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, 1998
-----------------
or
|
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ______________ to ______________
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.)
|
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
The aggregate market value of the voting stock held by non-affiliates of the Registrant was $174,889,210 based on the New York Stock Exchange - Composite Transactions closing price on March 29, 1999 of $7 1/8.
The number of shares outstanding as of March 29, 1999, of the Registrant's Common Stock, par value $.10, was 24,933,280.
DOCUMENTS INCORPORATED BY REFERENCE
SOUTHWESTERN ENERGY COMPANY
FORM 10-K
ANNUAL REPORT
For the Year Ended December 31, 1998
TABLE OF CONTENTS
PART I
Page
----
Item 1. Business....................................................................................... 1
Business Strategy.............................................................................. 1
Exploration and Production..................................................................... 1
Natural Gas Distribution ...................................................................... 7
Marketing and Transportation................................................................... 11
Other Items.................................................................................... 14
Item 2. Properties..................................................................................... 14
Item 3. Legal Proceedings.............................................................................. 16
Item 4. Submission of Matters to a Vote of Security Holders............................................ 18
Executive Officers of the Registrant........................................................... 18
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.......................... 19
Item 6. Selected Financial Data........................................................................ 20
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 20
Item 7.A. Quantitative and Qualitative Disclosure About Market Risks..................................... 20
Item 8. Financial Statements and Supplementary Data.................................................... 22
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........... 22
PART III
Item 10. Directors and Executive Officers of the Registrant............................................. 22
Item 11. Executive Compensation......................................................................... 23
Item 12. Security Ownership of Certain Beneficial Owners and Management................................. 23
Item 13. Certain Relationships and Related Transactions................................................. 23
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................... 23
|
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,
Southwestern is involved in the following business segments:
1. Exploration and Production -- Engaged in natural gas and oil
exploration, development and production, with operations principally
located in Arkansas, Oklahoma, Texas, New Mexico, south Louisiana, and
the Gulf Coast.
2. Natural Gas Distribution -- Engaged in the gathering, distribution and
transmission of natural gas to approximately 179,000 customers in
northern Arkansas and parts of Missouri.
3. Marketing and Transportation -- Provides marketing and transportation
services in the Company's core areas of operation and owns a 25%
interest in the NOARK Pipeline System, Limited Partnership (NOARK).
This Report on Form 10-K includes certain statements that may be deemed to be "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of this Report for a discussion of factors that could cause actual results to differ materially from any such forward-looking statements.
Business Strategy
The Company's business strategy is to provide long-term growth through focused exploration and production of oil and natural gas, while creating additional value through the Company's natural gas distribution, marketing and transportation activities. The Company seeks to maximize cash flow and earnings and provide consistent growth in oil and gas production and reserves through the discovery, production and marketing of high margin reserves from a balanced portfolio of drilling opportunities. This balanced portfolio includes low risk development drilling in the Arkoma Basin, moderate risk exploration and exploitation in the Permian Basin in New Mexico, and high potential exploration opportunities in south Louisiana and the Gulf Coast. Additionally, the Company strives to operate its utility systems safely and efficiently and to position them to earn their full, authorized return. The Company is also committed to enhancing shareholder value by creating and capturing additional value beyond the wellhead through its marketing and transportation activities.
Exploration and Production
In 1943, the Company commenced a program of exploration for and development of natural gas reserves in Arkansas for supply to its utility customers. In 1971, the Company initiated an exploration and development program outside Arkansas, unrelated to the utility requirements. Since that time, the Company's exploration and development activities outside Arkansas have expanded substantially.
During 1998, Southwestern brought in new senior operating management and replaced over 50% of its professional technical staff to refocus its exploration and production segment. Additionally in 1998, the Company closed its Oklahoma City office and moved these operations to its Houston office in an effort to increase future profitability. Another major part of this segment's restructuring was the reorganization into asset management teams. Two exploitation teams were formed (an Arkoma team and a Permian Basin/Mid-Continent/Gulf Coast team) to manage Southwestern's producing properties, and three exploration teams (Permian Basin, Texas Gulf Coast and south Louisiana) were formed to provide an area specific focus in exploration projects. A new incentive compensation system was also put in place in 1998 for the professional staff which aligns our employees' efforts with the interests of our shareholders, while fostering a culture that is innovative and focused on growth as well as profitability.
At December 31, 1998, the Company had proved oil and gas reserves of 344.8
billion cubic feet (Bcf) equivalent, including proved natural gas reserves of
303.7 Bcf and proved oil reserves of 6,850 thousand barrels (MBbls). All of the
Company's reserves are located entirely within the United States. Revenues of
the exploration and production subsidiaries are predominately generated from
production of natural gas. Sales of gas production accounted for 89% of total
operating revenues for this segment in 1998, 86% in 1997, and 90% in 1996.
Areas of Operation
Southwestern engages in gas and oil exploration and production through its subsidiaries, SEECO, Inc. (SEECO), Southwestern Energy Production Company (SEPCO), and Diamond "M" Production Company (Diamond M). SEECO operates exclusively in the state of Arkansas and holds a large base of both developed and undeveloped gas reserves and conducts an ongoing drilling program in the historically productive Arkansas part of the Arkoma Basin. SEPCO conducts development drilling and exploration programs in areas outside Arkansas, including the Permian Basin of Texas and New Mexico, the Gulf Coast areas of Louisiana and Texas, and the Anadarko Basin of Oklahoma. Diamond M operates properties in the Permian Basin of Texas.
The following table provides December 31, 1998 information as to proved reserves, well count, and gross and net acreage, and 1998 annual information as to production and reserve additions for each of the Company's core operating areas.
Arkoma Mid-Continent Permian Gulf Coast Total
------- ------------- ------- ---------- -------
Proved Reserves:
Gas (Bcf) 214.9 33.7 27.8 27.3 303.7
Oil (MBbls) - 2,242 3,532 1,076 6,850
Total Reserves (Bcfe) 214.9 47.1 49.0 33.8 344.8
Production (Bcfe) 20.7 6.7 4.7 4.8 36.9
Reserve Additions (Bcfe) 22.9 2.7 19.2 2.7 47.5
Total Gross Wells 818 1,414 362 68 2,662
Percent Operated 48% 37% 59% 41% 45%
Gross Acreage 336,664 137,107 63,610 141,640 679,021
Net Acreage 269,715 50,786 29,281 62,797 412,579
|
Arkoma. Southwestern has been active in the Arkansas portion of the Arkoma Basin since 1943. As a result, it has developed a substantial acreage position and reserve base in the basin. At December 31, 1998, the Company had approximately 214.9 Bcf of natural gas reserves in the Arkoma Basin. This represents 71% of the Company's natural gas reserves and 62% of total reserves on a Bcf equivalent basis. Southwestern's average net daily production in 1998 in the Arkoma Basin was 56.9 million cubic feet equivalent (MMcfe).
Historically, 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 operating areas to new fields. During 1998, Southwestern enjoyed successful stepout drilling in the lightly-explored southern edges of the Arkoma Basin in Arkansas and in the western part of the basin in Oklahoma. Overall, the Company participated in 52 gross wells (23.6 net) in the Arkoma Basin during 1998 with a success ratio of 83%. These wells contributed 22.9 Bcf to total 1998 reserve additions. During 1999, 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. At December 31, 1998, the Company had
approximately 33.7 Bcf of natural gas reserves and 2,242 MBbls of oil reserves
in the region, representing 11% and 33%, respectively, of the Company's total
gas and oil reserves. Average net daily production in 1998 for this region was
18.2 MMcfe. During 1998, the Company closed its Oklahoma City office and moved
these operations to Houston. Southwestern does not expect its Mid-Continent
operations to be a primary area of future growth.
Permian. In recent years, Southwestern has experienced excellent success in the lower and middle Morrow formations in the Permian Basin in southeast New Mexico. At December 31, 1998, the Company had approximately 27.8 Bcf of natural gas reserves and 3,532 MBbls of oil reserves in the region, representing 9% and 51%, respectively, of the Company's total gas and oil reserves. Average net daily production in 1998 for this region was 12.9 MMcfe.
Since its first exploratory discovery in 1995, the Company's drilling program in this area has resulted in 21 successful wells of 26 drilled. Continued development of our Gaucho unit, in which the Company has approximately a 50% working interest, resulted in reserve additions of 13.2 Bcf equivalent in 1998. The Rio Blanco #4-1, located two miles from existing Gaucho production, was recently completed and could extend the Gaucho field and lead to further development. Five wells have been drilled within the Gaucho prospect and, including the Rio Blanco #4-1, four are producing at a combined daily gross rate of 21.1 MMcf of natural gas and 137 barrels of condensate. The Company believes that its drilling activities in this area will provide additional opportunities for growth in production and reserves.
Gulf Coast/South Louisiana. The Company became active in the Gulf Coast and south Louisiana areas in 1990. At December 31, 1998, the Company had approximately 27.3 Bcf of natural gas reserves and 1,076 MBbls of oil reserves in the region, representing 9% and 16%, respectively, of the Company's total gas and oil reserves. Average net daily production in 1998 for this region was 13.1 MMcfe. Southwestern considers this region to be a primary area for growth in the Company's production and reserves.
South Louisiana continues to be the major focus area of high impact exploration activities. In 1998, the Company used its growing inventory of 3-D seismic data and leasehold acreage to create the largest inventory of exploration prospects in the Company's history. Drilling began in the fourth quarter of 1998 with four wells spud to date. Two of these wells are currently drilling and two test wells were dry, demonstrating the higher risk nature of south Louisiana exploration. The Company anticipates additional drilling in this area in 1999.
Over the past several years, the Company has built an extensive inventory of 3-D seismic data covering almost 550 square miles in south Louisiana. In 1998, the Company continued to analyze the seismic data from the East Atchafalaya and Boure 3-D shoots with promising results. Southwestern became involved in the East Atchafalaya project in mid-1995 through a 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. The Company has participated in four wells to date in the project. While two wells did not find commercially productive reserves, the other two wells were completed as producing wells. Additional wildcat drilling is planned in 1999.
Southwestern has a 50% working interest in the Boure project, a 185 square mile 3-D survey in Assumption Parish adjacent to the East Atchafalaya project area. The acquisition phase is complete and the data is currently being interpreted. The Company expects to drill up to two wells in the project in 1999.
In late 1998, the Company formed a strategic alliance with industry partners to jointly evaluate and explore a new proprietary 3-D seismic survey in the Nodosaria Embayment area of Lafayette, St. Landry and Acadia Parishes. The survey covers a 140-square mile area that contains several identified exploration leads, and provides 3-D data over the Bosco producing field which the Company purchased in 1995. The 3-D data is expected to be delivered in October 1999 with drilling to commence in the year 2000.
The Texas transition zone represents a new focus area for Southwestern, and covers the onshore Texas coast and the Texas state waters. Southwestern is currently developing the regional geologic mapping necessary to tie these distinct geological areas together. In 1999, the Company plans to drill up to four prospects and has developed several more leads as it continues to add to its existing acreage. The Company believes that this area has been relatively under-explored, as compared to the federal waters of the Gulf of Mexico, and expects it to be a meaningful source of new drilling opportunities.
The higher risk, higher return exploratory prospects in south Louisiana and the Gulf Coast are part of the Company's overall strategy of balanced oil and gas exploration and production. These high impact exploration plays provide an opportunity for significant reserve growth, while the low-risk Arkoma and medium-risk Permian drilling activities provide a stable base of continuing reserve additions and production.
Acquisitions
Prior to 1997, the Company had increased its emphasis on acquisitions of producing properties. However, in 1997, the market for producing property acquisitions became 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 1998 or 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 Company's current strategy in this area is to pursue selective acquisitions that would complement its existing operations.
Capital Spending
Southwestern began 1999 with planned capital expenditures for gas and oil exploration and development of $56.6 million, up from $52.4 million in 1998. The Company plans to maintain its capital investments within the limits of internally generated cash flow, and will adjust its capital program accordingly if commodity prices remain at their current low levels.
Sales and Major Customers
Natural gas equivalent production averaged 101 million cubic feet per day
(MMcfd) in 1998, compared to 104 MMcfd in 1997, and 101 MMcfd in 1996. The
Company's gas production was 32.7 Bcf in 1998, down from 33.4 Bcf in 1997, and
34.8 Bcf in 1996. The Company also produced 703,000 barrels of oil in 1998,
compared to 749,000 barrels in 1997, and 391,000 barrels in 1996. The decreases
in gas production were the result of lower sales from the Company's Arkansas
properties, which are largely affected by the demands of the Company's utility
distribution systems.
The Company's natural gas production received an average wellhead price of $2.34 per thousand cubic feet (Mcf) in 1998, compared to $2.57 per Mcf in 1997 and $2.26 per Mcf in 1996. Oil prices declined significantly, with an average price in 1998 of $13.60 per barrel, compared to $19.02 per barrel in 1997 and $21.21 per barrel in 1996.
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 36% of total exploration and production revenues in 1997, 43% in 1997, and 46% in 1996. All of the Company's remaining sales are to unaffiliated purchasers.
SEECO's production was 19.5 Bcf in 1998, down from 21.7 Bcf in 1997 and
23.1 Bcf in 1996. SEECO's sales to Arkansas Western were 11.3 Bcf in 1998, down
from 14.3 Bcf in 1997 and 16.3 Bcf in 1996. The decreases in gas sales were
primarily the result of warmer weather in the utility's service territory.
Gas volumes sold by SEECO to Arkansas Western for its northwest Arkansas division (AWG) were 7.7 Bcf in 1998, 8.6 Bcf in 1997, and 10.1 Bcf in 1996. Through these sales, SEECO furnished 59% of the northwest Arkansas system's requirements in 1998, 64% in 1997, and 62% in 1996. SEECO also delivered approximately 2.0 Bcf in 1998, 1.0 Bcf in 1997, and 1.1 Bcf in 1996 directly to certain large business customers of AWG through a transportation service of the utility subsidiary. Most of the sales to AWG were pursuant to a twenty-year contract between SEECO and AWG, entered into in July 1978, under which the price was frozen
between 1984 and 1994. This contract was amended in 1994 as a result of a settlement reached to resolve certain gas cost issues before the Arkansas Public Service Commission hereafter referred to as the "Gas Cost Settlement." The sales price under this contract averaged $2.99 per thousand cubic feet (Mcf) through November of 1998, $3.46 per Mcf in 1997, and $3.13 per Mcf in 1996. This contract expired July 24, 1998 but continued on a month-to-month basis through November 1998.
In March 1997, AWG filed a gas supply plan with the Arkansas Public Service Commission (APSC) which projected system load growth patterns and long range gas supply needs for the utility's northwest Arkansas system. The gas supply plan also addressed replacement supplies for AWG's long-term contract with SEECO. After discussions with the APSC it was determined that the majority of the utility's future gas supply needs should be provided through a competitive bidding process. On October 1, 1998, AWG sent requests for proposals to various suppliers requesting bids on seven different packages of gas supply to be effective December 1, 1998. These bid requests included replacement of the gas supply and no-notice service previously provided by the long-term gas supply contract between AWG and SEECO. Eleven potential suppliers returned bids in late October.
SEECO along with the Company's marketing subsidiary successfully bid on five of the seven packages with prices based on the NorAm East Index plus a demand charge. The volumes of gas projected to be sold under these contracts in their first year are approximately equal to the historical annual volumes sold under the expired long-term contracts. However, the volumes to be sold under these contracts are not fixed as they were under the expired contract. The total premium over the NorAm East Index under these contracts is estimated to be approximately $1.0 million lower (after tax) than the annual premium earned under the expired long-term contract. Other sales to AWG are made under long-term contracts with flexible pricing provisions.
SEECO's sales to Associated Natural Gas Company (Associated), a division of Arkansas Western which operates natural gas distribution systems in northeast Arkansas and parts of Missouri, were 3.6 Bcf in 1998, 5.7 Bcf in 1997, and 6.2 Bcf in 1996. These deliveries accounted for approximately 50% of Associated's total requirements in 1998, 61% in 1997, and 62% in 1996. In 1998, certain industrial customers of Associated began buying their gas supply directly from producers or marketers. This caused a decline in the percentage of Associated's gas supply provided by SEECO as these volumes were previously purchased by Associated from SEECO and then delivered to their industrial customers. Effective October 1990, SEECO entered into a ten-year contract with Associated to supply a portion of its system requirements at a price to be redetermined annually. 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 averaged $2.37 for 1998 compared to $2.51 for 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 19% of total exploration and production revenues in 1998, 15% in 1997, and 14% in 1996.
The combined gas production of SEPCO and Diamond M was 13.2 Bcf in 1998, up from 11.7 Bcf in 1997 and 1996. Oil production was 703 MBbls in 1998, compared to 749 MBbls in 1997, and 391 MBbls in 1996. 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 1998 and 1997, and 40% in 1996.
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 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 that may affect both the price it receives and contract terms it must offer. Outside Arkansas, the Company is less established and faces competition from a larger number of other producers. The Company has in recent years been successful in building its inventory of undeveloped leases and obtaining participating interests in drilling prospects outside Arkansas.
Natural Gas Distribution
The Company's subsidiary Arkansas Western Gas Company operates integrated natural gas distribution systems concentrated primarily in northern Arkansas and southeast Missouri. The APSC and the Missouri Public Service Commission (MPSC) regulate the Company's utility rates and operations. The Company serves approximately 179,000 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 110,000 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 through a competitive bidding process implemented in late 1998 and directly at the wellhead under long-term contracts. As previously indicated, SEECO furnished approximately 59% of AWG's system requirements in 1998, 64% in 1997, and 62% in 1996.
As discussed above in "Exploration and Production," AWG's twenty-year gas supply contract with SEECO expired in July 1998. Supplies previously provided by this contract are now obtained through a competitive bidding process. The Company's subsidiaries successfully bid on five of the seven gas supply packages available and will provide approximately the same volume to AWG that has historically been provided, but at a reduced premium.
AWG also purchases gas from unaffiliated producers under take-or-pay contracts. Currently, the Company believes that it does not have a significant exposure to take-or-pay liabilities resulting from these contracts. The Company expects to be able to continue to satisfactorily manage its exposure to take-or-pay liabilities.
Associated purchases gas for its system supply from unaffiliated suppliers accessed by interstate pipelines and from affiliates. Purchases from SEECO are under a ten-year contract with annual price redeterminations. Purchases from unaffiliated suppliers are under firm contracts with terms between one and three years. The rates charged by most suppliers include demand components to ensure availability of gas supply, administrative fees, and a commodity component which is based on monthly indexed market prices. Associated's gas purchases are transported through eight pipelines. The pipeline transportation rates include demand charges to reserve pipeline capacity and commodity charges based on volumes transported. Associated has also contracted with five interstate pipelines for storage capacity to meet its peak seasonal demands. These contracts involve demand charges based on the maximum deliverability, capacity charges based on the maximum storage quantity, and charges for the quantities injected and withdrawn.
AWG has no restriction on adding new residential or commercial customers and will supply new industrial customers that are compatible with the scale of its facilities. AWG has never denied service to new customers within its service area or experienced curtailments because of supply constraints. In addition, Associated has never denied service to new customers within its service area or experienced curtailments because of supply constraints since the acquisition date. Curtailment of large industrial customers of AWG and Associated occurs only infrequently when extremely cold weather requires that systems be dedicated exclusively to human needs customers.
Markets and Customers
The utility continues to capitalize on the healthy economies and sustained customer growth found in its service territory. AWG and Associated provide natural gas to approximately 157,000 residential, 22,000 commercial, and 300 industrial customers, while also providing gas transportation services to approximately 50 end-use and off-system customers. The utility's service territory includes northwest Arkansas, which in 1998 was the 8th fastest growing region in the United States. The population in Washington and Benton counties in northwest Arkansas has grown at an annual rate of 3.5 percent since 1990, and the total population of the two-county area is projected to be nearly 300,000 by the year 2000. Total gas throughput in 1998 was 32.8 Bcf, down from 37.0 Bcf in 1997, and 39.0 in 1996. The decreases were the result of comparatively warmer weather during the heating season in 1998 and 1997. Off-system transportation volumes were 1.1 Bcf in 1998, compared to 2.8 Bcf transported in 1997, and 3.6 Bcf transported in 1996.
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 1998, 1997, and 1996. Gas volumes sold to residential customers were
11.1 Bcf, down from 12.6 Bcf sold in 1997, and 13.4 Bcf sold in 1996. Gas sold
to commercial customers totaled 7.6 Bcf in 1998, down from 8.4 Bcf in 1997, and
8.8 Bcf in 1996. The decrease in gas volumes sold in 1998 was due to weather in
Arkansas Western's service territory that was 16% warmer than in 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 are generally smaller concerns using gas for plant heating or product processing, accounted for 13.0 Bcf in gas deliveries in 1998, 13.2 Bcf in 1997, and 13.0 Bcf in 1996. No industrial customer accounts for more than 4% 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 40 customers are currently using the Arkansas transportation service. AWG's seventeen largest customers in northwest Arkansas are using the transportation service. Associated's four largest customers in northeast Arkansas and eight 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 that the Company encourages. Competition is increasingly being experienced from alternative fuels, primarily electricity, fuel oil, and propane. A significant
amount of fuel switching has not been experienced, though, as natural gas is generally the least expensive, most readily available fuel in the service territories of AWG and Associated.
The competition from alternative fuels and, in a limited number of cases, alternative sources of natural gas have intensified in recent years. Industrial customers are most likely to consider utilization of these alternatives, as they are less readily available to commercial and residential customers. In an effort to provide some pricing alternatives to its large industrial customers with relatively stable loads, AWG offers an optional tariff to its larger business customers and to any other large business customer which shows that it has an alternate source of fuel at a lower price or that one of its direct competitors has access to cheaper sources of energy. This optional tariff enables those customers willing to accept the risk of price and supply volatility to direct AWG to obtain a certain percentage of their gas requirements in the spot market. Participating customers continue to pay the non-gas cost of service included in AWG's present tariff for large business customers and agree to reimburse AWG for any take-or-pay liability caused by spot market purchases on the 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 that are perpetual by state law. These franchises, however, are not exclusive within a geographic area. In Missouri, the Company operates through municipal franchises with various terms of existence.
In the recent past, 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 obtains its supply through competitive bids from suppliers and 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 placed the responsibility for arranging firm supplies of natural gas directly on local distribution companies.
As the regulatory focus of the natural gas industry shifts from the federal level to the state level, utilities across the nation are being required to unbundle their sales services from transportation services in an effort to promote greater competition. Although no such legislation or regulatory directives related to natural gas are presently pending in Arkansas or Missouri, the Company is aggressively controlling costs and constantly evaluating issues such as system capacity and reliability, obligation to serve, and rate design, with an eye toward minimizing any stranded or transition costs.
