, and to make all other determinations necessary or advisable for the administration of the Plan. All decisions and acts of the Committee shall be final and binding upon all affected Plan participants. (b) The Committee shall meet once each fiscal year, and at such additional times as it may determine or at the request of the chief executive officer of the Company, to designate the eligible employees, if any, to be granted awards under the Plan and the type and amount of such awards and the time when awards will be granted. All awards granted under the Plan shall be on the terms and subject to the conditions hereinafter provided. 2 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 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. 3 1.6 OTHER COMPENSATION PROGRAMS The existence and terms of the Plan shall not limit the authority of the Board of Directors in compensating employees of the Company and its subsidiaries in such other forms and amounts, including compensation pursuant to any other plans as may be currently in effect or adopted in the future, as it may determine from time to time. II. STOCK OPTIONS 2.1 TERMS AND CONDITIONS OF OPTIONS Subject to the following provisions, all Options granted under the Plan shall be in such form and shall have such terms and conditions as the Committee, in its discretion, may from time to time determine. (a) Option Price. The option price per share shall not be less than the fair market value of the Common Stock (as determined by the Committee) on the date the Option is granted. (b) Term of Option. The term of an Option shall not exceed ten years from the date of grant, and, notwithstanding any other provision of this Plan, no Option shall be exercised after the expiration of its term. (c) Exercise of Options. Options shall be exercisable at such time or times and subject to such terms and conditions as the Committee shall specify in the Option grant. The Committee shall have discretion to at any time declare all or any portion of the Options held by any optionee to be immediately exercisable. An Option may be exercised in accordance with its terms as to any or all shares purchasable thereunder. (d) Payment for Shares. Payment for shares as to which an Option is exercised shall be made in such manner and at such time or times as shall be provided by the Committee in the Option grant. Payment may be made in cash or in such other manner as the Committee in its discretion may authorize. (e) Nontransferability of Options. No Option or any interest therein shall be transferable by the optionee other than by will or by the laws of descent and distribution. During an optionee's lifetime, all Options shall be exercisable only by such optionee or by the guardian or legal representative of the optionee. (f) Shareholder Rights. The holder of an Option shall, as such, have none of the rights of a shareholder. (g) Termination of Employment. The Committee shall have discretion to specify in the Option grant or an amendment thereof, provisions with respect to the period, not extending beyond the term of the Option, during which the Option may be exercised following the optionee's termination of employment. 4 (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. (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 5 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. 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). 6 2.4 STATUTORY OPTIONS Subject to the limitations on Option terms set forth in Section 2.1, the Committee shall have the authority to grant (i) incentive stock options within the meaning of Section 422 of the Code and (ii) Options containing such terms and conditions as shall be required to qualify such Options for preferential tax treatment under the Code as in effect at the time of such grant. Options granted pursuant to this Section 2.4 may contain such other terms and conditions permitted by Article II of this Plan as the Committee, in its discretion, may from time to time determine (including, without limitation, provision for Stock Appreciation Rights, Limited Stock Appreciation Rights and Supplemental Payments), to the extent that such terms and conditions do not cause the Options to lose their preferential tax treatment. To the extent the Code and Regulations promulgated thereunder require a plan to contain specified provisions in order to qualify options for preferential tax treatment, such provisions shall be deemed to be stated in this Plan. III. RESTRICTED STOCK 3.1 TERMS AND CONDITIONS OF RESTRICTED STOCK AWARDS Subject to the following provisions, all awards of Restricted Stock shall be in such form and shall have such terms and conditions as the Committee, in its discretion, may from time to time determine: (a) The Restricted Stock award shall specify the number of shares of Restricted Stock to be awarded, the price, if any, to be paid by the recipient of the Restricted Stock, and the date or dates on which the Restricted Stock will vest. The vesting of Restricted Stock may be conditioned upon the completion of a specified period of service with the Company or its Subsidiaries, upon the attainment of specified performance goals, or upon such other criteria as the Committee may determine in its sole discretion. (b) Stock certificates representing the Restricted Stock granted to an employee shall be registered in the employee's name. Such certificates shall either be held by the Company on behalf of the employee, or delivered to the employee bearing a legend to restrict transfer of the certificate until the Restricted Stock has vested, as determined by the Committee. The Committee shall determine whether the employee shall have the right to vote and/or receive dividends on the Restricted Stock before it has vested. No share of Restricted Stock may be sold, transferred, assigned, or pledged by the employee until such share has vested in accordance with the terms of the Restricted Stock award. In the event of an employee's termination of employment before all of his Restricted Stock has vested, or in the event other conditions to the vesting of Restricted Stock have not been satisfied prior to any deadline for the satisfaction of such conditions set forth in the award, the shares of Restricted Stock which have not vested shall be forfeited and any purchase price paid by the employee shall be returned to the employee. At the time Restricted Stock vests (and, if the employee has been issued legended certificates of Restricted Stock, upon the return of such certificates to the Company), a certificate for such vested shares shall be delivered to the employee (or the beneficiary designated by the employee in the event of 7 death), free of all restrictions. (c) Notwithstanding the vesting conditions set forth in the Restricted Stock award, (i) the Committee may in its discretion accelerate the vesting of Restricted Stock at any time, and (ii) all shares of Restricted Stock shall vest upon a Change of Control of the Company. 3.2 SUPPLEMENTAL PAYMENT ON VESTING OF RESTRICTED STOCK The Committee, either at the time of grant or at the time of vesting of Restricted Stock, may provide for a Supplemental Payment by the Company to the employee in an amount specified by the Committee which shall not exceed, but may be equal to, the amount necessary to pay the federal income tax payable with respect to both the vesting of the Restricted Stock and receipt of the Supplemental Payment, assuming the employee is taxed at the maximum effective federal income tax rate applicable thereto and has not elected to recognize income with respect to the Restricted Stock before the date such Restricted Stock vests. The Supplemental Payment shall be paid within 30 days of each date that Restricted Stock vests. The Supplemental Payment shall be paid in cash or Common Stock, in the discretion of the Committee, except that in the event of a Change of Control the Supplemental Payment shall be paid in cash. IV. ADDITIONAL PROVISIONS 4.1 GENERAL RESTRICTIONS Each award under the Plan shall be subject to the requirement that, if at any time the Committee shall determine that (i) the listing, registration or qualification of the shares of Common Stock subject or related thereto upon any securities exchange or under any state or federal law, or (ii) the consent or approval of any government regulatory body, or (iii) an agreement by the recipient of an award with respect to the disposition of shares of Common Stock is necessary or desirable (in connection with any requirement or interpretation of any federal or state securities law, rule or regulation) as a condition of, or in connection with, the granting of such award or the issuance, purchase or delivery of shares of Common Stock thereunder, such award may not be consummated in whole or in part unless such listing, registration, qualification, consent, approval or agreement shall have been effected or obtained free of any conditions not acceptable to the Committee. 4.2 ADJUSTMENTS FOR CHANGES IN CAPITALIZATION In the event of a reorganization, recapitalization, stock split, stock dividend, combination of shares, rights offer, liquidation, dissolution, merger, consolidation, spin-off, sale of assets, payment of an extraordinary cash dividend, or any other change in or affecting the corporate structure or capitalization of the Company, the Committee shall make appropriate adjustment in the number and kind of shares authorized by the Plan (including any limitations on individual awards), in the number, price or kind of shares covered by the awards and in any outstanding awards under the Plan. 8 4.3 AMENDMENTS (a) The Board of Directors may amend the Plan from time to time. No such amendment shall require approval by the stockholders unless stockholder approval is required by applicable law or stock exchange requirements. (b) The Committee shall have the authority to amend any grant to include any provision which, at the time of such amendment, is authorized under the terms of the Plan; provided, however, that (1) no outstanding award may be revoked or altered in a manner unfavorable to the holder without the written consent of the holder, and (2) no outstanding Option may be altered in a manner that reduces the option price (except as provided in Section 4.2). 4.4 CANCELLATION OF AWARDS Any award granted under the Plan may be 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; provided, however, that any Option that is granted in lieu of a cancelled Option shall have an option price at least equal to the option price of the cancelled Option. 4.5 WITHHOLDING (a) Whenever the Company proposes or is required to issue or transfer shares of Common Stock under the Plan, the Company shall have the right to require the holder to remit to the Company an amount sufficient to satisfy any federal, state or local withholding tax liability prior to the delivery of any certificate for such shares. Whenever under the Plan payments are to be made in cash, such payments shall be net of an amount sufficient to satisfy any federal, state or local withholding tax liability. (b) An employee entitled to receive Common Stock under the Plan who has not received a cash Supplemental Payment may elect to have the federal, state and local tax liability (or a specified portion thereof) with respect to such Common Stock satisfied by having the Company withhold from the shares otherwise deliverable to the employee shares of Common Stock having a value equal to the amount of the tax liability to be satisfied with respect to the Common Stock. An election to have all or a portion of the tax liability satisfied using Common Stock shall comply with such requirements as may be imposed by the Committee and shall be subject to the disapproval of the Committee (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. 9 4.7 NON-UNIFORM DETERMINATIONS Determinations by the Committee under the Plan (including, without limitation, determinations of the persons to receive awards; the form, amount and timing of such awards; the terms and provisions of such awards and the agreements evidencing same; and provisions with respect to termination of employment) need not be uniform and may be made by it selectively among persons who receive, or are eligible to receive, awards under the Plan, whether or not such persons are similarly situated. 4.8 NO GUARANTEE OF EMPLOYMENT The grant of an award under the Plan shall not constitute an assurance of continued employment for any period. 