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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark one)
[x] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1999
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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
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SOUTHWESTERN ENERGY COMPANY
(Exact name of Registrant as specified in its charter)
ARKANSAS 71-0205415
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1083 Sain Street, P.O.Box 1408, Fayetteville, Arkansas 72702-1408
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(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code (501) 521-1141
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock - Par Value $.10 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 12 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
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
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The aggregate market value of the voting stock held by non-affiliates of
the Registrant was $181,640,298 based on the New York Stock Exchange - Composite
Transactions closing price on March 8, 2000 of $7 3/8.
The number of shares outstanding as of March 8, 2000, of the
Registrant's Common Stock, par value $.10, was 25,037,773.
DOCUMENTS INCORPORATED BY REFERENCE
Document incorporated by reference and the Part of the Form 10-K into
which the document is incorporated: Definitive Proxy Statement to holders of the
Registrant's Common Stock in connection with the solicitation of proxies to be
used in voting at the Annual Meeting of Shareholders on May 24, 2000 - PART III.
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SOUTHWESTERN ENERGY COMPANY
ANNUAL REPORT on FORM 10-K
For the Year Ended December 31, 1999
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TABLE OF CONTENTS
Part I Page
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Item 1. Business 3
Business Strategy 3
Exploration and Production 3
Natural Gas Distribution 10
Marketing and Transportation 13
Other Items 15
Item 2. Properties 16
Item 3. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 19
Executive Officers of the Registrant 19
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 21
Item 6. Selected Financial Data 22
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 24
Item 7.A. Quantitative and Qualitative Disclosure About Market Risks 34
Item 8. Financial Statements and Supplementary Data 37
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 60
Part III
Item 10. Directors and Executive Officers of the Registrant 60
Item 11. Executive Compensation 61
Item 12. Security Ownership of Certain Beneficial Owners and Management 61
Item 13. Certain Relationships and Related Transactions 61
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 61
</TABLE>
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Part I
ITEM 1. BUSINESS
Southwestern Energy Company (the "Company" or "Southwestern") is an
integrated energy company primarily focused on natural gas. The Company was
incorporated in Arkansas in 1929 as a local gas distribution company. Today,
Southwestern is an exempt holding company under the Public Utility Holding
Company Act of 1935 and is involved in the following business segments:
1. Exploration and Production - Engaged in natural gas and oil exploration,
development and production, with operations principally located in
Arkansas, Oklahoma, Texas, New Mexico, and Louisiana.
2. Natural Gas Distribution - Engaged in the gathering, distribution and
transmission of natural gas to approximately 181,000 customers in northern
Arkansas and parts of Missouri.
3. Marketing and Transportation - Provides marketing and transportation
services in the Company's core areas of operation and owns a 25% interest
in the NOARK Pipeline System, Limited Partnership (NOARK).
This Report on Form 10-K includes certain statements that may be deemed to
be "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Part II, Item 7 of this Report for a discussion of factors that
could cause actual results to differ materially from any such forward-looking
statements. For segment financial information, see Footnote 12 to the
consolidated financial statements in Part II, Item 8 of this Report.
Business Strategy
The Company's business strategy is to provide long-term growth through
focused exploration and development of oil and natural gas, while creating
additional value through the Company's natural gas distribution, marketing and
transportation activities. The Company seeks to maximize cash flow and earnings
and provide consistent growth in oil and gas production and reserves through the
discovery, production and marketing of high margin reserves from a balanced
portfolio of drilling opportunities. This balanced portfolio includes low-risk
development drilling in the Arkoma Basin, moderate-risk exploration and
exploitation in the Permian Basin, and high-potential exploration opportunities
in the Gulf Coast. Additionally, the Company strives to operate its utility
systems safely and efficiently and to improve the competitive position and
profitability of its utility systems. The Company is also committed to enhancing
shareholder value by creating and capturing additional value beyond the wellhead
through its marketing and transportation activities.
EXPLORATION AND PRODUCTION
In 1943, the Company commenced a program of exploration for and development
of natural gas reserves in Arkansas for supply to its utility customers. In
1971, the Company initiated an exploration and development program outside
Arkansas, unrelated to the utility's requirements. Since that time, the
Company's exploration and development activities outside Arkansas have expanded
substantially.
During 1998, Southwestern brought in new senior operating management and
replaced over 50% of its professional technical staff to refocus its exploration
and production segment. Additionally in 1998, the Company closed its Oklahoma
City office and moved these operations to its Houston office in an effort to
increase future profitability.
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The segment was also reorganized into asset management teams to provide an area
specific focus in exploration and development projects and a new incentive
compensation system was put in place to more closely align its employees'
efforts with the interests of its shareholders.
At December 31, 1999, the Company had proved oil and gas reserves of 354.7
billion cubic feet (Bcf) equivalent, including proved natural gas reserves of
307.5 Bcf and proved oil reserves of 7,859 thousand barrels (MBbls). The
Company's reserve life index averaged nearly 11 years at year-end 1999, with 83%
of total reserves classified as proved developed. All of the Company's reserves
are located entirely within the United States. Revenues of the exploration and
production subsidiaries are predominately generated from production of natural
gas. Sales of gas production accounted for 87% of total operating revenues for
this segment in 1999, 89% in 1998, and 86% in 1997.
Areas of Operation
Southwestern engages in gas and oil exploration and production through its
subsidiaries, SEECO, Inc. (SEECO), Southwestern Energy Production Company
(SEPCO), and Diamond "M" Production Company (Diamond M). SEECO operates
exclusively in the state of Arkansas and holds a large base of both developed
and undeveloped gas reserves and conducts an ongoing drilling program in the
historically productive Arkansas part of the Arkoma Basin. SEPCO conducts
development drilling and exploration programs in areas outside Arkansas,
including the Permian Basin of Texas and New Mexico, the Gulf Coast areas of
Louisiana and Texas, and the Anadarko Basin of Oklahoma. Diamond M operates
properties in the Permian Basin of Texas.
The following table provides information as to proved reserves, well count,
and gross and net acreage as of December 31, 1999, and annual information as to
production and reserve additions for 1999 for each of the Company's core
operating areas.
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Arkoma Mid-Continent Permian Gulf Coast Total
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Proved Reserves:
Gas (Bcf) 200.0 31.7 42.6 33.2 307.5
Oil (MBbls) - 2,275 4,722 862 7,859
Total Reserves (Bcfe) 200.0 45.3 70.9 38.5 354.7
Production (Bcfe) 20.3 4.9 5.2 2.5 32.9
Reserve Additions (Bcfe) 18.2 0.1 23.5 7.5 49.3
Total Gross Wells 794 799 294 77 1,964
Percent Operated 44% 34% 43% 33% 39%
Gross Acreage 290,363 165,649 259,238 94,466 809,716
Net Acreage 231,642 71,071 42,790 39,155 384,658
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Arkoma Basin. Southwestern has developed a key competitive position in the
Arkoma since it commenced drilling in the basin in 1943. At December 31, 1999,
the Company had approximately 200.0 Bcf of natural gas reserves in the Arkoma
Basin, representing 65% of the Company's natural gas reserves and 56% of total
reserves on a Bcf equivalent basis. The Company participated in 37 wells during
1999 with a 70% success ratio and an average working interest of 46%. This level
of drilling activity was somewhat lower as compared to prior years, due to cash
flow limitations. During
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1999, the Company's Arkoma drilling program added 18.2 Bcf of gas reserves at a
finding and development cost of $.90 per Mcf. Average net daily production in
1999 was 55.7 million cubic feet equivalent (MMcfe) and production, or lifting
costs, in the basin during 1999 were $.22 per Mcfe (including production taxes).
Southwestern's traditional operating area over the years has been in the
"fairway" part of the basin, which is primarily within the boundaries of its
utility gathering system. Southwestern continued its drilling activities in the
fairway in 1999, completing five wells out of seven drilled and adding 5.7 Bcf
of new reserves. The largest success in this area was the Teague #1-16 well in
Johnson County, Arkansas. This well was drilled to total depth of 4,500 feet and
was placed on production at 1.9 MMcf of gas per day.
The Company also completed extensive mapping of the basin's 26 productive
horizons covering over 2,300 square miles in the fairway that will help
recognize additional or previously untapped reserve potential. In 2000,
Southwestern plans to increase its activity in the fairway by drilling 22 wells
in this gas-rich area.
Additionally, Southwestern has continued to develop new geologic plays and
extend previously identified productive trends outside the fairway area. A
promising new play has been the Ranger Anticline prospect area, located near the
southern edge of the basin. To date, the Company has successfully drilled four
out of five wells in this prospect, targeting the deeper Borum sands that tend
to yield higher production rates and greater reserve potential per well. The
Company currently plans to drill three wells in the prospect area in 2000, but
this number could be increased with positive drilling results during the first
part of the year.
The Company successfully developed another new prospect area during 1999,
its Cherokee prospect, located in the Oklahoma portion of the basin. During
1999, the Company targeted the Red Oak, Brazil, and Spiro sand reservoirs in
this under-explored portion of the basin and completed six wells out of ten
drilled. One well in the prospect, the Calvin Terry #1 in LeFlore County,
Oklahoma, was recently placed on production at 5.8 MMcf per day. The Company
plans further development of this prospect with up to ten additional wells being
drilled in 2000.
Overall, the Company initiated drilling in four promising new prospect
areas in 1999, all located outside of the established fairway area. In 2000, the
Company intends to drill over 50 wells outside of the traditional fairway
drilling area, which includes testing six new prospect areas. In total, the
Company plans to participate in 75 wells in the Arkoma Basin in 2000, doubling
its 1999 activity.
Mid-Continent. The Company's activities in this region are primarily
focused on the Anadarko Basin of Oklahoma. At December 31, 1999, the Company had
approximately 31.7 Bcf of natural gas reserves and 2,275 MBbls of oil reserves
in the region, representing 10% and 29%, respectively, of the Company's total
gas and oil reserves. Average net daily production in 1999 for this region was
13.4 MMcfe. During 1998, the Company closed its Oklahoma City office and moved
these operations to Houston. Southwestern does not expect its Mid-Continent
operations to be a primary area of future growth due to its efforts to
concentrate on those areas where it has a competitive advantage. During 1999 and
the first part of 2000, the Company sold approximately 235 marginal properties
in the Mid-Continent area with estimated remaining reserves of 4.8 Bcfe.
Permian Basin. Through successful drilling results, a small acquisition and
several new joint ventures, Southwestern made meaningful strides in becoming a
more significant player in the Permian Basin in 1999. At December 31, 1999,
Southwestern had proved reserves of 42.6 Bcf of gas and 4,722 MBbls of oil in
the region, representing 14% and 60%,
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respectively, of the Company's total gas and oil reserves. During 1999, average
net daily production in the basin was 14.2 MMcfe and production costs averaged
$.71 per Mcfe. This rate includes higher operating costs from secondary recovery
oil properties acquired by the Company in 1996. Production costs exclusive of
these properties were $.39 per Mcfe in 1999.
The Company successfully completed 18 out of 22 wells drilled in the
Permian in 1999, resulting in a success rate of 82%. At year-end, drilling
operations at seven wells were still in progress. Southwestern's average working
interest in the Permian during 1999 was 24%. Total reserve additions from
drilling and acquisitions were 23.5 Bcfe at a finding cost of $.79 per Mcfe in
1999, while reserve additions through drilling were 10.6 Bcfe at a finding cost
of $.86 per Mcfe.
Southwestern enjoyed meaningful success in its Logan Draw development area
in Eddy County, New Mexico, successfully drilling 11 out of 13 wells there in
1999. Southwestern holds an average 28% working interest in the Logan Draw
development area, which is the combination of the Company's Top Dog, Amber, and
Freight Train prospects. Two notable wells in the Freight Train prospect, the
Amtrack State Com #1 and the Mule Train 16 State #1, are each currently
producing approximately 10.0 MMcfe per day. In 2000, Southwestern plans to drill
11 wells in the Logan Draw area.
The Company continued to successfully develop its Gaucho production unit in
Lea County, New Mexico, completing three out of four wells there in 1999. The
Gaucho #3 well was drilled during the first quarter of 1999 and is currently
producing 9.1 MMcfe per day. Additionally, the Company successfully confirmed
production from younger Atoka sands in three wells in the unit. Until 1999,
hydrocarbons in the Gaucho unit had been exclusively produced from Morrow sand
objectives. Southwestern holds a 50% working interest in the Gaucho unit and
plans to drill two wells in the unit in 2000.
The Company established a stronger presence in the basin with the
acquisition of producing properties from Petro-Quest Exploration effective
September 1, 1999. The transaction added 12.9 Bcfe of reserves for approximately
$9.4 million. This transaction is discussed more fully below under
"Acquisitions."
Additionally, the Company established exploration joint ventures in the
basin with Phillips Petroleum, Stratex, Inc., and Petro-Quest Exploration.
Several drilling opportunities have already been identified and planned for 2000
from these new ventures. Overall, Southwestern plans to participate in over 40
wells in the Permian in 2000, almost doubling its 1999 activity.
Gulf Coast. Southwestern became active in the Gulf Coast in 1990 and this
area continues to be the main focus area of the Company's high impact
exploration activities. At December 31, 1999, Southwestern had proved reserves
of 33.2 Bcf of gas and 862 MBbls of oil in the region, representing 11 percent
of the Company's total reserves on a gas equivalent basis. Average net daily
production in this area was 6.8 MMcfe, compared to 13.2 MMcfe per day in 1998,
with production costs averaging $1.06 per Mcfe during 1999. The decrease in 1999
production was due to the loss of production from certain wells in south
Louisiana.
The Company has built an extensive inventory of 3-D seismic data covering
over 900 miles in the Gulf Coast region of Texas and Louisiana. During 1999, the
Company continued to analyze this seismic data and has generated several
prospects to be drilled in 2000. The Company strives to limit its working
interest participation in its higher-risk Gulf Coast exploration prospects to
50% or less.
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Southwestern commenced drilling on two prospects in its Boure 3-D seismic
project in 1999 with positive results. The Boure 3-D project covers 185 square
miles in Assumption Parish, Louisiana. This seismic data was delivered to and
interpreted by the Company during 1999. In December 1999, the Company announced
its first discovery in the Boure 3-D project. The Dugas & LeBlanc #1 well,
located on the Company's Gloria prospect, was drilled to a total depth of 14,950
feet and encountered three separate sand intervals between 14,400 feet and
14,856 feet in the Lower Miocene Planulina formation. The well is currently
producing 5.4 million cubic feet of gas and 150 barrels of condensate per day
from the lowest sand interval. Southwestern is the operator of the well and
holds a 50% working interest. The Company announced in February 2000 that it had
made another discovery at its North Grosbec prospect. The Brownell-Kidd #1 well
logged approximately 50 feet of net pay sand in the Upper Discorbis interval at
approximately 16,950 feet. The Company is currently completing and testing the
well. Southwestern holds a 25% working interest in the well which is operated by
Petro-Hunt, L.L.C.
In 2000, the Company plans to drill up to two prospects in its East
Atchafalaya 3-D project. This project covers 113 square miles in portions of St.
Martin and Iberia Parishes, Louisiana. Southwestern became involved in the East
Atchafalaya 3-D project in 1995 with Union Pacific Resources Company. To date,
the Company has participated in five wells in the project, with two wells being
completed as producers. The Company drilled one well in the East Atchafalaya
project in 1999, the Panther prospect, which was unsuccessful.
In late 1998, the Company formed a strategic alliance with industry
partners to jointly evaluate and explore a new proprietary 3-D seismic survey in
the Nodosaria Embayment area of Lafayette, St. Landry and Acadia Parishes,
covering over 140 square miles. This seismic data was delivered to the Company
during 1999. Interpretation of the data has identified several exploration leads
and the Company currently plans to test its first prospect in the survey,
Havilah, in April 2000. Southwestern currently has a 27.5% working interest in
the 3-D project and is the operator.
The Company also was successful in leveraging its seismic databank and
regional geologic expertise into additional drilling opportunities for 2000.
Overall, the Company plans to drill seven additional prospects in the Gulf Coast
area in 2000.
Acquisitions
Effective September 1, 1999, the Company purchased producing properties in
the Permian Basin with estimated proved reserves of 9.4 Bcf of gas and 576 MBbls
of oil, or 12.9 Bcfe. The properties were purchased from Petro-Quest
Exploration, a privately held company headquartered in Midland, Texas, for $9.4
million. In addition, Southwestern established an exploration joint venture
agreement with Petro-Quest which will result in additional drilling
opportunities. The transaction strengthens Southwestern's position in the
Permian Basin, which continues to grow as a core operating area for the Company.
The Company did not make any producing property acquisitions in 1998 or
1997. In 1996, the Company acquired approximately 32.7 Bcf of gas and 6,350
MBbls of oil located in Texas and Oklahoma for $45.8 million. In 1995, the
Company acquired 4.5 Bcf of gas and 851 MBbls of oil located in the Gulf Coast
for $6.0 million. The Company's current strategy is to pursue selective
acquisitions that would complement its existing operations.
Capital Spending
Southwestern began 2000 with planned capital expenditures for gas and oil
exploration and development of $55.4 million. The Company's capital budget is
balanced between the Company's core areas of operations and is focused more
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on drilling in 2000. Approximately 37% of the Company's total exploration and
development budget for 2000 is allocated to the Company's low-risk development
activities in the Arkoma Basin, 21% is allocated to medium-risk exploration and
exploitation in the Permian Basin, and 24% is allocated to high-potential
exploration in the Gulf Coast. Although no capital was budgeted for acquisitions
in 2000, the Company will continue to seek producing property transactions in
its core producing areas that would complement its overall strategy. The Company
expects to maintain its capital investments within the limits of internally
generated cash flow, and will adjust its capital program accordingly.
Sales and Major Customers
Natural gas equivalent production averaged 90 million cubic feet per day
(MMcfd) in 1999, compared to 101 MMcfd in 1998, and 104 MMcfd in 1997. The
Company's gas production was 29.4 Bcf in 1999, down from 32.7 Bcf in 1998, and
33.4 Bcf in 1997. The Company also produced 578,000 barrels of oil in 1999,
compared to 703,000 barrels in 1998, and 749,000 barrels in 1997. The decreases
in production in 1999 were the result of lower non-operated production due to
the industry slowdown during late 1998 and early 1999, the decline in production
from certain wells in the Gulf Coast area and production losses from marginal
properties that were sold during the year. The Company expects its equivalent
production in 2000 to increase 5% to 10% over the 1999 level.
The Company's natural gas production received an average wellhead price of
$2.21 per thousand cubic feet (Mcf) in 1999, compared to $2.34 per Mcf in 1998
and $2.57 per Mcf in 1997. Prices received for the Company's oil production
averaged $17.11 per barrel in 1999, compared to $13.60 per barrel in 1998 and
$19.02 per barrel in 1997.
Southwestern's largest single customer for sales of its gas production is
the Company's utility subsidiary, Arkansas Western Gas Company (Arkansas
Western). These sales are made by SEECO. Sales to Arkansas Western accounted for
approximately 31% of total exploration and production revenues in 1999, 38% in
1998, and 43% in 1997. All of the Company's remaining sales are to unaffiliated
purchasers.
SEECO's production was 18.9 Bcf in 1999, down from 19.5 Bcf in 1998 and
21.7 Bcf in 1997. SEECO's sales to Arkansas Western were 8.2 Bcf in 1999, down
from 11.3 Bcf in 1998 and 14.3 Bcf in 1997. The decreases in affiliated gas
sales were primarily the result of warmer weather in the utility's service
territory.
Gas volumes sold by SEECO to Arkansas Western for its northwest Arkansas
division (AWG) were 5.1 Bcf in 1999, 7.7 Bcf in 1998, and 8.6 Bcf in 1997.
Through these sales, SEECO furnished 37% of the northwest Arkansas system's
requirements in 1999, 59% in 1998, and 64% in 1997. SEECO also delivered
approximately 2.6 Bcf in 1999, 2.0 Bcf in 1998, and 1.0 Bcf in 1997 directly to
certain large business customers of AWG through a transportation service of the
utility subsidiary. Most of the sales to AWG prior to December 1998 were
pursuant to a twenty-year contract between SEECO and AWG, entered into in July
1978, under which the price was frozen between 1984 and 1994. This contract was
amended in 1994 as a result of a settlement reached to resolve certain gas cost
issues before the Arkansas Public Service Commission (APSC). This contract
expired July 24, 1998, but continued on a month-to-month basis through November
1998.
In March 1997, AWG filed a gas supply plan with the APSC which projected
system load growth patterns and long range gas supply needs for the utility's
northwest Arkansas system. The gas supply plan also addressed replacement
supplies for AWG's long-term contract with SEECO. After discussions with the
APSC it was determined that the majority of the utility's future gas supply
needs should be provided through a competitive bidding process. On October 1,
1998, AWG sent requests for proposals to various suppliers requesting bids on
seven different packages of gas supply to be
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effective December 1, 1998. These bid requests included replacement of the gas
supply and no-notice service previously provided by the long-term gas supply
contract between AWG and SEECO. Eleven potential suppliers returned bids in late
October.
SEECO along with the Company's marketing subsidiary successfully bid on
five of the seven packages with prices based on the Reliant East Index plus a
demand charge. The volumes of gas projected to be sold under these contracts are
approximately equal to the historical annual volumes sold under the expired
long-term contracts, assuming normal weather patterns. However, the volumes to
be sold under these contracts are not fixed as they were under the expired
contract and will fluctuate with the weather-related requirements of AWG. These
contracts provide more of the gas needed during periods of colder weather, and
less of AWG's base system needs. As a result, periods of abnormally warmer
weather, such as 1999 and 1998, result in lower deliveries to AWG by SEECO.
However, charges for no-notice service associated with these contracts are
approximately $6.0 million per year and are received by SEECO regardless of
weather patterns. Other sales to AWG are made under long-term contracts with
flexible pricing provisions.
SEECO's sales to Associated Natural Gas Company (Associated), a division of
Arkansas Western which operates natural gas distribution systems in northeast
Arkansas and parts of Missouri, were 3.1 Bcf in 1999, 3.6 Bcf in 1998, and 5.7
Bcf in 1997. These deliveries accounted for approximately 47% of Associated's
total requirements in 1999, 50% in 1998, and 61% in 1997. In 1998, certain
industrial customers of Associated began buying their gas supply directly from
producers or marketers. This caused a decline in the percentage of Associated's
gas supply provided by SEECO as these volumes were previously purchased by
Associated from SEECO and then delivered to their industrial customers.
Effective October 1990, SEECO entered into a ten-year contract with Associated
to supply a portion of its system requirements at a price to be redetermined
annually. For the contract period beginning October 1, 1997, the contract was
revised to redetermine the sales price monthly based on an index posting plus a
reservation fee. The average price received under the contract was $2.37 for
1999 and 1998 and $2.51 in 1997. Prior to the end of the current contract term
in 2000, Associated will place its gas supply out for competitive bids.
Continued sales of these volumes, and the price of any such sales, could be
impacted by the results of the competitive bidding process and by the pending
sale of the Company's Missouri assets discussed below in "Natural Gas
Distribution."
At present, SEECO's contracts for sales of gas to unaffiliated customers
consist of short-term sales made to customers of the utility subsidiary's
transportation program and spot sales into markets away from the utility's
distribution system. These sales are subject to seasonal price swings. SEECO's
sales to unaffiliated customers are also affected by the demand of the utility
for production on its gathering system. SEECO's sales to unaffiliated purchasers
accounted for approximately 27% of total exploration and production revenues in
1999, 19% in 1998, and 15% in 1997.
The combined gas production of SEPCO and Diamond M was 10.5 Bcf in 1999,
compared to 13.2 Bcf in 1998 and 11.7 Bcf in 1997. Oil production was 578 MBbls
in 1999, compared to 703 MBbls in 1998 and 749 MBbls in 1997. SEPCO's and
Diamond M's gas and oil production is sold under contracts with unaffiliated
purchasers which reflect current short-term prices and which are subject to
seasonal price swings. SEPCO's and Diamond M's combined gas and oil sales
accounted for 42% of total exploration and production revenues in 1999 and 43%
in 1998 and 1997.
Competition
All phases of the gas and oil industry are highly competitive. Southwestern
competes in the acquisition of properties, the search for and development of
reserves, the production and sale of gas and oil and the securing of the labor
and equipment required to conduct operations. Southwestern's competitors include
major gas and oil companies, other
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independent gas and oil concerns and individual producers and operators. Many of
these competitors have financial and other resources that substantially exceed
those available to Southwestern. Gas and oil producers also compete with other
industries that supply energy and fuel.
Competition in the Arkoma Basin has increased in recent years, due largely
to the development of improved access to interstate pipelines. Due to the
Company's significant leasehold acreage position in the basin and its long-time
presence and reputation in this area, the Company believes it will continue to
be successful in acquiring new leases in the Arkoma Basin. While improved
intrastate and interstate pipeline transportation in the basin should increase
the Company's access to markets for its gas production, these markets will
generally be served by a number of other suppliers. Thus, the Company will
encounter competition that may affect both the price it receives and contract
terms it must offer. Outside Arkansas, the Company is less established and faces
competition from a larger number of other producers. The Company has in recent
years been successful in building its inventory of undeveloped leases and
obtaining participating interests in drilling prospects outside Arkansas.
NATURAL GAS DISTRIBUTION
The Company's subsidiary Arkansas Western Gas Company operates integrated
natural gas distribution systems concentrated primarily in northern Arkansas and
southeast Missouri. The Arkansas Public Service Commission and the Missouri
Public Service Commission (MPSC) regulate the Company's utility rates and
operations. The Company serves approximately 181,000 customers and obtains a
substantial portion of the gas they consume through its Arkoma Basin gathering
facilities.
Arkansas Western consists of two operating divisions. The AWG division
gathers natural gas in the Arkansas River Valley of western Arkansas and
transports the gas through its own transmission and distribution systems,
ultimately delivering it at retail to approximately 112,000 customers in
northwest Arkansas. The Associated division receives its gas from interstate
pipelines and delivers the gas through its own transmission and distribution
systems, ultimately delivering it at retail to approximately 21,000 customers in
northeast Arkansas and 48,000 customers in Missouri. Associated, formerly a
wholly-owned subsidiary of Arkansas Power and Light Company, was acquired and
merged into Arkansas Western effective June 1, 1988.
In October 1999, the Company entered into an agreement to sell its Missouri
utility operations to Atmos Energy for $32.0 million. The transaction is
currently awaiting approval by the MPSC and Federal Energy Regulatory Commission
(FERC). Once approval is obtained and the transaction is closed, the Company
will serve a total of approximately 133,000 customers in northern Arkansas. The
transaction is expected to be closed before mid-year 2000.
Gas Purchases and Supply
AWG purchases its system gas supply through a competitive bidding process
implemented in late 1998, as discussed above, and directly at the wellhead under
long-term contracts. SEECO furnished approximately 37% of AWG's system
requirements in 1999, 59% in 1998, and 64% in 1997. AWG also purchases gas from
unaffiliated producers under take-or-pay contracts. Currently, the Company
believes that it does not have a significant exposure to take-or-pay liabilities
resulting from these contracts. The Company expects to be able to continue to
satisfactorily manage its exposure to take-or-pay liabilities.
10
<PAGE>
Associated purchases gas for its system supply from unaffiliated suppliers
accessed by interstate pipelines and from affiliates. Purchases from SEECO are
under a ten-year contract with annual price redeterminations. Purchases from
unaffiliated suppliers are under firm contracts with terms between one and three
years. The rates charged by most suppliers include demand components to ensure
availability of gas supply, administrative fees, and a commodity component which
is based on monthly indexed market prices. Associated's gas purchases are
transported through eight pipelines. The pipeline transportation rates include
demand charges to reserve pipeline capacity and commodity charges based on
volumes transported. Associated has also contracted with five interstate
pipelines for storage capacity to meet its peak seasonal demands. These
contracts involve demand charges based on the maximum deliverability, capacity
charges based on the maximum storage quantity, and charges for the quantities
injected and withdrawn.
AWG has no restriction on adding new residential or commercial customers
and will supply new industrial customers that are compatible with the scale of
its facilities. AWG has never denied service to new customers within its service
area or experienced curtailments because of supply constraints. In addition,
Associated has never denied service to new customers within its service area or
experienced curtailments because of supply constraints since the acquisition
date. Curtailment of large industrial customers of AWG and Associated occurs
only infrequently when extremely cold weather requires that systems be dedicated
exclusively to human needs customers.
Markets and Customers
The utility continues to capitalize on the healthy economies and sustained
customer growth found in its service territory. AWG and Associated provide
natural gas to approximately 159,000 residential, 22,000 commercial, and 300
industrial customers, while also providing gas transportation services to
approximately 50 end-use and off-system customers. Total gas throughput during
1999 was 36.3 Bcf, compared to 32.8 Bcf in 1998, and 37.0 in 1997. The increase
during 1999 was the result of higher off-system transportation volumes.
Off-system transportation volumes were 4.8 Bcf in 1999, compared to 1.1 Bcf
transported in 1998, and 2.8 Bcf transported in 1997.
Residential and Commercial. Approximately 84% of the utility's revenues are
from residential and commercial markets. Residential and commercial customers
combined accounted for 51% of total gas throughput for the gas distribution
segment in 1999, compared to 57% in 1998 and 1997. Gas volumes sold to
residential customers were 10.8 Bcf, down from 11.1 Bcf sold in 1998, and 12.6
Bcf sold in 1997. Gas sold to commercial customers totaled 7.6 Bcf in 1999 and
1998 and 8.4 Bcf in 1997. The decrease in residential gas volumes sold in 1999
was due to record warm weather. Weather during the calendar year was 21% warmer
than normal and 8% warmer than in 1998.
The gas heating load is one of the most significant uses of natural gas and
is sensitive to outside temperatures. Sales, therefore, vary throughout the
year. Profits, however, have become less sensitive to fluctuations in
temperature as tariffs implemented in Arkansas contain a weather normalization
clause to lessen the impact of revenue increases and decreases which might
result from weather variations during the winter heating season.
Industrial and End-use Transportation. Deliveries to industrial customers,
which are generally smaller concerns using gas for plant heating or product
processing, accounted for 13.1 Bcf in gas deliveries in 1999, 13.0 Bcf in 1998,
and 13.2 Bcf in 1997. No industrial customer accounts for more than 5% of
Arkansas Western's total throughput.
Both AWG and Associated offer a transportation service that allows larger
business customers to obtain their own gas supplies directly from other
suppliers. A total of 40 customers are currently using the Arkansas
transportation service, including AWG's 15 largest customers in northwest
Arkansas. Associated's four largest customers in northeast Arkansas and seven of
Associated's 11 largest Missouri customers are currently using transportation
service.
11
<PAGE>
Competition
AWG and Associated have experienced a general trend in recent years toward
lower rates of usage among their customers, largely as a result of conservation
efforts that the Company encourages. Competition is increasingly being
experienced from alternative fuels, primarily electricity, fuel oil, and
propane. A significant amount of fuel switching has not been experienced,
though, as natural gas is generally the least expensive, most readily available
fuel in the service territories of AWG and Associated.
The competition from alternative fuels and, in a limited number of cases,
alternative sources of natural gas have intensified in recent years. Industrial
customers are most likely to consider utilization of these alternatives, as they
are less readily available to commercial and residential customers. In an effort
to provide some pricing alternatives to its large industrial customers with
relatively stable loads, AWG offers an optional tariff to its larger business
customers and to any other large business customer which shows that it has an
alternate source of fuel at a lower price or that one of its direct competitors
has access to cheaper sources of energy. This optional tariff enables those
customers willing to accept the risk of price and supply volatility to direct
AWG to obtain a certain percentage of their gas requirements in the spot market.
Participating customers continue to pay the non-gas cost of service included in
AWG's present tariff for large business customers and agree to reimburse AWG for
any take-or-pay liability caused by spot market purchases on the customers'
behalf.
Regulation
The Company's utility rates and operations are regulated by the APSC and
MPSC. In Arkansas, the Company operates through municipal franchises that are
perpetual by state law. These franchises, however, are not exclusive within a
geographic area. In Missouri, the Company operates through municipal franchises
with various terms of existence.
As the regulatory focus of the natural gas industry shifts from the federal
level to the state level, utilities across the nation are being required to
unbundle their sales services from transportation services in an effort to
promote greater competition. Although no such legislation or regulatory
directives related to natural gas are presently pending in Arkansas or Missouri,
the Company is aggressively controlling costs and constantly reviewing issues
such as system capacity and reliability, obligation to serve, rate design, and
stranded or transition costs.
In Arkansas, the state legislature recently passed legislation that will
deregulate the retail sale of electricity in Arkansas as soon as 2002. The
Company is unable to predict the precise impact of any such legislation on its
utility operations. The Company's utility subsidiary has historically maintained
a substantial price advantage over electricity for most applications. However,
when retail electric competition is implemented in Arkansas, it is possible that
some portion of this price advantage may be lost in some markets. As described
in the paragraph above, the Company is taking steps to preserve its competitive
advantage over alternative energy sources, including electricity. When electric
deregulation occurs in Arkansas, legislative or regulatory precedents may be set
that will also affect natural gas utilities in the future. These issues may
include further unbundling of services and the regulatory treatment of stranded
costs.
Gas distribution revenues in future years will be impacted by the sale of
the Company's Missouri assets and by customer growth and rate increases allowed
by regulatory commissions. In recent years, AWG has experienced customer growth
of approximately 2% to 3% annually, while Associated has experienced customer
growth of approximately 1% or less annually. Based on current economic
conditions in the Company's service territories, the Company expects this trend
in customer growth to continue.
12
<PAGE>
In December 1996, AWG received approval from the APSC for a rate increase
of $5.1 million annually. The December 1996 rate increase order issued by the
APSC also provided that AWG cause to be filed with the APSC an independent study
of its procedures for allocating costs between regulated and non-regulated
operations, its staffing levels and executive compensation. The independent
study was ordered by the APSC to address issues raised by the Office of the
Attorney General of the State of Arkansas. The study was conducted in 1999 with
a final report issued in December 1999. The report found the Company's costs to
be reasonable in all categories and did not recommend any changes to the rates
currently in effect.
The Company received approvals in December 1997 from the APSC and the MPSC
for rate increases and tariff changes for Associated which will allow the
utility to collect an additional $3.0 million annually. Of the $3.0 million
increase, approximately $2.0 million is in the form of base rate increases and
$1.0 million is related to the increased cost of service of the Company's
gathering plant which is recovered through either the purchased gas adjustment
clause or through direct charges to transportation customers. Rate increase
requests that may be filed in the future will depend on customer growth,
increases in operating expenses, and additional investments in property, plant
and equipment. AWG's rates for gas delivered to its retail customers are not
regulated by the FERC, but its transmission and gathering pipeline systems are
subject to the FERC's regulations concerning open access transportation since
AWG accepted a blanket transportation certificate in connection with its merger
with Associated.
In May 1999, the Staff of the APSC initiated a proceeding in which it
sought an annual reduction of approximately $2.3 million in the rates AWG
charges its customers in northwest Arkansas. Staff's position was 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 was
based on a downward adjustment to the utility's current return on equity
authorized by the APSC in 1996. During the third quarter of 1999, the Company
reached agreement with the Staff and the APSC to resolve this issue and to close
several other open dockets. In the settlement agreement, the Company agreed to
reduce its rates collected from customers on a prospective basis in the amount
of $1.4 million annually, effective December 1, 1999. The agreement also
includes the resolution of a proceeding initiated in December 1998 by the Staff
of the APSC where the Staff had recommended the disallowance of approximately
$3.1 million of gas supply costs. As part of the settlement, this docket was
closed with no negative adjustment to the Company.
MARKETING AND TRANSPORTATION
Gas Marketing
The marketing group was formed in mid-1996 to better enable the Company to
capture downstream opportunities which arise through marketing and
transportation activity. Through utilization of Southwestern's existing asset
base, the group's focus is to create and capture value beyond the wellhead. The
merger of the NOARK Pipeline with the Ozark Gas Transmission System discussed
below is expected to afford greater supply and market opportunities, allowing
the group to expand its marketing operations in Oklahoma.
The Company's marketing operations include the marketing of Southwestern's
own gas production and third-party natural gas. Operating income for this
segment was $2.1 million in 1999, compared to $1.8 million in 1998 and $1.3
million in 1997. The segment marketed 63.1 Bcf of natural gas in 1999, compared
to 49.6 Bcf in 1998 and 36.2 Bcf in 1997. Of the total volumes marketed,
purchases from the Company's exploration and production subsidiaries accounted
for 31% in 1999, 25% in 1998, and 23% in 1997.
13
<PAGE>
NOARK Pipeline
At December 31, 1999, the Company held a 25% general partnership interest
in NOARK. NOARK Pipeline was a 258-mile long intrastate natural gas transmission
system that originated in western Arkansas and terminated in northeast Arkansas,
crossing three major interstate pipelines and interconnecting with the Company's
distribution systems. NOARK Pipeline was completed and placed in service in 1992
and has been operating below capacity and generating losses since it was placed
in service. The Company's share of the pretax loss from operations related to
its NOARK investment was $2.0 million in 1999, $3.1 million in 1998, and $4.5
million in 1997.
In January 1998, the Company entered into an agreement with Enogex Inc.
(Enogex), a subsidiary of OGE Energy Corp., to expand NOARK Pipeline and provide
access to Oklahoma gas supplies through an integration of NOARK Pipeline with
the Ozark Gas Transmission System (Ozark). Ozark was a 437-mile interstate
pipeline system that began in eastern Oklahoma and terminated in eastern
Arkansas. On July 1, 1998, the FERC authorized the operation and integration of
Ozark and NOARK Pipeline as a single, integrated pipeline. The FERC order also
authorized the purchase of Ozark by a subsidiary of Enogex and the construction
of integration facilities. Enogex acquired Ozark and contributed the pipeline
system to the NOARK partnership and also acquired the NOARK partnership
interests not held by Southwestern. Enogex funded the acquisition of Ozark and
the expansion and integration with NOARK Pipeline which resulted in the
Company's interest in the partnership decreasing to 25% with Enogex owning a 75%
interest. There are also provisions in the agreement with Enogex which allow for
future revenue allocations to the Company above its 25% partnership interest if
certain minimum throughput and revenue assumptions are not met.
The merged pipeline system now has greater access to major gas producing
fields in Oklahoma. With access to greater regional production, Southwestern
expects the pipeline's additional throughput to create new marketing and
transportation opportunities and reduce the losses experienced on the project in
the past. The merged pipeline also provides the Company's utility systems with
additional access to gas supply.
The new integrated system, known as Ozark Pipeline, became operational
November 1, 1998, and includes 749 miles of pipeline with a total throughput
capacity of 330 MMcfd. Deliveries are currently being made by the integrated
pipeline to portions of AWG's distribution system, to Associated, and to the
interstate pipelines with which it interconnects. Before the integration with
Ozark, NOARK Pipeline had an average daily throughput of 27.3 MMcfd in 1998 and
39.8 MMcfd in 1997. For 1999, Ozark Pipeline had an average daily throughput of
167.5 MMcfd. At December 31, 1999, AWG had transportation contracts with Ozark
Pipeline for 82.3 MMcfd of firm capacity. These contracts expire in 2002 and
2003 and are renewable annually thereafter until terminated with 180 days'
notice.
Competition
The Company's gas marketing activities are in competition with numerous
other companies offering the same services, many of which possess larger
financial and other resources than those of Southwestern. Some of these
competitors are affiliates of companies with extensive pipeline systems that are
used for transportation from producers to end-users. Other factors affecting
competition are cost and availability of alternative fuels, level of consumer
demand, and cost of and proximity of pipelines and other transportation
facilities. The Company believes that its ability to effectively compete within
the marketing segment in the future depends upon establishing and maintaining
strong relationships with producers and end-users.
NOARK Pipeline previously competed with two interstate pipelines, one of
which was the Ozark system, to obtain gas supplies for transportation to other
markets. Because of the available transportation capacity in the Arkansas
portion
14
<PAGE>
of the Arkoma Basin, competition had been strong and had resulted in NOARK
Pipeline transporting gas for third parties at rates below the maximum tariffs
presently allowed. The integration with Ozark provides increased supplies to
transport to both local markets and markets served by the three major interstate
pipelines that Ozark Pipeline connects with in eastern Arkansas. As discussed
below under "Regulation," FERC's Order No. 636 has generally increased
competition in the transportation segment as end-users are now acquiring their
own supplies and independently arranging for the transportation of those
supplies. The Company believes that Ozark Pipeline will provide the additional
supplies necessary to compete more effectively for the transportation of natural
gas to end-users and markets served by the interstate pipelines.
Regulation
Since the mid-1980's, the FERC has issued a series of orders, culminating
in Order No. 636 in April 1992, that have altered the marketing and
transportation of natural gas. Order No. 636 required interstate natural gas
pipelines to "unbundle," or segregate, the sales, transportation, storage and
other components of their existing sales services, and to separately state the
rates for each of the unbundled services. Order No. 636 and subsequent FERC
orders issued in individual pipeline proceedings have been the subject of
appeals, the results of which have generally been supportive of the FERC's open
access policy. Generally, Order No. 636 has eliminated or substantially reduced
the interstate pipelines' roles as wholesalers of natural gas and has
substantially increased competition in natural gas markets.
Prior to the integration with Ozark, the operations of NOARK Pipeline were
regulated by the APSC. The APSC had established a maximum transportation rate of
approximately $.285 per dekatherm. The integration of NOARK Pipeline with Ozark
resulted in an interstate pipeline system subject to FERC regulations and FERC
approved tariffs. The APSC no longer has jurisdiction over NOARK Pipeline's
transportation rates and services. The FERC has initially set the maximum
transportation rate of Ozark Pipeline at $.2455 per dekatherm.
OTHER ITEMS
Environmental Matters
The Company's operations are subject to extensive federal, state and local
laws and regulations, including the Comprehensive Environmental Response,
Compensation and Liability Act, the Clean Water Act, the Clean Air Act and
similar state statutes. These laws and regulations require permits for drilling
wells and the maintenance of bonding requirements in order to drill or operate
wells and also regulate the spacing and location of wells, the method of
drilling and casing wells, the surface use and restoration of properties upon
which wells are drilled, the plugging and abandoning of wells, the prevention
and cleanup of pollutants and other matters. Southwestern maintains insurance
against costs of clean-up operations, but is not fully insured against all such
risks.
Compliance with environmental laws and regulations has had no material
effect on Southwestern's capital expenditures, earnings, or competitive
position. Although future environmental obligations are not expected to have a
material impact on the results of operations or financial condition of the
Company, there can be no assurance that future developments, such as
increasingly stringent environmental laws or enforcement thereof, will not cause
the Company to incur material environmental liabilities or costs.
Real Estate Development
A. W. Realty Company (AWR) owns an interest in approximately 155 acres of
real estate, most of which is undeveloped. AWR's real estate development
activities are concentrated on a 130-acre tract of land located near the
Company's headquarters in a growing part of Fayetteville, Arkansas. The Company
has owned an interest in this land for many years. The property is zoned for
commercial, office, and multi-family residential development. AWR continues to
review
15
<PAGE>
with a joint venture partner various options for developing this property that
would minimize the Company's initial capital expenditures, but still enable it
to retain an interest in any appreciation in value. This activity, however, does
not represent a significant portion of the Company's business.
Employees
At December 31, 1999, the Company had 686 employees, 97 of whom are
represented under a collective bargaining agreement. The Company believes that
its relations with its employees are good.
ITEM 2. PROPERTIES
For additional information about the Company's gas and oil operations refer
to Notes 5 and 6 to the financial statements in Item 8 ("Financial Statements
and Supplementary Data"). For information concerning capital expenditures, refer
to page 32 ("Capital Expenditures" section of Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations"). Also refer to
Item 6 ("Selected Financial Data") for information concerning gas and oil
produced.
The following table provides information concerning miles of pipe of the
Company's gas distribution systems. For a further description of Arkansas
Western's properties, see discussion under Item 1 ("Business").
<TABLE>
<CAPTION>
AWG Associated Total
----------------------------------
<S> <C> <C> <C>
Gathering 388 - 388
Transmission 805 608 1,413
Distribution 3,123 1,697 4,820
- --------------------------------------------------------------------------------
4,316 2,305 6,621
================================================================================
</TABLE>
The following information is provided to supplement that presented in Item
8. For a further description of Southwestern's oil and gas properties, see the
discussion under Item 1.
Leasehold Acreage
<TABLE>
<CAPTION>
Undeveloped Developed
Gross Net Gross Net
------------------------------------------------
<S> <C> <C> <C> <C>
Arkoma 100,540 89,035 189,823 142,607
Mid-Continent 61,634 27,127 104,015 43,944
Permian 120,137 22,390 139,101 20,400
Gulf Coast 38,240 19,385 56,226 19,770
- --------------------------------------------------------------------------------
320,551 157,937 489,165 226,721
================================================================================
</TABLE>
16
<PAGE>
Producing Wells
<TABLE>
<CAPTION>
Gas Oil Total
Gross Net Gross Net Gross Net
------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Arkoma 794 383.4 - - 794 383.4
Mid-Continent 242 100.7 557 182.4 799 283.1
Permian 75 11.1 219 132.3 294 143.4
Gulf Coast 56 22.1 21 16.0 77 38.1
- ---------------------------------------------------------------------------------------
1,167 517.3 797 330.7 1,964 848.0
=======================================================================================
</TABLE>
Wells Drilled During the Year
<TABLE>
<CAPTION>
Exploratory
Productive Wells Dry Holes Total
Year Gross Net Gross Net Gross Net
- ---- ----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1999 4.0 1.5 4.0 1.6 8.0 3.1
1998 3.0 .5 10.0 3.9 13.0 4.4
1997 2.0 1.3 4.0 3.0 6.0 4.3
</TABLE>
<TABLE>
<CAPTION>
Development
Productive Wells Dry Holes Total
Year Gross Net Gross Net Gross Net
- ---- ----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1999 47.0 18.3 15.0 6.1 62.0 24.4
1998 72.0 29.4 10.0 6.4 82.0 35.8
1997 58.0 27.5 24.0 13.5 82.0 41.0
</TABLE>
Wells in Progress as of December 31, 1999
<TABLE>
<CAPTION>
Gross Net
----------------
<S> <C> <C>
Exploratory 2.0 0.6
Development 10.0 2.0
- --------------------------------------------------------------------------------
Total 12.0 2.6
================================================================================
</TABLE>
During 1999, Southwestern was required to file Form 23, "Annual Survey of
Domestic Oil and Gas Reserves" with the Department of Energy. The basis for
reporting reserves on Form 23 is not comparable to the reserve data included in
Note 6 to the financial statements in Item 8. The primary differences are that
Form 23 reports gross reserves, including the royalty owners' share, and
includes reserves for only those properties where the Company is the operator.