In Arkansas, the state legislature is now considering legislation that would deregulate the retail sale of electricity in Arkansas as soon as 2002. At this time, it is unknown whether or not such legislation will be adopted or if it is adopted, what its final form will be. The Company is also unable to predict the precise impact of any such legislation on its utility operations. The Company's utility subsidiary has historically maintained
a substantial price advantage over electricity for most applications. However, if retail electric competition is implemented in Arkansas, it is possible that some portion of this price advantage may be lost in some markets. As described in the paragraph above, the Company is taking steps to preserve its competitive advantage over alternative energy sources, including electricity. If electric deregulation occurs in Arkansas, legislative or regulatory precedents may be set that would also affect natural gas utilities in the future. These issues may include further unbundling of services and the regulatory treatment of stranded costs.
Gas distribution revenues in future years will be impacted by both customer growth and rate increases allowed by regulatory commissions. In recent years, AWG has experienced customer growth of approximately 3% 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 Company received approvals in December 1997 from the APSC and the MPSC for rate increases and tariff changes for Associated which will allow the utility to collect an additional $3.0 million annually. Of the $3.0 million increase, approximately $2.0 million is in the form of base rate increases and $1.0 million is related to the increased cost of service of the Company's gathering plant which is recovered through either the purchased gas adjustment clause or through direct charges to transportation customers. Rate increase requests that may be filed in the future will depend on customer growth, increases in operating expenses, and additional investments in property, plant and equipment. AWG's rates for gas delivered to its retail customers are not regulated by the FERC, but its transmission and gathering pipeline systems are subject to the FERC's regulations concerning open access transportation since AWG accepted a blanket transportation certificate in connection with its merger with Associated.
Marketing and Transportation
Gas Marketing
The marketing group was formed in mid-1996 to better enable the Company to capture downstream opportunities which arise through marketing and transportation activity. Through utilization of Southwestern's existing asset base, the group's focus is to create and capture value beyond the wellhead. The Company presently plans to continue to expand its natural gas marketing activities, with particular emphasis on third-party marketing in the Mid-Continent region of the United States. The merger of the NOARK Pipeline with the Ozark Gas Transmission System discussed below is expected to afford greater supply and market opportunities, allowing the group to expand its marketing operations in Oklahoma.
The Company's marketing operations include the marketing of Southwestern's own gas production and third-party natural gas. Operating income for this segment was $1.8 million in 1998 and $1.3 million in 1997. This segment had an operating loss of $.5 million in 1996. The segment marketed 49.6 Bcf of natural gas in 1998, compared to 36.2 Bcf in 1997, and 13.0 Bcf in 1996. Of the total volumes marketed, purchases from the Company's exploration and production subsidiaries accounted for 25% in 1998, 23% in 1997, and 56% in 1996.
NOARK Pipeline
At December 31, 1998, the Company held a 25% general partnership interest in NOARK. NOARK Pipeline was a 258-mile long intrastate natural gas transmission system that originated in western Arkansas and terminated in northeast Arkansas, crossing three major interstate pipelines and interconnecting with the Company's distribution systems. NOARK Pipeline was completed and placed in service in 1992 and has been operating below capacity and generating losses since it was placed in service. The Company's share of the pretax loss from operations related to its NOARK investment was $3.1 million in 1998, $4.5 million in 1997, and $3.8 million in 1996.
In January 1998, the Company entered into an agreement with Enogex Inc. (Enogex), a subsidiary of OGE Energy Corp., to expand NOARK Pipeline and provide access to Oklahoma gas supplies through an integration of NOARK Pipeline with the Ozark Gas Transmission System (Ozark). Ozark was a 437-mile interstate pipeline system that began in eastern Oklahoma and terminated in eastern Arkansas. On July 1, 1998, the Federal Energy Regulatory Commission (FERC) authorized the operation and integration of Ozark and NOARK Pipeline as a single, integrated pipeline. The FERC order also authorized the purchase of Ozark by a subsidiary of Enogex and the construction of integration facilities. Enogex acquired Ozark and contributed the pipeline system to the NOARK partnership and also acquired the NOARK partnership interests not held by Southwestern. Enogex funded the acquisition of Ozark and the expansion and integration with NOARK Pipeline which resulted in the Company's interest in the partnership decreasing to 25% with Enogex owning a 75% interest. There are also provisions in the agreement with Enogex which allow for future revenue allocations to the Company above its 25% partnership interest if certain minimum throughput and revenue assumptions are not met.
The rationale behind the merger of the two pipelines was simple: NOARK Pipeline standing alone did not have the access to gas supply necessary to make the pipeline system economically viable. The merged pipeline system now has access to major gas producing fields in Oklahoma. With access to greater regional production, Southwestern expects the pipeline's additional throughput to create new marketing and transportation opportunities and significantly reduce the losses experienced on the project in the past. The merged pipeline also provides the Company's utility systems with additional access to gas supply.
The new integrated system, known as Ozark Pipeline, became operational November 1, 1998, and includes 749 miles of pipeline with a total throughput capacity of 330 MMcfd. Deliveries are currently being made by the integrated pipeline to portions of AWG's distribution system, to Associated, and to the interstate pipelines with which it interconnects. In 1998, NOARK Pipeline had an average daily throughput of 27.3 million cubic feet of gas per day (MMcfd) before the integration with Ozark, compared to average daily throughput of 39.8 MMcfd in 1997, and 57.5 MMcfd in 1996. After the integration in November 1998, Ozark Pipeline had an average daily throughput of 184.6 MMcfd. At December 31, 1998, AWG had transportation contracts with Ozark Pipeline for 82.3 MMcfd of firm capacity. These contracts expire in 2002 and 2003 and are renewable annually thereafter until terminated with 180 days' notice.
Competition
The Company's gas marketing activities are in competition with numerous other companies offering the same services, many of which possess larger financial and other resources than those of Southwestern. Some of these competitors are affiliates of companies with extensive pipeline systems that are used for transportation from producers to end-users. Other factors affecting competition are cost and availability of alternative fuels, level of consumer demand, and cost of and proximity of pipelines and other transportation facilities. The Company believes that its ability to effectively compete within the marketing segment in the future depends upon establishing and maintaining strong relationships with producers and end-users.
NOARK Pipeline previously competed with two interstate pipelines, one of which was the Ozark system, to obtain gas supplies for transportation to other markets. Because of the available transportation capacity in the Arkansas portion of the Arkoma Basin, competition had been strong and had resulted in NOARK Pipeline transporting gas for third parties at rates below the maximum tariffs presently allowed. The integration with Ozark provides increased supplies to transport to both local markets and markets served by the three major interstate pipelines that Ozark Pipeline connects with in eastern Arkansas. As discussed below under "Regulation," FERC's Order No. 636 has generally increased competition in the transportation segment as end-users are now acquiring their own supplies and independently arranging for the transportation of those supplies. The Company believes that Ozark Pipeline will provide the additional supplies necessary to compete more effectively for the transportation of natural gas to end-users and markets served by the interstate pipelines.
Regulation
Since the mid-1980's, the FERC has issued a series of orders, culminating in Order No. 636 in April 1992, that have altered the marketing and transportation of natural gas. Order No. 636 required interstate natural gas pipelines to "unbundle," or segregate, the sales, transportation, storage and other components of their existing sales services, and to separately state the rates for each of the unbundled services. Order No. 636 and subsequent FERC orders issued in individual pipeline proceedings have been the subject of appeals, the results of which have generally been supportive of the FERC's open access policy. Generally, Order No. 636 has eliminated or substantially reduced the interstate pipelines' 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.
Prior to the integration with Ozark, the operations of NOARK Pipeline were regulated by the APSC. The APSC had established a maximum transportation rate of approximately $.285 per dekatherm. The integration of NOARK Pipeline with Ozark resulted in an interstate pipeline system subject to FERC regulations and FERC approved tariffs. The APSC no longer has jurisdiction over NOARK Pipeline's transportation rates and services. The FERC has initially set the maximum transportation rate of Ozark Pipeline at $.2455 per dekatherm.
Environmental Matters
The Company's operations are subject to extensive federal, state and local laws and regulations, including the Comprehensive Environmental Response, Compensation and Liability Act, the Clean Water Act, the Clean Air Act and similar state statutes. These laws and regulations require permits for drilling wells and the maintenance of bonding requirements in order to drill or operate wells and also regulate the spacing and location of wells, the method of drilling and casing wells, the surface use and restoration of properties upon which wells are drilled, the plugging and abandoning of wells, the prevention and cleanup of pollutants and other matters. Southwestern maintains insurance against costs of clean-up operations, but is not fully insured against all such risks.
Compliance with environmental laws and regulations has had no material effect on Southwestern's capital expenditures, earnings, or competitive position. Although future environmental obligations are not expected to have a material impact on the results of operations or financial condition of the Company, there can be no assurance that future developments, such as increasingly stringent environmental laws or enforcement thereof, will not cause the Company to incur material environmental liabilities or costs.
Real Estate Development
A. W. Realty Company (AWR) owns an interest in approximately 160 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 that would minimize the Company's initial capital expenditures, but still enable it to retain an interest in any appreciation in value. This activity, however, does not represent a significant portion of the Company's business.
Employees
At December 31, 1998, the Company had 706 employees, 98 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 1998 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 a part of Exhibit 13 to this filing) for information concerning areas of operation of the Company's business segments. Also, see pages 35-38 (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 23 ("Capital Expenditures" section of "Management's Discussion and Analysis of Financial Condition and Results of Operations"). Also refer to page 47 ("Financial and Operating Statistics") for information concerning gas and oil produced. The following table provides information concerning miles of pipe of the Company's gas distribution systems.
AWG Associated Total
----- ---------- -----
Gathering 390 - 390
Transmission 806 608 1,414
Distribution 3,088 1,674 4,762
----- ----- -----
4,284 2,282 6,566
===== ===== =====
|
The following information is provided to supplement that presented in the 1998 Annual Report to Shareholders:
Leasehold Acreage
Undeveloped Developed
Gross Net Gross Net
----------------- -----------------
Arkoma...................... 141,529 124,048 195,135 145,667
Mid-Continent............... 38,127 16,867 98,980 33,919
Permian..................... 19,190 13,500 44,420 15,781
Gulf Coast.................. 53,340 29,593 88,300 33,204
----------------- -----------------
252,186 184,008 426,835 228,571
================= =================
|
Producing Wells
Gas Oil Total
Gross Net Gross Net Gross Net
------------- ------------- ---------------
Arkoma...................... 818 422.5 - - 818 422.5
Mid-Continent............... 497 199.9 917 305.8 1,414 505.7
Permian..................... 17 6.1 345 218.3 362 224.4
Gulf Coast.................. 35 14.2 33 24.8 68 39.0
------------- ------------- ---------------
1,367 642.7 1,295 548.9 2,662 1,191.6
============= ============= ===============
|
Net Wells Drilled During the Year
Exploratory
Productive
Year Wells Dry Holes Total
---- ---------- --------- -----
1998................ .5 3.9 4.4
1997................ 1.3 3.0 4.3
1996................ 5.3 3.0 8.3
|
Development
Productive
Year Wells Dry Holes Total
---- ---------- --------- -----
1998................ 29.4 6.4 35.8
1997................ 27.5 13.5 41.0
1996................ 29.4 11.8 41.2
|
Wells in Progress as of December 31, 1998
Type of Well Gross Net
------------ ----- ---
Exploratory............................ 5.0 1.1
Development............................ 12.0 4.0
---- ---
Total.................................. 17.0 5.1
==== ===
|
No individually significant discovery or other major favorable or adverse event has occurred since December 31, 1998.
During 1998, 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 1998 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 class action suit was filed against the Company in the Circuit Court of Sebastian County, Arkansas on behalf of royalty owners alleging improprieties in the disbursements of royalty proceeds. A trial was held on the class action suit beginning in late September 1998 that resulted in a verdict against the Company and two of its wholly-owned subsidiaries, SEECO, Inc. and Arkansas Western Gas Company, in the amount of $62.1 million. The trial judge subsequently awarded pre-judgment interest in an amount of $31.1 million, and
post-judgment interest accrued from the date of the judgment at the rate of 10% per annum simple interest. The Company has been required by the state court to post a judgment bond in the amount of $102.5 million (verdict amount plus pre-judgment interest and one year of post-judgment interest) in order to stay the jury's verdict and proceed with an appeal process. The bond was placed by a surety company and was collateralized by unsecured letters of credit.
The verdict was returned following a trial on the issues of the class action lawsuit brought by certain royalty owners of SEECO, Inc., who contend that since 1979 the defendants breached implied covenants in certain oil and gas leases, misrepresented or failed to disclose material facts to royalty owners concerning gas purchase contracts between the Company's subsidiaries, and failed to fulfill other alleged common law duties to the members of the royalty owner plaintiff class. The litigation was commenced in May 1996 and was disclosed by the Company at that time.
The Company believes that the jury's verdict was wrong as a matter of law and fact and that incorrect rulings by the trial judge (including evidentiary rulings and prejudicial jury instructions) provide substantial grounds for a successful appeal. The Company has obtained a temporary stay of the judgment on the jury's verdict and has filed and will vigorously prosecute an appeal in the Arkansas Supreme Court. If the Company is not successful in its appeal from the jury verdict, the Company's financial condition and results of operations would be materially and adversely affected.
In its Form 8-K filed July 2, 1996, the Company disclosed that a lawsuit relating to overriding royalty interests in certain Arkansas oil and gas properties had been filed against it and two of its wholly-owned subsidiaries. The lawsuit, which was brought by a party who was originally included in (but opted out of) the class action litigation described above, involves claims similar to those upon which judgment was rendered against the Company and its subsidiaries. In September 1998, another party who opted out of the class threatened the Company with similar litigation. While the amounts of these pending and threatened claims could be material, management believes, based on its investigations, that the Company's ultimate liability, if any, will not be material to its consolidated financial position or results of operations.
The United States Minerals Management Service (MMS), a federal agency responsible for the administration of federal oil and gas leases, is investigating the Company and its subsidiaries in respect of claims similar to those in the class action litigation. MMS was included in the class action litigation against its objections, but has not pursued further action to remove itself from the class. If MMS does remove itself from the class, its claims may be brought separately under federal statutes that provide for treble damages and civil penalties. In such event, the Company believes it would have defenses that were not available in the class action litigation. While the aggregate amount of MMS's claims could be material, management believes, based on its investigations, that the Company's ultimate liability, if any, will not be material to its consolidated financial position or results of operations.
In 1997, the Company's subsidiary, Southwestern Energy Production Company (SEPCO), filed suit against several parties, including an outside consultant previously employed by SEPCO, alleging breach of contract, fraud, and other causes of action in connection with services performed on SEPCO's south Louisiana exploration projects. On June 23, 1998, the outside consultant filed a counterclaim against SEPCO. The
consultant's primary cause of action relates to a claim that he is contractually entitled to a 25% interest in the Boure' project, one of SEPCO's south Louisiana exploration projects. The counterclaim alleges seven different claims for relief, including breach of contract, fraud, and defamation and requests damages in excess of $10,000,000 for each claim plus punitive damages in excess of $10,000,000. The Company feels these claims are without merit and intends to vigorously contest them. Although the total amount of these 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 operation.
The Company is subject to other litigation and claims that have arisen in the ordinary course of business. The Company accrues for such items when a liability is both probable and the amount can be reasonably estimated. In the opinion of management, the results of such litigation and claims will not have a material effect on the results of operations or the financial position of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted during the fourth quarter of the fiscal year ended December 31, 1998, to a vote of security holders, through the solicitation of proxies or otherwise.
Executive Officers of the Registrant
Years Served as
Name Officer Position Age Officer
---- ---------------- --- -------
Harold M. Korell President and Chief Executive Officer and 54 2
Director
Greg D. Kerley Senior Vice President and Chief Financial Officer 43 9
Alan H. Stevens Senior Vice President, Southwestern Energy Production 54 1
Company and SEECO, Inc.
Debbie J. Branch Senior Vice President, Southwestern Energy Services 47 3
Company and Southwestern Energy Pipeline Company
Charles V. Stevens Senior Vice President, Arkansas Western Gas Company 49 10
|
Mr. Korell was appointed to his present position in October 1998 and assumed the position of Chief Executive Officer on January 1, 1999. He joined the Company in 1997 as Executive Vice President and Chief Operating Officer. From 1992 to 1997, he was employed by American Exploration Company where he was most recently Senior Vice President - Operations. From 1990 to 1992, he was Executive Vice President of McCormick Resources and from 1973 to 1989, he held various positions with Tenneco Oil Company, including Vice President, Production.
Mr. Kerley was appointed to his present position in July 1998. Previously, he served as Senior Vice President Treasurer and Secretary from 1997 to 1998, Vice President - Treasurer and Secretary from 1992 to 1997, and Controller from 1990 to 1992. Mr. Kerley also served as the Chief Accounting Officer from 1990 to 1998.
Mr. 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 employed by Occidental Petroleum Company from 1989 to 1997 where he was most recently Vice President of Worldwide Exploration.
Ms. Branch joined the Company in her present position in 1996. Prior to joining the Company, she was Executive Vice President of Stalwart Energy Company from 1994 to 1996 and founder and President of Vesta Energy Company from 1983 to 1993.
Mr. Charles Stevens has served the Company in his present position since December 1997. Previously, he served as Vice President of Arkansas Western Gas Company from 1988 to 1997.
All officers are elected at the Annual Meeting of the Board of Directors for one-year terms or until their successors are duly elected. There are no arrangements between any officer and any other person pursuant to which he 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 48 and "Common Stock Statistics" included in the Company's Financial and Operating Statistics on page 46 of the 1998 Annual Report to Shareholders 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, 1998, $92.5 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 $6.0 million were paid during 1998.
The Company paid dividends at an annual rate of $.24 per share in 1998 and 1997. 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
Pages 46 and 47 ("Financial and Operating Statistics") of the 1998 Annual Report to Shareholders are hereby incorporated by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, and
The text on pages 17 through 25 ("Management's Discussion and Analysis of Financial Condition and Results of Operations") of the 1998 Annual Report to Shareholders is hereby incorporated by reference.
Item 7.A. Quantitative and Qualitative Disclosure About Market Risks
Market risks relating to the Company's operations result primarily from changes in commodity prices and interest rates, as well as credit risk concentrations. The Company uses natural gas and crude oil swap agreements and options to reduce the volatility of earnings and cash flow due to fluctuations in the prices of natural gas and oil. The Board of Directors has approved risk management policies and procedures to utilize financial products for the reduction of defined commodity price risks. These policies prohibit speculation with derivatives and limit swap agreements to counterparties with acceptable credit standings.
Credit Risks
The Company's financial instruments that are exposed to concentrations of credit risk consist primarily of trade receivables and derivative contracts associated with commodities trading. Concentrations of credit risk with respect to receivables are limited due to the large number of customers and their dispersion across geographic areas. No single customer accounts for greater than 4% of accounts receivable. See the discussion of credit risk associated with commodities trading below.
Interest Rate Risk
The following table provides information on the Company's financial instruments that are sensitive to changes in interest rates. The table presents the Company's debt obligations, principal cash flows and related weighted-average interest rates by expected maturity dates. Variable average interest rates reflect the rates in effect at December 31, 1998 for borrowings under the Company's revolving credit facilities. The Company's policy is to manage interest rates through use of a combination of fixed and floating rate debt. Interest rate swaps may be used to adjust interest rate exposures when appropriate. There were no interest rate swaps outstanding at December 31, 1998.
Fair
Value
Expected Maturity Date 12/31/98
----------------------------------------------------------- --------
1999 2000 2001 2002 2003 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
($ in millions)
Fixed Rate $1.5 - $2.0 $2.0 $2.0 $241.0 $248.5 $257.3
Average Interest Rate 8.86% - 9.36% 9.36% 9.36% 7.19% 7.25%
Variable Rate - - $20.0 $14.9 - - $34.9 $34.9
Average Interest Rate - - 5.33% 5.55% - - 5.42%
|
Commodities Risk
The Company uses over-the-counter natural gas and crude oil swap agreements and options to hedge sales of Company production and marketing activity against the inherent price risks of adverse price fluctuations or locational pricing differences between a published index and the NYMEX (New York Mercantile Exchange) futures market. These swaps include (1) transactions in which one party will pay a fixed price (or variable price) for a notional quantity in exchange for receiving a variable price (or fixed price) based on a published index (referred to as price swaps), and (2) transactions in which parties agree to pay a price based on two different indices (referred to as basis swaps).
The primary market risk related to these derivative contracts is the volatility in market prices for natural gas and crude oil. However, this market risk is offset by the gain or loss recognized upon the related sale of the natural gas or oil that is hedged. Credit risk relates to the risk of loss as a result of non-performance by the Company's counterparties. The counterparties are primarily major investment and commercial banks which management believes present minimal credit risks. The credit quality of each counterparty and the level of financial exposure the Company has to each counterparty are periodically reviewed to ensure limited credit risk exposure.
The following table provides information about the Company's financial instruments that are sensitive to changes in commodity prices. The table presents the notional amount in Bcf (billion cubic feet), the weighted average contract prices, and the total dollar contract amount by expected maturity dates. The "Carrying Amount" for the contract amounts are calculated as the contractual payments for the quantity of gas or oil to be exchanged under futures contracts and do not represent amounts recorded in the Company's financial statements. The "Fair Value" represents values for the same contracts using comparable market prices at December 31, 1998. The net difference between the contract amounts and fair value amounts of the contracts was $8.2 million at December 31, 1998.
Expected Maturity Date
------------------------------------------------------
1999 2000 2001
---- ---- ----
Carrying Fair Carrying Fair Carrying Fair
Amount Value Amount Value Amount Value
-------- ----- -------- ----- -------- -----
Natural Gas:
Swaps with a fixed price receipt
Contract volume (Bcf) 10.1 - -
Weighted average price per Mcf $2.40 - -
Contract amount (in millions) $24.3 $29.4 - - - -
Swaps with a fixed price payment
Contract volume (Bcf) 1.4 - -
Weighted average price per Mcf $2.25 - -
Contract amount (in millions) $3.1 $2.6 - - - -
Basis swaps
Contract volume (Bcf) 6.4 - -
Weighted average basis difference
per Mcf $.095 - -
Contract amount (in millions) $.6 $.4 - - - -
Oil:
Price floor
Contract volume (MBbls) 375 350 325
Weighted average price per Bbl $18.00 $18.00 $18.00
Contract amount (in millions) $6.8 $8.6 $6.3 $7.5 $5.9 $6.7
|
Item 8. Financial Statements and Supplementary Data
Pages 27 through 47 of the 1998 Annual Report to Shareholders are hereby incorporated by reference.
