-----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, JBkQEZQAjzyJM7XK82m9G1EHDEB7k2GZbziHmCbAHRY8HhAi49HFtHXRDTSp2jBt UPXDgUz7ykFi/sk9k800Zg== /in/edgar/work/20000809/0000007332-00-000021/0000007332-00-000021.txt : 20000921 0000007332-00-000021.hdr.sgml : 20000921 ACCESSION NUMBER: 0000007332-00-000021 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000809 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOUTHWESTERN ENERGY CO CENTRAL INDEX KEY: 0000007332 STANDARD INDUSTRIAL CLASSIFICATION: [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: 688809 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 0001.txt FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 2000 =========================================================================== 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 June 30, 2000 ------------- 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 August 4, 2000 ---------------------------- ----------------------------- Common Stock, Par Value $.10 25,033,281 =========================================================================== - 1 - PART I FINANCIAL INFORMATION - 2 - SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) ASSETS
June 30, December 31, 2000 1999 ------------- ------------ ($ in thousands) Current Assets Cash $ 1,202 $ 1,240 Accounts receivable 36,785 43,339 Inventories, at average cost 15,714 21,520 Under-recovered purchased gas costs 3,588 - Other 4,901 4,073 --------- --------- Total current assets 62,190 70,172 --------- --------- Investments 14,742 14,180 --------- --------- Property, Plant and Equipment, at cost Gas and oil properties, using the full cost method 855,392 816,199 Gas distribution systems 188,538 222,145 Gas in underground storage 27,769 28,712 Other 29,167 28,826 --------- --------- 1,100,866 1,095,882 Less: Accumulated depreciation, depletion and amortization 533,181 519,927 --------- --------- 567,685 575,955 --------- --------- Other Assets 12,615 11,139 --------- --------- Total Assets $ 657,232 $ 671,446 ========= =========
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
June 30, December 31, 2000 1999 ------------- ------------ ($ in thousands) Current Liabilities Short-term debt $ 42,000 $ 7,500 Accounts payable 40,479 33,069 Accrual for Hales judgment (Note 3) 109,288 - Taxes payable 2,639 3,506 Interest payable 2,383 2,483 Customer deposits 4,778 6,021 Other 3,441 3,767 --------- --------- Total current liabilities 205,008 56,346 --------- --------- Long-Term Debt, less current portion above 225,000 294,700 --------- --------- Other Liabilities Deferred income taxes 91,748 126,902 Other 2,832 3,142 --------- --------- 94,580 130,044 --------- --------- 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 20,747 20,732 Retained earnings 140,026 198,044 Less: Common stock in treasury, at cost, 2,703,963 shares in 2000 and 2,700,391 shares in 1999 30,123 30,083 Unamortized cost of 152,113 restricted shares in 2000 and 188,781 restricted shares in 1999, issued under stock incentive plan 780 1,111 --------- --------- 132,644 190,356 --------- --------- Total Liabilities and Shareholders' Equity $ 657,232 $ 671,446 ========= =========
The accompanying notes are an integral part of the financial statements. - 4 - SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Quarter Ended Six Months Ended June 30, June 30, ------------------------- ------------------------- 2000 1999 2000 1999 ---------- ---------- ---------- ---------- ($ in thousands, except per share amounts) Operating Revenues Gas sales $ 37,686 $ 30,715 $ 97,978 $ 91,654 Gas marketing 35,384 21,330 65,388 34,805 Oil sales 3,798 2,312 7,377 3,973 Gas transportation and other 1,615 1,682 4,653 3,827 ---------- ---------- ---------- ---------- 78,483 56,039 175,396 134,259 ---------- ---------- ---------- ---------- Operating Costs and Expenses Gas purchases - utility 7,963 7,714 27,226 28,074 Gas purchases - marketing 34,456 20,585 63,119 32,673 Operating and general 15,246 14,319 30,032 28,242 Unusual item - Hales judgment (Note 3) 109,288 - 109,288 - Depreciation, depletion and amortization 11,251 10,321 22,342 20,693 Taxes, other than income taxes 2,128 1,559 4,182 3,107 ---------- ---------- ---------- ---------- 180,332 54,498 256,189 112,789 ---------- ---------- ---------- ---------- Operating Income (101,849) 1,541 (80,793) 21,470 ---------- ---------- ---------- ---------- Interest Expense Interest on long-term debt 4,944 4,679 10,145 9,513 Other interest charges 913 258 1,105 541 Interest capitalized (683) (827) (1,320) (1,666) ---------- ---------- ---------- ---------- 5,174 4,110 9,930 8,388 ---------- ---------- ---------- ---------- Other Income (Expense) 3,239 (225) 1,998 (905) ---------- ---------- ---------- ---------- Income (Loss) Before Income Taxes (103,784) (2,794) (88,725) 12,177 ---------- ---------- ---------- ---------- Income Tax Provision (Benefit) Current (872) (4,620) - 750 Deferred (39,603) 3,530 (34,602) 3,999 ---------- ---------- ---------- ---------- (40,475) (1,090) (34,602) 4,749 ---------- ---------- ---------- ---------- Income (Loss) Before Extraordinary Item (63,309) (1,704) (54,123) 7,428 Extraordinary Loss Due to Early Retirement of Debt (Net of $569 Tax Benefit) (890) - (890) - ---------- ---------- ---------- ---------- Net Income (Loss) $ (64,199) $ (1,704) $ (55,013) $ 7,428 ========== ========== ========== ========== Basic and Diluted Earnings (Loss) Per Share Income (Loss) Before Extraordinary Item ($2.53) ($0.07) ($2.16) $0.30 Extraordinary Loss Due to Early Retirement of Debt (Net of $569 Tax Benefit) (0.04) - (0.04) - ---------- ---------- ---------- ---------- Net Income (Loss) ($2.57) ($0.07) ($2.20) $0.30 ========== ========== ========== ========== Basic and Diluted Average Common Shares Outstanding 25,035,079 24,934,012 25,036,294 24,933,966 ========== ========== ========== ========== Dividends Declared Per Share Payable 8/5/99 - $ .06 - $0.06 ===== ===== ===== =====
