-----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, UPWVCwf01FODvuCb72kVwRYxG1RJ+IHBhKHprA4UKVKcHhlc9eZrcTtRkssY84HH GXMHs1tWlcB9tJ7upCUekQ== 0000007332-99-000015.txt : 19990518 0000007332-99-000015.hdr.sgml : 19990518 ACCESSION NUMBER: 0000007332-99-000015 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOUTHWESTERN ENERGY CO CENTRAL INDEX KEY: 0000007332 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS TRANSMISSION & DISTRIBUTION [4923] IRS NUMBER: 710205415 STATE OF INCORPORATION: AR FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08246 FILM NUMBER: 99626595 BUSINESS ADDRESS: STREET 1: 1083 SAIN ST STREET 2: P O BOX 1408 CITY: FAYETTEVILLE STATE: AR ZIP: 72702-1408 BUSINESS PHONE: 5015211141 FORMER COMPANY: FORMER CONFORMED NAME: ARKANSAS WESTERN GAS CO DATE OF NAME CHANGE: 19790917 10-Q 1 FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 1999 =========================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------------- FORM 10-Q (Mark one) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 1999 -------------- or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _______ to _______ Commission file number 1-8246 SOUTHWESTERN ENERGY COMPANY (Exact name of registrant as specified in its charter) Arkansas 71-0205415 (State of incorporation (I.R.S. Employer or organization) Identification No.) 1083 Sain Street, P.O. Box 1408, Fayetteville, Arkansas 72702-1408 (Address of principal executive offices, including zip code) (501) 521-1141 (Registrant's telephone number, including area code) No Change (Former name, former address and former fiscal year; if changed since last report) 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 twelve 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Class Outstanding at May 5, 1999 ---------------------------- -------------------------- Common Stock, Par Value $.10 24,933,280 =========================================================================== - 1 - PART I FINANCIAL INFORMATION - 2 - SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) ASSETS
March 31, December 31, 1999 1998 ------------ --------- ($ in thousands) Current Assets Cash $ 1,595 $ 1,622 Accounts receivable 34,162 40,655 Income taxes receivable - 2,008 Inventories, at average cost 17,262 22,812 Other 4,852 5,174 --------- --------- Total current assets 57,871 72,271 --------- --------- Investments 13,457 14,015 --------- --------- Property, Plant and Equipment, at cost Gas and oil properties, using the full cost method 770,208 758,863 Gas distribution systems 218,558 217,741 Gas in underground storage 19,118 24,279 Other 28,094 27,582 --------- --------- 1,035,978 1,028,465 Less: Accumulated depreciation, depletion and amortization 489,119 478,790 --------- --------- 546,859 549,675 --------- --------- Other Assets 11,411 11,659 --------- --------- Total Assets $ 629,598 $ 647,620 ========= =========
The accompanying notes are an integral part of the financial statements. - 3 - SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) LIABILITIES AND SHAREHOLDERS' EQUITY
March 31, December 31, 1999 1998 ------------- --------- ($ in thousands) Current Liabilities Current portion of long-term debt $ 1,536 $ 1,536 Accounts payable 27,687 37,780 Taxes payable 7,060 3,408 Interest payable 7,033 2,471 Customer deposits 5,675 5,635 Over-recovered purchased gas costs 3,372 1,503 Other 2,464 2,453 --------- --------- Total current liabilities 54,827 54,786 --------- --------- Long-Term Debt, less current portion above 255,700 281,900 --------- --------- Other Liabilities Deferred income taxes 121,878 121,413 Other 3,574 3,665 --------- --------- 125,452 125,078 --------- --------- Commitments and Contingencies Shareholders' Equity Common stock, $.10 par value; authorized 75,000,000 shares, issued 27,738,084 shares 2,774 2,774 Additional paid-in capital 21,249 21,249 Retained earnings 201,738 194,102 Less: Common stock in treasury, at cost, 2,804,804 shares in 1999 and 2,803,527 shares in 1998 31,262 31,248 Unamortized cost of 120,877 restricted shares in 1999 and 133,172 restricted shares in 1998, issued under stock incentive plan 880 1,021 --------- --------- 193,619 185,856 --------- --------- Total Liabilities and Shareholders' Equity $ 629,598 $ 647,620 ========= =========