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 18, 1999 (the 1999 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 1999 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 1999 Proxy Statement is hereby incorporated by reference for the purpose of providing information about security ownership of certain beneficial owners and management. Refer to the sections "Security Ownership of Certain Beneficial Owners" and "Security Ownership of Directors, Nominees, and Executive Officers" for information about security ownership of certain beneficial owners and management.
Item 13. Certain Relationships and Related Transactions
The 1999 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 27 through 45 of its 1998 Annual Report to
Shareholders and the report of independent public accountants on page 26 of such
report are hereby incorporated by reference:
Report of Independent Public Accountants.
Consolidated Balance Sheets as of December 31, 1998 and 1997.
Consolidated Statements of Income for the years ended December 31, 1998, 1997, and 1996.
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997, and 1996.
Consolidated Statements of Retained Earnings for the years ended December 31, 1998, 1997, and 1996.
Notes to Consolidated Financial Statements, December 31, 1998, 1997, and 1996.
(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 26 - 28) are filed as part of, or incorporated by reference into, this Report.
(b) Reports on Form 8-K:
A Current Report on Form 8-K was filed on October 16, 1998,
referencing a press release issued that day announcing the verdict of
a state court jury in a class action royalty lawsuit against the
Company and two of its subsidiaries.
A Current Report on Form 8-K was filed on October 30, 1998, referencing a press release issued October 29, 1998, announcing the appointment by the Company's Board of Directors of Harold Korell to replace Charles E. Scharlau as Chief Executive Officer of the Company effective January 1, 1999. Mr. Korell was also elected to the Company's Board of Directors effective immediately.
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.
Dated: March 26, 1999 BY: /s/ GREG D. KERLEY
-------------------------------
Greg D. Kerley
Senior Vice President
and Chief Financial Officer
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 26, 1999.
/s/ HAROLD M. KORELL President and Chief Executive Officer
---------------------------------- and Director
Harold M. Korell
/s/ GREG D. KERLEY Senior Vice President
---------------------------------- and Chief Financial Officer
Greg D. Kerley
/s/ STANLEY T. WILSON Controller and Chief Accounting Officer
----------------------------------
Stanley T. Wilson
/s/ CHARLES E. SCHARLAU Director and Chairman
----------------------------------
Charles E. Scharlau
/s/ LEWIS E. EPLEY, JR. Director
----------------------------------
Lewis E. Epley, Jr.
/s/ JOHN PAUL HAMMERSCHMIDT Director
----------------------------------
John Paul Hammerschmidt
/s/ ROBERT L. HOWARD Director
----------------------------------
Robert L. Howard
/s/ KENNETH R. MOURTON Director
----------------------------------
Kenneth R. Mourton
|
Supplemental Information to be Furnished With Reports Filed Pursuant to
Section 15(d) of the Act by Registrants Which Have Not Registered Securities
Pursuant of Section 12 of the Act.
Not Applicable
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 Associated Natural Gas
Company, dated October 1, 1990, and as amended September 30, 1997
(original contract incorporated by reference to Exhibit 10 to Annual
Report on Form 10-K for the year ended December 31, 1990; amendment
incorporated by reference to Exhibit 10.2 to Annual Report on Form 10-K
for the year ended December 31, 1997).
10.2 Compensation Plans:
(a) Summary of Southwestern Energy Company Annual and Long-Term
Incentive Compensation Plan, effective January 1, 1985, as
amended July 10, 1989 (replaced by Southwestern Energy Company
Incentive Compensation Plan, effective January 1, 1993) (original
plan incorporated by reference to Exhibit 10 to Annual Report on
Form 10-K for the year ended December 31, 1984; first amendment
thereto incorporated by reference to Exhibit 10 to Annual Report
on Form 10-K for the year ended December 31, 1989).
(b) Southwestern Energy Company Incentive Compensation Plan,
effective January 1, 1993, and Amended and Restated as of January
1, 1999 (amended and restated plan filed herewith).
(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).
26
|
Exhibit
No. Description
------- -----------
(d) Southwestern Energy Company 1993 Stock Incentive Plan, dated
April 7, 1993 and Amended and Restated as of February 18, 1998
(amended and restated plan filed herewith).
(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).
10.3 Southwestern Energy Company Supplemental Retirement Plan, adopted May
31, 1989, and Amended and Restated as of December 15, 1993, and as
further amended February 1, 1996 (amended and restated plan incorporated
by reference to Exhibit 10.5 to Annual Report on Form 10-K for the year
ended December 31, 1993; amendment dated February 1, 1996, incorporated
by reference to Exhibit 10.5 to Annual Report on Form 10-K for the year
ended December 31, 1995).
10.4 Southwestern Energy Company Supplemental Retirement Plan Trust, dated
December 30, 1993 (incorporated by reference to Exhibit 10.6 to Annual
Report on Form 10-K for the year ended December 31, 1993).
10.5 Southwestern Energy Company Nonqualified Retirement Plan, effective
October 4, 1995 (incorporated by reference to Exhibit 10.7 to Annual
Report of Form 10-K for the year ended December 31, 1995).
10.6 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).
10.7 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).
10.8 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).
10.9 Employment and Consulting Agreement for Charles E. Scharlau, dated May
21, 1998 (filed herewith).
|
10.10 Employment Agreement for Harold M. Korell, effective April 28, 1997 (incorporated by reference to Exhibit 10.15 to Annual Report on Form 10-K for the year ended December 31, 1997).
10.11 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).
10.12 Form of Executive Severance Agreement for the Executive Officers of the Company, effective February 17, 1999 (filed herewith).
10.13 Omnibus Project Agreement of NOARK Pipeline System, Limited Partnership by and among Southwestern Energy Pipeline Company, Southwestern Energy Company, Enogex Arkansas Pipeline Corporation, and Enogex Inc., dated January 12, 1998 (incorporated by reference to Exhibit 10.17 to Annual Report on Form 10-K for the year ended December 31, 1997).
10.14 Amended and Restated Limited Partnership Agreement of NOARK Pipeline System, Limited Partnership dated January 12, 1998 and amended June 18, 1998 (amended and restated agreement incorporated by reference to Exhibit 10.18 to Annual Report on Form 10-K for the year ended December 31, 1997; first amendment thereto filed herewith).
13. 1998 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. Financial Data Schedule for the year ended December 31, 1998 (filed herewith).
SOUTHWESTERN ENERGY COMPANY
INCENTIVE COMPENSATION PLAN
(Amended and Restated as of January 1, 1999)
The name of this plan shall be the Southwestern Energy Company Incentive Compensation Plan ("Plan"). The Plan Sponsor is Southwestern Energy Company (the "Company"). The Plan is effective for fiscal years of the Company commencing on or after January 1, 1993 and is hereby amended and restated as of January 1, 1999. The Plan Year shall be each successive year beginning January 1 and ending December 31.
A. PURPOSE The purpose of this Plan is to attract, retain and motivate key employees by providing cash and stock incentive compensation to certain key employees of the Company and its Subsidiaries (as listed below) who have a significant impact on earnings, growth and shareholder value by rewarding both organizational and individual performance. The participating entities include Southwestern Energy Company ("Corporate"), Arkansas Western Gas Company ("Utility"), Southwestern Energy Production Company and SEECO, Inc. (together, "E & P"), and Southwestern Energy Services Company ("Marketing").
B. ADMINISTRATION
The Compensation Committee ("Committee") of the Board of Directors
("Board") of the Company shall have full power and authority to review and
approve the designation of Participants, to approve annually the performance
measures and payout thresholds, and to promulgate such rules and regulations as
it deems necessary for the proper administration of the
Plan, to interpret the provisions and supervise the administration of the Plan, to certify prior to the payment of any award under the Plan that the appropriate performance measures have been achieved giving rise to such awards, and to take all action in connection therewith or in relation to the Plan as it deems necessary or advisable. When authorizing action or taking action with respect to this Plan, the Committee and/or the Board shall act without the vote of any directors who shall fail to meet the definition of an Outside Director as defined in Internal Revenue Code section 162(m) and the regulations thereunder.
C. PARTICIPATION
1. Eligibility--Executives
Only active employees of the Company or its subsidiaries who are
employed in a key management capacity may be designated as Participants under
the Plan.
2. Designation and Removal of Participants Participation in the Plan shall be determined on an annual basis for each calendar year as early as practicable in each year. No person shall be entitled to any award under this Plan for any year unless he or she is so designated as a Participant for that year. The CEO shall make recommendations to the Committee for the executive Participants in the Plan and their corresponding Level of Participation. The Committee shall have approval authority as to the list of executive Participants and their corresponding level of participation. The CEO will establish annually the employees who will participate in Level VI and below bonus tiers. The Committee may add to or delete individuals from the list of designated Participants from time to time, at its sole discretion, during the year or for subsequent years. Exhibit 1 identifies those selected Participants for the Plan Year, their corresponding Level of Participation and their Performance
Unit. A Performance Unit is the Company, Subsidiary or business unit upon whose Performance Measures the Participant's awards will be determined.
3. Notice of Participation As soon as reasonably practicable, each person who is selected as a Participant in the Plan for a year will be notified of his selection and his Level of Participation and the criteria for awards.
4. Partial Payments: New Hires If an individual becomes a new Participant during the Plan Year, the incentive compensation award will be earned on the basis of one-twelfth of the annual incentive compensation for each full month of employment in the calendar year of initial employment or promotion. Any exceptions shall be approved by the Compensation Committee.
D. THRESHOLDS; PERFORMANCE CRITERIA
1. Organizational Performance
In connection with the designation of Participants for each year, the
Committee shall establish each Plan Year minimum, target and maximum
organization performance threshold levels ("Threshold Levels") for such Plan
Year based on Company and Subsidiary performance measures ("Performance
Measures"). The Committee may at its discretion make adjustments to the
performance threshold levels or to the actual Performance Measures to remove the
effect of extraordinary items or changes in accounting methods.
The Performance Measures to be used for each Performance Unit (Corporate, Utility, E&P, and Marketing) will be recommended by the CEO, but shall be set by the Committee. The
Weighting Factors and performance Threshold Levels are designated on Exhibit 3 and each Performance Measure is defined on Exhibit 3a. The Performance Measures and related definitions may be revised annually if deemed necessary upon approval by the Committee.
Achievement of the minimum, target or maximum Threshold Levels shall determine the bonus percentages ("Bonus Percentages") to be used in calculating bonus amounts as set forth herein. The Bonus Percentages applicable to each Threshold Level may be established by the Committee from time to time as outlined in Exhibit 2. For each Company Performance Measure, a bonus amount shall be calculated for the year equal to the Bonus Percentage of Salary (as defined below) for each Participant, adjusted by a percentage ("Weighting Factor") applicable to each Company Performance Measure as established by the Committee from time to time for each year. The Weighting Factors shall be as outlined in Exhibit 3, but may be changed by the Committee from year to year, and additional Company Performance Measures may be established, so long as the sum of the Weighting Factors is always equal to 100 percent. The sum of the individual bonus amounts so established for each Company Performance Measure shall be equal to the Organizational Performance Amount. The formulas for calculating the organizational performance awards are contained on Exhibit 4.
2. Individual Performance Award Amount The Plan allows for discretionary awards to be made to Participants upon the recommendation of the Company's Chief Executive Officer and the approval of the Committee. These awards will be based upon an individual Participant's performance against individually established goals or an overall assessment of a Participant's contribution in areas that cannot be quantifiably measured. The amount so determined shall be the Participant's "Individual
Performance Award Amount." A Participant's maximum Individual Performance Award Amount is equal to the Total Bonus Opportunity at the Target Performance level. However, in no event can the amount of Individual Performance Award Amount payable result in a Participant receiving a total bonus award greater than the Total Bonus Opportunity, given the organizational performance level achieved.
3. Final Determination of Bonus Each Participant's bonus for a year shall be equal to the sum of (i) the Organizational Performance Amount for such Participant and (ii) the Individual Performance Award Amount for such Participant.
4. Chief Executive Officer's Discretionary Pool In each Plan Year, the Chief Executive Officer of the Company, in his sole discretion, will be authorized to make awards from the Chief Executive Officer's Discretionary Pool to any employee of the Company or its Subsidiaries who is not a Participant in the Plan. Each Plan Year, the Chief Executive Officer, with the approval of the Committee, will establish the amount to be allocated to the Chief Executive Officer's Discretionary Pool. Initially, the amount will be set at 1% of the aggregate base salaries of the exempt employees who are not specified Participants under this Southwestern Energy Company Incentive Compensation Plan.
5. Salary
Salary for purposes of computing bonuses hereunder shall be equal to the average annual base salary in effect for such Participant for the Plan Year.
E. PAYMENT OF AWARD The total bonus payable for any Plan Year shall be payable to each Participant as soon as practicable after the date of determination of the amount thereof and a minimum of 75 percent of such amount shall be payable in cash. The balance shall be payable as the Committee may determine in its sole discretion, either in cash or in an award of shares of common stock of the Company ("Shares") having an aggregate Fair Market Value (FMV) equal to the balance of the bonus. The FMV shall be equal to the closing sale price of the Company's common stock as reported on the New York Stock Exchange for the day immediately preceding the date of payment of such bonus. The Shares so issued shall be subject to the restrictions set forth below.
The Committee may, in its absolute discretion, in connection with any grant of Restricted Stock or at any time thereafter, grant a cash bonus, payable promptly after the date on which the Participant is required to recognize income for federal income tax purposes in connection with such grant of Restricted Stock, in such amounts as the Committee shall determine from time to time; provided, however that in no event shall the amount of a cash bonus exceed the FMV of the related shares of Restricted Stock on such date. A cash bonus shall be subject to such conditions as the Committee shall determine at the time of the grant of such cash bonus and also subject to the Company's 1993 Stock Incentive Plan ("the Stock Plan").
Unless the Committee otherwise determines, no bonus shall be payable to any Participant who is not an active employee of the Company or one of its subsidiaries at the end of the Plan Year for which such bonus is payable.
F. RESTRICTED SHARES AWARDED Any Restricted Shares awarded to a Participant under this Plan will be awarded under the Stock Plan. As such, the terms and provisions of the Stock Plan shall apply and control any Restricted Shares awarded under this Plan.
G. PAYMENT OF AWARDS-CHANGE IN CONTROL
1. In the event a Participant's employment is terminated on or after a
Change in Control (as defined below) (a) by the Company (other than for Cause as
defined below) (b) voluntarily by any Participant with whom the Company has not
entered into a severance agreement or any agreement in the nature of a severance
agreement for Good Reason (as defined below) or (c) voluntarily by any
Participant with whom the Company has entered into a severance agreement or an
agreement in the nature of a severance agreement, pursuant to the same
conditions (if any) for payment in the event of voluntary termination of
employment on or after a Change in Control provided for in such severance
agreements:
(i) Any annual incentive determined or determinable but not yet paid as of the date of such termination of employment, immediately shall be paid.
(ii) Any annual incentive not yet determined as of the date of such termination of employment, immediately shall be determined pursuant to the subsection 3 below
entitled "Partial Payments: Termination of Employment" and shall be paid in a lump sum to such Participant.
2. For all purposes under the Plan, (a) the term "Cause," when used in connection with the termination of the Participant's employment shall mean (i) the willful and continued failure by the Participant substantially to perform his duties and obligations (other than any such failure resulting from his or her Disability) or (ii) the willful engaging by the Participant in misconduct which is materially injurious to the Company. For purposes of this definition, no act, or failure to act, on a Participant's part shall be considered "willful" unless done, or omitted to be done, by the Participant in bad faith and without reasonable belief that his or her action or omission was in the best interests of the Company or a participating Subsidiary.
(b) "Change in Control" shall mean the occurrence of any of the following:
(i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act"), and "Acquiring Person") becomes the "beneficial owner" (as such term is defined in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of Southwestern Energy Company representing 20 percent or more of the combined voting power of Southwestern Energy Company's then outstanding securities, excluding any employee benefit plan sponsored or maintained by Southwestern Energy Company (or any trustee of such plan as trustee);
(ii) Southwestern Energy Company's stockholders approve an agreement to merge or consolidate Southwestern Energy Company with another corporation (other than a
corporation 60 percent or more of which is controlled by, or is under common control with, Southwestern Energy Company);
(iii) any individual who is nominated by the Board for election to the Board on any date fails to be so elected as a direct or indirect result of any proxy fight or contested election for positions on the Board;
(iv) a "Change in Control" of Southwestern Energy Company of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Exchange Act occurs; or
(v) a majority of the Board determines in its sole and absolute discretion that there has been a Change in Control of Southwestern Energy Company or that there will be a Change in Control of Southwestern Energy Company upon the occurrence of certain specified events and such events occur.
(c) "Disability" shall mean a physical or mental incapacity of the Participant which entitles the Participant to benefits at least equal to two-thirds of his base salary during the period of such incapacity under any long term disability plan applicable to him and maintained by the Company and in effect immediately prior to a Change in Control.
(d) "Good Reason," when used with reference to a termination by the Participant of his employment with the Company, shall mean:
(i) the assignment to the Participant of any duties inconsistent with, or the reduction of hours or functions associated with, his positions, duties, responsibilities and status with the Company immediately prior to a Change in Control, or any removal of the Participant from, or any failure to reelect the Participant to, any positions or offices that the Participant held immediately prior to a Change in Control, except in connection with the termination of the Participant's employment by the Company for Cause or on account of Disability pursuant to the requirements of the Plan;
(ii) a reduction of the Participant's base salary as in effect immediately prior to a Change in Control, except in connection with the termination of the Participant's employment by the Company for Cause or on account of Disability pursuant to the requirements of the Plan;
(iii) a change in the Participant's principal work location to a location more than forty (40) miles from the Participant's work location immediately prior to a Change in Control except for required travel on business to an extent substantially consistent with the Participant's business travel obligations immediately prior to a Change in Control;
(iv) (A) the failure by the Company to continue in effect any employee benefit plan, program or arrangement (including, without limitation, "employee benefit plans" within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974) in which the Participant was participating immediately prior to a Change in Control (or substitute plans, programs or arrangements providing the Participant with substantially similar benefits), (B) the taking of any action, or the failure to take any action, by the
Company which could (1) adversely affect the Participant's participation in, or materially reduce the Participant's benefits under any of such plans, programs or arrangements, (2) materially adversely affect the basis for computing benefits under any of such plans, programs or arrangements or (3) deprive the Participant of any material fringe benefit enjoyed by the Participant immediately prior to a Change in Control or (C) the failure by the Company to provide the Participant with the number of paid vacation days to which the Participant was entitled immediately prior to a Change in Control in accordance with the Company's vacation policy applicable to the Participant then in effect, except, in each case, in connection with the termination of the Participant's employment by the Company for Cause or on account of Disability pursuant to the requirements of the Plan;
(v) the failure by the Company to pay the Participant any portion of the Participant's current compensation, or any portion of the Participant's compensation deferred under any plan, agreement or arrangement of or with the Company, within seven (7) days of the date such compensation is due;
(vi) a material increase in the required working hours of the Participant from that required prior to a Change in Control;
(vii) the failure by the Company to obtain an assumption of the obligations of the Company under the Plan by any successor to the Company; or
(viii) any termination of the Participant's employment by the Company which is not effected pursuant to the requirements of the Plan.
3. Partial Payments: Termination of Employment
In the event of a Participant's termination of employment, other than
(a) a termination by the Company (other than for Cause) on or after a Change in
Control, (b) voluntarily by any Participant with whom the Company has not
entered into a severance agreement or any agreement in the nature of a severance
agreement for Good Cause (as defined above) on or after a Change in Control, (c)
voluntarily by any Participant with whom the Company has entered into a
severance agreement or an agreement in the nature of a severance agreement on or
after a Change in Control, pursuant to the same conditions (if any) provided for
in such severance agreement for payment in the event of a voluntary termination
of employment on or after a Change in Control, (d) by the Participant's death,
(e) by disability or (f) by retirement, any unpaid incentive compensation awards
shall be subject to forfeiture at the discretion of the Committee. If the
termination is a result of retirement or Disability, the Participant shall be
considered to have earned one-twelfth of the annual incentive compensation award
of a particular year for each full month of employment in the calendar year of
retirement.
In the event of termination by the Company (other than for Cause) on or after a Change in Control, voluntarily by any Participant with whom the Company has not entered into a severance agreement or any agreement in the nature of a severance agreement for Good Reason on or after a Change in Control, or voluntarily by any Participant with whom the Company has entered into a severance agreement or an agreement in the nature of a severance agreement, on or after a Change in Control pursuant to the same conditions (if any) for payment in the event of a voluntary termination of employment on or after a Change in Control provided for in such severance agreement and in the event the Participant's employment terminates prior to the end of any calendar year:
(a) The Participant's annual incentive compensation award for the year of termination shall be determined based on the number of full months in the calendar year in which the termination of employment occurs during which the employee was a Participant in this Plan. In the event the Participant's employment terminates prior to the end of any calendar year, the performance measures used in determining a Participant's annual incentive compensation award shall be determined by annualizing Southwestern Energy Company's results to date with respect to each Performance Measure. Each of the Performance Measures for such incomplete calendar year for the respective Performance Unit (i.e. Corporate, Utility, E&P or Marketing) shall be deemed to be Southwestern Energy Company's projected Performance Measures (i.e. Cash Flow, EPS, G&A, Production, etc.) for such calendar year (as reflected in Southwestern Energy Company's Annual Budget for such calendar year, prepared in the immediately preceding calendar year) plus or minus a percentage of such projected Performance Measure, equal to the percentage by which Southwestern Energy Company's actual annualized Performance Measure during such incomplete calendar year, exceeds or is exceeded by the projected Performance Measure for such incomplete calendar year.
(b) The Individual Performance Award Amount for such Participant shall be the Compensation Committee's most recent estimation of such Participant's performance for the calendar year in which the Participant's employment terminates or, if there shall be no such estimation and the Participant was a Participant in the Plan in the immediately preceding calendar year, the Individual Performance Award Amount for such Participant for such immediately preceding calendar year.
For all purposes under the Plan, on or after a Change in Control, the term Compensation Committee shall mean the Compensation Committee of the Board as it existed immediately prior to such Change in Control.
H. NO VESTED RIGHTS Neither the adoption of the Plan nor any action of the Board or the Committee shall be deemed to give any employee any right to be granted participation in the Plan. Nothing contained in the Plan shall confer any right upon any employee concerning the continuation of employment with the Company or interfere in any way with the right of the Company to terminate his employment at any time. Nothing in the Plan shall be construed to prevent the Company from taking any corporate action which is deemed by the Company to be appropriate or in its best interest, whether or not such action will have an adverse effect on the Plan or any Participant or any award made thereunder. No employees, beneficiaries or other person shall have any claim against the Company or any Subsidiary as a result of any action and no Participant shall have any claim or legal right to a bonus hereunder until such time as the bonuses are actually paid pursuant to Section E hereof.
