<PAGE>
===========================================================================
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, 1998
--------------
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, 1998
---------------------------- ------------------------------
Common Stock, Par Value $.10 24,858,584
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- 1 -
<PAGE>
PART I
FINANCIAL INFORMATION
- 2 -
<PAGE>
SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
--------- ---------
($ in thousands)
<S> <C> <C>
Current Assets
Cash $ 2,393 $ 4,603
Accounts receivable 37,939 45,752
Income taxes receivable - 3,074
Inventories, at average cost 15,656 20,465
Under-recovered purchased gas costs, net 1,501 9,428
Other 4,646 4,633
--------- ---------
Total current assets 62,135 87,955
--------- ---------
Investments 13,596 7,039
--------- ---------
Property, Plant and Equipment, at cost
Gas and oil properties, using the
full cost method 715,572 708,094
Gas distribution systems 213,677 212,779
Gas in underground storage 20,797 23,748
Other 25,438 25,319
--------- ---------
975,484 969,940
Less: Accumulated depreciation,
depletion and amortization 379,687 366,638
--------- ---------
595,797 603,302
--------- ---------
Other Assets 12,311 12,570
--------- ---------
Total Assets $ 683,839 $ 710,866
========= =========
</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,
1998 1997
--------- ---------
($ in thousands)
<S> <C> <C>
Current Liabilities
Current portion of long-term debt $ 3,071 $ 3,071
Accounts payable 24,602 29,903
Taxes payable 10,144 3,893
Interest payable 7,147 2,569
Customer deposits 5,327 5,307
Other 4,261 4,246
--------- ---------
Total current liabilities 54,552 48,989
--------- ---------
Long-Term Debt, less current portion above 256,072 296,472
--------- ---------
Other Liabilities
Deferred income taxes 139,746 139,256
Other 4,215 4,584
--------- ---------
143,961 143,840
--------- ---------
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 21,473 21,475
Retained earnings 238,250 230,669
Less: Common stock in treasury, at cost,
2,889,257 shares in 1998 and
2,904,519 shares in 1997 32,187 32,357
Unamortized cost of 102,888
restricted shares in 1998
and 90,375 restricted shares
in 1997, issued under stock
incentive plan 1,056 996
--------- ---------
229,254 221,565
--------- ---------
Total Liabilities and Shareholders' Equity $ 683,839 $ 710,866
========= =========
</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
March 31
1998 1997
--------- ---------
($ in thousands, except per share amounts)
<S> <C> <C>
Operating Revenues
Gas sales $ 62,882 $ 69,262
Gas marketing 15,201 14,003
Oil sales 2,769 4,016
Gas transportation and other 2,104 1,638
--------- ---------
82,956 88,919
--------- ---------
Operating Costs and Expenses
Gas purchases - utility 18,687 22,283
Gas purchases - marketing 14,272 13,112
Operating and general 15,129 14,348
Depreciation, depletion and amortization 13,039 12,286
Taxes, other than income taxes 1,906 1,796
---------- ----------
63,033 63,825
---------- ----------
Operating Income 19,923 25,094
---------- ----------
Interest Expense 4,178 3,986
---------- ----------
Other Income (Expense) (873) (1,077)
---------- ----------
Income Before Provision for Income Taxes 14,872 20,031
---------- ----------
Income Tax Provision
Current 5,306 6,541
Deferred 494 1,171
---------- ----------
5,800 7,712
---------- ----------
Net Income $ 9,072 $ 12,319
========== ==========
Basic Earnings Per Share $0.37 $0.50
=========== ==========
Weighted Average Common Shares Outstanding 24,843,012 24,720,148
========== ==========
Dilutive Earnings Per Share $0.37 $0.50
=========== ==========
Dilutive Weighted Average Common Shares
Outstanding 24,860,505 24,866,467
========== ==========
Dividends Declared Per Share Payable
5/5/98 and 5/5/97 $0.06 $0.06
=========== ==========
</TABLE>
The accompanying notes are an integral part
of the financial statements.
