-----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, VEe4SZorAnubRUTNxk3njIO1YVoyjtBcihuuy59045LrjONPtP5ohAe+6m0ARbIH lDV2TzGBniIIKbnbYeutMA== 0000007332-99-000018.txt : 19990811 0000007332-99-000018.hdr.sgml : 19990811 ACCESSION NUMBER: 0000007332-99-000018 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990810 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: 99681966 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 JUNE 30, 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 June 30, 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 August 5, 1999 ---------------------------- ----------------------------- Common Stock, Par Value $.10 24,937,618 =========================================================================== - 1 - PART I FINANCIAL INFORMATION - 2 - SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) ASSETS
June 30, December 31, 1999 1998 ------------ ------------ ($ in thousands) Current Assets Cash $ 1,510 $ 1,622 Accounts receivable 22,193 40,655 Income taxes receivable 1,050 2,008 Inventories, at average cost 22,448 22,812 Other 3,880 5,174 --------- --------- Total current assets 51,081 72,271 --------- --------- Investments 12,960 14,015 --------- --------- Property, Plant and Equipment, at cost Gas and oil properties, using the full cost method 783,105 758,863 Gas distribution systems 219,659 217,741 Gas in underground storage 20,993 24,279 Other 28,168 27,582 --------- --------- 1,051,925 1,028,465 Less: Accumulated depreciation, depletion and amortization 499,425 478,790 --------- --------- 552,500 549,675 --------- --------- Other Assets 11,056 11,659 --------- --------- Total Assets $ 627,597 $ 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
June 30, December 31, 1999 1998 ------------ ------------ ($ in thousands) Current Liabilities Current portion of long-term debt $ 1,536 $ 1,536 Accounts payable 23,831 37,780 Taxes payable 2,447 3,408 Interest payable 2,375 2,471 Customer deposits 5,642 5,635 Over-recovered purchased gas costs 1,233 1,503 Other 3,101 2,453 --------- --------- Total current liabilities 40,165 54,786 --------- --------- Long-Term Debt, less current portion above 267,800 281,900 --------- --------- Other Liabilities Deferred income taxes 125,403 121,413 Other 3,668 3,665 --------- --------- 129,071 125,078 --------- --------- 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 21,245 21,249 Retained earnings 198,538 194,102 Less: Common stock in treasury, at cost, 2,803,471 shares in 1999 and 2,803,527 shares in 1998 31,247 31,248 Unamortized cost of 116,949 restricted shares in 1999 and 133,172 restricted shares in 1998, issued under stock incentive plan 749 1,021 --------- --------- 190,561 185,856 --------- --------- Total Liabilities and Shareholders' Equity $ 627,597 $ 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 Six Months Ended June 30, June 30, 1999 1998 1999 1998 ---------- ---------- ---------- ---------- ($ in thousands, except per share amounts) Operating Revenues Gas sales $ 30,715 $ 32,412 $ 91,654 $ 95,294 Gas marketing 21,330 19,504 34,805 34,705 Oil sales 2,312 2,575 3,973 5,344 Gas transportation and other 1,682 1,843 3,827 3,947 ---------- ---------- ---------- ---------- 56,039 56,334 134,259 139,290 ---------- ---------- ---------- ---------- Operating Costs and Expenses Gas purchases - utility 7,714 3,983 28,074 22,670 Gas purchases - marketing 20,585 19,054 32,673 33,326 Operating and general 14,319 16,612 28,242 31,741 Depreciation, depletion and amortization 10,321 12,399 20,693 25,438 Write-down of oil and gas properties - 66,383 - 66,383 Taxes, other than income taxes 1,559 1,738 3,107 3,644 ---------- ---------- ---------- ---------- 54,498 120,169 112,789 183,202 ---------- ---------- ---------- ---------- Operating Income (Loss) 1,541 (63,835) 21,470 (43,912) ---------- ---------- ---------- ---------- Interest Expense Interest on long-term debt 4,679 4,703 9,513 9,751 Other interest charges 258 503 541 768 Interest capitalized (827) (1,196) (1,666) (2,331) ---------- ---------- ---------- ---------- 4,110 4,010 8,388 8,188 ---------- ---------- ---------- ---------- Other Income (Expense) (225) (1,103) (905) (1,976) ---------- ---------- ---------- ---------- Income (Loss) Before Income Taxes (2,794) (68,948) 12,177 (54,076) ---------- ---------- ---------- ---------- Income Tax Provision (Benefit) Current (4,620) (1,418) 750 3,888 Deferred 3,530 (25,472) 3,999 (24,978) ---------- ---------- ---------- ---------- (1,090) (26,890) 4,749 (21,090) ---------- ---------- ---------- ---------- Net Income (Loss) $ (1,704) $ (42,058) $ 7,428 $ (32,986) ========== ========== ========== ========== Basic Earnings (Loss) Per Share ($0.07) ($1.70) $0.30 ($1.33) ====== ====== ====== ====== Weighted Average Common Shares Outstanding 24,934,012 24,859,789 24,933,966 24,851,447 ========== ========== ========== ========== Diluted Earnings (Loss) Per Share ($0.07) ($1.70) $0.30 ($1.33) ====== ====== ====== ====== Diluted Weighted Average Common Shares Outstanding 24,934,012 24,859,789 24,933,966 24,851,447 ========== ========== ========== ========== Dividends Declared Per Share Payable 8/5/99 and 8/5/98 $ .06 $ .06 $ .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)
Six Months Ended June 30, 1999 1998 -------- -------- ($ in thousands) Cash Flows From Operating Activities Net income (loss) $ 7,428 $(32,986) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization 21,382 26,101 Write-down of oil and gas properties - 66,383 Deferred income taxes 3,999 (24,978) Equity in loss of partnership 1,055 1,706 Change in assets and liabilities: Decrease in accounts receivable 18,462 21,565 Decrease in income taxes receivable 958 4,751 Decrease in inventories 364 1,107 Increase (decrease) in over-recovered purchased gas costs (270) 9,577 Decrease in accounts payable (13,949) (1,820) Net change in other current assets and liabilities 892 (452) -------- -------- Net cash provided by operating activities 40,321 70,954 -------- -------- Cash Flows From Investing Activities Capital expenditures (28,534) (26,414) Investment in partnership - (7,343) (Increase) decrease in gas stored underground 3,286 (306) Other items 1,907 863 -------- -------- Net cash used in investing activities (23,341) (33,200) -------- -------- Cash Flows From Financing Activities Net decrease in revolving long-term debt (14,100) (37,400) Cash dividends (2,992) (2,981) -------- -------- Net cash used in financing activities (17,092) (40,381) -------- -------- Decrease in cash (112) (2,627) Cash at beginning of year 1,622 4,603 -------- -------- Cash at end of period $ 1,510 $ 1,976 ======== ========
The accompanying notes are an integral part of the financial statements. - 6 - SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 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 June 30, 1998, financial statements in order to conform with the 1999 presentation. These reclassifications had no effect on previously reported net income. 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 1,634,901 shares of common stock with a weighted average exercise price of $12.15 per share in 1999, and options to purchase 1,286,501 shares with a weighted average exercise price of $13.37 in 1998, that were not included in the calculation of diluted shares because they would have had an anti-dilutive effect due to the Company's net loss in the second quarters of 1999 and 1998. 3. DIVIDEND PAYABLE A dividend of $.06 per share was declared June 7, 1999, payable August 5, 1999. 4. 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. -7- 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 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 Assets 413,275 170,153 8,664 35,505 627,597 Capital expenditures 13,034 1,810 1 (25) 14,820 Three months ended June 30, 1998: Revenues from external customers $ 14,430 $ 22,209 $ 19,505 $ 190 $ 56,334 Intersegment revenues 6,716 216 4,908 9 11,849 Depreciation, depletion and amortization expense 10,453 1,891 8 47 12,399 Write-down of oil and gas properties 66,383 - - - 66,383 Operating income (63,318) (769) 175 77 (63,835) Assets 392,772 174,109 7,556 37,246 611,683 Capital expenditures 14,513 2,767 5 199 17,484 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 Assets 413,275 170,153 8,664 35,505 627,597 Capital expenditures 25,217 3,185 8 124 28,534 Six months ended June 30, 1998: Revenues from external customers $ 26,305 $ 78,077 $ 34,706 $ 202 $ 139,290 Intersegment revenues 19,102 273 8,984 192 28,551 Depreciation, depletion and amortization expense 21,546 3,783 16 93 25,438 Write-down of oil and gas properties 66,383 - - - 66,383 Operating income (56,762) 11,871 824 155 (43,912) Assets 392,772 174,109 7,556 37,246 611,683 Capital expenditures 21,658 4,433 8 315 26,414 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. Includes a $66.4 million pre-tax write-down of oil and gas properties.
