===========================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-Q
(Mark one)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1994
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______ to _______
Commission file number 1-8246
SOUTHWESTERN ENERGY COMPANY
(Exact name of registrant as specified in its charter)
Arkansas 71-0205415
(State of incorporation (I.R.S. Employer
or organization) Identification No.)
1083 Sain Street, P.O. Box 1408, Fayetteville, Arkansas 72702-1408
(Address of principal executive offices, including zip code)
(501) 521-1141
(Registrant's telephone number, including area code)
No Change
(Former name, former address and former fiscal year; if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes: X No:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Outstanding at November 4, 1994
---------------------------- -------------------------------
Common Stock, Par Value $.10 25,684,110
===========================================================================
- 1 -
PART I
FINANCIAL INFORMATION
- 2 -
SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
September 30, December 31,
1994 1993
--------- ---------
($ in thousands)
Current Assets
Cash $ 525 $ 834
Accounts receivable 17,753 34,894
Inventories, at average cost 10,594 9,580
Other 2,881 1,489
--------- ---------
Total current assets 31,753 46,797
--------- ---------
Investments 3,669 5,661
--------- ---------
Property, Plant and Equipment, at cost
Gas and oil properties, using the
full cost method 414,915 375,281
Gas distribution systems 177,261 165,443
Gas in underground storage 38,195 37,171
Other 17,543 14,684
--------- ---------
647,914 592,579
--------- ---------
Less: Accumulated depreciation,
depletion and amortization 232,723 205,949
--------- ---------
415,191 386,630
--------- ---------
Other Assets 6,959 6,366
--------- ---------
Total Assets $ 457,572 $ 445,454
========= =========
The accompanying notes are an integral part
of the financial statements.
- 3 -
SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
September 30, December 31,
1994 1993
--------- ---------
($ in thousands)
Current Liabilities
Current portion of long-term debt $ 3,000 $ 3,000
Accounts payable 13,343 16,114
Taxes payable 2,148 6,449
Interest payable 2,048 1,445
Customer deposits 3,930 3,927
Current portion of deferred income taxes 1,426 1,426
Over-recovered purchased gas costs, net 462 4,187
Other 2,138 2,149
--------- ---------
Total current liabilities 28,495 38,697
--------- ---------
Long-Term Debt, less current portion above 127,184 124,000
--------- ---------
Other Liabilities
Deferred income taxes 96,654 93,593
Deferred investment tax credits 2,468 2,617
Other 2,949 2,017
--------- ---------
102,071 98,227
--------- ---------
Commitments and Contingencies
Shareholders' Equity
Common stock, $.10 par value; authorized
75,000,000 shares, issued 27,738,084
shares 2,774 2,774
Additional paid-in capital 21,231 21,231
Retained earnings 195,803 180,470
Less: Unamortized cost of 22,422
restricted shares in 1994
and 17,447 restricted shares
in 1993, issued under stock
incentive plan 269 228
Common stock in treasury, at cost,
2,053,974 shares 19,717 19,717
--------- ---------
199,822 184,530
--------- ---------
Total Liabilities and Shareholders' Equity $ 457,572 $ 445,454
========= =========
The accompanying notes are an integral part
of the financial statements.