- 5 -
<PAGE>
SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
March 31,
1998 1997
-------- --------
($ in thousands)
<S> <C> <C>
Cash Flows From Operating Activities
Net income $ 9,072 $ 12,319
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation, depletion and amortization 13,109 12,356
Deferred income taxes 494 1,171
Equity in loss of partnership 786 1,076
Change in assets and liabilities:
Decrease in accounts receivable 7,813 6,236
Decrease in inventories 4,809 3,696
(Increase) decrease in under-recovered
purchased gas costs 7,927 (3,986)
Decrease in accounts payable (5,301) (6,488)
Increase in income taxes payable 8,506 9,386
Increase in interest payable 4,578 3,164
Net change in other current assets
and liabilities 841 (351)
---------- ---------
Net cash provided by operating activities 52,634 38,579
---------- ---------
Cash Flows From Investing Activities
Capital expenditures (8,930) (18,145)
Investment in partnership (7,343) (1,272)
Decrease in gas stored underground 2,951 4,487
Other items 369 333
---------- ---------
Net cash used in investing activities (12,953) (14,597)
---------- ---------
Cash Flows From Financing Activities
Decrease in revolving long-term debt (40,400) (23,100)
Cash dividends (1,491) (1,483)
---------- ---------
Net cash used in financing activities (41,891) (24,583)
---------- ---------
Decrease in cash (2,210) (601)
Cash at beginning of year 4,603 2,297
--------- ---------
Cash at end of period $ 2,393 $ 1,696
========= =========
</TABLE>
The accompanying notes are an integral part
of the financial statements.
- 6 -
<PAGE>
SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
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 1997
Annual Report to Shareholders, Notes to Financial Statements.
Certain reclassifications have been made to the March 31, 1997,
financial statements in order to conform with the 1998 presentation.
These reclassifications had no effect on previously reported net
income.
2. DIVIDEND PAYABLE
A dividend of $.06 per share was declared April 3, 1998, payable May 5,
1998.
3. INTEREST AND INCOME TAXES PAID
The following table provides interest and income taxes paid during each
period presented.
<TABLE>
<CAPTION>
Quarter Ended March 31 1998 1997
-----------------------------------------------------------------------
(in thousands)
<C> <S> <S>
Interest payments $501 $1,569
Income tax payments $ - $165
</TABLE>
4. EARNINGS PER SHARE
The Company has adopted Financial Accounting Standards Board Statement
No. 128. "Earnings Per Share" (SFAS No. 128). 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 impact of the
adoption of SFAS No. 128 had no effect on reported earnings per share
for the first quarter of 1998 or 1997.
- 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, 1997, and
analyzes the changes in the results of operations between the three month period
ended March 31, 1998, and the comparable period of 1997.
RESULTS OF OPERATIONS
Net income for the three months ended March 31, 1998, was $9.1 million, or $.37
per share, down from $12.3 million, or $.50 per share, for the same period in
1997. The decrease in net income was the result of lower wellhead prices
received for both the Company's gas and oil production, partially offset by
improved earnings in the utility segment. The following tables compare operating
revenues and operating income by business segment for the first three months of
1998 and 1997:
<TABLE>
<CAPTION>
Increase
1998 1997 (Decrease)
-------- -------- ---------
Revenues (in thousands)
<C> <S> <S> <S>
Exploration and production $ 24,261 $ 29,282 $ (5,021)
Gas distribution 56,024 60,899 (4,875)
Energy services and other 19,373 16,983 2,390
Eliminations (16,702) (18,245) 1,543
-------- -------- ---------
$ 82,956 $ 88,919 $ (5,963)
======== ======== =========
Operating Income
Exploration and production $ 6,556 $ 12,435 $ (5,879)
Gas distribution 12,699 11,965 734
Energy services and other 668 694 (26)
-------- -------- --------
$ 19,923 $ 25,094 $ (5,171)
======== ======== ========
</TABLE>
Exploration and Production
Operating income of the exploration and production segment was down 47% for the
three months ended March 31, 1998, as compared to the same period in 1997, due
to lower wellhead prices received for the Company's production. The Company
received an average price of $2.44 per
- 8 -
<PAGE>
thousand cubic feet (Mcf) for its gas production during the three months ended
March 31, 1998, down from $2.91 per Mcf for the same period in 1997. The Company
received an average price of $14.44 per barrel for its oil production during the
three months ended March 31, 1998, down from $20.47 per barrel for the same
period of 1997. The decreases in average prices reflect the general decline in
market prices for natural gas and oil during the first quarter of 1998 as
compared to the same period of 1997.
Gas and oil production during the first quarter of 1998 was 9.9 billion cubic
feet (Bcf) equivalent, even with the same period in 1997. Gas production was 8.7
Bcf for both the three months ended March 31, 1998 and 1997. The Company's sales
to its gas distribution systems were 4.5 Bcf during the three months ended March
31, 1998, compared to 4.6 Bcf for the same period in 1997. The Company's oil
production was 192 thousand barrels (MBbls) during the three months ended March
31, 1998, down slightly from 196 MBbls for the same period of 1997.
