================================================================================
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, 1997
-----------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ______________ to ______________
Commission file number 1-8246
------
SOUTHWESTERN ENERGY COMPANY
(Exact name of Registrant as specified in its charter)
ARKANSAS 71-0205415
------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1083 Sain Street, P.O.Box 1408, Fayetteville, Arkansas 72702-1408
-----------------------------------------------------------------
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code (501) 521-1141
--------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
- ----------------------------- -----------------------
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
--- ---
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
---
The aggregate market value of the voting stock held by non-affiliates of
the Registrant was $270,018,419 based on the New York Stock Exchange - Composite
Transactions closing price on March 26, 1998 of $11.
The number of shares outstanding as of March 26, 1998, of the
Registrant's Common Stock, par value $.10, was 24,848,237.
DOCUMENTS INCORPORATED BY REFERENCE
Documents incorporated by reference and the Part of the Form 10-K into
which the document is incorporated: (1) Annual Report to holders of the
Registrant's Common Stock for the year ended December 31, 1997 - PARTS I, II,
and IV; and (2) 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 21, 1998 - PART III.
================================================================================
SOUTHWESTERN ENERGY COMPANY
FORM 10-K
ANNUAL REPORT
For the Year Ended December 31, 1997
TABLE OF CONTENTS
PART I
Page
Item 1. Business.......................................................................................... 1
Exploration and Production........................................................................ 1
Natural Gas Distribution ......................................................................... 7
Energy Services................................................................................... 11
Other Items....................................................................................... 13
Item 2. Properties........................................................................................ 14
Item 3. Legal Proceedings................................................................................. 16
Item 4. Submission of Matters to a Vote of Security Holders............................................... 16
Executive Officers of the Registrant.............................................................. 17
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters............................. 18
Item 6. Selected Financial Data........................................................................... 18
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............. 18
Item 8. Financial Statements and Supplementary Data....................................................... 19
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............. 19
PART III
Item 10. Directors and Executive Officers of the Registrant................................................ 19
Item 11. Executive Compensation............................................................................ 19
Item 12. Security Ownership of Certain Beneficial Owners and Management.................................... 19
Item 13. Certain Relationships and Related Transactions.................................................... 20
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................................. 20
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
organized in 1929 as a local gas distribution company in northwest Arkansas. The
Company is incorporated under the laws of the state of Arkansas and is an exempt
holding company under the Public Utility Holding Company Act of 1935. Today, the
Company's operations are carried out by 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, south Louisiana, and
the Gulf Coast.
2. Natural Gas Distribution -- Engaged in the gathering, distribution and
transmission of natural gas to approximately 177,000 customers in
northern Arkansas and parts of Missouri.
3. Energy Services -- Provides marketing and transportation services to a
variety of commercial and industrial customers in the Mid-Continent
area of the United States. Supply sources include both Company owned
natural gas and oil production as well as third-party production. Owns
a general partnership interest in the NOARK Pipeline System, Limited
Partnership (NOARK).
Financial and operating statistics for Southwestern's business segments are
included in the Company's consolidated financial statements, incorporated by
reference in Part II, Item 8 of this report, "Financial Statements and
Supplementary Data". A discussion of the primary businesses conducted by the
Company through its wholly-owned subsidiaries follows.
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.
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 requirements. Since that time, the Company's
exploration and development activities outside Arkansas have expanded
substantially. The Company's exploration and production activities consist of
ownership of mineral interests in productive and undeveloped leases located
entirely within the United States.
At December 31, 1997, the Company had proved natural gas reserves of 291.4
billion cubic feet (Bcf) and proved oil reserves of 7,852 thousand barrels
(MBbls). Revenues of the exploration and production
1
subsidiaries are predominately generated from production of natural gas. Sales
of gas production accounted for 86% of total operating revenues for this segment
in 1997, 90% in 1996, and 93% in 1995.
Areas of Operation
The Company 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 section of the Arkoma Basin. SEPCO conducts
development drilling and exploration programs in areas outside Arkansas,
including the Gulf Coast areas of Louisiana and Texas, the Anadarko Basin of
Oklahoma, and the Permian Basin of Texas and New Mexico. Diamond M operates
properties in the Permian Basin of Texas.
During 1997, Southwestern brought in new senior operating management to
refocus its exploration and production segment. In early 1998, the Company
consolidated its exploration and land efforts to its Houston office and
reorganized its staff into asset management teams. Three exploitation teams were
formed (an Arkoma team, a Mid-Continent team and a Gulf Coast team) to manage
Southwestern's producing properties, and three exploration teams were formed
(two south Louisiana teams and a new ventures team) to provide an area specific
focus in exploration projects.
Arkoma. Southwestern has been active in the Arkansas portion of the Arkoma
Basin since 1943. As a result, it has acquired a substantial acreage position
and reserve base in the basin. At December 31, 1997, the Company had
approximately 213.4 Bcf of natural gas reserves in the Arkoma Basin. This
represents 73% of the Company's natural gas reserves and 63% of total reserves
on a Bcf equivalent basis. Southwestern's average net daily production in 1997
in the Arkoma Basin was 62.0 million cubic feet equivalent (Mmcfe).