17
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
In May 1996, a class action suit was filed against the Company on behalf of
royalty owners alleging improprieties in the disbursements of royalty proceeds.
A trial was held on the class action suit beginning in late September 1998 that
resulted in a verdict against the Company and two of its wholly-owned
subsidiaries, SEECO, Inc. and Arkansas Western Gas Company, in the amount of
$62.1 million. The trial judge subsequently awarded pre-judgment interest in an
amount of $31.1 million, and post-judgment interest accrued from the date of the
judgment at the rate of 10% per annum simple interest. The Company has been
required by the state court to post a judgment bond which now stands at $109.3
million (verdict amount plus pre-judgment interest and 20 months of
post-judgment interest) in order to stay the jury's verdict and proceed with an
appeal process. The bond was placed by a surety company and was collateralized
by unsecured letters of credit.
The verdict was returned following a trial on the issues of the class
action lawsuit brought by certain royalty owners of SEECO, Inc., who contend
that since 1979 the defendants breached implied covenants in certain oil and gas
leases, misrepresented or failed to disclose material facts to royalty owners
concerning gas purchase contracts between the Company's subsidiaries, and failed
to fulfill other alleged common law duties to the members of the royalty owner
plaintiff class. The litigation was commenced in May 1996 and was disclosed by
the Company at that time.
The Company believes that the jury's verdict was wrong as a matter of law
and fact and that incorrect rulings by the trial judge (including evidentiary
rulings and prejudicial jury instructions) provide significant grounds for a
successful appeal. The Company had asked the trial judge to recuse himself due
to his apparent bias toward the plaintiffs and had also filed a motion with the
trial court for judgment notwithstanding the verdict or, in the alternative, for
a new trial. These motions were denied. The Company has filed and will
vigorously prosecute an appeal in the Arkansas Supreme Court. Based on
discussion with outside legal counsel, management of the Company remains
confident that the jury's verdict will be overturned and the case remanded for a
new trial. If the Company is not successful in its appeal from the jury verdict,
the Company's financial condition and results of operations would be materially
and adversely affected. However, management believes that the Company's ultimate
liability, if any, resulting from this case will not be material to its
financial position, but in any one year could be significant to the results of
operations. At December 31, 1999 and 1998, no amounts had been accrued on this
matter.
In its Form 8-K filed July 2, 1996, the Company disclosed that a lawsuit
relating to overriding royalty interests in certain Arkansas oil and gas
properties had been filed against it and two of its wholly owned subsidiaries.
The lawsuit, which was brought by a party who was originally included in (but
opted out of) the class action litigation described above, involves claims
similar to those upon which judgment was rendered against the Company and its
subsidiaries. In September 1998, another party who opted out of the class
threatened the Company with similar litigation. While the amounts of these
pending and threatened claims could be significant, management believes, based
on its extensive investigations and trial preparation, that these claims are
without merit and, that the Company's ultimate liability, if any, will not be
material to its consolidated financial position or results of operations. This
matter went to a non-jury trial as to liability on January 10, 2000 and the
Company is awaiting the court's ruling.
The United States Minerals Management Service (MMS), a federal agency
responsible for the administration of federal oil and gas leases, is
investigating the Company and its subsidiaries in respect of claims similar to
those in the class action litigation. MMS was included in the class action
litigation against its objections, but has not pursued further action to remove
itself from the class. If MMS does remove itself from the class, its claims may
be brought separately
18
<PAGE>
under federal statutes that provide for treble damages and civil penalties. In
such event, the Company believes it would have defenses that were not available
in the class action litigation. While the aggregate amount of MMS's claims could
be significant, management believes, based on its investigations, that the
Company's ultimate liability, if any, will not be material to its consolidated
financial position or results of operations.
As previously reported, the Company's subsidiary, SEPCO, filed suit in 1997
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. In 1999, this matter was settled for an amount that was not material to
the Company's consolidated financial position or results of operation.
The Company is subject to laws and regulations relating to the protection
of the environment. The Company's policy is to accrue environmental and cleanup
related costs of a non-capital nature when it is both probable that a liability
has been incurred and when the amount can be reasonably estimated. Management
believes any future remediation or other compliance related costs will not have
a material effect on the financial position or reported results of operations of
the Company.
The Company is subject to other litigation and claims that have arisen in
the ordinary course of business. The Company accrues for such items when a
liability is both probable and the amount can be reasonably estimated. In the
opinion of management, the results of such litigation and claims will not have a
material effect on the results of operations or the financial position of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the fiscal year
ended December 31, 1999, to a vote of security holders, through the solicitation
of proxies or otherwise.
Executive Officers of the Registrant
<TABLE>
<CAPTION>
Years Served
Name Officer Position Age as Officer
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Harold M. Korell President, Chief Executive Officer and Director 55 3
Alan H. Stevens President and Chief Operating Officer, 55 2
Southwestern Energy Production Company and SEECO, Inc.
Greg D. Kerley Executive Vice President and Chief Financial Officer 44 10
George A. Taaffe, Jr. Senior Vice President and General Counsel, Secretary 53 1
Debbie J. Branch Senior Vice President, Southwestern Energy Services 48 4
Company
Charles V. Stevens Senior Vice President, Arkansas Western Gas Company 50 11
</TABLE>
19
<PAGE>
Mr. Korell was appointed President in October 1998 and assumed the position
of Chief Executive Officer on January 1, 1999. He joined the Company in 1997 as
Executive Vice President and Chief Operating Officer. From 1992 to 1997, he was
employed by American Exploration Company where he was most recently Senior Vice
President - Operations. From 1990 to 1992, he was Executive Vice President of
McCormick Resources and from 1973 to 1989, he held various positions with
Tenneco Oil Company, including Vice President, Production.
Mr. Alan Stevens was appointed to his present position in December 1999. He
joined the Company in January 1998 as Senior Vice President of Southwestern
Energy Production Company and SEECO, Inc. Prior to joining the Company, he was
President and Chief Operating Officer for Petsec Energy during 1997 and was
employed by Occidental Petroleum Company from 1989 to 1997 where he was most
recently Vice President of Worldwide Exploration.
Mr. Kerley was appointed to his present position in December 1999.
Previously, he served as Senior Vice President and Chief Financial Officer since
July 1998, Senior Vice President - Treasurer and Secretary from 1997 to 1998,
Vice President - Treasurer and Secretary from 1992 to 1997, and Controller from
1990 to 1992. Mr. Kerley also served as the Chief Accounting Officer from 1990
to 1998.
Mr. Taaffe joined the Company in his current position in July 1999. Prior
to joining the Company, he served as Vice President and Assistant General
Counsel for Consolidated Natural Gas Company from 1988 to 1999 and Associated
General Counsel for Joy Technologies from 1973 to 1987.
Ms. Branch joined the Company in her present position in 1996. Prior to
joining the Company, she was Executive Vice President of Stalwart Energy Company
from 1994 to 1996 and founder and President of Vesta Energy Company from 1983 to
1993.
Mr. Charles Stevens has served the Company in his present position since
December 1997. Previously, he served as Vice President of Arkansas Western Gas
Company from 1988 to 1997.
All officers are elected at the Annual Meeting of the Board of Directors
for one-year terms or until their successors are duly elected. There are no
arrangements between any officer and any other person pursuant to which he or
she was selected as an officer. There is no family relationship between any of
the named executive officers or between any of them and the Company's directors.
20
<PAGE>
Part II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the New York Stock Exchange under
the symbol "SWN." At December 31, 1999, the Company had 2,268 shareholders of
record. The following prices represent closing market transactions on the New
York Stock Exchange.
<TABLE>
<CAPTION>
Range of Market Prices Cash Dividends Paid
Quarter Ended 1999 1998 1999 1998
- ------------- ------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
March 31 $ 8.44 $5.31 $12.94 $10.63 $.06 $.06
June 30 $10.56 $6.06 $12.00 $ 8.75 $.06 $.06
September 30 $10.94 $7.50 $10.38 $ 6.75 $.06 $.06
December 31 $ 9.19 $5.63 $ 8.50 $ 5.50 $.06 $.06
</TABLE>
The terms of certain of the Company's long-term debt instruments and
agreements impose restrictions on the payment of cash dividends. These covenants
generally limit the payment of dividends in a fiscal year to the total of net
income plus $20.0 million less dividends paid and purchases, redemptions or
retirements of capital stock during the period since January 1, 1990. At
December 31, 1999, $96.4 million of retained earnings was available for payment
as cash dividends. Dividends totaling $6.0 million were paid during 1999.
The Company paid dividends at an annual rate of $.24 per share in 1999 and
1998. While the Board of Directors intends to continue the practice of paying
dividends quarterly, amounts and dates of such dividends as may be declared will
necessarily be dependent upon the Company's future earnings and capital
requirements.
21
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Financial Review (in thousands)
Operating revenues
Exploration and production $ 75,039 $ 86,232 $100,129 $ 86,978 $ 63,285 $ 79,787
Gas distribution 132,420 134,711 154,155 142,730 119,452 126,667
Energy services and other 137,942 97,795 83,511 30,636 31,622 29,225
Intersegment revenues (65,005) (52,433) (61,606) (57,004) (47,534) (60,055)
- ---------------------------------------------------------------------------------------------------------------------
280,396 266,305 276,189 203,340 166,825 175,624
- ---------------------------------------------------------------------------------------------------------------------
Operating costs and expenses
Gas purchases - utility 45,370 39,863 46,806 42,851 37,133 36,395
Gas purchases - marketing 92,851 73,235 63,054 14,114 13,714 5,438
Operating and general 57,957 61,915 59,167 50,509 44,436 42,506
Depreciation, depletion and amortization 41,603 46,917 48,208 42,394 35,992 35,546
Write-down of oil and gas properties - 66,383 - - - -
Taxes, other than income taxes 6,557 6,943 7,018 5,476 4,362 3,657
- ---------------------------------------------------------------------------------------------------------------------
244,338 295,256 224,253 155,344 135,637 123,542
- ---------------------------------------------------------------------------------------------------------------------
Operating income 36,058 (28,951) 51,936 47,996 31,188 52,082
Interest expense, net (17,351) (17,186) (16,414) (13,044) (11,167) (8,867)
Other income (expense) (2,331) (3,956) (5,017) (4,015) (1,227) (2,362)
- ---------------------------------------------------------------------------------------------------------------------
Income before income taxes and
extraordinary item 16,376 (50,093) 30,505 30,937 18,794 40,853
- ---------------------------------------------------------------------------------------------------------------------
Income taxes:
Current 537 (6,029) (732) (5,569) (4,908) 9,288
Deferred 5,912 (13,467) 12,522 17,320 12,167 6,441
- ---------------------------------------------------------------------------------------------------------------------
6,449 (19,496) 11,790 11,751 7,259 15,729
- ---------------------------------------------------------------------------------------------------------------------
Income before extraordinary item 9,927 (30,597) 18,715 19,186 11,535 25,124
Extraordinary item - - - - (295) -
- ---------------------------------------------------------------------------------------------------------------------
Net income $ 9,927 $(30,597) $ 18,715 $ 19,186 $ 11,240 $ 25,124
=====================================================================================================================
Cash flow from operations, net of working
capital changes (in thousands) $ 58,131 $ 93,708 $ 79,483 $ 71,830 $ 56,177 $ 66,857
Return on equity 5.21% n/a 8.45% 9.23% 5.78% 12.35%
=====================================================================================================================
Common Stock Statistics
Basic earnings per share before
extraordinary item $.40 $(1.23) $.76 $.78 $.46 $.98
Basic and diluted earnings per share $.40 $(1.23) $.76 $.78 $.45 $.98
Cash dividends declared and paid per share $.24 $.24 $.24 $.24 $.24 $.24
Book value per share $7.60 $7.45 $8.92 $8.41 $7.87 $7.92
Market price at year-end $6.56 $7.50 $12.88 $15.13 $12.75 $14.88
Number of shareholders of record at
year-end 2,268 2,333 2,379 2,572 2,759 2,875
Average shares outstanding 24,941,550 24,882,170 24,738,882 24,705,256 25,130,781 25,684,110
=====================================================================================================================
22
<PAGE>
1999 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
Capitalization (in thousands)
Total debt, including current portion $302,200 $283,436 $299,543 $278,285 $210,828 $142,300
Common shareholders' equity 190,356 185,856 221,565 207,941 194,504 203,456
- ---------------------------------------------------------------------------------------------------------------------
Total capitalization $492,556 $469,292 $521,108 $486,226 $405,332 $345,756
- ---------------------------------------------------------------------------------------------------------------------
Total assets $671,446 $647,620 $710,866 $660,190 $569,093 $486,074
- ---------------------------------------------------------------------------------------------------------------------
Capitalization ratios:
Debt (excluding current portion
of long-term) 61.35% 60.27% 57.23% 56.96% 51.65% 40.10%
Equity 38.65% 39.73% 42.77% 43.04% 48.35% 59.90%
=====================================================================================================================
Capital Expenditures (in millions)
Exploration and production $59.0 $52.4 $73.5 $110.3 $ 82.2 $55.4
Gas distribution 7.1 10.1 12.6 12.8 18.5 17.6
Other .9 1.9 2.7 1.8 .9 3.9
- ---------------------------------------------------------------------------------------------------------------------
$67.0 $64.4 $88.8 $124.9 $101.6 $76.9
=====================================================================================================================
Exploration and Production
Natural gas:
Production, Bcf 29.4 32.7 33.4 34.8 34.5 37.7
Average price per Mcf $2.21 $2.34 $2.57 $2.26 $1.72 $2.04
Oil:
Production, MBbls 578 703 749 391 229 200
Average price per barrel $17.11 $13.60 $19.02 $21.21 $17.15 $15.89
Total gas and oil production, Bcfe 32.9 36.9 37.9 37.1 35.9 38.9
Average production (lifting) cost per
Mcf equivalent $.44 $.43 $.45 $.29 $.22 $.17
Proved reserves at year-end:
Natural gas, Bcf 307.5 303.7 291.4 297.5 294.9 316.1
Oil, MBbls 7,859 6,850 7,852 8,238 2,152 1,231
Total reserves, Bcf equivalent 354.7 344.8 338.5 346.9 307.8 323.5
=====================================================================================================================
Gas Distribution
Sales and transportation volumes, Bcf:
Residential 10.8 11.1 12.6 13.4 12.1 11.6
Commercial 7.6 7.6 8.4 8.8 7.6 7.2
Industrial 3.5 4.2 6.6 7.7 7.7 7.5
End-use transportation 9.6 8.8 6.6 5.5 5.2 4.8
- ---------------------------------------------------------------------------------------------------------------------
31.5 31.7 34.2 35.4 32.6 31.1
Off-system transportation 4.8 1.1 2.8 3.6 9.8 10.7
- ---------------------------------------------------------------------------------------------------------------------
36.3 32.8 37.0 39.0 42.4 41.8
- ---------------------------------------------------------------------------------------------------------------------
Customers - year-end
Residential 158,606 156,384 154,864 151,880 147,267 144,486
Commercial 21,929 22,229 21,431 20,845 20,109 19,489
Industrial 290 303 311 326 340 348
- ---------------------------------------------------------------------------------------------------------------------
180,825 178,916 176,606 173,051 167,716 164,323
- ---------------------------------------------------------------------------------------------------------------------
Degree days 3,179% 3,472% 4,131% 4,341% 4,064% 3,823%
Percent of normal 79 87 103 108 102 96
=====================================================================================================================
</TABLE>
23
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information should be read in conjunction with the
information contained in the financial statements and the notes thereto included
in Item 8 of this report and with the discussion below on "Forward-Looking
Information." Certain reclassifications have been made to the prior years'
financial statements to conform with the 1999 presentation. These
reclassifications had no effect on previously reported net income.
RESULTS OF OPERATIONS
The Company reported net income of $9.9 million, or $.40 per share, for
1999, compared to a net loss of $30.6 million, or $1.23 per share, for 1998 and
net income of $18.7 million, or $.76 per share, in 1997. The loss for 1998
reflects 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 charge, the Company would have recognized net income of $9.9
million, or $.40 per share in 1998. Results for 1999 reflect decreased oil and
gas production and the effects of record warm weather offset by lower operating
and general expenses and lower depreciation, depletion and amortization expense.
During 1998 earnings were negatively impacted by lower wellhead prices for both
oil and gas and by unseasonably warm weather. Revenues and operating income for
the Company's major business segments are shown in the following table.
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------------
(in thousands)
<S> <C> <C> <C>
Revenues
Exploration and production $ 75,039 $ 86,232 $100,129
Gas distribution 132,420 134,711 154,155
Marketing 137,526 97,175 82,807
Other 416 620 704
Eliminations (65,005) (52,433) (61,606)
- --------------------------------------------------------------------------------
$280,396 $266,305 $276,189
================================================================================
Operating Income
Exploration and production $ 16,451 $(47,273)(1) $ 33,303
Gas distribution 17,187 16,029 16,941
Marketing 2,142 1,800 1,315
Other 278 493 377
- --------------------------------------------------------------------------------
$ 36,058 $(28,951) $ 51,936
================================================================================
<FN>
(1) Includes a $66.4 million pre-tax write-down of oil and gas properties.
</FN>
</TABLE>
Exploration and Production
The Company's exploration and production revenues decreased 13% in 1999 and
14% in 1998. The decrease in 1999 was due to lower volumes of oil and gas
produced and a lower average gas price received while the decrease in 1998 was
due primarily to lower average oil and gas prices.
24
<PAGE>
Operating income of the exploration and production segment was $16.5
million in 1999, compared to $19.1 million in 1998 excluding the impact of the
non-cash write-down of oil and gas properties, and $33.3 million in 1997. The
decrease in 1999 was due primarily to an 11% decrease in equivalent oil and gas
production volumes. The decrease in 1998 was primarily due to lower average gas
and oil prices, which were down 9% and 28%, respectively, from their levels in
1997.
Gas and oil production totaled 32.9 billion cubic feet equivalent (Bcfe) in
1999, 36.9 Bcfe in 1998 and 37.9 Bcfe in 1997. The decreases in production were
due to the combined effects of production declines in the Company's outside
operated properties resulting from the industry slowdown that began in 1998,
production declines in some of the Company's Gulf Coast properties, and the loss
of production from marginal properties that were sold in 1999.
<TABLE>
<CAPTION>
1999 1998 1997
---------------------
<S> <C> <C> <C>
Gas Production
Affiliated sales (Bcf) 8.2 11.3 14.3
Unaffiliated sales (Bcf) 21.2 21.4 19.1
- --------------------------------------------------------------------------------
29.4 32.7 33.4
- --------------------------------------------------------------------------------
Average price per Mcf $2.21 $2.34 $2.57
================================================================================
Oil Production
Unaffiliated sales (MBbls) 578 703 749
- --------------------------------------------------------------------------------
Average price per Bbl $17.11 $13.60 $19.02
================================================================================
Total Production (Bcfe) 32.9 36.9 37.9
================================================================================
</TABLE>
Gas sales to unaffiliated purchasers were 21.2 Bcf in 1999, down slightly
from 21.4 Bcf in 1998 and up from 19.1 Bcf in 1997. Sales to unaffiliated
purchasers are primarily made under contracts which reflect current short-term
prices and which are subject to seasonal price swings.
Intersegment sales to Arkansas Western Gas Company (AWG), the utility
subsidiary which operates the Company's northwest Arkansas utility system, were
5.1 Bcf in 1999, 7.7 Bcf in 1998, and 8.6 Bcf in 1997. Unseasonably warm weather
during 1999 and 1998 decreased AWG's demand for the Company's gas supply. The
Company's gas production provided approximately 40% of AWG's requirements in
1999, and 60% in 1998 and 1997.
Prior to December 1998, most of the sales to AWG's system were pursuant to
an intersegment long-term contract entered into in 1978 with SEECO, Inc. (SEECO)
which was amended and restated in 1994 as the result of a settlement between the
Company, the Staff of the Arkansas Public Service Commission (APSC) and the
office of the Attorney General of the state of Arkansas. The sales price under
the amended contract averaged $2.99 per thousand cubic feet (Mcf) through
November of 1998, and $3.46 per Mcf in 1997.
On October 1, 1998, AWG sent requests for proposals to various suppliers
requesting bids on seven different packages of gas supply to be effective
December 1, 1998. These bid requests included replacement of the gas supply and
no-notice service previously provided by the long-term gas supply contract
between AWG and SEECO discussed above.
25
<PAGE>
SEECO along with the Company's marketing subsidiary successfully bid on five of
the seven packages with prices based on the Reliant East Index plus a demand
charge. Based on normal weather patterns, the volumes of gas projected to be
sold under these contracts would be approximately equal to the historical annual
volumes sold under the expired long-term contract. However, under the new
contracts, the Company supplies most of AWG's no-notice service and less of its
routine base requirements than it had under the previous contract. During
periods of warmer weather, as in 1999 and 1998, less total gas volumes will be
sold to AWG than compared to periods of normal or colder weather. The total
premium over the Reliant East Index under these contracts is estimated to be
approximately $1.0 million lower (after tax) than the annual premium earned
under the expired long-term contract. The majority of the premium is received
through monthly demand charges which will be received regardless of volumes
actually delivered. Other sales to AWG are made under long-term contracts with
flexible pricing provisions.
The Company's intersegment sales to Associated Natural Gas Company
(Associated), a division of AWG which operates the Company's natural gas
distribution systems in northeast Arkansas and parts of Missouri, were 3.1 Bcf
in 1999, 3.6 Bcf in 1998, and 5.7 Bcf in 1997. Deliveries to Associated
decreased in 1999 and 1998 due primarily to corresponding changes in heating
weather. Effective October 1990, SEECO entered into a ten-year contract with
Associated to supply a portion of its system requirements at a price to be
redetermined annually. For the contract period beginning October 1, 1997, the
contract was revised to redetermine the sales price monthly based on an index
posting plus a reservation fee. The average price received under the contract
was $2.37 for 1999 and 1998 and $2.51 for 1997. Prior to the end of the current
contract term in 2000, Associated will place its gas supply out for competitive
bids. Continued sales of these volumes to Associated, and the price of any such
sales, will depend on the results of this competitive bidding process.
Additionally, future volumes could be impacted by the sale of Associated's
Missouri properties as discussed further in the "Gas Distribution" section
below.
The overall average price received for the Company's gas production was
$2.21 per Mcf in 1999, $2.34 per Mcf in 1998, and $2.57 per Mcf in 1997. The
changes in the average price realized primarily reflects changes in average
annual spot market prices and the effects of the Company's price hedging
activities. The Company's hedging activities lowered the average gas price $.06
per Mcf in 1999, added $.19 per Mcf to the average gas price in 1998 and lowered
the 1997 average gas price $.05 per Mcf.
The Company periodically enters into hedging activities with respect to a
portion of its projected crude oil and natural gas production through a variety
of financial arrangements intended to support oil and gas prices at targeted
levels and to minimize the impact of price fluctuations (see Note 8 of the
financial statements for additional discussion). The Company's policies prohibit
speculation with derivatives and limit swap agreements to counterparties with
appropriate credit standings. Disregarding the impact of hedges, the Company
expects the average price it receives for its total gas production to be
slightly higher than average spot market prices due to the prices it receives
under the contracts covering its intersegment sales which are long-term and
provide swing services to the Company's utility systems. Future changes in
revenues from sales of the Company's gas production will be dependent upon
changes in the market price for gas, access to new markets, maintenance of
existing markets, and additions of new gas reserves.
The Company expects future increases in its gas production to come
primarily from sales to unaffiliated purchasers. The Company is unable to
predict changes in the market demand and price for natural gas, including
changes which may be induced by the effects of weather on demand of both
affiliated and unaffiliated customers for the Company's
26
<PAGE>
production. Additionally, the Company holds a large amount of undeveloped
leasehold acreage and producing acreage, and has an inventory of drilling leads,
prospects and seismic data which will continue to be developed and evaluated in
the future. The Company's exploration programs have been directed primarily
toward natural gas in recent years.
Gas Distribution
Gas distribution revenues fluctuate due to the pass-through of gas supply
cost changes and due to the effects of weather. Because of the corresponding
changes in purchased gas costs, the revenue effect of the pass-through of gas
cost changes has not materially affected net income. Gas distribution revenues
decreased 2% in 1999 and 13% in 1998 due to the effects of warmer weather.
Weather in 1999 was 21% warmer than normal and 8% warmer than the prior year.
Weather in 1998 was 13% warmer than normal and 16% warmer than the prior year.
Operating income for Southwestern's utility systems increased 7% in 1999
and decreased 5% in 1998. The increase in 1999 was due to the Company's efforts
in reducing operating costs and to customer growth. The decrease in 1998 was due
to the effects of warmer weather, partially offset by a $3.0 million rate
increase approved in December 1997 for the Company's northeast Arkansas and
Missouri systems, and customer growth.
<TABLE>
<CAPTION>
1999 1998 1997
-----------------------------
<S> <C> <C> <C>
Gas Distribution Systems
Throughput (Bcf)
Sales volumes 21.9 22.9 27.6
Transportation volumes
End-use 9.6 8.8 6.6
Off-system 4.8 1.1 2.8
- --------------------------------------------------------------------------------
36.3 32.8 37.0
- --------------------------------------------------------------------------------
Average number of sales customers 177,274 174,642 172,200
- --------------------------------------------------------------------------------
Heating weather
Degree days 3,179 3,472 4,131
Percent of normal 79% 87% 103%
Average sales rate per Mcf $5.67 $5.57 $5.36
================================================================================
</TABLE>
In 1999, AWG sold 14.5 Bcf to its customers at an average rate of $5.47 per
Mcf, compared to 15.1 Bcf at $5.37 per Mcf in 1998 and 17.4 Bcf at $5.34 per Mcf
in 1997. Additionally, AWG transported 6.2 Bcf in 1999, 6.0 Bcf in 1998, and 5.0
Bcf in 1997 for its end-use customers. Associated sold 7.4 Bcf to its customers
in 1999 at an average rate of $6.06 per Mcf, compared to 7.8 Bcf in 1998 at
$5.95 per Mcf and 10.2 Bcf at $5.39 per Mcf in 1997. Associated transported 3.4
Bcf for its end-use customers in 1999, compared to 2.8 Bcf in 1998 and 1.6 Bcf
in 1997. The decrease in the combined volumes sold and transported for end-use
customers in both 1999 and 1998 for the utility systems resulted from warmer
weather, partially offset by customer growth. The fluctuations in the average
sales rates reflect changes in the average cost of gas purchased for delivery to
the Company's customers, which are passed through to customers under automatic
adjustment clauses, and rate increases implemented in 1997.
27
<PAGE>
Total deliveries to industrial customers of AWG and Associated, including
transportation volumes, were 13.1 Bcf in 1999, 13.0 Bcf in 1998 and 13.2 Bcf in
1997. AWG also transported 4.8 Bcf of gas through its gathering system in 1999
for off-system deliveries, all to the Ozark Gas Transmission System, compared to
1.1 Bcf in 1998 and 2.8 Bcf in 1997. The increase in off-system deliveries in
1999 was due to decreased on-system demands of the Company's gas distribution
systems for the Company's gas production due to warmer than normal heating
weather. The average transportation tariff was approximately $.10 per Mcf,
exclusive of fuel, in 1999, $.11 per Mcf in 1998 and $.16 per Mcf in 1997.
In October 1999, the Company signed a definitive agreement to sell its
Missouri gas distribution assets for $32.0 million. The net book value of the
assets being sold is approximately $28.0 million. Proceeds from the sale will be
used to reduce the Company's outstanding debt. The sale requires regulatory
approval and is expected to close in the first half of 2000. After closing, the
Company's operating results for its gas distribution segment will be lower
reflecting the asset divestiture and the loss of Missouri customers. However,
the Company does not expect the sale to have a material negative impact on
earnings as the loss in operating income should be primarily offset by a
corresponding decrease in interest expense. The Company currently serves
approximately 48,000 customers in Missouri. The Company will continue to operate
its gas distribution systems in Arkansas where it currently serves approximately
133,000 customers.
Gas distribution revenues in future years will be impacted by the sale of
the Company's Missouri assets, customer growth and rate increases allowed by the
APSC. In recent years, AWG has experienced customer growth of approximately 2%
to 3% annually, while Associated has experienced customer growth of
approximately 1% or less annually. Based on current economic conditions in the
Company's service territories, the Company expects this trend in customer growth
to continue. The Company received approvals in December 1997 from the APSC and
the Missouri Public Service Commission (MPSC) for rate increases and tariff
changes which allow the utility to collect an additional $3.0 million annually.
Of the $3.0 million total, approximately $2.0 million is in the form of base
rate increases and $1.0 million is related to the increased cost of service of
the Company's gathering plant which is recovered through either the purchased
gas adjustment clause or through direct charges to transportation customers.
In its order approving the Missouri changes, the MPSC further ordered
Associated to modify its purchased gas adjustment tariff to remove any specific
language referencing recovery of the cost of service of its gathering
facilities. The MPSC order provided that Associated should base gathering
charges to its customers on competitive market conditions and that it would be
allowed recovery from its sales and transportation customers of all prudently
incurred gathering costs without reference to its cost of service. The MPSC will
review these gathering costs annually as part of its review of Associated's gas
costs. Associated believes that the MPSC lacks statutory authority to approve
charges which are not based on historical cost of service. Associated appealed
this issue to the circuit court which ruled in favor of the MPSC. The Company
has appealed the lower court's decision to the Missouri Court of Appeals. The
Company intends to bill its ratepayers gas gathering costs based on its cost of
service until the matter is resolved. If usage of the Company's gathering system
to obtain system gas supply or to source gas delivered to its industrial
customers should decrease, then recovery of these gathering costs would decrease
as well. Gathering costs have been recovered in this manner from Missouri
customers since Associated's 1990 rate case. Prior to the 1997 changes,
Associated's gathering costs were recovered from Arkansas customers through its
base rates.
28
<PAGE>
Tariffs implemented in Arkansas as a result of rate increases in both 1996
and 1997 contain a weather normalization clause to lessen the impact of revenue
increases and decreases which might result from weather variations during the
winter heating season. Rate increase requests which may be filed in the future
will depend on customer growth, increases in operating expenses, and additional
investments in property, plant and equipment. See "Regulatory Matters" below for
additional discussion related to the Company's gas distribution segment.
Marketing
Operating income for the marketing segment was $2.1 million on revenues of
$137.5 million in 1999, compared to $1.8 million on revenues of $97.2 million in
1998, and $1.3 million on revenues of $82.8 million in 1997. The Company
increased its marketing activities when it formed a marketing group in mid-1996
to better enable the Company to capture downstream opportunities which arise
through marketing and transportation activity. The Company marketed 63.1 Bcf in
1999, compared to 49.6 Bcf in 1998 and 36.2 Bcf in 1997. The Company enters into
hedging activities with respect to its gas marketing activities to provide
margin protection (see Note 8 of the financial statements for additional
discussion).
NOARK Pipeline
The marketing segment also manages the Company's 25% interest in the NOARK
Pipeline System, Limited Partnership (NOARK). The NOARK Pipeline was a 258-mile
long intrastate gas transmission system which extended across northern Arkansas,
crossing three major interstate pipelines and interconnecting with the Company's
distribution systems. The NOARK Pipeline had been operating below capacity and
generating losses since it was placed in service in September 1992. The
Company's share of the pretax loss from operations included in other income
related to its NOARK investment was $2.0 million in 1999, $3.1 million in 1998,
and $4.5 million in 1997. The improvement in the 1999 results 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 improvement in the 1998 pretax loss reflects a lower
interest rate on NOARK's debt which resulted from a refinancing discussed below
in "Liquidity and Capital Resources."
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 was a 437-mile interstate pipeline
system which began in eastern Oklahoma and terminated in eastern Arkansas.
Effective August 1, 1998, Enogex acquired Ozark and contributed the pipeline
system to the NOARK partnership. Enogex also acquired the NOARK partnership
interests not held by Southwestern. Enogex funded the acquisition of Ozark and
the expansion and integration with NOARK which resulted in the Company's
interest in the partnership decreasing to 25% with Enogex owning a 75% interest.
There are also provisions in the agreement with Enogex which allow for future
revenue allocations to the Company above its 25% partnership interest if certain
minimum throughput and revenue assumptions are not met. As a result of the
changes discussed above, the Company believes that it will be able to continue
to reduce the losses it has experienced on the NOARK project and expects its
investment in NOARK to be realized over the life of the system. See Note 7 of
the financial statements for additional discussion.
Ozark Pipeline, the new integrated system, became operational November 1,
1998, and includes 749 miles of pipeline with a total throughput capacity of 330
MMcfd. Deliveries are currently being made by the integrated pipeline to
portions of AWG's distribution system, to Associated, and to the interstate
pipelines with which it interconnects.
29
<PAGE>
In 1999 Ozark Pipeline had an average daily throughput of 167.5 million cubic
feet of gas per day (MMcfd). In 1998, NOARK had an average daily throughput of
27.3 MMcfd before the integration with Ozark, compared to average daily
throughput of 39.8 MMcfd in 1997. At December 31, 1999, the Company's gas
distribution subsidiary has transportation contracts with Ozark Pipeline for
82.3 MMcfd of firm capacity. These contracts expire in 2002 and 2003 and are
renewable annually thereafter until terminated with 180 days' notice.
As further explained in Note 11 of the financial statements, the Company
has severally guaranteed 60% of NOARK's currently outstanding debt. This debt
financed a portion of the original cost to construct the NOARK Pipeline.
Regulatory Matters
In May 1999, the Staff of the APSC initiated a proceeding in which it
sought an annual reduction of approximately $2.3 million in the rates AWG
charges its customers in northwest Arkansas. Staff's position was 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 was
based on a downward adjustment to the utility's current return on equity
authorized by the APSC in 1996. During the third quarter of 1999 the Company
reached agreement with the Staff and the APSC to resolve this issue and to close
several other dockets that had remained open. In the settlement agreement, the
Company agreed to reduce its rates collected from customers on a prospective
basis in the amount of $1.4 million annually, effective December 1, 1999. The
agreement also includes the resolution of a proceeding initiated in December
1998 by the Staff of the APSC and that was previously disclosed by the Company
where the Staff had recommended the disallowance of approximately $3.1 million
of gas supply costs. As part of the settlement, this docket was closed with no
negative adjustment to the Company.
A December 1996 rate increase order issued by the APSC also provided that
AWG cause to be filed with the APSC an independent study of its procedures for
allocating costs between regulated and non-regulated operations, its staffing
levels and executive compensation. The independent study was ordered by the APSC
to address issues raised by the Office of the Attorney General of the State of
Arkansas. The study was conducted in 1999 with a final report issued in December
1999. The report found the Company's costs to be reasonable in all categories
and did not recommend any changes to the rates currently in effect.
The Company is subject to continuing reviews of its gas supply costs by the
APSC and the MPSC and currently has open issues with the MPSC. However, the
Company believes that none of these issues will have a material adverse effect
on the Company's financial condition or results of operations.
AWG also purchases gas from unaffiliated producers under take-or-pay
contracts. The Company believes that it does not have a significant exposure to
liabilities resulting from these contracts and expects to be able to continue to
satisfactorily manage its exposure to take-or-pay liabilities.
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 by 8% in 1999 and increased by 1%
30
<PAGE>
in 1998. The decrease in 1999 was primarily due to a 6% decrease in operating
and general costs and an 11% decrease in depreciation, depletion and
amortization (DD&A) expense. The comparative decrease in operating and general
expenses was due primarily to costs recorded in 1998 for severance related costs
and other costs associated with the closing of the Company's Oklahoma City
exploration and production office, and to decreased oil and gas production. DD&A
expense also decreased due to the decline in production. In 1998, a 5% increase
in operating and general expenses due to inflationary increases and the
severance costs discussed above was largely offset by a decrease in DD&A
expense. The decrease in DD&A expense resulted primarily from a decline in
volumes produced and a second quarter write-down of oil and gas properties which
lowered the net cost basis of that segment's depreciable assets and the
amortization rate per unit of production.
The Company follows the full cost method of accounting for the exploration,
development, and acquisition of oil and gas properties. DD&A is calculated using
the units-of-production method. The Company's annual gas and oil production, as
well as the amount of proved reserves owned by the Company and the costs
associated with adding those reserves, are all components of the amortization
calculation. The DD&A rate in 1999 averaged $1.00 per Mcfe, compared to $1.04
per Mcfe in 1998 and $1.06 per Mcfe in 1997. The overall decreases in the
Company's average amortization rate were caused by the mid-year 1998 write-down
of the Company's oil and gas properties to the full cost ceiling limitation. The
Company evaluates its full cost ceiling position at the end of each quarter.
Market prices, production rates, levels of reserves, and the evaluation of costs
excluded from amortization all influence the calculation of the full cost
ceiling. A decline in oil and gas prices from year-end 1999 levels or other
factors, without other mitigating circumstances, could cause an additional
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 to
$92.9 million in 1999, compared to $73.2 million in 1998 and $63.1 million in
1997, due to an increase in volumes marketed. Changes in purchased gas costs for
the gas distribution segment are caused by changes in requirements for gas
sales, the price and mix of gas purchased, and the timing of recoveries of
deferred purchased gas costs.
Inflation impacts the Company by generally increasing its operating costs
and the costs of its capital additions. The effects of inflation on the
Company's operations in recent years have been minimal due to low inflation
rates. However, during late 1999 and continuing into 2000 the impact of
inflation intensified in certain areas of the Company's exploration and
production segment as shortages in drilling rigs, third party services and
qualified labor increased. Additionally, delays inherent in the rate-making
process prevent the Company from obtaining immediate recovery of increased
operating costs of its gas distribution segment.
Other Costs and Expenses
Interest costs, net of capitalization, were up 1% in 1999 and 5% in 1998,
both as compared to prior years. The increases in both 1999 and 1998 were
primarily due to the lower level of capitalized interest related to the
Company's oil and gas properties. Interest capitalized decreased 15% in 1999 and
13% in 1998. The changes in capitalized interest are due primarily to the change
in the level of costs excluded from amortization in the exploration and
production segment.
31
<PAGE>
The changes in other income in 1999, 1998, and 1997 relate primarily to
changes in the Company's share of operating losses incurred by NOARK, as
discussed above. Additionally, in 1999 and 1998 the Company recorded certain
costs related to a judgment bond that the Company was required to post after
receiving an adverse verdict in October 1998. See Note 11 of the financial
statements and Part I, Item 3, "Legal Proceedings," of this Form 10-K for
additional information regarding the class action lawsuit.
The previously discussed second quarter 1998 write-down of the Company's
oil and gas properties resulted in a deferred tax benefit of $25.9 million.
Excluding the impact of this change in deferred income taxes, the changes in the
provisions for current and deferred income taxes recorded each year result
primarily from the level of taxable income, the collection of under-recovered
purchased gas costs, abandoned leasehold and seismic costs 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.
YEAR 2000
The Company has not experienced any material negative effects in its
results of operation or financial condition related to year 2000. The Company is
continuing to monitor its systems and the activities of third parties for year
2000 irregularities, however no material problems have been encountered to date.
There have been no material changes in the costs previously disclosed to address
the Company's year 2000 compliance effort.
LIQUIDITY AND CAPITAL RESOURCES
The Company continues to depend principally on internally generated funds
as its major source of liquidity. However, the Company has sufficient ability to
borrow additional funds to meet its short-term seasonal needs for cash, to
finance a portion of its routine spending, if necessary, or to finance other
extraordinary investment opportunities which might arise. In 1999, 1998, and
1997, net cash provided from operating activities totaled $58.1 million, $93.7
million, and $79.5 million, respectively. The primary components of cash
generated from operations are net income, depreciation, depletion and
amortization, write-down of oil and gas properties and the provision for
deferred income taxes. Net cash from operating activities provided 89% of the
Company's capital requirements for routine capital expenditures, cash dividends,
and scheduled debt retirements in 1999, 125% in 1998, and 79% in 1997.
Capital Expenditures
Capital expenditures totaled $67.0 million in 1999, $64.4 million in 1998,
and $88.8 million in 1997. The Company's exploration and production segment
expenditures included acquisitions of oil and gas producing properties totaling
$9.4 million in 1999. The Company made no producing property acquisitions in
1998 or 1997.
<TABLE>
<CAPTION>
1999 1998 1997
-----------------------------
(in thousands)
<S> <C> <C> <C>
Capital Expenditures
Exploration and production $59,004 $52,376 $73,526
Gas distribution 7,124 10,108 12,561
Other 839 1,875 2,734
- --------------------------------------------------------------------------------
$66,967 $64,359 $88,821
================================================================================
</TABLE>
32
<PAGE>
Capital investments planned for 2000 total $62.7 million, consisting of
$55.4 million for exploration and production, $6.8 million for gas distribution
system expenditures, and $.5 million for general purposes.
The Company generally intends to adjust its level of routine capital
expenditures depending on the expected level of internally generated cash and
the level of debt in its capital structure. The Company expects that its level
of capital investments will be adequate to allow the Company to maintain its
present markets, explore and develop its existing gas and oil properties as well
as generate new drilling prospects, and finance improvements necessary due to
normal customer growth in its gas distribution segment.
Financing Requirements
At year-end 1999, Southwestern's total debt was $302.2 million, including
$7.5 million classified as short-term debt. This compares to year-end 1998 total
debt of $283.4 million. Revolving credit facilities with two banks provide the
Company access to $80.0 million of variable rate capital, including two floating
rate facilities that provide the Company access to $60.0 million of long-term
capital and another facility that provides the Company access to $20.0 million
of short-term capital. Borrowings outstanding under the long-term credit
facilities totaled $47.7 million at the end of 1999 and $34.9 million at the end
of 1998. Borrowings under the short-term facility were $7.5 million at December
31, 1999. There were no short-term borrowings at December 31, 1998.
In 1997, the Company issued $60.0 million of 7.625% Medium-Term Notes due
2027 and $40.0 million of Medium-Term Notes due 2017. These 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 $25.0
million of capacity remaining under the shelf registration statement. The
Company's public notes are rated BBB+ by Standard and Poor's and Baa2 by
Moody's.
The Company remains confident that it will prevail in its appeal of the
royalty owners proceeding described in Part I, Item 3, "Legal Proceedings," of
this Form 10-K. However, the agreement under which unsecured letters of credit
have been provided to collateralize the appeal bond would require the Company to
reimburse its lenders for the full amount drawn under the letters of credit if
it were to lose the appeal. Under these circumstances the Company's ability to
borrow money would be restricted and existing financing agreements could be
impacted through cross default provisions.
In connection with the Enogex transaction in 1998 discussed above under
"NOARK Pipeline," 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 1998. In June 1998, the
NOARK partnership issued $80.0 million of 7.15% Notes due 2018. The notes
require semi-annual principal payments of $1.0 million which began in December
1998. 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%. The Company advanced $2.3 million to
NOARK to fund its share of debt service payments in 1999 and advanced $2.2
million in 1998.
Under its existing debt agreements, the Company may not issue long-term
debt in excess of 65% of its total capital and may not issue total debt in
excess of 70% of its total capital. To issue additional long-term debt, the
Company must also have, after giving effect to the debt to be issued, a ratio of
earnings to fixed charges of at least 1.5 or higher (for any
33
<PAGE>
period of 12 consecutive months within the preceding 24 months). At the end of
1999, the capital structure consisted of 61.4% debt (including short-term debt
but excluding the Company's several guarantee of NOARK's obligations) and 38.6%
equity, with a ratio of earnings to fixed charges of 1.6. Over the long term,
the Company expects to lower the debt portion of its capital structure by
limiting its routine capital spending. In 2000 the proceeds from the sale of the
Company's Missouri gas distribution assets, as discussed above under "Gas
Distribution," will be used to pay down outstanding debt.
Working Capital
The Company maintains access to funds which may be needed to meet seasonal
requirements through the revolving lines of credit explained above. The Company
had net working capital of $13.9 million at the end of 1999, compared to $17.5
million at the end of 1998. Current assets decreased by 3% to $70.2 million in
1999, while current liabilities increased 3% to $56.3 million. The decrease in
current assets at December 31, 1999, was due primarily to decreases in gas
inventory in underground storage and prepaid expenses. The increase in current
liabilities resulted from an increase in short-term debt partially offset by a
decrease in accounts payable due to the timing of payments made.
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.
ITEM 7.A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
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
5% of accounts receivable. See the discussion of credit risk associated with
commodities trading below.
34
<PAGE>
Interest Rate Risk
The following table provides information on the Company's financial
instruments that are sensitive to changes in interest rates. The table presents
the Company's debt obligations, principal cash flows and related
weighted-average interest rates by expected maturity dates. Variable average
interest rates reflect the rates in effect at December 31, 1999 for borrowings
under the Company's revolving credit facilities. 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 December 31, 1999.