The Company has taken advantage of recent attractive natural gas futures prices
and hedged approximately 80% of its current floating price production
(approximately 1.8 Bcf per month) through September, 1998 at an average NYMEX
price of $2.45 per Mcf.
Gas Distribution
Operating income of the gas distribution segment increased 6% in the first
quarter of 1998, as compared to the first quarter of 1997, despite weather which
was 12% warmer than normal and 7% warmer than in the same period of 1997. The
improvement in operating income was due to the combined effects of rate
increases, customer growth and weather normalization adjustments. Rate increases
and tariff changes totaling $3.0 million annually were implemented in late 1997
for the utility's northeast Arkansas and Missouri systems. The utility realized
growth of 2% during the quarter in the average number of utility customers
served. Additionally, weather normalization adjustments which are now applicable
to the Company's Arkansas systems offset a large part of the effect of the warm
weather. The utility systems delivered 12.7 Bcf to sales and end-use
transportation customers during the three months ended March 31, 1998, down
slightly from 12.9 Bcf for the same period in 1997.
The Company's average rate for its utility sales decreased during the first
quarter of 1998 to $5.15 per Mcf, down from $5.25 per Mcf for the same period in
1997. The decrease reflected lower prices paid for purchases of natural gas
which are passed through to customers under automatic adjustment clauses.
Energy Services
Operating income for the energy services segment was $.7 million for both the
first quarter of 1998 and 1997. The Company marketed 9.8 Bcf of gas in the first
three months of 1998, compared to 6.8 Bcf for the same period in 1997. The
higher margins applicable to the first quarter of 1997 primarily relate to
income realized from the Company's unregulated storage facilities which were
utilized to take advantage of the significantly higher gas prices available at
that time.
- 9 -
<PAGE>
A portion of the activity of the energy services segment involves the NOARK
Pipeline System (NOARK). The Company's share of NOARK's pre-tax loss included in
other income was $.8 million for the first quarter of 1998, as compared to $1.1
million for the same period in 1997. The improvement in NOARK's pre-tax loss
reflects a lower interest rate on NOARK's debt which resulted from a refinancing
discussed below in "Changes in Financial Condition".
In January, 1998, the Company entered into an agreement with Enogex Inc.
(Enogex), a subsidiary of OGE Energy Corp., to expand the NOARK system and
provide access to Oklahoma gas supplies through an integration of NOARK with the
Ozark Gas Transmission System (Ozark). Ozark is a 437-mile interstate pipeline
system which begins in eastern Oklahoma and terminates in eastern Arkansas.
Enogex has entered into a separate agreement to acquire Ozark and will
contribute the pipeline system to the NOARK partnership when regulatory
approvals are obtained. Enogex has also acquired the NOARK partnership interests
not held by Southwestern. Subject to approval by the Federal Energy Regulatory
Commission, NOARK will be converted to an interstate pipeline and be operated
with Ozark as an integrated system. In addition to its purchase of Ozark, Enogex
will fund the integration project and an expansion of the combined system. The
integrated system will include 749 miles of pipeline and have total throughput
capacity of 330 MMcfd.
The Company, through its wholly owned subsidiary, Southwestern Energy Pipeline
Company, currently holds a 60% general partnership interest in NOARK. The
Company's ownership interest in NOARK temporarily increased from 48% as a result
of the Enogex transaction. Enogex will spend approximately $75 million to
acquire Ozark and integrate it with NOARK. Upon completion and funding by Enogex
of the integration, the Company's interest in the partnership will decrease to
25% and Enogex will own a 75% interest. The parties expect the integrated system
to be operational by November 1, 1998. After a start-up period, the Company
expects the improved project to eliminate the losses it has been experiencing on
its NOARK investment.