- 4 -
SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Quarter Ended Nine Months Ended
September 30, September 30,
1994 1993 1994 1993
---------- ---------- ---------- ----------
($ in thousands, except per share amounts)
Operating Revenues
Gas sales $ 25,004 $ 26,197 $ 119,775 $ 114,563
Oil sales 850 467 2,169 1,275
Gas transportation 1,062 1,371 3,581 4,121
Other 892 431 2,318 1,705
---------- ---------- ---------- ---------
27,808 28,466 127,843 121,664
---------- ---------- ---------- ---------
Operating Costs and Expenses
Purchased gas costs 2,385 3,393 27,955 28,929
Operating and general 10,048 9,395 30,668 29,532
Depreciation, depletion and amortization 8,128 7,118 26,098 22,929
Taxes, other than income taxes 920 771 2,799 2,488
---------- ---------- ---------- ---------
21,481 20,677 87,520 83,878
---------- ---------- ---------- ---------
Operating Income 6,327 7,789 40,323 37,786
---------- ---------- ---------- ---------
Interest Expense 2,275 1,915 6,328 6,648
---------- ---------- ---------- ---------
Other Income (Expense) (593) (354) (1,547) (1,516)
---------- ---------- ---------- ---------
Income Before Provision for Income Taxes
and Cumulative Effect of Accounting Change 3,459 5,520 32,448 29,622
---------- ---------- ---------- ---------
Income Tax Provision (Benefit)
Current (515) 1,521 9,692 7,984
Deferred 1,846 2,560 2,800 5,131
---------- ---------- ---------- ---------
1,331 4,081 12,492 13,115
---------- ---------- ---------- ---------
Income Before Cumulative Effect of Accounting Change 2,128 1,439 19,956 16,507
Cumulative Effect of Change in Accounting
for Income Taxes - - - 10,126
---------- ---------- ---------- ---------
Net Income $ 2,128 $ 1,439 $ 19,956 $ 26,633
========== ========== ========== ==========
Weighted Average Common Shares Outstanding 25,684,110 25,684,110 25,684,110 25,684,110
========== ========== ========== ==========
Earnings Per Share
Income Before Cumulative Effect of Accounting Change $ .09 $ .05 $ .78 $ .64
Cumulative Effect of Change in Accounting
for Income Taxes - - - .39
----- ----- ----- -----
Net Income $ .09 $ .05 $ .78 $1.03
===== ===== ===== =====
Dividends Declared Per Share Payable 11/4/94
and 11/5/93 $ .06 $ .06 $ .06 $ .06
===== ===== ===== =====
The accompanying notes are an integral part
of the financial statements.
- 5 -
SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
1994 1993
-------- --------
($ in thousands)
Cash Flows From Operating Activities
Net income $ 19,956 $ 26,633
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation, depletion and amortization 26,307 23,139
Deferred income taxes 2,800 5,131
Equity in loss of partnership 1,759 1,436
Cumulative effect of change in
accounting for income taxes - (10,126)
Change in assets and liabilities:
Decrease in accounts receivable 17,141 13,050
Increase in inventories (1,014) (1,329)
Decrease in accounts payable (2,771) (1,955)
Decrease in taxes payable (4,301) (1,247)
Increase in interest payable 603 641
Increase in customer deposits 3 115
Increase (decrease) in over-recovered
purchased gas costs (3,725) 2,229
Net change in other current assets
and liabilities (1,403) 547
-------- --------
Net cash provided by operating activities 55,355 58,264
-------- --------
Cash Flows From Investing Activities
Capital expenditures (54,653) (48,453)
(Increase) decrease in gas stored underground (1,024) 4,587
Other items 1,452 2,286
-------- --------
Net cash used in investing activities (54,225) (41,580)
-------- --------
Cash Flows From Financing Activities
Net increase (decrease) in revolving
long-term debt 9,184 (12,400)
Payments on other long-term debt (6,000) (585)
Cash dividends (4,623) (4,109)
-------- --------
Net cash used in financing activities (1,439) (17,094)
-------- --------
Decrease in cash (309) (410)
Cash at beginning of year 834 1,122
-------- --------
Cash at end of period $ 525 $ 712
======== ========
The accompanying notes are an integral part
of the financial statements.
- 6 -
SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1994
1. BASIS OF PRESENTATION
The financial statements included herein are unaudited; however,
such information reflects all adjustments (consisting solely of
normal recurring adjustments), which are, in the opinion of
management, necessary for a fair presentation of the results for
the interim periods. The Company's accounting policies are
summarized in the 1993 Annual Report to Shareholders, Notes to
Financial Statements.
Certain reclassifications have been made to the September 30,
1993, financial statements in order to conform with the 1994
presentation. These reclassifications had no effect on
previously reported net income.
2. ADOPTION OF ACCOUNTING STANDARD
Effective January 1, 1993, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes." The recognition of the cumulative effect, through
December 31, 1992, of this change in accounting increased net
income in the first quarter of 1993 by $10.1 million or $.39 per
share.
3. DIVIDEND PAYABLE
A dividend of $.06 per share was declared October 5, 1994,
payable November 4, 1994.
4. INTEREST AND INCOME TAXES PAID
The following table provides interest and income taxes paid
during each period presented.