The accompanying notes are an integral part of the financial statements. - 5 - SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 30, -------------------- 2000 1999 -------- -------- ($ in thousands) Cash Flows From Operating Activities Net income (loss) $(55,013) $ 7,428 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation, depletion and amortization 23,049 21,382 Deferred income taxes (34,602) 3,999 Equity in loss of partnership 1,057 1,055 Gain on sale of Missouri utility assets (3,209) - Extraordinary loss due to early retirement of debt (net of tax) 890 - Change in assets and liabilities: Decrease in accounts receivable 3,563 18,462 Decrease in inventories 3,577 364 Increase in under-recovered purchased gas costs (4,750) (270) Increase (decrease) in accounts payable 7,441 (13,949) Accrual for Hales judgment 109,288 - Net change in other current assets and liabilities (690) 1,850 -------- -------- Net cash provided by operating activities 50,601 40,321 -------- -------- Cash Flows From Investing Activities Capital expenditures (43,404) (28,534) Sale of Missouri utility assets 32,000 - Investment in partnership (1,620) - Decrease in gas stored underground 944 3,286 Other items (354) 1,907 -------- -------- Net cash used in investing activities (12,434) (23,341) -------- -------- Cash Flows From Financing Activities Net change in revolving debt (27,700) (14,100) Payment on revolving short-term note (7,500) - Cash dividends (3,005) (2,992) -------- -------- Net cash used in financing activities (38,205) (17,092) -------- -------- Decrease in cash (38) (112) Cash at beginning of year 1,240 1,622 -------- -------- Cash at end of period $ 1,202 $ 1,510 ======== ========
The accompanying notes are an integral part of the financial statements. - 6 - SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 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 1999 Annual Report on Form 10-K, Item 8, Notes to Consolidated Financial Statements. 2. 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. The Company had options for 2,052,933 shares of common stock with a weighted average exercise price of $10.51 per share at June 30, 2000, and options for 1,634,901 shares with an average exercise price of $12.15 per share at June 30, 1999, that were not included in the calculation of diluted shares because they would have had an antidilutive effect. 3. UNUSUAL ITEM - HALES JUDGMENT In the Company's Form 8-K filed June 22, 2000, it reported that the Arkansas Supreme Court ruled to affirm the 1998 decision of the Sebastian County Circuit Court awarding $109.3 million in a class action to royalty owners of SEECO, Inc., a wholly-owned subsidiary of Southwestern Energy Company. The Company has continuously reported on this matter and the details of the related matter involving a similar claim by the United States Mineral Management Service (MMS). The Company fully satisfied the judgment and the Circuit Court in Sebastian County issued an order in complete and final satisfaction of the judgment effective July 18, 2000. Since MMS is a member of the class whose claim was satisfied by the Court's order on July 18, 2000, the MMS claim is also extinguished. The Company has put in place interim financing with its lead banks to satisfy the judgment and meet its immediate financial obligations (see Note 4). The Company is currently in the process of soliciting interest for the sale of its gas distribution assets. The proceeds from the proposed sale will be used to pay down borrowings, including borrowings incurred subsequent to June 30, 2000 related to the Hales judgment. The Company is currently unable to estimate the timing of the completion of the proposed sale and can not at this time estimate the proceeds that would be realized from the sale. The Company does, however, expect to realize a gain from the sale of these assets. -7- 4. DEBT In July 2000, the Company replaced its existing revolving credit facilities with a new revolving credit facility that has a capacity of $180.0 million. This new facility was used to fund the Hales judgment of $109.3 million, pay off the existing revolver balance ($20.0 million at June 30, 2000), and retire $22.0 million of private placement debt. The new credit facility will also be used to fund normal working capital needs. The interest rate on the new facility is 112.5 basis points over the LIBOR rate. The new credit facility has a term of 364 days and will provide temporary financing while the Company pursues the potential sale of its gas distribution assets (see Note 3). In August 2000, the Company retired $22.0 million of 9.36% private placement notes due in annual installments of $2.0 million beginning December 4, 2001. Certain costs of the redemption were expensed during the second quarter of 2000 and are classified as an extraordinary loss, net of related income tax effects, in the accompanying financial statements. Due to the Company's replacement of its revolving credit facility and retirement of the private placement debt discussed above, the $20.0 million revolver balance and the $22.0 million private placement have been classified as short-term debt on the Company's balance sheet at June 30, 2000. 