<TABLE>
<CAPTION>
Expected Maturity Date Fair Value
----------------------------------------------------------- ----------
2000 2001 2002 2003 2004 Thereafter Total 12/31/99
----------------------------------------------------------- ----------
($ in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Rate - $2.0 $2.0 $2.0 $2.0 $239.0 $247.0 $234.0
Average Interest Rate - 9.36% 9.36% 9.36% 9.36% 7.17% 7.25%
Variable Rate $7.5 $30.0 $17.7 - - - $55.2 $55.2
Average Interest Rate 6.45% 6.02% 6.45% - - - 6.22%
</TABLE>
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
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 that are sensitive to changes in commodity prices. The table
presents the notional amount in Bcf (billion cubic feet) or MBbls (thousand
barrels), 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
35
<PAGE>
"Fair Value" represents values for the same contracts using comparable market
prices at December 31, 1999. At December 31, 1999, the "Carrying Amount" of
these financial instruments exceeded the "Fair Value" by $.4 million.
<TABLE>
<CAPTION>
Expected Maturity Date
-----------------------------------------------------------
2000 2001 2002
-----------------------------------------------------------
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) 15.6 .7 .5
Weighted average price per Mcf $2.34 $2.57 $2.57
Contract amount (in millions) $36.6 $35.9 $1.7 $1.8 $1.2 $1.2
Swaps with a fixed price payment
Contract volume (Bcf) .2 - -
Weighted average price per Mcf $2.68 - -
Contract amount (in millions) $.7 $.6 - - - -
Basis swaps
Contract volume (Bcf) .1 - -
Weighted average basis difference
per Mcf $.11 - -
Contract amount (in millions) - - - - - -
Oil
Price floor
Contract volume (MBbls) 350(1) 325 -
Weighted average price per Bbl $18.00 $18.00 -
Contract amount (in millions) $6.3 $6.5 $5.9 $6.4 - -
Swaps with a fixed price receipt
Contract volume (MBbls) 96 72 -
Weighted average price per Bbl $18.87 $17.49 -
Contract amount (in millions) $1.8 $1.5 $1.3 $1.2 - -
<FN>
(1) Subsequent to December 31, 1999, the Company offset its position relating to
the $18.00 per barrel floor on a notional amount of 320,837 barrels covering
eleven months of 2000 production and replaced the floor with a crude oil swap to
receive a fixed price of $24.02 per barrel.
</FN>
</TABLE>
36
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Reports of Management and Independent Public Accountants 38
Consolidated Statements of Income for the years ended December 31, 1999, 1998, and 1997 39
Consolidated Balance Sheets as of December 31, 1999 and 1998 40
Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998, and 1997 41
Consolidated Statements of Retained Earnings for the years ended December 31, 1999, 1998, and 1997 41
Notes to Consolidated Financial Statements, December 31, 1999, 1998, and 1997 42
</TABLE>
37
<PAGE>
Report of Management
Management is responsible for the preparation and integrity of the
Company's financial statements. The financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
consistently applied, and necessarily include some amounts that are based on
management's best estimates and judgment.
The Company maintains a system of internal accounting and administrative
controls and an ongoing program of internal audits that management believes
provide reasonable assurance that assets are safeguarded and that transactions
are properly recorded and executed in accordance with management's
authorization. The Company's financial statements have been audited by its
independent auditors, Arthur Andersen LLP. In accordance with auditing standards
generally accepted in the United States, the independent auditors obtained a
sufficient understanding of the Company's internal controls to plan their audit
and determine the nature, timing, and extent of other tests to be performed.
The Audit Committee of the Board of Directors, composed solely of outside
directors, meets with management, internal auditors, and Arthur Andersen LLP to
review planned audit scopes and results and to discuss other matters affecting
internal accounting controls and financial reporting. The independent auditors
have direct access to the Audit Committee and periodically meet with it without
management representatives present.
Report of Independent Public Accountants
To the Board of Directors and Shareholders of Southwestern Energy Company:
We have audited the consolidated balance sheets of SOUTHWESTERN ENERGY
COMPANY (an Arkansas corporation) AND SUBSIDIARIES as of December 31, 1999 and
1998, and the related consolidated statements of income, retained earnings, and
cash flows for each of the three years in the period ended December 31, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Southwestern Energy Company
and Subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
ARTHUR ANDERSEN LLP
Tulsa, Oklahoma
February 4, 2000
38
<PAGE>
Statements of Income
Southwestern Energy Company and Subsidiaries
<TABLE>
<CAPTION>
For the Years Ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------------
(in thousands, except per share amounts)
<S> <C> <C> <C>
Operating Revenues
Gas sales $165,898 $172,790 $190,298
Gas marketing 96,570 76,367 65,435
Oil sales 9,891 9,557 14,258
Gas transportation and other 8,037 7,591 6,198
- --------------------------------------------------------------------------------------
280,396 266,305 276,189
- --------------------------------------------------------------------------------------
Operating Costs and Expenses
Gas purchases - utility 45,370 39,863 46,806
Gas purchases - marketing 92,851 73,235 63,054
Operating and general 57,957 61,915 59,167
Depreciation, depletion and amortization 41,603 46,917 48,208
Write-down of oil and gas properties - 66,383 -
Taxes, other than income taxes 6,557 6,943 7,018
- --------------------------------------------------------------------------------------
244,338 295,256 224,253
- --------------------------------------------------------------------------------------
Operating Income (Loss) 36,058 (28,951) 51,936
- --------------------------------------------------------------------------------------
Interest Expense
Interest on long-term debt 19,735 19,600 19,818
Other interest charges 923 1,470 1,083
Interest capitalized (3,307) (3,884) (4,487)
- --------------------------------------------------------------------------------------
17,351 17,186 16,414
- --------------------------------------------------------------------------------------
Other Income (Expense) (2,331) (3,956) (5,017)
- --------------------------------------------------------------------------------------
Income (Loss) Before Provision (Benefit)
for Income Taxes 16,376 (50,093) 30,505
- --------------------------------------------------------------------------------------
Provision (Benefit) for Income Taxes
Current 537 (6,029) (732)
Deferred 5,912 (13,467) 12,522
- --------------------------------------------------------------------------------------
6,449 (19,496) 11,790
- --------------------------------------------------------------------------------------
Net Income (Loss) $ 9,927 $(30,597) $ 18,715
======================================================================================
Basic Earnings (Loss) Per Share $.40 $(1.23) $.76
======================================================================================
Weighted Average Common Shares Outstanding 24,941,550 24,882,170 24,738,882
======================================================================================
Diluted Earnings (Loss) Per Share $.40 $(1.23) $.76
======================================================================================
Diluted Weighted Average Common Shares
Outstanding 24,947,021 24,882,170 24,777,906
======================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements
39
<PAGE>
Balance Sheets
Southwestern Energy Company and Subsidiaries
<TABLE>
<CAPTION>
December 31, 1999 1998
- --------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Assets
Current Assets
Cash $ 1,240 $ 1,622
Accounts receivable 43,339 40,655
Inventories, at average cost 21,520 22,812
Other 4,073 7,182
- --------------------------------------------------------------------------------
Total current assets 70,172 72,271
- --------------------------------------------------------------------------------
Investments 14,180 14,015
- --------------------------------------------------------------------------------
Property, Plant and Equipment, at cost
Gas and oil properties, using the full cost method,
including $37,554,000 in 1999 and $53,110,000 in
1998 excluded from amortization 816,199 758,863
Gas distribution systems 222,145 217,680
Gas in underground storage 28,712 24,279
Other 28,826 27,643
- --------------------------------------------------------------------------------
1,095,882 1,028,465
Less: Accumulated depreciation, depletion and
amortization 519,927 478,790
- --------------------------------------------------------------------------------
575,955 549,675
- --------------------------------------------------------------------------------
Other Assets 11,139 11,659
- --------------------------------------------------------------------------------
$ 671,446 $ 647,620
================================================================================
Liabilities and Shareholders' Equity
Current Liabilities
Short-term debt $ 7,500 $ 1,536
Accounts payable 33,069 37,780
Taxes payable 3,506 3,408
Interest payable 2,483 2,471
Customer deposits 6,021 5,635
Other 3,767 3,956
- --------------------------------------------------------------------------------
Total current liabilities 56,346 54,786
- --------------------------------------------------------------------------------
Long-Term Debt, less current portion 294,700 281,900
- --------------------------------------------------------------------------------
Other Liabilities
Deferred income taxes 126,902 121,413
Other 3,142 3,665
- --------------------------------------------------------------------------------
130,044 125,078
- --------------------------------------------------------------------------------
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 20,732 21,249
Retained earnings, per accompanying statements 198,044 194,102
- --------------------------------------------------------------------------------
221,550 218,125
Less: Common stock in treasury, at cost, 2,700,391
shares in 1999 and 2,803,527 shares in 1998 30,083 31,248
Unamortized cost of restricted shares issued
under stock incentive plan, 188,781 shares
in 1999 and 133,172 shares in 1998 1,111 1,021
- --------------------------------------------------------------------------------
190,356 185,856
- --------------------------------------------------------------------------------
$ 671,446 $ 647,620
================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
40
<PAGE>
Statements of Cash Flows
Southwestern Energy Company and Subsidiaries
<TABLE>
<CAPTION>
For the Years Ended December 31, 1999 1998 1997
- ----------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income (loss) $ 9,927 $(30,597) $ 18,715
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation, depletion and amortization 42,971 48,267 49,271
Write-down of oil and gas properties - 66,383 -
Deferred income taxes 5,912 (13,467) 12,522
Equity in loss of partnership 2,008 3,087 4,523
Change in assets and liabilities:
(Increase) decrease in accounts receivable (2,684) 5,097 (5,824)
Decrease in income taxes receivable 1,658 1,066 3,549
(Increase) decrease in under-recovered
purchased gas costs (273) 10,931 (6,398)
(Increase) decrease in inventories 1,292 (2,347) (2,894)
Increase (decrease) in accounts payable (4,711) 7,877 4,259
Net change in other current assets and
liabilities 2,031 (2,589) 1,760
- ----------------------------------------------------------------------------------------
Net cash provided by operating activities 58,131 93,708 79,483
- ----------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Capital expenditures (66,967) (64,359) (88,821)
Investment in partnership (2,273) (10,062) (4,962)
(Increase) decrease in gas stored underground (4,433) (531) 1,888
Other items 2,380 340 1,048
- ----------------------------------------------------------------------------------------
Net cash used in investing activities (71,293) (74,612) (90,847)
- ----------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Net increase (decrease) in revolving long-term debt 12,800 (11,500) (50,100)
Proceeds from revolving short-term debt 7,500 - -
Proceeds from issuance of long-term debt - - 98,348
Payments on other long-term debt (1,535) (4,607) (28,643)
Dividends paid (5,985) (5,970) (5,935)
- ----------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 12,780 (22,077) 13,670
- ----------------------------------------------------------------------------------------
Increase (decrease) in cash (382) (2,981) 2,306
Cash at beginning of year 1,622 4,603 2,297
- ----------------------------------------------------------------------------------------
Cash at end of year $ 1,240 $ 1,622 $ 4,603
========================================================================================
</TABLE>
Statements of Retained Earnings
Southwestern Energy Company and Subsidiaries
<TABLE>
<CAPTION>
For the Years Ended December 31, 1999 1998 1997
- ----------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Retained Earnings, beginning of year $194,102 $230,669 $217,889
Net income (loss) 9,927 (30,597) 18,715
Cash dividends declared ($.24 per share) (5,985) (5,970) (5,935)
- ----------------------------------------------------------------------------------------
Retained Earnings, end of year $198,044 $194,102 $230,669
========================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
41
<PAGE>
Notes to Financial Statements
Southwestern Energy Company and Subsidiaries
December 31, 1999, 1998, and 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Consolidation
Southwestern Energy Company (Southwestern or the Company) is an integrated
energy company primarily focused on natural gas. Through its wholly-owned
subsidiaries, the Company is engaged in oil and gas exploration and production,
natural gas gathering, transmission and marketing, and natural gas distribution.
Southwestern's exploration and production activities are concentrated in
Arkansas, New Mexico, Texas, Oklahoma, Louisiana, and the Gulf Coast (primarily
onshore). The gas distribution segment operates in northern Arkansas and parts
of Missouri, and under normal weather conditions obtains approximately 50% of
its gas supply from one of the Company's exploration and production
subsidiaries. The customers of the gas distribution segment consist of
residential, commercial, and industrial users of natural gas. Southwestern's
marketing and transportation business is concentrated in its core areas of
operations.
In late 1999, the Company entered into a definitive agreement to sell its
Missouri gas distribution assets for $32.0 million. The Company's basis in these
assets is approximately $28.0 million. The sale requires regulatory approval and
is expected to close in the first half of 2000. The Company currently serves
approximately 48,000 customers in Missouri. Proceeds from the sale of the
Missouri assets will be used to reduce the Company's outstanding debt. The
Company does not expect a material impact on its continuing results of
operations due to this sale as interest savings from the reduction in debt are
expected to generally offset the reduction in net income.
The consolidated financial statements include the accounts of Southwestern
Energy Company and its wholly-owned subsidiaries, Southwestern Energy Production
Company, SEECO, Inc., Arkansas Western Gas Company, Southwestern Energy Services
Company, Diamond "M" Production Company, Southwestern Energy Pipeline Company,
A.W. Realty Company, and Arkansas Western Pipeline Company. All significant
intercompany accounts and transactions have been eliminated. The Company
accounts for its general partnership interest in the NOARK Pipeline System,
Limited Partnership (NOARK) using the equity method of accounting. In accordance
with Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for
the Effects of Certain Types of Regulation," the Company recognizes profit on
intercompany sales of gas delivered to storage by its utility subsidiary.
Certain reclassifications have been made to the prior years' financial
statements to conform with the 1999 presentation. These reclassifications had no
effect on previously recorded net income.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities, if any, at the
date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
42
<PAGE>
Property, Depreciation, Depletion and Amortization
Gas and Oil Properties - The Company follows the full cost method of
accounting for the exploration, development, and acquisition of gas and oil
reserves. Under this method, all such costs (productive and nonproductive)
including salaries, benefits, and other internal costs directly attributable to
these activities are capitalized and amortized on an aggregate basis over the
estimated lives of the properties using the units-of-production method. The
Company excludes all costs of unevaluated properties from immediate
amortization. The Company's unamortized costs of oil and gas properties are
limited to the sum of the future net revenues attributable to proved oil and gas
reserves discounted at 10 percent plus the lower of cost or market value of any
unproved properties. If the Company's unamortized costs in oil and gas
properties exceed this ceiling amount, a provision for additional depreciation,
depletion and amortization is required. At June 30, 1998, the Company recognized
a $40.5 million non-cash charge to earnings by recording a write-down of its oil
and gas properties of $66.4 million and a related reduction in the provision for
deferred income taxes of $25.9 million. At December 31, 1999, 1998, and 1997,
the Company's net book value of oil and gas properties did not exceed the
ceiling amounts. Market prices, production rates, levels of reserves, and the
evaluation of costs excluded from amortization all influence the calculation of
the full cost ceiling. A decline in oil and gas prices from year-end 1999 levels
or other factors, without other mitigating circumstances, could cause an
additional future write-down of capitalized costs and a noncash charge to
earnings.
Gas Distribution Systems - Costs applicable to construction activities,
including overhead items, are capitalized. Depreciation and amortization of the
gas distribution system is provided using the straight-line method with average
annual rates for plant functions ranging from 1.8% to 6.0%. Gas in underground
storage is stated at average cost.
Other property, plant and equipment is depreciated using the straight-line
method over estimated useful lives ranging from 5 to 40 years.
The Company charges to maintenance or operations the cost of labor,
materials, and other expenses incurred in maintaining the operating efficiency
of its properties. Betterments are added to property accounts at cost.
Retirements are credited to property, plant and equipment at cost and charged to
accumulated depreciation, depletion and amortization with no gain or loss
recognized, except for abnormal retirements.
Capitalized Interest - Interest is capitalized on the cost of unevaluated
gas and oil properties excluded from amortization. In accordance with
established utility regulatory practice, an allowance for funds used during
construction of major projects is capitalized and amortized over the estimated
lives of the related facilities.
Gas Distribution Revenues and Receivables
Customer receivables arise from the sale or transportation of gas by the
Company's gas distribution subsidiary. The Company's gas distribution customers
represent a diversified base of residential, commercial, and industrial users.
Approximately 112,000 of these customers are served in northwest Arkansas and
approximately 69,000 are served in northeast Arkansas and Missouri. The Company
records gas distribution revenues on an accrual basis, as gas volumes are used,
to provide a proper matching of revenues with expenses.
43
<PAGE>
The gas distribution subsidiary's rate schedules include purchased gas
adjustment clauses whereby the actual cost of purchased gas above or below the
level included in the base rates is permitted to be billed or is required to be
credited to customers. Each month, the difference between actual costs of
purchased gas and gas costs recovered from customers is deferred. The deferred
differences are billed or credited, as appropriate, to customers in subsequent
months. Rate schedules for the Company's Arkansas systems include a weather
normalization clause to lessen the impact of revenue increases and decreases
which might result from weather variations during the winter heating season. The
pass-through of gas costs to customers is not affected by this normalization
clause.
Gas Production Imbalances
The exploration and production subsidiaries record gas sales using the
entitlement method. The entitlement method requires revenue recognition of the
Company's revenue interest share of gas production from properties in which gas
sales are disproportionately allocated to owners because of marketing or other
contractual arrangements. The Company's net imbalance position at December 31,
1999 and 1998 was not significant.
Income Taxes
Deferred income taxes are provided to recognize the income tax effect of
reporting certain transactions in different years for income tax and financial
reporting purposes.
Risk Management
The Company has limited involvement with derivative financial instruments
and does not use them for trading purposes. They are used to manage defined
commodity price risks. The Company uses commodity swap agreements and options to
hedge sales of natural gas and crude oil. Gains and losses resulting from
hedging activities are recognized when the related physical transactions are
recognized. Gains or losses from commodity swap agreements and options that do
not qualify for accounting treatment as hedges are recognized currently as other
income or expense. See Note 8 for a discussion of the Company's commodity
hedging activity.
Earnings Per Share and Shareholders' Equity
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 1,275,899 shares of common stock with a weighted average exercise
price of $12.97 per share at December 31, 1999, and options for 951,047 shares
with an average exercise price of $14.61 at December 31, 1997, that were not
included in the calculation of diluted shares because they would have had an
anti-dilutive effect. There were options for 1,634,901 shares with a weighted
average exercise price of $12.15 outstanding at December 31, 1998. Due to the
Company's net loss for 1998 any incremental shares would have an anti-dilutive
effect and were, therefore, not considered.
During 1999 and 1998, the Company issued 105,436 and 105,488 treasury
shares, respectively, under a compensatory plan and for stock awards and
returned to treasury 2,300 and 4,496 shares, respectively, canceled from earlier
issues under the compensatory plan. The net effect of these transactions was a
$1.2 million decrease in 1999 and a $1.1 million decrease in 1998 in treasury
stock.
44
<PAGE>
(2) DEBT
Debt balances as of December 31, 1999 and 1998 consisted of the following:
<TABLE>
<CAPTION>
1999 1998
--------------------
(in thousands)
<S> <C> <C>
Senior Notes
8.86% Series $ - $ 1,536
9.36% Series due in annual installments of $2.0
million beginning 2001 22,000 22,000
6.70% Series due 2005 125,000 125,000
7.625% Series due 2027, putable at the holders'
option in 2009 60,000 60,000
7.21% Series due 2017 40,000 40,000
- --------------------------------------------------------------------------------
247,000 248,536
Other
Variable rate (6.18% at December 31, 1999) unsecured
revolving credit arrangements 47,700 34,900
- --------------------------------------------------------------------------------
Total long-term debt 294,700 283,436
Less: Current portion of long-term debt - 1,536
- --------------------------------------------------------------------------------
Long-term debt $294,700 $281,900
================================================================================
Short-term note payable $ 7,500 $ -
================================================================================
</TABLE>
The Company has several prepayment options under the terms of certain of
its Senior Notes. Prepayments made without premium are subject to certain
limitations. Other prepayment options involve the payment of premiums based in
some instances on market interest rates at the time of prepayment.
Revolving credit facilities with two banks provide the Company access to
$80.0 million of variable rate capital. Of this amount, long-term variable rate
credit facilities provide the Company access to $60.0 million of revolving
credit. Borrowings outstanding under these long-term credit facilities totaled
$47.7 million at December 31, 1999. The Company also has a short-term variable
rate credit facility which provides the Company access to $20.0 million of
revolving credit. Borrowings outstanding under this credit facility were $7.5
million at December 31, 1999, all of which were classified as short-term debt.
Each facility allows the Company four interest rate options - the floating prime
rate, a fixed rate tied to either short-term certificate of deposit or
Eurodollar rates, or a fixed rate based on the lenders' cost of funds. The
short-term revolving credit facility expires in 2000 and the long-term revolving
credit facilities expire in 2001 and 2002. The Company intends to renew or
replace the facilities prior to expiration.
The terms of the debt instruments and agreements contain covenants which
impose certain restrictions on the Company, including limitation of additional
indebtedness and restrictions on the payment of cash dividends. At December 31,
1999, approximately $96.4 million of retained earnings was available for payment
as dividends.
Aggregate maturities of long-term debt for each of the years ending
December 31, 2000 through 2004, are $0, $32.0 million, $19.7 million, $2.0
million, and $2.0 million. Total interest payments were $19.6 million in 1999
and 1998, and $18.8 million in 1997.
45
<PAGE>
(3) INCOME TAXES
The provision (benefit) for income taxes included the following components:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------
(in thousands)
<S> <C> <C> <C>
Federal:
Current $ - $ (6,673) $(1,614)
Deferred 5,236 (10,098) 11,422
State:
Current 537 644 882
Deferred 795 (3,250) 1,219
Investment tax credit amortization (119) (119) (119)
- --------------------------------------------------------------------------------
Provision (benefit) for income taxes $6,449 $(19,496) $11,790
================================================================================
</TABLE>
The provision (benefit) for income taxes was an effective rate of 39.4% in
1999, 38.9% in 1998, and 38.6% in 1997. The following reconciles the provision
(benefit) for income taxes included in the consolidated statements of income
with the provision (benefit) which would result from application of the
statutory federal tax rate to pretax financial income:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------
(in thousands)
<S> <C> <C> <C>
Expected provision (benefit) at federal
statutory rate of 35% $5,732 $(17,532) $10,677
Increase (decrease) resulting from:
State income taxes, net of federal
income tax effect 866 (1,694) 1,365
Other (149) (270) (252)
- --------------------------------------------------------------------------------
Provision (benefit) for income taxes $6,449 $(19,496) $11,790
================================================================================
</TABLE>
The components of the Company's net deferred tax liability as of December
31, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
--------------------
(in thousands)
<S> <C> <C>
Deferred tax liabilities:
Differences between book and tax basis of property $123,516 $109,538
Stored gas 8,267 7,583
Deferred purchased gas costs 2,289 1,997
Prepaid pension costs 2,086 2,036
Book over tax basis in partnerships 10,133 8,647
Other 415 1,091
- --------------------------------------------------------------------------------
146,706 130,892
- --------------------------------------------------------------------------------
Deferred tax assets:
Accrued compensation 705 647
Alternative minimum tax credit carryforward 3,127 3,034
Net operating loss carryforward 16,808 6,949
Other 1,155 1,234
- --------------------------------------------------------------------------------
21,795 11,864
- --------------------------------------------------------------------------------
Net deferred tax liability $124,911 $119,028
================================================================================
</TABLE>
46
<PAGE>
Total income tax payments of $.6 million, $3.3 million, and $4.2 million
were made in 1999, 1998, and 1997, respectively.
(4) PENSION PLAN AND OTHER POSTRETIREMENT BENEFITS
The Company applies SFAS No. 132, "Employers' Disclosures about Pensions
and Other Postretirement Benefits." Substantially all employees are covered by
the Company's defined benefit pension and postretirement benefit plans. The
following provides a reconciliation of the changes in the plans' benefit
obligations, fair value of assets, and funded status as of December 31, 1999 and
1998:
<TABLE>
<CAPTION>
Other Postretirement
Pension Benefits Benefits
--------------------------------------------
1999 1998 1999 1998
--------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Change in Benefit Obligations:
Benefit obligation at January 1 $59,194 $47,257 $ 3,832 $ 3,067
Service cost 1,881 2,060 99 87
Interest cost 4,130 3,644 261 242
Amendments 5,560 - - -
Actuarial loss (gain) (5,359) 7,920 (255) 616
Benefits paid (3,891) (1,687) (178) (180)
- ------------------------------------------------------------------------------------------
Benefit obligation at December 31 $61,515 $59,194 $ 3,759 $ 3,832
==========================================================================================
Change in Plan Assets:
Fair value of plan assets at January 1 $71,518 $65,966 $ 345 $ -
Actual return on plan assets 2,838 7,168 20 (12)
Employer contributions - - 428 537
Benefit payments (3,878) (1,616) (178) (180)
- ------------------------------------------------------------------------------------------
Fair value of plan assets at December 31 $70,478 $71,518 $ 615 $ 345
==========================================================================================
Funded Status:
Funded status at December 31 $ 8,963 $12,324 $(3,144) $(3,487)
Unrecognized net actuarial (gain) loss (9,237) (7,441) 926 1,284
Unrecognized prior service cost 5,417 308 - -
Unrecognized transition obligation (220) (403) 1,265 1,368
- ------------------------------------------------------------------------------------------
Prepaid (accrued) benefit cost $ 4,923 $ 4,788 $ (953) $ (835)
==========================================================================================
</TABLE>
The benefit obligation and fair value of plan assets at December 31, 1999
include $5.5 million to $6.0 million related to employees of the Company's
Missouri gas distribution segment that will be transferred in 2000 upon closing
the sale of the Company's Missouri gas distribution assets.
The Company's supplemental retirement plan has an accumulated benefit
obligation in excess of plan assets. The plan's accumulated benefit obligation
was $233,000 and $198,000 at December 31, 1999 and 1998, respectively. There are
no plan assets in the supplemental retirement plan due to the nature of the
plan.
47
<PAGE>
Net periodic pension and other postretirement benefit costs include the
following components for 1999, 1998, and 1997:
<TABLE>
<CAPTION>
Other Postretirement
Pension Benefits Benefits
-------------------------------------------------------------
1999 1998 1997 1999 1998 1997
-------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 1,881 $ 2,060 $ 1,744 $ 99 $ 87 $ 90
Interest cost 4,130 3,644 3,213 261 242 213
Expected return on plan assets (6,259) (5,863) (5,007) (28) - -
Amortization of transition obligation (183) (183) (183) 103 103 103
Recognized net actuarial (gain) loss (142) (150) (211) 111 55 40
Amortization of prior service costs 451 46 49 - - -
- -------------------------------------------------------------------------------------------------------
$ (122) $ (446) $ (395) $546 $487 $446
=======================================================================================================
</TABLE>
Prior to 1998, the Company's pension plans provided for benefits based on
years of benefit service and the employee's "average compensation" as defined.
During 1998, the Company amended its plans to become "cash balance" plans on a
prospective basis. A cash balance plan provides benefits based upon a fixed
percentage of an employee's annual compensation. The Company's funding policy is
to contribute amounts which are actuarially determined to provide the plans with
sufficient assets to meet future benefit payment requirements and which are tax
deductible.
The postretirement benefit plans provide contributory health care and life
insurance benefits. Employees become eligible for these benefits if they meet
age and service requirements. Generally, the benefits paid are a stated
percentage of medical expenses reduced by deductibles and other coverages.
During 1998, the Company established trusts to partially fund its postretirement
benefit obligations.
The weighted average assumptions used in the measurement of the Company's
benefit obligations for 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Other Postretirement
Pension Benefits Benefits
-------------------------------------------------
1999 1998 1999 1998
-------------------------------------------------
<S> <C> <C> <C> <C>
Discount rate 7.50% 6.75% 7.50% 6.75%
Expected return on plan assets 9.00% 9.00% 5.00% 5.00%
Rate of compensation increase 4.50% 5.00% n/a n/a
=====================================================================================
</TABLE>
For measurement purposes a 9% annual rate of increase in the per capita
cost of covered medical benefits and an 8% annual rate of increase in the per
capita cost of dental benefits was assumed for 2000. These rates were assumed to
gradually decrease to 6% for medical benefits and 5% for dental benefits for
2011 and remain at that level thereafter.
48
<PAGE>
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one percentage point change in
assumed health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
1% Increase 1% Decrease
--------------------------
(in thousands)
<S> <C> <C>
Effect on the total service and interest
cost components $ 46 $ (39)
Effect on postretirement benefit obligation $400 $(344)
================================================================================
</TABLE>
(5) NATURAL GAS AND OIL PRODUCING ACTIVITIES
All of the Company's gas and oil properties are located in the United
States. The table below sets forth the results of operations from gas and oil
producing activities:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------
(in thousands)
<S> <C> <C> <C>
Sales $ 75,039 $ 86,232 $100,129
Production (lifting) costs (14,039) (15,807) (17,155)
Depreciation, depletion and amortization (34,230) (39,444) (40,777)
Write-down of oil and gas properties - (66,383) -
- --------------------------------------------------------------------------------
26,770 (35,402) 42,197
Income tax benefit (expense) (10,528) 13,913 (16,161)
- --------------------------------------------------------------------------------
Results of operations $ 16,242 $(21,489) $ 26,036
================================================================================
</TABLE>
The results of operations shown above exclude overhead and interest costs.
Income tax expense is calculated by applying the statutory tax rates to the
revenues less costs, including depreciation, depletion and amortization, and
after giving effect to permanent differences and tax credits.
The table below sets forth capitalized costs incurred in gas and oil
property acquisition, exploration, and development activities during 1999, 1998,
and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
-----------------------------
(in thousands)
<S> <C> <C> <C>
Property acquisition costs $19,845 $12,729 $10,911
Exploration costs 19,519 14,273 33,225
Development costs 19,059 24,709 28,825
- --------------------------------------------------------------------------------
Capitalized costs incurred $58,423 $51,711 $72,961
================================================================================
Amortization per Mcf equivalent $1.004 $1.039 $1.057
================================================================================
</TABLE>
Capitalized interest is included as part of the cost of oil and gas
properties. The Company capitalized $3.3 million, $3.9 million, and $4.5 million
during 1999, 1998, and 1997, respectively, based on the Company's weighted
average cost of borrowings used to finance the expenditures.
In addition to capitalized interest, the Company also capitalized internal
costs of $7.4 million, $7.7 million, and $6.0 million during 1999, 1998, and
1997, respectively. These internal costs were directly related to acquisition,
exploration and development activities and are included as part of the cost of
oil and gas properties.
49
<PAGE>
The following table shows the capitalized costs of gas and oil properties
and the related accumulated depreciation, depletion and amortization at December
31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
-------------------
(in thousands)
<S> <C> <C>
Proved properties $774,473 $703,669
Unproved properties 41,726 55,194
- --------------------------------------------------------------------------------
Total capitalized costs 816,199 758,863
Less: Accumulated depreciation, depletion and amortization 419,517 386,384
- --------------------------------------------------------------------------------
Net capitalized costs $396,682 $372,479
================================================================================
</TABLE>
The table below sets forth the composition of net unevaluated costs
excluded from amortization as of December 31, 1999. Included in these costs is
$13.2 million related to 3-D seismic projects in south Louisiana. These costs
and subsequent costs to be incurred will be evaluated over several years as the
seismic data is interpreted and the acreage is explored. The remaining costs
excluded from amortization are related to properties which are not individually
significant and on which the evaluation process has not been completed. The
Company is, therefore, unable to estimate when these costs will be included in
the amortization computation.
<TABLE>
<CAPTION>
1999 1998 1997 Prior Total
------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Property acquisition costs $ 5,814 $4,661 $1,454 $3,276 $15,205
Exploration costs 5,308 3,992 6,934 1,729 17,963
Capitalized interest 411 910 1,556 1,509 4,386
- --------------------------------------------------------------------------------
$11,533 $9,563 $9,944 $6,514 $37,554
================================================================================
</TABLE>
(6) NATURAL GAS AND OIL RESERVES (UNAUDITED)
The following table summarizes the changes in the Company's proved natural
gas and oil reserves for 1999, 1998, and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
-----------------------------------------------------------
Gas Oil Gas Oil Gas Oil
(MMcf) (MBbls) (MMcf) (MBbls) (MMcf) (MBbls)
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Proved reserves, beginning of year 303,667 6,850 291,378 7,852 297,467 8,238
Revisions of previous estimates (7,464) 1,155 1,064 (696) 861 (51)
Extensions, discoveries, and other additions 34,730 225 44,814 442 26,430 426
Production (29,444) (578) (32,668) (703) (33,355) (749)
Acquisition of reserves in place 9,762 576 - - 76 -
Disposition of reserves in place (3,728) (369) (921) (45) (101) (12)
- ----------------------------------------------------------------------------------------------------------
Proved reserves, end of year 307,523 7,859 303,667 6,850 291,378 7,852
==========================================================================================================
Proved, developed reserves:
Beginning of year 258,092 6,370 252,393 7,312 255,234 7,804
End of year 250,290 7,154 258,092 6,370 252,393 7,312
==========================================================================================================
</TABLE>
50
<PAGE>
The "Standardized Measure of Discounted Future Net Cash Flows Relating to
Proved Oil and Gas Reserves" (standardized measure) is a disclosure required by
SFAS No. 69, "Disclosures About Oil and Gas Producing Activities." The
standardized measure does not purport to present the fair market value of a
company's proved gas and oil reserves. In addition, there are uncertainties
inherent in estimating quantities of proved reserves. Substantially all
quantities of gas and oil reserves owned by the Company were estimated or
audited by the independent petroleum engineering firm of K & A Energy
Consultants, Inc.
Following is the standardized measure relating to proved gas and oil
reserves at December 31, 1999, 1998, and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
-----------------------------------
(in thousands)
<S> <C> <C> <C>
Future cash inflows $ 989,997 $ 820,522 $ 973,536
Future production and development costs (227,361) (176,130) (197,021)
Future income tax expense (247,408) (206,097) (261,173)
- -----------------------------------------------------------------------------------------------
Future net cash flows 515,228 438,295 515,342
10% annual discount for estimated timing of cash flows (253,153) (215,502) (256,279)
- -----------------------------------------------------------------------------------------------
Standardized measure of discounted future net cash flows $ 262,075 $ 222,793 $ 259,063
===============================================================================================
</TABLE>
Under the standardized measure, future cash inflows were estimated by
applying year-end prices, adjusted for known contractual changes, to the
estimated future production of year-end proved reserves. Future cash inflows
were reduced by estimated future production and development costs based on
year-end costs to determine pretax cash inflows. Future income taxes were
computed by applying the year-end statutory rate, after consideration of
permanent differences, to the excess of pretax cash inflows over the Company's
tax basis in the associated proved gas and oil properties. Future net cash
inflows after income taxes were discounted using a 10% annual discount rate to
arrive at the standardized measure.
Following is an analysis of changes in the standardized measure during
1999, 1998, and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
- ----------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Standardized measure, beginning of year $222,793 $259,063 $370,944
Sales and transfers of gas and oil produced, net of
production costs (61,000) (70,425) (82,975)
Net changes in prices and production costs 48,506 (71,400) (173,730)
Extensions, discoveries, and other additions, net of
future production and development costs 48,279 61,146 41,267
Acquisition of reserves in place 14,765 - 116
Revisions of previous quantity estimates (612) (3,024) 646
Accretion of discount 32,447 38,445 55,852
Net change in income taxes (17,015) 23,714 62,186
Changes in production rates (timing) and other (26,088) (14,726) (15,243)
- ----------------------------------------------------------------------------------------
Standardized measure, end of year $262,075 $222,793 $259,063
========================================================================================
</TABLE>
51
<PAGE>
(7) INVESTMENT IN UNCONSOLIDATED PARTNERSHIP
At December 31, 1999, the Company held a 25% general partnership interest
in the NOARK Partnership. NOARK Pipeline was formerly a 258-mile long intrastate
gas transmission system which extended across northern Arkansas. In January
1998, the Company entered into an agreement with Enogex Inc. (Enogex) that
resulted in the expansion of the NOARK Pipeline and provided the pipeline with
access to Oklahoma gas supplies through an integration of NOARK with the Ozark
Gas Transmission System (Ozark). Enogex is a subsidiary of OGE Energy Corp.
Ozark was a 437-mile interstate pipeline system which began in eastern Oklahoma
and terminated in eastern Arkansas. Enogex acquired the Ozark system and
contributed it to the NOARK partnership. Enogex also acquired the NOARK
partnership interests not owned by Southwestern. The acquisition of Ozark and
its integration with NOARK Pipeline was approved by the Federal Energy
Regulatory Commission in late 1998 at which time NOARK Pipeline was converted to
an interstate pipeline and operated in combination with Ozark. Enogex funded the
acquisition of Ozark and the expansion and integration with NOARK Pipeline which
resulted in the Company's ownership interest in the partnership decreasing to
25% from 48%.
The Company's investment in NOARK totaled $14.0 million at December 31,
1999 and $13.8 million at December 31, 1998. The Company's investment in NOARK
includes advances of $2.3 million made during 1999, $10.1 million made during
1998, and $5.0 million made during 1997. Advances in 1998 included the Company's
share of costs related to the prepayment of NOARK's Senior Secured Notes. Other
advances are made primarily to provide certain minimum cash balances to service
NOARK's long-term debt. See Note 11 for further discussion of NOARK's funding
requirements and the Company's investment in NOARK.
NOARK's financial position at December 31, 1999 and 1998 is summarized
below:
<TABLE>
<CAPTION>
1999 1998
--------------------
(in thousands)
<S> <C> <C>
Current assets $ 7,056 $ 9,535
Noncurrent assets 178,195 175,361
- --------------------------------------------------------------------------------
$185,251 $184,896
================================================================================
Current liabilities $ 10,413 $ 8,576
Long-term debt 75,000 77,000
Partners' capital 99,838 99,320
- --------------------------------------------------------------------------------
$185,251 $184,896
================================================================================
</TABLE>
The Company's share of NOARK's pretax loss, before the effect of accrued
interest expense on general partner loans, was $2.0 million, $3.1 million, and
$4.5 million for 1999, 1998, and 1997, respectively. The Company records its
share of NOARK's pretax loss in other income (expense) on the statements of
income.
NOARK's results of operations for 1999, 1998, and 1997 are summarized
below:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------
(in thousands)
<S> <C> <C> <C>
Operating revenues $40,358 $17,445 $ 4,963
Pretax net loss $(3,564) $(4,114) $(8,850)
================================================================================
</TABLE>
52
<PAGE>
(8) FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate the
value:
Cash, Customer Deposits, and Short-Term Debt: The carrying amount is a
reasonable estimate of fair value.
Long-Term Debt: The fair value of the Company's long-term debt is estimated
based on the expected current rates which would be offered to the Company for
debt of the same maturities.
Commodity Hedges: The fair value of all hedging financial instruments is
the amount at which they could be settled, based on quoted market prices or
estimates obtained from dealers. The carrying amounts and estimated fair values
of the Company's financial instruments as of December 31, 1999 and 1998 were as
follows:
<TABLE>
<CAPTION>
1999 1998
----------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Cash $1,240 $1,240 $1,622 $1,622
Customer deposits $6,021 $6,021 $5,635 $5,635
Short-term debt $7,500 $7,500 $1,536 $1,536
Long-term debt $294,700 $289,193 $281,900 $290,621
Commodity hedges $640 $(399) $1,276 $8,227
================================================================================
</TABLE>
Derivatives and Price Risk Management
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133 establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate, and assess the effectiveness of transactions that receive
hedge accounting.
In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133." SFAS No. 137 delayed the required implementation date of
SFAS No. 133 by one year. SFAS No. 133 is now effective for fiscal years
beginning after June 15, 2000. SFAS No. 133, as amended, must be applied to (a)
derivative instruments and (b) certain derivative instruments embedded in all
hybrid contracts or, at a company's option, only hybrid contracts that were
issued, acquired, or substantively modified after either January 1, 1998 or
January 1, 1999 (a company may elect either transition date).
The Company has not yet quantified the impacts of adopting SFAS No. 133 on
its financial statements, nor has it determined the method of adoption. However,
it should be noted that SFAS No. 133 could increase volatility in future
reported earnings and other comprehensive income.
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
53
<PAGE>
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 appropriate credit
standings.
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).
At December 31, 1999, the Company had outstanding natural gas price swaps
on total notional volumes of 17.0 Bcf. Of the total, the Company will receive
fixed prices ranging from $2.13 to $2.87 per MMBtu on 16.8 Bcf. Under contracts
covering the remaining .2 Bcf, the Company will make average fixed price
payments of $2.68 per MMBtu and receive variable prices based on the NYMEX
futures market. At December 31, 1999, the Company held outstanding basis swaps
on a notional volume of .1 Bcf. At December 31, 1999, the Company also had
outstanding crude oil swaps to receive fixed prices of $18.87 per barrel in 2000
and $17.49 per barrel in 2001 on notional volumes of 96,000 barrels and 72,000
barrels, respectively. The Company's price risk management activities reduced
revenues $1.1 million in 1999, increased revenues $7.4 million in 1998, and
decreased revenues $2.7 million in 1997.
The Company uses options to fix a floor, a ceiling, or both a floor and
ceiling (a "collar") for prices on its production volumes. At December 31, 1999,
the Company had a crude oil price floor of $18.00 per barrel (based on the NYMEX
futures market) on total notional volumes of 675,000 barrels covering production
during calendar years 2000 through 2001. Subsequent to December 31, 1999 the
Company offset its position relating to the $18.00 per barrel floor on a
notional amount of 320,837 barrels covering eleven months of 2000 production and
replaced the floor with a crude oil swap to receive a fixed price of $24.02 per
barrel.
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
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.
(9) STOCK OPTIONS
The Southwestern Energy Company 1993 Stock Incentive Plan (1993 Plan)
provides for the compensation of officers and key employees of the Company and
its subsidiaries. The 1993 Plan provides for grants of options, shares of
restricted stock, and stock bonuses that in the aggregate do not exceed
1,700,000 shares, the grant of stand-alone stock appreciation rights (SARs),
shares of phantom stock and cash awards, the shares related to which in the
aggregate do not exceed 1,700,000 shares, and the grant of limited and tandem
SARs (all terms as defined in the 1993 Plan). The types of incentives which may
be awarded are comprehensive and are intended to enable the Board of Directors
to structure the most appropriate incentives and to address changes in income
tax laws which may be enacted over the term of the plan. The Company has also
awarded stock option grants outside the 1993 Plan to certain non-officer
employees and to certain officers at the time of their hire.
54
<PAGE>
The Southwestern Energy Company 1993 Stock Incentive Plan for Outside
Directors provides for annual stock option grants of 12,000 shares (with 12,000
limited SARs) to each non-employee director. Options may be awarded under the
plan on no more than 240,000 shares.
The Company's 1985 Nonqualified Stock Option Plan expired in 1992, except
with respect to awards then outstanding. The following tables summarize stock
option activity for the years 1999, 1998, and 1997 and provide information for
options outstanding at December 31, 1999:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------------------------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at January 1 1,634,901 $12.15 1,619,114 $13.37 1,501,641 $13.39
Granted 562,250 $6.18 394,900 $8.00 433,248 $12.58
Exercised 1,333 $7.31 22,200 $5.58 56,850 $5.96
Canceled 134,619 $12.68 356,913 $13.48 258,925 $13.82
- --------------------------------------------------------------------------------------------------------
Options outstanding at December 31 2,061,199 $10.49 1,634,901 $12.15 1,619,114 $13.37
========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------------------------
Weighted
Weighted Average Weighted
Options Average Remaining Options Average
Range of Outstanding Exercise Contractual Exercisable Exercise
Exercise Prices at Year End Price Life (Years) at Year End Price
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$6.00 - $9.44 880,550 $6.59 9.5 110,758 $7.35
$10.06 - $13.38 636,934 $12.09 6.1 480,153 $12.14
$14.00 - $17.50 543,715 $14.95 5.4 393,048 $15.09
- -----------------------------------------------------------------------------------------------
2,061,199 $10.49 7.4 983,959 $12.78
===============================================================================================
</TABLE>
All options are issued at fair market value at the date of grant and expire
ten years from the date of grant. Options generally vest to employees and
directors over a three to four year period from the date of grant. Of the total
options outstanding, 325,000 performance accelerated options were granted in
1994 at an option price of $14.63. These options vest over a four-year period
beginning six years from the date of grant or earlier if certain corporate
performance criteria are achieved.
The Company has granted 303,240 shares of restricted stock to employees
through 1999. Of this total, 260,690 shares vest over a three-year period and
the remaining shares vest over a five-year period. The related compensation
expense is being amortized over the vesting periods. As of December 31, 1999,
103,213 shares have vested to employees and 11,246 shares have been cancelled
and returned to treasury shares.
55
<PAGE>
The Company applies the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation cost has
been recognized for the stock option plans. Had compensation cost for the
Company's stock option plans been determined consistent with the provisions of
SFAS No. 123, the Company's net income (loss) and earnings (loss) per share
would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------
<S> <C> <C> <C>
Net income (loss), in thousands
As reported $9,927 $(30,597) $18,715
Pro forma $9,241 $(31,201) $18,378
Basic earnings (loss) per share
As reported $.40 $(1.23) $.76
Pro forma $.37 $(1.25) $.74
Diluted earnings (loss) per share
As reported $.40 $(1.23) $.76
Pro forma $.37 $(1.25) $.74
================================================================================
</TABLE>
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years. The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions: dividend yield of 2.3% to 4.0%; expected volatility of 37.0% to
39.0%; risk-free interest rate of 6.0% to 6.6%; and expected lives of 6 years.
(10) COMMON STOCK PURCHASE RIGHTS
In 1999, the Company's Common Share Purchase Rights Plan was amended and
extended for an additional ten years. Per the terms of the amended plan, one
common share purchase right is attached to each outstanding share of the
Company's common stock. Each right entitles the holder to purchase one share of
common stock at an exercise price of $40.00, subject to adjustment. These rights
will become exercisable in the event that a person or group acquires or
commences a tender or exchange offer for 15% or more of the Company's
outstanding shares or the Board determines that a holder of 10% or more of the
Company's outstanding shares presents a threat to the best interests of the
Company. At no time will these rights have any voting power.
