<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 June 30, 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 August 5, 1997
---------------------------- ----------------------------
Common Stock, Par Value $.10 24,742,332
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- 1 -
<PAGE>
PART I
FINANCIAL INFORMATION
- 2 -
<PAGE>
SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
--------- ---------
($ in thousands)
<S> <C> <C>
Current Assets
Cash $ 3,456 $ 2,297
Accounts receivable 22,826 39,928
Income taxes receivable - 6,623
Inventories, at average cost 16,460 17,571
Under-recovered purchased gas costs, net 8,908 3,030
Other 2,695 3,484
--------- ---------
Total current assets 54,345 72,933
--------- ---------
Investments 7,021 6,557
--------- ---------
Property, Plant and Equipment, at cost
Gas and oil properties, using the
full cost method 670,654 637,100
Gas distribution systems 208,522 203,070
Gas in underground storage 23,408 25,636
Other 22,884 22,031
--------- ---------
925,468 887,837
Less: Accumulated depreciation,
depletion and amortization 343,071 319,135
--------- ---------
582,397 568,702
--------- ---------
Other Assets 13,021 11,998
--------- ---------
Total Assets $ 656,784 $ 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>
June 30, December 31,
1997 1996
--------- ---------
($ in thousands)
<S> <C> <C>
Current Liabilities
Current portion of long-term debt $ 3,071 $ 3,071
Accounts payable 26,363 25,644
Taxes payable 7,571 3,290
Interest payable 1,910 1,628
Customer deposits 4,864 4,904
Other 2,744 3,285
--------- ---------
Total current liabilities 46,523 41,822
--------- ---------
Long-Term Debt, less current portion above 256,314 275,214
--------- ---------
Other Liabilities
Deferred income taxes 130,381 128,895
Deferred investment tax credits 1,731 1,791
Other 4,412 4,527
--------- ---------
136,524 135,213
--------- ---------
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 21,372 21,336
Retained earnings 227,271 217,889
Less: Common stock in treasury, at cost
2,995,752 shares in 1997 and
3,019,200 shares in 1996 33,340 33,603
Unamortized cost of 60,187
restricted shares in 1997
and 40,020 restricted shares
in 1996, issued under stock
incentive plan 654 455
--------- ---------
217,423 207,941
--------- ---------
Total Liabilities and Shareholders' Equity $ 656,784 $ 660,190
========= =========
</TABLE>
The accompanying notes are an integral part
of the financial statements.
- 4 -
<PAGE>
SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
---------- ---------- ---------- ----------
($ in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Operating Revenues
Gas sales $ 32,180 $ 31,130 $ 101,442 $ 91,836
Gas marketing 14,020 2,163 28,023 3,231
Oil sales 3,667 1,635 7,683 2,951
Gas transportation and other 1,377 1,454 3,015 3,228
---------- ---------- ---------- ---------
51,244 36,382 140,163 101,246
---------- ---------- ---------- ---------
Operating Costs and Expenses
Gas purchases - utility 4,993 3,023 27,276 23,117
Gas purchases - marketing 13,602 2,078 26,714 3,080
Operating and general 14,388 12,039 28,736 23,793
Depreciation, depletion and amortization 11,543 10,015 23,829 21,232
Taxes, other than income taxes 1,629 1,154 3,425 2,433
---------- ---------- ---------- ---------
46,155 28,309 109,980 73,655
---------- ---------- ---------- ---------
Operating Income 5,089 8,073 30,183 27,591
---------- ---------- ---------- ---------
Interest Expense 3,745 2,790 7,731 6,005
---------- ---------- ---------- ---------
Other Income (Expense) (1,296) (745) (2,373) (1,871)
---------- ---------- ---------- ---------
Income Before Provision for Income Taxes 48 4,538 20,079 19,715
---------- ---------- ---------- ---------
Income Tax Provision (Benefit)
Current (243) (662) 6,298 2,721
Deferred 262 2,409 1,433 4,869
---------- ---------- ---------- ---------
19 1,747 7,731 7,590
---------- ---------- ---------- ---------
Net Income $ 29 $ 2,791 $ 12,348 $ 12,125
========== ========== ========== ==========
Weighted Average Common Shares Outstanding 24,736,398 24,701,349 24,728,318 24,701,349
========== ========== ========== ==========
Earnings Per Share $ .00 $ .11 $ .50 $ .49
===== ===== ===== =====
Dividends Declared Per Share Payable 8/5/97
and 8/5/96 $ .06 $ .06 $ .06 $ .06
===== ===== ===== =====
</TABLE>
The accompanying notes are an integral part
of the financial statements.