4.9 CHANGE OF CONTROL (a) 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 10 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. (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 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 11 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, and corrects certain errors made in the earlier restatement of the Plan. IN WITNESS WHEREOF, this document has been executed as of December 4, 1996. SONAT INC. by: /s/ Ronald L. Kuehn, Jr. ---------------------------------------- Ronald L. Kuehn, Jr. Chairman of the Board, President and Chief Executive Officer 12 AMENDMENT TO THE SONAT INC. EXECUTIVE AWARD PLAN Sonat Inc. hereby amends the Executive Award Plan (the "Plan") as follows: 1. Sections 2.2(c) and 2.2(d) of the Plan are amended to read as follows: (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, and (ii) in addition to the Appreciation and the Supplemental Payment (if any), the holder shall receive in cash (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 13 in clause (iii) of this sentence. All of such amounts shall be paid in cash within 30 days of the exercise of the Limited Stock Appreciation Right. 2. This amendment to the Plan shall be effective as of December 6, 1996. IN WITNESS WHEREOF, this document has been executed as of December 6, 1996. SONAT INC. by: /s/ Ronald L. Kuehn, Jr. ---------------------------------------- Ronald L. Kuehn, Jr. Chairman of the Board, President and Chief Executive Officer 13 EX-10.9 6 DIRECTORS' FEES DEFERRAL PLAN OF SONAT INC. 1 EXHIBIT 10.9 SUMMARY OF THE SONAT INC. DIRECTOR'S FEES DEFERRAL PLAN JANUARY 1, 1997 DEFERRAL ELECTION The Sonat Inc. Director's Fees Deferral Plan (the "Plan") provides that a Director of Sonat Inc. (the "Company") may elect to defer receipt of all or any part of his or her Director's fees. (As used in this Summary, "fees" means both retainer fees and meeting fees.) You may defer fees by filing a Deferral Election Form with the Company. In general, you must file the Deferral Election before the beginning of the calendar year in which the Deferral Election is to become effective. The Deferral Election will renew automatically from year to year, unless you revoke or change it by filing a new form. Any revocation or change of the Deferral Election will be effective ONLY with respect to Director's fees paid in the calendar year(s) following the year in which the revocation or change is filed. ADMINISTRATION The Plan is administered by the Committee on Directors of the Board of Directors of the Company. DIRECTOR'S ACCOUNT The amount of any deferred fees will be credited to an account on the books of the Company on the date on which the fees would have first become payable. 2 INVESTMENT OF YOUR ACCOUNT The Company will establish investment options in your Account: investment in "phantom" units in a fund that is invested in the Company's common stock (except for about 1% of the fund's value, which is invested in short-term money-market investments) (a "Phantom Stock Investment") and "phantom" investments in the mutual funds available under the Company's Savings Plan. The investment options that are currently available under the Plan are described in the attached "Summary of Investment Options." To elect how future credits to your Account will be invested in these investment choices, you must make your initial election by filing an Initial Investment Election Form with the Company's Human Resources Department. This election will be effective on the first day of the calendar quarter after the form is received. ALLOCATIONS CREDITED TO YOUR ACCOUNT AFTER JANUARY 1, 1997 AND BEFORE THE EFFECTIVE DATE OF YOUR INITIAL INVESTMENT ELECTION FORM WILL BE INVESTED IN A PHANTOM INVESTMENT IN THE NORTHERN TRUST COMPANY BENCHMARK GOVERNMENT FUND. After you have filed your Initial Investment Election Form, you may change the way future allocations are invested by calling Mike Byrne ((205) 325-7329) in the Company's Human Resources Department. All elections must be in 1% increments. Such changes will be effective as of the close of business on the day the phone call is made. TRANSFERS AMONG INVESTMENT OPTIONS You may transfer funds among the various investment options, either before or after payments from the Plan have begun, by calling Mike Byrne ((205) 325-7329) in the Company's Human Resources Department on any business day. All transfers will be effective as of the close of business on the day the phone call is made. -2- 3 PAYMENT ELECTIONS Payment Commencement Event. Payments from your Account will begin on the first business day of the calendar quarter following your termination of service as a Director (your "Payment Commencement Event"). Special Rule for Elections Made Before January 1, 1995. If, under the Plan as in effect before January 1, 1995, you elected a Payment Commencement Event of a specified age, the Payment Commencement Event that you elected will be your Payment Commencement Event for all fees deferred under the Plan. Installment Election. At the time you make the Deferral Election, you may (but need not) elect to receive payments from your Account in annual installments (over a period you select of up to 15 years). Once you make an installment election, it may not be changed or revoked except with respect to fees earned during the calendar years following the calendar year in which the change is made. If at the time of making the Deferral Election, you are unsure as to whether you want to receive your Account in installments, you may defer making the installment election until a later time, provided that the election must be made at least 12 months before the Payment Commencement Event. If you do not make a timely election of installment payments, the deferred fees will automatically be paid in a lump sum. Lump-Sum Payments. Any deferred fees that are paid as a lump sum will be paid in cash on the first business day of the calendar quarter after the Payment Commencement Event. All investment options will be valued as of the close of the business day that is two business days before the date the payment is due (except for the Phantom Stock Investment, which will be valued based on the average of the closing prices of the Investment on the 10 business days ending two business days -3- 4 before the payment is due). Installment Payments. If any of your deferred fees are payable as installment payments, the first installment payment will be paid on the first business day of the calendar quarter after your Payment Commencement Event, and each subsequent payment will be made on the anniversary of the preceding payment. Each installment shall equal (1) the balance in your Account at the time of payment, divided by (2) the number of installments remaining to be paid (including the installment about to be paid). All investment options will be valued as of the close of the business day that is two business days before the date the payment is due (except for the Phantom Stock Investment, which will be valued based on the average of the closing prices of the Investment on the 10 business days ending two business days before the payment is due). All installment payments will be made in cash on a pro rata basis from your investments at the time of payment. Change of Control Election. At the time you make a Deferral Election, you may make a special election which overrides your elections as to Payment Commencement Event and installment payments in the event that your service as a Director is terminated within one year following a Change of Control of the Company. You may indicate that in such event, you want to receive all amounts credited to your Account in a lump sum within 30 days following termination of service as a Director. Change of Payment Elections. Each of the above payment elections will renew automatically without the filing of a separate Deferral Election Form each year. However, if you want to change any of the above elections, you may do so by filing a new Deferral Election Form. Except as provided under "Installment Election" above, the changes will only be effective with respect to fees earned in the calendar year -4- 5 following the calendar year in which the new form is filed. DESIGNATION OF BENEFICIARY You will receive a Designation of Beneficiary form on which to indicate the beneficiary who should receive any lump-sum payment or installment payments due from your Account in the event of your death. Any such designation may be revoked at any time and a new beneficiary designated by filing a new Designation of Beneficiary form with the Company's Human Resources Department. If no beneficiary is designated, your Account will be paid to your estate. EFFECT ON DIRECTOR'S RETIREMENT PLAN An election to defer receipt of Director's fees will not affect the benefits payable to you pursuant to the Sonat Inc. Retirement Plan for Directors. CONSEQUENCES UNDER SECURITIES EXCHANGE ACT SECTION 16 General. As a Director of the Company, you are subject to the provisions of Section 16 of the Securities Exchange Act. Section 16(b) requires you to pay over to the Company any profit that you realize from the purchase and sale, or sale and purchase, of any Company equity security within any period of less than six months. Section 16(a) requires you to report changes in your beneficial ownership of Company equity securities to the Securities and Exchange Commission. These reports are made on Form 4 (filed within 10 days after the end of the month in which the transaction occurs) or Form 5 (filed by the February 14 after the year in which the transaction occurs). Contributions; Transfers Among Funds. Units in the Phantom Stock Investment are treated as equity securities under Section 16. Acquisitions of these units through deferral of fees or reinvestment of earnings are exempt under Section 16(b) (in other words, such transactions are neither purchases nor sales). An -5- 6 election to transfer funds into (or out of) the Phantom Stock Investment is exempt under Section 16(b), unless it occurs less than six months after an election to make an "opposite way" transfer under the Plan. For example, an election to transfer funds OUT OF the Phantom Stock Investment (and into a phantom mutual fund) is not a Section 16(b) sale UNLESS it occurs less than six months after an election to transfer funds INTO the Phantom Stock Investment. Plan Distributions. The transactions that result from the payment of your Account to you upon your termination of service as a Director (i.e., liquidation of units in the Phantom Stock Investment) are exempt under Section 16(b). Reporting Requirements. The crediting of Phantom Stock Investment units upon a deferral of fees is reportable on Form 5 (or, if you so elect, on an earlier Form 4). Transfers of funds that result in a Section 16 purchase or sale must be reported on Form 4. All other transfers must be reported on Form 5 (or, if you so elect, on an earlier Form 4). Distributions under the Plan upon your termination of service as a Director are not subject to any reporting requirements. The crediting of Phantom Stock Investment units to reflect the reinvestment of dividends is not separately reportable; however, each Form 4 or Form 5 report that shows a transaction in Phantom Stock Investment units must show the total number of units held in the Plan. -6- EX-10.15 7 SONAT INC. DEFERRED COMPENSATION PLAN 1 EXHIBIT 10.15 SONAT INC. DEFERRED COMPENSATION PLAN PLAN SUMMARY MARCH 1, 1997 The Sonat Inc. Deferred Compensation Plan ("the Plan") provides you with a tax-advantaged opportunity to save for retirement and other future income needs. You are encouraged to review the Plan with your family and your tax and financial advisors to determine how the Plan can help you meet your personal financial goals. The following is a summary of the Plan, in a Question-and-Answer format. The official provisions of the Plan are in the Plan document, which you may obtain from the Human Resources Department in Birmingham. If there is any conflict or inconsistency between this summary or any other written or oral communication and the Plan document, the official Plan document will always govern. The Plan is subject to continued compliance with Internal Revenue Service regulations. HOW THE PLAN WORKS 1. WHAT IS THE SONAT INC. DEFERRED COMPENSATION PLAN? - AN OVERVIEW The Plan is a non-qualified deferred compensation program that allows you to make pre-tax deferrals of base pay and bonuses, allocate the deferrals to various investment options, and have your account balance paid to you in the future. You will be able to elect, for each year, the amount of base pay and bonus that you wish to defer. You may defer up to 25% of your base pay and up to 90% of your annual bonus. Your deferrals will accrue earnings as if held in "phantom" investments in the investment options available under the Sonat Savings Plan. Generally speaking, distribution will be made upon termination of your employment. You may instead select a specified date on which to receive payments, which may be before or after your anticipated retirement or termination date. Payment will be made as a lump sum or in annual installments, at your election. 2. WHAT ARE THE ADVANTAGES OF THE DEFERRED COMPENSATION PLAN? A. REDUCED CURRENT INCOME TAXES. Your current federal taxable income is reduced by the amount you elect to defer. However, you will be taxed at the ordinary income rates in effect at the time of distribution of your account. All state income tax laws (except in Pennsylvania and New Jersey) follow the federal law and exclude the amount you defer from current taxable income. Please consult with your personal tax advisor regarding the laws for your particular state. 1 2 B. MORE DOLLARS AVAILABLE FOR INVESTMENT. The initial deferral (investment) into this Plan can be a more efficient investment than most other outside investments, because you are investing pre-tax income rather than after-tax income. For example:
================================== OUTSIDE INVESTMENT THIS PLAN ================================== Compensation $1.00 $1.00 ----------------------------------------------------------------------- Current Income Tax @ 36% -.36 -.00 ----------------------------------------------------------------------- Net Funds Invested $ .64 $1.00 =======================================================================
C. TAX-DEFERRED ACCUMULATION. Earnings in your Plan account are not subject to federal income tax until paid to you. As a result, investments in the Plan can generate higher results than similar investments whose earnings are taxed each year. D. POSSIBLE FUTURE TAX SAVINGS. You may achieve additional income tax savings when you receive your deferral account, if you are in a lower tax bracket at that time. 3. WHAT ARE THE TRADE-OFFS IF I PARTICIPATE? A. REDUCED CURRENT CASH FLOW. By deferring your compensation, you reduce your current cash flow. Therefore, if you require a greater amount of current income, deferral may not be appropriate for you. However, the cash flow reduction may be significantly less than the amount deferred, since your deferral is in pre-tax dollars. For example, if your tax rate is 36%, $10,000 of compensation produces approximately $6,400 of after-tax income. Therefore, deferring $10,000 reduces your disposable after-tax income by $6,400, and you also have the equivalent of $10,000 working for you in your deferral account. B. THE PROGRAM IS UNFUNDED. Under current IRS regulations, your deferral account must be an unsecured general obligation of Sonat Inc. and may not be funded in any way. Therefore, your right to receive payments under the Plan will be subject to Sonat Inc.'s ability to pay, and in the event of Sonat's bankruptcy or insolvency will be the same as any other unsecured general creditor. The Plan does not create a trust relationship between you, or any other person, and the Company. 2 3 C. RESTRICTED ACCESS TO YOUR MONEY. You do not have access to your deferrals and earnings until the date you specify on your election form, except in the limited circumstances discussed at Question 15. D. EMPLOYMENT AND LOCAL TAXES. Amounts you defer under the Plan are subject to Social Security taxes (up to the statutory limit), Medicare taxes and local (county and city) taxes (if applicable). Withholding of these taxes on base pay deferral amounts will be made from your remaining undeferred base pay. If you defer any of your bonus, the taxes on your deferral will be withheld from the portion of the bonus that is not deferred. (This is the reason the Plan does not allow complete deferral of a bonus payout.) However, under current law, the payments from your accounts will not be subject to Social Security, Medicare or local taxes at the time of distribution. E. POSSIBLE HIGHER TAX RATE. The benefits of your deferral may be smaller than you would otherwise expect if, at the time of distribution, you are in a higher tax bracket than when you deferred. 4. HOW DOES THE DEFERRED COMPENSATION PLAN COMPARE WITH THE SONAT SAVINGS PLAN? Please refer to Exhibit A of this Summary. 5. DOES MY PARTICIPATION AFFECT MY OTHER SONAT BENEFITS? Your participation in the Plan will have no effect on your other Sonat benefits. ELIGIBILITY 6. WHO IS ELIGIBLE TO PARTICIPATE IN THE DEFERRED COMPENSATION PLAN? To be eligible to participate in the Plan, you must be an officer of the Company or one of its principal subsidiaries, and must be selected for participation by the Company's Chief Executive Officer. DEFERRAL ELECTIONS 7. WHAT DEFERRAL ELECTIONS CAN I MAKE? Each year you will be able to elect to defer both base pay and bonus. Each item of compensation (base pay and bonus) for each year will be treated as a discrete election. With each deferral election, you will select how much you wish to defer, how you wish it to be paid (lump sum or installments), and when you wish to receive it in the future. You will also select how the deferred amounts will be allocated among the investment choices under the Plan. All of these elections are discussed in more detail below. 3 4 8. WHEN DO I MAKE MY ELECTION TO DEFER? An election to defer base pay must be made before the calendar year in which the base pay is earned. The election to defer a bonus earned for a given calendar year must be made by March 31 of that year. Special rules will apply for an officer who first becomes eligible to participate in the Plan after January 1, 1997. Such an officer must make deferral elections for the remainder of the year's base pay, and the bonus earned for that year, during that year and within 31 days after becoming eligible. 9. HOW MUCH CAN I DEFER? You may defer up to 25% of your annual base pay. Your deferral can be for 1, 2, 3, 4 or 5% of base pay, or in 5% increments up to 25%. You may also defer up to 90% of your annual bonus in 10% increments. An election to defer a bonus will apply only to your annual bonus opportunity, and not to any special bonus that you may receive. In certain circumstances, if you elect to defer 90% of an annual bonus, the remaining 10% may not be enough to satisfy the applicable federal and state income, Social Security, Medicare and local tax withholding obligations. If this situation applies to you, the Company will automatically reduce the amount of bonus deferred (generally to about 85%), and use the remainder to satisfy the tax withholding obligations. Your election to defer is irrevocable, so you should carefully assess the impact of your deferral elections on your personal financial situation. 10. WHAT ARE MY INVESTMENT OPTIONS? Your deferral accounts will accrue earnings, according to your election, as if held in the investment options available under the Sonat Savings Plan - Sonat Stock Fund, Benchmark Government, PIMCO Total Return, Fidelity Puritan, Benchmark Equity Index, MFS Research, Fidelity Magellan, T. Rowe Price New Horizons, and T. Rowe Price International. Your allocations to these investment choices must be in 1% increments. For more information, see the Summary of Investment Options for the Plan. Please note that your deferrals will not actually be invested in these funds, but will be valued as if they were. (This bookkeeping treatment is often called a "phantom" investment.) Your account's value will change as the values of the relevant funds change, including reinvestments of dividends and earnings. 11. CAN I CHANGE HOW FUTURE ALLOCATIONS WILL BE INVESTED, AND MOVE FUNDS AMONG THE INVESTMENT OPTIONS? You may change the way future allocations are invested by selecting a new allocation (in 1% increments, with a total of 100% among the investment choices). You may also transfer your current balance among the investment options by selecting (in 1% increments, with a total allocation of 100%) the options in which you want your funds to be invested. Each procedure can be done by phone on any business day, and will be effective on the day you make the phone call. 4 5 To process these transactions, you should call Mike Byrne in the Company's Human Resources Department (205/325-7329). 12. WHEN WILL I RECEIVE MY DEFERRAL ACCOUNT BALANCE? Each time you make a deferral election, you will elect a payment event upon which to receive the amount deferred (and earnings on that amount) - termination of employment, or a specified future date. Each year and each element of compensation (base pay or bonus) will be treated as a separate election. Special Plan provisions apply in the event of your death, or in the event of a change of control of the Company. A. TERMINATION OF EMPLOYMENT If you select termination of employment as the payment event, the account balance will be paid to you on the first business day of the following calendar quarter. (If your employment terminates on the first day of a calendar quarter, payment will be made as soon as practicable (and within 30 days) thereafter.) This selection would cover termination due to early or normal retirement, disability, discharge, or resignation. AN ELECTION TO RECEIVE A DEFERRED AMOUNT (AND EARNINGS) UPON TERMINATION OF EMPLOYMENT WILL BE IRREVOCABLE. B. SPECIFIED DATE You may instead select a specified date on which to receive the amount deferred (and earnings). Such a date must be a July 1, must be at least two years after the deferral election is made, and must be no later than your 70th birthday. If you select a payment event of a specified date you may, by making a subsequent election at least 12 months before the specified date, elect to postpone the date of payment. The new date must be a July 1, must be at least two years after the date you first selected, and must be no later than your 70th birthday. (You may not select termination of employment as your new payment event.) YOU MAY POSTPONE THE SPECIFIED PAYMENT DATE OF A GIVEN DEFERRAL (AND EARNINGS) ONLY ONCE. For example, if you elect to have a portion of your 1998 base pay (and earnings) paid on July 1, 2001, you could elect a later payment date (on or after July 1, 2003) by filing an election before July 1, 2000. C. DEATH Upon your death, your entire balance in the Plan will be paid to your beneficiary in a cash lump sum on the first day of the calendar quarter following your death (or the first business day thereafter). For information about beneficiary designations, see Question 14. 5 6 D. CHANGE OF CONTROL If your employment terminates within three years after a Change of Control of the Company (as defined n the Plan), your entire balance in the Plan will be paid to you in a cash lump sum as soon as practicable (and within 30 days) after your termination of employment. Also, if a Change of Control occurs after termination of your employment, your entire balance in the Plan will be paid to you in a cash lump sum as soon as practicable (and within 30 days) after the Change of Control. E. COMMITTEE DISCRETION TO DEFER PAYMENT Under current tax law, if you are an executive whose pay is disclosed in the Company's proxy statement, and if the "non-performance based" pay you receive in a year exceeds $1,000,000, the Company will not receive a tax deduction for the excess non-performance based pay. In general, under the Company's current compensation programs, the following elements of pay are "non-performance based" when received: base pay; a portion of annual bonus; base pay deferred from previous years (and earnings thereon); and a portion of annual bonuses deferred from previous years (and earnings thereon). IF THE EXECUTIVE COMPENSATION COMMITTEE DETERMINES THAT YOUR RECEIPT OF A PAYMENT FROM THE PLAN COULD CAUSE THE COMPANY TO LOSE A TAX DEDUCTION UNDER THIS LAW, THE COMMITTEE CAN DEFER ALL OR PART OF THE PAYMENT TO ELIMINATE OR REDUCE LOSS OF THE TAX DEDUCTION. UNDER CURRENT LAW, THIS ISSUE CAN GENERALLY ARISE ONLY IF YOU RECEIVE A PAYMENT BEFORE TERMINATION OF EMPLOYMENT. 13. HOW WILL MY ACCOUNT BE PAID OUT OF THE PLAN? When you make a deferral election, you will elect how you wish to receive the amount deferred (and earnings on that amount). As with the payment event, each year and each element of compensation (base pay and bonus) will be treated as a separate election. You may choose, in each case, a lump sum payment or annual installments. A. ANNUAL INSTALLMENTS You may elect to have payment made to you in 2-15 annual installments. IF YOU MAKE AN INSTALLMENT ELECTION, THAT ELECTION IS IRREVOCABLE. If you elect installment payments, the first payment will be made on the first business day of the calendar quarter after your payment event (i.e. your termination or specified future date), and each subsequent payment will be made on the anniversary of the preceding payment. (If your payment event occurs on the first day of a calendar quarter, the first payment will be made as soon as practicable (and within 30 days) thereafter.) Each installment will equal (1) the balance of the amount deferred (and earnings) being paid out under the installment election at the time of payment, divided by (2) the number of payments remaining to be paid (including the current installment). For example, if you elect for a deferral (and earnings) to be paid in three annual installments beginning July 1, 2005, the first payment will equal 1/3 of the balance on July 1, 2005; the second installment will equal 1/2 of the balance on July 1, 2006; and the last installment will equal the remaining balance on July 1, 2007. 