The accompanying notes are an integral part of the financial statements. - 4 - SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Quarter Ended March 31, 1999 1998 ---------- ---------- ($ in thousands, except per share amounts) Operating Revenues Gas sales $ 60,939 $ 62,882 Gas marketing 13,475 15,201 Oil sales 1,661 2,769 Gas transportation and other 2,145 2,104 ---------- ---------- 78,220 82,956 ---------- ---------- Operating Costs and Expenses Gas purchases - utility 20,360 18,687 Gas purchases - marketing 12,088 14,272 Operating and general 13,923 15,129 Depreciation, depletion and amortization 10,372 13,039 Taxes, other than income taxes 1,548 1,906 ---------- ---------- 58,291 63,033 ---------- ---------- Operating Income 19,929 19,923 ---------- ---------- Interest Expense Interest on long-term debt 4,834 5,048 Other interest charges 283 265 Interest capitalized (839) (1,135) ---------- ---------- 4,278 4,178 ---------- ---------- Other Income (Expense) (680) (873) ---------- ---------- Income Before Provision for Income Taxes 14,971 14,872 ---------- ---------- Income Tax Provision Current 5,370 5,306 Deferred 469 494 ---------- ---------- 5,839 5,800 ---------- ---------- Net Income $ 9,132 $ 9,072 ========== ========== Basic Earnings Per Share $0.37 $0.37 ====== ====== Weighted Average Common Shares Outstanding 24,933,919 24,843,012 ========== ========== Diluted Earnings Per Share $0.37 $0.37 ====== ====== Diluted Weighted Average Common Shares Outstanding 24,933,919 24,860,505 ========== ========== Dividends Declared Per Share Payable 5/5/99 and 5/5/98 $ .06 $ .06 ===== =====
The accompanying notes are an integral part of the financial statements. - 5 - SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Quarter Ended March 31, 1999 1998 -------- -------- ($ in thousands) Cash Flows From Operating Activities Net income $ 9,132 $ 9,072 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization 10,715 13,364 Deferred income taxes 469 494 Equity in loss of partnership 557 786 Change in assets and liabilities: Decrease in accounts receivable 6,493 7,813 Change in income taxes receivable/payable 4,814 8,506 Decrease in inventories 5,550 4,809 Increase in over-recovered purchased gas costs 1,869 7,927 Decrease in accounts payable (10,093) (5,301) Increase in interest payable 4,562 4,578 Net change in other current assets and liabilities 1,219 841 -------- -------- Net cash provided by operating activities 35,287 52,889 -------- -------- Cash Flows From Investing Activities Capital expenditures (13,714) (8,930) Investment in partnership - (7,343) Decrease in gas stored underground 5,161 2,951 Other items 935 114 -------- -------- Net cash used in investing activities (7,618) (13,208) -------- -------- Cash Flows From Financing Activities Decrease in revolving long-term debt (26,200) (40,400) Cash dividends (1,496) (1,491) -------- -------- Net cash used in financing activities (27,696) (41,891) -------- -------- Decrease in cash (27) (2,210) Cash at beginning of year 1,622 4,603 -------- -------- Cash at end of period $ 1,595 $ 2,393 ======== ========
The accompanying notes are an integral part of the financial statements. - 6 - SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1999 1. BASIS OF PRESENTATION The financial statements included herein are unaudited; however, such information reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods. The Company's accounting policies are summarized in the 1998 Annual Report to Shareholders, Notes to Financial Statements. Certain reclassifications have been made to the March 31, 1998, financial statements in order to conform with the 1999 presentation. These reclassifications had no effect on previously reported net income. 2. OIL AND GAS PROPERTIES The Company utilizes the full cost method of accounting for costs related to its oil and natural gas properties. Under this method, all such costs (productive and nonproductive) are capitalized and amortized on an aggregate basis over the estimated lives of the properties using the units-of-production method. These capitalized costs are subject to a ceiling test, however, which limits such pooled costs to the aggregate of the present value of future net revenues attributable to proved gas and oil reserves discounted at 10 percent plus the lower of cost or market value of unproved properties. Such capitalized costs do not include costs related to unevaluated properties. At March 31, 1999, the Company's unamortized costs of oil and gas properties exceeded this ceiling amount by approximately $41.4 million (net of taxes) due primarily to low gas prices. However, the ceiling limitation was recalculated using May 1999 prices, as prescribed by SEC guidelines, and, as a result, the Company's unamortized costs of oil and gas properties did not exceed this recomputed ceiling amount. 3. EARNINGS PER SHARE Basic earnings per common share is computed by dividing net income by the weighted average number of common shares outstanding during each year. The diluted earnings per share calculation adds to the weighted average number of common shares outstanding the incremental shares that would have been outstanding assuming the exercise of dilutive stock options. Antidilutive options not included in the computation were for 1,634,901 shares of common stock with a weighted average exercise price of $12.15 per share in the first quarter of 1999, and options to purchase 1,286,501 shares with a weighted average exercise price of $13.83 in the first quarter of 1998. -7- 4. DIVIDEND PAYABLE A dividend of $.06 per share was declared April 7, 1999, payable May 5, 1999. 