<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-Q
(Mark one)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 1997
--------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______ to _______
Commission file number 1-8246
SOUTHWESTERN ENERGY COMPANY
(Exact name of registrant as specified in its charter)
Arkansas 71-0205415
(State of incorporation (I.R.S. Employer
or organization) Identification No.)
1083 Sain Street, P.O. Box 1408, Fayetteville, Arkansas 72702-1408
(Address of principal executive offices, including zip code)
(501) 521-1141
(Registrant's telephone number, including area code)
No Change
(Former name, former address and former fiscal year; if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes: X No:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Outstanding at May 5, 1997
---------------------------- ------------------------------
Common Stock, Par Value $.10 24,742,332
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<PAGE>
PART I
FINANCIAL INFORMATION
- 2 -
<PAGE>
SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
--------- ---------
($ in thousands)
<S> <C> <C>
Current Assets
Cash $ 1,696 $ 2,297
Accounts receivable 33,692 39,928
Income taxes receivable - 6,623
Inventories, at average cost 13,875 17,571
Under-recovered purchased gas costs, net 7,016 3,030
Other 4,305 3,484
--------- ---------
Total current assets 60,584 72,933
--------- ---------
Investments 6,750 6,557
--------- ---------
Property, Plant and Equipment, at cost
Gas and oil properties, using the
full cost method 651,754 637,100
Gas distribution systems 205,573 203,070
Gas in underground storage 21,149 25,636
Other 22,462 22,031
--------- ---------
900,938 887,837
Less: Accumulated depreciation,
depletion and amortization 331,495 319,135
--------- ---------
569,443 568,702
--------- ---------
Other Assets 12,030 11,998
--------- ---------
Total Assets $ 648,807 $ 660,190
========= =========
</TABLE>
The accompanying notes are an integral part
of the financial statements.
- 3 -
<PAGE>
SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
--------- ---------
($ in thousands)
<S> <C> <C>
Current Liabilities
Current portion of long-term debt $ 3,071 $ 3,071
Accounts payable 19,156 25,644
Taxes payable 6,697 3,290
Interest payable 4,792 1,628
Customer deposits 4,924 4,904
Other 3,091 3,285
--------- ---------
Total current liabilities 41,731 41,822
--------- ---------
Long-Term Debt, less current portion above 252,114 275,214
--------- ---------
Other Liabilities
Deferred income taxes 130,092 128,895
Deferred investment tax credits 1,761 1,791
Other 4,290 4,527
--------- ---------
136,143 135,213
--------- ---------
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 21,346 21,336
Retained earnings 228,725 217,889
Less: Common stock in treasury, at cost,
3,015,752 shares in 1997 and
3,019,200 shares in 1996 33,564 33,603
Unamortized cost of 40,187
restricted shares in 1997
and 31,527 restricted shares
in 1996, issued under stock
incentive plan 462 455
--------- ---------
218,819 207,941
--------- ---------
Total Liabilities and Shareholders' Equity $ 648,807 $ 660,190
========= =========
</TABLE>
The accompanying notes are an integral part
of the financial statements.
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<PAGE>
SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
March 31
1997 1996
--------- ---------
($ in thousands, except per share amounts)
<S> <C> <C>
Operating Revenues
Gas sales $ 69,262 $ 60,706
Gas marketing 14,003 1,068
Oil sales 4,016 1,316
Gas transportation and other 1,638 1,774
--------- ---------
88,919 64,864
--------- ---------
Operating Costs and Expenses
Gas purchases - utility 22,283 20,094
Gas purchases - marketing 13,112 1,002
Operating and general 14,348 11,754
Depreciation, depletion and amortization 12,286 11,217
Taxes, other than income taxes 1,796 1,279
---------- ----------
63,825 45,346
---------- ----------
Operating Income 25,094 19,518
---------- ----------
Interest Expense 3,986 3,215
---------- ----------
Other Income (Expense) (1,077) (1,126)
---------- ----------
Income Before Provision for Income Taxes 20,031 15,177
---------- ----------
Income Tax Provision
Current 6,541 3,383
Deferred 1,171 2,460
---------- ----------
7,712 5,843
---------- ----------
Net Income $ 12,319 $ 9,334
========== ==========
Weighted Average Common Shares Outstanding 24,720,148 24,701,349
========== ==========
Earnings Per Share $0.50 $0.38
=========== ==========
Dividends Declared Per Share Payable
5/5/97 and 5/3/96 $0.06 $0.06
=========== ==========
</TABLE>
The accompanying notes are an integral part
of the financial statements.