6 7 B. LUMP SUM If you make a lump sum election, payments will be made to you in that form. If you elect a lump sum, you may later decide, by making an irrevocable election at least 12 months before the payment event (that is, termination of employment or a specified date, according to your election), to instead receive the payment in 2-15 annual installments, as discussed above. Therefore, if you are not sure whether you want installment payments at the time you make a deferral election, you may wish to elect a lump sum, and consider making an installment election later. C. ACCOUNT VALUATION All investment options will be valued at the close of the business day that is two business days before the date of payment (except for the Sonat Stock Fund investment, which will be valued based on the average of the closing price of the Fund on the 10 business days ending two business days before the date of payment). All installment payments will be made on a pro rata basis from your investments at the time of payment. 14. HOW DO I NAME MY BENEFICIARY? Upon your death, your beneficiary(ies) will be paid your entire Plan balance. You may make or change a beneficiary designation at any time, by filling out a Beneficiary Designation Form and filing it with the Company's Human Resources Department. You may name one or more primary beneficiaries, as well as one or more contingent beneficiaries (to receive your Plan balance if all primary beneficiaries predecease you). If you make no beneficiary designation, or if all designated beneficiaries predecease you, your Plan balance will be paid to your estate. ACCESS TO YOUR MONEY BEFORE THE PAYMENT EVENT 15. CAN I GET MONEY FROM MY ACCOUNT BEFORE THE DATE I ELECT FOR DEFERRAL PAYMENTS TO BEGIN? Access to your Plan balance before the payment event that you select is very limited. You may withdraw funds from your deferral account only in the event of an extreme and unforeseen financial hardship. A. FINANCIAL HARDSHIP DISTRIBUTIONS In the event of unusual, extraordinary expenses or unforeseen financial hardship, you may request a distribution of the amount reasonably necessary to meet your financial need. This definition of hardship is more stringent than the hardship provision in the Sonat Savings Plan, and does not, for instance, include college expenses, or costs in connection with a home purchase. It generally encompasses hardship generated by unforeseen circumstances, such as unreimbursed medical expenses, family loss of income by layoff and the like. The Executive Compensation Committee of the Board of Directors may approve or deny the request in its sole discretion, and distribution is limited to the amount necessary to relieve the hardship plus your income tax liability on the distribution. If approved, this distribution is not subject to any penalty taxes, and is ordinary income for federal and state income tax purposes. 7 8 B. LOANS Loans are not available from your account balance, since the Plan would lose its favorable tax treatment if loans were permitted. TAX CONSIDERATIONS 16. WHAT ARE SOME OF THE MORE COMMON TAX-RELATED QUESTIONS THAT SHOULD CONCERN ME? AM I TAXED ON MY DEFERRALS OR EARNINGS CREDITED TO THEM? Under current tax law, neither your deferrals nor the earnings thereon are subject to federal income tax before withdrawal from the Plan. All state income laws (except in Pennsylvania and New Jersey) follow the federal law and exclude the amount you defer from current taxable income. Under current law, there will be no income tax liability until you actually receive a payment. Check with your legal or tax counsel concerning your specific state or local (city, county) tax laws. WHAT ABOUT SOCIAL SECURITY, MEDICARE AND LOCAL TAXES? Deferred amounts are subject to these taxes AT THE TIME OF DEFERRAL. The eventual payment of your deferral accounts, including earnings, will not be subject to these taxes under current law. Distributions from the Plan will not reduce your Social Security benefits after retirement, as they do not represent wages for services performed in the calendar year of receipt. HOW WILL PAYMENTS BE REPORTED? Payments made to you will be reported on Form W-2, whether you are employed or retired at time of distribution. Payments to beneficiaries made in the event of your death will be reported on Form 1099. CAN I ROLL OVER MY DISTRIBUTION TO AN IRA? No, because this is not a tax-qualified program under the Internal Revenue Code. When electing a Plan distribution, you should seek professional tax advice to determine the best course of action in light of your financial circumstances. WILL THE PLAN BENEFITS PAID TO MY BENEFICIARIES BE INCLUDED IN MY GROSS ESTATE FOR FEDERAL ESTATE TAX PURPOSES? Yes, the cumulative amounts in your account at the time of death will be included in your estate. If, however, your spouse is your beneficiary and the benefit qualifies for the estate tax marital deduction, the amount in your account may not increase your taxable estate. You should consult with your legal and financial advisors about beneficiary designations and the payment of benefits in the event of your death. 8 9 HOW WILL MY DISTRIBUTIONS BE TAXED? Under current law, distributions from your account are taxed as ordinary income when received, and no special tax advantages or penalties apply. Federal and state income taxes will be withheld from your payments when they are made. ENROLLMENT 17. HOW DO I SIGN UP FOR THE DEFERRED COMPENSATION PLAN? You will be given enrollment materials a few weeks before a deferral election is required under the Plan. You should review these materials carefully with your family and financial advisors, and return all the necessary forms by the dates described in the materials. 18. WHO CAN I TALK TO IF I HAVE QUESTIONS ABOUT THE DEFERRED COMPENSATION PLAN OR THE ENROLLMENT PACKAGE? If you have general questions about the Plan or the enrollment materials, call Mike Byrne (205/325-7329) or Al Delchamps (205/325-7676). You should call Mike Byrne (205/325-7329) for information about your Plan accounts and the available investment options, to change the way future allocations to your account are invested, to move funds among the investment options, and for information regarding beneficiary designations. OTHER INFORMATION 19. WHAT INFORMATION WILL I RECEIVE ABOUT MY PLAN BALANCE? You will receive a quarterly statement that will provide you with the balance in your account, deferrals and investment earnings for the quarter, and other information. 20. WHAT ARE THE SECTION 16 CONSEQUENCES OF PARTICIPATING IN THE PLAN? You need to review this Question and Answer only if you are an executive officer of Sonat Inc. who is subject to the provisions of Section 16 of the Securities Exchange Act. Section 16(b) requires executive officers to pay over to the Company any profit realized from the purchase and sale, or sale and purchase, of Company equity securities within any period of less than six months. Section 16(a) requires reports of changes in beneficial ownership of Sonat equity securities to the Securities and Exchange Commission. YOU WILL BE NOTIFIED IF YOU ARE SUBJECT TO SECTION 16. The following will describe how transactions in the Plan are treated for purposes of Sections 16(b) (short swing profit liability) and 16(a) (reporting). When a transaction is said to be "exempt", it means the transaction is not a "purchase" or a "sale" under Section 16(b). (As noted below, however, many exempt transactions still trigger reporting requirements under Section 16(a).) 9 10 A. CONTRIBUTIONS; INVESTMENT OF EARNINGS Acquisitions of units of the phantom Sonat Stock Fund through deferrals and reinvestment of earnings under the Plan are exempt under Section 16(b). B. TRANSFERS AMONG INVESTMENT OPTIONS; IN-SERVICE CASH WITHDRAWALS AND PAYMENTS; SAVINGS PLAN LOANS Transfers among investment options under the Plan are called "discretionary" transactions under the Section 16 rules. The Section 16 consequence of a discretionary transaction in the Plan is affected by the discretionary transactions in ANY Sonat plan that involves stock or phantom stock funds - the Sonat Savings Plan, the Savings Plan feature of the Supplemental Benefit Plan, and the Deferred Compensation Plan. A discretionary disposition of units of the Sonat Stock Fund or phantom Sonat Stock Fund in ANY of these plans (such as a transfer into a mutual fund investment, or the liquidation of stock to acquire loan proceeds or to fund a cash in-service withdrawal from the Savings Plan) will be exempt UNLESS you elected to make a discretionary acquisition (such as transfer from a mutual fund (or phantom mutual fund) into units of the Sonat Stock Fund (or phantom Sonat Stock Fund)) within the previous 6 months under ANY plan. Similarly, a discretionary acquisition of units of the Sonat Stock Fund (or phantom Sonat Stock Fund) under ANY plan (as described above) is exempt, UNLESS you elected to make a discretionary disposition of units of the Sonat Stock Fund (or phantom Sonat Stock Fund) under ANY plan within the previous 6 months. For example, assume the following sequence of transactions, with no prior discretionary transactions under any plan: December 1, 1998 -- you transfer 1,000 units out of the Sonat Stock Fund in the Savings Plan into a mutual fund. January 1, 1999 -- you transfer 1,000 units out of the phantom Sonat Stock Fund in the Supplemental Savings Plan into a phantom mutual fund. March 1, 1999 -- you acquire 1,000 units of the phantom Sonat Stock Fund in the Deferred Compensation Plan by transfer from a mutual fund. July 1, 1999 -- you take an in-service cash withdrawal from the Savings Plan which results in the liquidation of 500 units of the Sonat Stock Fund. The first two transactions are exempt under Section 16(b), because they are both dispositions of Sonat stock or phantom stock and there was no discretionary acquisition under any plan within the preceding six months. The March 1 transaction is a non-exempt "purchase" under Section 16(b), because it is a discretionary acquisition that occurs only two months after a discretionary disposition (the January 1 transfer). The fact that the January and March transactions occurred in different plans does not change the result. The March 1 purchase can be matched against any sale that occurs inside or outside the plans within six months before or after March 1 (including a sale resulting from a cashless option exercise). The July transaction is a discretionary disposition that occurred within three months of the March 1 discretionary acquisition, so it is a non-exempt "sale" under Section 16(b). The March purchase and the July sale will be matched against each other for Section 16(b) short-swing profit liability purposes. 10 11 C. DISTRIBUTIONS FROM THE PLAN In general, the liquidation of phantom Sonat Stock Funds units in connection with a distribution from the Plan is a Section 16(b) "sale", unless the Executive Compensation Committee of the Company's Board of Directors specifically approves the related deferral election. (However, such a liquidation is exempt under Section 16(b) if the distribution results from termination of employment, if you did not initially elect a lump-sum payment and subsequently change to annual installments.) D. REPORTING REQUIREMENTS Transactions in the Plan that result in a Section 16 "purchase" or "sale" must be reported on Form 4. All other (exempt) discretionary transactions must be reported on Form 5 (or, if you so elect, on an earlier Form 4). Transactions that result from your termination of service are not subject to any reporting requirements (unless you continue to serve as a director). Each Form 4 or Form 5 report that shows a transaction in phantom Sonat Stock Fund units must show the total number of shares of phantom Sonat stock represented by the units credited to your account in the Plan. 21. CAN THE PLAN BE AMENDED OR DISCONTINUED? The Company's Board of Directors retains the right to amend or terminate the Plan at any time. However, your accrued benefits at the time of any amendment, suspension or termination of the Plan cannot be reduced. 11 12 SONAT INC. DEFERRED COMPENSATION PLAN PLAN SUMMARY EXHIBIT A COMPARISON OF NON-QUALIFIED DEFERRED COMPENSATION PLAN AND BEFORE-TAX (401K) CONTRIBUTIONS TO QUALIFIED SONAT SAVINGS PLAN