5. SEGMENT INFORMATION The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," in 1998 which changes the way the Company reports information about its operating segments. The Company's reportable business segments have been identified based on the differences in products or services provided. Revenues for the exploration and production segment are derived from the production and sale of natural gas and crude oil. Revenues for the gas distribution segment arise from the transportation and sale of natural gas at retail. The marketing segment generates revenue through the marketing of both Company and third party produced gas volumes. The Company utilizes operating income to evaluate segment profit or loss. Summarized financial information for the Company's reportable segments are shown in the following table. The "Other" column includes items related to non-reportable segments (real estate and pipeline operations) and corporate items.
Exploration and Gas Production Distribution Marketing Other Total ---------- ------------ --------- ------- -------- (in thousands) Three months ended March 31, 1999: Revenues from external customers $ 11,678 $ 53,067 $ 13,475 $ -- $ 78,220 Intersegment revenues 8,703 51 8,519 96 17,369 Depreciation, depletion and amortization expense 8,565 1,767 18 22 10,372 Operating income 5,886 12,950 1,046 47 19,929 Assets 406,800 180,662 7,358 34,778 629,598 Capital expenditures 12,183 1,375 7 149 13,714 Three months ended March 31, 1998: Revenues from external customers $ 11,875 $ 55,868 $ 15,201 $ 12 $ 82,956 Intersegment revenues 12,386 57 4,076 183 16,702 Depreciation, depletion and amortization expense 11,093 1,891 8 47 13,039 Operating income 6,556 12,640 649 78 19,923 Assets 452,157 186,229 7,087 38,366 683,839 Capital expenditures 7,145 1,666 3 116 8,930 (1) Other assets includes the Company's equity investment in the operations of NOARK, corporate assets not allocated to segments, and assets for non-reportable segments.
Intersegment sales by the exploration and production segment to the gas distribution and marketing segments are priced in accordance with terms of existing contracts and current market conditions. Parent company assets include furniture and fixtures, prepaid debt costs and prepaid pension costs. Parent company general and administrative costs, depreciation expense and taxes other than income are allocated to segments. All of the Company's operations are located within the United States. -8- 6. INTEREST AND INCOME TAXES PAID The following table provides interest and income taxes paid during each period presented. Quarter Ended March 31 1999 1998 ----------------------------------------------------------------------- (in thousands) Interest payments $307 $501 Income tax payments $429 $ - -9- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following updates information as to the Company's financial condition provided in the Company's Form 10-K for the year ended December 31, 1998, and analyzes the changes in the results of operations between the three month period ended March 31, 1999, and the comparable period of 1998. RESULTS OF OPERATIONS Net income for the three months ended March 31, 1999, was $9.1 million, or $.37 per share, even with the same period in 1998. Improved operating results experienced by the natural gas utility and marketing segments during the first quarter offset a decline in operating income experienced by the exploration and production segment. The following tables compare operating revenues and operating income by business segment for the first three months of 1999 and 1998:
Increase 1999 1998 (Decrease) -------- -------- ---------- (in thousands) Revenues Exploration and production $ 20,381 $ 24,261 $(3,880) Gas distribution 53,118 55,925 (2,807) Marketing and other 22,090 19,472 2,618 Eliminations (17,369) (16,702) (667) -------- -------- ------- $ 78,220 $ 82,956 $(4,736) ======== ======== ======= Operating Income Exploration and production $ 5,886 $ 6,556 $ (670) Gas distribution 12,950 12,640 310 Marketing and other 1,093 727 366 -------- -------- ------- $ 19,929 $ 19,923 $ 6 ======== ======== =======
Exploration and Production Revenues for the exploration and production segment were down 16% and operating income was down 10% for the three months ended March 31, 1999, as compared to the same period in 1998, primarily due to lower oil and gas production. Gas and oil production during the first quarter of 1999 was 8.5 billion cubic feet (Bcf) equivalent, compared to 9.9 Bcf equivalent for the same period in 1998. Gas production was 7.7 Bcf for the three months ended March 31, 1999, compared to 8.7 Bcf for the same period in 1998. The decrease in production was largely due to reduced demand from the Company's utility systems due to warm weather combined with delays in non-operated projects. The Company's sales to its gas distribution systems were 3.2 Bcf during the three months ended March 31, 1999, compared to 4.5 Bcf for the same period in 1998. The -10- Company's oil production was 137 thousand barrels (MBbls) during the three months ended March 31, 1999, down from 192 MBbls for the same period of 1998, primarily