- 5 -
<PAGE>
SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1997 1996
-------- --------
($ in thousands)
<S> <C> <C>
Cash Flows From Operating Activities
Net income $ 12,348 $ 12,125
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation, depletion and amortization 23,969 21,372
Deferred income taxes 1,433 4,869
Equity in loss of partnership 2,014 1,601
Change in assets and liabilities:
Decrease in accounts receivable 17,102 15,888
Decrease in income taxes receivable 11,584 7,412
(Increase) decrease in inventories 1,111 (91)
Increase (decrease) in accounts payable 719 (2,895)
Decrease in taxes payable (680) (371)
Increase (decrease) in interest payable 282 (195)
Increase in under-recovered
purchased gas costs (5,878) (5,623)
Net change in other current assets
and liabilities 208 1,085
-------- --------
Net cash provided by operating activities 64,212 55,177
-------- --------
Cash Flows From Investing Activities
Capital expenditures (41,482) (41,486)
Investment in partnership (2,496) -
Decrease in gas stored underground 2,228 31
Other items 563 (576)
-------- --------
Net cash used in investing activities (41,187) (42,031)
-------- --------
Cash Flows From Financing Activities
Decrease in revolving long-term debt (78,900) (10,700)
Issuance of long-term debt 60,000 -
Cash dividends (2,966) (2,964)
-------- --------
Net cash used in financing activities (21,866) (13,664)
-------- --------
Increase (decrease) in cash 1,159 (518)
Cash at beginning of year 2,297 1,498
-------- --------
Cash at end of period $ 3,456 $ 980
======== ========
</TABLE>
The accompanying notes are an integral part
of the financial statements.
- 6 -
<PAGE>
SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 June 30, 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 July 9, 1997, payable August
5, 1997.
3. INTEREST AND INCOME TAXES PAID
The following table provides interest and income taxes paid during each
period presented.
<TABLE>
<CAPTION>
Three months Six months
Periods Ended June 30 1997 1996 1997 1996
---------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Interest payments $7,276 $7,039 $8,845 $7,360
Income tax payments $219 $2,512 $384 $2,521
</TABLE>
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 June 30, 1997 and 1996, the provisions
of SFAS No. 128 would have had no impact on the Company's reported
earnings per share.
- 7 -
<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 and six
month periods ended June 30, 1997, and the comparable periods of 1996.
RESULTS OF OPERATIONS
Net income for the three months ended June 30, 1997, was $29,000, or $.00 per
share, down from $2.8 million, or $.11 per share, for the same period in 1996.
For the six months ended June 30, 1997, net income was $12.3 million, or $.50
per share, compared to $12.1 million, or $.49 per share, for the same period in
1996.
Results for the second quarter 1997 were unfavorably impacted by lower oil and
gas prices, higher depreciation, depletion and amortization expense, and higher
interest costs. The following tables compare operating revenues and operating
income by business segment for the three and six month periods ended June 30,
1997 and 1996:
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
------------------------ ------------------------
June 30, June 30,
------------------------ ------------------------
1997 1996 1997 1996
----------- ----------- ----------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Revenues
Exploration and production $ 20,633 $ 20,711 $ 49,915 $ 43,817
Gas distribution 24,280 22,767 85,179 77,042
Energy services and other 18,553 6,500 35,536 9,923
Eliminations (12,222) (13,596) (30,467) (29,536)
---------- ----------- ----------- ----------
$ 51,244 $ 36,382 $ 140,163 $ 101,246
=========== =========== =========== ==========
Operating Income
Exploration and production $ 4,667 $ 8,540 $ 17,102 $ 18,409
Gas distribution 229 (432) 12,194 9,207
Energy services and other 193 (35) 887 (25)
----------- ----------- ----------- ----------
$ 5,089 $ 8,073 $ 30,183 $ 27,591
=========== =========== =========== ==========
</TABLE>
Revenues of the exploration and production segment were flat for the three month
period ended June 30, 1997, and were up 14% for the six month period ended June
30, 1997, both as compared to the same periods in 1996. Operating income of this
segment was down $3.9 million for the three months ended June 30, 1997, and was
down $1.3 million for the six months ended June 30, 1997, as compared to the
same periods in 1996.