======================================================================================== NON-QUALIFIED DEFERRED QUALIFIED COMPENSATION PRINCIPAL CHARACTERISTICS SONAT SAVINGS PLAN PLAN ======================================================================================== Yes Deferral on Pre-Tax Basis Yes(1) - ---------------------------------------------------------------------------------------- Yes FICA/Medicare/Local Withheld on Deferrals Yes - ---------------------------------------------------------------------------------------- Yes Earnings Accumulate Tax Deferred Yes - ---------------------------------------------------------------------------------------- No Actual Funds or Assets Held in Participant Accounts Yes - ---------------------------------------------------------------------------------------- Yes Distributions Subject to Income Taxes Yes - ---------------------------------------------------------------------------------------- 28% Federal Income Tax Statutory Withholding Rate on 20%(2) Lump-Sum Payments - ---------------------------------------------------------------------------------------- No Rollover into an IRA Allowed Yes - ---------------------------------------------------------------------------------------- No 5 or 10 Year Income Tax Averaging Available Yes(3) - ---------------------------------------------------------------------------------------- No 15% Excise Tax on Lump-Sum Distributions Over $750,000 Yes(4) - ---------------------------------------------------------------------------------------- Yes(5) Hardship Withdrawals Available Yes - ---------------------------------------------------------------------------------------- No Loans Against Accounts Available Yes - ---------------------------------------------------------------------------------------- No 10% Penalty Tax for pre-age 59 1/2 distributions Yes(2) ========================================================================================
- ------------------------ (1) Amount limited by IRS rules. (2) If not rolled over. (3) 5 year averaging not available on distributions after 1999; 10 year averaging grandfathered for those born on or before January 1, 1936. (4) For years after 1999. (5) "Hardship" definition is much more stringent than in the Savings Plan. 12 EX-11 8 COMPUTATION OF EARNINGS PER SHARE 1 Exhibit 11 SONAT INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE
Years Ended December 31, ---------------------------------------- 1996 1995 1994 ---- ---- ---- (In Thousands Except Per-Share Amounts) Primary Earnings Per Share (1) ------------------------------ Net Income $201,189 $192,888 $141,407 ======== ======== ======== Common Stock and Common Stock Equivalents: Weighted Average Number of Shares of Common Stock Outstanding 86,211 86,270 87,119 Common Stock Equivalents Applicable to Outstanding Stock Options 1,353 832 951 -------- -------- ------- Weighted Average Number of Shares of Common Stock and Common Stock Equivalents Outstanding 87,564 87,102 88,070 ======== ======== ====== Primary Earnings Per Share $ 2.30 $ 2.21 $ 1.61 ======== ======== ========
(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 9 COMPUTATION OF RATIOS 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, ---------------------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- (In Thousands) Earnings from Continuing Operations: Income before income taxes $294,304 $282,497 $154,871 $364,198 $133,728 Fixed charges (see computation below) 152,830 165,154 127,909 129,160 156,428 Less allowance for interest capitalized (5,094) (6,540) (6,692) (4,101) (8,422) -------- -------- ------------- -------- -------- Total Earnings Available for Fixed Charges $442,040 $441,111 $276,088 $489,257 $281,734 ======== ======== ============= ======== ======== Fixed Charges: Interest expense before deducting interest capitalized $145,406 $157,653 $120,295 $122,204 $149,165 Rentals(b) 7,424 7,501 7,614 6,956 7,263 -------- -------- ------------- -------- -------- $152,830 $165,154 $127,909 $129,160 $156,428 ======== ======== ============= ======== ======== Ratio of Earnings to Fixed Charges 2.9 2.7 2.2 3.8 1.8 ======== ======== ============= ======== ========
___________ (a) Amounts include the Company's portion of the captions as they relate to persons accounted for by the equity method. (b) These amounts represent 1/3 of rentals which approximate the interest factor applicable to such rentals of the Company and its subsidiaries and unconsolidated affiliates. EX-21 10 SUBSIDIARIES OF SONAT INC. 1 EXHIBIT 21 SUBSIDIARIES OF SONAT INC. AS OF JANUARY 1, 1997
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 Intrastate-Alabama Inc. Alabama 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% Sonat Public Service Company L.L.C.(e) Delaware 50% Vail Trading Company Delaware 100% Sonat Power Inc.(f) Delaware 100% Pacific Gas Power Inc. Delaware 100% Sonat Power Marketing Inc. Delaware 100% Sonat Power Marketing L.P.(g) Delaware 65% Utilities Service Group L.P.(h) 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(i) Delaware 100% Field Gas Gathering Inc. Delaware 100% Sonat Minerals Inc. Delaware 100% Sonat Minerals Leasing Inc. Delaware 100% Sonat Texas Gathering Company Delaware 100% Sonat Oil Transmission Inc. Delaware 100% Stateline Gas Gathering Company Delaware 100% SONAT SERVICES INC. Alabama l00% Sonat Services (D.C.) Inc. Delaware 100% SOUTHERN NATURAL GAS COMPANY Delaware 100% Destin Pipeline Company Inc. Delaware 100% Sonat Gathering Company Delaware 100% Sonat Ventures Inc.(j)(k) Delaware 100% Sonat NGV Technology Inc.(l) Delaware 100% South Georgia Natural Gas Company Delaware l00% Southern Deepwater Pipeline Company(m) Delaware l00% Southern LNG Inc. (formerly Southern Energy) Delaware l00% Southern Gas Storage Company(n) Delaware l00% Southern Offshore Pipeline Company(m) Delaware 100%
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; AGL Energy Services, Inc., a wholly owned subsidiary of AGL Resources, Inc., holds a 35-percent limited partnership interest. (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 Marketing Company L.P. has a 50-percent interest in Sonat Public Service Company L.L.C., a limited liability company, the remaining 50 percent of which is owned by PSNC Production Corporation, a wholly owned subsidiary of Public Service Company of North Carolina, Inc. (f) Sonat 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. (g) Sonat Power Marketing Inc. is a 65-percent participant and General Partner in Sonat Power Marketing L.P., a limited partnership; AGL Power Services, Inc., a wholly owned subsidiary of AGL Resources, Inc., holds a 35-percent limited partnership interest. (h) Sonat Energy Services Company has a 64-percent limited partnership interest and a 1-percent general partnership interest and Sonat Power Marketing Inc. has a 35-percent limited partnership interest in Utilities Service Group L.P., a Delaware limited partnership. (i) 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. (j) Sonat Ventures Inc. is a 50-percent participant in Monarch CNG, an Alabama general partnership, the remaining 50-percent interest of which is held by Midtown NGV, Inc., a wholly owned subsidiary of Energen Corporation. 4 (k) Sonat Ventures Inc. is a 50-percent participant in Florida Natural Fuels, Ltd., a Florida limited partnership, the remaining 50-percent interest of which is held by Suwannee Gas Marketing, Inc., a wholly owned subsidiary of Lykes Energy, Inc. (l) Sonat NGV Technology Inc. is a one-half participant in NGV Southeast Technology Center, L.L.C., a Georgia limited liability company, the remaining 50 percent of which is held by Georgia Energy Company, a subsidiary of AGL Resources, Inc. (m) Southern Deepwater Pipeline Company and Southern Offshore Pipeline Company each have a 50-percent interest in Sea Robin Pipeline Company, an unincorporated joint venture. (n) Southern Gas Storage Company has a 50-percent interest in Bear Creek Storage Company, an unincorporated joint venture, the remaining 50 percent of which is owned by Tennessee Storage Company, a wholly owned subsidiary of Tennessee Gas Pipeline Company, a subsidiary of El Paso Energy Corporation. Bear Creek Storage Company has a l00-percent interest in Bear Creek Capital Corporation. EX-22 11 PROXY STATEMENT OF SONAT INC. 1 EXHIBIT 22 SONAT INC. P. O. BOX 2563, BIRMINGHAM, ALABAMA 35202 TELEPHONE: (205) 325-3800 - -------------------------------------------------------------------------------- NOTICE OF ANNUAL MEETING OF STOCKHOLDERS TO BE HELD APRIL 24, 1997 To Our Stockholders: The Annual Meeting of Stockholders of Sonat Inc., a Delaware corporation, will be held at the Ballroom, The Ritz-Carlton Houston, 1919 Briar Oaks Lane, Houston, Texas at 9:00 a.m., local time, on Thursday, April 24, 1997, for the following purposes: 1. To elect five Directors as members of the Board of Directors of the Company, to serve until the 2000 Annual Meeting of Stockholders and until their respective successors have been duly elected and qualified. 2. To elect an Auditor of the Company for the ensuing year. The Board of Directors of the Company has recommended Ernst & Young LLP, the present Auditor, for election as Auditor (Proposal No. l). 3. To transact such other business as may properly be brought before the meeting. Only holders of Common Stock of record at the close of business on March 7, 1997, will be entitled to vote at the meeting. The meeting may be adjourned from time to time without other notice than by announcement at the meeting, or any adjournment thereof, and any and all business for which the meeting is hereby noticed may be transacted at any such adjournment. By order of the Board of Directors, /s/ Beverley T. Krannich BEVERLEY T. KRANNICH Secretary Birmingham, Alabama March 19, 1997 - -------------------------------------------------------------------------------- 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 24, 1997 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 24, 1997 at 9:00 a.m. at the Ballroom, The Ritz-Carlton Houston, 1919 Briar Oaks Lane, Houston, Texas. Mailing of the Proxy Statement and the accompanying proxy card to the stockholders is expected to commence on or about March 20, 1997. VOTING SECURITIES As of January 31, 1997, the Company had outstanding 86,417,161 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 7, 1997, 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. 1. The submission of an executed proxy will not affect a stockholder's right to attend, and to vote in person at, the Annual Meeting. A stockholder who executes a proxy may revoke it at any time before it is voted by filing a written revocation with the Secretary of the Company, executing a proxy bearing a later date or attending and voting in person at the Annual Meeting. THE BOARD OF DIRECTORS URGES YOU TO SIGN, DATE AND RETURN THE ENCLOSED PROXY IN THE ENCLOSED RETURN ENVELOPE. ELECTION OF DIRECTORS The Company's Restated Certificate of Incorporation provides for the classification of the Board of Directors into three classes (Class I, Class II and Class III). Five Class II Directors are to be elected at the Annual Meeting of Stockholders to serve for a three-year term and until the election and qualification of their respective successors in office. The five nominees for election as Class II Directors are Jerome J. Richardson, Donald G. Russell, Adrian M. Tocklin, James B. Williams and Joe B. Wyatt. Each of the nominees has been previously elected as a Director by the stockholders, except for Mr. Russell and Ms. Tocklin. In the event that any of the nominees becomes unavailable for any reason, which is not anticipated, the Board of Directors in its discretion may, unless it has taken appropriate action to provide for a lesser number of Directors, designate a substitute nominee, in which event, pursuant to the accompanying proxy, votes will be cast for such substitute nominee. THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" JEROME J. RICHARDSON, DONALD G. RUSSELL, ADRIAN M. TOCKLIN, JAMES B. WILLIAMS AND JOE B. WYATT AS CLASS II DIRECTORS. 3 NOMINEES FOR DIRECTOR -- CLASS II -- TERMS TO EXPIRE 2000 JEROME J. RICHARDSON, age 60, is Owner/Founder of the NFL Carolina [PHOTO Panthers. He has served as a Director of the Company since 1991. Mr. JEROME J. RICHARDSON] Richardson is also a Director of NCAA Foundation, 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. - ---------------------------------------------------------------------------------------------- DONALD G. RUSSELL, age 65, is Executive Vice President of the [PHOTO Company and Chairman of the Board and Chief Executive Officer of DONALD G. RUSSELL] Sonat Exploration Company (a wholly-owned subsidiary of the Company). On September 22, 1994, he was elected as a Director of the Company by the Board of Directors, effective as of September 22, 1994. During the past five years, Mr. Russell has served as an executive officer of the Company and Sonat Exploration Company. - ---------------------------------------------------------------------------------------------- ADRIAN M. TOCKLIN, age 45, is President -- Diversified Operations of [PHOTO CNA Insurance Companies, the principal business of which is property ADRIAN M. TOCKLIN] and casualty insurance. On July 28, 1994, she was elected as a Director of the Company by the Board of Directors, effective as of September 1, 1994. She is also a 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. - ----------------------------------------------------------------------------------------------