Intersegment sales 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 -8- expense and taxes other than income are allocated to segments. All of the Company's operations are located within the United States. 5. 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 1999 1998 1999 1998 --------------------------------------------------------------------- (in thousands) Interest payments $9,117 $9,280 $9,424 $9,781 Income tax payments $212 $2,342 $641 $2,342
-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 and six month periods ended June 30, 1999, and the comparable periods of 1998. RESULTS OF OPERATIONS The Company reported a net loss of $1.7 million, or $.07 per share, for the second quarter of 1999, compared to a net loss of $42.1 million or $1.70 per share, for the same period in 1998. The 1998 results reflect the impact of an after-tax, non-cash ceiling test write-down of the Company's oil and gas properties of $40.5 million, or $1.63 per share. Excluding the non-cash write-down, the Company would have recognized a net loss of $1.6 million, or $.07 per share in the second quarter of 1998, approximately even with the Company's 1999 results. Net income for the six months ended June 30, 1999, was $7.4, or $.30 per share, compared to $7.5 million, or $.30 per share for the same period in 1998, excluding the non-cash charge. Results for the second quarter of 1999 were unfavorably impacted by lower production volumes and lower gas prices, offset by decreased operating and general expenses and lower depreciation, depletion and amortization expense. The following tables compare operating revenues and operating income (before the effects of the write-down of oil and gas properties in 1998) by business segment for the three and six month periods ended June 30, 1999 and 1998:
Quarter Ended Six Months Ended June 30, June 30, 1999 1998 1999 1998 (in thousands) Revenues Exploration and production $ 16,037 $ 21,146 $ 36,418 $ 45,407 Gas distribution 21,545 22,425 74,663 78,350 Marketing and other 31,254 24,612 53,344 44,084 Eliminations (12,797) (11,849) (30,166) (28,551) -------- -------- -------- -------- $ 56,039 $ 56,334 $134,259 $139,290 ======== ======== ======== ======== Operating Income (Loss) Exploration and production $ 1,707 $ 3,065 $ 7,593 $ 9,621 Gas distribution (623) (769) 12,327 11,871 Marketing and other 457 252 1,550 979 -------- -------- -------- -------- $ 1,541 $ 2,548 $ 21,470 $ 22,471 ======== ======== ======== ========
-10- Exploration and Production Revenues of the exploration and production segment were down 24% for the three month period ended June 30, 1999, and down 20% for the six month period ended June 30, 1999, both as compared to the same periods in 1998, primarily due to lower production volumes and lower gas prices. Operating income of this segment, excluding the write-down in 1998, was down $1.4 million for the three months ended June 30, 1999, and was down $2.0 million for the six months ended June 30, 1999, as compared to the same periods in 1998. Gas production for the three months ended June 30, 1999, was 7.2 Bcf, compared to 8.0 Bcf for the same period in 1998. For the six months ended June 30, 1999, gas production was 14.9 Bcf, compared to 16.7 Bcf in 1998. The decrease in production resulted from the combined effects of lower production from the Company's non-operated properties caused primarily by the industry slowdown that began last year, reduced demand from the Company's utility systems due to warm weather, and higher declines than expected from some of the Company's Gulf Coast properties. The Company's sales to its utility distribution systems were 4.5 Bcf during the six months ended June 30, 1999, compared to 6.9 Bcf for the same period in 1998. The decline in sales to the utility segment was primarily the result of weather that was 8% warmer than in 1998. Warmer weather impacts deliveries to customers and lowers the utility segment's requirements for gas to be injected into its storage facilities. Southwestern received an average price of $1.91 per Mcf for its gas production during the three months ended June 30, 1999, down from $2.33 per Mcf for the same period in 1998. The Company received an average price of $2.19 per Mcf for its gas production during the six months ended June 30, 1999, down from $2.39 per Mcf for the same period in 1998. The Company hedged 9.9 Bcf of gas in the first six months of 1999 that added $.20 per Mcf to the average gas price realized. 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's oil production was 290 thousand barrels (MBbls) during the six months ended June 30, 1999, down from 387 MBbls for the same period of 1998, primarily reflecting the decline in productive capability of existing properties. Southwestern received an average price of $13.70 per barrel for its oil production during the six months ended June 30, 1999, compared to $13.82 per barrel for the same period of 1998. Gas Distribution Operating income of the gas distribution segment increased $.1 million for the second quarter of 1999 and $.5 million for the first six months of 1999, as compared to the same periods in 1998, despite weather during the first half of 1999 that was 17% warmer than normal and 8% warmer than the same period of 1998. Customer growth and reduced operating costs and expenses more than offset the effect of warmer weather. The utility systems delivered 18.0 Bcf to sales and end-use transportation customers during the six months ended June 30, 1999, down from 18.2 Bcf for the same period in 1998. The Company's average rate for its utility sales increased slightly to $5.44 per Mcf during the first six months of 1999, up from $5.40 per Mcf for the same period in 1998. The utility also realized 1% growth