<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, 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 $.10 24,937,618
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- 1 -
<PAGE>
PART I
FINANCIAL INFORMATION
- 2 -
<PAGE>
SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------ ------------
($ in thousands)
<S> <C> <C>
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
========= =========
</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,
1999 1998
------------ ------------
($ in thousands)
<S> <C> <C>
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
========= =========
</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,
1999 1998 1999 1998
---------- ---------- ---------- ----------
($ in thousands, except per share amounts)
<S> <C> <C> <C> <C>
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
===== ===== ===== =====
</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,
1999 1998
-------- --------
($ in thousands)
<S> <C> <C>
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
======== ========
</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, 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-
<PAGE>
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.
<TABLE>
<CAPTION>
Exploration
and Gas
Production Distribution Marketing Other Total
(in thousands)
<S> <C> <C> <C> <C> <C>
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<F1> 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)<F2> (769) 175 77 (63,835)
Assets 392,772 174,109 7,556 37,246<F1> 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<F1> 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)<F2> 11,871 824 155 (43,912)
Assets 392,772 174,109 7,556 37,246<F1> 611,683
Capital expenditures 21,658 4,433 8 315 26,414
<FN>
<F1> 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.
<F2> Includes a $66.4 million pre-tax write-down of oil and gas
properties.
</FN>
</TABLE>
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-
<PAGE>
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.
<TABLE>
<CAPTION>
Three Months Six Months
Periods Ended June 30 1999 1998 1999 1998
---------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Interest payments $9,117 $9,280 $9,424 $9,781
Income tax payments $212 $2,342 $641 $2,342
</TABLE>
-9-
<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, 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:
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
(in thousands)
<S> <C> <C> <C> <C>
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
======== ======== ======== ========
</TABLE>
-10-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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.
<TABLE>
<CAPTION>
Expected Maturity Date
1999 2000 2001
Carrying Fair Carrying Fair Carrying Fair
Amount Value Amount Value Amount Value
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
-17-
<PAGE>
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:
<TABLE>
<CAPTION>
Voted For Withheld
<S> <C> <C>
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
</TABLE>
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-
<PAGE>
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-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,510
<SECURITIES> 0
<RECEIVABLES> 23,243
<ALLOWANCES> 0
<INVENTORY> 22,448
<CURRENT-ASSETS> 51,081
<PP&E> 1,051,925
<DEPRECIATION> (499,425)
<TOTAL-ASSETS> 627,597
<CURRENT-LIABILITIES> 40,165
<BONDS> 267,800
0
0
<COMMON> 2,774
<OTHER-SE> 187,787
<TOTAL-LIABILITY-AND-EQUITY> 627,597
<SALES> 130,432
<TOTAL-REVENUES> 134,259
<CGS> 0
<TOTAL-COSTS> 112,789
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,388
<INCOME-PRETAX> 12,177
<INCOME-TAX> 4,749
<INCOME-CONTINUING> 7,428
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,428
<EPS-BASIC> 0.30
<EPS-DILUTED> 0.30
<FN>
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.
</FN>
</TABLE>