In recent years, Southwestern has conducted its Arkansas development
drilling program primarily within the boundaries of its utility gathering
system. In 1997, the Company accelerated the extension of its Arkoma drilling
program outside of its traditional areas to new fields. Southwestern enjoyed
successful stepout drilling in the lightly-explored southern edges of the Arkoma
Basin in Arkansas, as well as positive results from drilling in the western part
of the basin in Oklahoma. Overall, the Company participated in 69 gross wells
(36.6 net) in the Arkoma Basin during 1997, including 28 which were operated by
the Company. These wells contributed 13.1 Bcf to total 1997 reserve additions.
During 1998, Southwestern plans to continue to capitalize on its geological
experience in the Arkoma Basin and increase its emphasis on development drilling
outside of the traditional Arkansas fairway.
Mid-Continent. The Company's activities in this region are primarily
focused on the Anadarko Basin of Oklahoma and Permian Basin of Texas and New
Mexico. Southwestern has been active in the Mid-Continent region since 1971. At
December 31, 1997, the Company had approximately 46.2 Bcf of natural
2
gas reserves and 5,172 MBbls of oil reserves in the region, representing 16% and
66%, respectively, of the Company's total gas and oil reserves. Average net
daily production in 1997 for this region was 23.9 Mmcfe.
In recent years, Southwestern has experienced excellent success in the
lower and middle Morrow formations in the Permian Basin in southeast New Mexico.
Since its first exploratory discovery there in 1995, the Company's drilling
program in this area has resulted in 14 successful wells of 15 drilled. The most
recent was the Gaucho #4, which is currently flowing at a rate of 10 MMcf of
natural gas per day. Three wells have now been drilled within the Gaucho
prospect and are producing at a combined daily rate of 25 MMcf of natural gas
and 125 barrels of condensate. Southwestern has a 50% working interest in the
Gaucho unit.
Gulf Coast/South Louisiana. The Company became active in the Gulf Coast
area in 1990. At December 31, 1997, the Company had approximately 30.8 Bcf of
natural gas reserves and 1,480 MBbls of oil reserves in the region, representing
11% and 19%, respectively, of the Company's total gas and oil reserves. Average
net daily production in 1997 for this region was 15.8 Mmcfe. Southwestern's
initial strategy during entry into the upper Texas Gulf Coast and south
Louisiana revolved around participating in wells drilled to prove a prospect.
These exploratory wells had the potential for significant reserve additions, but
development opportunities were limited and a dry hole generally condemned the
prospect. This strategy did not meet Southwestern's reserve growth and
production goals, but it did enable the Company to establish a presence in the
region. As 3-D seismic technology became more widely accepted as an exploration
tool, Southwestern gained entry to a number of high potential joint ventures to
develop multiple, high quality prospects. The Company's typical project relies
on options to obtain access to leasehold acreage over a large prospective area.
The committed acreage is evaluated for leasing after 3-D seismic data is
acquired, thus optimizing the Company's investment.
The Company is actively pursuing its exploration and development strategy
in south Louisiana. Southwestern has an inventory of over 400 square miles of
3-D seismic data and, at the end of 1997, had invested approximately $37.2
million in leasehold and seismic data acquisition costs related to the Company's
major projects in south Louisiana. Each project is in a separate development
stage, which maximizes Southwestern's ability to fully fund their development.
The Company's major exploration projects in south Louisiana are as follows:
East Atchafalaya: Southwestern became involved in this project in mid-1995
through a 50-50 joint venture with Union Pacific Resources. The joint venture
has acquired 113 square miles of 3-D seismic data covering portions of St.
Martin and Iberia Parishes, Louisiana. During 1997, drilling was initiated. The
Company participated in four wells, two deep tests and two shallower wells.
While the first deep test and one shallow well did not find commercially
productive reserves, the other shallow well was completed in the Planulina
formation and is currently producing 4 MMcf of natural gas per day. The fourth
well, located in the Gator prospect, was spudded in December, 1997, to test a
deep Oligocene target and reached its objective total depth of 18,000 feet in
February, 1998. The well did not find hydrocarbons in the primary objective,
however, the well has been completed in a shallower secondary objective.
Additional wildcat drilling is planned in 1998.
3
Henry: This project was originated by Southwestern and includes the
acquisition of approximately 110 square miles of 3-D seismic data in Vermillion
Parish, Louisiana. Southwestern's Henry project continued on schedule in 1997
and drilling is expected in the second half of 1998. Southwestern received the
final processed 3-D data in September, 1997, and is in the process of
interpreting this data. To date, a number of prospect leads have been identified
and prospect generation is ongoing. Southwestern plans to drill up to four wells
in Henry during 1998. The Company presently owns a 100% interest in the project.
Boure[180]: During 1997, Southwestern and its partner initiated a 185
square mile 3-D survey in Assumption Parish adjacent to the East Atchafalaya
project area. Southwestern has a 50% working interest in the project. Actual
shooting of the 3-D program began in January, 1998, with field work likely to
continue through the middle of 1998. Southwestern should begin to receive
portions of the 3-D seismic data in the second half of 1998, with drilling
expected to begin in 1999.