reflecting the decline in productive capability of existing properties. The Company received an average price of $2.46 per thousand cubic feet (Mcf) for its gas production for the three months ended March 31, 1999, up slightly from $2.44 per Mcf for the same period of 1998. The Company hedged 4.2 Bcf of gas in the first quarter of 1999 that added $.47 per Mcf to the average gas price. Additionally, the Company receives monthly demand charges related to the no-notice service it makes available to the utility segment which increases the Company's average gas price received. The Company received an average price of $12.16 per barrel for its oil production during the three months ended March 31, 1999, down from $14.44 per barrel for the same period of 1998. Gas Distribution Operating income of the gas distribution segment increased 2% in the first quarter of 1999, as compared to the first quarter of 1998, despite weather which was 16% warmer than normal and 5% warmer than in the same period of 1998. The improvement in operating income was due to the combined effects of reduced operating expenses, customer growth and weather normalization adjustments. The utility realized growth of 1.3% during the quarter in the average number of utility customers served. Additionally, weather normalization adjustments which are now applicable to the Company's Arkansas systems offset a large part of the effect of the warmer weather. The utility systems delivered 12.6 Bcf to sales and end-use transportation customers during the three months ended March 31, 1999, down slightly from 12.7 Bcf for the same period in 1998. The Company's average rate for its utility sales decreased during the first quarter of 1999 to $5.09 per Mcf, down from $5.15 per Mcf for the same period in 1998. The decrease reflected lower prices paid for purchases of natural gas which are passed through to customers under automatic adjustment clauses. Marketing Operating income for the marketing segment was $1.0 million for the first quarter of 1999, compared to $.7 million for the first quarter of 1998. The increase in operating income in the Marketing segment was due to increased volumes marketed and monthly demand charges received under a competitively bid contract with the Company's gas distribution subsidiary. The Company marketed 12.7 Bcf of gas in the first three months of 1999, compared to 9.8 Bcf for the same period in 1997. NOARK Pipeline The Company's share of the NOARK Pipeline System Limited Partnership (NOARK) pre-tax loss included in other income was $.6 million for the first quarter of 1999, down from $.8 million for the same period in 1998. The improvement in NOARK's pre-tax loss primarily reflects the benefits of the integration of the NOARK Pipeline System with the Ozark Gas Transmission -11- System. The integration of the two systems was completed in November 1998. The Company expects its losses associated with NOARK to continue to decline from historical levels. Operating Costs and Expenses Operating costs and expenses decreased 8% in the first quarter of 1999, as compared to the first quarter of 1998. The decrease was primarily caused by lower operating expenses and lower depreciation, depletion and amortization expense. The decrease in operating and general expenses was due to both decreased general and administrative costs and decreased operating expenses in both the exploration and production segment and the gas distribution segment. The decrease in depreciation, depletion and amortization expense was due to a decrease in the amortization rate per unit of production in the exploration and production segment that resulted from the Company's write-down of its oil and gas properties in the second quarter of 1998. The amortization rate for this segment averaged $.98 per Mcf equivalent for the first quarter of 1999, compared to $1.10 per Mcf equivalent in the first quarter of 1998. The changes in purchased gas costs for the gas distribution and marketing segments reflect prices paid for supplies and the mix of purchases from intercompany versus third party sources. The Company utilizes the full cost method of accounting for costs related to its oil and natural gas properties. Under this method, all such costs (productive and nonproductive) are capitalized and amortized on an aggregate basis over the estimated lives of the properties using the units-of-production method. These capitalized costs are subject to a ceiling test, however, which limits such pooled costs to the aggregate of the present value of future net revenues attributable to proved gas and oil reserves discounted at 10 percent plus the lower of cost or market value of unproved properties. Such capitalized costs do not include costs related to unevaluated properties. At March 31, 1999, the Company's unamortized costs of oil and gas properties exceeded this ceiling amount by approximately $41.4 million (net of taxes) due primarily to low oil and gas prices. However, the ceiling limitation was recalculated using May 1999 