Three months Nine months
Periods Ended September 30 1994 1993 1994 1993
(in thousands)
Interest payments $1,768 $1,797 $6,622 $7,024
Income tax payments $2,379 $1,791 $13,051 $7,495
- 7 -
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following updates information as to the Company's financial
condition provided in the Company's Form 10-K for the year ended
December 31, 1993, and analyzes the changes in the results of
operations between the three and nine month periods ended September
30, 1994, and the comparable periods of 1993.
RESULTS OF OPERATIONS
Net income for the three months ended September 30, 1994, was $2.1
million, or $.09 per share, compared to $1.4 million, or $.05 per
share, for the same period in 1993. The third quarter operating
results for 1993 included an adjustment of $1.7 million, or $.07 per
share, to decrease net income and record the effect on accumulated
deferred income taxes of the increase in the maximum corporate income
tax rate enacted by legislation in 1993.
The third quarter operating results for 1994 reflect the effect of an
agreement with the Staff of the Arkansas Public Service Commission
(APSC) and the Office of the Attorney General of the State of Arkansas
to settle certain gas cost issues which have been outstanding before
the APSC. The APSC has scheduled a hearing for December 5, 1994, to
consider approval of the settlement. The issues in question involve
the price of gas sold under a long-term contract between two of the
Company's wholly owned subsidiaries, Arkansas Western Gas Company
(AWG) and SEECO, Inc. Under the stipulation and agreement, the price
under the contract will be referenced to a spot market index plus a
premium, effective as of July 1, 1994. Accordingly, operating results
for the third quarter of 1994 reflect the new pricing provision and
were negatively impacted by the low spot market prices experienced
during the quarter. Sales under the contract were previously made at
a higher fixed price.
For the nine months ended September 30, 1994, net income was $20.0
million, or $.78 per share, compared to $16.5 million, or $.64 per
share, for the same period in 1993. The comparison to 1993 of the
nine months ended September 30, 1994, excludes the cumulative effect
of a change in accounting for income taxes which was recorded in the
first quarter of 1993. There were no accounting changes or
extraordinary items recorded in 1994.
The comparative increase in net income for the nine months ended
September 30, 1994, was primarily the result of increased sales of the
Company's gas production combined with higher prices received for that
production. Deliveries of the Company's utility systems to sales and
end-use transportation customers during the first nine months of 1994
reflected the net effect of strong customer growth and weather which
was 1% colder than normal, but 9% warmer than in the same period of
1993. The following tables compare operating revenues and operating
income by business segment for the three and nine month periods ended
September 30, 1994 and 1993:
- 8 -
Quarter Ended Nine Months Ended
September 30, September 30,
----------------- -------------------
1994 1993 1994 1993
------- ------- -------- --------
(in thousands)
REVENUES
Exploration and
production $16,476 $16,340 $ 61,107 $ 56,071
Gas distribution 17,587 17,036 93,627 89,111
Other 76 64 227 192
Eliminations (6,331) (4,974) (27,118) (23,710)
------- ------- -------- --------
$27,808 $28,466 $127,843 $121,664
======= ======= ======== ========
OPERATING INCOME
Exploration and
production $ 7,051 $ 8,065 $ 31,376 $ 28,891
Gas distribution (636) (191) 9,261 9,192
Corporate expenses (88) (85) (314) (297)
------- ------- -------- --------
$ 6,327 $ 7,789 $ 40,323 $ 37,786
======= ======= ======== ========
Revenues of the exploration and production segment for the three month
period ended September 30, 1994, were up slightly compared to the same
period in 1993, as an increase in oil sales offset a decline in the
average price received for the Company's gas production. Gas
production for the quarter ended September 30, 1994, was 8.2 billion
cubic feet (Bcf), flat with the same period in 1993. Revenues of the
exploration and production segment for the nine months ended September
30, 1994, reflect increased volumes of gas production sold to both
unaffiliated purchasers and to the Company's own gas distribution
systems. For the first nine months of 1994, gas production was 27.2
Bcf, up from 26.1 Bcf for the same period in 1993. The increase was
the result of higher sales from the Company's properties in both
Arkansas and the Gulf Coast areas of Texas and Louisiana.