Southwestern also has interests in three other smaller prospect areas in
south Louisiana which are supported by 3-D seismic data and has active
exploration prospects in Oklahoma and New Mexico. The Company's strategy is to
balance the risks inherent in its exploration program with continued development
drilling, primarily in the Arkoma Basin of Arkansas, and with producing property
acquisitions in its core operating areas.
Acquisitions
In recent years, the Company increased its emphasis on acquisitions of
producing properties. However, in 1997, the market for producing property
acquisitions was demand-driven causing existing properties to sell at higher
prices as compared to historical levels. As a result, the Company did not make
any producing property acquisitions in 1997, compared to $45.8 million spent in
1996, $6.0 million spent in 1995, and $13.9 million in 1994. The Company
acquired approximately 32.7 Bcf of gas and 6,350 MBbls of oil during 1996, 4.5
Bcf of gas and 851 MBbls of oil during 1995, and 20.6 Bcf of gas and 1,038 MBbls
of oil during 1994. The 1996 acquisitions were primarily in Texas and Oklahoma,
the 1995 acquisitions were primarily in the Gulf Coast areas of Louisiana and
Texas, and the 1994 acquisitions were primarily in the Anadarko Basin of
Oklahoma. The largest single acquisition completed by the Company was a
transaction in which the Company acquired substantially all the oil and gas
properties owned by L.B. Simmons Energy, Inc. of Houston for $30.9 million. The
acquisition closed on November 1, 1996. Proved reserves acquired were 6 million
barrels of oil and 17 Bcf of natural gas, located primarily in west Texas and
Oklahoma. At the end of 1997, oil accounted for 14% of the Company's proved
reserves, up from 4% at the end of 1995, primarily due to this acquisition.
Capital Spending
The Company expects its 1998 capital expenditures for gas and oil
exploration and development to total $59.2 million, down from $73.5 million in
1997. During 1997, a large portion of capital spending was devoted to land and
seismic data acquisition. Expenditures in 1998 will direct more funds toward the
drilling of exploratory wells, reflecting the inventory of drilling prospects
which has been established.
4
Sales and Major Customers
Natural gas equivalent production rose to 104 million cubic feet per day
(MMcfd) in 1997, up from 101 MMcfd in 1996, and 98 MMcfd in 1995. The increase
in production was the ninth in the last ten years, and represented the second
highest level in the Company's history. The Company's gas production was 33.4
Bcf in 1997, down from 34.8 Bcf in 1996, and 34.5 Bcf in 1995. The Company also
produced 749,000 barrels of oil in 1997, up from 391,000 barrels in 1996, and
229,000 barrels in 1995.
The Company's natural gas production received an average wellhead price of
$2.57 per thousand cubic feet (Mcf) in 1997, up from $2.26 per Mcf in 1996 and
$1.72 per Mcf in 1995. Oil prices were weaker, with an average price in 1997 of
$19.02 per barrel, compared to $21.21 per barrel in 1996 and $17.15 per barrel
in 1995.
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 42% of total exploration and production revenues in 1997, 46% in
1996, and 47% in 1995. Sales to unaffiliated purchasers accounted for 62% of
total equivalent oil and gas volumes sold by the exploration and production
segment in 1997, 56% in 1996, and 61% in 1995.
SEECO's production was 21.7 Bcf in 1997, down from 23.1 Bcf in 1996 and
24.3 Bcf in 1995. SEECO's sales to Arkansas Western were 14.3 Bcf in 1997, down
from 16.3 Bcf in 1996 and up from 13.9 Bcf in 1995. SEECO's sales to
unaffiliated purchasers were 7.4 Bcf in 1997, 6.8 Bcf in 1996, and 10.4 Bcf in
1995.
Gas volumes sold by SEECO to Arkansas Western for its northwest Arkansas
division (AWG) were 8.6 Bcf in 1997, 10.1 Bcf in 1996, and 8.5 Bcf in 1995.
Through these sales, SEECO furnished 64% of the northwest Arkansas system's
requirements in 1997, 62% in 1996, and 65% in 1995. SEECO also delivered
approximately 1.0 Bcf in 1997, 1.1 Bcf in 1996, and 1.4 Bcf in 1995 directly to
certain large business customers of AWG through a transportation service of the
utility subsidiary. Most of the sales to AWG are 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 hereafter referred to as the "Gas Cost
Settlement." The Gas Cost Settlement became effective July 1, 1994, and calls
for sales under the contract to take place at a price which is equal to a spot
market index plus a premium. The amended contract provides that volumes equal to
the historical level of sales under the contract will be sold at the spot market
index plus a premium of $.95 per thousand cubic feet (Mcf), while incremental
sales volumes receive a premium of $.50 per Mcf. In 1997, 8.2 Bcf (net to the
Company's interest) was sold under the contract, compared to 8.6 Bcf in 1996 and
7.7 Bcf in 1995. The sales price under this contract averaged $3.35 per Mcf in
1997, $3.03 per Mcf in 1996, and $2.40 per Mcf in 1995. This contract expires
July 24, 1998. AWG has proposed to enter into a new intersegment gas supply
contract for a similar portion of its system needs at a price competitive with
the cost of alternative supplies. For further discussion see "Gas Purchases and
Supply" under the "Natural Gas Distribution" section below. In addition to this
contract,
5
SEECO also sells gas to AWG under newer long-term contracts with flexible
pricing provisions and under short-term spot market arrangements.