in the average number of customers. -11- Marketing Operating income for the marketing segment was $.4 million on revenues of $31.2 million for the second quarter of 1999, compared to $.2 million on revenues of $24.4 million for the same period in 1998. For the six months ended June 30, 1999, operating income for this segment was $1.5 million on revenues of $53.2 million, compared to $.8 million on revenues of $43.7 million for the same period in 1998. The increase in operating income in the marketing segment was primarily due to increased volumes marketed. The Company marketed 28.4 Bcf of gas in the first six months of 1999, compared to 21.6 Bcf for the same period in 1998. NOARK Pipeline The Company's share of NOARK's pre-tax loss included in other income was $.5 million for the second quarter of 1999 and $1.1 million for the first six months of 1999, compared to $.9 million and $1.7 million, respectively, for the same periods 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 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. Regulatory Matters On May 19, 1999, the Staff of the Arkansas Public Service Commission (Staff) initiated a proceeding before the Arkansas Public Service Commission (APSC) in which it seeks an annual reduction of approximately $2.3 million in the rates Arkansas Western Gas Company charges its ratepayers in northwest Arkansas (AWG division). The AWG division's last rate case was settled in 1996. Staff's position is based on various adjustments to the utility's rate base, operating expenses, capital structure and rate of return. A large portion of the proposed reduction is based on a significant downward adjustment to the utility's current return on equity authorized by the APSC in 1996. The APSC has set a hearing date of September 30, 1999. Management believes, based on its investigation, that the AWG division is not overearning and that the final resolution of this proceeding will not have a material effect on the Company's consolidated financial position or results of operations. Operating Costs and Expenses The Company's operating costs and expenses, exclusive of gas purchases by the Company's utility and marketing segments and the non-cash write-down of oil and gas properties in 1998, decreased 15% in the second quarter of 1999 and decreased 14% for the first six months of 1999, both as compared to the comparable periods in 1998. The decreases in operating and general expenses were due primarily to decreases in operating costs in the exploration and production and gas distribution segments, and lower general and administrative costs due to severance and other costs incurred in connection with the closing of the Company's Oklahoma City exploration and production office in 1998. The decrease in depreciation, depletion and amortization expense was due to both lower production and a decrease in the amortization rate per unit of production in the exploration and production segment that resulted primarily from the second quarter 1998 write-down of oil and gas properties. The Company's amortization rate was $.99 per Mcf equivalent for the first six months of 1999, compared to $1.11 for the same period in 1998, excluding the impact of the write-down of oil and gas properties. -12- 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, 1999, 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 mitigating circumstances could cause a future write-down of capitalized costs and a non-cash charge against future earnings. Gas purchased for resale by the Company's marketing segment increased in the second quarter of 1999 due to an increase in volumes marketed. The increase in purchased gas costs for the gas distribution segment reflects prices paid for supplies and the mix of purchases from intercompany versus third party sources. Interest expense, net of capitalization, for the six months ended June 30, 1999, was up slightly compared to the same period in 1998, as lower interest costs that resulted from lower average outstanding borrowings and a lower average interest rate 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 and six month periods ended June 30, 1999, as compared to the same periods in 1998, resulted primarily from the June 1998 write-down of the Company's oil and gas properties which resulted in a deferred tax benefit of $25.9 million. Other items impacting deferred taxes were 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. CHANGES IN FINANCIAL CONDITION Changes in the Company's financial condition at June 30, 1999, as compared to December 31, 1998, primarily reflect the seasonal nature of the gas distribution segment of the Company's business and the timing of cash receipts and payments. Routine capital expenditures, cash dividends and scheduled debt retirements are predominately funded through cash provided by operations. For the first six months of 1999 and 1998, net cash provided by operating activities was $40.3 million and $71.0 million, respectively, and exceeded the total of these routine requirements. The decrease in net cash provided by operating activities -13- during the first six months of 1999 was almost entirely due to the timing of cash receipts and payments for working capital items. 