5. DIVIDEND PAYABLE As a result of the financial impact of the Hales judgment as discussed in Note 3, the Company has indefinitely suspended payment of quarterly dividends on its common stock. 6. SEGMENT INFORMATION The Company applies SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." 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. 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. -8-
Exploration and Gas Production Distribution Marketing Other Total ----------- ------------ --------- -------- --------- (in thousands) Three months ended June 30, 2000: Revenues from external customers $ 19,799 $ 23,300 $ 35,384 $ - $ 78,483 Intersegment revenues 4,986 26 15,412 112 20,536 Depreciation, depletion and amortization expense 9,522 1,687 17 25 11,251 Operating income (101,660)(3) (692) 572 (69) (101,849) Interest expense(1) 3,628 1,274 - 272 5,174 Provision (benefit) for income taxes(1) (41,093) 429 226 (37) (40,475) Assets 455,957 148,275 18,319 34,681(2) 657,232 Capital expenditures 27,406 1,372 4 65 28,847 Three months ended June 30, 1999: Revenues from external customers $ 13,185 $ 21,524 $ 21,330 $ - $ 56,039 Intersegment revenues 2,852 21 9,828 96 12,797 Depreciation, depletion and amortization expense 8,456 1,824 18 23 10,321 Operating income 1,707 (623) 409 48 1,541 Interest expense (1) 2,729 1,249 (14) 145 4,109 Provision (benefit) for income taxes (1) (421) (736) 165 (98) (1,090) Assets 413,275 170,153 8,664 35,505(2) 627,597 Capital expenditures 13,034 1,810 1 (25) 14,820 Six months ended June 30, 2000: Revenues from external customers $ 33,514 $ 76,494 $ 65,388 $ - $ 175,396 Intersegment revenues 16,032 80 28,653 224 44,989 Depreciation, depletion and amortization expense 18,762 3,497 35 48 22,342 Operating income (92,972)(3) 10,678 1,537 (36) (80,793) Interest expense(1) 6,866 2,527 - 537 9,930 Provision (benefit) for income taxes(1) (39,191) 4,359 605 (375) (34,602) Assets 455,957 148,275 18,319 34,681(2) 657,232 Capital expenditures 40,517 2,652 4 231 43,404 Six months ended June 30, 1999: Revenues from external customers $ 24,863 $ 74,591 $ 34,805 $ - $ 134,259 Intersegment revenues 11,555 72 18,347 192 30,166 Depreciation, depletion and amortization expense 17,021 3,591 36 45 20,693 Operating income 7,593 12,327 1,455 95 21,470 Interest expense(1) 5,444 2,509 12 422 8,387 Provision (benefit) for income taxes(1) 791 3,798 563 (403) 4,749 Assets 413,275 170,153 8,664 35,505(2) 627,597 Capital expenditures 25,217 3,185 8 124 28,534
[FN] (1) Interest expense and the provision (benefit) for income taxes by segment is an allocation of corporate amounts as debt and income tax expense (benefit) are incurred at the corporate level. (2) Other assets includes the Company's equity investment in the operations of the NOARK Pipeline System, Limited Partnership, corporate assets not allocated to segments, and assets for non-reportable segments. (3) Includes a loss of $109.3 million for Hales judgment. Excluding the judgment, operating income for the Exploration and Production segment would have been $7.7 million and $16.3 million for the three months and the six months ended June 30, 2000, respectively. -9- Intersegment sales by the exploration and production segment and marketing segment to the gas distribution segment 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. 7. DERIVATIVE AND HEDGING ACTIVITIES In June 1999, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133" (SFAS No. 137). FASB Statement No. 133 (SFAS No. 133) establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 133 is effective for fiscal years beginning after June 15, 2000, as amended in SFAS 137, and cannot be applied retroactively. In June 2000, the FASB issued SFAS No. 138, an amendment of SFAS 133, to address a limited number of application issues. Included in the issues addressed was an expanded definition of normal purchases and sales contracts. The new definition allows contracts that are probable of physical delivery throughout the duration of the contract to be excluded from the provisions of SFAS 133 even though they may contain net settlement provisions. This amendment reduces the scope of SFAS No. 133 as it applies to the Company's operations. The Company has not yet quantified the impacts of adopting SFAS No. 133 on its financial statements. However, it should be noted that SFAS No. 133 could increase volatility in future reported earnings and other comprehensive income. 8. INTEREST AND INCOME TAXES PAID The following table provides interest and income taxes paid during each period presented.