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 5.7 Bcf in 1997, 6.2 Bcf in 1996, and 5.4
Bcf in 1995. These deliveries accounted for approximately 61% of Associated's
total requirements in 1997, 62% in 1996, and 59% in 1995. 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. The sales
price under this contract was $2.20 per Mcf for the contract period ended
September 30, 1995, $1.785 per Mcf for the contract period ended September 30,
1996, and $2.225 per Mcf for the contract period ended September 30, 1997. 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 sales price under the contract was $2.54 for the month of December,
1997.
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 is also affected by the demand of the utility
for production on its gathering system. SEECO's sales to unaffiliated purchasers
accounted for approximately 15% of total exploration and production revenues in
1997, 14% in 1996, and 21% in 1995.
The combined gas production of SEPCO and Diamond M was 11.7 Bcf in 1997 and
1996, up from 10.3 Bcf in 1995. Oil production was 749 MBbls in 1997, compared
to 391 MBbls in 1996 and 229 MBbls in 1995. The increases in equivalent
production in 1997 and 1996 primarily resulted from acquisitions of producing
properties in recent years. 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 43% of total exploration
and production revenues in 1997, 40% in 1996, and 32% in 1995.
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 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 state of Arkansas 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 Arkansas and its
long-time presence and reputation in this area, the Company believes it will
continue to be successful in acquiring new leases in Arkansas. While improved
intrastate and interstate pipeline
6
transportation in Arkansas 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 which may affect both
the price it receives and contract terms it must offer. Outside Arkansas, the
Company is less well-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 (APSC) and the
Missouri Public Service Commission (MPSC) regulate the Company's utility rates
and operations. The Company serves approximately 177,000 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 108,000 customers in
northwest Arkansas. The Associated division receives its gas from transportation
pipelines and delivers the gas through its own transmission and distribution
systems, ultimately delivering it at retail to approximately 69,000 customers
primarily in northeast Arkansas and southeast Missouri. Associated, formerly a
wholly-owned subsidiary of Arkansas Power and Light Company, was acquired and
merged into Arkansas Western effective June 1, 1988.
Gas Purchases and Supply
AWG purchases its system gas supply directly at the wellhead under
long-term contracts. Purchases are made from approximately 246 working interest
owners in 504 producing wells. As previously indicated, SEECO furnished
approximately 64% of AWG's system requirements in 1997, 62% in 1996, and 65% in
1995. A significant portion of AWG's unaffiliated supply comes from market
responsive, long-term contracts.
At December 31, 1997, AWG had a gas supply available to its northwest
Arkansas system of approximately 172 Bcf of proved developed reserves, equal to
10.3 times current annual usage. Of this total, approximately 96 Bcf were net
reserves available from SEECO. A portion of these reserves are utilized to meet
the annual sales volume commitment of 9.0 Bcf (gross) under the amended
long-term contract with AWG. For purposes of determining AWG's available gas
supply, deliveries to AWG's spot market purchasing program or transportation
customers and the reserves related to those deliveries are not considered.
AWG's twenty-year gas supply contract with SEECO expires in July, 1998. In
March, 1997, AWG filed a gas supply plan with the APSC which projects system
load growth patterns and long range gas supply
7
needs for the utility's northwest Arkansas system. As part of its long range
supply plan, AWG has proposed to enter into a new intersegment gas supply
contract for a similar portion of its system needs at a price competitive with
the cost of alternative supplies. The APSC has not yet approved AWG's gas supply
plan. The Company expects that the volumes will continue to be sold to AWG.
However, it is possible that the APSC may reject AWG's gas supply plan and
require that the gas supply now provided under this contract be replaced through
a competitive bidding process, involving multiple potential suppliers. If this
occurs, SEECO's continued sales of these volumes to AWG, and the price of any
such sales, will depend on the result of this competitive bidding process.
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 liabilities resulting from these contracts, although the Company's
exposure to take-or-pay liabilities to its gas suppliers has increased in recent
years as a result of a decline in its gas supply requirements. This decline
occurred because some of its large business customers converted to the
transportation service offered by AWG and began to obtain their own gas supplies
directly from other sources. The Company expects to be able to continue to
satisfactorily manage its exposure to take-or-pay liabilities.
Associated purchases gas for its system supply from unaffiliated suppliers
accessed by interstate pipelines and from SEECO. 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 these suppliers include demand components to ensure
availability of gas supply, administrative fees, and a commodity component which
is based on spot market gas 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 which 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 155,000 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 in 1997
was 37.0 Bcf, down from 39.0 Bcf in
8
1996, and 42.4 in 1995. Off-system transportation volumes were 2.8 Bcf in 1997,
compared to 3.6 Bcf transported in 1996, and 9.8 Bcf transported in 1995.
Residential and Commercial. Approximately 80% of the utility's revenues are
from residential and commercial markets. Residential and commercial customers
combined accounted for 57% of total gas throughput for the gas distribution
segment in 1997 and 1996, and 46% in 1995. Gas volumes sold to residential
customers were 12.6 Bcf, down from 13.4 Bcf sold in 1996 and up from 12.1 Bcf
sold in 1995. Gas sold to commercial customers totaled 8.4 Bcf in 1997, down
from 8.8 Bcf in 1996 and up from 7.6 Bcf in 1995. The decrease in gas volumes
sold in 1997 was due to weather in Arkansas Western's service territory which
was 5% warmer than in 1996, partially offset by customer growth of 2.2% in its
combined service territories during 1997.