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 credit facilities. Of this amount, $20.8 million was outstanding at June 30, 1999, all of which was classified as long-term debt. During the first six months of 1999, the Company's revolving long-term debt decreased by $14.1 million primarily due to cash flow generated by seasonally high utility revenues. Long-term debt at June 30, 1999, accounted for 58% of the Company's capitalization, down from 60% at December 31, 1998. The Company expects its outstanding borrowings to increase during the upcoming months of 1999 as cash generated from operations is expected to 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 six months of 1999 were $28.5 million, compared to $26.4 million for the same period in 1998. Planned capital spending during calendar year 1999 is currently expected to be approximately $8.0 million to $10.0 million lower than actual 1998 spending. Working Capital Accounts receivable has declined since December 31, 1998, due primarily to seasonally lower deliveries of the gas distribution segment. The decrease in income taxes receivable resulted from an increase in taxable income generated in the first half of 1999. Accounts payable has decreased since December 31, 1998 due to the seasonally lower gas purchases for the gas distribution segment and due to the timing of expenditures. Other changes in current assets and current liabilities between periods resulted primarily from the timing of expenditures and receipts. YEAR 2000 The primary financial information systems of the Company that are supported by outside vendors are designed to accommodate the century date or have been upgraded and tested in 1998 to a year 2000 compliant version at no additional cost to the Company. Other information systems supported internally by the Company have been either scheduled for replacement at which time they will become year 2000 compliant, or have been modified to support year 2000 processing. Scheduled implementation and final testing of these systems was originally scheduled to be completed no later than mid-year 1999. Due to delays by a third party vendor, one of the information systems that was an upgrade to existing software has not been completely installed and tested at June 30, 1999. The Company currently expects to have this software in place by the beginning of the fourth quarter of this year. If further delays are encountered that would delay the installation beyond year-end 1999, the Company does have alternatives for processing the necessary data in the year 2000. The Company does not anticipate any material disruptions in its business activities as a result of the delay in the installation of this software. For additional information regarding the Company's state of readiness for the year 2000, refer to "Management's -14- 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. -15- 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 June 30, 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 as a -16- 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 designated as hedges 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, 1999. At June 30, 1999, the "Carrying Amount" exceeds the "Fair Value" by $5.6 million.
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) 11.4 11.6 - Weighted average price per Mcf $2.16 $2.28 - Contract amount (in millions) $24.7 $21.3 $26.4 $24.0 - - Swaps with a fixed price payment Contract volume (Bcf) .6 - - Weighted average price per Mcf $2.17 - - Contract amount (in millions) $1.4 $1.5 - - - - Basis swaps Contract volume (Bcf) .5 - - Weighted average basis difference per Mcf $.100 - - Contract amount (in millions) $.1 $.1 - - - - Oil: Price floor Contract volume (MBbls) 188 350 325 Weighted average price per Bbl $18.00 $18.00 $18.00 Contract amount (in millions) $3.4 $3.4 $6.3 $6.3 $5.9 $6.0
-17- PART II OTHER INFORMATION Item 1 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 related to a claim that he was contractually entitled to a 25% interest in the Boure' project, one of SEPCO's south Louisiana exploration projects. The counterclaim alleged seven different claims for relief including breach of contract, fraud, and defamation and requested damages in excess of $10,000,000 for each claim plus punitive damages in excess of $10,000,000. This case was settled in June 1999 on terms that did not have a material effect on the Company's consolidated financial position or results of operation. This lawsuit was first disclosed in the Company's Form 10-Q for the quarter ended June 30, 1998, and has also been disclosed in the Company's Form 10-K for the year ended December 31, 1998 and in its Form 10-Q for the quarter ended March 31, 1999. Items 2 - 3 No developments required to be reported under Items 2 - 3 occurred during the quarter ended June 30, 1999. Item 4 - Submission of Matters to a Vote of Security Holders The Company held its Annual Meeting of Shareholders on May 18, 1999, for the purpose of electing Directors of the Company for the ensuing year. Holders of 22,553,315 shares voted in total. Holders of 20,729,007 shares voted for the election of directors and 1,824,308 shares voted as withheld. The Directors were elected with the number of shares voted as follows:
Voted For Withheld Lewis E. Epley, Jr. 20,659,255 1,894,060 John Paul Hammerschmidt 20,640,500 1,912,815 Robert L. Howard 20,659,494 1,893,821 Harold M. Korell 20,658,403 1,894,912 Kenneth R. Mourton 20,657,314 1,896,001 Charles E. Scharlau 20,915,511 1,637,804
Items 5 - 6(b) No developments required to be reported under Items 5 - 6(b) occurred during the quarter ended June 30, 1999 that have not been previously reported. -18- 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 10, 1999 /s/ GREGORY D. KERLEY --------------------- ------------------------------------------- Gregory D. Kerley Senior Vice President and Chief Financial Officer -19- EX-27 2 FINANCIAL DATA SCHEDULE FOR 2ND QTR - 1999
5 1,000 6-MOS DEC-31-1999 JUN-30-1999 1,510 0 23,243 0 22,448 51,081 1,051,925 (499,425) 627,597 40,165 267,800 0 0 2,774 187,787 627,597 130,432 134,259 0 112,789 0 0 8,388 12,177 4,749 7,428 0 0 0 7,428 0.30 0.30 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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