- 8 -
<PAGE>
Gas and oil production during the second quarter of 1997 was 9.1 billion cubic
feet (Bcf) equivalent, up from 8.8 Bcf equivalent for the same period in 1996.
For the six months ended June 30, 1997, gas and oil production was 19.0 Bcf
equivalent, even with the same period in 1996. Gas production for the three
month period ended June 30, 1997 was 7.9 Bcf, compared to 8.3 Bcf for the same
period in 1996. For the six months ended June 30, 1997, gas production was 16.6
Bcf, compared to 18.2 Bcf for the same period in 1996. The decreased production
in both the second quarter and year-to-date was primarily the result of lower
sales to the Company's utility distribution systems. Sales to the utility were
3.0 Bcf during the second quarter of 1997 and 7.6 Bcf during the first six
months of 1997, down from 3.6 Bcf and 9.5 Bcf for the same periods in 1996. The
declines were the result of weather which was 10% warmer than in 1996. In 1996,
the colder weather created higher demand by the Company's utility distribution
systems and that demand continued into the summer as the utility injected
increased volumes of gas into storage. Sales of gas production to unaffiliated
purchasers were 4.9 Bcf during the second quarter of 1997 and 9.0 Bcf for the
first six months of 1997, up from 4.7 Bcf and 8.7 Bcf, respectively, for the
same periods in 1996.
The Company's average sales price for its gas production was $2.13 per thousand
cubic feet (Mcf) for the second quarter of 1997, down from $2.31 per Mcf for the
same period in 1996. The average price was $2.54 per Mcf for the first six
months of 1997, up from $2.25 per Mcf for the same period of 1996. The changes
in the average sales prices received primarily reflect fluctuations in spot
market prices for natural gas.
The Company's oil production increased to 398 thousand barrels (MBbls) for the
six months ended June 30, 1997, up from 150 MBbls for the same period in 1996.
The increase was due primarily to production from properties acquired during the
fourth quarter of 1996.
Operating revenues of the gas distribution segment increased 7% in the second
quarter of 1997 and 11% in the six months ended June 30, 1997, both as compared
to the same periods in 1996. Operating income of this segment increased $.7
million for the second quarter of 1997 and $3.0 million for the first six months
of 1997, as compared to the same periods in 1996. The increases primarily
reflect a rate increase implemented in late 1996 partially offset by the effect
of lower weather-related deliveries to sales and end-use transportation
customers. Deliveries by the Company's utility systems to sales and end-use
transportation customers were 5.8 Bcf for the second quarter of 1997 and 18.7
Bcf for the six months ended June 30, 1997, compared to 5.6 Bcf and 20.2 Bcf,
respectively, for the same periods in 1996.
The Company's average rate for its utility sales increased during the first half
of 1997 to $5.22 per Mcf, up from $4.24 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 $.2 million on revenues of
$18.5 million for the second quarter of 1997, compared to break-even on revenues
of $6.4 million for the same period in 1996. For the six months ended June 30,
1997, operating income for this segment was $.9 million on revenues of $35.4
million, compared to $.1 million on revenues of $9.8 million for the same period
in 1996. The Company marketed 16.4 Bcf of gas in the first
- 9 -
<PAGE>
six months of 1997, compared to 4.1 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 63% in the second quarter of 1997 and
increased 49% for the first six months of 1997, both as compared to the
comparable periods in 1996. The increases were primarily caused by higher
purchased gas costs of the Company's gas distribution segment, increased gas
purchases by the energy services segment, and increased expenses related to
producing properties acquired in 1996. Most of those acquisitions were oil
properties which produce through secondary recovery methods. As a result, the
operating costs are higher than those associated with the Company's average gas
producing property. The increase in depreciation, depletion and amortization
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 Company
currently has a margin, or cushion, between its ceiling under the full cost
method of accounting for oil and gas producing activities and the financial
statement carrying value of its oil and gas properties, although that cushion
has been significantly reduced since December 31, 1996. The change in the amount
of cushion was due primarily to the drop in gas prices which occurred during the
first half of 1997. The Company's full cost ceiling is evaluated at the end of
each quarter. If gas prices decline below current levels in the future without
other mitigating circumstances, the Company could incur 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 six months ended June 30, 1997,
was up 29% compared to the same period in 1996, due to higher average
borrowings. 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) pretax loss included
in other income was $.9 million for the second quarter of 1997 and $2.0 million
for the six months ended June 30, 1997, compared to $.8 million and $1.6
million, respectively, for the same periods 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 and six month periods ended June 30, 1997, as compared to the same
periods 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.