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 recently as tariffs implemented in Arkansas as a result of the
recently approved rate filings 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 include end-use transportation deliveries, have increased for the eleventh
consecutive year, reflecting both the success of the Company's industrial
marketing efforts and the continued economic strength of its service territory.
Industrial customers, which are generally smaller concerns using gas for plant
heating or product processing, accounted for 13.2 Bcf in gas deliveries in 1997
and 1996, and 13.0 Bcf in 1995. No industrial customer accounts for more than 6%
of Arkansas Western's total throughput.
In an effort to more fully meet the service needs of larger business
customers, both AWG and Associated instituted a transportation service in 1991
that allows such customers in Arkansas to obtain their own gas supplies directly
from other suppliers. A total of 45 customers are currently using the Arkansas
transportation service. Eleven of AWG's twelve largest customers in northwest
Arkansas, including the seven largest, are using the transportation service.
Associated's four largest customers in northeast Arkansas and ten of
Associated's eleven largest Missouri customers are currently using
transportation service.
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 which 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 has intensified in recent years. Industrial
customers are most likely to consider utilization of these
9
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
nongas 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 customer's behalf.
Regulation
The Company's utility rates and operations are regulated by the APSC and
MPSC. In Arkansas, the Company operates through municipal franchises which 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.
Over the past several years, changes at the federal level have brought
significant changes to the regulatory structure governing interstate sales and
transportation of natural gas. The Federal Energy Regulatory Commission's (FERC)
Order No. 636 series changed a major portion of the gas acquisition merchant
function provided to gas distributors by interstate pipelines. AWG already
obtains its supply at the wellhead directly from producers and has not been
directly impacted by Order No. 636. Associated has acquired the bulk of its gas
supply at the wellhead since its acquisition by Arkansas Western, but continued
until Order No. 636 to purchase a portion of both its peak and base requirements
from interstate suppliers. The changes mandated by Order No. 636 have placed the
responsibility for arranging firm supplies of natural gas directly on local
distribution companies and have, as a result, lessened the ability of Associated
to purchase gas on the short-term spot market.
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 are presently pending in Arkansas or Missouri, the Company is
aggressively controlling costs and constantly evaluating issues such as system
capacity and reliability, obligation to serve, and rate design, with an eye
toward minimizing any stranded or transition costs.
Gas distribution revenues in future years will be impacted by both customer
growth and rate increases allowed by regulatory commissions. In recent years,
AWG has experienced customer growth of approximately 3% to 4% annually, while
Associated has experienced customer growth of approximately 1% annually. Based
on current economic conditions in the Company's service territories, the Company
expects this trend in customer growth to continue. AWG and Associated pass along
to customers through an automatic cost of gas adjustment clause any increase or
decrease experienced in purchased gas costs. In December, 1996, AWG received
approval from the APSC for a rate increase of $5.1 million annually. The
10
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 which
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.
Energy Services
Gas Marketing
The energy services 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.
During 1997, the group expanded its presence in natural gas marketing, building
a diverse customer base and providing a broad range of services at competitive
prices. In the future, the energy services group plans to further expand its
natural gas marketing activities, with particular emphasis on third-party
marketing in the Mid-Continent region of the United States. The planned merger
of NOARK with the Ozark Gas Transmission System (Ozark) discussed below will
afford greater supply and market opportunities, allowing the group to expand its
marketing operations in Oklahoma. Southwestern expects the contributions by this
segment to increase in significance as the pace of deregulation in the energy
industry accelerates.
The Company's marketing operations include the marketing of Southwestern's
own gas production and third-party natural gas. The segment marketed 36.2 Bcf of
natural gas in 1997, compared to 13.0 Bcf in 1996, and 19.9 Bcf in 1995. Of the
total volumes marketed, purchases from the Company's exploration and production
subsidiaries accounted for 23% in 1997, 56% in 1996, and 59% in 1995.
Pipeline Operations
A portion of the activity of the energy services segment involves the NOARK
Pipeline System, Limited Partnership. At December 31, 1997, the Company held a
48% general partnership interest in NOARK and served as the pipeline's operator.
The 258-mile long intrastate natural gas transmission system originates near the
Fort Chaffee military reservation in western Arkansas and terminates in
northeast Arkansas, crossing three major interstate pipelines and
interconnecting with the Company's distribution systems. NOARK's main line was
completed and placed in service in September, 1992. A lateral line of NOARK that
allows the Company's gas distribution segment to augment its supply to an
existing market, as well as supply gas to new markets, was completed and placed
in service in November, 1992. Construction of an eight-mile interstate pipeline
connecting NOARK to the distribution system of Associated was completed during
1993.
11
AWG provides field management services to NOARK under a contract with the
partnership and AWG's gathering system delivers to NOARK a substantial part of
the gas NOARK transports. In 1997, NOARK had an average daily throughput of 40
MMcfd, compared to 58 MMcfd in 1996, and 86 MMcfd in 1995. NOARK's current
capacity is 141 MMcfd. Arkansas Western has contracted for 52.3 MMcfd of firm
capacity on NOARK. The contract expires in 2002 and is renewable year to year
until terminated with 180 days notice.