Three Months Six Months Periods Ended June 30 2000 1999 2000 1999 ----------------------------------------------------------------------- (in thousands) Interest payments $9,465 $9,117 $10,071 $9,424 Income tax payments $270 $212 $270 $641
9. Contingencies and Commitments 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 -10- 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 Hales class action litigation described in Note 3 above, involves claims similar to those upon which judgment was rendered against the Company and its subsidiaries. This matter went to a non-jury trial as to liability on January 10, 2000 and the Company is awaiting the Court's ruling. In September 1998, another party who opted out of the class threatened the Company with similar litigation. That third party has never pursued any action against the Company and we believe any such action would now be barred by the statute of limitations. While the amounts of these pending and threatened claims could be significant, management believes, based on its extensive investigations, trial preparation, and discussions with outside counsel, that these claims are without merit and, that the Company's ultimate liability, if any, will not be material to its consolidated financial position or results of operations. The Company and the other general partner of NOARK have severally guaranteed the principal and interest payments on NOARK's 7.15% Notes due 2018. At June 30, 2000 and December 31, 1999, the principal outstanding for these Notes was $76.0 million and $77.0 million, respectively. The Company's share of the several guarantee is 60%. The Notes were issued in June 1998 and require semi-annual principal payments of $1.0 million. The proceeds from the issuance of the Notes were used to repay temporary financing provided by the other general partner and outstanding amounts under an unsecured revolving credit agreement. The temporary financing provided by the other general partner was incurred in connection with the prepayment in early 1998 of NOARK's 9.74% Senior Secured notes. Under the several guarantee, the Company is required to fund its share of NOARK's debt service which is not funded by operations of the pipeline. As a result of the integration of NOARK Pipeline with the Ozark Gas Transmission System, management of the Company believes that it will realize its investment in NOARK over the life of the system. Therefore, no provision for any loss has been made in the accompanying financial statements. Additionally, the Company's gas distribution subsidiary has transportation contracts for firm capacity of 82.3 MMcfd on NOARK's integrated pipeline system. These contracts expire in 2002 and 2003, and are renewable year-to-year thereafter until terminated by 180 days' notice. The Company is subject to laws and regulations relating to the protection of the environment. The Company's policy is to accrue environmental and cleanup related costs of a noncapital nature when it is both probable that a liability has been incurred and when the amount can be reasonably estimated. Management believes any future remediation or other compliance related costs will not have a material effect on the financial position or reported results of operations of the Company. The Company is subject to other litigation and claims that have arisen in the ordinary course of business. The Company accrues for such items when a liability is both probable and the amount can be reasonably estimated. In the opinion of management, the results of such litigation and claims will not have a material effect on the results of operations or the financial position of the Company. -11- 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, 1999, and analyzes the changes in the results of operations between the three and six month periods ended June 30, 2000, and the comparable periods of 1999. RESULTS OF OPERATIONS The Company reported a net loss for the three months ended June 30, 2000 of $64.2 million, or $2.57 per share, compared to a net loss of $1.7 million, or $.07 per share, in 1999. One-time charges during the quarter ended June 30, 2000 included a negative $109.3 million judgment in the Hales royalty lawsuit ($66.7 million after-tax) and an extraordinary loss on the early retirement of debt. These charges more than offset a $3.2 million gain from the sale of the Company's Missouri utility properties, which closed May 31, and improved results from the Company's operations. Excluding these items, Southwestern would have reported net income of $1.4 million, or $.05 per share, for the second quarter of 2000. The net loss for the six months ended June 30, 2000 was $55.0 million, or $2.20 per share. Excluding the unusual items discussed above, net income for the first six months of 2000 would have been $10.6 million, or $.42 per share, compared to net income of $7.4 million, or $.30 per share for the same period in 1999. Excluding the effects of the Hales judgment, the exploration and production segment had improved operating results benefiting from both increased production and higher commodity prices. The following tables compare operating revenues and operating income by business segment for the three and six month periods ended June 30, 2000 and 1999:
Quarter Ended Six Months Ended June 30, June 30, -------------------------- -------------------------- 2000 1999 2000 1999 ---------- ---------- ---------- ---------- (in thousands) Revenues Exploration and production $ 24,785 $ 16,037 $ 49,546 $ 36,418 Gas distribution 23,326 21,545 76,574 74,663 Marketing and other 50,908 31,254 94,265 53,344 Eliminations (20,536) (12,797) (44,989) (30,166) ---------- ---------- ---------- ---------- $ 78,483 $ 56,039 $ 175,396 $ 134,259 ========== ========== ========== ========== Operating Income (Loss) Exploration and production $ (101,660)(1) $ 1,707 $ (92,972)(1) $ 7,593 Gas distribution (692) (623) 10,678 12,327 Marketing and other 503 457 1,501 1,550 ---------- ---------- ---------- ---------- $ (101,849) $ 1,541 $ (80,793) $ 21,470 ========== ========== ========== ==========
-12- [FN] (1) Includes a loss of $109.3 million for the Hales judgment. Excluding this loss, operating income for the exploration and production segment would have been $7.7 million and $16.3 million for the three and six month periods ended June 30, 2000, respectively. Exploration and Production Revenues for the exploration and production segment were up 55% for the three month period ended June 30, 2000 and up 36% for the six month period ended June 30, 2000, both as compared to the same periods in 1999. Operating income, excluding the $109.3 Hales judgment, was up $5.9 million for the three months ended June 30, 2000, and up $8.7 million for the six months ended June 30, 2000 both as compared to the same periods in 1999. The improvements in operating income were due to both higher gas and oil prices and increased gas and oil production. Gas and oil production during the second quarter of 2000 was 8.9 billion cubic feet (Bcf) equivalent, up from 8.1 Bcf equivalent for the same period in 1999. For the six months ended June 30, 2000, gas and oil production was 17.6 Bcf equivalent up from 16.6 Bcf equivalent for the same period of 1999. The increase in production resulted from new wells added in 1999 and 2000. Gas production was 7.9 Bcf for the three months ended June 30, 2000, and 15.7 Bcf for the six months ended June 30, 2000, compared to 7.2 Bcf and 14.9 Bcf, respectively, for the same periods in 1999. The Company's sales to its gas distribution systems were 4.8 Bcf during the six months ended June 30, 2000, compared to 4.5 Bcf for the same period in 1999. The Company's oil production was 324 thousand barrels (MBbls) during the six months ended June 30, 2000, up from 290 MBbls for the same period of 1999. The Company received an average price of $2.64 per thousand cubic feet (Mcf) for its gas production for the three months ended June 30, 2000, up from $1.91 per Mcf for the same period of 1999. The Company received an average price of $2.63 per Mcf for its gas production during the six months ended June 30, 2000, up from $2.19 for the same period of 1999. The Company hedged 9.5 Bcf of gas production in the first half of 2000 at $2.42 per Mcf which had the effect of reducing the average gas price realized during the period by $.40 per Mcf. On a comparative basis, the average price during the first half of 1999 included the positive effect of hedges that increased the average price by $.20 per Mcf. 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 has hedged approximately 5.6 Bcf of its production in the third quarter of 2000 at an average NYMEX price of $2.38, and has hedged 2.6 Bcf in the fourth quarter at an average price of $2.38 per Mcf. Additionally, the Company has natural gas price collars on 4.4 Bcf of its fourth quarter 2000 gas production that have an average NYMEX price floor of $2.52 per Mcf and an average ceiling price of $3.62 per Mcf. The Company received an average price of $22.78 per barrel for its oil production during the six months ended June 30, 2000, up from $13.70 per barrel for the same period of 1999. For the remainder of 2000, the Company has hedges in place for 318,000 barrels at an average price of $23.24 per barrel. Subsequent to June 30, 2000, the Company sold at auction approximately 130 non-strategic Oklahoma properties located in the Anadarko Basin. These properties produced approximately 1.5 Bcf equivalent per year and were sold for approximately $12.5 million. -13- Gas Distribution On May 31, 2000, the Company completed the sale of its Missouri gas distribution assets for $32.0 million. The sale resulted in a pre-tax gain of approximately $3.2 million and proceeds from the sale were used to pay down debt. As a result of the adverse Hales judgment, the Company's Board of Directors has authorized management to pursue the sale of the Company's remaining gas distribution operations. The Company is currently in the process of soliciting interest for the sale of its gas distribution assets. The proceeds from the proposed sale will be used to pay down borrowings, including borrowings incurred subsequent to June 30, 2000 related to the Hales judgment. The Company is currently unable to estimate the timing of the completion of the proposed sale and can not at this time estimate the proceeds that would be realized from the