Sales of Arkansas production totaled 6.2 Bcf during both the third
quarter of 1994 and 1993, and 21.0 Bcf for the nine months ended
September 30, 1994, up from 20.5 Bcf for the nine months ended
September 30, 1993. Sales of gas production from the Company's Gulf
Coast properties were 1.7 Bcf for the third quarter of 1994 and 5.2
Bcf for the first nine months of 1994, up from 1.6 Bcf and 4.5 Bcf,
respectively, for the same periods in 1993. The increases were
primarily the result of the completion of a production platform at the
Galveston Block 283 gas field late in 1993 and first production from
the Earl Chauvin No. 1 well, a 1993 discovery in southeast Louisiana.
Requirements of the Company's gas distribution systems for storage
injection caused an increase during the third quarter of 1994 in
demand for system supply provided from the Company's gas production.
The Company sold 1.7 Bcf to AWG, which operates its northwest Arkansas
gas distribution system, during the third quarter of 1994, up from 1.0
Bcf for the same period in
- 9 -
1993. The Company sold 5.8 Bcf to AWG during the first nine months of
1994, compared to 4.7 Bcf for the same period in 1993. Associated
Natural Gas Company (Associated), which operates the Company's gas
distribution system in northeast Arkansas and parts of Missouri,
purchased .9 Bcf of the Company's gas production during both the third
quarters of 1994 and 1993, and 3.6 Bcf during the first nine months of
1994, compared to 3.8 Bcf for the first nine months of 1993.
The Company's average sales price for its gas production was $1.85 per
thousand cubic feet (Mcf) for the third quarter of 1994, down from
$1.93 per Mcf for the same period in 1993. The average price was
$2.14 per Mcf for the first nine months of 1994, up from $2.09 per Mcf
for the same period of 1993. The decrease in the third quarter
reflected the effect of lower spot market prices. The increase in the
average price for the first nine months of 1994 resulted from
increased sales under higher priced term contracts.
The Company's oil production increased to 137,182 barrels for the nine
months ended September 30, 1994, up from 70,301 barrels for the same
period in 1993. The increase was primarily due to additional
production from properties acquired in Oklahoma during the first
quarter of 1994.
Operating revenues of the gas distribution segment increased 3% in the
third quarter of 1994 and 5% in the nine months ended September 30,
1994, both as compared to the same periods in 1993. The increases
were primarily due to an increase in the average utility rate.
Weather during the first nine months of 1994 was 1% colder than
normal, but 9% warmer than in the same period of the prior year.
Deliveries by the Company's gas distribution systems to sales and end-
use transportation customers were 4.2 Bcf for the third quarter of
1994, compared to 4.0 Bcf for the same period of 1993, and 22.2 Bcf
for both the nine months ended September 30, 1994, and 1993. While
deliveries to industrial customers improved in 1994, deliveries to
residential and commercial customers decreased as growth of 3% in the
average number of customers was not enough to offset the effects of
weather which was warmer than in the prior year. AWG delivered a
total of 14.5 Bcf to its sales and end-use transportation customers
during the first nine months of 1994, up from 14.4 Bcf for the same
period in 1993. AWG also transported 8.8 Bcf for delivery off its
system during the first nine months of 1994, down from 10.3 Bcf for
the same period in 1993. Associated delivered a total of 7.7 Bcf
during the first nine months of 1994, down from 7.8 Bcf for the same
period in 1993.
The Company's average utility rate increased to $4.73 per Mcf during
the first nine months of 1994, up from $4.66 per Mcf for the same
period in 1993. The increase reflected higher prices paid for
purchases of natural gas which are passed through to customers under
automatic adjustment clauses.
Operating costs and expenses increased $.8 million, or 4%, in the
third quarter of 1994 and increased $3.6 million, or 4%, for the nine
months ended September 30, 1994, both as compared to the same periods
in 1993. The increases were due primarily to increases in operating
and general expenses and depreciation, depletion and amortization
expense, partially
- 10 -
offset by lower purchased gas costs. The increase in operating and
general expenses resulted primarily from increased operating costs in
the gas distribution segment related to a higher level of injections
of gas into storage and increased expenses related to the additional
oil production. The higher depreciation, depletion and amortization
expense was due to both an increase in production and an increase in
the rate applied to units of gas and oil production. The decreases in
purchased gas costs resulted from an increase in the elimination of
gas sales and gas purchases related to intercompany transactions which
were higher in 1994 than in 1993.
The Company's share of the NOARK Pipeline System's (NOARK) pre-tax
loss included in other income was $.9 million for the third quarter of
1994, as compared to $.3 million for the same period in 1993, and $1.8
million for the nine months ended September 30, 1994, as compared to
$1.4 million for the first nine months of 1993. The Company, through
a subsidiary, holds a 47.93% general partnership interest in NOARK and
is the pipeline's operator.