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<PAGE>
SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
March 31,
1997 1996
-------- --------
($ in thousands)
<S> <C> <C>
Cash Flows From Operating Activities
Net income $ 12,319 $ 9,334
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation, depletion and amortization 12,356 11,286
Deferred income taxes 1,171 2,460
Equity in loss of partnership 1,076 808
Change in assets and liabilities:
Decrease in accounts receivable 6,236 3,777
Decrease in income taxes receivable 9,386 5,730
Decrease in inventories 3,696 2,535
Increase in under-recovered purchased
gas costs (3,986) (2,624)
Decrease in accounts payable (6,488) (4,752)
Increase in interest payable 3,164 3,466
Net change in other current assets
and liabilities (351) 866
---------- ---------
Net cash provided by operating activities 38,579 32,886
---------- ---------
Cash Flows From Investing Activities
Capital expenditures (18,145) (18,721)
Investment in partnership (1,272) -
Decrease in gas stored underground 4,487 5,507
Other items 333 (539)
---------- ---------
Net cash used in investing activities (14,597) (13,753)
---------- ---------
Cash Flows From Financing Activities
Decrease in revolving long-term debt (23,100) (17,900)
Cash dividends (1,483) (1,482)
---------- ---------
Net cash used in financing activities (24,583) (19,382)
---------- ---------
Decrease in cash (601) (249)
Cash at beginning of year 2,297 1,498
--------- ---------
Cash at end of period $ 1,696 $ 1,249
========= =========
</TABLE>
The accompanying notes are an integral part
of the financial statements.
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<PAGE>
SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
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 1996
Annual Report to Shareholders, Notes to Financial Statements.
Certain reclassifications have been made to the March 31, 1996,
financial statements in order to conform with the 1997 presentation.
These reclassifications had no effect on previously reported net
income.
2. DIVIDEND PAYABLE
A dividend of $.06 per share was declared April 9, 1997, payable May 5,
1997.
3. INTEREST AND INCOME TAXES PAID
The following table provides interest and income taxes paid during each
period presented.
Quarter Ended March 31 1997 1996
-----------------------------------------------------------------------
(in thousands)
Interest payments $1,569 $321
Income tax payments $165 $9
4. RECENT PRONOUNCEMENT
In February, 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings Per Share (SFAS No. 128), which establishes
new standards for computing and presenting earnings per share. The
provisions of SFAS No. 128 are effective for earnings per share
calculations for periods ending after December 15, 1997. At that time,
the Company will be required to change the method currently used to
compute earnings per share. At March 31, 1997 and 1996, the provisions
of SFAS No. 128 would have had no impact on the Company's reported
earnings per share.
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<PAGE>
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, 1996, and
analyzes the changes in the results of operations between the three month period
ended March 31, 1997, and the comparable period of 1996.
RESULTS OF OPERATIONS
Net income for the three months ended March 31, 1997, was $12.3 million, or $.50
per share, up from $9.3 million, or $.38 per share, for the same period in 1996.
The increase in net income was the result of higher wellhead prices received for
the Company's production and a utility rate increase that became effective in
late 1996. These factors led to improved operating results in both of the
Company's major business segments. The following tables compare operating
revenues and operating income by business segment for the first three months of
1997 and 1996:
Increase
1997 1996 (Decrease)
--------- ---------- ----------
Revenues (in thousands)
Exploration and production $ 29,282 $ 23,106 $ 6,176
Gas distribution 60,899 54,275 6,624
Energy services and other 16,983 3,423 13,560
Eliminations (18,245) (15,940) (2,305)
--------- ---------- ----------
$ 88,919 $ 64,864 $24,055
========= ========== ==========
Operating Income
Exploration and production $ 12,435 $ 9,869 $ 2,566
Gas distribution 11,965 9,639 2,326
Energy services and other 694 10 684
--------- --------- ----------
$ 25,094 $19,518 $ 5,576
========= ========= ==========
Operating income of the exploration and production segment was up 26% for the
three months ended March 31, 1997, as compared to the same period in 1996. The
improvement was primarily the result of higher wellhead prices. Gas and oil
production during the first quarter of 1997 was 9.9 billion cubic feet (Bcf)
equivalent, down from 10.3 Bcf equivalent for the same period in 1996. The
decrease was primarily the result of lower sales to the Company's utility
subsidiary, partially offset by increased oil production. Gas production for the
three months
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<PAGE>
ended March 31, 1997, was 8.7 Bcf compared to 9.9 Bcf for the same period in
1996. The Company's sales to its gas distribution systems decreased to 4.6 Bcf
during the three months ended March 31, 1997, compared to 5.9 Bcf for the same
period in 1996. Weather which was 16% warmer in 1997 resulted in decreased
demand of the gas distribution segment for the Company's production of reserves
located on the utility's gathering system. Sales of gas production to
unaffiliated purchasers were 4.1 Bcf in the first quarter of 1997, up slightly
from 4.0 Bcf for the same period in 1996.