2 4 JAMES B. WILLIAMS, age 63, is Chairman of the Board and Chief [PHOTO Executive Officer of SunTrust Banks, Inc. He has served as a JAMES B. WILLIAMS] Director of the Company since 1987. Mr. Williams is also a Director of The Coca-Cola Company, Genuine Parts Company, Georgia-Pacific Corporation, Rollins, Inc. and RPC, Inc. During the past five years, Mr. Williams has served as an executive officer of SunTrust Banks, Inc. and certain of its subsidiaries. - ---------------------------------------------------------------------------------------------- JOE B. WYATT, age 61, is Chancellor, Chief Executive Officer and [PHOTO Trustee of Vanderbilt University, a position he has held during the JOE B. WYATT] past five years. He has served as a Director of the Company since 1984. Chancellor Wyatt is also a Director of Advanced Network & Services, Inc., Ingram Micro, Inc., Reynolds Metals Company and University Research Association. - ----------------------------------------------------------------------------------------------
CONTINUING DIRECTORS -- CLASS I -- TERMS TO EXPIRE 1999 [PHOTO WILLIAM O. BOURKE, age 69, is Chairman of the Executive Committee of WILLIAM O. BOURKE] the Board of Directors and a Director of Reynolds Metals Company, an 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., Premark International Inc. and Tupperware Corporation. During the past five years prior to his retirement in April 1992, Mr. Bourke served as an executive officer of Reynolds Metals Company. - ----------------------------------------------------------------------------------------------
3 5 [PHOTO ROBERTO ROBERTO C. GOIZUETA, age 65, is Chairman of the Board and Chief C. GOIZUETA] Executive Officer of The Coca-Cola Company, the principal business of which is the manufacture of soft drinks. He has served as a Director of the Company since 1981. Mr. Goizueta is also a Director 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. - ---------------------------------------------------------------------------------------------- [PHOTO RONALD RONALD L. KUEHN, JR., age 61, is Chairman of the Board, President L. KUEHN, JR.] and Chief Executive Officer of the Company. He has served as a Director of the Company since 1981. Mr. Kuehn is also a Director of AmSouth Bancorporation, Praxair, Inc., Protective Life Corporation, The Dun & Bradstreet Corporation, Transocean Offshore Inc. and Union Carbide Corporation, and a member of the Board of Trustees of Birmingham-Southern College and Tuskegee University. During the past five years, Mr. Kuehn has served as an executive officer of the Company. - ---------------------------------------------------------------------------------------------- [PHOTO ROBERT ROBERT J. LANIGAN, age 68, is Chairman Emeritus of the Board of J. LANIGAN] Directors of Owens-Illinois, Inc., the principal business of which is the manufacture and sale of packaging products. He has served as a Director of the Company since 1983. Mr. Lanigan is also a Director of Chrysler Corporation, Cognizant Corporation, The Coleman Company, Inc., The Dun & Bradstreet Corporation and Transocean Offshore Inc. During the past five years prior to his appointment to his current position, Mr. Lanigan served as an executive officer of Owens-Illinois, Inc. - ---------------------------------------------------------------------------------------------- [PHOTO CHARLES CHARLES MARSHALL, age 67, is the former Vice Chairman of the Board MARSHALL] of American Telephone and Telegraph Company. He has served as a Director of the Company since 1982. Mr. Marshall is also a Director of Ceridian Corporation, GATX Corporation, Hartmarx Corporation and Sundstrand Corporation. Prior to his retirement, Mr. Marshall served as an executive officer of American Telephone and Telegraph Company. - ----------------------------------------------------------------------------------------------
4 6 CONTINUING DIRECTORS -- CLASS III -- TERMS TO EXPIRE 1998 [PHOTO MAX MAX L. LUKENS, age 48, is Chairman, President and Chief Executive L. LUKENS] Officer of Baker Hughes Incorporated, the principal business of which is the provision of products and services to the petroleum and continuous process industries. He has served as a Director of the Company since 1995. Mr. Lukens is also a Director of Baker Hughes Incorporated and Transocean Offshore Inc. During the past five years, Mr. Lukens has served as an executive officer of Baker Hughes Incorporated. - ---------------------------------------------------------------------------------------------- [PHOTO BENJAMIN BENJAMIN F. PAYTON, age 64, is President of Tuskegee University, a F. PAYTON] position he has held during the past five years. He has served as a Director of the Company since 1992. Dr. Payton is also a Director of AmSouth Bancorporation, ITT Corporation, Liberty Corporation, Morrison's Health Care, Inc., Praxair, Inc. and Ruby Tuesday, Inc. - ---------------------------------------------------------------------------------------------- [PHOTO JOHN JOHN J. PHELAN, JR., age 65, is the former Chairman of the Board and J. PHELAN, JR.] Chief Executive Officer of the New York Stock Exchange. From 1991 to 1993, he was President of the International Federation of Stock Exchanges. Mr. Phelan has served as a Director of the Company since 1990. He is also a Director of Eastman Kodak Company, Merrill Lynch & Co., Inc. and Metropolitan Life Insurance Company and a Senior Advisor to The Boston Consulting Group. - ----------------------------------------------------------------------------------------------
John J. Creedon, who is currently a Class III Director, will retire from the Board of Directors on April 24, 1997, in accordance with the Board's retirement policy. BOARD MEETINGS AND COMMITTEES During 1996 the Board of Directors held eight regular and special meetings. The Board has established Committees that assist the Board in the discharge of its responsibilities. Each Director attended at least 75% of the meetings of the Board and the Committees on which the Director served. 5 7 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, Mr. Phelan, Vice Chairman, and Mr. Goizueta, Mr. Richardson, Ms. Tocklin and Mr. Wyatt. The Committee met three times during 1996. 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 three times during 1996. 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 funded plans. The current members of the Committee are Mr. Wyatt, Chairman, and Mr. Lanigan, Mr. Marshall, Dr. Payton, Ms. Tocklin and Mr. Williams. The Committee met twice during 1996. 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 and Mr. Wyatt. The Committee met six times during 1996. 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 and Mr. Richardson. The Committee met three times during 1996. 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 6 8 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. Bourke, Chairman, and Mr. Creedon, Mr. Marshall, Dr. Payton, Mr. Phelan and Ms. Tocklin. The Committee met twice during 1996. 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, Ms. Tocklin, Mr. Williams and Mr. Wyatt. The Committee met three times during 1996. COMPENSATION OF OUTSIDE DIRECTORS FEES AND RETAINERS. Each non-employee Director of the Company receives a quarterly retainer of $9,000 ($10,250 for Committee Chairmen) and a fee of $1,250 for each Board meeting and each Board Committee meeting attended, plus incurred expenses where appropriate. Pursuant to the Director's Fees Deferral Plan, a Director may elect to defer receipt of some or all of the Director's fees and retainer. All amounts deferred are credited to the Director's account under the Plan. The Director may invest the Plan balance in "phantom" investments in the Company's common stock and eight mutual funds. The Director may choose to have the account balance distributed in a lump sum or in annual installments, commencing upon termination of service as a Director. RETIREMENT PLAN FOR DIRECTORS. Directors of the Company who during some portion of their service as Directors were not officers of the Company or its subsidiaries are participants in the Retirement Plan for Directors. An eligible Director who ceases being a Director after reaching age 70, completing five years of service as a non-employee Director or as a result of death or permanent disability, will receive a retirement benefit from the Plan. The Director may choose to have such benefit paid as either (1) a cash lump sum in an amount equal to the value of a series of quarterly payments equal to the retainer (as of the date of the Director's retirement) for the period the Director served as a non-employee Director of the Company or (2) in a series of quarterly payments with a value equal to such lump-sum payment. RESTRICTED STOCK PLAN FOR DIRECTORS. Each non-employee Director of the Company is a participant in the Restricted Stock Plan for Directors. Each such Director who was a member of the Board of Directors on April 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 7 9 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, 1997.
AMOUNT AND NATURE OF NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) --------------------------------------------------------- ----------------------- Richard B. Bates......................................... 88,277(2) William O. Bourke........................................ 5,000 John J. Creedon.......................................... 13,550(3) Roberto C. Goizueta...................................... 3,600 Ronald L. Kuehn, Jr. .................................... 811,067(2 and 4) Robert J. Lanigan........................................ 6,040 Max L. Lukens............................................ 967 Charles Marshall......................................... 7,600 James E. Moylan, Jr. .................................... 118,043(2 and 5) Benjamin F. Payton....................................... 2,612 John J. Phelan, Jr. ..................................... 2,660 Jerome J. Richardson..................................... 5,192 James A. Rubright........................................ 101,475(2) Donald G. Russell........................................ 351,442(2) William A. Smith......................................... 253,672(2) Adrian M. Tocklin........................................ 2,633(6) James B. Williams........................................ 15,200 Joe B. Wyatt............................................. 3,200 All Present Directors and Executive Officers as a Group (20 persons)........................................... 1,926,023(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, 1997, each such individual beneficially owned less than 1.0% 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 20 persons, beneficially owned 2.2% of the outstanding shares of the Company's Common Stock. The number of shares shown includes 800 shares of restricted stock for each of Mr. Bourke, Mr. Goizueta, Mr. Lanigan, Mr. Lukens, Mr. Marshall, Dr. Payton, Mr. Phelan, Mr. Richardson, Ms. Tocklin, Mr. Williams and Mr. Wyatt, and 400 shares of restricted stock for Mr. Creedon, granted under the Company's Restricted Stock Plan for Directors, which shares had not vested as of January 31, 1997. 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, 1997, the following individuals also held the following number of "phantom" shares of the Company's Common Stock under the Company's Director's Fees Deferral Plan (with respect to Mr. Creedon, Mr. Marshall, Ms. Tocklin and Mr. Williams) or Supplemental Benefit Plan (with respect to the other named 8 10 individuals): Mr. Bates, 477 phantom shares; Mr. Creedon, 9,203 phantom shares; Mr. Kuehn, 12,424 phantom shares; Mr. Marshall, 4,594 phantom shares; Mr. Moylan, 188 phantom shares; Mr. Rubright, 455 phantom shares; Mr. Russell, 6,717 phantom shares; Mr. Smith, 513 phantom shares; Ms. Tocklin, 711 phantom shares; and Mr. Williams, 4,247 phantom shares. NOTE 2: The number of shares shown for Messrs. Bates, Kuehn, Moylan, Rubright, Russell and Smith includes 9,600 shares, 109,600 shares, 13,500 shares, 15,700 shares, 31,000 shares and 12,100 shares, respectively, of restricted stock granted under the Company's Executive Award Plan, which shares had not vested as of January 31, 1997. Such persons have the right to vote and receive dividends on such shares, but do not have the power to dispose of, or to direct the disposition of, such shares until such shares are vested pursuant to the terms of such plan. The number of shares shown for Messrs. Bates, Kuehn, Moylan, Rubright, Russell and Smith also includes (a) 8,441 shares, 47,593 shares, 10,622 shares, 275 shares, 11,391 shares and 16,296 shares, respectively, held by the Trustee under the Company's Savings Plan as of January 31, 1997; and (b) 66,000 shares, 634,800 shares, 92,000 shares, 85,500 shares, 297,000 shares and 211,000 shares, respectively, covered by options under the Company's Executive Award Plan which were exercisable within sixty days after January 31, 1997. 