If any person or entity actually acquires 15% of the common stock (10% or
more if the Board determines such acquiror is adverse), rightholders (other than
the 15% or 10% stockholder) will be entitled to buy, at the right's then current
exercise price, the Company's common stock with a market value of twice the
exercise price. Similarly, if the Company is acquired in a merger or other
business combination, each right will entitle its holder to purchase, at the
right's then current exercise price, a number of the surviving company's common
shares having a market value at that time of twice the right's exercise price.
The rights may be redeemed by the Board for $.01 per right or exchanged for
common shares on a one-for-one basis prior to the time that they become
exercisable. In the event, however, that redemption of the rights is considered
in connection with a proposed acquisition of the Company, the Board may redeem
the rights only on the recommendation
56
<PAGE>
of its independent directors (nonmanagement directors who are not affiliated
with the proposed acquiror). These rights expire in 2009.
(11) CONTINGENCIES AND COMMITMENTS
The Company and the other general partner of NOARK have severally
guaranteed the principal and interest payments on NOARK's 7.15% Notes due 2018.
The Company's share of the several guarantee is 60%. At December 31, 1999 and
1998, the principal outstanding for these Notes was $77.0 million and $79.0
million, respectively. The Notes were issued in June 1998 and require
semi-annual principal payments of $1.0 million. The proceeds from the issuance
of the Notes were used to repay temporary financing provided by the other
general partner and outstanding amounts under an unsecured revolving credit
agreement. The temporary financing provided by the other general partner was
incurred in connection with the prepayment in early 1998 of NOARK's 9.74% Senior
Secured notes. Under the several guarantee, the Company is required to fund its
share of NOARK's debt service which is not funded by operations of the pipeline.
As a result of the integration of NOARK Pipeline with the Ozark Gas Transmission
System, as discussed further in Note 7, management of the Company believes that
it will realize its investment in NOARK over the life of the system. Therefore,
no provision for any loss has been made in the accompanying financial
statements. Additionally, the Company's gas distribution subsidiary has
transportation contracts for firm capacity of 82.3 MMcfd on NOARK's integrated
pipeline system. These contracts expire in 2002 and 2003, and are renewable
year-to-year thereafter until terminated by 180 days' notice.
In May 1996, a class action suit was filed against the Company on behalf of
royalty owners alleging improprieties in the disbursements of royalty proceeds.
A trial was held on the class action suit beginning in late September 1998 that
resulted in a verdict against the Company and two of its wholly-owned
subsidiaries, SEECO, Inc. and Arkansas Western Gas Company, in the amount of
$62.1 million. The trial judge subsequently awarded pre-judgment interest in an
amount of $31.1 million, and post-judgment interest accrued from the date of the
judgment at the rate of 10% per annum simple interest. The Company has been
required by the state court to post a judgment bond which now stands at $109.3
million (verdict amount plus pre-judgment interest and 20 months of
post-judgment interest) in order to stay the jury's verdict and proceed with an
appeal process. The bond was placed by a surety company and was collateralized
by unsecured letters of credit.
The verdict was returned following a trial on the issues of the class
action lawsuit brought by certain royalty owners of SEECO, Inc., who contend
that since 1979 the defendants breached implied covenants in certain oil and gas
leases, misrepresented or failed to disclose material facts to royalty owners
concerning gas purchase contracts between the Company's subsidiaries, and failed
to fulfill other alleged common law duties to the members of the royalty owner
plaintiff class. The litigation was commenced in May 1996 and was disclosed by
the Company at that time.
The Company believes that the jury's verdict was wrong as a matter of law
and fact and that incorrect rulings by the trial judge (including evidentiary
rulings and prejudicial jury instructions) provide significant grounds for a
successful appeal. The Company had asked the trial judge to recuse himself due
to his apparent bias toward the plaintiffs and had also filed a motion with the
trial court for judgment notwithstanding the verdict or, in the alternative, for
a new trial. These motions were denied. The Company has filed and will
vigorously prosecute an appeal in the Arkansas Supreme Court. Based on
discussions with outside legal counsel management remains confident that the
jury's verdict will be overturned and the case remanded for a new trial. If the
Company is not successful in its appeal from the jury verdict, the Company's
financial condition and results of operations would be materially and adversely
affected. However,
57
<PAGE>
management believes that the Company's ultimate liability, if any, resulting
from this case will not be material to its financial position, but in any one
year could be significant to the results of operations. At December 31, 1999 and
1998, no amounts had been accrued on this matter.
In its Form 8-K filed July 2, 1996, the Company disclosed that a lawsuit
relating to overriding royalty interests in certain Arkansas oil and gas
properties had been filed against it and two of its wholly-owned subsidiaries.
The lawsuit, which was brought by a party who was originally included in (but
opted out of) the class action litigation described above, involves claims
similar to those upon which judgment was rendered against the Company and its
subsidiaries. In September 1998, another party who opted out of the class
threatened the Company with similar litigation. While the amounts of these
pending and threatened claims could be significant, management believes, based
on its extensive investigations and trial preparation, that these claims are
without merit, and that the Company's ultimate liability, if any, will not be
material to its consolidated financial position or results of operations. This
matter went to a non-jury trial as to liability on January 10, 2000 and the
Company is awaiting the court's ruling.
The United States Minerals Management Service (MMS), a federal agency
responsible for the administration of federal oil and gas leases, is
investigating the Company and its subsidiaries in respect of claims similar to
those in the class action litigation. MMS was included in the class action
litigation against its objections, but has not pursued further action to remove
itself from the class. If MMS does remove itself from the class, its claims may
be brought separately under federal statutes that provide for treble damages and
civil penalties. In such event, the Company believes it would have defenses that
were not available in the class action litigation. While the aggregate amount of
MMS's claims could be significant, management believes, based on its
investigations, that the Company's ultimate liability, if any, will not be
material to its consolidated financial position or results of operations.
As previously reported, the Company's subsidiary, Southwestern Energy
Production Company (SEPCO), filed suit in 1997 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. In 1999, this matter was
settled for an amount that was not material to the Company's consolidated
financial position or results of operations.
The Company is subject to laws and regulations relating to the protection
of the environment. The Company's policy is to accrue environmental and cleanup
related costs of a noncapital nature when it is both probable that a liability
has been incurred and when the amount can be reasonably estimated. Management
believes any future remediation or other compliance related costs will not have
a material effect on the financial position or reported results of operations of
the Company.
The Company is subject to other litigation and claims that have arisen in
the ordinary course of business. The Company accrues for such items when a
liability is both probable and the amount can be reasonably estimated. In the
opinion of management, the results of such litigation and claims will not have a
material effect on the results of operations or the financial position of the
Company.
58
<PAGE>
(12) SEGMENT INFORMATION
The Company applies SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." 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.
Summarized financial information for the Company's reportable segments is
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>
1999
Revenues from external customers $ 51,533 $132,293 $96,570 $ - $280,396
Intersegment revenues 23,506 127 40,956 416 65,005
Operating income 16,451 17,187 2,142 278 36,058
Depreciation, depletion and amortization expense 34,230 7,186 92 95 41,603
Interest expense (1) 11,345 5,027 - 979 17,351
Provision (benefit) for income taxes (1) 1,806 4,569 859 (785) 6,449
Assets 435,022 190,731 11,212 34,481(2) 671,446
Capital expenditures 59,004 7,124 9 830 66,967
===============================================================================================================
1998
Revenues from external customers $ 55,347 $134,579 $76,367 $ 12 $266,305
Intersegment revenues 30,885 132 20,808 608 52,433
Operating income (loss) (47,273) 16,029 1,800 493 (28,951)
Depreciation, depletion and amortization expense 39,444 7,296 41 136 46,917
Write-down of oil and gas properties 66,383 - - - 66,383
Interest expense (1) 10,906 5,299 38 943 17,186
Provision (benefit) for income taxes (1) (23,238) 4,028 704 (990) (19,496)
Assets 408,193 192,396 8,905 38,126(2) 647,620
Capital expenditures 52,376 10,108 8 1,867 64,359
===============================================================================================================
1997
Revenues from external customers $ 56,658 $153,993 $65,435 $ 103 $276,189
Intersegment revenues 43,471 162 17,372 601 61,606
Operating income 33,303 16,941 1,315 377 51,936
Depreciation, depletion and amortization expense 40,777 7,227 26 178 48,208
Interest expense (1) 10,090 5,484 100 740 16,414
Provision (benefit) for income taxes (1) 9,054 4,157 476 (1,897) 11,790
Assets 460,193 204,223 7,085 39,365(2) 710,866
Capital expenditures 73,526 12,561 45 2,689 88,821
===============================================================================================================
<FN>
(1) Interest expense and the provision (benefit) for income taxes by segment is
an allocation of corporate amounts as debt and income tax expense (benefit) are
incurred at the corporate level.
(2) Other assets includes the Company's equity investment in the operations of
NOARK (see Note 7), corporate assets not allocated to segments, and assets for
non-reportable segments.
</FN>
</TABLE>
59
<PAGE>
Intersegment sales by the exploration and production segment and marketing
segment to the gas distribution segment 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 expense and taxes other
than income are allocated to segments. All of the Company's operations are
located within the United States.
(13) QUARTERLY RESULTS (UNAUDITED)
The following is a summary of the quarterly results of operations for the
years ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
Quarter Ended March 31 June 30 September 30 December 31
- ---------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
1999
----------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues $78,220 $56,039 $60,400 $85,737
Operating income $19,929 $1,541 $1,664 $12,924
Net income (loss) $9,132 $(1,704) $(1,935) $4,434
Basic and diluted earnings (loss) per share $.37 $(.07) $(.08) $.18
1998
----------------------------------------------------
Operating revenues $82,956 $56,334 $53,551 $73,464
Operating income (loss) $19,923 $(63,835) $2,914 $12,047
Net income (loss) $9,072 $(42,058) $(1,331) $3,720
Basic and diluted earnings (loss) per share $.37 $(1.70) $(.05) $.15
===================================================================================================
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in or disagreements with accountants on
accounting and financial disclosure.
Part III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The definitive Proxy Statement to holders of the Company's Common Stock in
connection with the solicitation of proxies to be used in voting at the Annual
Meeting of Shareholders on May 24, 2000 (the 2000 Proxy Statement), is hereby
incorporated by reference for the purpose of providing information about the
identification of directors. Refer to the sections "Election of Directors" and
"Security Ownership of Directors, Nominees, and Executive Officers" for
information concerning the directors.
Information concerning executive officers is presented in Part I, Item 4 of
this Form 10-K.
60
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The 2000 Proxy Statement is hereby incorporated by reference for the
purpose of providing information about executive compensation. Refer to the
section "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The 2000 Proxy Statement is hereby incorporated by reference for the
purpose of providing information about security ownership of certain beneficial
owners and management. Refer to the sections "Security Ownership of Certain
Beneficial Owners" and "Security Ownership of Directors, Nominees, and Executive
Officers" for information about security ownership of certain beneficial owners
and management.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The 2000 Proxy Statement is hereby incorporated by reference for the
purpose of providing information about related transactions. Refer to the
section "Security Ownership of Directors, Nominees, and Executive Officers" for
information about transactions with members of the Company's Board of Directors.
Part IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) The consolidated financial statements of the Company and its
subsidiaries and the report of independent public accountants are included in
Item 8 of this Report.
(2) The consolidated financial statement schedules have been omitted
because they are not required under the related instructions, or are not
applicable.
(3) The exhibits listed on the accompanying Exhibit Index (pages 63 and 64)
are filed as part of, or incorporated by reference into, this Report.
(b) Reports on Form 8-K:
A Current Report on Form 8-K was filed on October 20, 1999, referencing a
press release issued on October 19, 1999, announcing the sale of the Company's
Missouri utility assets to Atmos Energy for $32.0 million.
61
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused the report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SOUTHWESTERN ENERGY COMPANY
---------------------------
(Registrant)
Dated: March 29, 2000 BY: /s/ Greg D. Kerley
---------------------------
Greg D. Kerley
Executive Vice President
and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 29, 2000.
/s/ Harold M. Korell President, Chief Executive Officer
- --------------------------- and Director
Harold M. Korell
/s/ Greg D. Kerley Executive Vice President
- --------------------------- and Chief Financial Officer
Greg D. Kerley
/s/ Stanley T. Wilson Controller and Chief Accounting Officer
- ---------------------------
Stanley T. Wilson
/s/ Charles E. Scharlau Director and Chairman
- ---------------------------
Charles E. Scharlau
/s/ Lewis E. Epley, Jr. Director
- ---------------------------
Lewis E. Epley, Jr.
/s/ John Paul Hammerschmidt Director
- ---------------------------
John Paul Hammerschmidt
/s/ Robert L. Howard Director
- ---------------------------
Robert L. Howard
/s/ Kenneth R. Mourton Director
- ---------------------------
Kenneth R. Mourton
Supplemental Information to be Furnished With Reports Filed Pursuant to
Section 15(d) of the Act by Registrants Which Have Not Registered Securities
Pursuant of Section 12 of the Act.
Not Applicable
62
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
------- -----------
3. Articles of Incorporation and Bylaws of the Company (amended and
restated Articles of Incorporation incorporated by reference to
Exhibit 3 to Annual Report on Form 10-K for the year ended December
31, 1993); Bylaws of the Company (amended Bylaws of the Company
incorporated by reference to Exhibit 3 to Annual Report on Form 10-K
for the year ended December 31, 1994).
4.1 Amended and Restated Rights Agreement, dated April 12, 1999 (filed
herewith).
4.2 Prospectus, Registration Statement, and Indenture on 6.70% Senior
Notes due December 1, 2005 and issued December 5, 1995 (incorporated
by reference to the Company's Forms S-3 and S-3/A filed on November
1, 1995, and November 17, 1995, respectively, and also to the
Company's filings of a Prospectus and Prospectus Supplement on
November 22, 1995, and December 4, 1995, respectively).
4.3 Prospectus Supplement and Form of Distribution Agreement on
$125,000,000 of Medium-Term Notes dated February 21, 1997 (Prospectus
Supplement incorporated by reference to the Company's filing of a
Prospectus Supplement on February 21, 1997, Form of Distribution
Agreement incorporated by reference to Exhibit 10 filed with the
Company's Form 8-K dated February 21, 1997).
Material Contracts:
10.1 Gas Purchase Contract between SEECO, Inc. and Associated Natural Gas
Company, dated October 1, 1990, and as amended September 30, 1997
(original contract incorporated by reference to Exhibit 10 to Annual
Report on Form 10-K for the year ended December 31, 1990; amendment
incorporated by reference to Exhibit 10.2 to Annual Report on Form
10-K for the year ended December 31, 1997).
10.2 Compensation Plans:
(a) Summary of Southwestern Energy Company Annual and Long-Term
Incentive Compensation Plan, effective January 1, 1985, as
amended July 10, 1989 (replaced by Southwestern Energy Company
Incentive Compensation Plan, effective January 1, 1993) (original
plan incorporated by reference to Exhibit 10 to Annual Report on
Form 10-K for the year ended December 31, 1984; first amendment
thereto incorporated by reference to Exhibit 10 to Annual Report
on Form 10-K for the year ended December 31, 1989).
(b) Southwestern Energy Company Incentive Compensation Plan,
effective January 1, 1993, and Amended and Restated as of January
1, 1999 (incorporated by reference to Exhibit 10.2(b) to Annual
Report on Form 10-K for the year ended December 31, 1998).
(c) Nonqualified Stock Option Plan, effective February 22, 1985, as
amended July 10, 1989 (replaced by Southwestern Energy Company
1993 Stock Incentive Plan, dated April 7, 1993) (original plan
incorporated by reference to Exhibit 10 to Annual Report on Form
10-K for the year ended December 31, 1985; amended plan
incorporated by reference to Exhibit 10 to Annual Report on Form
10-K for the year ended December 31, 1989).
(d) Southwestern Energy Company 1993 Stock Incentive Plan, dated
April 7, 1993 and Amended and Restated as of February 18, 1998
(incorporated by reference to Exhibit 10.2(d) to Annual Report on
Form 10-K for the year ended December 31, 1998).
(e) Southwestern Energy Company 1993 Stock Incentive Plan for Outside
Directors, dated April 7, 1993 (incorporated by reference to the
appendix filed with the Company's definitive Proxy Statement to
holders of the Registrant's Common Stock in connection with the
solicitation of proxies to be used in voting at the Annual
Meeting of Shareholders on May 26, 1993).
63
<PAGE>
Exhibit
No. Description
------- -----------
10.3 Southwestern Energy Company Supplemental Retirement Plan, adopted
May 31, 1989, and Amended and Restated as of December 15, 1993, and
as further amended February 1, 1996 (amended and restated plan
incorporated by reference to Exhibit 10.5 to Annual Report on Form
10-K for the year ended December 31, 1993; amendment dated February
1, 1996, incorporated by reference to Exhibit 10.5 to Annual Report
on Form 10-K for the year ended December 31, 1995).
10.4 Southwestern Energy Company Supplemental Retirement Plan Trust, dated
December 30, 1993 (incorporated by reference to Exhibit 10.6 to
Annual Report on Form 10-K for the year ended December 31, 1993).
10.5 Southwestern Energy Company Nonqualified Retirement Plan, effective
October 4, 1995 (incorporated by reference to Exhibit 10.7 to Annual
Report of Form 10-K for the year ended December 31, 1995).
10.6 Employment and Consulting Agreement for Charles E. Scharlau, dated
May 21, 1998 (incorporated by reference to Exhibit 10.9 to Annual
Report on Form 10-K for the year ended December 31, 1998).
10.7 Employment Agreement for Harold M. Korell, effective April 28, 1997
(incorporated by reference to Exhibit 10.15 to Annual Report on Form
10-K for the year ended December 31, 1997).
10.8 Form of Indemnity Agreement, between the Company and each officer
and director of the Company (incorporated by reference to Exhibit
10.20 to Annual Report on Form 10-K for the year ended December 31,
1991).
10.9 Form of Executive Severance Agreement for the Executive Officers of
the Company, effective February 17, 1999 (incorporated by reference
to Exhibit 10.12 to Annual Report on Form 10-K for the year ended
December 31, 1998).
10.10 Omnibus Project Agreement of NOARK Pipeline System, Limited
Partnership by and among Southwestern Energy Pipeline Company,
Southwestern Energy Company, Enogex Arkansas Pipeline Corporation,
and Enogex Inc., dated January 12, 1998 (incorporated by reference to
Exhibit 10.17 to Annual Report on Form 10-K for the year ended
December 31, 1997).
10.11 Amended and Restated Limited Partnership Agreement of NOARK Pipeline
System, Limited Partnership dated January 12, 1998 and amended June
18, 1998 (amended and restated agreement incorporated by reference to
Exhibit 10.18 to Annual Report on Form 10-K for the year ended
December 31, 1997; first amendment thereto incorporated by reference
to Exhibit 10.14 to Annual Report on Form 10-K for the year ended
December 31, 1998).
10.12 Asset Sale and Purchase Agreement by and among Southwestern Energy
Company, Arkansas Western Gas Company and Atmos Energy Corporation,
dated October 15, 1999 (filed herewith).
21. Subsidiaries of the Registrant (incorporated by reference to Exhibit
21 to Annual Report on Form 10-K for the year ended December 31,
1996).
23. Consent of Arthur Andersen LLP (filed herewith).
27. Financial Data Schedule for the year ended December 31, 1999 (filed
herewith).
64
SOUTHWESTERN ENERGY COMPANY
AND
FIRST CHICAGO TRUST COMPANY OF NEW YORK
Rights Agent
-------------------------
Amended and Restated Rights Agreement
Dated as of April 12, 1999
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Section Page
<S> <C>
Section l. Certain Definitions.............................................................................1
Section 2. Appointment of Rights Agent.....................................................................6
Section 3. Issue of Right Certificates.....................................................................6
Section 4. Form of Right Certificates......................................................................7
Section 5. Countersignature and Registration...............................................................8
Section 6. Transfer, Split Up, Combination and Exchange of Right Certificates;
Mutilated, Destroyed, Lost or Stolen Right Certificates.........................................8
Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights...................................9
Section 8. Cancellation and Destruction of Right Certificates.............................................10
Section 9. Reservation and Availability of Capital Stock..................................................10
Section 10. Holders of Record.............................................................................12
Section 11. Adjustment of Purchase Price, Number of Shares or Number of Rights............................12
Section 12. Certification of Adjusted Purchase Price or Number of Shares..................................19
Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power..........................20
Section 14. Fractional Rights and Fractional Shares.......................................................23
Section 15. Rights of Action..............................................................................24
Section 16. Agreement of Right Holders....................................................................24
Section 17. Right Certificate Holder Not Deemed a Stockholder.............................................25
Section 18. Concerning the Rights Agent...................................................................25
Section 19. Merger or Consolidation or Change of Name of Rights Agent.....................................25
Section 20. Duties of Rights Agent........................................................................26
Section 21. Change of Rights Agent........................................................................28
i
<PAGE>
Section Page
Section 22. Issuance of New Right Certificates............................................................28
Section 23. Redemption....................................................................................29
Section 24. Exchange......................................................................................30
Section 25. Notice of Certain Events......................................................................31
Section 26. Notices.......................................................................................32
Section 27. Supplements and Amendments....................................................................32
Section 28. Successors....................................................................................33
Section 29. Benefits of this Agreement....................................................................33
Section 30. Severability..................................................................................33
Section 31. Determinations and Actions by the Board of Directors, etc.....................................33
Section 32. Governing Law.................................................................................34
Section 33. Counterparts..................................................................................34
Section 34. Descriptive Headings..........................................................................34
Exhibit A Form of Right Certificate
Exhibit B Summary of Rights to Purchase Shares of Common Stock
</TABLE>
ii
<PAGE>
AMENDED AND RESTATED RIGHTS AGREEMENT
This Amended and Restated Rights Agreement (this "Agreement or
"Amended and Restated Rights Agreement"), dated as of April 12, 1999, between
Southwestern Energy Company, an Arkansas corporation (the "Company"), and First
Chicago Trust Company of New York (the "Rights Agent").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, on May 5, 1989 (the "Declaration Date"), the Board of
Directors of the Company authorized and declared a dividend of one right
representing the right to purchase one share of Common Stock upon the terms and
subject to the conditions set forth in a Rights Agreement, dated May 5, 1989,
between the Company and the Rights Agent (the "1989 Rights Agreement") for each
outstanding share of common stock, $2.50 par value, of the Company outstanding
at the close of business on May 19, 1989 (the "Record Date"), and authorized the
issuance of one Right with respect to each share of Common Stock (as hereinafter
defined) that shall become outstanding between the Record Date and the earlier
of the Distribution Date and the Expiration Date (as such terms are hereinafter
defined), each Right initially representing the right to purchase one share of
Common Stock upon the terms and subject to the conditions hereinafter set forth;
WHEREAS, the Company declared a three-for-one stock split in
1993 and, in connection with such split, the number of Rights was adjusted
pursuant to Section 11 of the 1989 Rights Agreement such that each certificate
for Common Stock outstanding as of the date of this Amended and Restated Rights
Agreement also represents one Right under the 1989 Rights Agreement representing
the right to purchase one share of Common Stock upon the terms and subject to
the conditions set forth in the 1989 Rights Agreement;
WHEREAS, the Board of Directors have authorized and approved
the amendment and restatement in its entirety of the 1989 Rights Agreement in
order to extend the Expiration Date until April 11, 2009 and to make other
changes and provisions that they have determined are necessary or desirable and
do not adversely affect the interests of the holders of the Rights;
WHEREAS, in compliance with the terms of Section 26 of the
1989 Rights Agreement, the Company has (i) delivered to the Rights Agent a
certificate from an appropriate officer of the Company which states that this
Agreement has been approved by the Company's Board of Directors and is in
compliance with the terms of Section 26 of the 1989 Rights Agreement and (ii)
instructed the Rights Agent to execute this Agreement;
NOW, THEREFORE, in consideration of the premises and the
mutual agreements herein set forth, the parties hereby agree as follows:
Section l. Certain Definitions. For purposes of this
Agreement, the following terms shall have the meanings indicated:
(a) "Acquiring Person" shall mean (i) any Person (as
hereinafter defined), together with all Affiliates and Associates (as such terms
are hereinafter defined) of such Person,
<PAGE>
who or which shall, subsequent to the Declaration Date, become the Beneficial
Owner (as hereinafter defined) of 15% or more of the shares of Common Stock then
outstanding (other than as a result of an Approved Offer (as hereinafter
defined), or (ii) any Person who is an Adverse Person (as hereinafter defined)
or (iii) any Person, together with all Affiliates and Associates of such Person,
who or which is, on the Declaration Date, the Beneficial Owner of 15% or more of
the shares of Common Stock then outstanding if, subsequent to the Declaration
Date, such Person, together with all Affiliates and Associates of such Person,
shall increase its Beneficial Ownership of shares of Common Stock by an
additional 1% or more of the shares of Common Stock then outstanding; provided,
however, that (x) a Person shall not become an Acquiring Person if such Person,
together with its Affiliates and Associates, shall become the Beneficial Owner
of 15% or more (in the case of clause (i) above) or an additional 1% or more (in
the case of clause (iii) above) of the shares of Common Stock then outstanding
solely as a result of a reduction in the number of shares of Common Stock
outstanding due to the repurchase of shares of Common Stock by the Company,
unless and until such time as such Person shall purchase or otherwise become (as
a result of actions taken by such Person or its Affiliates or Associates) the
Beneficial Owner of additional shares of Common Stock constituting 1% or more of
the then outstanding shares of Common Stock; (y) "Acquiring Person" shall not
include any Company Entity (as defined below); and (z) "Acquiring Person" shall
not include any Person who becomes the Beneficial Owner of 15% or more (or an
additional 1% or more), of the outstanding shares of Common Stock but who
acquired beneficial ownership of shares of Common Stock inadvertently
(including, without limitation, because (i) such Person was unaware that it
Beneficially Owned 15% or more of the Common Stock or (ii) such Person was aware
of the extent of such beneficial ownership but such Person acquired beneficial
ownership of such shares of Common Stock without any plan or intention to change
or influence the control of the Company), and such Person promptly (and in any
event within ten Business Days after being so requested by the Company) enters
into an irrevocable commitment satisfactory to the Company's Board of Directors
promptly (and in any event within twenty Business Days or such shorter period as
shall be determined by the Company's Board of Directors) to divest, and
thereafter promptly divests as required by such commitment, sufficient shares of
Common Stock so that such Person (together with all of its Affiliates and
Associates) ceases to be a Beneficial Owner of 15% or more of shares of Common
Stock.
(b) "Adverse Person" shall mean any Person declared to be an
Adverse Person by the Board of Directors of the Company upon a determination
that such Person, alone or together with its Affiliates and Associates, has, at
any time after the Declaration Date, become the Beneficial Owner of a number of
shares of Common Stock that the Board of Directors determines to be substantial
(which amount shall in no event be less than 10% of the shares of Common Stock
then outstanding) and a determination by a majority of the Board of Directors
after reasonable inquiry and an investigation, including consultation with such
persons as the Board of Directors shall deem appropriate, that (a) as such
Beneficial Ownership by such Person is intended to cause the Company to
repurchase the shares of Common Stock beneficially owned by such Person or to
cause pressure on the Company to take action or enter into a transaction or
series of transactions intended to provide such Person with short-term financial
gain under circumstances where the Board of Directors determines that the best
long-term interest of the Company and its shareholders would not be served by
taking such action or entering into such
2
<PAGE>
transaction or series of transactions at that time or (b) such Beneficial
Ownership is causing or reasonably likely to cause a material adverse impact on
the business or prospects of the Company. The failure by the Board of Directors
of the Company to declare a Person to be an Adverse Person following such Person
becoming the Beneficial Owner of 10% or more of the outstanding shares of Common
Stock shall not imply that such Person is not an Adverse Person or limit the
Board's right at any time in the future to declare such Person to be an Adverse
Person.
(c) "Affiliate" shall have the meaning ascribed to such term
in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), as in effect on the date of this
Amended and Restated Rights Agreement.
(d) "Approved Offer" shall mean a tender or exchange offer
for all outstanding shares of Common Stock that is at a price and on terms
approved, prior to the acceptance for payment of shares under such tender or
exchange offer, by the Board of Directors of the Company based upon the prior
recommendation of a majority of its Independent Directors at a time at which
there are at least two Independent Directors.
(e) "Associate" shall include (x) any Person included in the
definition of "Associate" in Rule 12b-2 under the Exchange Act, as in effect on
the date of this Amended and Restated Rights Agreement, and (y) any Affiliate of
any such Person.
(f) A Person shall be deemed the "Beneficial Owner" of, and
shall be deemed to "beneficially own," any securities:
(i) which such Person or any of such Person's
Affiliates or Associates beneficially owns, directly or indirectly (as
determined pursuant to Rule 13d-3 or 13d-5 under the Exchange Act as in
effect on the date of this Agreement);
(ii) which such Person or any of such Person's
Affiliates or Associates has, directly or indirectly: (A) the right to
acquire (whether such right is exercisable immediately or only after
the passage of time or the satisfaction of one or more conditions or
both) pursuant to any agreement (other than customary agreements with
and between underwriters and selling group members with respect to a
bona fide public offering of securities), arrangement or understanding
(whether in writing or not), or upon the exercise of conversion rights,
exchange rights, rights (other than the Rights described herein),
warrants or options, or otherwise (provided, however, that a Person
shall not be deemed to be the Beneficial Owner of, or to beneficially
own, any security solely because such security has been tendered
pursuant to a tender or exchange offer made by such Person or any of
such Person's Affiliates or Associates until such tendered security is
accepted for payment or exchange); or (B) the right to vote or dispose
of, or to direct the vote or disposition of, alone or in concert with
others, pursuant to any agreement, arrangement or understanding
(whether in writing or not); provided, however, that a Person shall not
be deemed pursuant to this clause (ii)(B) to be the Beneficial Owner
of, or to beneficially own, any security if the agreement, arrangement
or understanding to vote, or direct the vote of, such security (1)
arises solely from a revocable proxy or consent given to such Person or
any of such Person's Affiliates or Associates in response to a public
proxy or
3
<PAGE>
consent solicitation made pursuant to, and in accordance with, the
applicable rules and regulations under the Exchange Act and (2) is not
also then reportable on Schedule 13D under the Exchange Act; or
(iii) which are beneficially owned, directly or
indirectly, by any other Person with which such Person or any of such
Person's Affiliates or Associates has any agreement (other than
customary agreements with and between underwriters and selling group
members with respect to a bona fide public offering of securities),
arrangement or understanding (whether or not in writing) for the
purpose of acquiring, holding, voting (except pursuant to a revocable
proxy or consent as described in clause (ii) (B) of this paragraph (c))
or disposing of any securities of the Company.
If a Person shall be deemed to be the Beneficial Owner of any
securities which are not outstanding, such securities shall be deemed
to be outstanding for purposes of determining the percentage of Common
Stock beneficially owned by such Person but all other securities
(including securities of the same class) not actually outstanding shall
not be deemed outstanding for such purposes.
(e) "Board of Directors" shall mean the Board of Directors of
the Company.
(f) "Business Day" shall mean any day other than a Saturday,
Sunday, or a day on which banking institutions in the State of New York or
Illinois are authorized or obligated by law or executive order to close.
(g) "Close of business" on any given date shall mean 5:00
P.M., New York City time, on such date; provided, however, that if such date is
not a Business Day it shall mean 5:00 P.M., New York City time, on the next
succeeding Business Day.
(h) "Common Stock" shall mean the common stock $0.10 par
value, of the Company (as it may be constituted from time to time during the
term of this Agreement), except that "Common Stock" when used with reference to
any Person other than the Company (or, in the case of a transaction referred to
in Section 13 hereof, if the Company is the successor to the other Person
referred to in clause (a), (b) or (c) of Section 13, or is the surviving
corporation, when thereafter used with reference to the Company) shall mean the
capital (or, in the case of a partnership or other unincorporated entity, the
equivalent equity interest) with the greatest voting power of such Person,
together with all rights and benefits (however denominated or constituted)
relating to such capital stock (including, without limitation, any rights or
warrants to acquire additional shares of such capital stock or other securities
or assets, or to participate in any trust for the benefit of holders of such
shares, or to share in the benefits of any agreements or other arrangements for
the benefit of such holders), whether or not such rights are yet exercisable,
and together with any other securities which are represented by the certificates
for such shares or are transferred in connection with transfers of such shares.
(i) "Company Entity" shall mean the Company, any wholly owned
Subsidiary (as hereinafter defined) of the Company, any employee benefit plan or
employee stock plan of the Company or of any of its wholly owned Subsidiaries,
or any Person holding Common Stock
4
<PAGE>
which was organized, appointed or established by the Company or any of its
wholly owned Subsidiaries for or pursuant to the terms of any such plan
(j) "Person" shall mean any individual, firm, corporation,
partnership or other entity.
(k) "Stock Acquisition Date" shall mean the time and day of
the first public announcement (which for purposes of this definition, shall
include, without limitation, the filing of a report pursuant to the Exchange
Act) by the Company or an Acquiring Person containing information indicating
that an Acquiring Person has become such. For purposes hereof, in the event that
it is publicly announced that any Person has acquired beneficial ownership of
sufficient shares of Common Stock to cause such Person to become an Acquiring
Person under clause (i) or clause (iii) of the definition of Acquiring Person,
such Person shall not be deemed an Acquiring Person for up to ten Business Days
(or such shorter period as shall be determined by the Board of Directors) if
such Person advises the Company that it acquired beneficial ownership
inadvertently (within the meaning of clause (z) of the proviso to the definition
of an Acquiring Person) and the Board of Directors is continuing to determine
whether such Person qualifies for the exclusion contained in such clause (z).
(l) "Subsidiary" shall mean, with respect to any Person, any
corporation or other entity as to which such Person beneficially owns sufficient
voting securities or other ownership interests having ordinary voting power
sufficient, in the absence of contingencies, to elect at least a majority of its
directors (or individuals performing similar functions).
(m) The terms set forth below are defined in the Sections
indicated below:
<TABLE>
<CAPTION>
Term Section
<S> <C>
Act 7 (c)
Common Stock Equivalent 11 (a) (iv) (B)
current market price 11 (d)
Current Value 11 (a) (iv) (A)
Declaration Date Recitals
Distribution Date 3 (a)
Exchange Act 1 (c)
Exchange Ratio 24
Expiration Date 7 (a)
Final Expiration Date 7 (a)
Independent Director 23
Principal Party 13(b)
Proposed Acquiror 23
Purchase Price 7 (b)
Record Date Recitals
Redemption Price 23
Right Recitals
Right Certificates 3 (a)
5
<PAGE>
Rights Agent Recitals
Section 13 Event 13(a)
Security 11 (d) (i)
Spread 11 (a) (iv) (A)
Substitution Period 11 (a) (iv)
Summary of Rights 3 (b)
Trading Day 11(d)(i)
</TABLE>
Section 2. Appointment of Rights Agent. The Company hereby
appoints the Rights Agent to act as agent for the Company and the holders of the
Rights in accordance with the terms and conditions hereof, and the Rights Agent
hereby accepts such appointment. The Company may from time to time appoint such
Co-Rights Agents as it may deem necessary or desirable. In the event that the
Company appoints one or more Co-Rights Agents, the respective duties of the
Rights Agent and any Co-Rights Agents shall be as the Company shall determine.
Section 3. Issue of Right Certificates. (a) Until the close
of business on the earlier of (i) the tenth Business Day after the Stock
Acquisition Date (including any such date which is after the Declaration Date
even if prior to the Record Date), and (ii) the tenth Business Day (or such
later day as may be determined by action of the Board of Directors of the
Company prior to such time as any Person becomes an Acquiring Person) after the
date of the commencement of, or the first public announcement of the intent of
any Person (other than a Company Entity) to commence (which intention to
commence remains in effect for five Business Days after such announcement), a
tender or exchange offer the consummation of which would result in any person
becoming an Acquiring Person (the earlier of the dates referred to in clauses
(i) and (ii) above being herein referred to as the "Distribution Date"), (x) the
Rights will be evidenced (subject to the provisions of paragraph (b) of this
Section 3) by the certificates for the Common Stock registered in the names of
the holders of the Common Stock (which certificates for Common Stock shall also
be deemed (other than for purposes of this Section 3 and any provision of this
Agreement referring to the issuance of Rights Certificates) to be Right
Certificates (as such term is hereinafter defined)) and not by separate Right
Certificates, and (y) the Rights (and the right to receive Right Certificates)
will be transferable only simultaneously and together with the transfer of the
underlying shares of Common Stock. As soon as practicable after the Distribution
Date, subject to Section 11(a)(iii) hereof, the Company shall prepare and
execute and the Rights Agent will countersign, and the Company will send or
cause to be sent, by first-class, postage-prepaid mail, to each record holder of
the Common Stock as of the close of business on the Distribution Date, as shown
by the records of the Company, at the address of such holder shown on such
records, a right certificate, substantially in the form of Exhibit A hereto (a
"Right Certificate"), evidencing one Right for each share of Common Stock so
held, subject to adjustment as herein provided. As of and after the close of
business on the Distribution Date, the Rights will be evidenced solely by such
Right Certificates and may be transferred only by the transfer of the Rights
Certificates as permitted hereby, separately and apart from any transfer of one
or more shares of Common Stock.
(b) As soon as practicable after the date of this Amended and
Restated Agreement, the Company will mail a copy of the Summary of Rights to
Purchase Common Stock
6
<PAGE>
in the form attached hereto as Exhibit B (the "Summary of Rights"), by
first-class, postage-prepaid mail, to each record holder of the Common Stock as
of the close of business on the Record Date, as shown by the records of the
Company, at the address of such holder shown on such records. With respect to
certificates for Common Stock outstanding as of the close of business on the
date of this Amended and Restated Agreement or issued prior to the Distribution
Date, until the Distribution Date, the Rights will be evidenced solely by such
certificates registered in the names of the holders thereof (whether or not such
certificates contain the legend contemplated by Section 3(c) of the 1989 Rights
Agreement). Until the Distribution Date (or the earlier redemption or expiration
of the Rights), the surrender for transfer of any certificate for Common Stock
outstanding as of the close of business on the Record Date shall also constitute
the transfer of the Rights associated with the shares of Common Stock
represented thereby.
The Company will mail to any record holder of a Right
(including, prior to the Distribution Date, a record holder of shares of Common
Stock) a copy of this Rights Agreement, without charge, within ten Business Days
of a written request therefor.
(c) Rights shall be issued in respect of all shares of Common
Stock that become outstanding after the date of this Amended and Restated
Agreement and prior to the earlier of the Distribution Date and the Expiration
Date, and all certificates for shares of Common Stock issued or which become
outstanding after the date of this Amended and Restated Agreement but prior to
the earlier of the Distribution Date and the Expiration Date, shall have
impressed on, printed on, written on or otherwise affixed to them substantially
the following legend:
This certificate also evidences and entitles the holder hereof to
certain Rights as set forth in a Rights Agreement between Southwestern
Energy Company and First Chicago Trust Company of New York, dated as of
May 5, 1989, as amended by the Amended and Restated Rights Agreement
dated as of April 12, 1999 and as it may from time to time be further
supplemented or amended pursuant to its terms (the "Rights Agreement"),
the terms of which are hereby incorporated by reference and a copy of
which is on file at the principal executive offices of Southwestern
Energy Company. Under certain circumstances as set forth in the Rights
Agreement, such Rights will be evidenced by separate certificates and
will no longer be evidenced by this certificate. Southwestern Energy
Company will mail to the registered holder of this certificate a copy
of the Rights Agreement without charge within ten business days after
receipt of a written request therefor. Under certain circumstances
provided for in the Rights Agreement, Rights issued to, or beneficially
owned by any Person who is an Acquiring Person or an Affiliate or
Associate thereof (as such terms are defined in the Rights Agreement)
or any subsequent holder of such Rights shall become null and void.
Section 4. Form of Right Certificates. The Right Certificates
(and the forms of election to purchase shares and of assignment to be printed on
the reverse thereof) shall be substantially in the form of Exhibit A hereto and
may have such marks of identification or designation and such legends, summaries
or endorsements printed thereon as the Company may deem appropriate and as are
not inconsistent with the provisions of this Agreement, or as may be required to
comply with any law or with any rule or regulation made pursuant thereto or with
any
7
<PAGE>
rule or regulation of any stock exchange or quotation system on which the Rights
may from time to time be listed, or to conform to usage. Subject to the
provisions of Sections 11 and 22 hereof, the Right Certificates, whenever
distributed, shall be dated as of the Record Date, and on their face shall
entitle the holders thereof to purchase such number of shares of Common Stock as
shall be set forth therein at the Purchase Price (as such term is hereinafter
defined), but the number and type of securities purchasable upon the exercise of
each Right and the Purchase Price thereof shall be subject to adjustment as
provided herein. To the extent provided in Section 11(a)(iii) hereof, certain
Right Certificates shall contain the legend provided for therein.
Section 5. Countersignature and Registration. (a) The Right
Certificates shall be executed on behalf of the Company by its Chairman of the
Board, its President , its Chief Executive Officer, any Vice President, its
Treasurer or its Secretary, either manually or by facsimile signature, and have
affixed thereto the Company's seal or a facsimile thereof which shall be
attested by the Secretary or an Assistant Secretary of the Company, either
manually or by facsimile signature. The Right Certificates shall be manually
countersigned by the Rights Agent and shall not be valid for any purpose unless
so countersigned. In case any officer of the Company who shall have signed or
attested any of the Right Certificates shall cease to be such officer of the
Company before countersignature by the Rights Agent and issuance and delivery by
the Company, such Right Certificates, nevertheless, may be countersigned by the
Rights Agent, and issued and delivered with the same force and effect as though
the person who signed or attested such Right Certificates had not ceased to be
such officer of the Company; and any Right Certificate may be signed or attested
on behalf of the Company by any person who, at the actual date of the execution
of such Right Certificate, shall be a proper officer of the Company to sign or
attest such Right Certificate, although at the date of the execution of this
Rights Agreement any such person was not such an officer.
(b) Following the Distribution Date, the Rights Agent will
keep or cause to be kept, at its principal office or such other office
designated by it for such purpose, books for registration and transfer of the
Right Certificates issued hereunder. Such books shall show the name(s) and
address(es) of the holder(s) of each Right Certificate, the number of Rights
evidenced on its face by each Right Certificate, the certificate number of each
Right Certificate and the date of each Right Certificate.
Section 6. Transfer, Split Up, Combination and Exchange of
Right Certificates; Mutilated, Destroyed, Lost or Stolen Right Certificates. (a)
Subject to the provisions of Sections 7(e), 11(a)(iii) and 14 hereof, at any
time after the close of business on the Distribution Date, and at or prior to
the close of business on the Expiration Date, any Right Certificate or Right
Certificates may be transferred, split up, combined or exchanged for another
Right Certificate or Right Certificates, entitling the registered holder to
purchase a like number of shares of Common Stock (or other securities, cash
and/or assets, as the case may be), as the Right Certificate or Right
Certificates surrendered then entitled such holder to purchase. Any registered
holder desiring to transfer, split up, combine or exchange any Right Certificate
shall make such request in writing delivered to the Rights Agent, and shall
surrender the Right Certificate or Right Certificates to be transferred, split
up, combined or exchanged at the principal office or such other office of the
Rights Agent designated for such purpose. Neither the Rights Agent nor the
Company shall be obligated to take any action whatsoever with respect to the
transfer of any such
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surrendered Right Certificate unless and until the registered holder shall have
completed and signed the certificate contained in the form of assignment on the
reverse side thereof and shall have provided such additional evidence of the
identity of the Beneficial Owner (or former Beneficial Owner) or Associates and
Affiliates of the foregoing as the Company shall reasonably request. Thereupon
the Rights Agent shall countersign and deliver to the person entitled thereto a
Right Certificate or Right Certificates, as the case may be, as so requested.
The Company may require payment, by the holder of Rights, of a sum sufficient to
cover any tax or governmental charge that may be imposed in connection with any
transfer, split up, combination or exchange of Right Certificates.
(b) Upon receipt by the Company and the Rights Agent of
evidence reasonably satisfactory to them of the loss, theft, destruction or
mutilation of a Right Certificate, and, in case of loss, theft or destruction,
of an indemnity or security reasonably satisfactory to the Company and the
Rights Agent, and reimbursement to the Company and the Rights Agent of all
reasonable expenses incidental thereto, and upon surrender to the Rights Agent
and cancellation of the Right Certificate if mutilated, the Company will make
and deliver a new Right Certificate of like tenor to the Rights Agent for
countersignature and delivery to the registered holder in lieu of the Right
Certificate so lost, stolen, destroyed or mutilated.
Section 7. Exercise of Rights; Purchase Price; Expiration
Date of Rights. (a) Subject to Sections 11(a)(iii) and (iv), the registered
holder of any Right Certificate may exercise the Rights evidenced thereby in
whole or in part at any time after the Distribution Date upon surrender of the
Right Certificate, with the form of election to purchase and certificate on the
reverse side thereof duly executed, to the Rights Agent at its principal office
or such other office designated by it for such purpose, together with payment of
the Purchase Price for each share of Common Stock (or other securities, cash
and/or assets, as the case may be) as to which the Rights are exercised, at or
prior to the earliest of (i) the close of business on April 11, 2009 (the "Final
Expiration Date"), and (ii) the date and time at which the Rights are redeemed
as provided in Section 23 hereof, (iii) the date and time at which the Rights
are exchanged as provided in Section 24 hereof, or (iv) the time at which the
rights expire pursuant to Section 13(d) (such earliest date and time being
referred to herein as the "Expiration Date").