sale. The Company does, however, expect to realize a gain from the sale of these assets. Operating income of the gas distribution segment decreased 11% in the second quarter of 2000 and 13% for the first six months of 2000, as compared to the same periods of 1999. The decreases in operating income were primarily due to weather which was 19% warmer than normal and 2% warmer than in the same period of 1999, and a reduction in rates that became effective December 1999. The decrease in rates was the result of an agreement with the Staff of the Arkansas Public Service Commission during the third quarter of 1999 to close multiple open dockets and to reduce annual rates by $1.4 million. The utility systems delivered 17.3 Bcf to sales and end-use transportation customers during the six months ended June 30, 2000, down from 18.0 Bcf for the same period in 1999. The decrease in deliveries was due to warmer weather. The Company's average rate for its utility sales increased during the first half of 2000 to $5.87 per Mcf, up from $5.44 per Mcf for the same period in 1999. The increase reflected higher prices paid for purchases of natural gas which are passed through to customers under automatic adjustment clauses. Going forward, the Company's comparative operating results for its gas distribution segment will be lower reflecting the Missouri asset divestiture and the loss of Missouri customers. However, the Company does not expect the sale to materially impact earnings as the loss in operating income should be offset by a corresponding decrease in interest expense. The Company served approximately 48,000 customers in Missouri. The Company's remaining gas distribution systems in Arkansas serve approximately 134,000 customers. Marketing and NOARK Pipeline Operating income for the marketing segment was $1.5 million for the first half of 2000, even with the same period in 1999, as an increase in gas marketing revenues was offset by a comparable increase in purchased gas costs. The Company marketed 33.9 Bcf of gas in the first six months of 2000, compared to 28.4 Bcf for the same period in 1999. The Company's share of the NOARK Pipeline System Limited Partnership (NOARK) pre-tax loss included in other income was $.5 million for the second quarter and $1.1 million for the first six months of 2000, even with the same periods in 1999. -14- Operating Costs and Expenses Operating costs and expenses, exclusive of purchased gas costs and the Hales judgment, increased 9% in both the second quarter and the first six months of 2000, as compared to the same periods in 1999. The increases were primarily caused by higher operating and general expenses and increased depreciation, depletion and amortization expense. The increase in operating and general expenses was due primarily to increased production costs and increased severance and ad valorem taxes in the exploration and production segment that resulted primarily from increased production volumes and higher prices. The increase in depreciation, depletion and amortization expense was due to the increase in production in the exploration and production segment and an increase in the amortization rate per unit of production. The amortization rate for this segment averaged $1.03 per Mcf equivalent for the first six months of 2000, compared to $.99 per Mcf equivalent in the first six months of 1999. The changes in purchased gas costs for the gas distribution and marketing segments reflect volumes purchased, 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. At June 30, 2000, the Company's unamortized costs of oil and gas properties did not exceed this 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 for the six months ended June 30, 2000, was up 18% compared to the same period in 1999, due to higher average borrowings, one-time costs associated with the new revolving credit facility discussed below in Financing Requirements, and a 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 and six month periods ended June 30, 2000, as compared to the same periods in 1999, resulted primarily from the Hales judgment which resulted in a deferred tax benefit of $42.6 million. Other items impacting deferred taxes include the level of taxable income and the deduction of intangible drilling costs in the year incurred for tax purposes, netted against the turnaround of intangible drilling costs deducted for tax 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. -15- CHANGES IN FINANCIAL CONDITION Changes in the Company's financial condition at June 30, 2000, as compared to December 31, 1999, primarily reflect the impact of the Hales judgment (see Note 3) and the seasonal nature of the gas distribution segment of the Company's business combined with the sale of the Company's Missouri gas distribution assets. Routine capital expenditures, cash dividends and scheduled debt retirements are predominantly funded through cash provided by operations. For the first six months of 2000 and 1999, net cash provided by operating activities was $50.6 million and $40.3 million, respectively, and exceeded the total of these routine requirements. In connection with the Hales judgment, the Company indefinitely suspended the quarterly dividend on its common