While NOARK has always accessed good markets, its performance has been
hindered by a lack of adequate gas supply. NOARK has been operating below
capacity and generating losses since it was placed in service. As a result of
these continuing losses, the Company investigated options to improve NOARK's
future financial prospects, including an extension into Oklahoma that would
provide additional access to gas supply. 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
the integration of NOARK with the Ozark Gas Transmission System (Ozark). Ozark
is a 437-mile interstate pipeline system which begins near McAlester, Oklahoma
and terminates near Searcy, Arkansas. Ozark has a throughput capacity of
approximately 170 MMcfd. Enogex has entered into an agreement to acquire Ozark
from NGC Corporation for $55.0 million and will contribute Ozark to the NOARK
partnership when regulatory approvals are obtained. Enogex has also acquired the
NOARK partnership interests not held by Southwestern. Subject to approval by the
Federal Energy Regulatory Commission, NOARK will be converted to an interstate
pipeline and be operated with Ozark as an integrated system.
In addition to its purchase of Ozark, Enogex will fund the integration
project and an expansion of the combined system at an estimated cost of $15.0
million. The two pipelines currently have a minor interconnection and run in
general proximity to each other in western Arkansas, but a larger
interconnecting pipeline and compression will be constructed to enable the Ozark
line in Oklahoma to serve as the supply line for both NOARK and Ozark. The
combined pipelines will have capacity of approximately 330 MMcfd. The integrated
system is expected to be operational in late 1998. After the integration is
complete, Southwestern will have a 25% interest in the expanded project and
Enogex will have a 75% interest.
Competition
The Company's energy 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 energy marketing segment in the future depends upon establishing and
maintaining strong relationships with producers and end-users.
NOARK currently competes with two interstate pipelines, one of which is the
Ozark system, to obtain gas supplies for transportation to other markets.
Because of the available transportation capacity in the Arkansas portion of the
Arkoma Basin, competition has been strong and has resulted in NOARK transporting
12
gas for third parties at rates below the maximum tariffs presently allowed. The
planned integration with Ozark will provide the Company's pipeline operations
with increased supplies to transport to both local markets and markets served by
the three major interstate pipelines that NOARK 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 the integration of
NOARK and Ozark 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 existng 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' role as wholesalers of natural gas and has
substantially increased competition in natural gas markets. While some
regulatory uncertainty remains, Order No. 636 may ultimately enhance the ability
of the Company to market natural gas, although it may also create greater
competition for the Company.
The operations of NOARK are currently regulated by the APSC. The APSC has
established a maximum transportation rate of approximately $.285 per dekatherm
based on NOARK's original construction cost estimate of $73 million. The planned
integration of NOARK with Ozark will result in an interstate pipeline system
subject to FERC regulations and FERC approved tariffs. A filing was made with
the FERC on March 5, 1998, seeking approval for the acquisition of Ozark by
Enogex and the integration of NOARK and Ozark. The APSC will no longer have
jurisdiction over NOARK's transportation rates and services once the integrated
system is placed in service.
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.
13
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 170 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 with a joint venture partner various options for developing this property
which 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, 1997, the Company had 705 employees, 99 of whom are
represented under a collective bargaining agreement. The Company believes that
its relations with its employees are good.
Item 2. Properties
The portions of the Registrant's 1997 Annual Report to Shareholders (filed
as Exhibit 13 to this filing) listed below are hereby incorporated by reference
for the purpose of describing its properties.
Refer to the Appendix (filed as part of Exhibit 13 to this filing) for
information concerning areas of operation of the Company's business segments.
See the table entitled "Gas Distribution Systems" at the Appendix for
information concerning miles of pipe of the Company's gas distribution systems.
Also, see pages 37 and 38 (Notes 5 and 6 to the financial statements) for
additional information about the Company's gas and oil operations. For
information concerning capital expenditures, refer to page 27 ("Capital
Expenditures" section of "Management's Discussion and Analysis of Financial
Condition and Results of Operations"). Also refer to page 45 ("Financial and
Operating Statistics") for information concerning gas and oil produced.