I. NON-ASSIGNMENT The interest of any Participant under the Plan shall not be assignable either by voluntary or involuntary assignment or by operation of law.
J. TERM OF THE PLAN Awards may be granted pursuant to this Plan for any year ending on or before December 31, 2009 unless the Plan is sooner terminated by the Board of Directors.
K. AMENDMENTS The Board may, from time to time, amend, alter, suspend or discontinue the Plan or alter or amend any and all awards of Shares granted thereunder prior to the issuance thereof. The power of the Board to amend the Plan shall include the power to amend the Plan, without the approval of shareholders, to provide that all bonuses shall be payable in cash.
APPENDIX
SOUTHWESTERN ENERGY COMPANY
1993 STOCK INCENTIVE PLAN
(As Amended and Restated as of February 18, 1998)
1. Purpose of the Plan This Southwestern Energy Company 1993 Stock Incentive Plan is intended to promote the interests of the Company and its shareholders by providing the Company's key employees on whose judgment, initiative and efforts the successful conduct of the business of the Company largely depends and who are largely responsible for the management, growth and protection of the business of the Company, with appropriate incentives and rewards to encourage them to continue in the employ of the Company and to maximize their performance.
2. Definitions As used in the Plan, the following definitions apply to the terms indicated below:
(a) "Board of Directors" shall mean the Board of Directors of the Company.
(b) "Cause," when used in connection with the termination of a Participant's employment with the Company, shall mean the termination of the Participant's employment by the Company on account of (i) the willful and continued failure by the Participant substantially to perform his duties and obligations to the Company (other than any such failure resulting from his incapacity due to physical or mental illness) or (ii) the willful engaging by the Participant in misconduct which is materially injurious to the Company. For purposes of this Section 2(b), no act, or failure to act, on a Participant's part shall be considered "willful" unless done, or omitted to be done, by the Participant in bad faith and without reasonable belief that his action or omission was in the best interests of the Company
(c) "Cash Bonus" shall mean an award of a bonus payable in cash pursuant to Section 13 hereof.
(d) "Change in Control" shall mean the occurrence of any of the following:
(i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act, an "Acquiring Person") becomes the "beneficial owner" (as such term is defined in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities, excluding any employee benefit plan sponsored or maintained by the Company (or any trustee of such plan acting as trustee);
(ii) the Company's stockholders approve an agreement to merge or consolidate the Company with another corporation (other than a corporation 50% or more of which is controlled by, or is under common control with, the Company);
(iii) any individual who is nominated by the Board of Directors for election to the Board of Directors on any date fails to be so elected as a direct or indirect result of any proxy fight or contested election for positions on the Board;
(iv) a "change in control" of the Company of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Exchange Act occurs; or
(v) a majority of the Board determines in its sole and absolute discretion that there has been a Change in Control of the Company or that there will be a Change in Control of the Company upon the occurrence of certain specified events and such events occur.
(e) "Code" shall mean the Internal Revenue Code of 1986.
(f) "Committee" shall mean the Compensation Committee of the Board of Directors or such other committee as the Board of Directors shall appoint from time to time to administer the Plan; provided, however; that the Committee shall at all times consist of two or more persons, each of whom shall be a "disinterested person" within the meaning of Rule 16b-3 promulgated under Section 16 of the Exchange Act.
(g) "Company" shall mean Southwestern Energy Company, an Arkansas corporation, and each of its Subsidiaries.
(h) "Company Stock" shall mean the common stock of the Company.
(i) "Disability" shall mean any physical or mental condition that would qualify a Participant for a disability benefit under the long-term disability plan maintained by the Company and applicable to him.
(j) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
(k) the "Fair Market Value" of a share of Company Stock with respect to any day shall be (i) the closing sales price on the immediately preceding business day of a share of Company Stock as reported on the principal securities exchange on which shares of Company Stock are then listed or admitted to trading or (ii) if not so reported, the average of the closing bid and ask prices on the immediately preceding business day as reported on the National Association of Securities Dealers Automated Quotation System or (iii) if not so reported, as furnished by any member of the National Association of Securities Dealers, Inc. selected by the Committee. In the event that the price of a share of Company Stock shall not be so reported, the Fair Market Value of a share of Company Stock shall be determined by the Committee in its absolute discretion.
(1) "Incentive Award" shall mean an Option, LSAR, Tandem SAR, Stand-Alone SAR, share of Restricted Stock, share of Phantom Stock, Stock Bonus or Cash Bonus granted pursuant to the terms of the Plan.
(m) "Incentive Stock Option" shall mean an Option that is an "incentive stock option" within the meaning of Section 422 of the Code and that is identified as an Incentive Stock Option in the agreement by which it is evidenced.
(n) "Issue Date" shall mean the date established by the Committee on which certificates representing shares of Restricted Stock shall be issued by the Company pursuant to the terms of Section 10(d) hereof.
(o) "LSAR" shall mean a limited stock appreciation right that is granted pursuant to the provisions of Section 7 hereof and which relates to an Option. Each LSAR shall be exercisable only upon the occurrence of a Change in Control and only in the alternative to the exercise of its related Option.
(p) "Non-Qualified Stock Option" shall mean an Option that is not an Incentive Stock Option.
(q) "Option" shall mean an option to purchase shares of Company Stock granted pursuant to Section 6 hereof. Each Option shall be identified as either an Incentive Stock Option or a Non-Qualified Stock Option in the agreement by which it is evidenced.
(r) "Participant" shall mean an employee of the Company who is eligible to participate in the Plan and to whom an Incentive Award is granted pursuant to the Plan, and, upon his death, his successors, heirs, executors and administrators, as the case may be.
(s) "Person" shall mean a "person," as such term is used in Sections 13(d) and 14(d) of the Exchange Act.
(t) "Phantom Stock" shall mean the right to receive in cash the Fair Market Value of a share of Company Stock, which right is granted pursuant to Section 11 hereof and subject to the terms and conditions contained therein.
(u) "Plan" shall mean the Southwestern Energy Company 1993 Stock Incentive Plan, as it may be amended from time to time.
(v) "Restricted Stock" shall mean a share of Company Stock which is granted pursuant to the terms of Section 10 hereof and which is subject to the restrictions set forth in Section 10(c) hereof for so long as such restrictions continue to apply to such share.
(w) "Securities Act" shall mean the Securities Act of 1933, as amended.
(x) "Stand-Alone SAR" shall mean a stock appreciation right granted pursuant to Section 9 hereof which is not related to any Option.
(y) "Stock Bonus" shall mean a grant of a bonus payable in shares of Company Stock pursuant to Section 12 hereof.
(z) "Subsidiary" shall mean any corporation in which, at the time of reference, the Company owns, directly or indirectly, stock comprising more than fifty percent of the total combined voting power of all classes of stock of such corporation.
(aa) "Tandem SAR" shall mean a stock appreciation right granted pursuant to Section 8 hereof which is related to an Option. Each Tandem SAR shall be exercisable only to the extent its related Option is exercisable and only in the alternative to the exercise of its related Option.
(bb) "Vesting Date" shall mean the date established by the Committee on which a share of Restricted Stock or Phantom Stock may vest.
3. Stock Subject to the Plan
Under the Plan, the Committee may grant to Participants (i) Options, (ii)
LSARs, (iii) Tandem SARs, (iv) Stand-Alone SARs, (v) shares of Restricted Stock,
(vi) shares of Phantom Stock, (vii) Stock Bonuses and (viii) Cash Bonuses.
Subject to adjustment as provided in Section 14 hereof, the Committee may grant: (a) Options, shares of Restricted Stock, and Stock Bonuses under the Plan with respect to a number of shares of Company Stock that in the aggregate, does not exceed 1,700,000 shares; and (b) Stand-Alone SARs, shares of Phantom Stock and Cash Awards with respect to a number of shares of Company Stock that in the aggregate does not exceed 1,700,000 shares.
To the extent Incentive Awards granted under the Plan are exercised, the shares covered will be unavailable for future grants under the Plan. To the extent that Options together with any related rights granted under the Plan terminate, expire or are cancelled without having been exercised, or; in the case of LSARs, Stand-Alone SARs or Tandem SARs exercised for cash, new Incentive Awards may be made with respect to the shares covered thereby. In the event that any shares of Restricted Stock or Phantom Stock, or any shares of Company Stock granted in a Stock Bonus are forfeited or cancelled for any reason, such shares (together with any related Cash Bonuses) shall again be available for grants under the Plan; provided that, if and to the extent required under Rule 16b-3 promulgated under Section 16(b) of the Exchange Act, no shares of Company Stock in respect of a forfeited Stock Bonus or grant of Restricted Stock shall again be available for grant to the extent that, prior to such forfeiture, the Participant had any benefits of ownership such as the present right to receive dividends distributed with respect thereto.
Shares of Company Stock issued under the Plan may be either newly issued shares or treasury shares, at the discretion of the Committee.
4. Administration of the Plan The Plan shall be administered by the Committee. The Committee shall from time to time designate the key employees of the Company who shall be granted Incentive Awards and the amount and type of such Incentive Awards.
The Committee shall have full authority to administer the Plan, including authority to interpret and construe any provision of the Plan and the terms of any Incentive Award issued under it and to adopt such rules and regulations for administering the Plan as it may deem necessary or appropriate. Decisions of the Committee shall be final and binding
on all parties.
The Committee may, in its absolute discretion, without amendment to the Plan, (i) accelerate the date on which any Option or Stand-Alone SAR granted under the Plan becomes exercisable or otherwise adjust, to the extent consistent with other provisions of the Plan, any of the terms of such Option or Stand-Alone SAR other than a downward adjustment to the exercise price, (ii) accelerate the Vesting Date or Issue Date, or waive any condition imposed hereunder, with respect to any share of Restricted Stock granted under the Plan or otherwise adjust any of the terms of such Restricted Stock and (iii) accelerate the Vesting Date or waive any condition imposed hereunder, with respect to any share of Phantom Stock granted under the Plan or otherwise adjust any of the terms of such Phantom Stock.
In addition, the Committee may, in its absolute discretion and without
amendment to the Plan, grant Incentive Awards of any type to Participants on the
condition that such Participants surrender to the Committee for cancellation
such other Incentive Awards of the same or any other type as the Committee
specifies. Notwithstanding Section 3 herein, prior to the surrender of such
other Incentive Awards, Incentive Awards granted pursuant to the preceding
sentence of this Section 4 shall not count against the limits set forth in such
Section 3. However, stock options and stock appreciation rights may not be
surrendered for other stock options or stock appreciation rights with a lower
exercise price unless both count towards the aggregate limitations under the
Stock Plan.
Whether an authorized leave of absence, or absence in military or government service, shall constitute termination of employment shall be determined by the Committee subject to applicable law.
No member of the Committee shall be liable for any action, omission, or determination relating to the Plan, and the Company shall indemnify and hold harmless each member of the Committee and each other director or employee of the Company to whom any duty or power relating to the administration or interpretation of the Plan has been delegated against any cost or expense (including counsel fees) or liability (including any sum paid in settlement of a claim with the approval of the Committee) arising out of any action, omission or determination relating to the Plan, unless, in either case, such action, omission or determination was taken or made by such member, director or employee in bad faith and without reasonable belief that it was in the best interests of the Company.
5. Eligibility The persons who shall be eligible to receive Incentive Awards pursuant to the Plan shall be such key employees of the Company who are largely responsible for the management, growth and protection of the business of the Company (including officers of the Company, whether or not they are directors of the Company) as the Committee shall select from time to time. Directors who are not employees or officers of the Company shall not be eligible to receive Incentive Awards under the Plan.
6. Options The Committee may grant Options pursuant to the Plan. Such Options shall be evidenced by agreements in such form as the Committee shall from time to time approve. Options shall comply with and be subject to the following terms and conditions:
(a) Identification of Options All Options granted under the Plan shall be clearly identified in the agreement evidencing such Options as either Incentive Stock Options or as Non-Qualified Stock Options.
(b) Exercise Price The exercise price of any Option granted under the Plan shall be not less than 100% of the Fair Market Value of a share of Company Stock on the date on which such Option is granted.
(c) Term and Exercise of Options
(1) Each Option shall be exercisable on such date or dates, during such
period and for such number of shares of Company Stock as shall be determined by
the Committee on the day on which such Option is granted and set forth in the
Option agreement with respect to such Option; provided, however; that no Option
shall be exercisable after the expiration of ten years from the date such Option
was granted; and, provided, further; that each Option shall be subject to
earlier termination, expiration or cancellation as provided in the Plan.
(2) Each Option shall be exercisable in whole or in part; provided, that no partial exercise of an Option shall be for an aggregate exercise price of less than $1,000. The partial exercise of an Option shall not cause the expiration, termination or cancellation of the remaining portion thereof. Upon the partial exercise of an Option, the agreements evidencing such Option and any related LSARs and Tandem SARs, marked with such notations as the Committee may deem appropriate to evidence such partial exercise, shall be returned to the Participant exercising such Option together with the delivery of the certificates described in Section 6(c)(5) hereof.
(3) An Option shall be exercised by delivering notice to the Company's principal office, to the attention of its Secretary, no less than one business day in advance of the effective date of the proposed exercise. Such notice shall be accompanied by the agreements evidencing the Option and any related LSARs and Tandem SARs, shall specify the number of shares of Company Stock with respect to which the Option is being exercised and the effective date of the proposed exercise and shall be signed by the Participant. The Participant may withdraw such notice at any time prior to the close of business on the business day immediately preceding the effective date of the proposed exercise, in which case such agreements shall be returned to him. Payment for shares of Company Stock purchased upon the exercise of an Option shall be made on the effective date of such exercise either (i) in cash, by certified check, bank cashier's check or wire transfer or (ii) subject to the approval of the Committee, in shares of Company Stock owned by the Participant and valued at their Fair Market Value on the effective date of such exercise, or partly in shares of Company Stock with the balance in cash, by certified check, bank cashier's check or wire transfer. Any payment in shares of Company Stock shall be effected by the delivery of such shares to the Secretary of the Company, duly endorsed in blank or accompanied by stock powers duly executed in blank, together with any other documents and evidences as the Secretary of the Company shall require from time to time.
(4) During the lifetime of a Participant, each Option granted to the Participant shall be exercisable only by the Participant. No Option shall be assignable or transferrable otherwise than by will or by the laws of descent or distribution, nor shall any Option be permitted to be pledged in any manner. However, any Non-Qualified Stock Option, including the right to exercise such option, may also be transferred by a Participant or a subsequent transferee, during the Participant's lifetime, only to: (i) one or more of a Participant's spouse or natural or adopted lineal descendants; or (ii) a trust, partnership, corporation or other similar entity which is owned solely by one or more of the Participant's spouse or natural or adopted lineal descendants or which will hold such Non-Qualified Stock Options solely for the benefit of one or more of such persons.
(5) Certificates for shares of Company Stock purchased upon the exercise of an Option shall be issued in the name of the Participant or his beneficiary, as the case may be, and delivered to the Participant or his beneficiary, as the case may be, as soon as practicable following the effective date on which the Option is exercised.
(d) Limitations on Grant of Options
(1) The maximum number of common shares of stock underlying Options which
may be awarded to any single Participant under the Plan is 425,000.
(2) The aggregate Fair Market Value of shares of Company Stock with respect to which Incentive Stock Options granted hereunder are exercisable for the first time by a Participant during any calendar year under the Plan and any other stock option plan of the Company (or any "subsidiary corporation" of the Company within the meaning of Section 424 of the Code) shall not exceed $100,000. Such Fair Market Value shall be determined as of the date on which each such Incentive Stock Option is granted. In the event that the aggregate Fair Market Value of shares of Company Stock with respect to such Incentive Stock Options exceeds $100,000, then Incentive Stock Options granted hereunder to such Participant shall, to the extent and in the order in which they were granted, automatically be deemed to be Non-Qualified Stock Options, but all other terms and provisions of such Incentive Stock Options shall remain unchanged.
(3) No Incentive Stock Option may be granted to an individual if, at the time of the proposed grant, such individual owns stock possessing more than ten percent of the total combined voting power of all classes of stock of the Company or any of its "subsidiary corporations" (within the meaning of Section 424 of the Code), unless (i) the exercise price of such Incentive Stock Option is at least one hundred and ten percent of the Fair Market Value of a share of Company Stock at the time such Incentive Stock Option is granted and (ii) such Incentive Stock Option is not exercisable after the expiration of five years from the date such Incentive Stock Option is granted.
(e) Effect of Termination of Employment
(1) In the event that the employment of a Participant with the Company
shall terminate for any reason other than Cause, Disability or death (i) Options
granted to such Participant, to the extent that they were exercisable at the
time of such termination, shall remain exercisable until the expiration of three
months after such termination, on which date they shall expire, and (ii) Options
granted to such Participant, to the extent that they were not exercisable at the
time of such termination, shall expire at the close of business on the date of
such termination; provided, however; that no Option shall be exercisable after
the expiration of its term.
(2) In the event that the employment of a Participant with the Company shall terminate on account of the Disability or death of the Participant (i) Options granted to such Participant, to the extent that they were exercisable at the time of such termination, shall remain exercisable until the expiration of one year after such termination, on which date they shall expire, and (ii) Options granted to such Participant, to the extent that they were not exercisable at the time of such termination, shall expire at the close of business on the date of such termination; provided, however; that no Option shall be exercisable after the expiration of its term.
(3) In the event of the termination of a Participant's employment for Cause, all outstanding Options granted to such Participant shall expire at the commencement of business on the date of such termination.
(4) Notwithstanding anything to the contrary contained herein, in the event that the employment of a Participant with the Company shall terminate for death, disability or retirement, the Committee may waive the accelerated expiration provisions of subsection 6(e) as they apply to any or all Non-Qualified Stock Options or any or all stand alone SARs granted to the Participant, to the extent that they were exercisable at the time of such termination, so that they shall remain exercisable until the expiration of their term. Non-Qualified Stock Options or stand alone SARs granted to such Participant, to the extent that they were not exercisable at the time of such termination, shall expire at the close of business on the date of such termination; provided, however; that a Non-Qualified Stock Option and a stand alone SAR shall not be exercisable after the expiration of its term.
(f) Acceleration of Exercise Date Upon Change in Control Upon the occurrence of a Change in Control, each Option granted under the Plan and outstanding at such time shall become fully and immediately exercisable and shall remain exercisable until its expiration, termination or cancellation pursuant to the terms of the Plan.
7. Limited SARs
The Committee may grant in connection with any Option granted hereunder one or more LSARs relating to a number of shares of Company Stock less than or equal to the number of shares of Company Stock subject to the related Option. An LSAR may be granted at the same time as, or, in the case of a Non-Qualified Stock Option, subsequent to the time that, its related Option is granted. Each LSAR shall be evidenced by an agreement in such form as the Committee shall from time to time approve. Each LSAR granted hereunder shall be subject to the following terms and conditions:
(a) Benefit Upon Exercise
(1) The exercise of an LSAR relating to a Non-Qualified Stock Option with
respect to any number of shares of Company Stock shall entitle the Participant
to a cash payment, for each such share, equal to the excess of (i) the greater
of (A) the highest price per share of Company Stock paid in the Change in
Control in connection with which such LSAR became exercisable and (B) the Fair
Market Value of a share of Company Stock on the date of such Change in Control
over (ii) the exercise price of the related Option. Such payment shall be made
as soon as practicable, but in no event later than the expiration of five
business days after the effective date of such exercise.
(2) The exercise of an LSAR relating to an Incentive Stock Option with respect to any number of shares of Company Stock shall entitle the Participant to a cash payment, for each such share, equal to the excess of (i) the Fair Market Value of a share of Company Stock on the effective date of such exercise over (ii) the exercise price of the related Option. Such payment shall be made as soon as practical, but in no event later than the expiration of five business days, after the effective date of such exercise.
(b) Term and Exercise of LSARs
(1) An LSAR shall be exercisable only during the period commencing on the first day following the occurrence of a Change in Control and terminating on the expiration of sixty days after such date. Notwithstanding the preceding sentence of this Section 7(b), in the event that an LSAR held by any Participant who is or may be subject to the provisions of Section 16(b) of the Exchange Act becomes exercisable prior to the expiration of six months following the date on which it is granted, then the LSAR shall also be exercisable during the period commencing on the first day immediately following the expiration of such six month period and terminating on the expiration of sixty days following such date. Notwithstanding anything else herein, an LSAR relating to an Incentive Stock Option may be exercised with respect to a share of Company Stock only if the Fair Market Value of such share on the effective date of such exercise exceeds the exercise price relating to such share. Notwithstanding anything else herein, an LSAR may be exercised only if and to the extent that the Option to which it relates is exercisable.
(2) The exercise of an LSAR with respect to a number of shares of Company Stock shall cause the immediate and automatic cancellation of the Option to which it relates with respect to an equal number of shares. The exercise of an Option, or the cancellation, termination or expiration of an Option (other than pursuant to this Paragraph (2)), with respect to a number of shares of Company Stock, shall cause the cancellation of the LSAR related to it with respect to an equal number of shares.
(3) Each LSAR shall be exercisable in whole or in part; provided, that no partial exercise of an LSAR shall be for an aggregate exercise price of less than $1,000. The partial exercise of an LSAR shall not cause the expiration, termination or cancellation of the remaining portion thereof. Upon the partial exercise of an LSAR, the agreements evidencing the LSAR, the related Option and any Tandem SARs related to such Option, marked with such notations as the Committee may deem appropriate to evidence such partial exercise, shall be returned to the Participant exercising such LSAR together with the payment described in Paragraph 7(a)(1) or (2) hereof, as applicable.
(4) During the lifetime of a Participant, each LSAR granted to him shall be exercisable only by him. No LSAR shall be assignable or transferable otherwise than by will or by the laws of descent and distribution and otherwise than together with its related Option, nor shall any LSAR be permitted to be pledged in any manner.
(5) An LSAR shall be exercised by delivering notice to the Company's principal office, to the attention of its Secretary, no less than one business day in advance of the effective date of the proposed exercise. Such notice shall be accompanied by the applicable agreements evidencing the LSAR, the related Option and any Tandem SARs relating to such Option, shall specify the number of shares of Company Stock with respect to which the LSAR is being exercised and the effective date of the proposed exercise and shall be signed by the Participant. The Participant may withdraw such notice at any time prior to the close of business on the business day immediately preceding the effective date of the proposed exercise, in which case such agreements shall be returned to him.