(b) The purchase price (the "Purchase Price") for each share
of Common Stock pursuant to the exercise of a Right shall initially be $40,
shall be subject to adjustment from time to time as provided in Sections 11 and
13 hereof and shall be payable in lawful money of the United States of America
in accordance with paragraph (c) below.
(c) Except as otherwise provided herein, upon receipt of a
Right Certificate representing exercisable Rights, with the form of election to
purchase and certificate duly executed, accompanied by payment of the Purchase
Price for the shares (or other securities, cash and/or assets, as the case may
be) to be purchased and an amount equal to any applicable transfer tax (as
determined by the Rights Agent) in cash, or by certified check or bank draft
payable to the order of the Company, the Rights Agent shall thereupon promptly
(i) requisition from any transfer agent of the shares of Common Stock (or make
available, if the Rights Agent is the transfer agent) certificates for the
number of shares of Common Stock to be purchased and the Company hereby
irrevocably authorizes such transfer agent to comply with all such requests,
(ii) when appropriate,
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requisition from the Company the amount of cash to be paid in lieu of issuance
of fractional shares in accordance with Section 14 hereof, (iii) promptly after
receipt of such certificates, cause the same to be delivered to or upon the
order of the registered holder of such Right Certificate registered in such name
or names as may be designated by such holder, and (iv) when appropriate, deliver
any such cash, promptly after its receipt, to or upon the order of the
registered holder of such Right Certificate. In the event that the Company is
obligated to issue other securities of the Company, pay cash and/or distribute
other property pursuant to Section 11(a) hereof, the Company will make all
arrangements necessary so that such other securities, cash and/or property are
available for distribution by the Rights Agent, if and when appropriate.
Notwithstanding the foregoing provisions of this Section 7(c), the Company may
suspend the issuance of shares of Common Stock or other securities upon exercise
of a Right for a reasonable period, not in excess of 90 days, during which the
Company seeks to register under the Securities Act of 1933 (the "Act"), as
amended, and any applicable securities law of any other jurisdiction, the shares
of Common Stock or such other securities to be issued pursuant to the Rights.
(d) In case the registered holder of any Right Certificate
shall exercise less than all the Rights evidenced thereby, a new Right
Certificate evidencing Rights equivalent to the Rights remaining unexercised
shall be issued by the Rights Agent to the registered holder of such Right
Certificate or to his duly authorized assigns, subject to the provisions of
Sections 7(e), 11(a)(iii) and 14 hereof.
(e) Notwithstanding any other provision of this Agreement,
neither the Rights Agent nor the Company shall be obligated to take any action
whatsoever with respect to a registered holder of any Right Certificate upon the
occurrence of any purported transfer or exercise as set forth in this Section 7
unless and until the registered holder shall have completed and signed the
certificate contained in the form of election to purchase shares set forth on
the reverse side thereof and shall have provided such additional evidence of the
identity of the Beneficial Owner and former Beneficial Owner (and Associates and
Affiliates of the foregoing) as the Company shall reasonably request.
Section 8. Cancellation and Destruction of Right Certificates.
All Right Certificates surrendered for the purpose of exercise, transfer, split
up, combination or exchange shall, if surrendered to the Company or to any of
its agents, be delivered to the Rights Agent for cancellation or in cancelled
form, or, if surrendered to the Rights Agent, shall be cancelled by it, and no
Right Certificate shall be issued in lieu thereof except as expressly permitted
by any of the provisions of this Rights Agreement. The Company shall deliver to
the Rights Agent for cancellation and retirement, and the Rights Agent shall so
cancel and retire, any other Right Certificate purchased or acquired by the
Company otherwise than upon the exercise thereof. The Rights Agent shall deliver
all cancelled Right Certificates to the Company, or shall, at the written
request of the Company, destroy such cancelled Right Certificates, and in such
case shall deliver a certificate of destruction thereof to the Company.
Section 9. Reservation and Availability of Capital Stock. (a)
The Company covenants and agrees that it will cause to be reserved and kept
available out of its authorized and unissued Common Stock or other securities or
any Common Stock or other securities held in its treasury, the number of shares
of Common Stock or shares of other securities that, as provided in
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this Agreement (including Section 11(a) (iv) hereof), will be sufficient to
permit the exercise in full of all outstanding Rights.
(b) The Company covenants and agrees that it will take all
such action as may be necessary to insure that all Common Stock and/or other
securities delivered upon exercise of Rights shall, at the time of delivery of
the certificates for such shares (subject to payment of the Purchase Price), be
duly and validly authorized and issued and fully paid and nonassessable shares.
(c) The Company covenants and agrees that it will pay when
due and payable any and all federal and state transfer taxes and charges which
may be payable in respect of the issuance or delivery of the Right Certificates
or any Common Stock and/or other securities, as the case may be, upon the
exercise of Rights. The Company shall not however, be required to pay any
transfer tax which may be payable in respect of any transfer involved in the
transfer or delivery of Right Certificates or the issuance or delivery of
certificates or depositary receipts for Common Stock and/or other securities, as
the case may be, in a name other than that of the registered holder of the Right
Certificate evidencing Rights surrendered for exercise or to issue or deliver
any certificates or depositary receipts for Common Stock and/or other
securities, as the case may be, upon the exercise of any Rights until any such
tax shall have been paid (any such tax being payable by the holder of such Right
Certificate at the time of surrender) or until it has been established to the
Company's satisfaction that no such tax is due.
(d) So long as the Common Stock (and/or other securities)
issuable upon the exercise of the Rights may be listed on any national
securities exchange, the Company shall use its best efforts to cause, from and
after such time as the Rights become exercisable, all shares reserved for such
issuance to be listed on such exchange upon official notice of issuance upon
such exercise.
(e) The Company shall use its best efforts to (i) file, as
soon as practicable following the earliest date after occurrence of the Stock
Acquisition Date as of which the consideration to be delivered by the Company
upon exercise of the Rights has been determined in accordance with Section
11(a)(iv) hereof, or as soon as is required by law following the Distribution
Date, as the case may be, a registration statement under the Act with respect to
the securities purchasable upon exercise of the Rights on an appropriate form,
(ii) cause such registration statement to become effective as soon as
practicable after such filing and (iii) cause such registration statement to
remain effective (with a prospectus at all times meeting the requirements of the
Act and the rules and regulations thereunder) until the earlier of (A) the date
as of which the Rights are no longer exercisable for such securities and (B) the
expiration of the Rights. The Company will also take such action as may be
appropriate to ensure compliance with the securities or "blue sky" laws of the
various states. The Company may temporarily suspend, in accordance with
applicable law, for a period of time not to exceed 90 days after the date set
forth in clause (i) of the first sentence of this Section 9(e), the
exercisability of the Rights in order to prepare and file such registration
statement and permit it to become effective. Upon any such suspension, the
Company shall issue a public announcement stating that the exercisability of the
Rights has been temporarily suspended, as well as a public announcement at such
time as the suspension is no longer in effect. Notwithstanding any provision of
this Agreement to the contrary, the Rights shall not be exercisable in any
jurisdiction if the requisite qualification in such
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jurisdiction shall not have been obtained, the exercise thereof shall not be
permitted under applicable law or a registration statement shall not have been
declared effective.
Section 10. Holders of Record. Each person in whose name any
certificate for Common Stock and/or other securities, as the case may be, is
issued upon the exercise of Rights shall for all purposes be deemed to have
become the holder of record of the Common Stock and/or other securities, as the
case may be, represented thereby on, and such shall be dated, the date upon
which the Right Certificate evidencing such Rights was duly surrendered and
payment of the Purchase Price (and any applicable transfer taxes) was made;
provided, however, that if the date of such surrender and payment is a date upon
which the transfer books of the Company are closed, such Person shall be deemed
to have become the record holder of such shares on, and such certificate shall
be dated, the next succeeding Business Day on which the transfer books of the
Company are open. Prior to the exercise of the Rights evidenced thereby, the
holder of a Right Certificate shall not be entitled to any rights of a
stockholder of the Company with respect to shares for which the Rights shall be
exercisable, including, without limitation, the right to vote, to receive
dividends or other distributions or to exercise any preemptive rights, and shall
not be entitled to receive any notice of any proceedings of the Company, except
as provided herein.
Section 11. Adjustment of Purchase Price, Number of Shares or
Number of Rights. The Purchase Price, the number and kind of securities, or
fractions thereof, covered by each Right and the number of Rights outstanding
are subject to adjustment from time to time as provided in this Section 11.
(a) (i) In the event the Company shall at any time after the
date of this Agreement (A) declare or pay a dividend on the Common Stock,
payable in shares of Common Stock, (B) subdivide the outstanding shares of
Common Stock, (C) combine or consolidate the outstanding shares of Common Stock
into a smaller number of shares of Common Stock or (D) issue any shares of its
capital stock in a reclassification of the Common Stock (including any such
reclassification in connection with a consolidation or merger in which the
Company is the continuing or surviving corporation), except as otherwise
provided in this Section 11, the Purchase Price in effect at the time of the
record date for such dividend or of the effective date of such subdivision,
split, combination, consolidation or reclassification, and the number and kind
of shares of capital stock issuable upon exercise of a Right on such date, shall
be proportionately adjusted so that the holder of any Right exercised after such
time shall be entitled to receive, upon payment of the Purchase Price then in
effect, the aggregate number and kind of shares of capital stock which, if such
Right had been exercised immediately prior to such date and at a time when the
transfer books of the Company were open, such holder would have owned upon such
exercise and been entitled to receive by virtue of such dividend, subdivision,
split, combination, consolidation or reclassification. If an event occurs which
would require an adjustment under both this Section 11(a)(i) and Section
11(a)(ii), the adjustment provided for in this Section 11(a)(i) shall be in
addition to, and shall be made prior to, any adjustment required pursuant to
Section 11(a)(ii).
(ii) In the event that a Stock Acquisition Date occurs,
proper provision shall be made so that each holder of a Right (except
as otherwise provided in clause (iii) below) thereafter shall have the
right to receive, upon exercise thereof at the then current
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Purchase Price in accordance with the terms of this Agreement, such
number of shares of Common Stock of the Company as shall equal the
result obtained by (x) multiplying the then current Purchase Price by
the then number of shares of Common Stock for which a Right is then
exercisable and (y) dividing that product by 50% of the current market
price per share of the Common Stock (determined pursuant to Section
11(d) hereof) on the Stock Acquisition Date, and, at the time such
provision is made the Company shall cause to be reserved out of its
authorized but unissued (or treasury) shares of Common Stock, the
lesser of (m) the number of shares of Common Stock that will be
sufficient to permit the exercise in full of all outstanding Rights
(other than those referred to in clause (iii) below) and (n) the number
of shares of Common Stock which are authorized by the Company's
certificate of incorporation but not outstanding or reserved for
issuance for purposes other than upon exercise of the Rights.
(iii) Notwithstanding any provision of this Agreement,
from and after the Stock Acquisition Date, any Rights beneficially
owned by (p) an Acquiring Person or any Associate or Affiliate thereof,
(q) a transferee of an Acquiring Person (or Associate or Affiliate
thereof) who becomes the transferee of such Rights concurrently with
such Acquiring Person becoming such or at any time thereafter, or (r) a
transferee of an Acquiring Person (or Associate or Affiliate thereof)
who becomes a transferee prior to the Acquiring Person becoming such
and receives such Rights pursuant to either (A) a transfer (whether not
for consideration) by the Acquiring Person to holders of its stock or
other equity or to any Person with whom the Acquiring Person has any
continuing agreement, arrangement or understanding, whether or not in
writing, regarding the transferred Rights or (B) a transfer which the
Board of Directors of the Company has determined is part of a plan,
arrangement or understanding, whether or not in writing, which has as a
primary purpose or effect the avoidance of this Section 11(a)(iii),
shall become null and void, and any existing or subsequent holder of
such Rights shall thereafter have no right to exercise such Rights
under any provision of this Agreement. Any Right Certificate issued
pursuant to Section 3 or Section 22 hereof that represents Rights
beneficially owned by any Person referred to in clause (p), (q) or (r)
above, and any Right Certificate issued pursuant to Section 6 or
Section 11 hereof upon transfer, exchange, replacement or adjustment of
any other Right Certificate referred to in this sentence, shall contain
(to the extent feasible) the following legend:
The Rights represented by this Right Certificate are or were
beneficially owned by a Person who is, was or be came an Acquiring
Person or an Affiliate or an Associate of an Acquiring Person (as those
terms are defined in the Rights Agreement). This Right Certificate and
the Rights represented hereby may be or may become null and void in the
circumstances specified in the Rights Agreement.
The Company shall use all reasonable efforts to comply with this clause (iii),
but neither it nor the Rights Agent shall have any liability to any Person as a
result of the failure to make any determination with respect to an Acquiring
Person, or its Associates, Affiliates or to transferees of the foregoing.
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(iv) In the event that the number of shares of
Common Stock which are authorized by the Company's articles of
incorporation but not outstanding or reserved for issuance for purposes
other than upon exercise of the Rights is not sufficient to permit the
exercise in full of the Rights in accordance with the foregoing clause
(ii) of this Section 11(a), the Company shall:
(A) determine the excess of (1) the value (the "Current
Value") of the shares of Common Stock issuable upon the exercise of a
Right pursuant to the foregoing clause (ii) of this Section 11(a)
(assuming that there were a sufficient number of authorized but
unissued shares to permit exercise in full of all outstanding Rights
for Common Stock) over (2) the then current Purchase Price (such excess
being referred to herein as the "Spread"), and
(B) with respect to each Right, to the extent permitted by
applicable law and any contractual restrictions binding on the Company,
make adequate provision to substitute for such shares of Common Stock
issuable upon exercise of a Right pursuant to the foregoing clause (ii)
of this Section 11(a), upon payment of the Purchase Price, (1) Common
Stock or other equity securities of the Company (including, without
limitation, shares, or units of shares, of preferred stock which the
Board of Directors of the Company has deemed to have the same value as
shares of Common Stock (such shares of preferred stock being referred
to herein as "Common Stock Equivalents")), (2) debt securities of the
Company, (3) cash, (4) other assets, or (5) any combination of the
foregoing (provided, that in making any such provision, Rights shall,
to the fullest extent feasible in view of the number of shares of
authorized Common Stock not outstanding or reserved for issuance for
purposes other than upon exercise of the Rights, be exercisable for
Common Stock), in each case having an aggregate value equal to the
Current Value, where such aggregate value has been determined by the
Board of Directors of the Company based upon the advice of a nationally
recognized investment banking firm selected by the Board of Directors
of the Company;
provided, however, that if the Company shall not have made adequate provision to
deliver value pursuant to clause (B) above within thirty (30) days following the
Stock Acquisition Date, then the Company shall be obligated to deliver, upon the
surrender for exercise of a Right and without requiring payment of the Purchase
Price, shares of Common Stock (to the extent available) and then, if necessary,
cash, which shares and/or cash have an aggregate value equal to the Spread.
Notwithstanding the immediately preceding sentence, if the Board of Directors of
the Company shall determine in good faith that it is likely that sufficient
additional shares of Common Stock could be authorized for issuance upon exercise
in full of the Rights, the thirty (30) day period set forth above may be
extended to the extent necessary, but not to more than ninety (90) days after
the Stock Acquisition Date, in order that the Company may seek stockholder
approval for the authorization of such additional shares (such period, as may be
extended, being referred to herein as the "Substitution Period"). To the extent
that the Company determines that some action need be taken pursuant to the first
and/or second sentences of this Section 11(a)(iv), the Company (x) shall
provide, subject to the foregoing clause (iii) of this Section 11(a), that such
action shall apply uniformly to all outstanding Rights and (y) may suspend the
exercisability of the Rights until the expiration of the Substitution Period in
order to seek any authorization of additional shares and/or
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to decide the appropriate form of distribution to be made pursuant to such first
sentence and to determine the value thereof. In the event of any such
suspension, the Company shall issue a public announcement stating that the
exercisability of the Rights has been temporarily suspended, as well as a public
announcement at such time as the suspension is no longer in effect. For purposes
of this Section 11(a)(iv), the terms of any Common Stock Equivalent shall be
determined so that such Common Stock Equivalent shall have the same value as the
Common Stock on the Stock Acquisition Date.
(b) In case the Company shall fix a record date for the
issuance of rights, options or warrants to all holders of Common Stock entitling
them (for a period expiring within 45 calendar days after such record date) to
subscribe for or purchase shares of Common Stock (or shares having the same
rights, privileges, and preferences as the Common Stock ("equivalent common
shares")) or securities convertible into Common Stock or equivalent common
shares at a price per share of Common Stock or equivalent common share (or
having a conversion price per share, if a security convertible into Common Stock
or equivalent common shares) less than the current market price per share of
Common Stock (as defined in Section 11(d) hereof) on such record date, the
Purchase Price to be in effect after such record date shall be determined by
multiplying the Purchase Price in effect immediately prior to such record date
by a fraction, of which the numerator shall be the number of shares of Common
Stock and equivalent common shares outstanding on such record date plus the
number of shares of Common Stock which the aggregate offering price of the total
number of shares of Common Stock and/or equivalent common shares to be so
offered (and/or the aggregate initial conversion price of the convertible
securities to be so offered) would purchase at such current market price an of
which the denominator shall be the number of shares of Common Stock and
equivalent common shares outstanding on such record date plus the number of
additional shares of Common Stock and/or equivalent common shares to be offered
for subscription or purchase (or into which the convertible securities so to be
offered are initially convertible). In case such subscription price may be paid
in a consideration part or all of which shall be in a form other than cash the
value of such consideration shall be as determined in good faith by the Board of
Directors of the Company, whose determination shall be described in a statement
filed with the Rights Agent. Common Stock owned by or held for the account of
the Company or any of its Subsidiaries shall not be deemed outstanding for the
purpose of any such computation. Such adjustment shall be made successively
whenever such a record date is fixed; and in the event that such rights, options
or warrants are not so issued, the Purchase Price shall be adjusted to be the
Purchase Price which would then be in effect if such record the date had not
been fixed.
(c) In case the Company shall fix a record date for the
making of a distribution to all holders of Common Stock (including any such
distribution made in connection with a consolidation or merger in which the
Company is the continuing or surviving corporation) of evidences of indebtedness
or assets (other than a regular periodic cash dividend at a rate per share not
in excess of the greater of (x) 200% of the rate of the last periodic cash
dividend theretofore paid and (y) $0.10 per quarter (as such amount may be
appropriately adjusted to reflect any stock split, stock dividend, or similar
transaction) or a dividend payable in shares of Common Stock) or subscription
rights or warrants (excluding those referred to in Section 11(b) hereof), the
Purchase Price to be in effect after such record date shall be determined by
multiplying the Purchase Price in effect immediately prior to such record date
by a fraction, the numerator of which shall be the
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current market price per share of Common Stock (as defined in Section 11(d)
hereof) on such record date, less the fair market value (as determined in good
faith by the Board of Directors of the Company, whose determination shall be
described in a statement filed with the Rights Agent) of the portion of the
assets or evidences of indebtedness so to be distributed or of such subscription
rights or warrants applicable to one share of Common Stock and of which the
denominator shall be such current market price per share of Common Stock. Such
adjustments shall be made successively whenever such a record date is fixed; and
in the event that such distribution is not so made, the Purchase Price shall
again be adjusted to be the Purchase Price which would then be in effect if such
record date had not been fixed.
(d) (i) For the purpose of any computation hereunder, the
"current market price" for any security (a "Security" for purposes of this
Section 1l(d)(i)) on any date shall be deemed to be the average of the daily
closing prices per share of such Security for the thirty (30) consecutive
Trading Days (as such term is hereinafter defined) immediately prior to such
date; provided, however, that in the event that the current market price per
share of the Security is determined during a period following the announcement
by the issuer of such Security of a dividend or distribution on such Security
payable in shares of such Security or securities convertible into (or
exercisable or exchangeable for) shares of such Security, or any subdivision,
split, combination, consolidation or reclassification of such Security, and
prior to the expiration of 30 Trading Days after the ex-dividend date for such
dividend or distribution or the record date for such subdivision, split,
combination, consolidation or reclassification, then, and in each such case, the
current market price shall be appropriately adjusted to reflect ex-dividend or
ex-distribution trading. The closing price for each day shall be the last sale
price, regular way, or, in case no such sale takes place on such day, the
average of the closing bid and asked prices, regular way, in either case as
reported in the principal consolidated transaction reporting system with respect
to securities listed or admitted to trading on the New York Stock Exchange or,
if the Security is not listed or admitted to trading on the New York Stock
Exchange, as reported in the principal consolidated transaction reporting system
with respect to securities listed on the principal national securities exchange
on which the shares of the Security are listed or admitted to trading or, if the
shares of the Security are not listed or admitted to trading on any national
securities exchange, the last quoted price or, if not so quoted, the average of
the high bid and low asked prices in the over-the-counter market, as reported by
the National Association of Securities Dealers, Inc. Automated Quotation System
or any successor ("NASDAQ") or such other system then in use, or, if on any such
date the shares of the Security are not quoted by any such organization, the
average of the closing bid and asked prices as furnished by a professional
market maker making a market in the Security selected by the Board of Directors
of the Company. If on such date no such market maker is making a market in the
Security, the fair value of such shares on such date as determined in good faith
by the Board of Directors of the Company shall be used, such determination to be
described in a statement filed with the Rights Agent. The term "Trading Day"
shall mean a day on which the principal national securities exchange on which
the shares of the Security are listed or admitted to trading is open for the
transaction of business or, if the shares of the Security are not listed or
admitted to trading on any national securities exchange but are quoted on
NASDAQ, a day on which NASDAQ is in operation or if the shares of the Security
are neither listed nor admitted to trading on any national securities exchange
nor quoted on NASDAQ, a Business Day.
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(ii) For the purpose of any computation hereunder, the
"current market price" of the Common Stock shall be determined in accordance
with the method set forth in Section 11(d)(i), except that if the Common Stock
is not publicly traded, the "current per share market price" shall mean the fair
value per share as determined in good faith by the Board of Directors of the
Company, whose determination shall be described in a statement filed with the
Rights Agent and shall be conclusive for all purposes.
(e) Notwithstanding anything herein to the contrary, no
adjustment in the Purchase Price shall be required unless such adjustment would
require an increase or decrease of at least 1% in such price; provided, however
that any adjustments which by reason of this Section 11(e) are not required to
be made shall be carried forward and taken into account in any subsequent
adjustment. All calculations under this Section 11 shall be made to the nearest
cent or to the nearest one-thousandth of a share of Common Stock.
Notwithstanding the first sentence of this Section 11(e), any adjustment
required by this Section 11 shall be made no later than the earlier of (i) three
years from the date of the transaction which mandates such adjustment and (ii)
the date of the expiration of the right to exercise any Rights.
(f) In the event that at any time, as a result of an
adjustment made pursuant to Section 11(a) or Section 13(a), the holder of any
Right thereafter exercised shall become entitled to receive any securities other
than Common Stock, thereafter the number or amount of such other securities so
receivable upon exercise of any Right shall be subject to adjustment from time
to time in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the securities contained in Sections 11(a), (b), (c),
(e), (g), (h), (i), (j), (k) and (m), and the provisions of Sections 7, 9, 10,
13 and 14 of this Agreement with respect to the Common Stock shall apply on like
terms to any such other securities.
(g) All Rights originally issued by the Company subsequent to
any adjustment made to the Purchase Price hereunder shall evidence the right to
purchase, at the adjusted Purchase Price, the number of shares of Common Stock
purchasable from time to time hereunder upon exercise of the Rights, all subject
to further adjustment as provided herein.
(h) Unless the Company shall have exercised its election as
provided in Section 11(i) of this Agreement, upon each adjustment of the
Purchase Price as a result of the calculations made in Sections 11(b) and (c) of
this Agreement, each Right outstanding immediately prior to the making of such
adjustment shall thereafter evidence the right to purchase, at the adjusted
Purchase Price, that number of shares of Common Stock (calculated to the nearest
one-thousandth of a share of Common Stock) obtained by (i) multiplying (x) the
number of shares of Common Stock covered by a Right immediately prior to such
adjustment by (y) the Purchase Price in effect immediately prior to such
adjustment of the Purchase Price and (ii) dividing the product so obtained by
the Purchase Price in effect immediately after such adjustment of the Purchase
Price.
(i) The Company may elect on or after the date of any
adjustment of the Purchase Price to adjust the number of Rights held by each
holder of Rights, in substitution for any adjustment in the number of shares of
Common Stock purchasable upon the exercise of a Right. Each of the Rights
outstanding after such adjustment of the number of Rights shall be
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exercisable for the number of shares of Common Stock for which it was
exercisable immediately prior to such adjustment. Each holder of a Right held of
record prior to such adjustment of the number of Rights shall become the holder
of that number of Rights (calculated to the nearest one hundredth) obtained by
dividing the Purchase Price in effect immediately prior to adjustment of the
Purchase Price by the Purchase Price in effect immediately after adjustment of
the Purchase Price. The Company shall make a public announcement of its election
to adjust the number of Rights, indicating the record date for the adjustment,
and, if known at the time, the amount of the adjustment to be made, and
information as to the manner in which such adjustment is to be effected. This
record date may be the date on which the Purchase Price is adjusted or any day
thereafter, but, if the Right Certificates have been issued, shall be at least
10 days later than the date of the public announcement. If Right Certificates
have not been issued, in the case of a stock split, stock dividend or similar
event, such adjustment in the number of Rights held by each existing holder of
Rights shall be effected (unless the Board of Directors otherwise elects), by
allocating the adjusted number of Rights proportionately among all shares held
by such holder immediately after such stock split, stock dividend or other
event. If Right Certificates have been issued, upon each adjustment of the
number of Rights pursuant to this Section 11(i), the Company shall, as promptly
as practicable, cause to be distributed to holders of record of Right
Certificates on such record date, Right Certificates evidencing, subject to
Section 14 hereof, the additional Rights to which such holders shall be entitled
as a result of such adjustment, or, at the option of the Company, shall cause to
be distributed to such holders of record in substitution and replacement for the
Right Certificates held by such holders prior to the date of adjustment, and
upon surrender thereof, if required by the Company, new Right Certificates
evidencing all the Rights to which such holders shall be entitled after such
adjustment. Right Certificates so to be distributed shall be issued, executed
and countersigned in the manner provided for herein (and may bear, at the option
of the Company, the adjusted Purchase Price) and shall be registered in the
names of the holders of record of Right Certificates on the record date
specified in the public announcement.
(j) Irrespective of any adjustment or change in the Purchase
Price or the number of shares of Common Stock issuable upon the exercise of the
Rights, the Right Certificates theretofore and thereafter issued may continue to
express the Purchase Price per share of Common Stock and the number of shares of
Common Stock which were expressed in the initial Right Certificates issued
hereunder.
(k) Before taking any action that would cause an adjustment
reducing the Purchase Price below the then par value, if any, of the Common
Stock issuable upon exercise of the Rights, the Company shall take any corporate
action which may, in the opinion of its counsel, be necessary in order that the
Company may validly and legally issue fully paid and nonassessable Common Stock
at such adjusted Purchase Price.
(1) In any case in which this Section 11 shall require that
an adjustment in the Purchase Price be made effective as of a record date for a
specified event, the Company may elect to defer until the occurrence of such
event the issuing to the holder of any Right exercised after such record date of
the Common Stock and other capital stock or securities of the Company, if any,
issuable upon such exercise over and above the Common Stock and other capital
stock or securities of the Company, if any, issuable upon such exercise on the
basis of the Purchase Price in
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effect prior to such adjustment; provided, however, that the Company shall
deliver to such holder a due bill or other appropriate instrument evidencing
such holder's right to receive such additional shares of Common Stock upon the
occurrence of the event requiring such adjustment.
(m) Anything in this Section 11 to the contrary
notwithstanding, the Company shall be entitled to make such reductions in the
Purchase Price, in addition to those adjustments expressly required by this
Section 11, as and to the extent that the Company's Board of Directors shall, in
its sole discretion, determine to be advisable in order that any (i)
consolidation or subdivision of the Common Stock, (ii) issuance wholly for cash
of any Common Stock at less than the current market price, (iii) issuance wholly
for cash of Common Stock or securities which by their terms are convertible into
or exercisable or exchangeable for Common Stock, (iv) Common Stock dividends or
(v) issuance of rights, options or warrants referred to hereinabove in this
Section 11, hereafter made by the Company to holders of its Common Stock shall
not be taxable to such stockholders.
(n) The Company covenants and agrees that it shall not, at
any time after the Distribution Date, (i) consolidate with any other Person
(other than a wholly-owned Subsidiary of the Company in a transaction which does
not violate Section 11(o) hereof), (ii) merge with or into any other Person
(other than a wholly-owned Subsidiary of the Company in a transaction which does
not violate Section 11(o) hereof), or (iii) sell or transfer (or permit any
Subsidiary to sell or transfer), in one transaction, or a series of related
transactions, assets or earning power aggregating more than 50% of the assets or
earning power of the Company and its Subsidiaries (taken as a whole) to any
other Person or Persons (other than the Company and/or any of its Subsidiaries
in one or more transactions each of which does not violate Section 11(o)
hereof), if (x) at the time of or immediately after such consolidation, merger,
sale or transfer there are any charter or by-law provisions or any rights,
warrants or other instruments or securities outstanding or agreements in effect
or other actions taken, which would materially diminish or otherwise eliminate
the benefits intended to be afforded by the Rights or (y) prior to,
simultaneously with or immediately after such consolidation, merger or sale, the
stockholders of the Person who constitutes, or would constitute, the "Principal
Party" for purposes of Section 13(a) hereof shall have received a distribution
of Rights previously owned by such Person or any of its Affiliates and
Associates. The Company shall not consummate any such consolidation, merger,
sale or transfer unless prior thereto the Company and such other Person shall
have executed and delivered to the Rights Agent a supplemental agreement
evidencing compliance with this Section 11(n).
(o) The Company covenants and agrees that, after a Stock
Acquisition Date it will not, except as permitted by Section 24 or Section 27
hereof, take (or permit any Subsidiary to take) any action the purpose of which
is to, or if at the time such action is taken it is reasonably foreseeable that
the effect of such action is to, materially diminish or eliminate the benefits
intended to be afforded by the Rights.
Section 12. Certification of Adjusted Purchase Price or Number
of Shares. Whenever an adjustment is made as provided in Sections 11 or 13
hereof, the Company shall (a) promptly prepare a certificate setting forth such
adjustment and a brief statement of the facts accounting for such adjustment and
(b) promptly file with the Rights Agent and with each transfer agent for the
Common Stock a copy such certificate.
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Section 13. Consolidation, Merger or Sale or Transfer of
Assets or Earning Power. (a) In the event (a "Section 13 Event") that, following
the Stock Acquisition Date, directly or indirectly, (x) the Company shall
consolidate with, or merge with and into, any Person or Persons, (y) the Company
shall consolidate with or merge with and into, any Person or Persons, and the
Company shall be the continuing or surviving corporation of such consolidation
or merger (other than, in a case of any transaction described in (x) or (y), a
merger or consolidation which would result in all of the securities generally
entitled to vote in the election of directors ("voting securities") of the
Company outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into securities of the surviving
entity) all of the voting securities of Company or such surviving entity
outstanding immediately after such merger or consolidation and holders of such
securities not having changed as a result of such merger or consolidation), or
(z) the Company shall sell or otherwise transfer (or one or more of its
Subsidiaries shall sell or otherwise transfer), in one or a series of related
transactions, assets or earning power aggregating more than 50% of the assets or
earning power of the Company and its Subsidiaries (taken as a whole and
calculated on the basis of the Company's most recent regularly prepared
financial statements) to any Person or Persons (other than the Company or any
Subsidiary of the Company in one or more transactions each of which does not
violate Section 11(o) hereof), then, and in each such case (except as provided
in Section 13(d) hereof), proper provision shall be made so that (i) each holder
of a Right, except as provided in Section 11(a)(iii) hereof, shall thereafter
have the right to receive, upon the exercise thereof at the then current
Purchase Price in accordance with the terms of this Agreement Common Stock and
other securities or assets of the Company, such number of validly authorized and
issued, fully paid, non-assessable and freely tradeable shares of Common Stock
of the Principal Party (as hereinafter defined), not subject to any liens,
encumbrances, rights of first refusal or other adverse claims, as shall be equal
to the result obtained by (A) multiplying the then current Purchase Price by the
number of shares of Common Stock for which a Right was exercisable immediately
prior to the first occurrence of a Section 13 Event (without taking into account
any adjustment previously made pursuant to Section 11(a)(ii)) and (y) dividing
that product by 50% of the current market price per share of the Common Stock of
such Principal Party (determined pursuant to Section 11(d) hereof) on the date
of consummation of such Section 13 Event; (ii) such Principal Party shall
thereafter be liable for, and shall assume, by virtue of such Section 13 Event,
all the obligations and duties of the Company pursuant to this Agreement; (iii)
the term "Company" shall thereafter be deemed to refer to such Principal Party,
it being specifically intended that the provisions of Section 11 hereof shall
apply only to such Principal Party following the first occurrence of a Section
13 Event; and (iv) such Principal Party shall take such steps (including, but
not limited to, the reservation of a sufficient number of shares of its Common
Stock in accordance with Section 9 hereof (applying the provisions thereof with
respect to Common Stock of the Company to the Common Stock of such Principal
Party)) in connection with such consummation as may be necessary to assure that
the provisions hereof shall thereafter be applicable, as nearly as reasonably
may be possible, in relation to the shares of its Common Stock thereafter
deliverable upon the exercise of the Rights.
(b) "Principal Party" shall mean:
(i) in the case of any transaction described
in clause (x) or (y) of the first sentence of Section 13(a):
(A) the Person that is the issuer of any
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securities into which Common Shares of the Company are
converted in such merger or consolidation, or, if there is
more than one such issuer, the issuer of Common Stock of which
has the greatest aggregate market value or (B) if no
securities are so issued, the Person that is the other party
to such merger or consolidation, or, if there is more than one
such Person, the Person the Common Stock of which has the
greatest aggregate market value (including, if applicable, the
Company if it is the surviving corporation); and
(ii) in the case of any transaction
described in clause (z) of the first sentence of Section
13(a), the Person that is the party receiving the greatest
portion of the assets or earning power transferred pursuant to
such transaction or transactions or if the Person receiving
the greatest portion of the assets or earning power cannot be
determined, whichever of such Persons which is the issuer of
Common Stock having the greatest aggregate market value;
provided, however, that in any of the cases described in 13(b)(i) or (b)(ii)
above, (1) if the shares of Common Stock of such Person are not at such time and
have not been continuously over the preceding twelve (12) month period
registered under Section 12 of the Exchange Act, and such Person is a direct or
indirect Subsidiary of another Person the shares of Common Stock of which are
and have been so registered, "Principal Party" shall refer to such other Person;
(2) in case such Person is a Subsidiary, directly or indirectly, of more than
one Person, the shares of Common Stock of two or more of which are and have been
so registered, "Principal Party" shall refer to whichever of such Persons is the
issuer of the shares of Common Stock having the greatest aggregate market value;
and (3) in case such Person is owned, directly or indirectly, by a joint venture
formed by two or more Persons that are not owned, directly or indirectly, by the
same Person, the rules set forth in (1) and (2) above shall apply to each of the
chains of ownership having an interest in such joint venture as if such party
were a "Subsidiary" of both or all of such joint ventures and the Principal
Parties in each such chain shall bear the obligations set forth in this Section
13 in the same ratio as their direct or indirect interests in such Person bear
to the total of such interests.
(c) The Company shall not consummate any such consolidation,
merger, sale or transfer unless the Principal Party shall have a sufficient
number of its authorized shares of Common Stock which have not been issued or
reserved for issuance to permit the exercise in full of the Rights in accordance
with this Section 13 and unless prior thereto the Company and such Principal
Party shall have executed and delivered to the Rights Agent a supplemental
agreement providing for the terms set forth in paragraphs (a) and (b) of this
Section 13 and that all rights of first refusal or preemptive rights in respect
of the issuance of shares of Common Stock of the Principal Party upon exercise
of the outstanding Rights have been waived and that such transaction shall not
result in a default by the Principal Party under this Agreement, and further
providing that, as soon as practicable after the date of any consolidation,
merger, sale or transfer mentioned in paragraph (a) of this Section 13, the
Principal Party at its own expense shall:
(i) prepare and file a registration
statement under the Act with respect to the Rights and the
securities purchasable upon the exercise of the Rights on an
appropriate form, and use its best efforts to cause such
registration
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statement to become effective as soon as practicable after
such filing and to remain effective (with a prospectus at all
times meeting the requirements of the Act) until the Final
Expiration Date;
(ii) use its best efforts to qualify or
register the Rights and the securities purchasable upon
exercise of the Rights under the blue sky laws of such
jurisdictions as may be necessary or appropriate;
(iii) deliver to holders of the Rights
historical financial statements for the Principal Party which
comply in all respects with the requirements for registration
on Form 10 under the Exchange Act; and
(iv) use its best efforts to list (or
continue the listing of) the Rights and the securities
purchasable upon exercise of the Rights on a national
securities exchange or to meet the eligibility requirement for
quotation on NASDAQ.
The provisions of this Section 13 shall similarly apply to
successive mergers or consolidations or sales or other transfers. In the event
that a Section 13 Event shall occur at any time after the occurrence of a Stock
Acquisition Date, the Rights which have not theretofore been exercised pursuant
to Section 11(a)(ii) shall thereafter become exercisable in the manner described
in Section 13(a).
(d) Notwithstanding anything in this Agreement to the
contrary, Section 13 shall not be applicable to a transaction described in
subparagraphs (x) and (y) of Section 13(a) if: (i) such transaction is
consummated with a Person or Persons who acquired Common Stock pursuant to an
Approved Offer (or an Affiliate of any such Person or Persons) as promptly as
reasonably practical (and in any event within one year) following consummation
of such Approved Offer; (ii) the price per share of Common Stock offered in such
transaction is not less than the price per share of Common Stock paid to all
holders of Common Stock whose shares were purchased pursuant to such Approved
Offer; and (iii) the form of consideration offered in such transaction is the
same as the form of consideration paid pursuant to such Approved Offer. Upon
consummation of any such transaction contemplated by this Section 13(d), all
Rights hereunder shall expire.
(e) In case the Principal Party which is to be a party to a
transaction referred to in this Section 13 has provision in any of its
authorized securities or in its Certificate of Incorporation or By-Laws or other
instrument governing its corporate affairs, which provision would have the
effect of (i) causing such Principal Party to issue, in connection with, or as a
consequence of, the consummation of a transaction referred to in this Section
13, shares of Common Stock of such Principal Party at less than the then current
market price per share (determined pursuant to Section 11(d) hereof) or
securities exercisable for, or convertible into, Common Stock of such Principal
Party at less than such then current market price (other than to holders of
Rights pursuant to this Section 13) or (ii) providing for any special payment,
tax or similar provisions in connection with the issuance of the Common Stock of
such Principal Party pursuant to the provisions of Section 13, then, in such
event, the Company shall not consummate any such transaction unless prior
thereto the Company and such Principal Party shall have
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<PAGE>
executed and delivered to the Rights Agent a supplemental agreement providing
that the provision in question of such Principal Party shall have been canceled,
waived or amended, or that the authorized securities shall be redeemed, so that
the applicable provision will have no effect in connection with, or as a
consequence of, the consummation of the proposed transaction.
Section 14. Fractional Rights and Fractional Shares. (a) The
Company shall not be required to issue fractions of Rights (except, prior to the
Distribution Date, as provided in Section 11 hereof) or to distribute Right
Certificates which evidence fractional Rights. In lieu of such fractional
Rights, there shall be paid to the registered holders of the Right Certificates
with regard to which such fractional Rights would otherwise be issuable, an
amount in cash equal to the same fraction of the current market value of a whole
Right. For the purposes of this Section 14(a), the current market value of a
whole Right shall be the closing price of the Rights for the Trading Day
immediately prior to the date on which such fractional Rights would have been
otherwise issuable. The closing price of the Rights for any day shall be the
last sale price, regular way, or, in case no such sale takes place on such day,
the average of the closing bid and asked prices, regular way, in either case as
reported in the principal consolidated transaction reporting system with respect
to securities listed or admitted to trading on the New York Stock Exchange or,
if the Rights are not listed or admitted to trading on the New York Stock
Exchange, as reported in the principal consolidated transaction reporting system
with respect to securities listed on the principal national securities exchange
on which the Rights are listed or admitted to trading or, if the Rights are not
listed or admitted to trading on any national securities exchange, the last
quoted price or, if not so quoted, the average of the high bid and low asked
prices in the over-the-counter market, as reported by NASDAQ or such other
system then in use or, if on any such date the Rights are not quoted by any such
organization, the average of the closing bid and asked prices as furnished by a
professional market maker making a market in the Rights, as selected by the
Board of Directors of the Company. If on any such date the Rights are not quoted
by any such organization and no professional market maker is making such a
market in the Rights, the fair value of the Rights on such date as determined in
good faith by the Board of Directors of the Company shall be used.
(b) Following the occurrence of the Stock Acquisition Date or
a Section 13 Event, the Company shall not be required to issue fractions of
shares of its Common Stock upon exercise of the Rights or to distribute
certificates which evidence fractional shares of its Common Stock. In lieu of
fractional shares of its Common Stock, the Company may pay to the registered
holders of Right Certificates at the time such Rights are exercised as herein
provided an amount in cash equal to the same fraction of the current market
value of one share of Common Stock. For purposes of this Section 14(b), the
current market value of a share of Common Stock shall be the closing price of
one share of Common Stock of the Company (as determined pursuant to the second
sentence of Section 11(d)(i) hereof) for the Trading Day immediately prior to
the date of such exercise.
(c) The holder of a Right by the acceptance thereof expressly
waives any right to receive any fractional Rights or any fractional shares upon
exercise of a Right (except as provided above).
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<PAGE>
Section 15. Rights of Action. All rights of action in respect
of this Agreement, other than the rights of action vested in the Rights Agent
pursuant to Section 18, are vested in the respective registered holders of the
Right Certificates (and, prior to the Distribution Date, the registered holders
of the Common Stock); and any registered holder of any Right Certificate (or,
prior to the Distribution Date, of the Common Stock), without the consent of the
Rights Agent or of the holder of any other Right Certificate (or, prior to the
Distribution Date, any holder of the Common Stock), may, on his own behalf and
for his own benefit, enforce, and may institute and maintain any suit, action or
proceeding against the Company to enforce, or otherwise act in respect of, his
right to exercise the Rights evidenced by such Right Certificate in the manner
provided in such Right Certificate and in this Agreement. Without limiting the
foregoing or any remedies available to the holders of Rights, it is specifically
acknowledged that the holders of Rights would not have an adequate remedy at law
for any breach of this Agreement and will be entitled to specific performance of
the obligations under, and injunctive relief against actual or threatened
violations of the obligations of any Person subject to, this Agreement.
Section 16. Agreement of Right Holders. Every holder of a
Right by accepting the same, consents and agrees with the Company and the Rights
Agent and with every other holder of a Right that:
(a) prior to the Distribution Date, the Rights will be
transferable only simultaneously and together with the transfer of
Common Stock;
(b) after the Distribution Date, the Right Certificates are
transferable only on the registry books of the Rights Agent if
surrendered at the principal office or such other office of the Rights
Agent designated for such purpose, duly endorsed or accompanied by a
proper instrument of transfer and with the appropriate forms and
certificates fully executed;
(c) subject to Section 6, Section 7(e) and Section 11(a)
hereof, the Company and the Rights Agent may deem and treat the person
in whose name the Right Certificate (or, prior to the Distribution
Date, the associated Common Stock certificate) is registered as the
absolute owner thereof and of the Rights evidenced thereby
(notwithstanding any notations of ownership or writing on the Right
Certificates or the associated Common Stock certificate made by anyone
other than the Company or the Rights Agent) for all purposes
whatsoever, and neither the Company nor the Rights Agent shall be
affected by any notice to the contrary; and
(d) notwithstanding anything in this Agreement to the
contrary, neither the Company nor the Rights Agent shall have any liability to
any holder of a Right or other Person as a result of its inability to perform
any of its obligations under this Agreement by reason of any preliminary or
permanent injunction or other order, decree or ruling issued by a court of
competent jurisdiction or by a governmental, regulatory or administrative agency
or commission, or any statute, rule, regulation or executive order promulgated
or enacted by any governmental authority, prohibiting or otherwise restraining
performance of such obligation; provided, however, that the Company must use its
best efforts to have any such injunction, order, decree or ruling lifted,
dissolved or otherwise overturned as soon as possible.
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<PAGE>
Section 17. Right Certificate Holder Not Deemed a Stockholder.
No holder, as such, of any Right Certificate shall be entitled to vote, receive
dividends or be deemed for any purpose the holder of shares of Common Stock or
any other securities of the Company which may at any time be issuable on the
exercise of the Rights represented thereby, nor shall anything contained herein
or in any Right Certificate be construed to confer upon the holder of any Right
Certificate, as such, any of the rights of a stockholder of the Company or any
right to vote for the election of directors or upon any matter submitted to
stockholders at any meeting thereof, or to give or withhold consent to any
corporate action, or to receive notice of meetings or other actions affecting
stockholders (except as provided in Section 25 of this Agreement), or to receive
dividends or other distributions or to exercise any preemptive or subscription
rights, or otherwise, until the Right or Rights evidenced by such Right
Certificate shall have been exercised in accordance with the provisions hereof.
Section 18. Concerning the Rights Agent. The Company agrees to
pay to the Rights Agent reasonable compensation for all services rendered by it
hereunder and, from time to time, on demand of the Rights Agent, its reasonable
expenses and counsel fees and other disbursements incurred in the administration
and execution of this Agreement and the exercise and performance of its duties
hereunder. The Company also agrees to indemnify the Rights Agent for, and to
hold it harmless against, any loss, liability or expense, incurred without
negligence, bad faith or willful misconduct on the part of the Rights Agent, for
anything done or omitted by the Rights Agent in connection with the acceptance
and administration of this Agreement, including the costs and expenses of
defending against any claim of liability.