- 10 -
<PAGE>
CHANGES IN FINANCIAL CONDITION
Changes in the Company's financial condition at June 30, 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
predominately funded through cash provided by operations. For the first six
months of 1997 and 1996, net cash provided by operating activities was $64.2
million and $55.2 million, respectively, and exceeded the total of these routine
requirements. The increase in net cash provided by operating activities during
the first six months of 1997, as compared to the same period in 1996, was
primarily due to the timing of both cash receipts and expenditures. The Company
expects its outstanding borrowings to increase during the upcoming months of
1997 as cash generated from operations will be less than the requirements for
routine capital expenditures and cash dividends due to lower levels of
heating-generated revenues and seasonally higher capital expenditures resulting
from favorable drilling and construction weather. The Company's capital
expenditures for the first six months of both 1997 and 1996 were $41.5 million.
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, $17.6 million was outstanding at June 30, 1997, all of which was
classified as long-term debt. During the first six months of 1997, the Company's
revolving long-term debt decreased by $78.9 million. Approximately $60.0 million
of this decrease resulted from the issuance of the Medium-Term Notes discussed
below. The remainder of the decrease resulted from cash flow generated by both
seasonally high utility revenues and increased prices received for the Company's
gas production. As a result, long-term debt at June 30, 1997, accounted for 54%
of the Company's capitalization, down from 57% at December 31, 1996.
In May, 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 a supplement to the Company's
$250.0 million shelf registration statement filed with the Securities and
Exchange Commission in February, 1997, for the issuance of up to $125.0 million
of Medium-Term Notes. The Company has $65.0 million of remaining capacity under
the shelf registration statement.
Accounts receivable has declined since December 31, 1996, due primarily to
seasonally lower 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 half of 1997. Accounts
payable has increased slightly since December 31, 1996 as the seasonal decrease
related to gas purchases for the gas distribution segment was more than offset
by increased gas purchases for the energy services segment and by the timing of
expenditures. Other changes in current assets and current liabilities between
periods resulted primarily from the timing of expenditures and receipts.
- 11 -
<PAGE>
The Company had under-recovered $8.9 million of purchased gas costs at June 30,
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.
- 12 -
<PAGE>
PART II
OTHER INFORMATION
Items 1 - 3
No developments required to be reported under Items 1 - 3 occurred during the
quarter ended June 30, 1997.
Item 4 - Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Shareholders on May 22, 1997, for the
purpose of electing Directors of the Company for the ensuing year. Holders of
21,138,091 shares voted, with 21,055,752 shares voted for the election of
directors and 82,339 shares voted as withheld. The Directors were elected with
the number of shares voted as follows:
Voted For Withheld
---------- --------
John Paul Hammerschmidt 21,038,654 99,437
Robert L. Howard 21,055,252 82,839
Kenneth R. Mourton 21,055,452 82,639
Charles E. Sanders 21,042,442 95,649
Charles E. Scharlau 21,044,526 93,565
Items 5 - 6(b)
No developments required to be reported under Items 5 - 6(b) occurred during the
quarter ended June 30, 1997 that have not previously been reported.
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 14, 1997 /s/ GREGORY D. KERLEY
--------------------- --------------------------------
Gregory D. Kerley
Vice President - Treasurer and Secretary,
and Chief Accounting Officer
- 13 -
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 3,456
<SECURITIES> 0
<RECEIVABLES> 22,826
<ALLOWANCES> 0
<INVENTORY> 16,460
<CURRENT-ASSETS> 54,345
<PP&E> 925,468
<DEPRECIATION> (343,071)
<TOTAL-ASSETS> 656,784
<CURRENT-LIABILITIES> 46,523
<BONDS> 256,314
0
0
<COMMON> 2,774
<OTHER-SE> 214,649
<TOTAL-LIABILITY-AND-EQUITY> 656,784
<SALES> 137,148
<TOTAL-REVENUES> 140,163
<CGS> 0
<TOTAL-COSTS> 109,980
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,731
<INCOME-PRETAX> 20,079
<INCOME-TAX> 7,731
<INCOME-CONTINUING> 12,348
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,348
<EPS-PRIMARY> .50
<EPS-DILUTED> 0
</TABLE>