8. Tandem SARs The Committee may grant in connection with any Option granted hereunder one or more Tandem SARs relating to a number of shares of Company Stock less than or equal to the number of shares of Company Stock subject to the related Option. A Tandem SAR may be granted at the same time as, or subsequent to the time that, its related Option is granted. Each Tandem SAR shall be evidenced by an agreement in such form as the Committee shall from time to time approve. Tandem SARs shall comply with and be subject to the following terms and conditions:
(a) Benefit Upon Exercise The exercise of a Tandem SAR with respect to any number of shares of Company Stock shall entitle a Participant to a cash payment, for each such share, equal to the excess of (i) the Fair Market Value of a share of Company Stock on the effective date of such exercise over (ii) the exercise price of the related Option. Such payment shall be made as soon as practicable, but in no event later than the expiration of five business days, after the effective date of such exercise.
(b) Term and Exercise of Tandem SAR
(1) A Tandem SAR shall be exercisable at the same time and to the same
extent (on a proportional basis, with any fractional amount being rounded down
to the immediately preceding whole number) as its related Option.
Notwithstanding the first sentence of this Section 8(b)(1), (i) a Tandem SAR
shall not be exercisable at any time that an LSAR related to the Option to which
the Tandem SAR is related is exercisable and (ii) a Tandem SAR relating to an
Incentive Stock Option may be exercised with respect to a share of Company Stock
only if the Fair Market Value of such share on the effective
date of such exercise exceeds the exercise price relating to such share.
(2) The exercise of a Tandem SAR with respect to a number of shares of Company Stock shall cause the immediate and automatic cancellation of its related Option with respect to an equal number of shares. The exercise of an Option, or the cancellation, termination or expiration of an Option (other than pursuant to this Paragraph (2)), with respect to a number of shares of Company Stock shall cause the automatic and immediate cancellation of its related Tandem SARs to the extent that the number of shares of Company Stock subject to such Option after such exercise, cancellation, termination or expiration is less than the number of shares subject to such Tandem SARs. Such Tandem SARs shall be cancelled in the order in which they became exercisable.
(3) Each Tandem SAR shall be exercisable in whole or in part; provided, that no partial exercise of a Tandem SAR shall be for an aggregate exercise price of less than $1,000. The partial exercise of a Tandem SAR shall not cause the expiration, termination or cancellation of the remaining portion thereof. Upon the partial exercise of a Tandem SAR, the agreements evidencing such Tandem SAR, its related Option and LSARs relating to such Option, marked with such notations as the Committee may deem appropriate to evidence such partial exercise, shall be returned to the Participant exercising such Tandem SAR together with the payment described in Section 8(a) hereof.
(4) During the lifetime of a Participant, each Tandem SAR granted to him shall be exercisable only by him. No Tandem SAR shall be assignable or transferable otherwise than by will or by the laws of descent and distribution and otherwise than together with its related Option, nor shall any Tandem SAR be permitted to be pledged in any manner.
(5) A Tandem SAR shall be exercised by delivering notice to the Company's principal office, to the attention of its Secretary, no less than one business day in advance of the effective date of the proposed exercise. Such notice shall be accompanied by the applicable agreements evidencing the Tandem SAR, its related Option and any LSARs related to such Option, shall specify the number of shares of Company Stock with respect to which the Tandem SAR is being exercised and the effective date of the proposed exercise and shall be signed by the Participant. The Participant may withdraw such notice at any time prior to the close of business on the business day immediately preceding the effective date of the proposed exercise, in which case such agreements shall be returned to him.
9. Stand-Alone SARs The Committee may grant Stand-Alone SARs pursuant to the Plan, which Stand-Alone SARs shall be evidenced by agreements in such form as the Committee shall from time to time approve. Stand-Alone SARs shall comply with and be subject to the following terms and conditions:
(a) Exercise Price The exercise price of any Stand-Alone SAR granted under the Plan shall be not less than 100% of the Fair Market Value of a share of Company Stock on the date on which such Stand Alone SAR is granted.
(b) Benefit Upon Exercise
(1) The exercise of a Stand-Alone SAR with respect to any number of shares
of Company Stock prior to the occurrence of a Change in Control shall entitle a
Participant to a cash payment, for each such share, equal to the excess of (i)
the Fair Market Value of a share of Company Stock on the exercise date over (ii)
the exercise price of the Stand-Alone SAR.
(2) The exercise of a Stand-Alone SAR with respect to any number of shares of Company Stock on or after the occurrence of a Change in Control shall entitle a Participant to a cash payment, for each such share, equal to the excess of (i) the greater of (A) the highest price per share of Company Stock paid in connection with such Change in Control and (B) the Fair Market Value of a share of Company Stock on the date of such Change in Control over (ii) the exercise price of the Stand-Alone SAR.
(3) All payments under this Section 9(b) shall be made as soon as practicable, but in no event later than five business days, after the effective date of the exercise.
(c) Term and Exercise of Stand-Alone SARs
(1) Each Stand-Alone SAR shall be exercisable on such date or dates, during such period and for such number of shares of Company Stock as shall be determined by the Committee and set forth in the Stand-Alone SAR agreement with respect to such Stand-Alone SAR; provided, however, that no Stand-Alone SAR shall be exercisable after the expiration of ten years from the date such Stand-Alone SAR was granted; and, provided, further; that each Stand-Alone SAR shall be subject to earlier termination, expiration or cancellation as provided in the Plan.
(2) Each Stand-Alone SAR may be exercised in whole or in part; provided, that no partial exercise of a Stand-Alone SAR shall be for an aggregate exercise price of less than $1,000. The partial exercise of a Stand-Alone SAR shall not cause the expiration, termination or cancellation of the remaining portion thereof. Upon the partial exercise of a Stand-Alone SAR, the agreement evidencing such Stand-Alone SAR, marked with such notations as the Committee may deem appropriate to evidence such partial exercise, shall be returned to the Participant exercising such Stand-Alone SAR together with the payment described in Section 9(b)(1) or 9(b)(2) hereof.
(3) A Stand-Alone SAR shall be exercised by delivering notice to the Company's principal office, to the attention of its Secretary, no less than one business day in advance of the effective date of the proposed exercise. Such notice shall be accompanied by the applicable agreement evidencing the Stand-Alone SAR, shall specify the number of shares of Company Stock with respect to which the Stand-Alone SAR is being exercised and the effective date of the proposed exercise and shall be signed by the Participant. The Participant may withdraw such notice at any time prior to the close of business on the business day immediately preceding the effective date of the proposed exercise, in which case the agreement evidencing the Stand-Alone SAR shall be returned to him.
(4) During the lifetime of a Participant, each Stand-Alone SAR granted to him shall be exercisable only by him. No Stand-Alone SAR shall be assignable or transferable otherwise than by will or by the laws of descent and distribution, nor shall any Stand-Alone SARs be permitted to be pledged in any manner.
(d) Effect of Termination of Employment
(1) In the event that the employment of a Participant with the Company shall terminate for any reason other than Cause, Disability or death (i) Stand-Alone SARs granted to such Participant, to the extent that they were exercisable at the time of such termination, shall remain exercisable until the expiration of three months after such termination, on which date they shall expire, and (ii) Stand-Alone SARs granted to such Participant, to the extent that they were not exercisable at the time of such termination, shall expire at the close of business on the date of such termination; provided, however; that no Stand-Alone SAR shall be exercisable after the expiration of its term.
(2) In the event that the employment of a Participant with the Company shall terminate on account of the Disability or death of the Participant (i) Stand-Alone SARs granted to such Participant, to the extent that they were exercisable at the time of such termination, shall remain exercisable until the expiration of one year after such termination, on which date they shall expire, and (ii) Stand-Alone SARs granted to such Participant, to the extent that they were not exercisable at the time of such termination, shall expire at the close of business on the date of such termination; provided, however; that no Stand-Alone SAR shall be exercisable after the expiration of its term.
(3) In the event of the termination of a Participant's employment for Cause, all outstanding Stand-Alone SARs granted to such Participant shall expire at the commencement of business on the date of such termination.
(e) Acceleration of Exercise Date Upon Change in Control Upon the occurrence of a Change in Control, any Stand-Alone SAR granted under the Plan and outstanding at such time shall become fully and immediately exercisable and shall remain exercisable until its expiration, termination or cancellation pursuant to the terms of the Plan.
10. Restricted Stock The Committee may grant shares of Restricted Stock pursuant to the Plan. Each grant of shares of Restricted Stock shall be evidenced by an agreement in such form as the Committee shall from time to time approve. Each grant of shares of Restricted Stock shall comply with and be subject to the following terms and conditions:
(a) Issue Date and Vesting Date At the time of the grant of shares of Restricted Stock, the Committee shall establish an Issue Date or Issue Dates
and a Vesting Date or Vesting Dates with respect to such shares. The Committee may divide such shares into classes and assign a different Issue Date and/or Vesting Date for each class. Except as provided in Sections 10(c) and 10(f) hereof, upon the occurrence of the Issue Date with respect to a share of Restricted Stock, a share of Restricted Stock shall be issued in accordance with the provisions of Section 10(d) hereof. Provided that all conditions to the vesting of a share of Restricted Stock imposed pursuant to Section 10(b) hereof are satisfied, and except as provided in Sections 10(c) and 10(f) hereof, upon the occurrence of the Vesting Date with respect to a share of Restricted Stock, such share shall vest and the restrictions of Section 10(c) hereof shall cease to apply to such share.
(b) Conditions to Vesting At the time of the grant of shares of Restricted Stock, the Committee may impose such restrictions or conditions, not inconsistent with the provisions hereof, to the vesting of such shares as it, in its absolute discretion deems appropriate. By way of example and not by way of limitation, the Committee may require, as a condition to the vesting of any class or classes of shares of Restricted Stock, that the Participant or the Company achieve such performance criteria as the Committee may specify at the time of the grant of such shares.
(c) Restrictions on Transfer Prior to Vesting Prior to the vesting of a share of Restricted Stock, no transfer of a Participant's rights with respect to such share, whether voluntary or involuntary, by operation of law or otherwise, shall vest the transferee with any interest or right in or with respect to such share, but immediately upon any attempt to transfer such rights, such share, and all of the rights related thereto, shall be forfeited by the Participant and the transfer shall be of no force or effect.
(d) Issuance of Certificates
(1) Except as provided in Sections 10(c) or 10(f) hereof, reasonably
promptly after the Issue Date with respect to shares of Restricted Stock, the
Company shall cause to be issued a stock certificate, registered in the name of
the Participant to whom such shares were granted, evidencing such shares;
provided, that the Company shall not cause to be issued such a stock certificate
unless it has received a stock power duly endorsed in blank with respect to such
shares. Each such stock certificate shall bear the following legend:
The transferability of this certificate and the shares of stock represented hereby are subject to the restrictions, terms and conditions (including forfeiture provisions and restrictions against transfer) contained in the Southwestern Energy Company 1993 Stock Incentive Plan and an Agreement entered into between the registered owner of such shares and Southwestern Energy Company A copy of the Plan and Agreement is on file in the office of the Secretary of Southwestern Energy Company, 1083 Sain Street, Fayetteville, Arkansas 72702-1408.
Such legend shall not be removed from the certificate evidencing such shares until such shares vest pursuant to the terms hereof.
(2) Each certificate issued pursuant to Section 10(d)(1) hereof, together with the stock powers relating to the shares of Restricted Stock evidenced by such certificate, shall be deposited by the Company with a custodian designated by the Company. The Company shall cause such custodian to issue to the Participant a receipt evidencing the certificates held by it which are registered in the name of the Participant.
(e) Consequences Upon Vesting Upon the vesting of a share of Restricted Stock pursuant to the terms hereof, the restrictions of Section 10(c) hereof shall cease to apply to such share. Reasonably promptly after a share of Restricted Stock vests pursuant to the terms hereof, the Company shall cause to be issued and delivered to the Participant to whom such shares were granted, a certificate evidencing such share, free of the legend set forth in Section 10(d)(1) hereof together with any other property of the Participant held by the custodian pursuant to Section 14(b) hereof.
(f) Effect of Termination of Employment
(1) In the event that the employment of a Participant with the Company
shall terminate for any reason other than Cause prior to the vesting of shares
of Restricted Stock granted to such Participant, a proportion of such shares, to
the extent not forfeited or cancelled on or prior to such termination pursuant
to any provision hereof, shall vest on the date of such termination. The
proportion referred to in the preceding sentence shall initially be determined
by the Committee
at the time of the grant of such shares of Restricted Stock and may be based on the achievement of any conditions imposed by the Committee with respect to such shares pursuant to Section 10(b). Such proportion may be equal to zero.
(2) In the event of the termination of a Participant's employment for Cause, all shares of Restricted Stock granted to such Participant which have not vested as of the date of such termination shall immediately be forfeited.
(g) Effect of Change in Control Upon the occurrence of a Change in Control, all shares of Restricted Stock which have not theretofore vested (including those with respect to which the Issue Date has not yet occurred), or been cancelled or forfeited pursuant to any provision hereof, shall immediately vest.
11. Phantom Stock The Committee may grant shares of Phantom Stock pursuant to the Plan. Each grant of shares of Phantom Stock shall be evidenced by an agreement in such form as the Committee shall from time to time approve. Each grant of shares of Phantom Stock shall comply with and be subject to the following terms and conditions:
(a) Vesting Date At the time of the grant of shares of Phantom Stock, the Committee shall establish a Vesting Date or Vesting Dates with respect to such shares. The Committee may divide such shares into classes and assign a different Vesting Date for each class. Provided that all conditions to the vesting of a share of Phantom Stock imposed pursuant to Section 11(c) hereof are satisfied, and except as provided in Section 11(d) hereof, upon the occurrence of the Vesting Date with respect to a share of Phantom Stock, such share shall vest.
(b) Benefit Upon Vesting
Upon the vesting of a share of Phantom Stock, a Participant shall be entitled to receive in cash, within 30 days of the date on which such share vests, an amount in cash in a lump sum equal to the sum of (i) the Fair Market Value of a share of Company Stock on the date on which such share of Phantom Stock vests and (ii) the aggregate amount of cash dividends paid with respect to a share of Company Stock during the period commencing on the date on which the share of Phantom Stock was granted and terminating on the date on which such share vests.
(c) Conditions to Vesting At the time of the grant of shares of Phantom Stock, the Committee may impose such restrictions or conditions, not inconsistent with the provisions hereof, to the vesting of such shares as it, in its absolute discretion deems appropriate. By way of example and not by way of limitation, the Committee may require, as a condition to the vesting of any class or classes of shares of Phantom Stock, that the Participant or the Company achieve such performance criteria as the Committee may specify at the time of the grant of such shares of Phantom Stock.
(d) Effect of Termination of Employment
(1) In the event that the employment of a Participant with the Company
shall terminate for any reason other than Cause prior to the vesting of shares
of Phantom Stock granted to such Participant, a proportion of such shares, to
the extent not forfeited or cancelled on or prior to such termination pursuant
to any provision hereof, shall vest on the date of such termination. The
proportion referred to in the preceding sentence initially shall be determined
by the Committee at the time of the grant of such shares of Phantom Stock and
may be based on the achievement of any conditions imposed by the Committee with
respect to such shares pursuant to Section 11(c). Such proportion may be equal
to zero.
(2) In the event of the termination of a Participant's employment for Cause, all shares of Phantom Stock granted to such Participant which have not vested as of the date of such termination shall immediately be forfeited.
(e) Effect of Change in Control Upon the occurrence of a Change in Control, all shares of Phantom Stock which have not theretofore vested, or been cancelled or forfeited pursuant to any provision hereof, shall immediately vest.
12. Stock Bonuses The Committee may grant Stock Bonuses in such amounts as it shall determine from time to time. A Stock Bonus shall be paid at such time and subject to such conditions as the Committee shall determine at the time of the grant of such
Stock Bonus. Certificates for shares of Company Stock granted as a Stock Bonus shall be issued in the name of the Participant to whom such grant was made and delivered to such Participant as soon as practicable after the date on which such Stock Bonus is required to be paid.
13. Cash Bonuses The Committee may, in its absolute discretion, in connection with any grant of Restricted Stock or Stock Bonus or at any time thereafter; grant a cash bonus, payable promptly after the date on which the Participant is required to recognize income for federal income tax purposes in connection with such grant of Restricted Stock or Stock Bonus, in such amounts as the Committee shall determine from time to time; provided, however; that in no event shall the amount of a Cash Bonus exceed the Fair Market Value of the related shares of Restricted Stock or Stock Bonus on such date. A Cash Bonus shall be subject to such conditions as the Committee shall determine at the time of the grant of such Cash Bonus.
14. Adjustment Upon Changes in Company Stock
(a) Shares Available for Grants In the event of any change in the number of shares of Company Stock outstanding by reason of any stock dividend or split, reverse stock split, recapitalization, merger, consolidation, combination or exchange of shares or similar corporate change, the maximum aggregate number of shares of Company Stock with respect to which the Committee may grant Options, Stand-Alone SARs, shares of Restricted Stock, shares of Phantom Stock, Stock Bonuses and Cash Bonuses shall be appropriately adjusted by the Committee. In the event of any change in the number of shares of Company Stock outstanding by reason of any other event or transaction, the Committee may, but need not, make such adjustments in the number and class of shares of Company Stock with respect to which Options, Stand-Alone SARs, shares of Restricted Stock, shares of Phantom Stock, Stock Bonuses and Cash Bonuses may be granted as the Committee may deem appropriate.
(b) Outstanding Restricted Stock and Phantom Stock Unless the Committee in its absolute discretion otherwise determines, any securities or other property (including dividends paid in cash) received by a Participant with respect to a share of Restricted Stock, the Issue Date with respect to which occurs prior to such event, but which has not vested as of the date of such event, as a result of any dividend, stock split, reverse stock split, recapitalization, merger, consolidation, combination, exchange of shares or otherwise will not vest until such share of Restricted Stock vests, and shall be promptly deposited with the custodian designated pursuant to Paragraph 10(d)(2) hereof.
The Committee may, in its absolute discretion, adjust any grant of shares of Restricted Stock, the Issue Date with respect to which has not occurred as of the date of the occurrence of any of the following events, or any grant of shares of Phantom Stock, to reflect any dividend, stock split, reverse stock split, recapitalization, merger, consolidation, combination, exchange of shares or similar corporate change as the Committee may deem appropriate to prevent the enlargement or dilution of rights of Participants under the grant.
(c) Outstanding Options, LSARs, Tandem SARs and Stand-Alone SARs -Increase or Decrease in Issued Shares Without Consideration Subject to any required action by the shareholders of the Company in the event of any increase or decrease in the number of issued shares of Company Stock resulting from a subdivision or consolidation of shares of Company Stock or the payment of a stock dividend (but only on the shares of Company Stock), or any other increase or decrease in the number of such shares effected without receipt of consideration by the Company, the Committee shall proportionally adjust the number of shares of Company Stock subject to each outstanding Option, LSAR, Tandem SAR and Stand-Alone SAR, and the exercise price per share of Company Stock of each such Option, LSAR, Tandem SAR and Stand-Alone SAR.
(d) Outstanding Options, LSARs, Tandem SARs and Stand-Alone SARs - Certain Mergers Subject to any required action by the shareholders of the Company, in the event that the Company shall be the surviving corporation in any merger or consolidation (except a merger or consolidation as a result of which the holders of shares of Company Stock receive securities of another corporation), each Option, LSAR, Tandem SAR and Stand-Alone SAR outstanding on the date of such merger or consolidation shall pertain to and apply to the securities which a
holder of the number of shares of Company Stock subject to such Option, LSAR, Tandem SAR or Stand-Alone SAR would have received in such merger or consolidation.
(e) Outstanding Options, LSARs, Tandem SARs and Stand-Alone SARs - Certain Other Transactions In the event of (i) a dissolution or liquidation of the Company, (ii) a sale of all or substantially all of the Company's assets, (iii) a merger or consolidation involving the Company in which the Company is not the surviving corporation or (iv) a merger or consolidation involving the Company in which the Company is the surviving corporation but the holders of shares of Company Stock receive securities of another corporation and/or other property, including cash, the Committee shall, in its absolute discretion, have the power to:
(i) cancel, effective immediately prior to the occurrence of such event, each Option (including each LSAR and Tandem-SAR related thereto) and Stand-Alone SAR outstanding immediately prior to such event (whether or not then exercisable), and, in full consideration of such cancellation, pay to the Participant to whom such Option or Stand-Alone SAR was granted an amount in cash, for each share of Company Stock subject to such Option or Stand-Alone SAR, respectively, equal to the excess of (A) the value, as determined by the Committee in its absolute discretion, of the property (including cash) received by the holder of a share of Company Stock as a result of such event over (B) the exercise price of such Option or Stand-Alone SAR; or
(ii) provide for the exchange of each Option (including any related LSAR or Tandem SAR) and Stand-Alone SAR outstanding immediately prior to such event (whether or not then exercisable) for an option on or stock appreciation right with respect to, as appropriate, some or all of the property for which such Option or Stand-Alone SAR is exchanged and, incident thereto, make an equitable adjustment as determined by the Committee in its absolute discretion in the exercise price of the option or stock appreciation right, or the number of shares or amount of property subject to the option or stock appreciation right or, if appropriate, provide for a cash payment to the Participant to whom such Option or Stand-Alone SAR was granted in partial consideration for the exchange of the Option or Stand-Alone SAR.
(f) Outstanding Options, LSARs, Tandem SARs and Stand-Alone SARs - Other
Changes
In the event of any change in the capitalization of the Company or a
corporate change other than those specifically referred to in Sections 14(c),
(d) or (e) hereof, the Committee may, in its absolute discretion, make such
adjustments in the number and class of shares subject to Options, LSARs, Tandem
SARs or Stand-Alone SARs outstanding on the date on which such change occurs and
in the per-share exercise price of each such Option, LSAR, Tandem SAR and
Stand-Alone SAR as the Committee may consider appropriate to prevent dilution or
enlargement of rights.
(g) No Other Rights Except as expressly provided in the Plan, no Participant shall have any rights by reason of any subdivision or consolidation of shares of stock of any class, the payment of any dividend, any increase or decrease in the number of shares of stock of any class or any dissolution, liquidation, merger or consolidation of the Company or any other corporation. Except as expressly provided in the Plan, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number of shares of Company Stock subject to an Incentive Award or the exercise price of any Option, LSAR, Tandem SAR or Stand-Alone SAR.
15. Rights as a Stockholder No person shall have any rights as a stockholder with respect to any shares of Company Stock covered by or relating to any Incentive Award granted pursuant to this Plan until the date of the issuance of a stock certificate with respect to such shares. Except as otherwise expressly provided in Section 14 hereof, no adjustment to any Incentive Award shall be made for dividends or other rights for which the record date occurs prior to the date such stock certificate is issued.
16. No Special Employment Rights; No Right to Incentive Award Nothing contained in the Plan or any Incentive Award shall confer upon any Participant any right with respect to the continuation of his employment by the Company or interfere in any way with the right of the Company, subject to the terms of any separate employment agreement to the contrary, at any time to terminate such employment or to increase or decrease the compensation of the Participant from the rate in existence at the time of the grant of an Incentive Award.