The Rights Agent shall be protected and shall incur no
liability for or in respect of any action taken, suffered or omitted by it in
connection with its administration of this Agreement in reliance upon any Right
Certificate or certificate for shares of Common Stock or for other securities of
the Company, instrument of assignment or transfer, power of attorney,
endorsement, affidavit, letter, notice, direction, consent, certificate,
statement, or other paper or document believed by it to be genuine and to be
signed, executed and, where necessary, verified or acknowledged, by the proper
person or persons.
Section 19. Merger or Consolidation or Change of Name of
Rights Agent. Any corporation into which the Rights Agent or any successor
Rights Agent may be merged or with which it may be consolidated, or any
corporation resulting from any merger or consolidation to which the Rights Agent
or any successor Rights Agent shall be a party, or any corporation succeeding to
the corporate trust or stock transfer business of the Rights Agent or any
successor Rights Agent, shall be the successor to the Rights Agent under this
Agreement without the execution or filing of any paper or any further act on the
part of any of the parties hereto, provided that such corporation would be
eligible for appointment as a successor Rights Agent under the provisions of
Section 21 hereof. In case at the time such successor Rights Agent shall succeed
to the agency created by this Agreement, any of the Right Certificates shall
have been countersigned but not delivered, any such successor Rights Agent may
adopt the countersignature of the predecessor Rights Agent and deliver such
Right Certificate so countersigned; and in case at that time any of the Right
Certificates shall not have been countersigned, any successor Rights Agent may
countersign such Right Certificate either in the name of the predecessor Rights
Agent
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<PAGE>
or in the name of the successor Rights Agent; and in all such cases such Right
Certificate shall have the full force provided in the Right Certificate and in
this Agreement.
In case at any time the name of the Rights Agent shall be
changed and at such time any of the Right Certificates shall have been
countersigned but not delivered, the Rights Agent may adopt the countersignature
under its prior name and deliver Right Certificates so countersigned; and in
case at that time the Rights Agent may countersign such Right Certificates
either in its prior name or in its changed name; and in all such cases such
Right Certificates shall have the full force provided in the Right Certificates
and in this Agreement.
Section 20. Duties of Rights Agent. The Rights Agent
undertakes the duties and obligations expressly set forth in this Agreement, and
no implied duties or obligations shall be read into this Agreement against the
Rights Agent. The Rights Agent undertakes the duties and obligations imposed by
this Agreement upon the following terms and conditions, by all of which the
Company and the holders of Right Certificates, by their acceptance thereof,
shall be bound:
(a) The Rights Agent may consult with legal counsel (who may
be legal counsel for the Company), and the opinion of such counsel
shall be full and complete authorization and protection to the Rights
Agent as to any action taken or omitted by it in good faith and in
accordance with such opinion.
(b) Whenever in the performance of its duties under this
Agreement the Rights Agent shall deem it necessary or desirable that
any fact or matter (including, without limitation, the identity of any
Acquiring Person or any Affiliate or Associate thereof) be proved or
established by the Company prior to taking or suffering any action
hereunder, such fact or matter (unless other evidence in respect
thereof be herein specifically prescribed) may be deemed to be
conclusively proved and established by a certificate signed by the
Chairman of the Board, President and Chief Executive Officer or the
Vice President-Treasurer and Secretary or the Assistant Treasurer or
the Assistant Secretary of the Company and delivered to the Rights
Agent; and such certificate shall be full authorization to the Rights
Agent for any action taken or suffered in good faith by it under the
provisions of this Agreement in reliance upon such certificate.
(c) The Rights Agent shall be liable hereunder only for its
own negligence, bad faith or willful misconduct.
(d) The Rights Agent shall not be liable for or by reason of
any of the statements of fact or recitals contained in this Agreement
or in the Right Certificates (except its countersignature thereof), or
be required to verify the same, but all such statements and recitals
are and shall be deemed to have been made by the Company only.
(e) The Rights Agent shall not be under any responsibility in
respect of the validity of this Agreement or the execution and delivery
hereof (except the due execution hereof by the Rights Agent) or in
respect of the validity or execution of any Right Certificate (except
its countersignature thereof); nor shall it be responsible for any
breach by the Company of any covenant or condition contained in this
Agreement or in any Right
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Certificate; nor shall it be responsible for any change in the
exercisability of the Rights (including Rights becoming null and void
pursuant to Section 11(a)(iii) hereof); nor shall it be responsible for
any adjustment required under the provisions of Sections 11 or 13
hereof or responsible for the manner, method or amount of any such
adjustment or the ascertaining of the existence of facts that would
require any such adjustment (except with respect to the exercise of
Rights evidenced by Right Certificates after actual notice of any such
adjustment); nor shall it by any act hereunder be deemed to make any
representation or warranty as to the authorization or reservation of
Common Stock or other securities to be issued pursuant to this
Agreement or any Right Certificate or as to whether any Common Stock or
other securities will, when issued, be validly authorized and issued,
fully paid and nonassessable.
(f) The Company agrees that it will inform the Rights Agent
promptly upon the Company's determination that a Person has become an
Acquiring Person and the Rights Agent will not be responsible for
determining the status of a Person as an Acquiring Person prior to such
notification except as such status may be indicated in the assignment
or election to purchase of a Right Certificate. The Company agrees that
it will perform, execute, acknowledge and deliver or cause to be
performed, executed, acknowledged and delivered all such further and
other acts, instruments and assurances as may reasonably be required by
the Rights Agent for the carrying out or performing by the Rights Agent
of the provisions of this Agreement.
(g) The Rights Agent is hereby authorized and directed to
accept instructions with respect to the performance of its duties
hereunder from the Chairman of the Board, President and Chief Executive
Officer, or the Vice President-Treasurer and Secretary of the Company,
and to apply to such officers for advice or instructions in connection
with its duties, and it shall not be liable for any action taken or
suffered to be taken by it in good faith in accordance with
instructions of any such officer.
(h) The Rights Agent and any stockholder, director, officer
or employee of the Rights Agent may buy, sell or deal in any of the
Rights or other securities of the Company or become pecuniarily
interested in any transaction in which the Company may be interested,
or contract with or lend money to the Company or otherwise act as fully
and freely as though it were not Rights Agent under this Agreement.
Nothing herein shall preclude the Rights Agent from acting in any other
capacity for the Company or for any other legal entity.
(i) The Rights Agent may execute and exercise any of the
rights or powers hereby vested in it or perform any duty hereunder
either itself or by or through its attorneys or agents, and the Rights
Agent shall not be answerable or accountable for any act, default,
neglect or misconduct of any such attorneys or agents or for any loss
to the Company resulting from any such act, default, neglect or
misconduct, provided reasonable care was exercised in the selection and
continued employment thereof.
(j) If, with respect to any Right Certificate surrendered to
the Rights Agent for exercise or transfer, the certificate attached to
the form of assignment or form of election
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<PAGE>
to purchase, as the case may be, has either not been completed or
indicates an affirmative response to any item therein, the Rights Agent
shall not take any further action with respect to such requested
exercise or transfer without first consulting with the Company.
Section 21. Change of Rights Agent. The Rights Agent or any
successor Rights Agent may resign and be discharged from its duties under this
Agreement upon 30 days' notice in writing mailed to the Company and to each
transfer agent of the Common Stock by registered or certified mail, and to the
holders of the Right Certificates by first class mail. The Company may remove
the Rights Agent or any successor Rights Agent upon 30 days' notice in writing,
mailed to the Rights Agent or successor Rights Agent:, as the case may be, and
to each transfer agent of the Common Stock by registered or certified mail, and
to the holders of the Right Certificates by first class mail. If the Rights
Agent shall resign or be removed or shall otherwise become incapable of acting,
the Company shall appoint a successor to the Rights Agent. If the Company shall
fail to make such appointment within a period of 30 days after such removal or
after it has been notified in writing of such resignation or incapacity by the
resigning or incapacitated Rights Agent or by the holder of a Right Certificate
(who shall, with such notice, submit his Right Certificate for inspection by the
Company), then the registered holder of any Right Certificate may apply to any
court of competent jurisdiction for the appointment of a new Rights Agent. Any
successor Rights Agent, whether appointed by the Company or by such a court,
shall be (i) a corporation, bank or trust company organized and doing business
under the laws of the United States or of any state thereof, in good standing,
having its principal office in the United States of America, which is authorized
under applicable laws to exercise corporate trust or stock transfer powers and
is subject to supervision or examination by federal or state authority and which
has at the time of its appointment as Rights Agent a combined capital and
surplus of at least $50,000,000 or (ii) an Affiliate of a corporation described
in clause (i) of this sentence. After appointment, the successor Rights Agent
shall be vested with the same powers, rights, duties and responsibilities as if
it had been originally named as Rights Agent without further act or deed; but
the predecessor Rights Agent shall, upon payment of its charges, deliver and
transfer to the successor Rights Agent any property at the time held by it
hereunder, and execute and deliver any further assurance, conveyance, act or
deed necessary for the purpose. Not later than the effective date of any such
appointment, the Company shall file notice thereof in writing with the
predecessor Rights Agent and each transfer agent of the Common Stock, and mail a
notice thereof in writing to the registered holders of the Right Certificates.
Failure to give any notice provided for in this Section 21, however, or any
defect therein, shall not affect the legality or validity of the resignation or
removal of the Rights Agent or the appointment of the successor Rights Agent, as
the case may be. Notwithstanding the foregoing provision, in the event of
resignation, removal or incapacity of the Rights Agent, the Company shall have
the authority to act as the Rights Agent until a successor Rights Agent shall
have assumed the duties of the Rights Agent hereunder.
Section 22. Issuance of New Right Certificates.
Notwithstanding any of the provisions of this Agreement or of the Rights to the
contrary, the Company may, at its option, issue new Right Certificates
evidencing Rights in such form as may be approved by its Board of Directors to
reflect any adjustment or change in the Purchase Price and the number or kind or
class of shares of stock or other securities or property purchasable under the
Right Certificates made in accordance with the provisions of this Agreement.
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<PAGE>
In addition, in connection with the issuance or sale of shares
of Common Stock following the Distribution Date (other than upon exercise or
exchange of a Right) and prior to the Expiration Date, the Company, subject to
Section 11(a)(iii) hereof, (a) shall, with respect to shares of Common Stock so
issued or sold pursuant to the exercise of stock options or under any employee
plan or arrangement, or upon the exercise, conversion or exchange of securities,
notes or debentures issued by the Company, and (b) may, in any other case, if
deemed necessary or appropriate by the Board of Directors, issue Right
Certificates representing the appropriate number of Rights in connection with
such issuance or sale; provided, however, that (i) the Company shall not be
obligated to issue any Right Certificate if, and to the extent that, the Company
shall be advised by counsel that such issuance would create a significant risk
of material adverse tax consequences to the Company or the Person to whom such
Rights Certificate would be issued, and (ii) no such Rights Certificate shall be
issued if, and to the extent that, appropriate adjustment shall otherwise have
been made in lieu of the issuance thereof.
Section 23. Redemption. (a) The Company may, by resolution of
its Board of Directors, at its option, at any time prior to the earlier of (x)
the Stock Acquisition Date or (y) the close of business on the Final Expiration
Date, redeem all but not less than all of the then outstanding Rights at a
redemption price of $0.01 per Right, as such amount may be appropriately
adjusted to reflect any stock split, stock dividend or similar transaction
occurring after the date of this Amended and Restated Rights Agreement (such
redemption price being hereinafter referred to as the "Redemption Price");
provided, however, that in the event that a redemption of the Rights is
proposed, requested or considered at a time at which any Person (a "Proposed
Acquiror") has proposed or publicly announced an intention to propose a
transaction that, if consummated, would cause a Stock Acquisition Date or any of
the events listed in Sections 13(a), (b) or (c) to occur, the Board of Directors
may only act to redeem the rights upon the prior recommendation of a majority of
its Independent Directors at a time at which there are at least two Independent
Directors. "Independent Director" shall mean any member of the Board of
Directors of the Company who is not a proposed Acquiror or an Affiliate,
Associate, representative or nominee of a Proposed Acquiror and who is not an
officer or employee of the Company or any of its Subsidiaries. The redemption of
Rights by the Board of Directors shall be made effective at such time, on such
basis and with such conditions as the Board of Directors in its sole discretion
may establish. The Company may , at its option, pay the Redemption Price in
cash, shares of Common Stock (based on the "current market price", as defined in
Section 11(d)(i) hereof, of the Common Stock at the time of such Board
resolution) or any other form of consideration deemed appropriate by the Board
of Directors.
(b) Immediately upon adoption of an effective resolution of
the Board of Directors of the Company ordering the redemption of the Rights in
compliance with Section 23(a) (or upon the subsequent satisfaction of all
conditions to such redemption established by such resolution), evidence of which
shall have been filed with the Rights Agent, and without any further action and
without any notice, the right to exercise the Rights will terminate and the only
right thereafter of the holders of Rights shall be to receive the Redemption
Price. Within 10 Business Days after the action of the Board of Directors
ordering the redemption of the Rights (or such subsequent satisfaction of all
such conditions), the Company shall give notice of such redemption to the
holders of the then outstanding Rights by mailing such notice to all such
holders at their last addresses as they appear upon the registry books of the
Rights Agent or, prior
29
<PAGE>
to the Distribution Date, on the registry books of the transfer agent for the
Common Stock. Any notice which is mailed in the manner herein provided shall be
deemed given, whether or not the holder receives the notice. Each such notice of
redemption will state the method by which the payment of the Redemption Price
will be made. Neither the Company nor any of its Affiliates or Associates may
redeem, acquire or purchase any Rights at any time in any manner other than that
specifically set forth in this Section 23, and other than in connection with the
repurchase of Common Stock of the Company prior to the Distribution Date.
(c) In the event that the Board of Directors adopts an
effective resolution ordering the redemption of the Rights in compliance with
Section 23(a), the Company may, at its option, discharge all of its obligations
with respect to the Rights by (i) issuing a press release announcing the manner
of redemption of the Rights in accordance with this Agreement and (ii) mailing
payment of the Redemption Price to the registered holders of the Rights at their
last addresses as they appear on the registry books of the Rights Agent or,
prior to the Distribution Date, on the registry books of the transfer agent of
the Common Stock, and upon such action, all outstanding Rights and Right
Certificates shall be null and void without any further action by the Company.
Section 24. Exchange. (a) The Board of Directors of the
Company may, at its option, at any time after the Stock Acquisition Date
exchange all or part of the then-outstanding and exercisable Rights (which shall
not include Rights that have become void pursuant to the provisions of Section
11(a)(iii) hereof) for Common Stock (or Common Stock Equivalents) at an exchange
ratio of one share of Common Stock per Right, appropriately adjusted to reflect
any stock split, stock dividend or similar transaction occurring after the date
of this Amended and Restated Rights Agreement (such exchange ratio being
hereinafter referred to as the "Exchange Ratio") (provided that if there is then
a Proposed Acquiror, the Rights may not be exchanged without the prior
recommendation of a majority of its Independent Directors at a time at which
there are at least two Independent Directors). Notwithstanding the foregoing,
the Board of Directors of the Company shall not be empowered to effect such
exchange at any time after any Person (other than a Company Entity), together
with all Affiliates and Associates of such Person, becomes the Beneficial Owner
of 50% or more of the Common Stock then outstanding.
(b) Immediately upon the action of the Board of Directors of
the Company ordering the exchange of Rights pursuant to and in compliance with
subsection (a) of this Section 24 and without any further action and without any
notice, the right to exercise such Rights shall terminate and the only right
thereafter of a holder of such Rights, which excludes Rights that have become
void pursuant to the provisions of Section 11(a)(iii) hereof, shall be to
receive that number of shares of Common Stock, or Common Stock Equivalents,
equal to the number of such Rights held by such holder multiplied by the
Exchange Ratio. The Company shall promptly file notice of such Board action with
the Rights Agent and give public notice of any such exchange; provided, however,
that the failure to give, or any defect in, such notice shall not affect the
validity of such exchange. The Company shall promptly mail a notice of any such
exchange to all of the holders of such Rights at their last addresses as they
appear upon the registry books of the Rights Agent. Any notice which is mailed
in the manner herein provided shall be deemed given, whether or not the holder
receives the notice. Each such notice of exchange will state the method by which
the exchange of the Common Stock for Rights will be effected and, in the event
of any partial exchange, the number of Rights which will be exchanged. Any
partial exchange shall be
30
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effected pro rata based on the number of Rights (other than Rights which have
become void pursuant to the provisions of Section 11(a)(iii)) held by each
holder of Rights.
(c) In the event that there shall not be sufficient shares of
Common Stock issued but not outstanding or authorized but unissued to permit any
exchange of Rights as contemplated in accordance with this Section 24, the
Company shall take all such action as may be necessary to authorize additional
Common Stock for issuance upon exchange of the Rights.
(d) The Company shall not be required, pursuant to this
Section 24, to issue shares of Common Stock or to distribute certificates which
evidence fractional shares of Common Stock. In lieu of such fractional shares of
Common Stock, the Company shall pay to the registered holders of the Right
Certificates, with regard to which such fractional shares of Common Stock would
otherwise be issuable, an amount in cash equal to the same fraction of the
current market value of a whole share of Common Stock. For the purposes of this
paragraph (d), the current market value of a whole share of Common Stock shall
be the closing price of a share of Common Stock (as determined pursuant to the
second sentence of Section 11(d)(i) hereof) for the Trading Day immediately
prior to the date of exchange pursuant to this Section 24, and the value of any
Common Stock Equivalent shall be deemed to have the same current market value as
the Common Stock on such date.
Section 25. Notice of Certain Events. In case the Company
shall propose, at any time after the Distribution Date, (a) to pay any dividend
payable in stock of any class to the holders of its Common Stock or to make any
other distribution described to the holders of its Common Stock (other than a
regular quarterly cash dividend at a rate per share not in excess of the greater
of (x) 200% of the rate of the last quarterly dividend theretofore paid and (y)
$0.10 per quarter (as such amount may be appropriately adjusted to reflect any
stock split, stock dividend, or similar transaction)), or (b) to offer to the
holders of its Common Stock rights, options or warrants to subscribe for or to
purchase any additional Common Stock or securities convertible into Common
Stock, or (c) to effect any reclassification of its Common Stock (other than a
reclassification involving only the subdivision of outstanding Common Stock) or
any other event described in Section 11(a)(i) hereof, or (d) to effect any
merger, consolidation or other combination into or with any Person (other than a
Subsidiary of the Company in a transaction which does not violate Section 11(o)
hereof), or to effect any sale or other transfer (or to permit one or more of
its Subsidiaries to effect any sale or other transfer), in one or more
transactions, of more than 50% of the assets or earning power of the Company and
its Subsidiaries (taken as a whole) to any Person or Persons (other than the
Company and/or any of its Subsidiaries in one or more transactions each of which
does not violate Section 11(o) hereof), or (e) to effect the liquidation,
dissolution or winding up of the Company, then, in each such case, the Company
shall give to each holder of a Right, in accordance with Section 26 hereof, a
notice of such proposed action to the extent feasible and file a certificate
with the Rights Agent to that effect, which shall specify the record date for
the purposes of such stock dividend, distribution of rights or Rights, or the
date on which such reclassification, consolidation, merger, sale, transfer,
liquidation, dissolution, or winding up is to take place and the date of
participation therein by the holders of Common Stock, if any such date is to be
fixed, and such notice shall be so given in the case of any action covered by
clause (a) or (b) above at least twenty (20) days prior to the record date for
determining holders of the Common Stock for purposes of such action, and in the
case of any
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<PAGE>
such other action, at least twenty (20) days prior to the date of the taking of
such proposed action or the date of participation therein by the holders of
Common Stock, whichever shall be earlier.
(b) The Company shall, on the Stock Acquisition Date, or as
soon as practicable thereafter, give each holder of a Right, in accordance with
Section 26 hereof, a notice of the occurrence of such event, which notice shall
describe the event and the consequences of such event to holders of Rights under
Sections 11(a)(ii), (iii) and (iv) hereof. The failure to give notice required
by this Section 25 or any defect therein shall not affect the legality or
validity of the action taken by the Company or the vote upon any such action.
Section 26. Notices. Notices or demands authorized by this
Agreement to be given or made by the Rights Agent or by the holder of any Right
Certificate to or on the Company shall be sufficiently given or made if sent by
first class mail, postage prepaid, addressed (until another address is filed in
writing with the Rights Agent) as follows:
Southwestern Energy Company
1083 Sain Street
P.O. Box 1408
Fayetteville, Arkansas 72703
Attention: Chief Executive Officer
Subject to the provisions of Section 21, any notice or demand authorized by this
Agreement to be given or made by the Company or by the holder of any Right
Certificate to or on the Rights Agent shall be sufficiently given or made if
sent by first class mail, postage prepaid, addressed (until another address is
filed in writing with the Company) as follows:
First Chicago Trust Company of New York
525 Washington Boulevard
Suite 4660
Jersey City, New Jersey 07311
Attention: Corporate Actions Administration
Notices or demands authorized by this Agreement to be given or made by the
Company or the Rights Agent to the holder of any Right Certificate (or, if prior
to the Distribution Date, to the holder of any certificate for shares of Common
Stock) shall be sufficiently given or made if sent by first-class mail, postage
prepaid, addressed to such holder at the address of such holder as shown on the
registry books of the Company.
Section 27. Supplements and Amendments. The Company and the
Rights Agent shall, if the Company so directs, from time to time supplement or
amend this Agreement without the approval of any holders of Rights in order (i)
to cure any ambiguity, (ii) to correct or supplement any provision contained
herein which may be defective or inconsistent with any other provisions herein
(provided that any amendment made pursuant to clause (i) or (ii) hereof after a
Stock Acquisition Date or at any time that there is a Proposed Acquiror, shall
not materially adversely affect the interests of the holders of Right
Certificates (other than an Acquiring Person, a Proposed Acquiror or any
Affiliate or Associate thereof)), (iii) prior to the Stock Acquisition
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<PAGE>
Date, to effect any other change or modification which the Company may deem
necessary or desirable (provided that if there is then a Proposed Acquiror, this
Agreement may not be amended pursuant to this Section 27(iii) without the prior
recommendation of a majority of Independent Directors at a time at which there
are at least two Independent Directors), or (iv) after the Stock Acquisition
Date or at any time that there is a Proposed Acquiror, to make any other
provisions in regard to matters or questions arising hereunder which the Company
may deem necessary or desirable and which shall not adversely affect the
interests of the holders of Right Certificates (other than an Acquiring Person,
a Proposed Acquiror or any Affiliate or Associate thereof). Notwithstanding
anything contained in this Agreement to the contrary, this Agreement may not be
amended or supplemented (x) to reinstate a right of redemption if the Rights are
not then redeemable or (y) to decrease the Redemption Price. Upon the delivery
of a certificate from an appropriate officer of the Company which states that
the proposed supplement or amendment has been approved by the Company's Board of
Directors and is in compliance with the terms of this Section 27, the Rights
Agent shall execute such supplement or amendment; provided, however, that the
Rights Agent may, but shall not be obligated to, enter into any such supplement
or amendment that adversely affects its rights, duties or immunities under this
Agreement. Prior to the Distribution Date, the interests of the holders of
Rights shall be deemed to coincide with the interests of holders of shares of
Common Stock (other than an Acquiring Person, an Adverse Person, a Proposed
Acquiror or any Affiliate or Associate thereof).
Section 28. Successors. All the covenants and provisions of
this Agreement by or for the benefit of the Company or the Rights Agent shall
bind and inure to the benefit of their respective successors and assigns
hereunder.
Section 29. Benefits of this Agreement. Nothing in this
Agreement shall be construed to give to any person or corporation other than the
Company, the Rights Agent and the registered holders of the Right Certificates
(and, prior to the Distribution Date, of the Common Stock of the Company) any
legal or equitable right, remedy or claim under this Agreement; but this
Agreement shall be for the sole and exclusive benefit of the Company, the Rights
Agent and the registered holders of the Right Certificates (and, prior to the
Distribution Date, of the Common Stock of the Company).
Section 30. Severability. If any term, provision, covenant or
restriction of this Agreement or the Rights is held by a court of competent
jurisdiction or other authority to be invalid, void or unenforceable, the
remainder of this Agreement and the Rights shall remain in full force and effect
and shall in no way be affected, impaired or invalidated; provided, however,
that notwithstanding anything in this Agreement to the contrary, if any such
term, provision, covenant or restriction is held by such court or authority to
be invalid, void or unenforceable and the Board of Directors of the Company
determines in its good faith judgment that severing the invalid language from
this Agreement would adversely affect the purpose or effect of this Agreement,
the right of redemption set forth in Section 23 hereof shall be reinstated and
shall not expire until the close of business on the tenth Business Day following
the date of such determination by the Board of Directors.
Section 31. Determinations and Actions by the Board of
Directors, etc. The Board of Directors of the Company shall have the exclusive
power and authority to administer
33
<PAGE>
this Agreement and to exercise all rights and powers specifically granted to the
Board of Directors or to the Company, or as may be necessary or advisable in the
administration of this Agreement, including, without limitation, the right and
power to (i) interpret the provisions of this Agreement, and (ii) make all
determinations deemed necessary or advisable for the administration of this
Agreement (including, without limitation, a determination to redeem or not to
redeem the Rights pursuant to Section 23 hereof or to supplement or amend the
Agreement and whether any proposed supplement or amendment adversely affects the
interests of the holders of Right Certificates and comports with the
requirements of Section 27 hereof or to find or to announce publicly that any
Person has become an Acquiring Person, an Adverse Person or Proposed Acquiror).
For all purposes of this Agreement, any calculation of the number of shares of
Common Stock or other securities outstanding at any particular time, including
for purposes of determining the particular percentage of such outstanding shares
of Common Stock or any other securities of which any Person is the Beneficial
Owner, shall be made in accordance with the last sentence of Rule 13d-3(d)(1)(i)
of the General Rules and Regulations under the Exchange Act as in effect on the
date of this Agreement. All such actions, calculations, interpretations and
determinations (including for purpose of clause (y) below, all omissions with
respect to the foregoing) which are done or made by the Board of Directors of
the Company in good faith, shall (x) be final, conclusive and binding on the
Company, the Rights Agent, the holders of the Rights and all other parties, and
(y) not subject the Board of Directors or any director to any liability to the
holders of the Rights.
Section 32. Governing Law. This Agreement and each Right
Certificate issued hereunder shall be deemed to be a contract made under the
laws of the State of Arkansas and for all purposes shall be governed by and
construed in accordance with the laws of such state applicable to contracts to
be made and performed entirely within such state.
Section 33. Counterparts. This Agreement may be executed in
any number of counterparts and each of such counterparts shall for all purposes
be deemed to be an original, and all such counterparts shall together constitute
but one and the same instrument.
Section 34. Descriptive Headings. Descriptive headings of the
several Sections of this Agreement are inserted for convenience only and shall
not control or affect the meaning or construction of any of the provisions
hereof.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed and their respective corporate seals to be
hereunto affixed and attested, all as of the date and the year first above
written.
34
<PAGE>
Attest: SOUTHWESTERN ENERGY COMPANY
By: /s/ JEFF DANGEAU By: /s/ GREG D. KERLEY
-------------------------- --------------------------
Jeff Dangeau Greg D. Kerley
Assistant Secretary Senior Vice President and
Chief Financial Officer
FIRST CHICAGO TRUST COMPANY OF
Attest: NEW YORK
By: /s/ MARY E. GARCIA By: /s/ JOANNE GOROSTIOLA
-------------------------- --------------------------
Mary E. Garcia Joanne Gorostiola
Customer Service Officer Assistant Vice President
35
<PAGE>
EXHIBIT A
(Form of Right Certificate)
Certificate No. R- ___________ Rights
NOT EXERCISABLE AFTER APRIL 11, 2009 OR EARLIER IF NOTICE OF
REDEMPTION IS GIVEN. THE RIGHTS ARE SUBJECT TO REDEMPTION, AT THE OPTION OF THE
COMPANY AT $.01 PER RIGHT ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT UNDER
CERTAIN CIRCUMSTANCES, RIGHTS BENEFICIALLY OWNED BY AN ACQUIRING PERSON OR ANY
ASSOCIATES OR AFFILIATES THEREOF (AS SUCH TERMS ARE DEFINED IN THE RIGHTS
AGREEMENT) OR ANY SUBSEQUENT HOLDER OF SUCH RIGHTS MAY BECOME NULL AND VOID.
[THE RIGHTS REPRESENTED BY THIS RIGHT CERTIFICATE ARE OR WERE BENEFICIALLY OWNED
BY A PERSON WHO IS, WAS OR BECAME AN ACQUIRING PERSON OR AN AFFILIATE OR AN
ASSOCIATE OF AN ACQUIRING PERSON (AS THOSE TERMS ARE DEFINED IN THE RIGHTS
AGREEMENT). THIS RIGHT CERTIFICATE AND THE RIGHTS REPRESENTED HEREBY MAY BECOME
NULL AND VOID IN THE CIRCUMSTANCES SPECIFIED IN THE RIGHTS AGREEMENT.]1
Right Certificate
SOUTHWESTERN ENERGY COMPANY
This certifies that , or registered assigns, is the
registered owner of the number of Rights set forth above, each of which entitles
the owner thereof, subject to the terms, provisions and conditions of the
Amended and Restated Rights Agreement dated as of April 12, 1999 (the "Rights
Agreement") between Southwestern Energy Company, an Arkansas corporation (the
"Company"), and The First National Bank of Chicago (the "Rights Agent"), to
purchase from the Company at any time after the Distribution Date and prior to
5:00 P.M. (New York City time) on the Expiration Date (as such terms are defined
in the Rights Agreement) at the principal office or such other office of the
Rights Agent designated for such purpose, or of its successors as Rights Agent,
one fully-paid, nonassessable share of Common Stock, $0.10 par value (the
"Common Stock") of the Company, at a purchase price of $40 per share of Common
Stock (the "Purchase Price"), upon presentation and surrender of this Right
Certificate with the appropriate Form of Election to Purchase Shares duly
executed. The number of Rights evidenced
____________________
[FN]
1 The portion of the legend in brackets shall be inserted only if applicable
and shall replace the preceding sentence.
</FN>
<PAGE>
by this Right Certificate and the number of shares which may be purchased upon
exercise hereof) set forth above, and the Purchase Price set forth above, have
been determined as of April 7, 1999.
As provided in the Rights Agreement, the Purchase Price and
the number of shares of Common Stock or other securities which may be purchased
upon the exercise of the Rights evidenced by this Right Certificate are subject
to modification and adjustment upon the happening of certain events, and in
certain circumstances may be exercised to purchase securities of issuers other
than the Company.
This Right Certificate is subject to all of the terms,
provisions and conditions of the Rights Agreement, which terms, provisions and
conditions are hereby incorporated herein by reference and made a part hereof
and to which Rights Agreement reference is hereby made for a full description of
the rights, limitations of rights, obligations, duties and immunities hereunder
of the Rights Agent, the Company and the holders of the Right Certificates.
Copies of the Rights Agreement are on file at the above mentioned office of the
Rights Agent and are available free of charge upon written request from the
Company at:
Southwestern Energy Company
1083 Sain Street
P.O. Box 1408
Fayetteville, Arkansas 72703
Attention: Chief Executive Officer
This Right Certificate, with or without other Right
Certificates, upon surrender at the office of the Rights Agent, may be exchanged
for another Right Certificate or Right Certificates of like tenor and date
evidencing Rights entitling the holder to purchase a like aggregate number of
shares of Common Stock as the Rights evidenced by the Right Certificate or Right
Certificates surrendered shall have entitled such holder to purchase. If this
Right Certificate shall be exercised in part, the holder shall be entitled to
receive, upon surrender hereof, another Right Certificate or Right Certificates
for the number of whole Rights not exercised.
Subject to the provisions of the Rights Agreement, the Rights
evidenced by this Right Certificate may be redeemed by the Company at a
redemption price of $.01 per Right (payable in cash, shares of Common Stock or
other consideration), appropriately adjusted to reflect any Common Stock split,
Common Stock dividend or similar transaction occurring after the date hereof.
Subject to the provisions of the Rights Agreement, the Rights
evidenced by this Right Certificate (and the Rights Agreement itself) may be
amended by action of the Company's Board of Directors.
No fractional shares of Common Stock will be issued upon the
exercise of any Right or Rights evidenced hereby, but in lieu thereof a cash
payment will be made, as provided in the Rights Agreement.
A-2
<PAGE>
No holder of this Right Certificate, as such, shall be
entitled to vote or receive dividends or be deemed for any purpose the holder of
shares of Common Stock or of any other securities of the Company which may at
any time be issuable on the exercise hereof, nor shall anything contained in the
Rights Agreement or herein be construed to confer upon the holder hereof, as
such, any of the rights of a stockholder of the Company or any right to vote for
the election of directors or upon any matter submitted to stockholders at any
meeting thereof, or to give or withhold consent to any corporate action, or to
receive notice of meetings or other actions affecting stockholders (except as
provided in the Rights Agreement), or to receive dividends or subscription
rights, or otherwise, until the Right or Rights evidenced by this Right
Certificate shall have been exercised as provided in the Rights Agreement.
This Right Certificate shall not be valid or obligatory for
any purpose until it shall have been countersigned by the Rights Agent.
WITNESS the facsimile signature of the proper officers of the
Company and its corporate seal. Dated as of _________________, _____.
Attest: SOUTHWESTERN ENERGY COMPANY
By:_________________________ By_________________________
Secretary Title:
Countersigned:
FIRST CHICAGO TRUST COMPANY OF
NEW YORK
By:__________________________
Authorized Signature
A-3
<PAGE>
[Form of Reverse Side of Right Certificate]
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder desires
to transfer the Right Certificate)
FOR VALUE RECEIVED ______________________ hereby sells, assigns
and transfers unto _____________________________________________________________
________________________________________________________________________________
(Please print name and address of transferee)
this Right Certificate, together with all right, title and interest therein, and
does hereby irrevocably constitute and appoint ____________________ Attorney, to
transfer the within Right Certificate on the books of the within-named Company,
with full power of substitution.
DATED: ________________, ________
_____________________________
Signature
Signature Guaranteed:
A-4
<PAGE>
Certificate
The undersigned hereby certifies by checking the appropriate
boxes that:
(1) this Right Certificate [ ] is [ ] is not being sold,
assigned and transferred by or on behalf of a Person who is or was an Acquiring
Person or an Affiliate or Associate of any such Acquiring Person (as such terms
are defined pursuant to the Rights Agreement);
(2) after due inquiry and to the best knowledge of the
undersigned, it [ ] did [ ] did not acquire the Rights evidenced by this Right
Certificate from any Person who is, was or subsequently became an Acquiring
Person or an Affiliate or Associate of an Acquiring Person.
Dated:______________________, ________ __________________________
Signature
Signature Guaranteed:
NOTICE
The signature of the foregoing Assignment must correspond to
the name as written upon the face of this Right Certificate in every particular,
without alteration or enlargement or any change whatsoever.
A-5
<PAGE>
FORM OF ELECTION TO PURCHASE SHARES
(To be executed if holder desires to
exercise the Right Certificate)
To Southwestern Energy Company:
The undersigned hereby irrevocably elects to exercise
__________ Rights represented by this Right Certificate to purchase the Common
Stock of the Company (or such other securities of the Company or any other
person) and requests that certificates for such Common Stock be issued in the
name of:
Please insert social security or other identifying number
________________________________________________________________________________
(Please print name and address)
________________________________________________________________________________
If such number of Rights shall not be all the Rights evidenced by this Right
Certificate, a new Right Certificate for the balance remaining of such Rights
shall be registered in the name of and delivered to:
Please insert social security or other identifying number
________________________________________________________________________________
(Please print name and address)
________________________________________________________________________________
Dated:______________________, _____
______________________________
Signature
Signature Guaranteed:
A-6
<PAGE>
Certificate
The undersigned hereby certifies by checking the appropriate
boxes that:
(1) the Rights evidenced by this Right Certificate [ ] are [ ]
are not being exercised by or on behalf of a Person who is or was an Acquiring
Person or an Affiliate or Associate of any such Acquiring Person (as such terms
are defined pursuant to the Rights Agreement);
(2) after due inquiry and to the best knowledge of the
undersigned, it [ ] did [ ] did not acquire the Rights evidenced by this Right
Certificate from any Person who is, was or became an Acquiring Person or an
Affiliate or Associate of an Acquiring Person.
Dated:________________________, ______ ____________________________
Signature
Signature Guaranteed:
NOTICE
The signature to the foregoing Election to Purchase must
correspond to the name as written upon the face of this Right Certificate in
every particular, without alteration or enlargement or any change whatsoever.
A-7
<PAGE>
Exhibit B
SOUTHWESTERN ENERGY COMPANY
SUMMARY OF RIGHTS TO PURCHASE COMMON STOCK
On April 7, 1999, the Board of Directors of Southwestern
Energy Company (the "Company") adopted an Amended and Restated Rights Agreement,
dated as of April 12, 1999 (the "Rights Agreement"), between the Company and
First Chicago Trust Company of New York as Rights Agent, that amends the terms
of the outstanding rights (the "Rights") previously issued. The Rights are
currently evidenced (on the basis of one right for each outstanding share) by
the existing certificates for outstanding shares of common stock, $0.10 par
value, of the Company (the "Common Stock") and are not exerciseable and do not
trade separately from such shares. The Summary describes the rights as so
amended.
Each Right, when exercisable, will entitle the registered
holder to purchase from the Company one share of the Company's Common Stock at a
price of $40 per share (the "Purchase Price"), subject to adjustment.
Until the close of business on the earliest of: (i) the
tenth day after a public announcement that (A) a person or group of affiliated
or associated persons has acquired, or obtained the right to acquire, beneficial
ownership ("Beneficial Ownership") of 15% or more of the outstanding shares of
Common Stock of the Company (other than pursuant to a tender offer for all
outstanding shares of Common Stock at the price and on terms approved by the
Board of Directors based upon a prior recommendation of the Independent
Directors at a time when there are at least two Independent Directors or solely
as a result of a reduction of the number of shares of Common Stock outstanding
due to a repurchase of shares by the Company), (B) any person or group which
beneficially owned 15% of the outstanding shares on the date of the Rights
Agreement, or which acquired beneficial ownership of 15% of the outstanding
shares as a result of any repurchase of shares by the Company, thereafter
acquired beneficial ownership of additional shares constituting 1% or more of
the outstanding shares of Common Stock or (C) the Board of Directors determines
that a holder of 10% or more of the Common Stock is an Adverse Person (each, an
"Acquiring Person"); and (ii) the tenth Business Day (or such later day as may
be determined by action of the Board of Directors of the Company prior to such
time as any Person becomes an Acquiring Person) after the date of the
commencement of, or the first public announcement of the intent of any person
(other than a Company Entity (as defined in the Rights Agreement)) to commence
(which intention to commence remains in effect for five business days after such
announcement) a tender or exchange offer by any Person (other than a Company
Entity) to acquire (when added to any shares as to which such Person is the
Beneficial Owner immediately prior to such commencement) beneficial ownership of
15% or more of the issued and outstanding shares of Common Stock (the earlier of
such dates being called the "Distribution Date"), the Rights will be evidenced,
with respect to any of the Company's Common Stock certificates outstanding as of
the Record Date, by such Common Stock certificate and this Summary.
B-1
<PAGE>
The Rights Agreement provides that, until the Distribution
Date, the Rights will be transferred with and only with the Common Stock. New
Common Stock certificates issued after the Record Date upon transfer or new
issuance of the Common Stock will contain a notation incorporating the Rights
Agreement by reference. Until the Distribution Date, the surrender for transfer
of any of the Common Stock certificates outstanding as of the date of the Rights
Agreement (whether or not containing a notation contemplated by the original
Rights Agreement dated May 5, 1989) will also constitute the transfer of the
Rights associated with the Common Stock represented by such certificate and the
number of Rights associated with each share of Common Stock shall be
proportionately adjusted in the event of any dividend in Common Stock on the
Common Stock or subdivision, combination or reclassification of the Common Stock
(except as otherwise provided in the Rights Agreement). As soon as practicable
following the Distribution Date, separate certificates evidencing the Rights
("Right Certificates") will be mailed to holders of record of the Common Stock
as of the close of business on the Distribution Date and such separate
certificates alone will evidence Rights.
The Rights are not exercisable until the Distribution Date.
The Rights will expire on April 11, 2009, unless earlier redeemed by the Company
as described below or unless further extended pursuant to an amendment in the
Rights Agreement as described below.
The Purchase Price payable, and the number of shares of Common
Stock or other securities or property issuable, upon exercise of the Rights are
subject to adjustment from time to time to prevent dilution (i) in the event of
a stock dividend on, or a subdivision, combination or reclassification of, the
Common Stock, (ii) upon the grant to holders of Common Stock of certain rights
or warrants to subscribe for shares of Common Stock or convertible securities at
less than the current market price of the Common Stock or (iii) upon the
distribution to holders of Common Stock of evidences of indebtedness or assets
(excluding regular periodic cash dividends or dividends payable in Common Stock)
or of subscription rights or warrants (other than those referred to above).
In the event that, at any time after the Rights become
exercisable, the Company is acquired in a merger or other business combination,
proper provision shall be made so that each holder of a Right shall thereafter
have the right to receive, upon the exercise thereof at the then current
exercise price of the Right, that number of shares of common stock of the
surviving company (or its parent company or other controlling entity) which at
the time of such transaction would have a market value of two times the exercise
price of the Right. In the event that any person becomes an Acquiring Person,
the Rights Agreement provides that proper provision would be made so that each
holder of a Right, other than the Acquiring Person (whose Rights would
thereafter be null and void) and certain of its transferees, would thereafter
have the right to receive upon exercise that number of shares of the Common
Stock having a market value of two times the exercise price of the Right.
With certain exceptions, no adjustment in the Purchase Price
will be required until cumulative adjustments require an adjustment of at least
1% in such Purchase Price. No fractional shares will be issued and, in lieu
thereof, an adjustment in cash will be made based on the market price of the
Common Stock on the last trading date prior to the date of exercise.
B-2
<PAGE>
At any time prior to the close of business on the date that
Rights holders become entitled to purchase Common Stock of the Company (or of
the surviving entity after a merger with the Company) with a market value of
twice the Purchase Price (as described above), the Board of Directors of the
Company may redeem the Rights in whole, but not in part, at a price of $.01 per
Right (payable in cash, shares of Common Stock or other consideration),
appropriately adjusted to reflect any stock split, stock dividend or similar
transaction occurring after the date hereof (the "Redemption Price"). In the
event, however, that any person or group (a "Proposed Acquiror") has proposed or
publicly announced an intention to propose a transaction that, if consummated,
would cause an Acquiring Person to become such or cause the Company to be
acquired in a merger or other business combination, the Board of Directors may
only redeem the Rights after receiving a recommendation from a majority of its
Independent Directors. Immediately upon the action of the Board of Directors of
the Company electing to redeem the Rights (unless otherwise specified in such
Board action), the right to exercise the Rights will terminate and the only
right of the holders of Rights will be to receive the Redemption Price.
Upon the first public announcement (including, without
limitation, the filing of a report pursuant to the Securities Exchange Act of
1934) by the Company or an Acquiring Person containing information indicating
that an Acquiring Person has become such and prior to the acquisition by an
Acquiring Person of 50% or more of the Common Stock then outstanding, the Board
of Directors may, at its option and after receiving the prior recommendation of
its Independent Directors, exchange all or part of the then outstanding and
existing Rights (other than Rights owned by such Acquiring Person which shall
become void) for Common Stock at an Exchange Ratio of one share of Common Stock
per Right (subject to adjustment) (the "Exchange Ratio"). Immediately upon the
action of the Board of Directors of the Company electing to exchange the Rights,
the right to exercise the Rights will terminate and the only right of the
holders of Rights will be to receive that number of shares of Common Stock or
Common Stock equivalents equal to the number of Rights held by such holder
multiplied by the Exchange Ratio.
Until a Right is exercised, the holder thereof, as such, will
have no rights as a stockholder of the Company, including, without limitation,
no right to vote or to receive dividends.
At any time prior to the time that an Acquiring Person or a
Potential Acquiror has become such, the Company may amend the Rights Agreement
and the terms of the Rights in any manner deemed necessary or desirable.
Thereafter, the Rights Agreement and the terms of the Rights may be amended by
the Company under certain circumstances, but not in any manner that adversely
affects the interests of the holders of the Rights (other than an Acquiring
Person or a Proposed Acquiror).
A copy of the Rights Agreement is being filed with the
Securities and Exchange Commission as an Exhibit to a Registration Statement on
Form 8-A. A copy of the Rights Agreement will be available free of charge from
the Company. This summary description of the Rights does not purport to be
complete and is qualified in its entirety by reference to the Rights Agreement,
which is incorporated herein by reference.