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 9,500 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 205,700 shares of restricted stock granted under the Company's Executive Award Plan, which shares had not vested as of January 31, 1997; 112,874 shares held by the Trustee under the Company's Savings Plan as of January 31, 1997; 1,484,800 shares covered by options under the Company's Executive Award Plan which were exercisable within sixty days after January 31, 1997; and 9,200 shares of restricted stock granted under the Company's Restricted Stock Plan for Directors, which shares had not vested as of January 31, 1997. COMPENSATION OF EXECUTIVE OFFICERS REPORT OF THE EXECUTIVE COMPENSATION COMMITTEE The Executive Compensation Committee of the Board of Directors of the Company, which is composed solely of non-employee Directors, administers the Company's executive compensation program. The Committee's primary responsibility is to ensure that the executive compensation program furthers the interests of the Company and its stockholders. The Company's executive compensation program has three principal objectives: (1) to attract and retain a highly qualified and motivated management team; (2) to appropriately reward individual executives for their contributions to the attainment of the Company's key strategic goals; and (3) to link the interests of executives and stockholders through stock-based plans and performance measures. The Committee meets with outside consultants at least annually to evaluate the Company's performance against the performance of a peer group of companies and to review and compare the level of compensation paid or awarded to key executives to the compensation practices of the peer 9 11 group. The peer group used for determining 1996 compensation for corporate executives consisted of 23 publicly held companies in the energy business (the "Corporate Peer Group"). In comparing the level of the Company's compensation to that of the companies in the Corporate Peer Group, the Committee reviews an analysis which "size-adjusts" the compensation paid by a company to take into account the relative size of the company as measured by its revenues. The recommended size-adjustment is computed by an independent compensation consulting firm. The Committee also reviews and may give greater weight to compensation survey data specific to a particular business segment when considering the compensation of executive officers whose job is related primarily to a single business segment. The Standard & Poor's Natural Gas Distribution/Pipeline Group described in the five-year total stockholder return comparison on page 18 of this Proxy Statement is not used to determine the compensation of executives, because that group includes primarily natural gas distribution companies and does not adequately represent the broader energy industry from which the Company recruits. 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 1996 were slightly above the median level overall, although some executives were below and some above the median. Mr. Kuehn has been in his current position for approximately 12 1/2 years. His salary for 1996 (which included a 3.1% increase, effective April 1) 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 program is designed to pay total annual cash compensation in the upper quartile of the relevant peer group when the Company meets or exceeds 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 1996 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 1996 bonus opportunities were the Company's 1996 earnings per share ("EPS") as compared to EPS targets established by the Committee, the Company's five- 10 12 year average cash flow return on assets as compared to that of a group of energy companies whose aggregate asset mix approximates that of the Company (the "Financial Peer Group") and, for the subsidiary officers, subsidiary earnings before interest, taxes and corporate charges ("EBITC") as compared to EBITC targets established by the Committee. Payout of the EPS and EBITC goals was based on comparison of actual EPS and EBITC to the EPS and EBITC targets, provided that a minimum level of EPS or EBITC was required for any payout to be made. The payout of the cash flow return on assets goal was based on the Company's performance against the mean of the Financial Peer Group. The corporate and subsidiary goals included in the 1996 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 1996 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 1997, the Committee reviewed in detail the extent to which the 1996 performance goals had been achieved. The Company's EPS was significantly above the target, and cash flow return on assets was significantly above the mean for the Financial Peer Group. Each of the subsidiaries met or exceeded its EBITC target. The payout percentages for these financial goals were 120% of the bonus opportunity for the EPS goal, 100% of the bonus opportunity for the cash flow return on assets goal, and 104-120% of the bonus opportunity for the subsidiary EBITC goals. In general, there was substantial achievement of the other corporate and subsidiary goals. The payout percentage for corporate and subsidiary goals ranged from 93% to 103%. Including individual performance, the total bonus payout percentages under the 1996 annual incentive program ranged from 95% to 130%. Mr. Kuehn's total bonus payout percentage for 1996 was 120% of his bonus opportunity. LONG-TERM STOCK INCENTIVES. The long-term stock incentives component of the Company's executive compensation program is designed to align executive and stockholder interests by rewarding executives for the attainment of stock price appreciation and total stockholder returns. As a general rule, the Committee administers the long-term stock incentive program through annual grants of stock options and restricted stock to certain executive officers of the Company and its major operating subsidiaries. Awards under the annual grant program were made in December 1996. In addition, the Committee may make special awards to individual executives during the year on a discretionary basis. In 1996, 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 dividends paid, and weighted for most recent performance) as compared to the total stockholder return of the Financial Peer Group. The amount of an executive's annual long-term incentive grant 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 Financial Peer Group. In 1996, the Company's weighted annualized three-year total stockholder return was in the top quartile of the Financial Peer Group. The December 1996 long-term incentive grants were designed to reflect that performance and to result in long-term compensation at that level. For purposes of determining the value of long-term incentive compensation, an independent compensation consulting firm uses a modified Black- 11 13 Scholes option pricing model to value stock options granted by the Company and the companies in the Corporate Peer Group. Similarly, the consulting firm values restricted share grants based on the present value of the shares on the date of grant (taking into account the vesting schedules of the grants and projected executive turnover). The Committee may adjust the grants to take into account individual performance and the number of options and restricted shares previously granted to the executive. In December 1996, 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 Financial Peer Group and to result in long-term compensation in the top quartile 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 Joe B. Wyatt
12 14 SUMMARY COMPENSATION TABLE The following table shows, for the fiscal years ending December 31, 1994, 1995 and 1996 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., 1996 $736,500 $800,000 $2,154,978(3) $748,800(4) 82,500 $108,429 Director, Chairman of 1995 $710,000 $418,600 $ 332,396(3) $306,375(5) 79,200 $108,107 the Board, President and 1994 $660,000 $450,000 $ 0 $459,938(6) 112,000 $110,064 Chief Executive Officer Richard B. Bates, 1996 $241,875 $165,000 $ 0 $208,000(4) 20,000 $ 27,146 Senior Vice President 1995 $222,500 $ 84,900 $ 0 $ 74,175(5) 18,000 $ 26,100 1994 $208,750 $121,400 $ 0 $ 91,988(6) 22,000 $ 25,362 James E. Moylan, Jr., 1996 $245,000 $190,000 $ 0 $208,000(4) 20,000 $ 28,245 Senior Vice President 1995 $226,250 $131,100 $ 0 $ 74,175(5) 18,000 $ 27,284 1994 $200,000 $114,300 $ 0 $ 91,988(6) 22,000 $ 25,525 James A. Rubright, 1996 $300,250 $193,700 $ 0 $208,000(4) 20,000 $ 40,173 Senior Vice President 1995 $287,750 $117,100 $ 0 $ 74,175(5) 18,000 $ 40,534 and General Counsel(7) 1994 $240,625 $130,600 $ 115,572(8) $268,275(6 & 9) 67,500 $ 35,813 Donald G. Russell, 1996 $481,500 $469,400 $ 0 $468,000(4) 53,000 $ 39,209 Director and Executive 1995 $465,750 $184,400 $ 0 $161,250(5) 45,000 $ 39,588 Vice President 1994 $430,000 $250,000 $ 0 $278,750(6) 66,000 $ 71,165 William A. Smith, 1996 $365,000 $218,300 $ 919,299(3) $197,600(4) 17,000 $ 43,817 Executive Vice President 1995 $361,250 $135,300 $ 188,043(10) $ 74,175(5) 18,000 $ 45,560 1994 $342,000 $200,000 $ 44,000(11) $167,250(6) 45,000 $ 44,439
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, 1996, and the value of such shares (calculated by multiplying the closing price of unrestricted shares of the Company's Common Stock on December 31, 1996 ($51.50) by the number of shares held on such date) is as follows: Mr. Kuehn, 109,600 shares, $5,644,400; Mr. Bates, 9,600 shares, $494,400; Mr. Moylan, 13,500 shares, $695,250; Mr. Rubright, 15,700 shares, $808,550; Mr. Russell, 31,000 shares, $1,596,500; and Mr. Smith, 12,100 shares, $623,150. NOTE 2: With respect to 1996, 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 for each such executive officer; (2) Company contributions to the Savings Plan accounts under the Company's Supplemental 13 15 Benefit Plan -- $47,224, $6,932, $7,189, $11,698, $26,459 and $17,832; 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 -- $48,455, $7,464, $8,306, $15,725, $0 and $13,235. 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 14,400 shares, 4,000 shares, 4,000 shares, 4,000 shares, 9,000 shares and 3,800 shares of restricted stock granted on December 5, 1996 to Messrs. Kuehn, Bates, Moylan, Rubright, Russell and Smith, respectively. NOTE 5: 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 6: 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 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 $44,000 housing allowance related to Mr. Smith's relocation from Birmingham, Alabama to Houston, Texas. 14 16 OPTION GRANT TABLE The following table contains certain information with respect to stock options (and tandem stock appreciation rights that become exercisable only upon certain change of control events ("Limited SARs")) granted in 1996 under the Company's Executive Award Plan to the named executive officers. OPTION/SAR GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION FOR OPTION TERM (10 INDIVIDUAL GRANTS YEARS) -------------------------------------------------------- ------------------------------------ NUMBER OF % OF TOTAL 5% 10% SECURITIES OPTIONS/SARS (RESULTING (RESULTING UNDERLYING GRANTED TO EXERCISE COMPANY STOCK COMPANY STOCK OPTIONS/SARS EMPLOYEES IN PRICE EXPIRATION PRICE OF PRICE OF NAME GRANTED(1) 1996 ($/SHARE)(2) DATE(3) $84.70)(4) $134.87)(4) - ----------------------------- ------------- ------------- ------------- ----------- ----------------- ----------------- All Stockholders............. -- -- -- -- $ 2,825,841,165 $ 7,161,390,132 Ronald L. Kuehn, Jr.......... 82,500 13.0% $ 52.00 12/4/06 $ 2,697,750 $ 6,836,775 Richard B. Bates............. 20,000 3.2% $ 52.00 12/4/06 $ 654,000 $ 1,657,400 James E. Moylan, Jr.......... 20,000 3.2% $ 52.00 12/4/06 $ 654,000 $ 1,657,400 James A. Rubright............ 20,000 3.2% $ 52.00 12/4/06 $ 654,000 $ 1,657,400 Donald G. Russell............ 53,000 8.4% $ 52.00 12/4/06 $ 1,733,100 $ 4,392,110 William A. Smith............. 17,000 2.7% $ 52.00 12/4/06 $ 555,900 $ 1,408,790 Named Executive Officers' Potential Realizable Value as a % of All Stockholders' Potential Realizable Value 0.25% 0.25%
NOTE 1: All stock options shown in the table were granted on December 5, 1996. 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). 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 December 5, 2001, the average of the closing prices of the Company's Common Stock during such period is at least $78.00. 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 $84.70 or $134.87 Resulting Company Stock Price (as the case may be) and the $52.00 exercise price, multiplied by (a) for all stockholders, the number of outstanding shares of the Company's Common Stock as of December 31, 1996, and (b) for each named executive officer, the number of options granted. 15 17 AGGREGATED OPTION/SAR EXERCISES AND FISCAL YEAR-END OPTION/SAR VALUE TABLE The following table shows certain information with respect to the named executive officers concerning the exercise of stock options (or stock appreciation rights ("SARs") granted in tandem therewith) during 1996 and unexercised stock options (and tandem SARs) held as of December 31, 1996.