No person shall have any claim or right to receive an Incentive Award hereunder. The Committee's granting of an Incentive Award to a Participant at any time shall neither require the Committee to grant an Incentive Award to such Participant or any other Participant or other person at any time nor preclude the Committee from making subsequent grants to such Participant or any other Participant or other person.
17. Securities Matters
(a) The Company shall be under no obligation to effect the registration
pursuant to the Securities Act of any interests in the Plan or any shares of
Company Stock to be issued hereunder or to effect similar compliance under any
state laws. Notwithstanding anything herein to the contrary, the Company shall
not be obligated to cause to be issued or delivered any certificates evidencing
shares of Company Stock pursuant to the Plan unless and until the Company is
advised by its counsel that the issuance and delivery of such certificates is in
compliance with all applicable laws, regulations of governmental authority and
the requirements of the New York Stock Exchange and any other securities
exchange on which shares of Company Stock are traded. The Committee may require,
as a condition of the issuance and delivery of certificates evidencing shares of
Company Stock pursuant to the terms hereof, that the recipient of such shares
make such covenants, agreements and representations, and that such certificates
bear such legends, as the Committee, in its sole discretion, deems necessary or
desirable.
(b) The exercise of any Option granted hereunder shall be effective only at such time as counsel to the Company shall have determined that the issuance and delivery of shares of Company Stock pursuant to such exercise is in compliance with all applicable laws, regulations of governmental authority and the requirements of the New York Stock Exchange and any other securities exchange on which shares of Company Stock are traded. The Committee may, in its sole discretion, defer the effectiveness of any exercise of an Option granted hereunder in order to allow the issuance of shares of Company Stock pursuant thereto to be made pursuant to registration or an exemption from registration or other methods for compliance available under federal or state securities laws. The Committee shall inform the Participant in writing of its decision to defer the effectiveness of the exercise of an Option granted hereunder. During the period that the effectiveness of the exercise of an Option has been deferred, the Participant may, by written notice, withdraw such exercise and obtain the refund of any amount paid with respect thereto.
18. Withholding Taxes
(a) Cash Remittance
Whenever shares of Company Stock are to be issued upon the exercise of an
Option, the occurrence of the Issue Date or Vesting Date with respect to a share
of Restricted Stock or the payment of a Stock Bonus, the Company shall have the
right to require the Participant to remit to the Company in cash an amount
sufficient to satisfy federal, state and local withholding tax requirements, if
any, attributable to such exercise, occurrence or payment prior to the delivery
of any certificate or certificates for such shares. In addition, upon the
exercise of an LSAR, Tandem SAR or Stand-Alone SAR, the grant of a Cash Bonus or
the making of a payment with respect to a share of Phantom Stock, the Company
shall have the right to withhold from any cash payment required to be made
pursuant thereto an amount sufficient to satisfy the federal, state and local
withholding tax requirements, if any, attributable to such exercise or grant.
(b) Stock Remittance Subject to Section 18(d) hereof at the election of the Participant, subject to the approval of the Committee, when shares of Company Stock are to be issued upon the exercise of an Option, the occurrence of the Issue Date or the Vesting Date with respect to a share of Restricted Stock or the grant of a Stock Bonus, in lieu of the remittance required by Section 18(a) hereof, the Participant may tender to the Company a number of shares of Company Stock determined by such Participant, the Fair Market Value of which at the tender date the Committee determines to be sufficient to satisfy the federal, state and local withholding tax requirements, if any, attributable to such exercise, occurrence or grant and not greater than the Participant's estimated total federal, state and local tax obligations associated with such exercise, occurrence or grant.
(c) Stock Withholding The Company shall have the right, when shares of Company Stock are to be issued upon the exercise of an Option, the occurrence of the Issue Date or the Vesting Date with respect to a share of Restricted Stock or the grant of a Stock Bonus, in lieu of requiring the remittance required by Section 18(a) hereof, to withhold a number of such shares, the Fair Market Value of which at the exercise date the Committee determines to be sufficient to satisfy the federal, state and local
withholding tax requirements, if any, attributable to such exercise, occurrence or grant and is not greater than the Participant's estimated total federal, state and local tax obligations associated with such exercise, occurrence or grant.
(d) Timing and Method of Elections Notwithstanding any other provisions of the Plan, a Participant who is subject to Section 16(b) of the Exchange Act may not make the election described in Section 18(b) hereof prior to the expiration of six months after the date on which the applicable Option, share of Restricted Stock or Stock Bonus was granted, except in the event of the death or Disability of the Participant. A Participant who is subject to Section 16(b) of the Exchange Act may not make such election other than (i) during the 10-day window period beginning on the third business day following the date of release for publication of the Company's quarterly and annual summary statements of sales and earnings and ending on the twelfth business day following such date or (ii) at least six months prior to the date such election is made. Such elections shall be irrevocable and shall be made by the delivery to the Company's principal office, to the attention of its Secretary, of a written notice signed by the Participant.
19. Amendment or Termination of the Plan The Board of Directors may, at any time, suspend or discontinue the Plan or revise or amend it in any respect whatsoever; provided, however; that no amendment shall be effective without the approval of the shareholders of the Company, that (i) except as provided in Section 14 hereof, increases the number of shares of Company Stock that may be issued under the Plan, (ii) materially increases the benefits accruing to individuals pursuant to the Plan, (iii) materially modifies the requirements as to eligibility for participation in the Plan, or (iv) would otherwise materially alter the Plan. Nothing herein shall restrict the Committee's ability to exercise its discretionary authority hereunder pursuant to Section 4 hereof, which discretion may be exercised without amendment to the Plan. No action hereunder may, without the consent of a Participant, reduce the Participant's rights under any previously granted and outstanding Incentive Award. Nothing herein shall limit the right of the Company to pay compensation of any kind outside the terms of the Plan.
20. No Obligation to Exercise The grant to a Participant of an Option, LSAR, Tandem SAR or Stand-Alone SAR shall impose no obligation upon such Participant to exercise such Option, LSAR, Tandem SAR or Stand-Alone SAR.
21. Transfers Upon Death Upon the death of a Participant, outstanding Incentive Awards granted to such Participant may be exercised only by the executors or administrators of the Participant's estate or by any person or persons who shall have acquired such right to exercise by will or by the laws of descent and distribution. No transfer by will or the laws of descent and distribution of any Incentive Award, or the right to exercise any Incentive Award, shall be effective to bind the Company unless the Committee shall have been furnished with (a) written notice thereof and with a copy of the will and/or such evidence as the Committee may deem necessary to establish the validity of the transfer and (b) an agreement by the transferee to comply with all the terms and conditions of the Incentive Award that are or would have been applicable to the Participant and to be bound by the acknowledgments made by the Participant in connection with the grant of the Incentive Award. Except as provided in this Section 21, no Incentive Award shall be transferable, and shall be exercisable only by a Participant during the Participant's lifetime.
22. Expenses and Receipts The expenses of the Plan shall be paid by the Company. Any proceeds received by the Company in connection with any Incentive Award will be used for general corporate purposes.
23. Failure to Comply In addition to the remedies of the Company elsewhere provided for herein, failure by a Participant (or beneficiary) to comply with any of the terms and conditions of the Plan or the agreement executed by such Participant (or beneficiary) evidencing an Incentive Award, unless such failure is remedied by such Participant (or beneficiary) within ten days after having been notified of such failure by the Committee, shall be grounds for the cancellation and forfeiture of such Incentive Award, in whole or in part, as the Committee, in its absolute discretion, may determine.
24. Effective Date of Plan The Plan was adopted by the Board of Directors on April 7, 1993, subject to approval by the shareholders of the Company at their annual meeting on May 26, 1993 in accordance with applicable law, the requirements of Section 422
of the Code and the requirements of Rule 16b-3 promulgated under Section 16(b) of the Exchange Act. Incentive Awards maybe granted under the Plan at any time prior to the receipt of such shareholder approval; provided, however, that each such grant shall be subject to such approval. Without limitation on the foregoing, no Option, LSAR, Tandem SAR or Stand-Alone SAR may be exercised prior to the receipt of such approval, no share certificate shall be issued pursuant to a grant of Restricted Stock or Stock Bonus prior to the receipt of such approval and no Cash Bonus or payment with respect to a share of Phantom Stock shall be paid prior to the receipt of such approval. If the Plan is not so approved prior to December 31, 1993, then the Plan and all Incentive Awards then outstanding hereunder shall forthwith automatically terminate and be of no force and effect.
25. Term of the Plan The right to grant Incentive Awards under the Plan will terminate upon the expiration of 10 years after the Effective Date of the Plan.
26. Applicable Law Except to the extent preempted by any applicable federal law, the Plan will be construed and administered in accordance with the laws of the State of Arkansas, without reference to the principles of conflicts of law.
EMPLOYMENT AND CONSULTING AGREEMENT
THIS EMPLOYMENT AND CONSULTING AGREEMENT [Agreement] is made and
entered into as of May 21, 1998, at Fayetteville, Washington County, Arkansas,
by and between SOUTHWESTERN ENERGY COMPANY, an Arkansas Business Corporation,
designated herein as SWEN, and CHARLES E. SCHARLAU, designated herein as
Scharlau;
W-I-T-N-E-S-S-E-T-H:
A. PARTIES: (1) SOUTHWESTERN ENERGY COMPANY [SWEN] is an Arkansas
Business Corporation with its principal office being situated in Fayetteville,
Washington County, Arkansas, and it is the parent company of the following
wholly owned subsidiary corporations [SUBSIDIARIES]:
(a) Arkansas Western Gas Company: Arkansas Western Gas Company
[AWG] is an Arkansas Business Corporation with its home office being situated in
Fayetteville, Washington County, Arkansas, and it is a natural gas distribution
public utility in the States of Arkansas and Missouri;
(b) SEECO, Inc.: SEECO, Inc. [SEECO] is an Arkansas Business
Corporation with its home office situated in Fayetteville, Washington County,
Arkansas, and it is engaged in the natural gas exploration, development and
production business in the States of Arkansas, Oklahoma, Texas, Louisiana, and
other areas.
(c) Southwestern Energy Production Company: Southwestern Energy
Production Company [SEPCO] is an Arkansas Business Corporation with its home
office situated in Fayetteville, Washington County, Arkansas, and it is engaged
in the oil and gas exploration, development and production business in the
States of Arkansas, Oklahoma, Texas, Louisiana and other areas in the United
States and in the Gulf of Mexico; and
(d) AW Realty Company: AW Realty Company [AWR] is an Arkansas
Business Corporation with its home office situated in Fayetteville, Washington
County, Arkansas, and it is engaged in real estate development and sales and
owning and operating rental properties in Arkansas.
(2) CHARLES E. SCHARLAU: Charles E. Scharlau [Scharlau] is a
natural person, he is now and since June of 1951, he has been a licensed
attorney at law in the State of Arkansas; and he first became an employee of
Arkansas Western Gas Company in 1951, and he
served the organization as the head of the legal department until 1968, when he
became the President and the Chief Executive Officer of the organization and he
has held that position at all times since. In addition, he is now and at all
times since 1968 he has been a member of and the Chairman of the Board of
Directors.
B. RECITALS: (1) SWEN, as the parent corporation and/or all of the
SUBSIDIARIES are all engaged in the business of oil and gas exploration and
development, the sale and distribution of oil and gas; the natural gas public
utility business, and the real estate development and the ownership of real
estate for sale and rental, all for the production of income.
(2) Scharlau is a regularly licensed attorney in the State of
Arkansas, and is an experienced corporate executive in the field of oil and gas
exploration and development, the sale and distribution of oil and gas, the
natural gas public utility distribution business, and the development and sale
of real property and the ownership and operations of rental real estate.
(3) SWEN wishes to be assured of the services of Scharlau,
particularly with reference to the operation of the businesses now conducted by
SWEN and the SUBSIDIARIES as specified above and in the areas indicated.
(4) The purposes of this Agreement are:
(a) To provide for the employment by SWEN and its SUBSIDIARIES
of Scharlau until his retirement as Chief Executive Officer at SWEN's Annual
Meeting in May of 1999, and to provide for his continued services as a
consultant and advisor following that date, for the benefit of SWEN and all of
its SUBSIDIARIES and their shareholders that benefit from the professional and
managerial services rendered and to be rendered by Scharlau;
(b) To secure for SWEN and all of its SUBSIDIARIES the
professional and managerial services, and the advisory and consulting services
of Scharlau and to provide for the payment of compensation to Scharlau for such
services to be rendered directly to SWEN and the SUBSIDIARIES and any other
entities that are now owned or which may be owned by SWEN and/or the
SUBSIDIARIES in the future; and,
(c) To assure, during the term provided herein, that Scharlau
shall not compete with SWEN and/or any of its SUBSIDIARIES in any undertaking of
any professional and managerial activity in the area of the operations of SWEN
and the SUBSIDIARIES
after Scharlau's employment has been terminated.
C. AGREEMENT: FOR AND IN CONSIDERATION of the foregoing recitals and of
the mutual and interdependent promises, SWEN and the SUBSIDIARIES hereby employ
Scharlau and Scharlau accepts such employment, and SWEN and the SUBSIDIARIES,
and Scharlau have covenanted and they agree one with the other as set forth as
follows:
(1) Full-time Employment:
(a) Scharlau's employment under this Agreement shall commence
with SWEN's Annual Meeting in 1998, and shall continue until SWEN's Annual
Meeting in 1999. During such period Scharlau shall perform the services as a
full-time employee of SWEN and the SUBSIDIARIES as designated by the Board of
Directors in the area of the Chief Executive Officer of all of the business
activities of SWEN and the SUBSIDIARIES.
(b)(1) Scharlau's service as an advisor and consultant shall
commence with SWEN's Annual Meeting in 1999 and continue until May 31, 2002.
During such time Scharlau shall perform such services to SWEN and represent SWEN
as requested by the Chief Executive Officer or the Board of Directors. In
performing such services Scharlau will devote as much time as necessary, not to
exceed 1,040 hours per year.
(c) For such services as a full-time employee of SWEN and the
SUBSIDIARIES, SWEN and the SUBSIDIARIES shall compensate Scharlau as the base
compensation at the rate of Four Hundred Sixty Eight Thousand Dollars
($468,000.00) per annum, (2) for such services as an advisor and consultant of
SWEN and SUBSIDIARIES, SWEN and the SUBSIDIARIES shall compensate Scharlau at
the rate of $234,000.00 per annum, and (3) payment of such compensation shall be
in approximately equal installments on SWEN's regularly scheduled payroll dates
during the period of employment.
(d) Scharlau may be appointed to such executive positions with
SWEN and SUBSIDIARIES as the Board of Directors of each shall determine.
(e) SWEN and the SUBSIDIARIES represent to Scharlau that it
established and at its expense is now maintains in continuous existence for the
benefit of its qualified officers and employees the following:
(i) A qualified retirement plan that is fully funded
through a Trust;
(ii) A stock option-bonus plan;
(iii) A health, medical, hospital and dental plan which
provides coverage for each such officer and employee of SWEN and their immediate
family; and
(iv) A group professional liability insurance policy
issued by a reputable insurance company authorized to do business in the State
of Arkansas, covering all of SWEN's and the SUBSIDIARIES officers, directors and
all professional, technical and related employees with at least minimum
coverage.
Scharlau shall continue to be a participant in each of the foregoing
employee benefit plans and any other plans presently in existence or that SWEN
and the SUBSIDIARIES may create and maintain for the officer employees,
according to the terms and provisions of each such plan and/or insurance policy,
and shall continue as such participant as long as he is an employee of SWEN and
the SUBSIDIARIES and effective with SWEN's Annual Meeting in 1999 shall continue
to participate in the plans described in paragraph (iii) and (iv) above during
his consulting and advisory service pursuant to this Agreement.
(f) Expenses generally. Scharlau is entitled to receive
prompt reimbursement for all reasonable expenses incurred by Scharlau and to the
use of Company facilities, including aircraft, to conduct Company business.
Reimbursement must be made in accordance with the Company's policies and
procedures in effect on the Effective Date.
(g) Meetings, conventions, and seminars. Scharlau is
encouraged and is expected to attend seminars, professional meetings and
conventions, and educational courses. The cost of travel, tuition or
registration, food, and lodging for attending those activities will be paid by
SWEN. Other costs are Scharlau's expense, unless SWEN authorizes those costs. If
those other costs are authorized expenses, Scharlau will be reimbursed after
satisfying SWEN's policies and procedures for such reimbursement (which may
include a requirement that Scharlau submit an itemized expense voucher).
(h) Promotional expenses. Scharlau is encouraged and is
expected, from time to time, to incur reasonable expenses for promoting SWEN's
business. Such promotional expenses include travel, entertainment (including
memberships in social and athletic clubs), professional advancement, and
community service expenses. Scharlau agrees to bear those
expenses except to the extent that those expenses are incurred at SWEN's
specific direction or those expenses are specifically authorized by SWEN as
expenses that SWEN may pay directly or indirectly through reimbursement to
Scharlau.
(i) Outside activities. During his term as an employee and his
service as an advisor and consultant, Scharlau may (i) serve on corporate,
civic, or charitable boards or committees; (ii) deliver lectures, fulfill
speaking engagements, or teach at educational institutions; and (iii) manage
personal investments. Such activities must not significantly interfere with the
performance of Scharlau's responsibilities to SWEN. To the extent that any such
activities have been conducted by Scharlau before the Effective Date, such prior
conduct of activities and any subsequent conduct of activities similar in nature
and scope may not be deemed to interfere with the performance of Scharlau's
responsibilities. During his term as an advisor and consultant, in addition to
the activities permitted herein, he may engage as an attorney, consultant,
advisor or investor in any business enterprise providing there is no conflict of
interest with SWEN as outlined in paragraph (3) of this section.
(2) Termination of Employment of the Employee: If SWEN or the
SUBSIDIARIES shall terminate the employment of Employee at any time during the
one (1) year period commencing with SWEN's 1998 Annual Meeting, and ending on
the date of SWEN's 1999 Annual Meeting, then the termination rights of Scharlau
hereunder shall be determined pursuant to and under that certain Executive
Severance Agreement dated August 4, 1989, between SWEN and the SUBSIDIARIES and
Scharlau. The Contract dated August 4, 1989, and identified hereinabove is
hereby referred to for a full recital of the terms and provisions thereof and by
this reference is made a part hereof.
(3) Non-Compete Agreement: For a period of two (2) years from and
after the date of the termination of this contract, Scharlau agrees that he will
not engage, without the prior consent of SWEN and the SUBSIDIARIES, either
directly or indirectly, whether as a chief operating officer, manager, employee
or director of, or agent, consultant or business advisor for, or any substantial
ownership in any incorporated or unincorporated oil and gas exploration,
production and sales entity in the geographical area of SWEN's and the
SUBSIDIARIES' area of operation. SWEN agrees that it will not unreasonably
withhold its consent to Scharlau acting as
attorney, advisor or consultant to any such entity if there is no conflict of
interest with SWEN.
(4) Non-Assignability: Neither this Agreement nor any rights
thereunder shall be assignable by either party.
(5) Inurement: This Agreement shall be binding upon and inure to
the benefit of the parties hereto, their executors, administrators heirs-at-law,
successors and assigns.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement in
original triplicates on the date first hereinabove written.
SOUTHWESTERN ENERGY COMPANY;
ARKANSAS WESTERN GAS COMPANY;
SEECO, INC.; SOUTHWESTERN ENERGY
PRODUCTION COMPANY; AND AW REALTY
INC.
ATTEST: BY: COMPENSATION COMMITTEE OF THE
BOARD OF DIRECTORS
-------------------------- --------------------------------------
Greg Kerley, Secretary Robert Howard
--------------------------------------
Ken Mourton
--------------------------------------
John Paul Hammerschmidt
|
ACKNOWLEDGMENT
STATE OF ARKANSAS
COUNTY OF WASHINGTON
BE IT REMEMBERED, that on this day came before the undersigned, a Notary Public, within and for the County aforesaid duly commissioned and acting, ______________________ and __________________________, to me well know as the members of the Compensation Committee and Greg D. Kerley as the secretary of the committee of the Board of Directors of Southwestern Energy Company, Arkansas Western Gas Company, SEECO, Inc., Southwestern Energy Production Company, and AW Realty, Inc., all corporations, and stated that they had execute the same for the consideration and purposes therein mentioned and set forth.
WITNESS my hand and seal as such Notary Public this _____ day of ______________, 1998.
My Commission Expires:
---------------------- ------------------------------------
Notary Public
|
ACKNOWLEDGMENT
STATE OF ARKANSAS
COUNTY OF WASHINGTON
BE IT REMEMBERED, that on this day came before the undersigned, a Notary Public, within and for the County aforesaid, duly commissioned and acting, Charles E. Scharlau, to me well known as the party in the foregoing agreement, and stated that he had executed the same for the consideration and purposes therein mentioned and set forth.
WITNESS my hand and seal as such Notary Public this ____ day of ___________, 1998.
My Commission Expires:
--------------------- ------------------------------------
Notary Public
|
EXECUTIVE SEVERANCE AGREEMENT
This agreement (this "Agreement") is made as of the __ day of ______, ____, between Southwestern Energy Company, an Arkansas corporation with its principal offices at 1083 Sain Street, P.O. Box 1408, Fayetteville, Arkansas 72702-1408 (hereinafter called the "Company"), and _______________ (hereinafter called the "Employee"), residing at ____ ____________, ______________________.
WITNESSETH THAT:
WHEREAS, should the Company or shareholders of the Company receive any proposal from a third person concerning a possible business combination with the Company or an acquisition of equity securities of the Company, the Board of Directors of the Company (hereinafter called the "Board") believes it imperative that the Company and the Board be able to rely upon the Employee to continue in his position, and that the Company and the Board be able to receive and rely upon his advice, if they request it, as to the best interests of the Company and its shareholders, without concern that he might be distracted or that his advice might be affected by the personal uncertainties and risks created by such a proposal;
WHEREAS, the Company desires to provide the compensation and benefits provided for herein in order to enable it to attract and retain qualified executives such as the Employee, without a current expense to the Company;
NOW, THEREFORE, to assure the Company that it will have the continued
dedication of the Employee and the availability of his advice and counsel
notwithstanding the possibility, threat or occurrence of a bid to take over
control of the Company and to induce the Employee to remain in the employ of the
Company, and for other good and valuable consideration, the Company and the
Employee hereby agree as follows:
1. Definitions.
(i) "Cause", when used in connection with the termination of the Employee's employment by the Company, shall mean (a) the willful and continued failure by the Employee substantially to perform his duties and obligations to the Company (other than any such failure resulting from his Disability) which failure continues after the Company has given notice thereof to the Employee or (b) the willful engaging by the Employee in misconduct which is materially injurious to the Company. For purposes of this definition, no act, or failure to act, on the Employee's part shall be considered "willful" unless done, or omitted to be done, by the Employee in bad faith and without reasonable belief that his action or omission was in the best interests of the Company.