B-3
================================================================================
ASSET SALE AND PURCHASE AGREEMENT
By and Among
SOUTHWESTERN ENERGY COMPANY,
ARKANSAS WESTERN GAS COMPANY
and
ATMOS ENERGY CORPORATION
Dated as of October 15, 1999
================================================================================
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
I. DEFINITIONS.............................................................1
II. SALE AND PURCHASE.......................................................5
2.1. Sale and Purchase of Assets..........................................5
2.2. Excluded Assets......................................................6
2.3. Purchase Price; Adjustment...........................................7
2.4. Assumption of Liabilities............................................9
2.5. Closing.............................................................10
2.6. Nonassignable Contracts.............................................11
III. REPRESENTATIONS AND WARRANTIES OF SELLERS..............................11
3.1. Corporate Existence.................................................11
3.2. Authorization and Validity of Agreement.............................12
3.3. No Contravention....................................................12
3.4. Title to Assets; Adequacy; Condition................................12
3.5. Material Contracts..................................................12
3.6. Real Property.......................................................13
3.7. Permits.............................................................13
3.8. Litigation..........................................................13
3.9. Compliance with Laws................................................13
3.10. Governmental Consents............................................13
3.11. Tax Matters......................................................13
3.12. Financial Statements.............................................14
3.13. Employee Matters.................................................14
3.14. Brokerage........................................................15
3.15. Environmental Matters............................................15
3.16. No Undisclosed Liabilities; No Material Adverse Effect...........16
3.17. Customers; Suppliers.............................................16
3.18. Books and Records................................................16
3.19. Insurance........................................................16
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<PAGE>
3.20. Accounts Receivable..............................................16
3.21. Y2K Compliance...................................................16
3.22. No Other Representations.........................................16
IV. REPRESENTATIONS AND WARRANTIES OF BUYER................................17
4.1. Organization........................................................17
4.2. Authorization and Validity of Agreement.............................17
4.3. No Contravention....................................................17
4.4. Consents............................................................17
4.5. Brokerage...........................................................17
4.6. Litigation..........................................................17
4.7. Financing...........................................................17
V. OBLIGATIONS OF SELLERS.................................................17
5.1. Consents............................................................18
5.2. Conduct of Business.................................................18
5.3. Access Before Closing...............................................18
5.4. Clearance Certificate...............................................18
VI. OBLIGATIONS OF BUYER...................................................18
6.1. Consents............................................................18
VII. EMPLOYEE MATTERS....................................................19
7.1. Employment of Employees.............................................19
7.2. Severance Benefits..................................................19
7.3. Transfer of Pension Assets and Liabilities..........................19
7.4. Savings Plan........................................................20
7.5. Indemnification for Plan Liabilities................................20
7.6. Service Credit......................................................21
7.7. Medical and Dental Plans............................................21
7.8. Vacation and Sick Day Benefits Accrued Through Closing Date.........22
7.9. Welfare Benefits....................................................22
7.10. Long Term Disability.............................................22
7.11. Flexible Spending Accounts.......................................22
7.12. WARN Act Liability...............................................22
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<PAGE>
7.13. Health Care Continuation Coverage................................22
7.14. Employment Taxes.................................................22
VIII. ADDITIONAL RIGHTS AND OBLIGATIONS...................................23
8.1. Access After Closing................................................23
8.2. Further Assurances..................................................23
8.3. Confidentiality.....................................................23
8.4. Schedules...........................................................23
8.5. Tax Matters.........................................................23
8.6. Use of Name and Logos...............................................24
8.7. Environmental Matters...............................................24
8.8. Abstracts...........................................................24
8.9. Y2K.................................................................25
IX. CONDITIONS TO BUYER'S OBLIGATIONS......................................25
9.1. Representations, Warranties and Covenants of Sellers................25
9.2. No Prohibition......................................................25
9.3. Further Action......................................................25
9.4. No Material Adverse Effect..........................................25
9.5. Abstracts...........................................................25
9.6. Omnibus Gas Transportation and Supply Agreement.....................26
9.7. Other Documents.....................................................26
X. CONDITIONS TO SELLERS' OBLIGATIONS.....................................26
10.1. Representations, Warranties and Covenants of Buyer...............26
10.2. No Prohibition...................................................26
10.3. Further Action...................................................26
10.4. Omnibus Gas Transportation and Supply Agreement..................26
10.5. Other Documents..................................................26
XI. TERMINATION PRIOR TO CLOSING...........................................26
11.1. Termination......................................................26
11.2. Effect of Termination............................................27
XII. INDEMNIFICATION AND SURVIVAL........................................27
12.1. Indemnification by Sellers.......................................27
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<PAGE>
12.2. Indemnification by Buyer.........................................27
12.3. Limitations on Liability.........................................27
12.4. Indemnification Procedure........................................28
12.5. Exclusive Remedies...............................................29
XIII. MISCELLANEOUS.......................................................29
13.1. Entire Agreement.................................................29
13.2. Waiver of Bulk Transfer Requirements.............................29
13.3. Successors and Assigns...........................................29
13.4. Counterparts.....................................................29
13.5. Headings.........................................................29
13.6. Modification and Waiver..........................................29
13.7. No Third-Party Beneficiary Rights................................30
13.8. Sales and Transfer Taxes.........................................30
13.9. Expenses.........................................................30
13.10. Waiver of Conditions.............................................30
13.11. Notices..........................................................30
13.12. Knowledge of Sellers.............................................31
13.13. Governing Law....................................................31
13.14. Waiver of Jury Trial.............................................31
13.15. Announcements....................................................31
13.16. Severability.....................................................32
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
SCHEDULES
<S> <C> <C>
2.1.1 - Owned Property
2.1.2 - Leased Property
2.1.4 - List of Machinery, Equipment, etc.
2.1.6 - Contracts
2.1.13 - Intellectual Property
2.2(c) - Names and Logos
2.2(k) - Other Excluded Assets
2.3.3 - Financial Principles
2.4 - Certain Excluded Liabilities
2.5.2(c) - Gas Transportation and Supply Matters
3.3 - Sellers' Third Party Consents
3.4 - Encumbrances on Transferred Assets
3.5 - Material Contracts
3.6 - Real Property
3.7 - Permits
3.8 - Litigation
3.9 - Compliance with Laws
3.10 - Seller Governmental Consents
3.12 - Financial Statements
3.13.1 - Employee Benefit Plans
3.13.2 - Pension Plans
3.13.4 - Labor Matters
3.15 - Environmental Matters
3.16 - Certain Liabilities
3.19 - Insurance Policies
3.20 - Accounts Receivable
4.4 - Buyer's Consents
7.1 - Transferred Employees
7.2 - Severance Benefits
7.3.2 - Accumulated Benefit Obligation and Calculation Assumption
7.11 - Flexible Spending Accounts
9.3 - Required Non-Governmental Third Party Consents
</TABLE>
<PAGE>
ASSET SALE AND PURCHASE AGREEMENT
ASSET SALE AND PURCHASE AGREEMENT (the "Agreement") dated as of October
15, 1999, by and among SOUTHWESTERN ENERGY COMPANY, a corporation organized
under the laws of the state of Arkansas ("Parent"), ARKANSAS WESTERN GAS
COMPANY, a corporation organized under the laws of the state of Arkansas ("AWG"
and, together with Parent, the "Sellers"), and ATMOS ENERGY CORPORATION, a
corporation organized under the laws of Texas and Virginia ("Buyer").
BACKGROUND
Sellers desire to sell and assign to Buyer, and Buyer desires to
purchase and assume from Sellers, the Transferred Assets (as defined
hereinafter) and the Assumed Liabilities (as defined hereinafter), all on the
terms and subject to the conditions of this Agreement.
TERMS
NOW, THEREFORE, intending to be legally bound hereby, the parties agree
as follows:
I. DEFINITIONS.
For purposes of this Agreement, the following terms shall have the
following meanings:
"Affiliate" means, when used with respect to a specified Person,
another Person that, either directly or indirectly through one or more
intermediaries, controls or is controlled by or is under common control with the
Person specified.
"Abstracts" has the meaning specified in Section 8.8.
"Agreement" has the meaning specified in the first paragraph.
"Assumed Contracts" has the meaning specified in Section 2.1.6.
"Assumed Liabilities" has the meaning specified in Section 2.4.
"Assumption Agreement" has the meaning specified in Section 2.5.3.
"AWG" has the meaning specified in the first paragraph.
"Business" means the gas distribution and transmission business and the
unregulated operations conducted by AWG's Associated Natural Gas Company
Division in the State of Missouri immediately prior to the date hereof; provided
that the Business shall not be deemed to include any operations of the Sellers
conducted in the State of Arkansas.
"Buyer" has the meaning specified in the first paragraph.
"Buyer Medical Plan" has the meaning specified in Section 7.7.1.
"Buyer's Pension Plan" has the meaning specified in Section 7.3.1.
"Buyer's Post-Retirement Trusts" has the meaning specified in Section
7.7.3.
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<PAGE>
"Buyer's Savings Plan" has the meaning specified in Section 7.4.
"Closing" and "Closing Date" have the meanings specified in Section
2.5.1.
"Closing Purchase Price" has the meaning specified in Section 2.3.1.
"Closing Statement" has the meaning specified in Section 2.3.3.
"Code" has the meaning specified in Section 7.3.1.
"Current Assets" means the current assets of the Sellers reported as
(i) accounts receivable, (ii) inventory, (iii) stores expense undistributed,
(iv) deferred gas purchases and (v) (to the extent not exceeding $100,000) other
current assets that are included in the Transferred Assets, all as determined in
accordance with the Financial Principles applied consistently with the Financial
Statements.
"Current Liabilities" means the current liabilities of the Sellers
reported as (i) accounts payable, (ii) other taxes payable, (iii) deferred gas
purchases, (iv) customer deposits, (v) accrued vacation payable and (vi) (to the
extent not exceeding $50,000) other current liabilities that are Assumed
Liabilities, all as determined in accordance with the Financial Principles
applied consistently with the Financial Statements.
"Current Period" has the meaning specified in Section 2.3.4.
"Eligible Transferred Employee" has the meaning specified in Section
7.4.
"Encumbrances" has the meaning specified in Section 2.1.
"Environmental Laws" means any federal, state, local or foreign
statute, law, ordinance, regulation, rule, code, order, common law, and any
enforceable judicial or administrative interpretation thereof, including any
judicial or administrative order, writ, consent decree or judgment, relating: to
(a) emissions, discharges, releases or threatened releases of Hazardous
Materials into the natural environment, including into ambient air, soil,
sediments, land surface or subsurface, buildings or facilities, surface water,
groundwater, publicly-owned treatment works, septic systems or land; (b) the
generation, treatment, storage disposal, use, handling, manufacturing,
transportation or shipment of Hazardous Materials; (c) occupational health and
safety; or (d) otherwise relating to the pollution or protection of the
environment, health, safety or natural resources; provided that "Environmental
Laws" shall not mean or refer to any of the foregoing except to the extent in
existence and in full force and effect on and as of the Closing Date and,
accordingly, shall not include any of the foregoing as it may be enacted,
promulgated, amended, changed or altered (by statute, judicial interpretation,
official interpretation or otherwise) at any time with effect after the Closing
Date.
"Environmental Permit" means any permit, approval, identification
number, license or other authorization required under or issued pursuant to any
Environmental Law.
"ERISA" has the meaning specified in Section 3.13.2.
"Excluded Assets" has the meaning specified in Section 2.2.
"Excluded Liabilities" has the meaning specified in Section 2.4.
"Financial Principles" has the meaning specified in Section 2.3.3.
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<PAGE>
"Financial Statements" has the meaning specified in Section 3.12.
"FSA's" has the meaning specified in Section 7.11.
"Hazardous Material" means (a) any petroleum, petroleum hydrocarbons,
gas, gas liquids, or any other petroleum products, by-products or breakdown
products, radioactive materials, asbestos-containing materials in any form or
condition or polychlorinated biphenyls in any form or condition or (b) any
solid, chemical, material or substance regulated as toxic or hazardous or as a
pollutant, contaminant or waste under any Environmental Law.
"Knowledge of Sellers" has the meaning specified in Section 13.12.
"Leased Property" has the meaning specified in Section 2.1.2.
"Leave" has the meaning specified in Section 7.1.
"Losses" has the meaning specified in Section 12.1.
"Material Adverse Effect" means any change in, or effect on, the
Business or the Transferred Assets that is or is reasonably likely to be
materially adverse to the Transferred Assets taken as a whole or the assets,
liabilities, operations, results of operations or financial condition of the
Business taken as a whole, except for any such changes or effects resulting from
(i) changes in general economic, regulatory or political conditions or changes
that affect the industry in general and (ii) this Agreement or the transactions
contemplated hereby .
"Material Contracts" has the meaning specified in Section 3.5.
"Matters of Environmental Concern" has the meaning specified in Section
8.7(a).
"Measurement Period" has the meaning specified in Section 2.3.3.
"Names and Logos" has the meaning specified in Section 2.2(c).
"Net Working Capital" has the meaning specified in Section 2.3.3.
"Non-Assigned Contracts" has the meaning specified in Section 2.6.
"Omnibus Gas Transportation and Supply Agreement" has the meaning
specified in Section 2.5.2.
"Owned Property" has the meaning specified in Section 2.1.1.
"Parent" has the meaning specified in the first paragraph.
"Pension Plans" has the meaning specified in Section 3.13.2.
"Permits" has the meaning specified in Section 3.7.
"Permitted Encumbrances" has the meaning specified in Section 3.4.
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<PAGE>
"Person" means any individual, partnership, firm, corporation,
association, trust, limited liability company, unincorporated organization,
governmental authority or other entity.
"Plans" has the meaning specified in Section 3.13.1.
"Post-Retirement Benefits" has the meaning specified in Section 7.7.3.
"Pre-Closing Returns" has the meaning specified in Section 8.5.
"Purchase Price" has the meaning specified in Section 2.3.1.
"Returns" has the meaning specified in Section 3.11.
"Seller Medical Plans" has the meaning specified in Section 7.7.1.
"Seller Pension Plan" has the meaning specified in Section 7.3.1.
"Seller Pension Plan Trust" has the meaning specified in Section 7.3.1.
"Seller Savings Plan" has the meaning specified in Section 7.4.
"Sellers" has the meaning specified in the first paragraph.
"Seller's Post-Retirement Trusts" has the meaning specified in Section
7.7.3.
"SFAS 106 Obligations" has the meaning specified in Section 3.13.5.
"System Property" has the meaning specified in Section 2.1.3.
"Taxes" means all federal, state, local and other taxes and similar
levies, fees, charges and assessments imposed by a governmental authority,
including without limitation, income, gross receipts, sales, use, transfer,
business and occupation, franchise, profits, license, lease, service, service
use, duties, excise, severance, stamp, occupation, ad valorem, real and personal
property, withholding, payroll, and value added taxes.
"Threshold" has the meaning specified in Section 8.7.
"Transfer Taxes" has the meaning specified in Section 13.8.
"Transferred Assets" has the meaning specified in Section 2.1.
"Transferred Employee" and "Transferred Employees" have the meanings
specified in Section 7.1.
"Transferred Pension Plan Participants" has the meaning specified in
Section 7.3.1.
"Transition Services Agreement" has the meaning specified in Section
2.5.2.
"WARN Act" has the meaning specified in Section 7.12.
"Welfare Plans" has the meaning specified in Section 3.13.3.
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<PAGE>
II. SALE AND PURCHASE.
2.1. Sale and Purchase of Assets. Subject to the terms and conditions
of this Agreement, at the Closing, each Seller shall sell, transfer and assign
to Buyer, free and clear of any lien, pledge, option, security interest, claim,
charge or other encumbrance ("Encumbrances"), except Permitted Encumbrances, and
Buyer shall purchase and assume from each Seller, the Transferred Assets. For
purposes of this Agreement, "Transferred Assets" shall mean the following
assets:
2.1.1. The real property owned in fee by Sellers and listed on
Schedule 2.1.1 (the "Owned Property"), together with all improvements,
fixtures, rights, and other appurtenances thereto of Sellers;
2.1.2. The leasehold interests of Sellers in all possessory
leases of real property listed on Schedule 2.1.2 (the "Leased
Property");
2.1.3. All rights of way, easements, appurtenances and similar
realty interests of Sellers relating to the Owned Property or the
Leased Property or necessary for or relating primarily to the Business
(the "System Property");
2.1.4. Machinery, equipment, tools and fixed assets owned by
Sellers listed on Schedule 2.1.4, subject to such additions,
substitutions or deletions thereto as shall have occurred in the
ordinary course of the conduct of the Business prior to the Closing
Date that is consistent with past practice;
2.1.5. All vehicles and other tangible assets of Sellers which
are used primarily in or related primarily to the Business;
2.1.6. All rights of Sellers under the contracts listed on
Schedule 2.1.6, subject to such additions, substitution or deletions
thereto as shall have occurred in the ordinary course of Sellers'
conduct of the Business prior to the Closing Date that is consistent
with past practice (the "Assumed Contracts");
2.1.7. To the extent assignable to Buyer, all of the
governmental permits, franchises, licenses, consents or other
authorizations issued or given to Sellers which relate primarily to the
Business or any of the Transferred Assets and which are required in
connection with the conduct, use, operation or ownership thereof;
2.1.8. Copies of all customer, supplier and personnel records
and other records as are in either Seller's possession or control which
are used primarily in or related primarily to the Business;
2.1.9. Accounts and notes receivable of Sellers which arose
from the operations of the Business (other than accounts and notes
receivable relating to inter-company accounts between the Sellers,
which accounts and notes receivable shall not be included on the
Closing Statement);
2.1.10. All inventories of gas, materials and spare parts of
Sellers used primarily in or relating primarily to the Business;
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2.1.11. All prepaid expenses of Sellers relating primarily to
the Business, except for prepaid expenses attributable to any Excluded
Asset or Excluded Liability;
2.1.12. To the extent the rights and benefits thereunder are
assignable to Buyer, all rights and benefits under any manufacturer's,
subcontractor's, supplier's, repairman's or other third-party
warranties, guarantees, and service and replacement programs, and all
rights of indemnification, insurance proceeds, claims against insurers
and similar rights of Sellers relating to the Transferred Assets or the
Business, except to the extent any such rights or benefits relate to
Excluded Assets or losses or conditions which Sellers have fully
remedied prior to the Closing;
2.1.13. All patents, patent rights, trademarks, trade names
and logos used in the Business listed on Schedule 2.1.13, other than
the name "Associated Natural Gas" or "ANG" or variants thereof and the
associated logos; and
2.1.14. All of either Seller's other assets, properties,
franchises, interests, and rights and privileges of every kind and
description, real, personal or mixed, tangible or intangible, necessary
for, or primarily used by the Sellers in, the operation of the
Business.
2.2. Excluded Assets. Anything herein to the contrary
notwithstanding, the Transferred Assets shall not include the following (the
"Excluded Assets"):
(a) all cash on hand, cash equivalents,
investments, and bank accounts of Sellers as of the Closing
Date;
(b) all negotiable instruments (other than
notes receivable of the type included in the Transferred
Assets pursuant to Section 2.1.9) and chattel paper of Sellers
as of the Closing Date;
(c) all rights to the name "Associated Natural
Gas" (or any derivative thereof) or the logos identified
on Schedule 2.2(c) (the "Names and Logos"), subject to the
provisions of Section 8.6;
(d) refunds or claims for refunds due from
federal, state, local and foreign taxing authorities with
respect to taxes paid or to be paid by Sellers;
(e) all insurance policies of Sellers, except
to the extent provided in Section 2.1.12, and any related
unearned premiums;
(f) Sellers' rights under this Agreement;
(g) each Seller's corporate charter, minute and
stock record books and corporate seal;
(h) each Seller's ledgers, journals and tax
returns;
(i) any assets relating to any benefits
provided or plans maintained by Sellers for any employees,
subject to the provisions of Article VII;
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(j) any assets of Sellers primarily used in
Sellers' gas distribution and transmission business
conducted in the State of Arkansas; and
(k) the assets identified on Schedule 2.2(k).
2.3. Purchase Price; Adjustment.
2.3.1. Determination and Payment. In addition to the
assumption of the Assumed Liabilities contemplated by Section 2.4, the
consideration to be paid by Buyer for the Transferred Assets will be
$32,000,000 (the "Closing Purchase Price"), payable at Closing by wire
transfer of immediately available funds to an account designated by
Sellers. The Closing Purchase Price shall be subject to adjustment
after Closing pursuant to Section 2.3.3 (as so adjusted, the "Purchase
Price").
2.3.2. Allocation. Within ninety (90) days after the Closing
Date, the Purchase Price and the value of the Assumed Liabilities will
be allocated among the Transferred Assets by Buyer and Sellers in a
mutually acceptable manner which is consistent with Section 1060 of the
Code and the regulations thereunder. The parties agree that they will
report the federal, state and local and other tax consequences of the
purchase and sale hereunder (including, without limitation, in filings
on Internal Revenue Service Form 8594) in a manner consistent with such
allocation and that they will not take any position inconsistent
therewith in connection with any tax return, refund claim, litigation
or otherwise. The provisions of this Section 2.3.2 shall apply to any
subsequent adjustments to the Purchase Price, including, without
limitation, adjustment pursuant to Sections 2.3.3 and 13.8 of this
Agreement.
2.3.3. Post-Closing Adjustments. Within 90 days after the
Closing Date, Sellers shall deliver to Buyer a statement (the "Closing
Statement") of (i) the net amount of the Current Assets minus the
Current Liabilities ("Net Working Capital") as at the Closing Date and
(ii) capital expenditures with respect to the Business and depreciation
with respect to the Business during the period from the date hereof to
and including the Closing Date ("Measurement Period"), in each case in
accordance with the accounting principles and assumptions set forth in,
and in the form provided in, the document entitled Financial Principles
which is included as Schedule 2.3.3 hereto (the "Financial
Principles").
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If Net Working Capital is more than $1,600,000, the Closing
Purchase Price shall be increased by the amount by which Net Working
Capital exceeds $1,600,000. If Net Working Capital is less than
$1,600,000, the Closing Purchase Price shall be decreased by the amount
by which Net Working Capital is less than $1,600,000. If capital
expenditures with respect to the Business during the Measurement Period
exceed depreciation with respect to the Business during the Measurement
Period, the Closing Purchase Price shall be increased by the amount by
which such capital expenditures exceed such depreciation, but this
amount shall not exceed $1,000,000. If depreciation with respect to the
Business during the Measurement Period exceeds capital expenditures
with respect to the Business during the Measurement Period, the Closing
Purchase Price shall be decreased by the amount by which such
depreciation exceeds such capital expenditures. If the Purchase Price,
as adjusted as provided above, exceeds the Closing Purchase Price,
Buyer shall pay the amount of such excess to Sellers. If the Purchase
Price, as adjusted as provided above, is less than the Closing Purchase
Price, then Sellers shall pay the amount of such deficit to Buyer. Any
such payment shall be made by wire transfer of immediately available
funds within 15 days after Buyer's written notification to Sellers of
Buyer's acceptance of the Closing Statement or within 15 days after
Buyer is deemed to have accepted the Closing Statement as provided in
this Section 2.3.3. The amount of any payment required by this Section
2.3.3 shall bear interest from the Closing Date through the date of
actual payment at the rate of 30-day LIBOR plus 50 basis points.
After delivery of the Closing Statement, Sellers shall permit
Buyer and Buyer's independent accountants access, upon reasonable
notice and during reasonable business hours, to review their work
papers and all books and records of Sellers relevant to the items
covered by the Closing Statement, and Sellers shall permit such
accountants to perform such tests as they may reasonably require to
confirm the accuracy of such items.
In the event Buyer disputes any matter or matters on the
Closing Statement, Buyer may within forty-five (45) days after the
delivery of the Closing Statement notify Sellers of such dispute in a
writing setting forth in reasonable detail the nature of such dispute
and the facts upon which it is based, together with the application or
treatment proposed by Buyer and the reasons supporting the use of such
application or treatment rather than that used by Sellers. If both the
Closing Statement as delivered by Sellers to Buyer and the Closing
Statement as proposed by Buyer would require a payment by the same
party pursuant to the second paragraph of this Section 2.3.3, then such
party shall make a payment of the lesser amount reflected on the
respective Closing Statements within 15 days of delivery of Buyer's
proposed Closing Statement to Sellers, together with interest thereon
as provided by such paragraph. If no such notice is given by Buyer
within the time specified, the Closing Statement shall be deemed
accepted by Buyer.
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If the parties have not resolved all matters in dispute
relating to the Closing Statement within forty-five (45) days after
Sellers' receipt of such notice from Buyer, then any party may notify
the others in writing that it elects to submit all remaining issues to
resolution by a neutral accounting firm of national reputation. Within
ten (10) days after receipt of such notice of election by a party, the
parties shall agree upon the selection of a neutral accounting firm or,
if they are unable to agree, Sellers and Buyer shall each submit the
names of two neutral firms and a firm shall be selected at random from
among them. A firm shall be considered neutral if it has not within the
past three years performed and does not currently perform or
contemplate performing any accounting, consulting or other services for
any of the parties and their respective Affiliates having an aggregate
value in excess of $250,000.
As soon as reasonably practicable, the firm selected shall
resolve all matters remaining in dispute solely on the basis of the
Financial Principles and the provisions of this Section 2.3.3. Such
firm shall not be required to follow any particular rules of procedure,
it being the intention of the parties to create a feasible, practical
and expeditious method for resolving any disagreement hereunder. The
decision of such firm hereunder shall be final and binding and shall
not be subject to review or challenge of any kind. The appropriate
party shall pay to the other any disputed amount that is determined to
be due within 15 days after such determination, together with interest
thereon as provided in the second paragraph of this Section 2.3.3. The
fees and expenses of such firm shall be borne equally by Buyer, on the
one hand, and Sellers, on the other.
If the parties resolve all matters in dispute relating to the
Closing Statement, then the Closing Statement shall be adjusted as
required by the agreement resolving the matters in dispute and the
Closing Statement as modified shall be deemed accepted by Buyer.
2.3.4. Proration of Certain Expenses. To the extent not
reflected on the Closing Statement, real property, personal property
and other ad valorem Taxes, rents, utility charges and similar expenses
of Sellers related to the Transferred Assets shall be allocated between
Buyer, on the one hand, and Sellers, on the other, on the basis of a
daily proration and the net amount owing from Buyer to Sellers or from
Sellers to Buyer on account of such proration shall be paid at such
time as the post-closing adjustment is paid pursuant to Section 2.3.3.
If an assessment for the period that includes the Closing Date (the
"Current Period") has not been made by the time that payment is due
under the preceding sentence, a tentative payment shall be made at that
time based on the assessment for the immediately preceding tax period,
and Buyer or Sellers, as the case may be, shall make an appropriate
adjusting payment within 10 days following receipt of the assessment
for the Current Period.
2.4. Assumption of Liabilities. In addition to the payment of the
Purchase Price in accordance with Section 2.3.1, Buyer shall assume and pay,
perform and discharge in accordance with the terms thereof the following
liabilities and obligations (the "Assumed Liabilities"):
2.4.1. The obligations of Sellers not required to be performed
prior to or as of the Closing Date under the Assumed Contracts;
2.4.2. The Current Liabilities included in the determination
of Net Working Capital;
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2.4.3. The obligations of Sellers not required to be performed
prior to or as of the Closing Date under the governmental permits,
franchises, consents or other authorizations included in the
Transferred Assets pursuant to Section 2.1.7;
2.4.4. The obligations of Sellers not required to be performed
prior to or as of the Closing Date under the agreements and
arrangements giving rise to the rights and benefits included in the
Transferred Assets pursuant to Section 2.1.12; and
2.4.5. The obligations of Sellers to customers providing
advances for construction to refund portions of such advances to the
extent additional amounts are received by Buyer after the Closing Date
from other customers with respect to reimbursement of such advances.
Notwithstanding the foregoing, the Assumed Liabilities shall not
include any of the following (collectively, the "Excluded Liabilities"): (a) any
liabilities that AWG's Associated Natural Gas Company Division owes to either of
the Sellers or any of its other Affiliates (other than those arising under an
Assumed Contract for the payment of natural gas or transportation services to
the extent not disallowed by any regulatory agency); (b) any liabilities or
obligations that relate primarily to the Excluded Assets; (c) any liabilities or
obligations of Sellers with respect to any legal, administrative or other
action, proceeding or governmental investigation pending or threatened on or
prior to the Closing Date; (d) any Taxes attributable to Tax periods that close
on or before the Closing Date, or to the extent a Tax period closes after the
Closing Date but includes the period on or before the Closing Date, any Taxes
attributable to the portion of such Tax period that is on or before the Closing
Date; (e) any liability relating to employee benefits or employment except as
provided in Article VII; (f) any liability or obligation identified on Schedule
2.4; and (g) any other contingent liability or obligation, whether known or
unknown, of either Seller to the extent arising out of or relating to the
operation or conduct of the Business on or prior to the Closing Date or the
ownership of the Transferred Assets on or prior to the Closing Date which is not
a liability or obligation specifically referred to in Section 2.4.1, 2.4.2,
2.4.3, 2.4.4 or 2.4.5. For the avoidance of doubt, the provisions of this
paragraph are not intended to qualify the obligations of Buyer to the extent
provided in Section 2.3.4, Article VII, Section 8.7 or Section 13.8. The Sellers
shall retain and pay, perform or discharge when due, all of the Excluded
Liabilities.
2.5. Closing.
2.5.1. Time and Place. The closing of the transactions
contemplated hereby (the "Closing") shall take place at the offices of
Parent, 1083 Sain Street, Fayetteville, Arkansas 72703, at 11:00 a.m.,
Central Time (or at such other place and time as Buyer and Sellers
shall agree), on the last day of the month in which all of the
conditions specified in Articles IX and X hereof have been satisfied or
waived (the "Closing Date").
2.5.2. Sellers' Deliveries at Closing. At the Closing,
Sellers shall deliver to Buyer:
(a) Such bills of sale and instruments of conveyance,
transfer and assignment, dated the Closing Date, as Buyer
shall reasonably request to vest in Buyer the Transferred
Assets;
(b) An agreement (the "Transition Services
Agreement") requiring Sellers to furnish to Buyer post-Closing
information technology, human resources, billing, call center
and other transition services to be mutually agreed upon by
Sellers and Buyer for a
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period not to exceed ninety (90) days following the Closing
Date for consideration and upon such other terms to be
mutually agreed upon by Sellers and Buyer;
(c) An agreement (the "Omnibus Gas Transportation and
Supply Agreement") relating to certain arrangements regarding
gas transportation contracts and related matters, including
those matters identified on Schedule 2.5.2(c), on terms to be
mutually agreed upon by Sellers and Buyer; and
(d) The closing certificates and documents required
by this Agreement and such other documents and instruments as
may be reasonably requested by Buyer.
2.5.3. Buyer's Deliveries at Closing. At the Closing, Buyer
shall deliver to Sellers:
(a) By wire transfer, the Closing Purchase Price
in the manner specified in Section 2.3.1 hereof;
(b) An instrument of assumption of liabilities,
dated the Closing Date, in a form reasonably acceptable to
Sellers (the "Assumption Agreement");
(c) An executed counterpart of each of the
Transition Services Agreement and the Omnibus Gas
Transportation and Supply Agreement; and
(d) The closing certificates and documents required
by this Agreement and such other documents and instruments as
may be reasonably requested by Sellers.
2.6. Nonassignable Contracts. In the case of any contract or other
agreement (other than agreements described in Section 2.1.7) that would be
included in the Transferred Assets but which by its terms or by virtue of its
subject matter is not assignable to Buyer as of the Closing Date (collectively,
the "Non-Assigned Contracts"), such Non-Assigned Contracts shall not be
transferred or assigned to Buyer, and Sellers agree to use commercially
reasonable efforts to obtain, as soon as is reasonably practicable following the
Closing Date, any consents necessary to convey to Buyer the benefit thereof, it
being understood that such efforts shall not include any requirement to offer or
grant any material financial accommodations to any third party or to remain
secondarily liable with respect to any such Non-Assigned Contract. Sellers agree
to use commercially reasonable efforts to provide Buyer with the same economic
and other benefits of each Non-Assigned Contract as if such contracts had been
assigned on the Closing Date. Nothing in this Agreement shall be construed as an
attempt or an agreement to assign or cause the assignment of any Non-Assigned
Contract which is not assignable without the consent of the other party or
parties thereto, unless such consent shall have been given, or as to which all
the remedies for the enforcement thereof enjoyed by Sellers would not, as a
matter of law, pass to Buyer as an incident of the assignments provided by this
Agreement. The provision of benefits under this Section 2.6 shall not constitute
satisfaction of the conditions in Articles IX and X.
III. REPRESENTATIONS AND WARRANTIES OF SELLERS.
Sellers, jointly and severally, hereby represent and warrant to Buyer
as follows:
3.1. Corporate Existence. Each Seller (a) is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Arkansas, (b) has the requisite power and authority to
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enter into and perform its obligations under this Agreement, and (c) is duly
qualified to do business as a foreign corporation, and is in good standing in
each jurisdiction where the Business makes such qualification necessary, except
where the failure to be so qualified or in good standing would not reasonably be
expected to have a Material Adverse Effect.
3.2. Authorization and Validity of Agreement. The execution, delivery
and performance by each Seller of this Agreement have been duly authorized by
all necessary corporate action. This Agreement has been duly and validly
executed and delivered by each Seller and constitutes a valid and binding
obligation enforceable against each Seller in accordance with its terms, except
to the extent that such enforceability (i) may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating to
creditors' rights generally, or (ii) is subject to general principles of equity.
3.3. No Contravention. The execution, delivery and performance by each
Seller of this Agreement and the consummation by each Seller of the transactions
contemplated on its part hereby will not, subject to obtaining the consents,
approvals, authorizations, exemptions or waivers identified on Schedule 3.3, 3.7
or 3.10, (i) violate any provision of law, rule or regulation to which either
Seller is subject, (ii) violate any order, judgment or decree applicable to
either Seller or (iii) conflict with, or result in a breach or default under,
any term or condition of any of the charter or bylaws of either Seller or any
material term or condition of any contract, agreement or instrument (including
the Assumed Contracts) to which it is a party or by which it or any of the
Transferred Assets may be bound.
3.4. Title to Assets; Adequacy; Condition. Each Seller has good title
to the Transferred Assets to be sold by it hereunder, subject to no Encumbrance,
except Permitted Encumbrances. For purposes of this Agreement, "Permitted
Encumbrances" shall mean (i) liens for Taxes and assessments not yet due or
being contested in good faith by appropriate proceedings, (ii) such minor
imperfections of title and encumbrances that do not secure monetary obligations
which individually or in the aggregate are not substantial and do not materially
detract from the value or impair the use of the Transferred Assets and (iii)
such encumbrances as set forth in Schedule 3.4. The Transferred Assets include
all assets and properties that are necessary for the supply and servicing of the
customers of the Business in accordance in all material respects with the
historical supply and service standards of the Sellers, except for the functions
subject to the Transition Services Agreement and the Omnibus Gas Transportation
and Supply Agreement. The tangible assets included in the Transferred Assets are
in good operating condition, reasonable wear and tear excepted, and are adequate
for the uses to which they are being put in the conduct of the Business.
3.5. Material Contracts. Schedule 3.5 contains a list of each Assumed
Contract in existence as of September 30, 1999, (i) which is a gas supply,
transportation or storage agreement relating to the Business involving a minimal
annual payment of more than $50,000, (ii) which involves a minimum annual
payment to or by a Seller relating to the Business of more than $50,000, (iii)
the loss of which would have a Material Adverse Effect, (iv) pursuant to which
either Seller is subject to take-or-pay obligations with respect to gas
purchases or gas marketing in connection with the Business which impose minimum
obligations of more than $50,000 over the remaining term thereof or (v) which is
otherwise material to the Business or the Transferred Assets (collectively, the
"Material Contracts"). Except as set forth in Schedule 3.5, each of the Material
Contracts is in full force and effect and is valid and enforceable in accordance
with its terms, subject as to enforceability to the effects of any bankruptcy or
similar laws. Except as set forth in Schedule 3.5, each Seller is in material
compliance with all applicable terms of each Material Contract, and to the
Knowledge of each Seller, each other party thereto
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is in material compliance with all applicable terms of each Material Contract.
Neither Seller has given to or received from any other party to any Material
Contract any notice or other written communication regarding any actual or
alleged material breach of or default under any Material Contract that has not
been withdrawn, settled, or otherwise resolved.
3.6. Real Property. To the Knowledge of each Seller, no condemnation,
expropriation, eminent domain or similar proceeding is pending or contemplated
with respect to the Owned Property, the Leased Property or the System Property.
Except as set forth in Schedule 3.6, each Seller is in compliance, in all
material respects, with all covenants, restrictions, rights of way, easements
and similar realty interests benefiting or encumbering the Real Property, the
Leased Property and the System Property. The Real Property, the Leased Property
and the System Property, and all improvements thereon, do not violate in any
material respect any applicable zoning, construction code or other governmental
restriction.
3.7. Permits. Except with regard to Environmental Permits, as to which
the Sellers' sole representations and warranties are set forth in Section 3.15,
each Seller holds all material permits, franchises and other authorizations
necessary to conduct the Business as currently conducted by such Seller. The
Sellers are in compliance, in all material respects, with all of such permits,
franchises and other authorizations. A list of all material permits, franchises
and other authorizations, other than Environmental Permits, relating to the
Business is set forth in Schedule 3.7 (the "Permits").
3.8. Litigation. Except as set forth in Schedule 3.8, there is no
legal, administrative or other action, proceeding or, to the Knowledge of each
Seller, governmental investigation either pending or, to the Knowledge of each
Seller, threatened (i) against either Seller with respect to the Business or the
Transferred Assets, or (ii) which seeks to enjoin or obtain damages in respect
of the consummation of the transactions contemplated hereby, which, in either
case, if decided adversely, would reasonably be expected to have a Material
Adverse Effect.
3.9. Compliance with Laws. Except as set forth in Schedule 3.9, each
Seller is in compliance, in all material respects, with all laws, rules,
regulations, ordinances, judgments, injunctions, orders and decrees applicable
to the Transferred Assets or the Business, excluding, however, Environmental
Laws, as to which the Sellers' sole representations and warranties are set forth
in Section 3.15.
3.10. Governmental Consents. Except as set forth in Schedule 3.10, no
consent, approval or authorization of, or exemption by, or declaration,
registration or filing with, any governmental or regulatory authority is
required in connection with the execution, delivery and performance by Sellers
of this Agreement or the taking of any other action contemplated hereby,
excluding, however, consents, approvals, authorizations, exceptions and filings,
if any, where the failure to obtain or make the same would not impair in any
material respect the consummation of the transactions contemplated by this
Agreement and would not materially affect the use or operation of the
Transferred Assets after the Closing Date.
3.11. Tax Matters.
(a) Tax Returns. All federal, state, local and other Tax returns,
declarations, statements, reports or other documents required to be filed with
respect to Taxes ("Returns") by Sellers on or before the Closing Date have been
filed or will be filed on a timely basis with the appropriate governmental
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agencies in all jurisdictions in which such Returns are required to be filed.
All such Returns are true, complete and correct in all material respects and all
Taxes shown on such Returns as being due, or otherwise due, in respect of
material Taxes either (i) have been or will be fully paid or adequately provided
for or (ii) are being contested in good faith by appropriate proceedings.
(b) Transferred Asset Status. None of the Transferred Assets (i)
secures any debt the interest on which is tax-exempt under Section 103 of the
Code, (ii) is "tax-exempt use property" within the meaning of Section 168(h) of
the code, (iii) is "tax-exempt bond financing property" within the meaning of
Section 168(g)(5) of the Code, (iv) is "limited use property" within the meaning
of Revenue Procedure 76-30, or (v) is required to be treated as being owned by
any other Person pursuant to the provisions of former section 168(f)(8) of the
Code.
3.12. Financial Statements. Attached hereto as Schedule 3.12 are a
balance sheet and a statement of income for the Business as of and for the nine
months ended September 30, 1999 and a balance sheet and a statement of income
for the Business for the year ended December 31, 1998 (the "Financial
Statements"). The Financial Statements have been prepared in accordance with the
Financial Principles and with the books and records of Sellers. To the extent
relevant to the Financial Statements, in all material respects the books and
records of Sellers are true, accurate and complete; have been maintained in
accordance with good accounting practices; and, except as set forth in the
Financial Principles, have been maintained on a consistent basis. The Financial
Statements make adequate provision, in accordance with the Financial Principles,
for any material contracts (or material group of similar contracts) reasonably
expected to be performed at a loss. The Financial Statements fairly present, in
all material respects, the financial position and the results of operations of
the Business as of and for such dates and periods in accordance with the
Financial Principles consistently applied. Since September 30, 1999, the Sellers
have not made any capital expenditures outside the ordinary course of business
or inconsistent with past practice with respect to the Business, entered into
any material contracts (or material group of similar contracts) reasonably
expected to be performed at a loss, or experienced any material damage,
destruction or loss (whether or not covered by insurance) to the assets or
properties used in the conduct of the Business.
3.13. Employee Matters.
3.13.1. Schedule 3.13.l contains a list, which is true and
complete in all material respects, of (a) each employment agreement
with any Transferred Employee, written or oral, and (b) each bonus,
deferred compensation, incentive compensation, stock purchase, stock
option, severance pay, change in control, disability, medical, dental,
life or other insurance, supplemental unemployment benefits, profit
sharing, pension or retirement plan, program, agreement or arrangement
(collectively, the "Plans") sponsored, maintained or contributed to or
required to be contributed to by either Seller or with respect to which
Seller has any liability for the benefit of any Transferred Employee
(as hereinafter defined) or any former employee of the Business.
3.13.2. Each Seller maintains, sponsors or contributes to only
those employee pension benefit plans (as defined in Section 3(2) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
whether or not excluded from coverage under specific Titles or
Subtitles of ERISA) established or maintained for the benefit of
employees or former employees of the Business that are described in
Schedule 3.13.2 (the "Pension Plans"), none of which is a
multi-employer plan (within the meaning of Section 3(37) of ERISA).
Except as set forth on
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Schedule 3.13.2, each Pension Plan that is intended to be tax qualified
under Sections 401(a) and 501(a) of the Code is so qualified, has
received one or more favorable IRS determination letters as to its
qualification, covering such plan from its inception, and nothing has
occurred that could jeopardize such tax qualified status.
3.13.3. Each Seller maintains, sponsors or contributes to only
those employee welfare benefit plans (as defined in Section 3(1) of
ERISA, whether or not excluded from coverage under specific Titles or
Subtitles of ERISA) for the benefit of employees or former employees of
the Business that are described in Schedule 3.13.1 (the "Welfare
Plans"), none of which is a multi-employer plan (within the meaning of
Section 3(37) of ERISA).
3.13.4. Except as set forth on Schedule 3.13.4, neither Seller
is a party to any collective bargaining or labor agreement relating to
the Business, and there is not, as of the date of this Agreement, any
strike, work stoppage or material labor controversy or dispute pending
or, to the best of the Knowledge of each Seller, threatened relating to
the Business.
3.13.5 The post-retirement health and life obligations of
Sellers for Transferred Employees and former employees of the Business
("SFAS 106 Obligations") for the year ended December 31, 1998 did not
exceed by more than $20,000 the amount included in rate recovery for
the Business with respect to SFAS 106 Obligations pursuant to Sellers'
most recent Missouri rate case (effective January 10, 1998). That
portion of all rates reflecting the SFAS 106 Obligations paid to
Sellers relating to the Business has been deposited in the trusts
created to fund the SFAS 106 Obligations.
3.13.6 Prior to January 10, 1998, there were no
post-retirement health or life obligations of Sellers for employees or
former employees of the Business included in rate recovery, other than
"pay-as-you-go" obligations.
3.14. Brokerage. No broker or finder has acted directly or indirectly
for either Seller in connection with this Agreement or the transactions
contemplated hereby, and no broker or finder is entitled to any brokerage or
finder's fee or other commission in respect thereof based in any way on
agreements, arrangements or understandings made by or on behalf of either
Seller.
3.15. Environmental Matters. Except as disclosed in Schedule 3.15, each
Seller holds all Environmental Permits that are required for the operation of
the Business. Except as disclosed in Schedule 3.15, each Seller's conduct of the
Business, and the condition of all properties and improvements included in the
Transferred Assets (and, to the Knowledge of each Seller, any off-site storage
or disposal of any Hazardous Materials from such operations), is in compliance,
in all material respects, with all Environmental Laws. Except as disclosed on
Schedule 3.15, neither Seller is currently in receipt of any written claim,
demand, notice or complaint alleging material violation of, or material
liability under, any Environmental Law relating to the operation of the Business
or the Transferred Assets. Except as described on Schedule 3.15, to the
Knowledge of each Seller, neither of Sellers has incurred any material liability
or obligation in connection with any release or threatened release of any
Hazardous Material in the environment or any material reclamation or remediation
requirements under any Environmental Law, in each case relating to the operation
of the Business or the Transferred Assets. No Seller has been named as a
potential responsible party under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, or any corresponding state
laws. Except
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as described on Schedule 3.15, to the Knowledge of each Seller, no Hazardous
Materials were incorporated in the Real Property, the Leased Property or the
System Property prior to the acquisition thereof by such Seller. There are no
sites, locations or operations at which any Seller is currently undertaking, or
has completed, any remedial or response action relating to the disposal or
release of a Hazardous Material, as required by Environmental Laws, with respect
to the Business. Buyer acknowledges that (i) the representations and warranties
contained in this Section 3.15 are the only representations and warranties being
made with respect to compliance with or liability under Environmental Laws or
with respect to any environmental, health or safety matter, including natural
resources, related in any way to this Agreement or its subject matter and (ii)
no other representation contained in this Agreement shall apply to any such
matters and no other representation or warranty, express or implied, is being
made with respect thereto.
3.16. No Undisclosed Liabilities; No Material Adverse Effect. There are
no material liabilities or obligations of the Business or of either Seller
arising out of or relating to the Business or the Transferred Assets, except (i)
Excluded Liabilities, (ii) liabilities and obligations reflected in the
Financial Statements, (iii) liabilities and obligations arising since September
30, 1999 in the ordinary course of business that are not inconsistent with the
types and amounts of such liabilities and obligations historically incurred in
the Business, and (iv) liabilities and obligations identified on Schedule 3.16
or another Schedule hereto. Since September 30, 1999, there has not occurred any
event resulting in a Material Adverse Effect.
3.17. Customers; Suppliers. Neither of Sellers has been involved
in any material controversy with any group of similarly situated customers of
the Business or with any material suppliers of the Business during the last two
years.