prices, as prescribed by SEC guidelines, and, as a result, the Company's unamortized costs of oil and gas properties did not exceed this recomputed ceiling amount. The Company's full cost ceiling is evaluated at the end of each quarter. A decline in gas and oil prices from current levels, or other factors, without other mitigating circumstances, could cause a future write-down of capitalized costs and a non-cash charge against future earnings. Interest expense, net of capitalization, for the three months ended March 31, 1999, was up 2% compared to the same period in 1998, as lower interest costs that primarily resulted from lower average borrowings were more than offset by the lower level of capitalized interest. Interest is capitalized in the exploration and production segment on costs that are unevaluated and excluded from amortization. The changes in the provisions for current and deferred income taxes recorded in the three month period ended March 31, 1999, as compared to the same period in 1998, resulted primarily from the level of taxable income and from the deduction of intangible drilling costs in the year incurred for tax purposes, netted against the turnaround of intangible drilling costs deducted for tax -12- purposes in prior years. Intangible drilling costs are capitalized and amortized over future years for financial reporting purposes under the full cost method of accounting. CHANGES IN FINANCIAL CONDITION Changes in the Company's financial condition at March 31, 1999, as compared to December 31, 1998, primarily reflect the seasonal nature of the gas distribution segment of the Company's business. Routine capital expenditures, cash dividends and scheduled debt retirements are predominantly funded through cash provided by operations. For the first three months of 1999 and 1998, net cash provided by operating activities was $35.3 million and $52.9 million, respectively, and exceeded the total of these routine requirements. The decrease in cash provided by operations during the first quarter of 1999 was due to the timing of cash receipts and payments. The Company had net over-recovered purchased gas costs of $3.4 million at March 31, 1999. At December 31, 1998, the Company had net over-recovered purchased gas costs in the amount of $1.5 million. These amounts are classified as current liabilities. Financing Requirements The Company has access to $80.0 million of medium to long-term capital at current market lending rates through two floating rate revolving credit facilities. Of this amount, $8.7 million was outstanding at March 31, 1999, all of which was classified as long-term debt. During the first quarter of 1999, the Company's revolving long-term debt was reduced by $26.2 million, due to seasonally strong cash flow. As a result, long-term debt at March 31, 1999, accounted for 57% of the Company's capitalization, down from 60% at December 31, 1998. The Company expects its outstanding borrowings to increase during the remaining months of 1999 as cash generated from operations will be less than the requirements for routine capital expenditures and cash dividends due to lower levels of heating-generated revenues and seasonally higher capital expenditures resulting from favorable drilling and construction weather. The Company's capital expenditures for the first three months of 1999 were $13.7 million, compared to $8.9 million for the same period in 1998. Planned capital spending during 1999 is expected to be approximately even with 1998 spending. At March 31, 1999, the NOARK partnership had outstanding debt totaling approximately $79.0 million. The Company and the other general partner of NOARK have severally guaranteed the principal and interest payments on the NOARK debt. The Company's share of the several guarantee is 60%. Working Capital Accounts receivable has declined since December 31, 1998, due primarily to seasonally lower gas deliveries of the gas distribution segment. The decrease in income taxes receivable resulted from an increase in taxes payable that resulted from taxable income generated in the first quarter of -13- 1999. The decrease in inventories since December 31, 1998, is both the result of withdrawals of gas stored underground to meet seasonal requirements in the gas distribution segment and sales of gas to unaffiliated parties from the Company's unregulated underground storage facility. Accounts payable has declined since December 31, 1998, due primarily to seasonally lower gas purchases of the gas distribution segment and to the timing of expenditures. The increase in interest payable is due to the timing of interest payments on the Company's long-term debt. Other changes in current assets and current liabilities between periods resulted primarily from the timing of expenditures and receipts. YEAR 2000 The Company's current state of readiness for the year 2000 has not materially changed from its state of readiness that was disclosed in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 1998 Form 10-K. FORWARD LOOKING