(ii) "Change in Control" shall mean the occurrence of any of the following:
(a) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act"), an "Acquiring Person") becomes the "beneficial owner" (as such term is defined in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities, provided, however, that any acquisition by (x) the Company or any of its subsidiaries, or any employee benefit plan (or related trust) sponsored or maintained by the Company or any of its subsidiaries or (y) any corporation with respect to which, immediately following such acquisition, more than 60% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or
indirectly, in the aggregate by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the outstanding Company common stock and Company voting securities immediately prior to such acquisition in substantially the same proportion as their ownership, immediately prior to such acquisition, of the outstanding Company common stock and Company voting securities, as the case may be, shall not constitute a Change in Control;
(b) consummation by the Company of a reorganization, merger or consolidation (a "Business Combination"), in each case, with respect to which all or substantially all of the individuals and entities who were the respective beneficial owners of the outstanding Company common stock and Company voting securities immediately prior to such Business Combination do not in the aggregate, immediately following such Business Combination, beneficially own, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination in substantially the same proportion as their ownership immediately prior to such Business Combination of the outstanding Company common stock and Company voting securities, as the case may be;
(c) any individual who is nominated by the Board for election to the Board on any date fails to be so elected as a direct or indirect result of any proxy fight or contested election for positions on the Board;
(d) a "change in control" of the Company of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Exchange Act occurs;
(e) (i) a complete liquidation or dissolution of the Company or (ii) a sale or other disposition of all or substantially all of the assets of both the Exploration and Production and the Utility business segments of the Company other than to a corporation with respect to which, immediately following such sale or disposition, more than 80% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, in the aggregate by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the outstanding Company common stock and Company voting securities immediately prior to such sale or disposition in substantially the same proportion as their ownership of the outstanding Company common stock and Company voting securities, as the case may be, immediately prior to such sale or disposition;
[(f) <F1> the sale or other disposition of all or substantially all the assets of the [Utility business segment<F2>/Exploration and Production business segment<F3>] other than to a corporation with respect to which, immediately following such sale or disposition, more than 80% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, in the aggregate by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the outstanding Company common stock and Company voting securities immediately prior to such sale or disposition in substantially the same proportion as their ownership of the
outstanding Company common stock and Company voting securities, as the case may be, immediately prior to such sale or disposition]; or
(g) a majority of the Board determines in its sole and absolute discretion that there has been a Change in Control of the Company or that there will be a Change in Control of the Company upon the occurrence of certain specified events and such events occur.
Notwithstanding the foregoing, a Change in Control shall not occur with respect to the Employee by reason of any event which would otherwise constitute a Change in Control if, immediately after the occurrence of such event, individuals including such Employee who were executive officers of the Company immediately prior to the occurrence of such event, own, directly or indirectly, on a fully diluted basis, (i) 15% or more of the then outstanding shares of common stock of the Company or any acquiror or successor to substantially all of the business of the Company [or, in the case of an event described in Section 1(ii)(f) relating to a sale of a business segment, the entity acquiring the business segment]<F4> or (ii) 15% or more of the combined voting power of the then outstanding voting securities of the Company or any acquiror or successor to substantially all of the business of the Company [or, in the case of an event described in Section 1(ii)(f) relating to a sale of a business segment, the entity acquiring the business segment]<F4> entitled to vote generally in the election of directors.
(iii) "Committee" shall mean the Compensation Committee of the Board.
(iv) "Compensation" shall mean the sum of the highest annual base salary of the Employee in effect at any time during the year preceding the Termination Date and the maximum
cash bonus opportunity available to the Employee under the Company's Incentive Compensation Plan(s) at any time during the year prior to the Termination Date.
(v) "Contract Period" shall mean the period defined in
Section 2 hereof.
(vi) "Disability" shall mean a physical or mental incapacity of the Employee which entitles the Employee to compensation and benefits at least equal to two-thirds of his base salary during the period of such incapacity under any long term disability plan applicable to him and maintained by the Company as in effect immediately prior to a Change in Control.
(vii) "Good Reason," when used with reference to a termination by the Employee of his employment with the Company, shall mean:
(a) the assignment to the Employee of any duties inconsistent with, or the reduction of powers or functions associated with, his positions, duties, responsibilities and status with the Company immediately prior to a Change in Control, or any removal of the Employee from, or any failure to reelect the Employee to, any positions or offices the Employee held immediately prior to a Change in Control, except in connection with the termination of the Employee's employment by the Company for Cause or on account of Disability pursuant to the requirements of this Agreement;
(b) a reduction by the Company of the Employee's base salary as in effect immediately prior to a Change in Control, except in connection with the termination of the Employee's employment by the Company for Cause or on account of Disability pursuant to the requirements of this Agreement;
(c) a change in the Employee's principal work location to a location more than forty (40) miles from the Employee's principal work location immediately prior to a change
in control, except for required travel on the Company's business to an extent substantially consistent with the Employee's business travel obligations immediately prior to a Change in Control;
(d) (1) the failure by the Company to continue in effect any employee benefit plan, program or arrangement (including without limitation, "employee benefit plans" within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974 and any incentive or equity-based plans) in which the Employee was participating immediately prior to a Change in Control (or substitute plans, programs or arrangements providing the Employee with substantially similar compensation and benefits), (2) the taking of any action, or the failure to take any action, by the Company which could (A) adversely affect the Employee's participation in, or materially reduce the Employee's benefits under, any of such plans, programs or arrangements, (B) materially adversely affect the basis for computing benefits under any of such plans, programs or arrangements or (C) deprive the Employee of any material fringe benefit enjoyed by the Employee immediately prior to a Change in Control or (3) the failure by the Company to provide the Employee with the number of paid vacation days to which the Employee was entitled immediately prior to a Change in Control in accordance with the Company's vacation policy applicable to the Employee then in effect, except in each case, in connection with the termination of the Employee's employment by the Company for Cause or on account of Disability pursuant to the requirements of this Agreement;
(e) the failure by the Company to pay the Employee any portion of the Employee's current compensation, or any portion of the Employee's compensation deferred
under any plan, agreement or arrangement of or with the Company, within seven (7) days of the date such compensation is due;
(f) a material increase in the required working hours of the Employee from that required prior to a Change in Control;
(g) the failure by the Company to obtain an assumption of the obligations of the Company under this Agreement by any successor to the Company pursuant to Section 8(i) hereof; or
(h) any termination of the Employee's employment by the Company during the Contract Period which is not effected pursuant to the requirements of this Agreement.
(viii) "Termination Date" shall mean the effective date as provided hereunder of the termination of the Employee's employment.
2. Application of Agreement. This Agreement shall apply only to a termination of employment of the Employee during a period (the "Contract Period") commencing on the date immediately preceding the date of a Change in Control and terminating on the third anniversary of the date of the Change in Control; provided, however, that such Change in Control occurs during the period commencing as of the date hereof and terminating on the first anniversary of the date hereof or as further extended pursuant to the following sentence. On the first anniversary of the date hereof, and on each anniversary of the date hereof thereafter, the period during which this Agreement shall apply shall automatically be extended for one additional year, unless at least six months before such anniversary the Company notifies the Employee that it elects not to extend such period. If the Company elects not to extend such period, then such period shall end two years after the next anniversary of the date hereof that follows the date of such notice. Notwithstanding anything in this
Agreement to the contrary, if, within six months prior to the date on which a
Change in Control occurs, the Employee's employment with the Company is
terminated by the Company other than by reason of the Employee's death,
Disability or circumstances that would constitute Cause or the terms and
conditions of the Employee's employment are adversely changed in a manner which
would constitute grounds for a termination of employment by the Employee for
Good Reason, and it is reasonably demonstrated that such termination of
employment or adverse change (i) was at the request of a third party who has
taken steps reasonably calculated to effect the Change in Control of (ii)
otherwise arose in connection with or in anticipation of the Change in Control,
then for all purposes of this Agreement such termination of employment shall be
deemed to have occurred during the Contract Period and shall be considered
either termination of the Employee's employment without Cause by the Company or
termination of the Employee's employment by the Employee for Good Reason, as the
case may be. Any reference herein to the Employee's employment or termination of
employment by or with the Company shall include the Employee's employment or
termination of employment by or with any subsidiary or affiliated company of the
Company.
3. Termination of Employment of the Employee By the Company
During the Contract Period.
(i) During the Contract Period, the Company shall have the right to terminate the Employee's employment hereunder for Cause, for Disability or without Cause by following the procedures hereinafter specified.
(ii) Termination of the Employee's employment for Disability shall become effective thirty (30) days after a notice of intent to terminate the Employee's employment, specifying Disability as the basis for such termination, is given to the Employee by the Committee.
(iii) The Employee may not be terminated for Cause unless and until a notice of intent to terminate the Employee's employment for Cause, specifying the particulars of the conduct of the Employee forming the basis for such termination, is given to the Employee by the Committee and, subsequently, a majority of the Board finds, after reasonable notice to the Employee (but in no event less than fifteen (15) days' prior notice) and an opportunity for the Employee and his counsel to be heard by the Board, that termination of the Employee's employment for Cause is justified. Termination of the Employee's employment for Cause shall become effective after such finding has been made by the Board and five (5) business days after the Board gives to the Employee notice thereof, specifying in detail the particulars of the conduct of the Employee found by the Board to justify such termination for Cause.
(iv) The Company shall have the absolute right to terminate the Employee's employment without Cause at any time during the Contract Period by vote of a majority of the Board. Termination of the Employee's employment without Cause shall be effective five (5) business days after the Board gives to the Employee notice thereof, specifying that such termination is without Cause.
(v) Upon a termination of the Employee's employment for Cause during the Contract Period, the Employee shall have no right to receive any compensation or benefits hereunder (other than those compensation and benefits provided in Paragraph (i) (a) of Section 5 hereof). Upon a termination of the Employee's employment without Cause or for Disability during the Contract Period, the Employee shall be entitled to receive the compensation and benefits provided in Section 5 hereof. Except as provided in Section 2, this Agreement shall not apply to, and the Employee shall have no right to receive any compensation or benefits hereunder in connection with any termination of the Employee's employment by the Company other than during the Contract Period.
4. Termination of Employment By the Employee During the Contract Period. During the Contract Period, the Employee shall be entitled to terminate his employment with the Company, and shall be entitled to the compensation and benefits hereunder as follows:
(i) If the Employee terminates his employment with the Company during the twelve-month period beginning immediately preceding the date of a Change in Control other than for Good Reason, the Employee shall have no right to receive any compensation or benefits hereunder (other than those provided in Paragraph (i) (a) of Section 5 hereof).
(ii) If the Employee shall terminate his employment with the Company at any time during the Contract Period for Good Reason, the Employee shall be entitled to receive the benefits provided in Section 5 hereof.
(iii) The Employee shall give the Company notice of voluntary
termination of employment pursuant to this Section 4, which notice need specify
only the Employee's desire to terminate his employment and, if such termination
is for Good Reason, set forth in reasonable detail the facts and circumstances
claimed by the Employee to constitute Good Reason. Termination of the Employee's
employment by the Employee pursuant to this Section 4 shall be effective five
(5) business days after the Employee gives notice thereof to the Company. Except
as provided in Section 2, this Agreement shall not apply to, and the Employee
shall have no right to receive, any compensation or benefits hereunder in
connection with any termination of the Employee's employment by the Employee
other than during the Contract Period. This Agreement shall not apply to, and
the Employee shall have no right to receive, any compensation or benefits
hereunder in connection with a termination of the Employee's employment on
account of the Employee's death, whether or not during the Contract Period.
5. Compensation and Benefits Upon Termination in Certain
Circumstances. (i) Upon the termination of the employment of the Employee by the
Company pursuant to Section 3(iv) (termination without Cause) hereto or by the
Employee as described in Section 4(ii) hereof, the Employee shall be entitled to
receive the compensation and benefits in Subparagraphs (a) and (b) of this
Paragraph (i). Upon the termination of the employment of the Employee by the
Company pursuant to Section 3(ii) (termination by reason of Disability) or
Section 3(iii) (termination for Cause) or by the Employee pursuant to Section
4(i), the Employee shall be entitled to the compensation and benefits in
Subparagraph (a) of this Paragraph (i).
(a) The Company shall pay to the Employee, not later than the Termination Date, a lump sum cash amount equal to the sum of (I) the full base salary earned by the Employee through the Termination Date and unpaid at the Termination Date, calculated at the highest rate of base salary in effect at any time during the twelve months immediately preceding the Termination Date, (II) the amount of any base salary attributable to vacation earned by the Employee but not taken before the Termination Date, (III) any annualized bonus accrued to the Employee through the Termination Date and unpaid at the Termination Date, plus (IV) all other amounts earned by the Employee and unpaid at the Termination Date.
(b) The Company shall pay to the Employee, not later than the Termination Date, a lump sum cash amount equal to the product of the Employee's Compensation times [2.99/2.00]<F5>.
(ii) If the Employee's employment is terminated by the Company
pursuant to Section 3(ii) (termination by reason of Disability) or 3(iv)
(termination without Cause) hereof, or by the Employee pursuant to Section 4(ii)
hereof, the Employee shall be entitled to receive the following compensation and
benefits:
(a) The Company shall maintain in full force and effect for the Employee's continued benefit all life, medical, dental, prescription drug and long- and short-term disability plans, programs or arrangements, whether group or individual, in which the Employee was entitled to participate at any time during the twelve 12 month-period prior to the Termination Date, until the earliest to occur of (I) three years after the Termination Date; (II) the Employee's death (provided that compensation and benefits payable to his beneficiaries shall not terminate upon his death); or (III) with respect to any particular plan, program or arrangement, the date he is afforded a comparable benefit at a comparable cost to the Employee by a subsequent employer. In the event that the Employee's participation in any such plan, program or arrangement of the Company is prohibited the Company shall arrange to provide the Employee with compensation and benefits substantially similar to those which the Employee is entitled to receive under such plan, program or arrangement for such period.
(b) The Company shall pay to the Employee all legal fees and expenses (including legal fees and expenses incurred in connection with an arbitration proceeding engaged in pursuant to Section 10 hereof) incurred by the Employee as a result of such termination of employment (including all such fees and expenses, if any, incurred in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided to the Employee by this Agreement or under any other plan, program or
arrangement of the Company or agreement with the Company), as and when such fees and expenses become due.
(iii) The Employee shall not be required to mitigate the amount of any payment or benefit provided for in this Section 5 by seeking other employment or otherwise.
(iv) The amount of any payment or benefit provided for in this
Section 5 shall not be reduced by any compensation, benefits or other amounts
paid to or earned by the Employee as the result of employment with another
employer after the Termination Date or otherwise, except as specifically
provided in Section 5(ii)(a)(III).
(v) In the event that any payment hereunder, together with any other payment or the value of any benefit received in connection with a Change in Control or the termination or the Employee's employment pursuant to this Agreement or any plan, agreement or other arrangement between the Company and the Employee (or any member of Company's affiliated group ("Affiliated Group") as such term is defined in Section 1504 of the Internal Revenue Code of 1986, as amended (the "Code"), without regard to Section 1504(b) thereof) ("Change in Control Payments") would result in the imposition of an excise tax ("Excise Tax") under Section 4999 of the Code, the payment hereunder may, at the election of the Employee, be reduced by the amount necessary to prevent the imposition of such excise tax (the "Payment Reduction").
(a) All determinations required to be made under this Paragraph (v), including whether a Payment Reduction is required to avoid the taxes described in the preceding paragraph, the amount of any such Payment Reduction, and the assumptions to be used in determining such conclusions, shall be made by the Company's certified public accountants (the "Accountants") which shall provide detailed supporting calculations both to the Company and the Employee within fifteen days of the Termination Date, if applicable. All
fees and expenses of the Accountants shall be borne solely by the Company. Within five (5) days after receipt of such supporting detail, the Employee may, by filing a written notice with the Company, elect a Payment Reduction. The Payment Reduction, if any, shall then be made by the Company within five days of the receipt of the Employee's election. If the Accountants determine that no Excise Tax is payable by the Employee, it shall furnish the Employee with a written representation that failure to report the Excise Tax on Employee's applicable U.S. Federal income tax return for the applicable year would not result in the imposition of a negligence or similar penalty. Any determination by the Accountants shall be binding on both the Employee and the Company.
(b) If it is determined that the Payment Reductions which were not made by the Company should have been made ("Overpayment"), or, if such Payment Reductions which were made should not have been made ("Underpayment"), (I) the Company shall, in the case of any such Underpayment, make a further payment to Employee, within thirty days notice of such Underpayment, in the amount of such Underpayment, including interest accrued with respect thereto, provided however, such further payment shall not include any such amounts (including such interest) that would result, either alone, or in combination with any Change in Control Payment in any Excise Tax after giving effect to such payment by the Company to the Employee on account of such Underpayment, or (II) in the case of an Overpayment, then Employee shall pay an amount equal to such Overpayment, including any interest accrued with respect thereto, such that the net effect, after such payment of such Overpayment (including interest) from Employee to the Company would be that no Excise Tax would be imposed on the Employee. For purposes of this Paragraph (v), the Accountants shall determine the amount of such Overpayment or Underpayment.
(vi) In the event that any payment hereunder, together with any other payment or the value of any benefit received in connection with a Change in Control or the termination or the Employee's employment pursuant to this Agreement or any plan, agreement or other arrangement between the Company and the Employee (or any member of the Affiliated Group) would result in the imposition of an excise tax ("Excise Tax") under Section 4999 of the Code, and the Employee does not elect a Payment Reduction, as described in Paragraph 5(v) above, the Company shall pay to the Employee an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Employee of all taxes (including interest and penalties imposed with respect to such taxes), including without limitation, any income taxes, employment taxes and Excise Tax imposed upon the Gross-Up Payment, the Employee retains an amount of the Gross-Up payment equal to the Excise Tax imposed upon the payments made.
(a) Subject to the provisions of Paragraph (vi)(c) hereof, all determinations required to be made under this Paragraph (vi), including whether a Gross-Up Payment is required, the amount of any such Gross-Up Payment, and the assumptions to be used in determining such conclusions, shall be made by the Company's Accountants which shall provide detailed supporting calculations both to the Company and the Employee within fifteen days of the Termination Date. All fees and expenses of the Accountants shall be borne solely by the Company. The Gross-Up Payment, if any, shall be made by the Company within five days of the receipt of the Accountants' determination. If the Accountants determine that no Excise Tax is payable by the Employee, it shall furnish the Employee with a written representation that failure to report the Excise Tax on Employee's applicable U.S. Federal income tax return for the applicable year would not result in the imposition of a negligence or similar penalty.
(b) If it is determined that a Gross-Up Payment which was not
made by the Company should have been made ("Gross-Up Underpayment"),
or, if such Gross-Up Payments which were made should not have been made
("Gross-Up Overpayment"), Employee shall, in the case of any such
Gross-Up Overpayment, refund such Gross-Up Overpayment (together with
any interest paid or credited thereon after taxes applicable thereto)
promptly to the Company, or in the case of an Gross-Up Underpayment, in
the event that the Company exhausts its remedies under Paragraph
(vi)(c) hereof, and the Employee is required thereafter to make a
payment of any Excise Tax, any such Gross-Up Underpayment shall be
promptly paid by the Company to or for the benefit of the Employee. For
purposes of this Paragraph (vi), the Accountants shall determine the
amount of such Overpayment or Underpayment.
(c) Employee shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment of an Excise Tax. Such notification shall be given as soon as practicable but no later than ten business days after the Employee is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. Employee shall not pay any such claim prior to the expiration of a thirty day period following the date on which the Employee gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Employee in writing prior to the expiration of such period that it desires to contest such claim, Employee shall (I) give the Company any information reasonably requested by the Company relating to such claim, (II) take such action in connection with contesting such claim as the Company shall reasonably request, in writing from time to time, including,
without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, and acceptable to the Employee (which such acceptance shall not be unreasonably withheld), (III) cooperate with the Company in good faith in order to effectively contest such claim, and (IV) permit the Company to participate in any proceedings relating to such claim, provided however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold harmless the Employee, on an after-tax basis, for any income taxes, employment taxes and Excise Tax imposed, including interest and penalties imposed with respect thereto, imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Paragraph (vi)(c), the Company shall control all proceedings taken in connection with such contest, and may, at its sole option, pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the applicable taxing authority in respect of such claim and may, at its sole option, either direct the Employee to pay the tax claimed and sue for a refund, or contest the claim in a permissible manner, and the Employee agrees to prosecute such contest to a determination before any administrative tribunal, any court of initial jurisdiction and in one or more appellate courts, as the Company shall determine, provided however, that if the Company directs the Employee to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Employee, on an interest-free basis and shall indemnify and hold the Employee harmless, on an after-tax basis from any income taxes, employment taxes and Excise Tax imposed, including interest or penalties with respect thereto, imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that
any extension of the statute of limitations relating to payment of taxes for the taxable year of the Employee with respect to which such contested amount is claimed is due is limited solely by such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Employee shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority.
(d) If, after the receipt by the Employee of an amount
advanced by the Company pursuant to Paragraph (vi)(c), the Employee
receives a refund with respect to such claim, the Employee shall
(subject to the Company's complying with the requirements of Paragraph
(vi)(c)) promptly pay to the Company the amount of such refund
(together with any interest paid or credited thereon after taxes
applicable thereto). If, after the receipt by the Employee of an amount
advanced by the Company pursuant to Paragraph (vi)(c), a determination
is made that the Employee shall not be entitled to any refund with
respect to such claim and the Company does not notify the Employee in
writing of its intent to contest such denial of refund prior to the
expiration of 30 days after such determination, then such advance shall
be forgiven and shall not be required to be repaid and the amount of
such advance shall offset, to the extent thereof, the amount of
Gross-Up Payment required to be paid.
6. Payment Obligations Absolute. The Company's obligation to pay the Employee the amounts provided for hereunder shall be absolute and unconditional and shall not be affected by any circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or other right which the Company may have against him or anyone else and, including without limitation, any defense or claim based on a breach by the Employee of the covenants contained herein. All amounts payable by the Company hereunder shall be paid without notice or
demand. Except as expressly provided herein, the Company waives all rights which it may now have or may hereafter have conferred upon it, by statute or otherwise, to amend, terminate, cancel or rescind this Agreement in whole or in part. Subject to the right of the Company to seek arbitration under Section 10 hereof and recover any payment made hereunder, each and every payment made hereunder by the Company shall be final, and the Company shall not seek to recover all or any part of such payment from the Employee or from whomsoever may be entitled thereto, for any reason whatsoever.