The changes in the provisions for current and deferred income taxes
recorded in the three and nine month periods ended September 30, 1994,
as compared to the same periods in 1993, resulted primarily from the
level of taxable income combined with the effects of gas storage
activity 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.
The Company's capitalized costs of gas and oil properties at September
30, 1994, were well below the "ceiling" level to which such costs are
limited under the full cost method.
CHANGES IN FINANCIAL CONDITION
Changes in the Company's financial condition at September 30, 1994, as
compared to December 31, 1993, primarily reflect the seasonal nature
of the gas distribution segment of the Company's business and seasonal
changes in prices for gas production of the Company's exploration and
production segment.
Routine capital expenditures, cash dividends and scheduled debt
retirements are predominately funded through cash provided by
operations. For the first nine months of 1994 and 1993, net cash
provided by operating activities was $55.4 million and $58.3 million,
respectively, and exceeded the total of these routine requirements.
The decrease in net cash provided by operating activities during the
first nine months of 1994 was primarily due to the timing of both cash
receipts and expenditures.
The Company's capital expenditures for the first nine months of 1994
were $54.7 million, compared to $48.5 million for the same period in
1993. The comparative increase was the result of an expenditure of
$12.7 million to purchase oil and gas properties during the third
quarter of 1994, partially offset by non-routine expenditures incurred
during the first quarter of 1993 to further develop the Company's gas
storage facilities. The oil and gas properties acquired in 1994
represent interests in 15 oil and gas fields located in the Anadarko
Basin of Oklahoma and have estimated proved producing reserves of
approximately 25 Bcf equivalent.
- 11 -
The Company has access to $80.0 million of medium to long-term capital
at current market lending rates through two floating rate revolving
credit facilities. Of this amount, $40.2 million was outstanding at
September 30, 1994, all of which was classified as long-term debt.
The Company also has available short-term lines of credit totaling
$3.5 million, none of which was outstanding at September 30, 1994.
Long-term debt at September 30, 1994, accounted for 39% of the
Company's capitalization, down from 41% at December 31, 1993.
Accounts receivable has declined since December 31, 1993, due
primarily to seasonally lower gas deliveries of the gas distribution
segment. The Company's accounts payable balance has declined since
December 31, 1993, due primarily to seasonally lower gas purchases of
the gas distribution segment. Other changes in current assets and
current liabilities between periods resulted primarily from the timing
of expenditures and receipts.
The Company had over-recovered $.5 million of purchased gas costs at
September 30, 1994, which will be refunded to its utility customers
through automatic cost of gas adjustment clauses included in its filed
rate tariffs. At December 31, 1993, the Company had over-recovered
purchased gas costs in the amount of $4.2 million. These amounts were
classified as current liabilities.
- 12 -
PART II
OTHER INFORMATION
Items 1 - 6(a)
No developments required to be reported under Items 1 - 6(a) occurred
during the quarter ended September 30, 1994.
Item 6(b) - Reports on Form 8-K
On November 8, 1994, the Company filed a current report on Form 8-K
regarding an announcement made on October 31, 1994, that two of its
wholly owned subsidiaries have entered into a stipulation and
agreement with the Staff of the Arkansas Public Service Commission
(APSC) and the Attorney General of the State of Arkansas to settle
certain gas cost issues which have been outstanding before the APSC
for almost four years. The issues in question involve the price of
gas sold by one of the Company's gas producing subsidiaries under a
long-term contract with the Company's utility subsidiary. Under the
stipulation and agreement the price paid by the Company's utility
subsidiary will be referenced to an index plus a premium. At current
market prices, the new provision will result in a reduced sales price
under the contract. The stipulation and agreement must be approved by
the APSC before becoming effective. Subsequent to October 31, 1994,
the APSC established a procedural schedule for consideration of the
stipulation and agreement and set a hearing on the matter for December
5, 1994.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
SOUTHWESTERN ENERGY COMPANY
---------------------------
Registrant
DATE: November 14, 1994 /s/ GREGORY D. KERLEY
----------------- ----------------------
Gregory D. Kerley
Vice President - Treasurer and Secretary,
and Chief Accounting Officer
- 13 -