INFORMATION All statements, other than historical financial information, included in this discussion and analysis of financial condition and results of operations may be deemed to be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Although the Company believes the expectations expressed in such forward-looking statements are based on reasonable assumptions, such statements are not guarantees of future performance and actual results or developments may differ materially from those in the forward-looking statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements herein include, but are not limited to, the timing and extent of changes in commodity prices for gas and oil, the timing and extent of the Company's success in discovering, developing, producing, and estimating reserves, the effects of weather and regulation on the Company's gas distribution segment, increased competition, legal and economic factors, changing market conditions, the comparative cost of alternative fuels, conditions in capital markets and changes in interest rates, availability of oil field services, drilling rigs, and other equipment, as well as various other factors beyond the Company's control. -14- PART I Item 3. Quantitative and Qualitative Disclosures About Market Risk Market risks relating to the Company's operations result primarily from changes in commodity prices and interest rates, as well as credit risk concentrations. The Company uses natural gas and crude oil swap agreements and options to reduce the volatility of earnings and cash flow due to fluctuations in the prices of natural gas and oil. The Board of Directors has approved risk management policies and procedures to utilize financial products for the reduction of defined commodity price risks. These policies prohibit speculation with derivatives and limit swap agreements to counterparties with acceptable credit standings. Credit Risks The Company's financial instruments that are exposed to concentrations of credit risk consist primarily of trade receivables and derivative contracts associated with commodities trading. Concentrations of credit risk with respect to receivables are limited due to the large number of customers and their dispersion across geographic areas. No single customer accounts for greater than 4% of accounts receivable. See the discussion of credit risk associated with commodities trading below. Interest Rate Risk The Company's long-term debt obligations are sensitive to changes in interest rates. The Company's policy is to manage interest rates through use of a combination of fixed and floating rate debt. Interest rate swaps may be used to adjust interest rate exposures when appropriate. There were no interest rate swaps outstanding at March 31, 1999. There have been no material changes in the interest rate risk information that was presented in the Company's 1998 10-K. Commodities Risk The Company uses over-the-counter natural gas and crude oil swap agreements and options to hedge sales of Company production and marketing activity against the inherent price risks of adverse price fluctuations or locational pricing differences between a published index and the NYMEX (New York Mercantile Exchange) futures market. These swaps include (1) transactions in which one party will pay a fixed price (or variable price) for a notional quantity in exchange for receiving a variable price (or fixed price) based on a published index (referred to as price swaps), and (2) transactions in which parties agree to pay a price based on two different indices (referred to as basis swaps). The primary market risk related to these derivative contracts is the volatility in market prices for natural gas and crude oil. However, this market risk is offset by the gain or loss recognized upon the related sale of the natural gas or oil that is hedged. Credit risk relates to the risk of loss -15- as a result of non-performance by the Company's counterparties. The counterparties are primarily major investment and commercial banks which management believes present minimal credit risks. The credit quality of each counterparty and the level of financial exposure the Company has to each counterparty are periodically reviewed to ensure limited credit risk exposure. The following table provides information about the Company's financial instruments that are sensitive to changes in commodity prices. The table presents the notional amount in Bcf (billion cubic feet), the weighted average contract prices, and the total dollar contract amount by expected maturity dates. The "Carrying Amount" for the contract amounts are calculated as the contractual payments for the quantity of gas or oil to be exchanged under futures contracts and do not represent amounts recorded in the Company's financial statements. The "Fair Value" represents values for the same contracts using comparable market prices at March 31, 1999. The net difference between the contract amounts and fair value amounts of the contracts was $.9 million at March 31, 1999.