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. ................. 110,000 $ 3,128,125 634,800 82,500 $ 17,455,200 $ 0 Richard B. Bates....... 9,000 $ 133,875 66,000 20,000 $ 1,503,250 $ 0 James E. Moylan, Jr. ................. 0 $ 0 92,000 20,000 $ 2,270,875 $ 0 James A. Rubright...... 0 $ 0 85,500 20,000 $ 1,891,187 $ 0 Donald G. Russell...... 0 $ 0 297,000 53,000 $ 7,510,687 $ 0 William A. Smith....... 45,000 $ 1,334,437 211,000 17,000 $ 5,564,312 $ 0
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 $51.50 (the closing price of the Company's Common Stock on December 31, 1996) 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 before January 1, 1992; plus (b) 2.0% of average covered compensation minus 1.667% of primary social security benefits for each year of service after January 1, 1992; plus (c) when the total of (a) plus (b) above equals 60% of average covered compensation minus 50% of primary social security benefits, 1% of average covered compensation for each year of service after January 1, 1992, not included in the calculation in (b) above, up to five such additional years of service. The eligible survivors of a deceased Retirement Plan participant are entitled to a survivors benefit, which usually equals 75% of the participant's retirement benefit. Retirement Plan benefits are generally paid as life annuities. 16 18 The Supplemental Benefit Plan provides its eligible participants and their eligible survivors with retirement and survivors benefits which would have been payable under the Retirement Plan but for the fact that benefits payable under funded pension plans are limited by federal tax laws. As a general rule, during 1996 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 1996 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 1996 COVERED RETIREMENT NAME SERVICE(1) COMPENSATION(2) BENEFIT(3) - ------------------------------------------ ----------- --------------- ---------------- Ronald L. Kuehn, Jr. ..................... 26.4 $ 1,155,150 $739,296 Richard B. Bates.......................... 11.8 $ 326,825 $211,129 James E. Moylan, Jr. ..................... 20.5 $ 376,150 $244,498 James A. Rubright......................... 2.8 $ 417,400 $156,525 Donald G. Russell......................... 8.9 $ 665,950 $155,832 William A. Smith.......................... 26.7 $ 500,350 $325,228
NOTE 1: The number of years of credited service under the Retirement Plan and Supplemental Benefit Plan as of December 31, 1996. NOTE 2: The amount of covered compensation under the Retirement Plan and Supplemental Benefit Plan during 1996. NOTE 3: The estimated annual retirement benefit payable as a single life annuity to the named executive officer (based on the assumptions that such officer retires at age 65 (age 67 for Mr. Russell) and has average covered compensation at his retirement date equal to his 1996 covered compensation, and calculated prior to the offset for primary social security benefits). 17 19 PERFORMANCE GRAPH The following graph compares the cumulative total stockholder return on the Company's Common Stock for the five-year period ending December 31, 1996, 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 12/31/91 100.00 100.00 100.00 12/31/92 153.57 107.61 110.45 12/31/93 190.56 118.41 131.04 12/31/94 191.67 120.01 125.08 12/31/95 252.23 164.95 176.73 12/31/96 373.77 202.73 234.70
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, 1991, 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, The Columbia Gas System, Inc., Consolidated Natural Gas Company, Eastern Enterprises, Enron Corp., ENSERCH Corporation, NICOR Inc., NorAm Energy Corp., ONEOK Inc., Pacific Enterprises, PanEnergy Corp., 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 18 20 certain exceptions, as set forth in the plans); (2) the individuals who, as of December 1, 1995, constituted the Board of Directors (the "Incumbent Board"), cease to be at least a majority of the Board of Directors (but including as Incumbent Board members, except as otherwise provided, any director whose election or nomination was approved by the Incumbent Board); or (3) there is consummation of a reorganization, consolidation or merger involving the Company, or sale of all or substantially all of the Company's assets, unless the stockholders and Board of Directors of the Company before the transaction control the resulting company after the transaction. Any outside Director who is eligible for a retirement benefit under the Retirement Plan for Directors will receive such benefit (regardless of whether 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's account balance in the Director's Fees Deferral Plan will be distributed immediately in a cash lump if either (a) the Director terminates service as a Director within three years after a Change of Control or (b) a Change of Control occurs after the Director has commenced payment of benefits from the Plan, regardless of any elections the Director may have made with respect to the timing and manner of payment of such account balance. 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. The named executive officers have Limited SARs in tandem with all outstanding options under the Executive Award Plan. Upon exercise of a Limited SAR or an SAR 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 19 21 (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 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, 1997, 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, $4,615,150 in cash and $0 in retirement benefits; Mr. Bates, $1,226,400 in cash and $0 in retirement benefits; Mr. Moylan, $1,310,150 in cash and $0 in retirement benefits; Mr. Rubright, $1,484,750 in cash and $5,502 in retirement benefits; Mr. Russell, $1,745,547 in cash and $0 in retirement benefits; and Mr. Smith, $1,750,050 in cash and $69,362 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. 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 1998 Annual Meeting of Stockholders, such proposals must be received at the principal executive offices of the Company, AmSouth-Sonat Tower, Birmingham, Alabama 35203, by no later than November 24, 1997. 20 22 STOCKHOLDER PROPOSALS TO BE PRESENTED AT MEETINGS. A stockholder who desires to propose any business at an annual meeting of stockholders must give the Secretary of the Company written notice which is received not later than the close of business on the 60th day nor earlier than the close of business on the 90th day before the first anniversary of the preceding year's annual meeting (the "Notice Deadline"). (Special notice provisions apply if the date of the annual meeting is more than 30 days before or more than 60 days after such anniversary date.) Adjournment of an annual meeting shall not commence a new Notice Deadline. The stockholder's notice must set forth (a) a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and the beneficial owner, if any, on whose behalf the proposal is made; (b) a representation that the stockholder is a holder of record of stock of the Company entitled to vote at such meeting (or if the record date for such meeting is subsequent to the date required for such stockholder notice, a representation that the stockholder is a holder of record at the time of such notice and intends to be a holder of record on the record date for such meeting) and intends to appear in person or by proxy at such meeting to propose such business; (c) any material interest of the stockholder in such business; and (d) for both the stockholder giving notice and the beneficial owner, if any, on whose behalf the proposal is made (1) the name and address of such stockholder and beneficial owner and (2) the class and number of shares owned beneficially and of record by such stockholder and beneficial owner. STOCKHOLDER NOMINATIONS FOR DIRECTORS. A stockholder who desires to nominate Directors at a meeting of stockholders must give the Secretary of the Company written notice within the Notice Deadline (for an annual meeting) or, for a special meeting at which directors are to be elected pursuant to the Company's notice of meeting, not earlier than the close of business on the 90th day before such special meeting and not later than the close of business on the later of the 60th day before such special meeting or the 10th day after the date public announcement is made of the date of the special meeting and the nominees proposed by the Board of Directors to be elected at such meeting. The stockholder's notice must set forth (a) the name and address of the stockholder giving the notice and of the beneficial owner, if any, on whose behalf the nominations are made; (b) the class and number of shares owned beneficially and of record by such stockholder and such beneficial owner; (c) a representation that the stockholder is a holder of record of stock of the Company entitled to vote at such meeting (or if the record date for such meeting is subsequent to the date required for such stockholder notice, a representation that the stockholder is a holder of record at the time of such notice and intends to be a holder of record on the record date for such meeting) and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (d) a description of all arrangements or understandings between the stockholder or beneficial owner and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made; (e) such other information regarding each nominee proposed by such stockholder as would have been required to be disclosed in solicitations of proxies for election of directors pursuant to the rules of the Securities and Exchange Commission; and (f) the consent of each nominee to be named in the proxy statement as a nominee and to serve as a Director of the Company if so elected. The Chairman of the meeting may refuse to transact any business or to acknowledge the nomination of any person if a stockholder has failed to comply with the foregoing procedures. 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. 21 23 INSTITUTIONAL OWNERSHIP OF COMMON STOCK The table below sets forth, as of December 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 - ------------------------------------------ ------------- ------------------ -------- FMR Corp. 82 Devonshire Street Boston, Massachusetts 02109............. Common Stock 9,199,244 10.6% The Prudential Insurance Company of America 751 Broad Street Newark, New Jersey 07102................ Common Stock 4,690,717 5.4%
In reports 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, 1996, FMR Corp. and The Prudential Insurance Company of America each stated that such stock was acquired in the ordinary course of business and was not acquired for the purpose of changing or influencing the control of the Company and was not acquired in connection with or as a participant in any transaction having such a purpose or effect. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE John J. Creedon, a Director of the Company, filed one late report under Section 16(a) of the Securities Exchange Act of 1934 with respect to a charitable contribution of the Company's Common Stock. VOTING AT THE ANNUAL MEETING The presence, in person or by proxy, of the holders of a majority of the Company's Common Stock is necessary to constitute a quorum at the Annual Meeting or any adjournment thereof. The vote required for the election of Directors and the approval of the other matters scheduled for a vote at the Annual Meeting is controlled by the provisions of the Company's Charter and By-Laws and the Delaware General Corporation Law. Directors are elected by a plurality vote. Approval of Proposal No. 1 would require a plurality vote. Abstentions and broker "non-votes" (shares not voted on a matter because a nominee holding shares for a beneficial owner neither receives voting instructions from such beneficial owner nor has discretionary voting power with respect thereto) shall not have an effect on the vote 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 anticipates that the fees that it will incur for this service, excluding out-of-pocket expenses, will not exceed $10,000. 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. ------------------------------ 22 24 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 1997 Annual Meeting, but if any other matters do properly come before the meeting, the persons named as proxies will vote upon such matters in accordance with their best judgment. Please complete, sign, date and return the enclosed proxy card promptly. SONAT INC. /s/ Beverley T. Krannich ------------------------- Beverley T. Krannich SECRETARY Birmingham, Alabama March 19, 1997 23 EX-23 12 CONSENT OF ERNST & YOUNG 1 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in (i) the Registration Statement (Form S-8, No. 33-64367) pertaining to the Sonat Inc. Executive Award Plan and the related Prospectus; (ii) the Registration Statement (Form S-8, No. 33-50142) pertaining to the Sonat Savings Plan and the related Prospectus; and (iii) the Registration Statements (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 20, 1997, with respect to the consolidated financial statements of Sonat Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 1996. ERNST & YOUNG LLP Birmingham, Alabama March 18, 1997 EX-24 13 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, 1996, 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, 1997. /s/ 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, 1996, 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, 1997. /s/ 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, 1996, 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, 1997. /s/ 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, 1996, 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, 1997. /s/ 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, 1996, 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, 1997. /s/ 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, 1996, 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, 1997. /s/ 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, 1996, 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, 1997. /s/ 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, 1996, 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, 1997. /s/ 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, 1996, 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, 1997. /s/ 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, 1996, 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, 1997. /s/ 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, 1996, 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, 1997. /s/ 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, 1996, and any and all amendments thereto to be filed with the Securities and Exchange Commission pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 and to file the same, with all exhibits thereto, and any other documents in connection therewith, with the Securities and Exchange Commission. The undersigned does hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. Each of such attorneys shall have and may exercise all powers to act hereunder with or without the others. IN WITNESS WHEREOF, the undersigned has signed her name hereto as of the 27th day of February, 1997. /s/ Adrian M. Tocklin 13 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of Sonat Inc., does hereby constitute and appoint Ronald L. Kuehn, Jr.; Thomas W. Barker, Jr.; 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, 1996, 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, 1997. /s/ James B. Williams 14 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of Sonat Inc., does hereby constitute and appoint Ronald L. Kuehn, Jr.; Thomas W. Barker, Jr.; 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, 1996, 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, 1997. /s/ Joe B. Wyatt EX-27 14 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF SONAT INC. FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1996 DEC-31-1996 29,639 0 577,717 0 30,500 751,519 5,084,283 2,650,419 3,774,659 848,837 872,255 0 0 87,233 1,497,131 3,774,659 2,699,535 3,394,898 2,224,012 2,567,492 288,192 0 86,946 294,304 93,115 201,189 0 0 0 201,189 2.33 2.33
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