The following information is provided to supplement that presented in the
1997 Annual Report to Shareholders:
14
Leasehold Acreage
Undeveloped Developed
Gross Net Gross Net
----------------- -------------------
Arkansas.................... 234,319 107,140 316,542 141,977
Oklahoma.................... 27,512 14,909 98,268 45,541
Texas....................... 16,905 7,429 96,158 30,825
Louisiana................... 35,144 18,742 39,792 6,485
New Mexico.................. 10,104 7,932 23,859 8,732
Other areas................. - - 17,554 4,773
----------------- -------------------
323,984 156,152 592,173 238,333
================= ===================
Producing Wells
Gas Oil Total
Gross Net Gross Net Gross Net
----------------- ------------------- -----------------
Arkansas.................... 784 411.9 - - 784 411.9
Oklahoma.................... 551 238.7 662 152.4 1,213 391.1
Texas....................... 117 34.8 158 119.4 275 154.2
Louisiana................... 14 4.5 26 17.7 40 22.2
New Mexico.................. 9 1.9 15 11.5 24 13.4
Other areas................. - - 50 14.1 50 14.1
----------------- ------------------- -----------------
1,475 691.8 911 315.1 2,386 1,006.9
================= =================== =================
Net Wells Drilled During the Year
Exploratory
Productive
Year Wells Dry Holes Total
---- ---------- --------- -----
1997 . . . . 1.3 3.0 4.3
1996 . . . . 5.3 3.0 8.3
1995 . . . . 6.3 7.1 13.4
Development
Productive
Year Wells Dry Holes Total
---- ---------- --------- -----
1997 . . . . 27.5 13.5 41.0
1996 . . . . 29.4 11.8 41.2
1995 . . . . 37.5 19.4 56.9
15
Wells in Progress as of December 31, 1997
Type of Well Gross Net
------------ ----- ---
Exploratory............................ 3.0 1.6
Development............................ 9.0 4.4
----- ---
Total.................................. 12.0 6.0
===== ===
No individually significant discovery or other major favorable or adverse
event has occurred since December 31, 1997.
During 1997, 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 the 1997 Annual Report to Shareholders.
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.
Item 3. Legal Proceedings
In May, 1996, a lawsuit was filed against the Company involving the
disputed ownership of overriding royalty interests in a number of oil and gas
properties. In a related matter, a purported class action suit was filed against
the Company in May, 1996 on behalf of royalty owners alleging improprieties in
the disbursement of royalty proceeds. The Company feels these claims are
substantially without merit and intends to vigorously contest the claims brought
in each matter. While the amount of the potential claims is significant in the
aggregate, management believes, based on its investigation, that the Company's
ultimate liability, if any, will not be material to its consolidated financial
position or results of operations.
The Company and its subsidiaries are involved in various other legal
proceedings arising in the ordinary course of business. While the outcome of
lawsuits or other proceedings cannot be predicted with certainty, management
expects these matters will not have a material adverse effect on the
consolidated financial position or results of operations 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, 1997, to a vote of security holders, through the solicitation
of proxies or otherwise.
16
Executive Officers of the Registrant
Years Served as
Name Officer Position Age Officer
---- ---------------- --- -------
Charles E. Scharlau Chairman of the Board and Chief Executive Officer 70 40
Stanley D. Green Executive Vice President - Finance and Corporate 44 16
Development and Chief Financial Officer
Harold M. Korell Executive Vice President - Operations and 53 1
Chief Operating Officer
Debbie J. Branch Senior Vice President, Southwestern Energy Services 46 2
Company and Southwestern Energy Pipeline Company
Gregory D. Kerley Senior Vice President - Treasurer and Secretary and 42 8
Chief Accounting Officer
Alan H. Stevens Senior Vice President, Southwestern Energy Production 53 -
Company and SEECO, Inc.
Charles V. Stevens Senior Vice President, Arkansas Western Gas Company 48 9
Mr. Scharlau was elected to his present position in 1979. He has served as
Chief Executive Officer since 1968.
Mr. Green was elected to his present position in 1992 and has served as
Chief Financial Officer since 1987. Previously, he served as Vice President -
Treasurer and Secretary from 1987 to 1992, and as Controller from 1981 to 1990.
Mr. Korell joined the Company in his present position in 1997. 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.
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.
17
Mr. Kerley was elected to his present position in December, 1997 and has
served as Chief Accounting Officer since 1990. Previously, he served as Vice
President - Treasurer and Secretary from 1992 to 1997, and Controller from 1990
to 1992.
Mr. Alan Stevens joined the Company in his present position in January,
1998. Prior to joining the Company, he was President and Chief Operating Officer
for Petsec Energy during 1997. Previously, he was Vice President of Worldwide
Exploration for Occidental Petroleum Company from 1989 to 1997.
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 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.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Shareholder Information on page 46 and "Common Stock Statistics" included
in the Company's Financial and Operating Statistics on page 44 of the 1997
Annual Report to Shareholders (filed as Exhibit 13 to this filing) are hereby
incorporated by reference for information concerning the market for and prices
of the Company's Common Stock, the number of shareholders, and cash dividends
paid.
The terms of certain of the Company's long-term debt instruments and
agreements impose restrictions on the payment of cash dividends. At December 31,
1997, $129.1 million of retained earnings was available for payment as 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. Dividends totaling $5.9 million were paid during 1997.
The Company paid dividends at an annual rate of $.24 per share in 1997 and
1996. 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.
Item 6. Selected Financial Data, and
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations, and
18
Item 8. Financial Statements and Supplementary Data
The following portions of the 1997 Annual Report to Shareholders (filed as
Exhibit 13 to this filing) are hereby incorporated by reference.
Refer to pages 44 and 45 ("Financial and Operating Statistics") for
selected financial data of the Company.
Refer to the text on pages 23 through 28 for "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Refer to pages 30 through 45 for financial statements and supplementary
data.
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 21, 1998 (the 1998 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.
Item 11. Executive Compensation
The 1998 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 1998 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.
19
Item 13. Certain Relationships and Related Transactions
The 1998 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 following consolidated financial statements of the Company and
its subsidiaries, included on pages 30 through 43 of its 1997 Annual Report to
Shareholders (filed as Exhibit 13 to this filing) and the report of independent
public accountants on page 29 of such report are hereby incorporated by
reference:
Report of Independent Public Accountants.