stock. Financing Requirements In July 2000, the Company replaced its existing revolving credit facilities that had previously provided the Company access to $80.0 million of variable rate capital with a new revolving credit facility that has a capacity of $180.0 million. This new facility was used to fund the Hales judgment of $109.3 million, pay off the existing revolver balance ($20.0 million at June 30, 2000), and retire $22.0 million of private placement debt. The new credit facility will also be used to fund normal working capital needs. The interest rate on the new facility is 112.5 basis points over the LIBOR rate. The new credit facility has a term of 364 days and will provide temporary financing while the Company pursues the potential sale of its gas distribution assets. In August 2000, the Company retired $22.0 million of 9.36% private placement notes due in annual installments of $2.0 million beginning December 4, 2001. Certain costs of the redemption were expensed during the second quarter of 2000 and are classified as an extraordinary loss, net of related income tax effects. Due to the Company's replacement of its revolving credit facility and retirement of the private placement debt discussed above, the $20.0 million revolver balance and the $22.0 million private placement have been classified as short-term debt on the Company's balance sheet at June 30, 2000. During the first six months of 2000, the Company's debt was reduced by $35.2 million, due to seasonally strong cash flow and the application of the proceeds from the sale of the Company's Missouri gas distribution assets. Total debt at June 30, 2000, accounted for 67% of the Company's capitalization, up from 61% at December 31, 1999. The increase reflected the decline in shareholders' equity resulting from the loss related to the Hales judgment. The Hales judgment was funded on July 18, 2000 with the Company's new revolving credit facility. Including this amount as a component of debt, the Company's debt capitalization would have been 74% at June 30, 2000. The Company expects its outstanding borrowings to increase during the remaining months of 2000 as cash generated from operations will be less than the requirements for routine capital expenditures due to lower levels of heating-generated revenues and seasonally higher capital expenditures -16- resulting from favorable drilling and construction weather. The Company's capital expenditures for the first six months of 2000 were $43.4 million, compared to $28.5 million for the same period in 1999. At June 30, 2000, the NOARK partnership had outstanding debt totaling approximately $76.0 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, 1999, due primarily to seasonally lower gas deliveries of the gas distribution segment and the loss of customers resulting from the sale of the Missouri gas distribution assets, partially offset by increases in sales by the marketing segment. The decrease in inventories since December 31, 1999, is the result of the sale of the Missouri assets, combined with 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 increased since December 31, 1999, due primarily to increases in gas purchase costs in the marketing segment, seasonally lower third party gas purchases of the gas distribution segment and to the timing of expenditures. Short-term debt has increased since December 31, 1999 due primarily to the reclassification of $42 million of long-term debt to short-term debt as a result of the revolving credit facility entered into subsequent to June 30, 2000, as discussed above in Financing Requirements. The June 30, 2000 accrued liability for the Hales judgment was subsequently funded using the new revolving credit facility. At June 30, 2000, the company had under-recovered gas costs of $3.6 million recorded in current assets. Purchased gas costs are recovered from the Company's utility customers in subsequent months through automatic cost of gas adjustment clauses included in the utility's filed rate tariffs. At December 31, 1999 the Company had over-recovered gas costs of $1.2 million recorded in other current liabilities. Other changes in current assets and current liabilities between periods resulted primarily from the timing of expenditures and receipts. 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 -17- weather and regulation on the Company's gas distribution segment, the value that the Company's gas distribution segment may bring in exploring sales opportunities for this 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. -18- 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 11% of accounts receivable. See the discussion of credit risk associated with commodities trading below. Interest Rate Risk The Company's short-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 June 30, 2000. There have been no material changes in the interest rate risk information that was presented in the Company's 1999 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 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 -19- 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 June 30, 2000. At June 30, 2000, the "Carrying Amount" of these financial instruments exceeded the "Fair Value" by $31.7 million.