Expected Maturity Date ---------------------------------------------------------- 1999 2000 2001 ---------------- ---------------- ---------------- Carrying Fair Carrying Fair Carrying Fair Amount Value Amount Value Amount Value ------ ----- ------ ----- ------ ----- Natural Gas: Swaps with a fixed price receipt Contract volume (Bcf) 12.9 9.3 - Weighted average price per Mcf $2.04 $2.24 - Contract amount (in millions) $26.4 $26.0 $20.9 $20.5 - - Swaps with a fixed price payment Contract volume (Bcf) .9 - - Weighted average price per Mcf $2.13 - - Contract amount (in millions) $2.0 $1.9 - - - - Basis swaps Contract volume (Bcf) .7 - - Weighted average basis difference per Mcf $.089 - - Contract amount (in millions) $.1 $.1 - - - - Oil: Price floor Contract volume (MBbls) 281 350 325 Weighted average price per Bbl $18.00 $18.00 $18.00 Contract amount (in millions) $5.1 $5.5 $6.3 $7.0 $5.9 $6.6
-16- PART II OTHER INFORMATION Item 1 In its Form 8-K filed July 2, 1996, the Company disclosed that a lawsuit relating to overriding royalty interests in certain Arkansas oil and gas properties had been filed against it and two of its wholly-owned subsidiaries. The lawsuit, which was brought by a party who was originally included in (but opted out of) the class action litigation described in the Company's Form 10-K for the fiscal year ended December 31, 1998, involves claims similar to those upon which judgment was rendered against the Company and its subsidiaries in that class action litigation. This lawsuit has been set for trial in January 2000. While the amounts of this pending claim could be material, management believes, based on its investigations, that the Company's ultimate liability, if any, will not be material to its consolidated financial position or results of operations. In 1997, the Company's subsidiary, Southwestern Energy Production Company (SEPCO), filed suit against several parties, including an outside consultant previously employed by SEPCO, alleging breach of contract, fraud, and other causes of action in connection with services performed on SEPCO's south Louisiana exploration projects. On June 23, 1998, the outside consultant filed a counterclaim against SEPCO. The consultant's primary cause of action relates to a claim that he is contractually entitled to a 25% interest in the Boure' project, one of SEPCO's south Louisiana exploration projects. The counterclaim alleges seven different claims for relief, including breach of contract, fraud, and defamation and requests damages in excess of $10,000,000 for each claim plus punitive damages in excess of $10,000,000. This case has been scheduled for non-binding mediation in June 1999 and is expected to be tried in October 1999. The Company feels these claims are without merit and intends to vigorously contest them. Although the total amount of these claims is significant in the aggregate, management believes, based on its investigation, that the Company's ultimate liability, if any, will not be material to its consolidated financial position or results of operation. Items 2 - 6(a) No developments required to be reported under Items 2 - 6(a) occurred during the quarter ended March 31, 1999. Item 6(b) On April 8, 1999, the Company filed a current report on Form 8-K dated April 7, 1999, announcing the approval by the Company's Board of Directors of an amendment and extension of the Company's Share Purchase Rights Plan. -17- Signatures Pursuant to the requirements 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. SOUTHWESTERN ENERGY COMPANY Registrant DATE: May 14, 1999 /s/ GREG D. KERLEY ------------------ ------------------------------ Greg D. Kerley Senior Vice President and Chief Financial Officer - 18 - EX-27 2 FINANCIAL DATA SCHEDULE FOR 1ST QTR - 1999
5 1,000 3-MOS DEC-31-1999 MAR-31-1999 1,595 0 34,162 0 17,262 57,871 1,035,978 (489,119) 629,598 54,827 255,700 0 0 2,774 190,845 629,598 76,075 78,220 0 58,291 0 0 4,278 14,971 5,839 9,132 0 0 0 9,132 0.37 0.37 The information has been prepared in accordance with SFAS No. 128. Basic and dilted EPS have been entered in place of primary and fully diluted, respectively.
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