Consolidated Balance Sheets as of December 31, 1997 and 1996.
Consolidated Statements of Income for the years ended December 31,
1997, 1996, and 1995.
Consolidated Statements of Cash Flows for the years ended December
31, 1997, 1996, and 1995.
Consolidated Statements of Retained Earnings for the years ended
December 31, 1997, 1996, and 1995.
Notes to Consolidated Financial Statements,December 31, 1997, 1996,
and 1995.
(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 22 - 24)
are filed as part of, or incorporated by reference into, this Report.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended
December 31, 1997.
20
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 27, 1998 BY: /s/ STANLEY D. GREEN
----------------------------
Stanley D. Green,
Executive Vice President - Finance
and Corporate Development 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 27, 1998.
/s/ CHARLES E. SCHARLAU Director, Chairman, and
- ---------------------------- Chief Executive Officer
Charles E. Scharlau
/s/ STANLEY D. GREEN Executive Vice President -
- ---------------------------- Finance and Corporate Development
Stanley D. Green and Chief Financial Officer
/s/ GREGORY D. KERLEY Senior Vice President -
- ---------------------------- Treasurer and Secretary and
Gregory D. Kerley Chief Accounting Officer
/s/ JOHN PAUL HAMMERSCHMIDT Director
- ----------------------------
John Paul Hammerschmidt
/s/ ROBERT L. HOWARD Director
- ----------------------------
Robert L. Howard
/s/ KENNETH R. MOURTON Director
- ----------------------------
Kenneth R. Mourton
/s/ CHARLES E. SANDERS Director
- ----------------------------
Charles E. Sanders
Supplemental Information to be Furnished With Reports Filed Pursuant to
Section 15(d) of the Act by Registrants Which Have Not Registered Securities
Pursuant to Section 12 of the Act.
Not Applicable
21
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 Shareholder Rights Agreement, dated May 5, 1989 (incorporated by
reference to Exhibit 1 filed with the Company's Form 8-K on May 10,
1989).
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 Arkansas Western Gas
Company, dated July 24, 1978, as amended May 21, 1979, and Amended and
Restated as of July 1, 1994 (incorporated by reference to Exhibit 10.1
to Annual Report on Form 10-K for the year ended December 31, 1994).
10.2 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
filed herewith).
10.3 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) Summary of Southwestern Energy Company Incentive Compensation
Plan, effective January 1, 1993 (incorporated by reference to
Exhibit 10.4(b) to Annual Report on Form 10-K for the year ended
December 31, 1993).
(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).
22
Exhibit
No. Description
(d) Southwestern Energy Company 1993 Stock Incentive Plan, 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).
(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).
10.4 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).
10.5 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).
10.6 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).
10.7 Split-Dollar Life Insurance Agreement for Stanley D. Green, effective
February 1, 1996 (incorporated by reference to Exhibit 10.8 to Annual
Report on Form 10-K for the year ended December 31, 1995).
10.8 Executive Severance Agreement for Charles E. Scharlau, effective August
4, 1989 (incorporated by reference to Exhibit 10 to Annual Report on
Form 10-K for the year ended December 31, 1989).
10.9 Executive Severance Agreement for Stanley D. Green, effective August 4,
1989 (incorporated by reference to Exhibit 10 to Annual Report on Form
10-K for the year ended December 31, 1989).
10.10 Executive Severance Agreement for B. Brick Robinson, effective August 4,
1989 (incorporated by reference to Exhibit 10 to Annual Report on Form
10-K for the year ended December 31, 1989).
10.11 Executive Severance Agreement for Gregory D. Kerley, effective December
14, 1994 (incorporated by reference to Exhibit 10.11 to Annual Report on
Form 10-K for the year ended December 31, 1994).
10.12 Executive Severance Agreement for Debbie J. Branch, effective July 9,
1997 (filed herewith).
10.13 Executive Severance Agreement for Alan H. Stevens, effective January 2,
1998 (filed herewith).
23
Exhibit
No. Description
10.14 Employment Agreement for Charles E. Scharlau, dated December 18, 1990,
effective January 1, 1991, as amended December 7, 1994 (original
agreement incorporated by reference to Exhibit 10 to Annual Report on
Form 10-K for the year ended December 31, 1990; amended agreement
incorporated by reference to Exhibit 10.12 to Annual Report on Form 10-K
for the year ended December 31, 1994).
10.15 Employment Agreement for Harold M. Korell, effective April 28, 1997
(filed herewith).
10.16 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).
10.17 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 (filed herewith).
10.18 Amended and Restated Limited Partnership Agreement of NOARK Pipeline
System, Limited Partnership dated January 12, 1998 (filed herewith).
13. 1997 Annual Report to Shareholders, except for those portions not
expressly incorporated by reference into this Report. Those portions not
expressly incorporated by reference are not deemed to be filed with the
Securities and Exchange Commission as part of this Report (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).
27.1 Financial Data Schedule for 1997(filed herewith).
27.2 Restated Financial Data Schedule for 1996(filed herewith).
27.3 Restated Financial Data Schedule for 1995(filed herewith).
24