Expected Maturity Date ------------------------------------------------------------------------- 2000 2001 2002 2003 ---------------- ---------------- ---------------- ---------------- Carrying Fair Carrying Fair Carrying Fair Carrying Fair Amount Value Amount Value Amount Value Amount Value -------- ----- -------- ----- -------- ----- -------- ----- Natural Gas: Swaps with a fixed price receipt Contract volume (Bcf) 8.3 1.2 1.0 .2 Weighted average price per Mcf $2.39 $2.70 $2.65 $2.75 Contract amount (in millions) $19.9 $2.5 $3.1 $2.0 $2.6 $2.2 $.6 $.6 Swaps with a fixed price payment Contract volume (Bcf) .4 - - - Weighted average price per Mcf $4.25 - - - Contract amount (in millions) $1.6 $1.6 - - - - - - Price collar Contract volume (Bcf) 4.4 9.3 - - Weighted average floor price per Mcf $2.52 $2.56 - - Contract amount of floor (in millions) $11.0 $11.2 $23.7 $25.0 - - - - Weighted average ceiling price per Mcf $3.62 $3.20 - - Contract amount of ceiling (in millions) $15.7 $11.6 $29.6 $22.4 - - - - Oil: Swaps with a fixed price receipt Contract volume (MBbls) 318 72 - - Weighted average price per Bbl $23.24 $17.49 - - Contract amount (in millions) $7.4 $5.1 $1.3 $.6 - - - - Price floor Contract volume (MBbls) - 325 - - Weighted average price per Bbl - $18.00 - - Contract amount (in millions) - - $5.9 $5.9 - - - -
-20- PART II OTHER INFORMATION Item 1 In the Company's Form 8-K filed June 22, 2000, it reported that the Arkansas Supreme Court ruled to affirm the 1998 decision of the Sebastian County Circuit Court awarding $109.3 million in a class action to royalty owners of SEECO, Inc., a wholly-owned subsidiary of Southwestern Energy Company. The Company has continuously reported on this matter and the details of the related matter involving a similar claim by the United States Minerals Management Service (MMS). The Company fully satisfied the judgment and the Circuit Court in Sebastian County issued an order in complete and final satisfaction of the judgment effective July 18, 2000. Since MMS is a member of the class whose claim was satisfied by the Court's order on July 18, 2000, the MMS claim is also extinguished. The Company has put in place interim financing with its lead banks to satisfy the judgment and meet its immediate financial obligations. This new credit facility has a term of 364 days and will provide interim financing while the Company pursues the proposed sale of its utility business. 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 above, involves claims similar to those upon which judgment was rendered against the Company and its subsidiaries. This matter went to a non-jury trial as to liability on January 10, 2000 and the Company is awaiting the Court's ruling. In September 1998, another party who opted out of the class threatened the Company with similar litigation. That third party has never pursued any action against the Company and we believe any such action would now be barred by the statute of limitations. While the amounts of these pending and threatened claims could be significant, management believes, based on its extensive investigations, trial preparation, and discussions with outside counsel, that these claims are without merit and, that the Company's ultimate liability, if any, will not be material to its consolidated financial position or results of operations. Items 2 - 6(a) No developments required to be reported under Items 2 - 6(a) occurred during the quarter ended June 30, 2000. Item 6(b) On June 22, 2000, the Company filed a current report on Form 8-K announcing the Arkansas Supreme Court ruling to affirm the 1998 decision of a Sebastian County Circuit Court awarding $109.3 million in a class action to royalty owners of SEECO, Inc., a wholly-owned Southwestern Energy Company subsidiary. -21- On June 26, 2000, the Company filed a current report of Form 8-K announcing approval of the Board of Directors to pursue the sale of its utility business to fund the $109.3 million class action judgment against the Company and to strengthen the Company's financial condition. 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: August 8, 2000 BY: /s/ GREG D. KERLEY --------------------- --------------------------- Greg D. Kerley Executive Vice President and Chief Financial Officer -22- EX-27 2 0002.txt FINANCIAL DATA SCHEDULE FOR 2ND QTR - 2000
5 1,000 6-MOS DEC-31-2000 JUN-30-2000 1,202 0 36,785 0 15,714 62,190 1,100,866 (533,181) 657,232 205,008 225,000 0 0 2,774 129,870 657,232 170,743 175,396 0 256,189 0 0 9,930 (88,725) (34,602) (54,123) 0 (890) 0 (55,013) (2.20) (2.20)
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