The Company received an average price of $2.91 per thousand cubic feet (Mcf) for
its gas production during the three months ended March 31, 1997, up from $2.20
per Mcf received in the first three months of 1996. The increased average price
reflected the general improvement in the market for natural gas during the first
quarter of 1997 as compared to the same period of 1996.
The Company's oil production was 196 thousand barrels (MBbls) during the three
months ended March 31, 1997, up from 72 MBbls for the same period of 1996. The
increase was due primarily to production from properties acquired during the
fourth quarter of 1996.
Operating income of the gas distribution segment increased 24% in the first
quarter of 1997, as compared to the first quarter of 1996. The increase reflects
a rate increase implemented in late 1996 partially offset by the effect of lower
weather-related deliveries to sales and end-use transportation customers. The
Company's utility systems delivered 12.9 Bcf to these customers during the three
months ended March 31, 1997, down from 14.6 Bcf for the same period in 1996. The
lower deliveries reflected the effects of weather which was 5% warmer than
normal and 16% warmer than in the same period of the prior year.
The Company's average rate for its utility sales increased during the first
quarter of 1997 to $5.25 per Mcf, up from $4.03 per Mcf for the same period in
1996. The increase reflected higher prices paid for purchases of natural gas
which are passed through to customers under automatic adjustment clauses, and
the effects of the rate increase.
Operating income for the energy services segment was $.7 million on revenues of
$17.0 million for the first quarter of 1997, compared to approximately $.1
million on revenues of $3.4 million for the same period in 1996. The Company
marketed 6.4 Bcf of gas in the first three months of 1997, compared to 1.4 Bcf
for the same period in 1996. The Company increased its activities in this area
in mid-1996 when it formed an energy services group to better enable the Company
to capture downstream opportunities which arise through marketing and
transportation activity.
Operating costs and expenses increased 41% in the first quarter of 1997, as
compared to the first quarter of 1996. The increase was primarily caused by
higher purchased gas costs of the Company's gas distribution and marketing
segments, and increased operating expenses and depreciation, depletion and
amortization expense in the exploration and production segment. The increase in
operating expenses for the exploration and production segment was primarily due
to higher operating costs associated with producing properties acquired in late
1996. These
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<PAGE>
properties produce oil through secondary recovery methods and have higher
average operating costs per unit of production than the Company's average gas
producing property. The increase in depreciation, depletion and amortization
(DD&A) expense was due to an increase in the amortization rate per unit of
production. The proved reserves owned by the Company and the costs associated
with adding those reserves are both components of the amortization rate. The
margin between the Company's full cost ceiling and the financial statement
carrying value of the Company's oil and gas properties was virtually eliminated
at March 31, 1997, due to wellhead prices realized at that time. At December 31,
1996, the Company had approximately $140 million of margin, or cushion,
available. The change in the amount of cushion was due primarily to the drop in
gas prices which occurred during the first quarter of 1997. The Company's full
cost ceiling is evaluated at the end of each quarter. If gas prices decline
below the level in effect at March 31, 1997, without other mitigating
circumstances, the Company could have a write-down of its capitalized costs of
oil and gas properties and a noncash charge against earnings in a later quarter.
Interest expense, net of capitalization, for the three months ended March 31,
1997, was up 24% compared to the same period in 1996, due to higher average
borrowings, partially offset by a lower weighted average interest rate. Interest
is capitalized in the exploration and production segment on costs that are
unevaluated and excluded from amortization.
The Company's share of the NOARK Pipeline System's (NOARK) pre-tax loss included
in other income was $1.1 million for the first quarter of 1997, as compared to
$.8 million for the same period in 1996. The Company, through a subsidiary,
holds a 47.93% general partnership interest in NOARK and is the pipeline's
operator.
The changes in the provisions for current and deferred income taxes recorded in
the three month period ended March 31, 1997, as compared to the same period in
1996, resulted primarily from the level of taxable income and from the deduction
of intangible drilling costs in the year incurred for tax purposes, netted
against the turnaround of intangible drilling costs deducted for tax purposes in
prior years. Intangible drilling costs are capitalized and amortized over future
years for financial reporting purposes under the full cost method of accounting.