3.18. Books and Records. All books and records of each Seller with
respect to the Business or the Transferred Assets have been prepared, assembled
and maintained in accordance in all material respects with the usual and
customary policies and procedures and accurately reflect, in reasonable detail,
the assets and transactions of each Seller relating to the Business or the
Transferred Assets.
3.19. Insurance. Schedule 3.19 identifies each material insurance
policy of Sellers relating to the Transferred Assets.
3.20. Accounts Receivable. Except as set forth on Schedule 3.20,
the accounts and notes receivable included in the Transferred Assets: (a) arose
from bona fide sales or contracting transactions by Sellers in the ordinary
course of business consistent with past practices; and (b) represent bona fide
indebtedness of the respective debtors.
3.21. Y2K Compliance. Sellers have put into effect reasonable and
customary practices and programs designed to enable all material software,
hardware and equipment that are owned or utilized by Sellers in the operation of
the Business to be capable, by December 31, 1999, of accounting for all
calculations using a century and date sensitive algorithm for the year 2000
without any material interruption caused by the occurrence of the year 2000.
3.22. No Other Representations. Except as set forth in this
Article III or made pursuant to Section 9.1, Sellers make no representation or
warranty whatsoever to Buyer.
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IV. REPRESENTATIONS AND WARRANTIES OF BUYER.
Buyer hereby represents and warrants to Sellers as follows:
4.1. Organization. Buyer is a corporation duly organized, validly
existing and in good standing under the laws of the State of Texas and the
Commonwealth of Virginia and has all requisite corporate power and authority to
execute, deliver and perform this Agreement and to consummate the transactions
contemplated hereby.
4.2. Authorization and Validity of Agreement. The execution, delivery
and performance by Buyer of this Agreement have been duly authorized by all
necessary corporate action. This Agreement has been duly and validly executed
and delivered by Buyer and constitutes a valid and binding obligation
enforceable against Buyer in accordance with its terms, except to the extent
that such enforceability (i) may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to creditors' rights
generally, or (ii) is subject to general principles of equity.
4.3. No Contravention. The execution, delivery and performance by Buyer
of this Agreement and the consummation of the transactions contemplated on its
part hereby will not, subject to obtaining any required consents, approvals,
authorizations, exemptions or waivers, (i) violate any provision of law, rule or
regulation to which it is subject, (ii) violate any order, judgment or decree
applicable to it, or (iii) conflict with, or result in a breach or default
under, any term or condition of Buyer's articles of incorporation or bylaws, or
any contract, agreement or other instrument to which it is a party or by which
it may be bound.
4.4. Consents. Except as set forth on Schedule 4.4, no consent,
approval or authorization of, or exemption by, or declaration, registration or
filing with, any governmental or regulatory authority is required in connection
with the execution, delivery and performance by Buyer of this Agreement, or the
taking of any other action contemplated hereby.
4.5. Brokerage. No broker or finder has acted directly or indirectly
for Buyer in connection with this Agreement or the transactions contemplated
hereby, and no broker or finder is entitled to any brokerage or finder's fee or
other commission in respect thereof based in any way on agreements, arrangements
or understandings made by or on behalf of Buyer.
4.6. Litigation. There is no legal, administrative or other action,
proceeding or, to Buyer's knowledge, governmental investigation pending or, to
Buyer's knowledge, threatened (i) against Buyer with respect to which there is a
reasonable likelihood of a determination which would have a material adverse
effect on the ability of Buyer to perform its obligations under this Agreement
or (ii) which seeks to enjoin or obtain damages in respect of the consummation
of the transactions contemplated hereby.
4.7. Financing. Buyer has all funds necessary to consummate the
transactions contemplated by this Agreement.
V. OBLIGATIONS OF SELLERS.
Sellers hereby covenant and agree with Buyer as follows:
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5.1. Consents. Each Seller will use commercially reasonable efforts,
and will cooperate with Buyer, to secure all necessary consents, approvals,
authorizations, exemptions and waivers from third parties, including
governmental authorities, as shall be required in order to enable Sellers to
effect the transactions contemplated on their part hereby. It is understood that
such efforts do not require Sellers to offer or grant financial accommodations
to any third party or to remain secondarily liable with respect to any Assumed
Liability.
5.2. Conduct of Business. Except as may be otherwise contemplated by
this Agreement or required by any of the documents listed in any Schedule hereto
or except as Buyer may otherwise consent in writing, between the date hereof and
the Closing Date Sellers will: (i) in all material respects, conduct the
Business only in the ordinary course consistent with past practice; (ii) use
commercially reasonable efforts to preserve intact the Business and the goodwill
of its customers, suppliers, employees and any other Persons having business
relations with them with respect to the Business; (iii) maintain the properties,
machinery and equipment included in the Transferred Assets in sufficient
operating condition and repair to enable Buyer to conduct the Business as
currently conducted by Sellers; and (iv) use commercially reasonable efforts to
conduct the Business in such a manner so that the representations and warranties
of the Sellers contained herein shall continue to be true and correct at all
times prior to the Closing Date as if made on and as of such times. Without
limiting the generality of the foregoing, except as Buyer may otherwise consent
in writing, Sellers shall not (i) enter into any contract which would be a
Material Contract, or amend or modify any existing Material Contract, not in the
ordinary course of business consistent with past practice or (ii) except for
budgeted compensation increases, adopt, amend or terminate any Plan, increase
any salary, bonus or other compensation or benefit, or promise or commit to do
any of the foregoing, except in a manner which individually or in the aggregate
will not result in a material increase in benefits or compensation expense.
5.3. Access Before Closing. From the date of this Agreement until the
Closing Date, Sellers will permit Buyer and its representatives reasonable
access on reasonable notice during normal business hours to the properties,
personal property, personnel, books and records, contracts, and commitments of
the Business, including the right to make copies of such books and records,
contracts, and commitments. In the event that any record or other information
requested by Buyer is subject to a confidentiality agreement with a third party,
attorney-client privilege, or other legal restriction or privilege, Sellers and
Buyer will endeavor to find means of disclosing as much information as
practicable that is needed by Buyer to prepare for the transfer of the Business,
but Sellers will not be obligated to breach such restriction or privilege. Buyer
shall return all copies of such books and records, contracts, and commitments
promptly upon the request of Sellers if for any reason the Closing does not
occur.
5.4. Clearance Certificate. On or prior to the Closing Date, Sellers
shall use commercially reasonable efforts to provide Buyer, at Buyer's request,
with all clearance certificates or similar documents that may be required by any
state, local or other taxing authority in order to relieve Buyer of any
obligation to withhold or escrow any portion of the Purchase Price.
VI. OBLIGATIONS OF BUYER.
Buyer hereby covenants and agrees with Sellers as follows:
6.1. Consents. Buyer will use commercially reasonable efforts, and will
cooperate with Sellers, to secure all necessary consents, approvals,
authorizations, exemptions and waivers from third
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parties, including governmental authorities, as shall be required in order to
enable Buyer to effect the transactions contemplated hereby. It is understood
that such efforts do not require Buyer to offer or grant financial
accommodations to any third party or to become liable with respect to any
Excluded Liability.
VII. EMPLOYEE MATTERS.
7.1. Employment of Employees. As of the Closing Date, Buyer shall offer
to employ each employee listed in Schedule 7.1 (which Schedule shall be updated
as of the Closing Date with appropriate deletions and additions thereto to
reflect the then current employees of the Business, but not including any
employee then on long-term disability, short-term disability or not actively at
work other than those employees on vacation, bereavement leave, short-term sick
leave or other short-time due to non-medical reasons which are not scheduled to
last more than ten (10) business days ("Leave"), unless and until such employee
returns to full-time work from such long-term disability, short-term disability
or Leave after the Closing Date) at a base salary or hourly rate not less than
the base salary or hourly rate then applicable to such employee and to provide
such benefits, holidays, vacation days, and similar benefits as are, in the
aggregate, substantially comparable to those then in effect for such employees,
except that Buyer shall not be required to provide a 401(k) savings plan. Each
such employee as of the Closing Date (or for an employee on long-term or
short-term disability or Leave as of the Closing Date, who returns from such
disability or Leave after the Closing Date), who becomes employed by Buyer is
herein referred to individually as a "Transferred Employee" and collectively as
the "Transferred Employees".
7.2. Severance Benefits. For a period of one year after the
Closing Date, Buyer shall provide to each Transferred Employee who is
involuntarily terminated not for cause by Buyer the severance benefits set forth
on Schedule 7.2 hereto.
7.3. Transfer of Pension Assets and Liabilities.
7.3.1. Transfer. Subject to the review of Sellers' plan
documents, as soon as practicable following the Closing Date, but not
earlier than thirty (30) days following the filing of appropriate Forms
5310A, if applicable, with the Internal Revenue Service, Parent shall
cause to be transferred (i) from the Southwestern Energy Company
Pension Plan (the "Seller Pension Plan") to the pension plan sponsored
by or to be established by Buyer ("Buyer's Pension Plan"), and Buyer's
Pension Plan shall assume, the accrued benefits liability as of the
Closing Date for each of the Transferred Employees who participated in
the Seller Pension Plan prior to the Closing Date (the "Transferred
Pension Plan Participants"), and (ii) from the Southwestern Energy
Company Pension Trust (the "Seller Pension Plan Trust") to Buyer's
Pension Plan trust, an amount in cash equal to the projected benefit
obligation to the Transferred Pension Plan Participants on the Closing
Date under the Seller Pension Plan, increased by interest at the plan's
actuarial rate from Closing to the actual date of transfer and
decreased by the amount of any benefit payments to Transferred Pension
Plan Participants after the Closing Date but before the date of
transfer. Parent shall not be obligated to cause any amount to be
transferred to any plan or trust designated by Buyer until Buyer
provides evidence (such as a favorable determination letter from the
Internal Revenue Service, an opinion of counsel or other reasonably
satisfactory evidence) reasonably acceptable to Parent that (i) such
plan and trust satisfy the requirements for qualification under Section
40l(a) of the Internal Revenue Code (the "Code") and (ii) such plan
provides that each Transferred Pension Plan Participant is entitled to
a nonforfeitable accrued
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benefit under such plan that is not less than the nonforfeitable
accrued benefit to which such Transferred Pension Plan Participant was
entitled under the Seller Pension Plan on the Closing Date.
7.3.2. Benefit Calculations. The projected benefit obligation
to Transferred Pension Plan Participants shall be determined using the
projected benefit obligation methodology of Statement of Financial
Accounting Standards No. 87, on the basis of (i) each participant's
age, service for benefit accrual purposes and average compensation and
the terms of the Seller Pension Plan in effect on the Closing Date, and
(ii) the actuarial assumptions and method used for determining the
projected benefit obligation as set forth in Schedule 7.3.2. In no
event shall each amount transferred pursuant to this Section 7.3 be
less than the amount required to be transferred to meet the
requirements of Sections 401(a)(12) and 414(1) of the Code. The
calculation of projected benefit obligation required for purposes of
this Section 7.3.2 shall be made in accordance with the assumptions set
forth on Schedule 7.3.2.
7.3.3. Plan Termination. Subject to the requirements of
applicable law, in the event of the termination of Buyer's Pension Plan
within five (5) years after the Closing Date, all of the assets
transferred to such plan pursuant to this Section 7.3, adjusted for
earnings, gains or losses after the date of such transfer, shall be
used to provide benefits to Transferred Pension Plan Participants and
their beneficiaries who are entitled to benefits under such plan at the
time of its termination.
7.4. Savings Plan. Subject to the review of Sellers' plan documents, as
soon as practicable following the Closing Date, to the extent that Buyer
sponsors a 401(k) savings plan (which it shall not be required to do), Parent
shall cause to be transferred (i) from the Southwestern Energy Company 401(k)
savings plan (the "Seller Savings Plan") to the 401(k) savings plan sponsored by
Buyer ("Buyer's Savings Plan"), and the Buyer's Savings Plan shall assume, the
account balance liability as of the date of transfer for each Transferred
Employee who participated in the Seller Savings Plan prior to the Closing Date,
who is employed by Buyer on the date of transfer (the "Eligible Transferred
Employee"), and (ii) from the trust relating to the Seller Savings Plan, an
amount in cash or other property, including participant loans, acceptable to the
trustee of the Buyer's Savings Plan equal to the sum of the account values (as
of the date of transfer) of each Eligible Transferred Employee. Parent shall not
be obligated to cause any amount to be transferred to the Buyer's Savings Plan
or the trust thereunder until Buyer provides evidence (such as a favorable
determination letter from the Internal Revenue Service, an opinion of counsel or
other reasonably satisfactory evidence) reasonably acceptable to Parent that
such plan and trust satisfy the requirements for qualification under Section
40l(a) of the Code. Each Eligible Transferred Employee shall be entitled on the
date of transfer to a nonforfeitable account balance under the Buyer's Savings
Plan that is not less than such Eligible Transferred Employee's nonforfeitable
account balance under the Seller Savings Plan immediately prior to such
transfer. Buyer agrees to permit any Eligible Transferred Employee who has an
unpaid loan balance under the Seller Savings Plan to continue to repay such loan
under the Buyer's Savings Plan under the same terms as such loan was required to
be repaid under the Seller Savings Plan. However, nothing herein shall require
Buyer to sponsor or establish a Savings Plan, in which case this Section 7.4
shall not apply. Buyer shall permit the Transferred Employees to participate in
Buyer's Employee Stock Ownership Plan.
7.5. Indemnification for Plan Liabilities. From the dates of the
transfers of assets referred to in Sections 7.3 and 7.4, Buyer shall indemnify
and hold Sellers and Seller Savings Plan and Seller
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Pension Plan harmless for any loss that Sellers or said plans may incur in
respect of any obligation or liability transferred under Sections 7.3 and 7.4 to
the applicable plan of Buyer designated under such Sections.
7.6. Service Credit. For purposes of vesting, benefit accrual, benefit
calculation, participation, eligibility (including for optional forms of
benefits or early retirement or disability retirement under Buyer's Pension
Plan), and matching contribution benefits, if any, Buyer shall, with respect to
each benefit required to be provided under the terms of this Article 7, credit
each Transferred Employee with all service credited to the Transferred Employee
under each Seller's corresponding plan, policy, program, or arrangement
applicable to such Transferred Employee as of the Closing Date.
7.7. Medical and Dental Plans.
7.7.1. Effective as of the Closing Date, Buyer shall make
enrollment available to all Transferred Employees and their eligible
dependents without any waiting period in a Buyer plan or plans
providing medical and dental benefits (the "Buyer Medical Plan"), to
the extent such individuals were covered under Seller's Medical Plan,
as contemplated by Section 7.1. Such Buyer Medical Plan shall waive any
restrictions and limitations for pre-existing conditions for all
Transferred Employees, to the extent such restrictions did not apply
under Seller's Medical Plan, and shall give credit to each Transferred
Employee for any deductibles and out-of-pocket expenses paid during the
current plan year by such Transferred Employee under Sellers'
applicable medical and dental Plans (hereinafter collectively referred
to as the "Seller Medical Plans").
7.7.2. Buyer shall be responsible for medical and dental
expenses covered under the terms of the Buyer Medical Plan incurred on
the later of (i) the Closing Date or (ii) the date such person becomes
a Transferred Employee, by a Transferred Employee and/or his covered
dependents who are enrolled in the Buyer Medical Plan. Sellers shall be
responsible only for medical and dental expenses covered under the
terms of the Seller Medical Plans incurred prior to the Closing Date
(or if later, for the period from the Closing Date until the date such
person becomes a Transferred Employee) by a Transferred Employee and/or
his covered dependents. If a Transferred Employee or a covered
dependent of a Transferred Employee enrolled in the Seller Medical
Plans is hospitalized on the Closing Date, the Seller Medical Plans
shall continue to provide coverage for such person until he or she is
discharged from the hospital, to the extent coverage is provided under
the terms of the Seller Medical Plans.
7.7.3. As soon as possible following the Closing Date, but in
no event later than 30 days following the later of the Closing Date or
the establishment of Buyer's Post-Retirement Trusts (as defined below),
Parent shall cause to be transferred to Buyer, either through the
transfer from the trusts or other vehicles (the "Seller's
Post-Retirement Trusts") funding the post-retirement medical and other
welfare benefits (the "Post Retirement Benefits") for all Transferred
Employees listed on Schedule 7.1 and not greater than thirty-five (35)
former employees of the Business (to be listed on a Schedule to be
provided by Sellers to Buyer within five days of the date hereof, and
updated as of the Closing Date) to the trust or trusts established or
maintained by Buyer (the "Buyer's Post-Retirement Trusts") for the
funding of post-retirement medical and other welfare benefits or
through a direct payment to Buyer, an amount equal to the difference
between (a) the amount of the Post-Retirement Benefits which has been
recovered by Seller in
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rates on or after January 10, 1998, and (b) the amount of the
Post-Retirement Benefits paid by Seller in the form of benefit payments
between January 10, 1998 and the Closing Date. In the event the
representations and warranties of Sellers in Section 3.13.6 do not
continue to be true and correct, Sellers shall pay to Buyer the amount
by which the rate recovery with respect to the Business for periods
prior to January 10, 1998 exceeded the "pay-as-you-go" obligations of
the Business for periods prior to January 10, 1998.
7.8. Vacation and Sick Day Benefits Accrued Through Closing Date. Buyer
shall credit each Transferred Employee with any vacation and sick days accrued
as of the Closing Date in accordance with the terms of Sellers' vacation and
sick day policies in effect as of such date.
7.9. Welfare Benefits. Sellers shall be liable for claims incurred
under the Welfare Plans prior to the Closing Date.
7.10. Long Term Disability. Buyer shall not assume sponsorship of,
or any liabilities under, the Southwestern Energy Company Long Term Disability
Plan. Any and all such liabilities shall remain solely with Sellers.
7.11. Flexible Spending Accounts. As soon as possible following the
Closing Date, Sellers shall transfer to Buyer, and Buyer agrees to accept, those
amounts which represent the Transferred Employees' debit and credit balances
under the Southwestern Energy Company Salary Conservation Plan (the "FSA's"), a
schedule of which is attached hereto as Schedule 7.11. Buyer agrees to
administer the FSA's (consistent with the terms of the flex plan applicable to
Buyer's employees) such that Transferred Employees will be able to defer
additional compensation (in accordance with the terms of the applicable Buyer
plan) and to submit claims against the FSA within the time period permitted by
applicable law.
7.12. WARN Act Liability. Sellers shall pay and be solely liable for
all liability under the Worker Adjustment and Retraining Notification Act ("WARN
Act"), in each case, arising from any act or omission of Sellers on or before
the Closing Date. Buyer shall pay and be solely liable for all liability under
the WARN Act, in each case, arising from any act or omission of Buyer or its
Affiliates after the Closing Date.
7.13. Health Care Continuation Coverage. Sellers shall be responsible
for compliance with all requirements under Section 4980B of the Code and Section
601 et seq. of ERISA with respect to any (a) Transferred Employee or (b) family
member of such Transferred Employee, in each case who becomes a qualified
beneficiary within the meaning of Section 4980B(g)(1) of the Code as a result of
any "qualifying event" within the meaning of Section 4980B(f)(3) of the Code
which occurs on or prior to the Closing Date. Buyer shall be responsible for
compliance with all requirements under Section 4980B of the Code and Section 601
et seq. of ERISA with respect to any (a) Transferred Employee or (b) family
member of such Transferred Employee, in each case who becomes a qualified
beneficiary within the meaning of Section 4980B(g)(1) of the Code as a result of
any "qualifying event" within the meaning of Section 4980B(f)(3) of the Code
which occurs after the Closing Date.
7.14. Employment Taxes. Sellers hereby acknowledge that, for FICA and
FUTA tax purposes, Buyer qualifies as a successor employer with respect to the
Transferred Employees. In connection with the foregoing, the parties agree to
follow the "Alternative Procedures" set forth in Section 5 of Revenue Procedure
96-60, 1996-2-C.B.399. In connection with the application of the "Alternative
Procedures,"
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(i) Sellers and Buyer each shall report on a predecessor-successor basis as set
forth in such Revenue Procedure, (ii) provided that Sellers provide to Buyer all
necessary payroll records for the calendar year that includes the Closing Date,
Sellers shall be relieved from furnishing Forms W-2 to employees of Sellers that
become employees of Buyer, and (iii) provided that Sellers provide to Buyer
all necessary payroll records for the calendar year that includes the Closing
Date, Buyer shall assume the obligations of Sellers to furnish such Forms W-2 to
such employees for the full calendar year in which the Closing occurs.
VIII. ADDITIONAL RIGHTS AND OBLIGATIONS.
8.1. Access After Closing. Buyer will permit Sellers and their
representatives reasonable access on reasonable notice during normal business
hours, for a period of three years following the Closing Date and for such
longer period as may be required in connection with any pending or threatened
tax audit or judicial or administrative proceeding, (i) to the books and records
of Sellers included in the Transferred Assets, including the right to make
copies thereof, and to personnel (for reasonable inquiry and testimony), and
(ii) to any computerized data included in the Transferred Assets. All
information so obtained shall be kept confidential by the Sellers, unless such
information otherwise becomes publicly available or disclosure of such
information is required by applicable law.
8.2. Further Assurances. At any time and from time to time after the
Closing Date, Sellers shall, at the request of Buyer, and Buyer shall, at the
request of Sellers, execute and deliver any further instruments or documents and
take all such further action as the other party may reasonably request in order
to consummate and make effective the sale of the Transferred Assets and the
assumption of the Assumed Liabilities pursuant to this Agreement or to fulfill
any other of such party's obligations hereunder.
8.3. Confidentiality. The terms of the Confidentiality Agreement dated
June 15, 1999 between Parent and Buyer are hereby incorporated herein by
reference and shall continue in full force and effect until the Closing, at
which time such Confidentiality Agreement and the obligations of Buyer under
this Section 8.3 shall terminate. If this Agreement is, for any reason,
terminated prior to the Closing, the Confidentiality Agreement shall continue in
full force and effect.
8.4. Schedules. Certain information set forth in the Schedules is
included solely for informational purposes and may not be required to be
disclosed pursuant to this Agreement. The disclosure of any information shall
not be deemed to constitute an acknowledgment that such information is required
to be disclosed in condition with the representations and warranties made by
Sellers in this Agreement. .
8.5. Tax Matters. Sellers shall prepare or cause to be prepared and
timely file or cause to be timely filed all required Tax Returns relating to
Transfer Taxes imposed on Sellers for (i) all taxable periods ending on or
before the Closing Date for which Returns shall not have been filed as of the
Closing Date, and (ii) all taxable periods ending following the Closing Date
that include the Closing Date (all such Returns referred to in clause (i) and
(ii) being "Pre-Closing Returns"). All such Pre-Closing Returns shall be
prepared on a basis consistent with prior practice unless a different treatment
is required by a change in applicable law.
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8.6. Use of Name and Logos.
8.6.1. Buyer agrees to cease using the Names and Logos on its
literature, inventory, products, labels, packaging or materials as soon
as available supplies thereof are exhausted and in any event within six
months after the Closing Date with respect to inventory and products,
and within 90 days after the Closing Date with respect to literature.
8.6.2. For thirty days after Closing, Buyer may use, as is,
any of Sellers' receipts, bags, boxes, stationery, purchase order
forms, bills or other similar paper goods on hand or order at Closing.
After such time, Buyer shall not use any such supplies which state or
otherwise indicate thereon that the business operated by Buyer is a
subsidiary, division or unit of either Seller without first crossing
out or marking over such statement or indication or otherwise clearly
indicating on such supplies that the business operated by Buyer is no
longer a subsidiary, division or unit of either Seller.
8.7. Environmental Matters.
(a) Sellers jointly and severally agree to indemnify and hold Buyer
harmless against any and all Losses incurred by Buyer resulting from Matters of
Environmental Concern (as hereinafter defined); provided that: (i) any claim by
Buyer for indemnification pursuant to this clause 8.7(a) must be made by written
notice given within three (3) years after the Closing Date; (ii) Sellers will
have no obligation to indemnify Buyer for such Losses except to the extent that
such Losses, taken together, exceed $200,000 in the aggregate (the "Threshold"),
and then only to the extent of the excess that has not and will not be
recoverable through rates; and (iii) any clean-up, remediation, reclamation or
other costs with respect to the Transferred Assets for which a claim is made by
Buyer under this Section 8.7(a) shall be borne, after giving effect to the
Threshold, 50% by Sellers and 50% by Buyer. "Matters of Environmental Concern"
means (i) any failure by Sellers to have complied prior to the Closing Date with
applicable Environmental Laws or (ii) any handling, use, storage, generation,
release, discharge, disposal, dumping or migration of any Hazardous Materials
(whether legal, illegal, accidental or intentional) on, to, from or beneath the
Real Property, the Leased Real Property, the System Property or any other
Transferred Asset to the extent occurring prior to the Closing Date.
(b) If Buyer or either Seller has or may have the right to recover
Losses indemnified by Sellers or borne by Buyer pursuant to clause (a) of this
Section 8.7 from a party in addition to Sellers, Buyer and each Seller, as the
case may be, shall assign such right to the other (in proportion to the relative
amounts indemnified against or borne) and shall reasonably cooperate in pursuing
any rights against such third party.
8.8. Abstracts. Within 60 days after the date hereof, Sellers shall
cause to be prepared by a title abstractor reasonably acceptable to Buyer and
delivered to Buyer abstracts of title for the Real Property and the Leased
Property (other than office and warehouse space) and the System Property (the
"Abstracts") showing, in customary detail, the state of title to such
Transferred Assets, including the legal description and any other identification
of such Transferred Assets, the instruments creating or evidencing such
Transferred Assets and the encumbrances affecting such Transferred Assets.
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<PAGE>
8.9. Y2K. To the extent, if any, that the information technology
included in the Transferred Assets (including components of the Transferred
Assets that interface with or whose operation is dependent upon the operation of
information technology systems) will not operate without error relating to date
data that references different centuries or more than one century, Sellers shall
use commercially reasonable efforts, at Sellers' expense, to modify or replace
such information technology so it will so operate without error. Any
modification or replacement will be made as promptly as practicable after
Buyer's request; provided that Buyer's request is made not later than six months
after the Closing Date.
IX. CONDITIONS TO BUYER'S OBLIGATIONS.
The obligations of Buyer under this Agreement to purchase the
Transferred Assets and to consummate the other transactions contemplated hereby
shall be subject to the satisfaction (or waiver by Buyer) on or prior to the
Closing Date of all of the following conditions:
9.1. Representations, Warranties and Covenants of Sellers. Sellers
shall have complied in all material respects with their agreements and covenants
contained herein to be performed on or prior to the Closing Date, and all the
representations and warranties of Sellers contained herein shall be (a) true and
correct on and as of the date hereof and (b) true and correct in all material
respects on and as of the Closing Date with the same effect as though made on
and as of the Closing Date, (i) except to the extent that such representations
and warranties were made as of a specified date, and as to such representations
and warranties the same shall continue on the Closing Date to have been true and
correct in all material respects as of the specified date and (ii) in the case
of clause (b) above, except for changes after the date hereof resulting from the
conduct of the Business in the ordinary course of business that do not result
from a violation of Section 5.2, if such changes could not adversely affect the
Buyer, the Transferred Assets or the use or operations thereof in any material
respect. Buyer shall have received a certificate of Sellers, dated as of the
Closing Date and signed by an officer of each Seller, certifying as to the
fulfillment of the condition set forth in this Section 9.1.
9.2. No Prohibition. No statute, rule or regulation or order of
any court or administrative agency shall be in effect which prohibits Buyer from
consummating the transactions contemplated hereby.
9.3. Further Action. All consents and approvals of governmental
authorities referred to in Schedule 3.10 or 4.4 hereto, the granting of which
are necessary to consummate the transactions contemplated hereby, shall have
been obtained and shall not (a) result in rate adjustments with respect to the
Business which would be materially less favorable in the aggregate to Buyer than
the rates currently in effect on the date hereof, (b) prevent or adversely
affect the operation of the Transferred Assets (or the results of operations
therefrom) after the Closing Date in a manner consistent with the Business or
(c) contain any other terms materially adverse to the Buyer. The consents and
approvals of third parties (other than governmental authorities) identified on
Schedule 9.3 shall have been obtained and shall be reasonably satisfactory to
Buyer.
9.4. No Material Adverse Effect. Since the date of this Agreement,
there shall not have occurred any event resulting in a Material Adverse Effect.
9.5. Abstracts. Buyer shall have received the Abstracts, and the
Abstracts reflect a state of title that is reasonably satisfactory to Buyer.
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<PAGE>
9.6. Omnibus Gas Transportation and Supply Agreement. The parties
shall have reached agreement on, and executed, the Omnibus Gas Transportation
and Supply Agreement.
9.7. Other Documents. The Sellers shall have delivered to Buyer
such certificates, documents and instruments, including certified resolutions,
authorizations and confirmations of incumbency, as Buyer may reasonably request
to effect or confirm the transactions contemplated hereby.
X. CONDITIONS TO SELLERS' OBLIGATIONS.
The obligations of Sellers under this Agreement to sell the Transferred
Assets and to consummate the other transactions contemplated hereby shall be
subject to the satisfaction (or waiver by Sellers) on or prior to the Closing
Date of all of the following conditions:
10.1. Representations, Warranties and Covenants of Buyer. Buyer shall
have complied in all material respects with all of its agreements and covenants
contained herein to be performed on or prior to the Closing Date, and all of the
representations and warranties of Buyer contained herein shall be (a) true and
correct on and as of the date hereof and (b) true and correct in all material
respects on and as of the Closing Date with the same effect as though made on
and as of the Closing Date, except to the extent that such representations and
warranties were made as of a specified date, and as to such representations and
warranties the same shall continue on the Closing Date to have been true and
correct in all material respects as of the specified date. Sellers shall have
received a certificate of Buyer, dated as of the Closing Date and signed by an
officer of Buyer, certifying as to the fulfillment of the condition set forth is
this Section 10.1.
10.2. No Prohibition. No statute, rule, regulation or order of any
court or administrative agency shall be in effect which prohibits Sellers from
consummating the transactions contemplated hereby.
10.3. Further Action. All consents and approvals of governmental
authorities, referred to in Schedule 3.10 or Schedule 4.4 hereto, the granting
of which are necessary to consummate the transactions contemplated hereby, shall
have been obtained.
10.4. Omnibus Gas Transportation and Supply Agreement. The parties
shall have reached agreement on, and executed, the Omnibus Gas Transportation
and Supply Agreement.
10.5. Other Documents. Buyer shall have delivered to Sellers such
certificates, documents and instruments, including certified resolutions,
authorizations and confirmations of incumbency, as Sellers may reasonably
request to effect or confirm the transactions contemplated hereby.
XI. TERMINATION PRIOR TO CLOSING.
11.1. Termination. This Agreement may be terminated and the
transactions contemplated hereby may be abandoned at any time prior to the
Closing:
(i) By the mutual written consent of Buyer and Sellers;
or
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<PAGE>
(ii) By either Buyer or Sellers, if the Closing shall have
not occurred on or before December 31, 2000;
provided, however, that the right to terminate this
Agreement under this subclause (ii) shall not be
available to any party whose failure to fulfill any
obligation under this Agreement shall have been the
cause of, or resulted in, the failure of the Closing
to occur on or before such date.
11.2. Effect of Termination. In the event of termination of this
Agreement as provided in Section 11.1, this Agreement shall forthwith become
void; provided, however, that such termination shall not relieve any party of
its obligations under Section 8.3, Section 13.9 and Section 13.15 nor relieve
any party from liability for any breach hereof. Upon any termination of this
Agreement, each party hereto will return all documents, work papers and other
material of the other party relating to the transactions contemplated hereby and
all copies of such materials, whether so obtained before or after the execution
hereof, to the party furnishing the same.
XII. INDEMNIFICATION AND SURVIVAL.
12.1. Indemnification by Sellers. Subject to Sections 12.3 and 12.4,
Sellers will jointly and severally indemnify and hold Buyer harmless against any
and all Losses to which Buyer becomes subject or which Buyer suffers or incurs,
insofar as such Losses arise out of or result from (a) the Excluded Liabilities,
(b) the inaccuracy of any representation or warranty of Sellers contained
herein, (c) the breach of any covenant of Sellers contained herein, (d) subject
to Sections 2.3.4 and 13.8, any Tax imposed upon either Seller or the
Transferred Assets for any event or period through the Closing Date and (e) any
failure to comply with any bulk transfer or similar law in connection with the
transactions contemplated hereby or, subject to the provisions of Section 8.7,
the imposition on Buyer of any liability or obligation of Sellers that are not
Assumed Liabilities pursuant to any successor liability law. As used herein,
"Losses" means losses, liabilities, claims, damages, costs and expenses
(including reasonable attorneys' fees and costs of investigation), whether or
not involving a third party claim; provided that Losses shall not include (i)
any multiple, punitive or exemplary damages, except to the extent resulting from
third party claims, (ii) consequential or special damages, except to the extent
proximately resulting from any inability to operate the Transferred Assets in a
manner consistent with the Business, or (iii) any matter to the extent taken
into account on the Closing Statement.
12.2. Indemnification by Buyer. Subject to Sections 12.3 and 12.4,
Buyer will indemnify and hold Sellers harmless against any and all Losses to
which either Seller becomes subject or which either Seller suffers or incurs,
insofar as such Losses arise out of or result from (a) the Assumed Liabilities,
(b) the inaccuracy of any representation or warranty of Buyer contained herein,
(c) the breach of any covenant of Buyer contained herein or (d) expect for
matters as to which Buyer is entitled to indemnification pursuant to Section
12.1, the operation or use of the Transferred Assets subsequent to the Closing
Date.
12.3. Limitations on Liability.
12.3.1. Time Limitations and Survival. The representations,
warranties, covenants and agreements of the parties shall survive the
Closing and any investigation by the parties. Any claim by any party
with respect to any representation or warranty, or any covenant to be
performed on or prior to the Closing Date, by another party for
indemnification must be made by written notice given within twelve (12)
months after the Closing Date; provided that (i) claims with respect to
the representations and warranties contained in Section 3.15 may be
made by
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<PAGE>
written notice within three (3) years after the Closing Date and (ii)
claims with respect to the representations and warranties contained
in Section 3.13.6 may be made by written notice until the earlier of
four (4) years after the Closing Date or the conclusion of Buyer's next
rate case with respect to the Business.
12.3.2. Limitation on Amount. Sellers will have no obligation
to indemnify Buyer for any Losses pursuant to clause (b) (other than in
respect of Section 3.13.6) or clause (c) (to the extent relating to
covenants to be performed on or prior to the Closing Date) of Section
12.1, except to the extent that such Losses, taken together, exceed
$100,000 (provided that if a Loss relates to breach of a representation
or warranty contained in Section 3.15 relating to Matters of
Environmental Concern, such Loss shall be subject to the $200,000
deductible provided in Section 8.7(a) and not towards this $100,000
deductible), and then only to the extent of such excess. In no event
shall Sellers be liable for aggregate Losses under Sections 12.1(b)
(other than in respect of Section 3.15 or Section 3.13.6) and 12.1(c)
(but only in respect of the covenants in Section 5.2) of more than $3.2
million.
12.3.3. Other Limitations. If any indemnified party may have
the right to recover Losses from a third party (other than an insurer)
in addition to the indemnifying party, the indemnified party shall
assign to the indemnifying party any such right remaining against such
third party after the indemnified party shall have recovered all of its
Losses, and shall reasonably cooperate (at the expense of the
indemnifying party) in pursuing any rights against such third party.
12.4. Indemnification Procedure. Promptly after receipt by any
indemnified party of notice of the commencement of any action, proceeding, or
claim in respect of which the indemnified party intends to seek indemnification
pursuant to Section 12.1 or 12.2, the indemnified party shall notify the
indemnifying party in writing; provided that the omission to so notify shall not
relieve the indemnifying party of its indemnification obligations except to the
extent the indemnifying party is materially prejudiced thereby. The indemnifying
party shall be entitled to assume control of the defense of such action or claim
with counsel reasonably satisfactory to the indemnified party; provided,
however, that:
(i) the indemnified party shall be entitled to
participate in the defense of such claim and to
employ counsel at its own expense to assist in the
handling of such claim;
(ii) no indemnifying party shall consent to the entry of
any judgment or enter into any settlement that does
not include as an unconditional term thereof the
giving by each claimant or plaintiff to the
indemnified party of a release from all liability in
respect of such claim or if, pursuant to or as a
result of such consent or settlement, injunctive or
other equitable relief would be imposed against the
indemnified party or such judgment or settlement
could materially interfere with the business,
operations or assets of the indemnified party; and
(iii) after written notice by the indemnifying party to the
indemnified party of its election to assume control
of the defense of any such action in accordance with
the foregoing provisions, the indemnifying party
shall not be liable to such indemnified party
hereunder for any legal fees, costs and expenses
subsequently incurred by such indemnified party in
connection with the defense thereof.
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<PAGE>
If the indemnifying party does not assume control of the defense of
such claim in accordance with the foregoing provisions, the indemnified party
shall have the right to defend such claim in such manner as it may deem
appropriate at the reasonable cost and expense of the indemnifying party, and
the indemnifying party will promptly reimburse the indemnified party therefore
in accordance with this Section 12.4; provided that the indemnified party shall
not be entitled to consent to the entry of any judgment or enter into any
settlement of such claim without the prior written consent of the indemnifying
party (not to be unreasonably withheld).
12.5. Exclusive Remedies. If the Closing occurs, then the remedies
provided in this Article XII shall constitute the sole and exclusive remedies
with respect to all claims for breach of any representation or warranty, or
covenant to be performed on or prior to the Closing Date, contained in this
Agreement, except for fraud or other willful dishonesty. Notwithstanding the
foregoing, the provisions of this Article XII shall not affect the rights of any
party hereto against any third party (including a third party whose claim
against a party hereto is the basis of a claim for indemnification) and shall
not inure to the benefit of any third party.
XIII. MISCELLANEOUS.
13.1. Entire Agreement. This Agreement (including the Exhibits and
Schedules hereto) and the Confidentiality Agreement referred to in Section 8.3
constitute the entire understanding of the parties with respect to the subject
matter hereof and, except as provided in Section 8.3, supersedes all other prior
or contemporaneous oral or written statements by any party with respect thereto.
13.2. Waiver of Bulk Transfer Requirements. Subject to Section 12.1,
Buyer agrees to waive Sellers' compliance with Article 6 of the Uniform
Commercial Code (Bulk Transfers), as in effect in any jurisdiction, or any other
applicable bulk sales law.
13.3. Successors and Assigns. The terms and conditions of this
Agreement shall inure to the benefit of and be binding upon the respective
successors of the parties hereto; provided, however, that this Agreement may not
be assigned by Buyer without the prior written consent of Sellers, which consent
shall not be unreasonably withheld in the case of an assignment to an entity
that is controlled by Buyer.
13.4. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall for all purposes be deemed to be an original
and all of which shall constitute the same instrument.
13.5. Headings. The headings of the sections and paragraphs of this
Agreement are inserted for convenience only and shall not be deemed to
constitute a part of this Agreement or to affect the construction hereof.
13.6. Modification and Waiver. No amendment, modification or alteration
of the terms or provisions of this Agreement shall be binding unless the same
shall be in writing and duly executed by the parties hereto, except that any of
the terms or provisions of this Agreement may be waived in writing at any time
by the party which is entitled to the benefits of such waived terms or
provisions. No waiver of any of the provisions of this Agreement shall be deemed
to or shall constitute a waiver of any other provision hereof (whether or not
similar). No delay on the part of any party in exercising any right, power or
privilege hereunder shall operate as a waiver thereof.
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<PAGE>
13.7. No Third-Party Beneficiary Rights. This Agreement is not intended
to and shall not be construed to give any person or entity other than the
parties signatory hereto any interest or rights (including, without limitation,
any third party beneficiary rights) with respect to or in connection with any
agreement or provision contained herein or contemplated hereby.
13.8. Sales and Transfer Taxes. Sellers, on the one hand, and Buyer, on
the other, shall each be responsible for and pay one-half (1/2) of all
applicable sales, transfer, documentary, or use taxes and recording and filing
fees ("Transfer Taxes") that may become due or payable as a result of the sale,
conveyance, assignment, transfer or delivery of any of the Transferred Assets or
the transactions contemplated hereby whether levied on Buyer, Sellers or any
Affiliate of Sellers. At the Closing, Sellers shall execute and deliver to Buyer
any certificates or other documents as Buyer may reasonably request to claim
available exemptions from the payment of Transfer Taxes under applicable law.
13.9. Expenses. Except as expressly provided otherwise herein, each of
Sellers and Buyer shall pay all costs and expenses incurred by it or on its
behalf in connection with this Agreement and the transactions contemplated
hereby, including, without limiting the generality of the foregoing, fees and
expenses of its own financial consultants, accountants and counsel.
13.10. Waiver of Conditions. The conditions to each party's
obligations hereunder are for the sole benefit of such party and may be waived
by such party in whole or in part to the extent permitted by applicable law.
13.11. Notices. Any notice, request, instruction or other document to
be given hereunder by either party hereto to the other party shall be in writing
and shall be sent by telefax (with confirmation received of the recipient's
number) to the number stated below or shall be delivered personally or sent by
registered or certified mail (postage prepaid and return receipt requested) to
the address stated below.
If to either Seller, to:
Southwestern Energy Company
1083 Sain Street
Fayetteville, AR 72703
Attention: Greg D. Kerley
Senior Vice President and
Chief Financial Officer
Telephone: (501) 521-1141
Telefax: (501) 521-1147
With a copy to:
Cahill Gordon & Reindel
80 Pine Street
New York, New York 10005
Attention: Gary W. Wolf, Esq.
Telephone: (212) 701-3000
Telefax: (212) 269-5420
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<PAGE>
If to Buyer, to:
Atmos Energy Corporation
1800 Three Lincoln Center
5430 LBJ Freeway
Dallas, Texas 75240
Attention: John P. Reddy
Telephone: (972) 934-9227
Telefax: (972) 855-3080
With a copy to:
Gibson, Dunn & Crutcher LLP
1717 Main Street, Suite 5400
Dallas, Texas 75201-7390
Attention: Irwin F. Sentilles, III, Esq.
Telephone: (214) 698-3100
Telefax: (214) 698-3400
or at such other telefax number or address for a party as shall be specified by
like notice. Any notice which is delivered personally in the manner provided
herein shall be deemed to have been duly given to the party to whom it is
directed upon actual receipt by such party. Any notice which is sent by telefax
or addressed and mailed in the manner herein provided shall be conclusively
presumed to have been duly given to the party to which it is addressed on the
date indicated on the telefax confirmation or the postal receipt.
13.12. Knowledge of Sellers. For purposes of this Agreement,
"knowledge of Sellers" or any similar term shall mean the actual knowledge of an
executive officer of Parent or of Charles V. Stevens, Senior Vice President of
AWG, after reasonable inquiry.
13.13. Governing Law. This Agreement shall be construed in accordance
with and governed by the laws of the State of Arkansas applicable to agreements
made and to be performed wholly within such jurisdiction without regard to the
conflicts of laws provisions thereof. Each of the parties agrees to (i) the
irrevocable designation of the Secretary of State of the State of Arkansas as
its agent upon whom process against it may be served and (ii) personal
jurisdiction in any action brought in any court, Federal or State, within the
State of Arkansas having subject matter jurisdiction over matters arising under
this Agreement. Any suit, action or proceeding arising out of or relating to
this Agreement shall only be instituted in a Federal or State court located in
the State of Arkansas. Each party waives any objection which it may have now or
hereafter to the laying of the venue of such suit, action or proceeding, and
irrevocably submits to the jurisdiction of any such court in any such suit,
action or proceeding.
13.14. Waiver of Jury Trial. Each of Sellers and Buyer hereby
irrevocably waives all right to trial by jury in any action, proceeding or
counterclaim (whether based on contract, tort or otherwise) arising out of or
relating to this Agreement or the actions of Sellers or Buyer in the
negotiations, administration, performance and enforcement thereof.
13.15. Announcements. No party hereto shall make any public statements,
including, without limitation, any press release, with respect to this Agreement
and the transactions contemplated hereby
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<PAGE>
without the prior written consent of the other parties, other than as may be
required by law, which consent shall not be unreasonably withheld.
13.16. Severability. If any term or other provision of this Agreement
is held to be invalid, illegal or incapable of being enforced by any court
having jurisdiction, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed on its behalf as of the date first above written.
SELLERS:
SOUTHWESTERN ENERGY COMPANY
By: /s/GREG D. KERLEY
-----------------------------------
Greg D. Kerley
Senior Vice President
ARKANSAS WESTERN GAS COMPANY
By: /s/GREG D. KERLEY
-----------------------------------
Greg D. Kerley
Senior Vice President
BUYER:
ATMOS ENERGY CORPORATION
By: /s/LARRY J. DAGLEY
-----------------------------------
Larry J. Dagley
Executive Vice President and
Chief Financial Officer
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EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated February 4, 2000 included in this Form 10-K, into the Company's
previously filed Registration Statement on Form S-8 (File No. 333-96161).
Tulsa, Oklahoma
March 29, 2000
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,240
<SECURITIES> 0
<RECEIVABLES> 43,339
<ALLOWANCES> 0
<INVENTORY> 21,520
<CURRENT-ASSETS> 70,172
<PP&E> 1,095,882
<DEPRECIATION> 519,927
<TOTAL-ASSETS> 671,446
<CURRENT-LIABILITIES> 56,346
<BONDS> 294,700
0
0
<COMMON> 2,774
<OTHER-SE> 187,582
<TOTAL-LIABILITY-AND-EQUITY> 671,446
<SALES> 272,359
<TOTAL-REVENUES> 280,396
<CGS> 0
<TOTAL-COSTS> 244,338
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,351
<INCOME-PRETAX> 16,376
<INCOME-TAX> 6,449
<INCOME-CONTINUING> 9,927
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,927
<EPS-BASIC> .40
<EPS-DILUTED> .40
</TABLE>