Operating Costs and Expenses
Operating costs and expenses decreased slightly in the first quarter of 1998, as
compared to the first quarter of 1997. The small decrease was primarily caused
by lower purchased gas costs of the Company's gas distribution segment, offset
by increased operating expenses and higher depreciation, depletion and
amortization expense. The increase in operating expenses was primarily due to
increased payroll and employee benefit costs, and the effects of inflation. The
increase in depreciation, depletion and amortization (DD&A) expense was due to
an increase in the amortization rate per unit of production in the exploration
and production segment. 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, 1998, due to lower wellhead prices being realized at that time. The
Company's full cost ceiling is evaluated at the end of each quarter. If prices
decline below the level in effect at March 31, 1998, without other
- 10 -
<PAGE>
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,
1998, was up 5% compared to the same period in 1997, due to slightly 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 changes in the provisions for current and deferred income taxes recorded in
the three month period ended March 31, 1998, as compared to the same period in
1997, 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, 1998, as compared to
December 31, 1997, 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 1998 and 1997, net cash provided by operating activities was $52.6
million and $38.6 million, respectively, and exceeded the total of these routine
requirements. The increase in cash provided by operations during the first
quarter of 1998 is largely due to the utility segment's collection of $7.9
million of gas costs incurred during the past year, but deferred for collection
until 1998 pursuant to the utility's purchased gas adjustment clauses in its
filed rate tariffs. The Company had remaining under-recovered purchased gas
costs of $1.5 million at March 31, 1998. At December 31, 1997, the Company had
net under-recovered purchased gas costs in the amount of $9.4 million. These
amounts are classified as current assets.
Financing Requirements
The Company has access to $80.0 million of medium to long-term capital at
current market lending rates through two floating rate revolving credit
facilities. Of this amount, $6.0 million was outstanding at March 31, 1998, all
of which was classified as long-term debt. During the first quarter of 1998, the
Company's revolving long-term debt was reduced by $40.4 million, due to
seasonally strong cash flow and the collection of deferred gas costs discussed
above. As a result, long-term debt at March 31, 1998, accounted for 53% of the
Company's capitalization, down from 57% at December 31, 1997.
- 11 -
<PAGE>
The Company expects its outstanding borrowings to increase during the remaining
months of 1998 as cash generated from operations will be less than the
requirements for routine capital expenditures and cash dividends due to lower
levels of heating-generated revenues and seasonally higher capital expenditures
resulting from favorable drilling and construction weather. The Company's
capital expenditures for the first three months of 1998 were $8.9 million,
compared to $18.1 million for the same period in 1997. Planned capital spending
during 1998 is expected to be approximately $14.6 million, or 16%, lower than
actual 1997 spending.
In connection with the Enogex transaction discussed above, the Company and a
previous general partner converted certain of their loans to the NOARK
partnership, plus accrued interest, into equity, and contributed approximately
$10.7 million to the partnership to fund costs incurred in connection with the
prepayment of NOARK's 9.74% Senior Secured Notes. The Company's share of the
contribution was $6.5 million and is the primary reason for the increase in
investments during the first quarter of 1998. The notes were refinanced with
Senior Secured Notes payable to the other general partner of NOARK. The
partnership intends to refinance its Senior Secured Notes and revolving credit
agreement through a new issue of long-term debt during 1998. At March 31, 1998,
the NOARK partnership had outstanding debt totaling approximately $77.5 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, 1997, 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
and an increase in taxes payable resulted from taxable income generated in the
first quarter of 1998. The decrease in inventories since December 31, 1997, 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, 1997, due primarily to
seasonally lower gas purchases of the gas distribution segment and to the timing
of expenditures. The increase in interest payable is primarily due to the timing
of interest payments on the Company's medium-term notes issued during 1997.
Proceeds from the issuance of these notes were used to repay certain borrowings
under the Company's revolving credit facilities. Other changes in current assets
and current liabilities between periods resulted primarily from the timing of
expenditures and receipts.
- 12 -
<PAGE>
PART II
OTHER INFORMATION
Items 1 - 6(b)
No developments required to be reported under Items 1 - 6(b) occurred during the
quarter ended March 31, 1998.
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, 1998 /s/ GREGORY D. KERLEY
------------------ ----------------------------
Gregory D. Kerley
Senior Vice President -
Treasurer and Secretary,
and Chief Accounting Officer
- 13 -
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 2,393
<SECURITIES> 0
<RECEIVABLES> 37,939
<ALLOWANCES> 0
<INVENTORY> 15,656
<CURRENT-ASSETS> 62,135
<PP&E> 975,484
<DEPRECIATION> (379,687)
<TOTAL-ASSETS> 683,839
<CURRENT-LIABILITIES> 54,552
<BONDS> 256,072
0
0
<COMMON> 2,774
<OTHER-SE> 226,480
<TOTAL-LIABILITY-AND-EQUITY> 683,839
<SALES> 80,852
<TOTAL-REVENUES> 82,956
<CGS> 0
<TOTAL-COSTS> 63,033
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,178
<INCOME-PRETAX> 14,872
<INCOME-TAX> 5,800
<INCOME-CONTINUING> 9,072
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,072
<EPS-PRIMARY> .37
<EPS-DILUTED> .37
</TABLE>