CHANGES IN FINANCIAL CONDITION
Changes in the Company's financial condition at March 31, 1997, as compared to
December 31, 1996, primarily reflect the seasonal nature of the gas distribution
segment of the Company's business.
Routine capital expenditures, cash dividends and scheduled debt retirements are
predominantly funded through cash provided by operations. For the first three
months of 1997 and 1996, net cash provided by operating activities was $38.6
million and $32.9 million, respectively, and exceeded the total of these routine
requirements. The Company expects its outstanding borrowings to increase during
the remaining months of 1997 as cash generated from operations will be less than
the requirements for routine capital expenditures and cash dividends due to
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<PAGE>
lower levels of heating-generated revenues and seasonally higher capital
expenditures resulting from favorable drilling and construction weather. The
Company's capital expenditures for the first three months of 1997 were $18.1
million, compared to $18.7 million for the same period in 1996.
The Company has access to $80.0 million of medium to long-term capital at
current market lending rates through two floating rate revolving credit
facilities. These facilities were temporarily expanded to $120.0 million in late
1996 to provide additional debt financing to fund the acquisition of certain
producing properties. Of this amount, $73.4 million was outstanding at March 31,
1997, all of which was classified as long-term debt. During the first quarter of
1997, the Company's revolving long-term debt was reduced by $23.1 million,
primarily due to the increased cash flow generated by both seasonally high
utility revenues and higher gas prices. As a result, long-term debt at March 31,
1997, accounted for 54% of the Company's capitalization, down from 57% at
December 31, 1996.
Subsequent to March 31, 1997, the Company issued $60.0 million of 7.625%
medium-term notes due 2027. The notes may be repaid prior to maturity on May 1,
2009, at the noteholder's option. The notes were issued under the Company's
$125.0 million prospectus supplement filed with the Securities and Exchange
Commission in February, 1997. Proceeds from the issuance of these notes were
used primarily to repay certain borrowings under the Company's revolving credit
facilities.
Accounts receivable has declined since December 31, 1996, due primarily to
seasonally lower gas deliveries of the gas distribution segment. The decrease in
income taxes receivable resulted from the receipt of federal income tax refunds
related to a 1996 tax net operating loss and an increase in taxes payable
resulting from taxable income generated in the first quarter of 1997. The
decrease in inventories since December 31, 1996, is both the result of
withdrawals of gas stored underground to meet seasonal requirements in the gas
distribution segment and sales of gas to unaffiliated parties from the Company's
unregulated underground storage facility. Accounts payable has declined since
December 31, 1996, due primarily to seasonally lower gas purchases of the gas
distribution segment and to the timing of expenditures. Other changes in current
assets and current liabilities between periods resulted primarily from the
timing of expenditures and receipts.
The Company had under-recovered $7.0 million of purchased gas costs at March 31,
1997, which will be collected from its utility customers through automatic cost
of gas adjustment clauses included in its filed rate tariffs. At December 31,
1996, the Company had net under-recovered purchased gas costs in the amount of
$3.0 million. These amounts are classified as current assets.
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<PAGE>
PART II
OTHER INFORMATION
Items 1 - 6(a)
No developments required to be reported under Items 1 - 6(a) occurred during the
quarter ended March 31, 1997.
Item 6(b)
On April 29, 1997 the Company filed a current report on Form 8-K dated April 25,
1997, referencing its press release announcing operating results for the first
quarter of 1997.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOUTHWESTERN ENERGY COMPANY
---------------------------
Registrant
DATE: May 14, 1997 /s/ GREGORY D. KERLEY
------------------ --------------------------------
Gregory D. Kerley
Vice President - Treasurer and Secretary,
and Chief Accounting Officer
- 12 -
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,696
<SECURITIES> 0
<RECEIVABLES> 33,692
<ALLOWANCES> 0
<INVENTORY> 13,875
<CURRENT-ASSETS> 60,584
<PP&E> 900,938
<DEPRECIATION> (331,495)
<TOTAL-ASSETS> 648,807
<CURRENT-LIABILITIES> 41,731
<BONDS> 252,114
0
0
<COMMON> 2,774
<OTHER-SE> 216,045
<TOTAL-LIABILITY-AND-EQUITY> 648,807
<SALES> 87,281
<TOTAL-REVENUES> 88,919
<CGS> 0
<TOTAL-COSTS> 63,825
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,986
<INCOME-PRETAX> 20,031
<INCOME-TAX> 7,712
<INCOME-CONTINUING> 12,319
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,319
<EPS-PRIMARY> .50
<EPS-DILUTED> 0
</TABLE>