7. Covenant Not to Solicit.
(i) In the event the Employee's employment is terminated by the Company pursuant to Section 3(iv) hereof (termination without Cause) or by the Employee pursuant to Section 4 hereof, the Employee agrees during the three-year period following the Termination Date not to:
(a) offer employment to any officer or employee of the Company or any subsidiary or affiliated company of the Company or attempt to induce any such officer or employee to leave the employ of the Company or any subsidiary or affiliated company of the Company; or
(b) attempt to persuade or induce, or persuade or induce, any officer, director, agent, customer, client or supplier of the Company or any subsidiary or affiliated company of the Company to discontinue his or her relationship with the Company or any subsidiary or affiliated company of the Company.
(ii) In the event of any breach of the foregoing covenant, the Employee acknowledges that the Company's remedy at law is inadequate and that the Company shall be entitled to seek injunctive relief.
8. Successors; Binding Agreement.
(i) This Agreement shall be binding upon any successor (whether direct or indirect, by purchase, merger, consolidation, liquidation or otherwise) to all or substantially all of the business and/or assets of the Company. Additionally, the Company shall require any such successor expressly to agree to assume and to assume all of the obligations of the Company under this Agreement upon or prior to such succession taking place. A copy of such assumption and agreement shall be delivered to the Employee promptly after its execution by the successor. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession shall constitute "Good Reason." As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and or assets as aforesaid, whether or not such successor executes and delivers the agreement provided for in this Section 8(i).
(ii) This Agreement is personal to the Employee and the Employee may not assign or transfer any part of his rights or duties hereunder, or any compensation due to him hereunder, to any other person, except that this Agreement shall inure to the benefit of and be enforceable by the Employee's personal or legal representatives, executors, administrators, heirs, distributees, devises, legatees or beneficiaries. No payment pursuant to any will or the laws of descent and distribution shall be made hereunder unless the Company shall have been furnished with a copy of such will and/or such other evidence as the Board may deem necessary to establish the validity of the payment.
9. Modification; Waiver. No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in a writing signed by the Employee and such director or officer as may be specifically designated by the Board. Waiver by any party of any breach of or failure to comply with any provision of this Agreement by
the other party shall not be construed as, or constitute, a continuing waiver of such provision, or a waiver of any other breach of, or failure to comply with, any other provision of this Agreement.
10. Arbitration of Disputes.
(i) Any disagreement, dispute, controversy or claim arising out of or relating to this Agreement or the interpretation or validity hereof shall be settled exclusively and finally by arbitration except that in the event of the Employee's breach of the covenant contained in Section 7 hereof, the Company shall be entitled to seek injunctive relief pursuant to Section 7(ii) hereof. It is specifically understood and agreed that any disagreement, dispute or controversy which cannot be resolved between the parties, including without limitation any matter relating to the interpretation of this Agreement, may be submitted to arbitration irrespective of the magnitude thereof, the amount in controversy or whether such disagreement, dispute or controversy otherwise would be considered justiciable or ripe for resolution by a court or arbitral tribunal.
(ii) The arbitration shall be conducted in accordance with the Commercial Arbitration Rules (the "Arbitration Rules") of the American Arbitration Association (the "AAA").
(iii) The arbitral tribunal shall consist of one arbitrator. The parties to the arbitration jointly shall directly appoint such arbitrator within 30 days of initiation of the arbitration. If the parties shall fail to appoint such arbitrator as provided above, such arbitrator shall be appointed by the AAA as provided in the Arbitration Rules and shall be a person who (a) maintains his principal place of business within 30 miles of the City of Fayetteville, Arkansas, and (b) has had substantial experience (whether practical or academic) in mergers and acquisitions or, if no such person is available, in employee compensation and benefits. The Company shall pay all of the fees, if any, and expenses of such arbitrator.
(iv) The arbitration shall be conducted within 30 miles of the City of Fayetteville, Arkansas or in such other city in the United States of America as the parties to the dispute may designate by mutual written consent.
(v) At any oral hearing of evidence in connection with the arbitration, each party thereto or its legal counsel shall have the right to examine its witnesses and to cross-examine the witnesses of any opposing party. No evidence of any witness shall be presented unless the opposing party or parties shall have the opportunity to cross-examine such witness, except as the parties to the dispute otherwise agree in writing or except under extraordinary circumstances where the interests of justice require a different procedure.
(vi) Any decision or award of the arbitral tribunal shall be final and binding upon the parties to the arbitration proceeding. The parties hereto hereby waive, to the extent permitted by law, any rights to appeal or to seek review of such award by any court or tribunal. The parties hereto agree that the arbitral award may be enforced against the parties to the arbitration proceeding or their assets wherever they may be found and that a judgment upon the arbitral award may be entered in any court having jurisdiction.
(vii) Nothing herein contained shall be deemed to give the arbitral tribunal any authority, power, or right to alter, change, amend, modify, add to, or subtract from any of the provisions of this Agreement.
11. Notice. All notices, requests, demands and other communications required or permitted to be given by either party to the other party by this Agreement (including, without limitation, any notice of termination of employment and any notice under the Arbitration Rules of an intention to arbitrate) shall be in writing and shall be deemed to have been duly given when
delivered personally or received by certified or registered mail, return receipt requested, postage prepaid, at the address of the other party, as follows:
If to the Company, to:
Southwestern Energy Company
1083 Sain Street
P.O. Box 1408
Fayetteville, Arkansas 72702-1408
Attention: Board of Directors and Secretary
Either party hereto may change its address for purposes of this Section 11 by giving fifteen (15) days' prior notice to the other party hereto.
12. Severability. If any term or provision of this Agreement or the application thereof to any person or circumstance shall to any extent be invalid or unenforceable, the remainder of this Agreement or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable shall not be affected thereby, and each term and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law.
13. Headings. The headings in this Agreement are inserted for convenience of reference only and shall not be a part of or control or affect the meaning of this Agreement.
14. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed an original.
15. Governing Law. This Agreement has been executed and delivered in the State of Arkansas and shall in all respects be governed by, and construed and enforced in accordance with, the laws of the State of Arkansas.
16. Payroll and Withholding Taxes. The Company may withhold from any amounts payable to the Employee hereunder all federal, state, city or other taxes that the Company may reasonably determine are required to be withheld pursuant to any applicable law or regulation, provided however, that the Company's determinations respecting matters described in Paragraph 5(v) shall be based upon and shall be consistent with the determinations by the Accountants.
17. Entire Agreement. Except as explicitly provided for herein, this Agreement supersedes any and all other oral or written agreements heretofore made relating to the subject matter hereof, including the agreement dated, ______, between the Company and the Employee, and constitutes the entire agreement of the parties relating to the subject matter hereof; provided, that, this Agreement shall not supersede or limit or in any way affect the amount of compensation or benefits to which the Employee would be entitled under any other agreement, plan, program or arrangement with the Company including any such agreement, plan, program or arrangement providing for compensation and benefits in the nature of severance pay.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.
Southwestern Energy Company
By: ___________________________
Chairman of the Compensation Committee
Southwestern Energy Company
By:___________________________
Chairman of the Board of
Southwestern Energy Company
<F2> Applies to Mr. Charles Stevens
<F3> Applies to Messrs. Harold Korell, Greg Kerley, Alan Stevens and Richard Lane.
<F4> Applies to Messrs. Harold Korell, Greg Kerley, Alan Stevens, Richard Lane and Charles Stevens.
<F5> 2.99 for Messrs. Harold Korell, Greg Kerley, Alan Stevens and Ms. Debbie Branch; 2.0 for Richard Lane and Charlie Stevens
FIRST AMENDMENT TO AMENDED AND
RESTATED AGREEMENT OF LIMITED PARTNERSHIP
OF
NOARK PIPELINE SYSTEM, LIMITED PARTNERSHIP
This FIRST AMENDMENT TO AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF NOARK PIPELINE SYSTEM, LIMITED PARTNERSHIP (this "First Amendment") dated as of June 18, 1998 amends that certain Amended and Restated Agreement of Limited Partnership of NOARK Pipeline System, Limited Partnership dated as of January 12, 1998 (the "Partnership Agreement") between Southwestern Energy Pipeline Company, as a general partner, and Enogex Arkansas Pipeline Corporation, as a general partner and a limited partner. Capitalized terms used herein and not defined herein shall have the meanings assigned thereto in the Partnership Agreement.
In consideration of the mutual promises made herein, and for other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, the Partners hereby agree as follows:
1. The definition of "Existing Loans" in Section 1.1 of the Partnership Agreement is hereby amended in its entirety to read as follows:
" "Existing Loans" means the NOARK Debt, and any subsequent loans to the Partnership or any NOARK Related Entity replacing the then existing principal balance of the NOARK Debt, or the then existing principal balance of such subsequent loans, as applicable."
2. The definition of "NOARK Debt" in Section 1.1 of the Partnership Agreement is hereby amended by inserting at the end thereof, the following:
"; provided, however, that from and after June 18, 1998 "NOARK Debt" shall mean the Finance Notes, and shall exclude for all purposes of this Agreement the debt incurred by the Partnership pursuant to the terms of that certain Loan Agreement dated as of June 1, 1998 between the Partnership and NOARK Pipeline Finance, L.L.C., an Oklahoma limited liability company."
3. Section 1.1 of the Partnership Agreement is hereby amended by inserting the following definitions:
"Defaulting Guarantor" shall have the meaning assigned thereto in the Indenture.
"EAPC Allocated Existing Loans" shall mean, at any time after indebtedness is incurred pursuant to the last sentence of Section 3.5(b) hereof, (i) 40% of the Existing Loans immediately prior to the incurrence of such indebtedness and the application of the
proceeds thereof; less, if and only if Southwestern Energy Company is the Defaulting Guarantor (as defined in the Indenture), the principal amount of Finance Notes redeemed upon application of the proceeds of such indebtedness and (ii) if and only if Southwestern Energy Company is the Defaulting Guarantor, the indebtedness incurred pursuant to the last sentence of Section 3.5(b) hereof, and any subsequent loans to the Partnership replacing the principal balance thereof at the time such subsequent loans are made.
"Enogex Guaranty" shall have the meaning assigned thereto in the Indenture.
"Finance Notes" shall mean the 7.15% Notes Due 2018 issued by NOARK Pipeline Finance, L.L.C. in the original aggregate principal amount of $80,000,000 pursuant to the Indenture.
"Indenture" shall mean the Indenture dated as of June 1, 1998 between the NOARK Pipeline Finance, L.L.C. and The Bank of New York, as trustee, as it may be amended or supplemented from time to time.
"Non-Defaulting Guarantor" shall have the meaning assigned thereto in the Indenture.
"Southwestern Guaranty" shall have the meaning assigned thereto in the Indenture.
"SWPL Allocated Existing Loans" shall mean, at any time after
indebtedness is incurred pursuant to the last sentence of Section
3.5(b) hereof, the sum of (i) 60% of the Existing Loans immediately
prior to the incurrence of such indebtedness and the application of the
proceeds thereof, less, if and only if Enogex Inc. is the Defaulting
Guarantor (as defined in the Indenture), the principal amount of
Finance Notes redeemed upon application of the proceeds of such
indebtedness and (ii) if and only if Enogex Inc. is the Defaulting
Guarantor, the indebtedness incurred pursuant to the last sentence of
Section 3.5(b) hereof, and any subsequent loans to the Partnership
replacing the principal balance thereof at the time such subsequent
loans are made.
4. Subsection (b) of Section 3.5 of the Partnership Agreement is hereby amended as follows:
(i) by inserting the words "by the Partnership (including any NOARK Related Entity)" immediately after the words "indebtedness for borrowed money" in the first line thereof; and
(ii) by inserting at the end of said subsection (b), the following sentence:
"Notwithstanding the foregoing, (i) if Southwestern Energy Company shall be a Defaulting Guarantor and Enogex Inc. shall be a Non-Defaulting Guarantor, the Partnership, at the direction of EAPC, may incur indebtedness for borrowed money (x) upon a declaration of acceleration of the Finance Notes pursuant to Section 6.1(b) of the Indenture, in a principal amount equal to the Guaranteed Principal Amount (as defined in the Enogex Guaranty) or (y) otherwise, in a principal amount equal to the Redemption
Price (as defined in the Indenture) applicable to the redemption of Finance Notes in an aggregate principal amount equal to the Guaranteed Principal Amount (as defined in the Enogex Guaranty), in each case without the consent of the SuperMajority in Interest of Partners, and the proceeds of such indebtedness shall be applied on behalf of Enogex Inc. to the payment of the Finance Notes upon acceleration thereof or to the redemption of Finance Notes pursuant to Section 3.1(b) of the Indenture, as applicable, and (ii) if Enogex Inc. shall be a Defaulting Guarantor and Southwestern Energy Company shall be a Non-Defaulting Guarantor, the Partnership may, at the direction of SWPL, incur indebtedness for borrowed money (x) upon a declaration of acceleration of the Finance Notes pursuant to Section 6.1(b) of the Indenture, in a principal amount equal to the Guaranteed Principal Amount (as defined in the Southwestern Guaranty) or (y) otherwise, in a principal amount equal to the Redemption Price (as defined in the Indenture) applicable to the redemption of Finance Notes in an aggregate principal amount equal to the Guaranteed Principal Amount (as defined in the Southwestern Guaranty), in each case without the consent of the SuperMajority in Interest of Partners, and the proceeds of such indebtedness shall be applied on behalf of Southwestern Energy Company to the payment of the Finance Notes upon acceleration thereof or to the redemption of Finance Notes pursuant to Section 3.1(b) of the Indenture; provided that any indebtedness incurred pursuant to this sentence without the consent of the SuperMajority in Interest of Partners shall be unsecured, shall be non-recourse to each of the Partners (unless with respect to either Partner, such Partner shall otherwise consent in writing) and shall not contain any covenants, agreements or provisions which would in any material respect be more restrictive on the Partnership and the NOARK Related Entities and their respective businesses and affairs than the covenants, agreements or provisions of the Indenture and the Finance Notes. In the event that EAPC directs the Partnership to incur indebtedness as described in the preceding sentence, (i) EAPC, on behalf of the Partnership, and the Partnership are hereby authorized to take such action as may be reasonably required in order for the Partnership to incur such indebtedness in conformity with the requirements of the preceding sentence, without any further action by the Partners or the Management Committee and (ii) SWPL shall take all such actions and execute any and all documents reasonably required by it as a general partner of the Partnership to facilitate the incurrence of such indebtedness by the Partnership; provided that SWPL shall not incur any liability in respect thereof. In the event that SWPL directs the Partnership to incur indebtedness as described in the preceding sentence, (i) SWPL, on behalf of the Partnership, and the Partnership are hereby authorized to take such action as may be reasonably required in order for the Partnership to incur such indebtedness in conformity with the requirements of the second preceding sentence, without any further action by the Partners or the Management Committee and (ii) EAPC shall take all such actions and execute any and all documents reasonably required by it as a general partner of the Partnership to facilitate the incurrence of such indebtedness by the Partnership; provided that EAPC shall not incur any liability in respect thereof.
5. Section 4.2(c) of the Partnership Agreement is hereby amended in its entirety to read as follows:
(c) The Partners agree that (i) prior to the incurrence of any indebtedness pursuant to the last sentence of Section 3.5(b), the Existing Loans, including applicable interest, shall be repaid as follows: (x) sixty percent (60%) of the Existing Loans, including applicable interest, shall be repaid out of any amounts otherwise distributable to SWPL, before taking into account debt service on the Existing Loans, under this Agreement and (y) forty percent (40%) of the Existing Loans, including applicable interest, shall be repaid out of any amounts otherwise distributable to EAPC, before taking into account debt service on the Existing Loans, under this Agreement, and (ii) from and after the incurrence of any indebtedness pursuant to the last sentence of Section 3.5(b), the Existing Loans, including applicable interest, shall be repaid as follows: (x) the SWPL Allocated Existing Loans, including applicable interest, shall be repaid out of any amounts otherwise distributable to SWPL, before taking into account debt service on the Existing Loans, under this Agreement and (y) the EAPC Allocated Existing Loans, including applicable interest, shall be repaid out of any amounts otherwise distributable to EAPC, before taking into account debt service on the Existing Loans, under this Agreement. If such amounts referred to in clause (i) of the preceding sentence are insufficient to pay a Partner's percentage share (i.e. 60% or 40% as set forth above) of the debt service on the Existing Loans, including applicable interest, in accordance with their terms, then such Partner shall be responsible to contribute to the capital of the Partnership amounts sufficient to pay its percentage share (i.e. 60% or 40% as set forth above) of the debt service on the Existing Loans, including applicable interest, and shall do so upon notice from the Project Leader. If such amounts referred to in clause (ii) of the preceding sentence are insufficient to pay the debt service on the SWPL Allocated Existing Loans or the EAPC Allocated Existing Loans, in each case including applicable interest, in accordance with its respective terms, then SWPL or EAPC, as the case may be, shall be responsible to contribute to the capital of the Partnership amounts sufficient to pay the debt service on the SWPL Allocated Existing Loans or the EAPC Allocated Existing Loans, as applicable, including in each case interest thereon, and shall do so upon notice from the Project Leader. Notwithstanding the foregoing, if either SWPL or EAPC obtains knowledge that it is responsible to contribute to the capital of the Partnership pursuant to this Section 4.2(c), then such Partner shall be obligated to make such contribution of capital to the Partnership on a timely basis notwithstanding the fact that the Project Leader has not given notice to such Partner as contemplated hereby. Capital Contributions by the Partners pursuant to this Section 4.2(c) shall not alter the Partnership Percentages of the Partners. Default by a Partner in the making of such Capital Contributions shall cause it to be deemed a Delinquent Partner subject to the provisions of Section 4.3 hereof.
6. Section 4.2(d) of the Partnership Agreement is hereby amended in its entirety to read as follows:
(d) Notwithstanding anything to the contrary in Section 4.2(c) above or elsewhere in this Agreement, it is understood and agreed that the terms of any Existing Loans may in the future (but do not currently) provide that the amortization of the principal amount thereof shall be borne or allocated in a manner different from the percentages set forth in
Section 4.2(c) or any Partner may direct the Project Leader to apply amounts of Partnership cash otherwise distributable to such Partner (except amounts to be paid to other Partners pursuant to the other provisions of this Agreement) to the repayment or prepayment of the principal amount of the Existing Loans in excess of the amounts required to be repaid under the terms of the Existing Loans, provided such Partner bears all costs and penalties of doing so. In addition, either Partner may elect to redeem from such Partner's own funds a portion of the Finance Notes pursuant to Section 3.1 of the Indenture. Consequently, a Partner may thereby pay or bear more than its attributable percentage of the principal amount of the Existing Loans to be repaid. In such event, the percentages of the then outstanding principal amount of the Existing Loans payable out of the distributable amounts attributable to the Partners set forth in Section 4.2(c) shall be adjusted as appropriate to reflect the resulting percentage of the aggregate outstanding principal amount of the Existing Loans then attributable to each Partner.
7. Section 5.3 of the Partnership Agreement is hereby amended in its entirety to read as follows:
5.3. Special Interest Expense. The Partnership interest expense deductions incurred with regard to the Existing Loans and the Finance Notes as referenced in Section 4.2(c) shall be allocated to the Partners as follows:
(i) prior to the incurrence of any indebtedness pursuant to the last sentence of Section 3.5(b), 60% to SWPL and 40% to EAPC; and
(ii) following the incurrence of any indebtedness pursuant to the last sentence of Section 3.5(b), the Partnership interest expense deductions incurred with regard to the SWPL Allocated Existing Loans shall be allocated to SWPL and the Partnership interest expense deductions incurred with regard to the EAPC Allocated Existing Loans shall be allocated to EAPC.
In the event the percentages of the outstanding principal amounts of the Existing Loans payable out of the distributable amounts attributable to each Partner are adjusted pursuant to Section 4.2(d), the foregoing percentages shall be subject to adjustment to reflect the same percentages as the percentages established pursuant to Section 4.2(d).
8. The Partnership Agreement, as amended hereby, shall remain in full force and effect and is hereby ratified, approved and confirmed in all respects.
9. From and after the date hereof, each reference in the Partnership Agreement to "this Agreement," "hereof," or "hereunder" or words of like import, and all references to the Partnership Agreement in any and all agreements, instruments, documents, notes, certificates and other writings of every kind and nature shall be deemed to mean the Partnership Agreement, as modified and amended by this First Amendment.
10. THE PROVISIONS OF THIS FIRST AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF ARKANSAS (EXCLUDING ANY CONFLICTS-OF-LAW RULE OR PRINCIPLE THAT MIGHT REFER SAME TO THE LAWS OF ANOTHER JURISDICTION), EXCEPT TO THE EXTENT THAT SAME ARE MANDATORILY SUBJECT TO THE LAWS OF ANOTHER JURISDICTION PURSUANT TO THE LAWS OF SUCH OTHER JURISDICTION.
11. This First Amendment may be executed in multiple counterparts, each of which shall be deemed an original agreement, and all of which shall constitute one agreement, by each of the parties hereto on the dates respectively indicated in the signatures of said parties, notwithstanding that all of the parties are not signatories to the original or to the same counterpart, to be effective as of the day and year hereinabove set forth.
IN WITNESS WHEREOF, the Partners have executed this First Amendment on the date first set forth above.
GENERAL PARTNERS:
ENOGEX ARKANSAS PIPELINE CORPORATION
By: Name: E. Keith Mitchell Title: Vice President |
SOUTHWESTERN ENERGY PIPELINE COMPANY
By:
Name: Stanley D. Green
Title: Executive Vice President-Finance
& Corporate Development
|
LIMITED PARTNER:
ENOGEX ARKANSAS PIPELINE CORPORATION
By: Name: E. Keith Mitchell Title: Vice President |
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following information should be read in conjunction with the information contained in the financial statements and the notes thereto included in this report and with the discussion below on "Forward-Looking Information." Certain reclassifications have been made to the prior years' financial statements to conform with the 1998 presentation. These reclassifications had no effect on previously reported net income.
Results of Operations
The Company reported a net loss of $30.6 million, or $1.23 per share, for
1998. The loss for 1998 reflects the impact of an after-tax, non-cash ceiling
test write-down of the Company's oil and gas properties of $40.5 million, or
$1.63 per share, recorded in the second quarter of 1998. Excluding the non-cash
charge, the Company would have recognized net income of $9.9 million, or $.40
per share, down from $18.7 million, or $.76 per share, in 1997. Net income in
1996 was $19.2 million, or $.78 per share. During 1998, earnings were negatively
impacted by both lower wellhead prices for oil and gas and by unseasonably warm
weather. The slight drop in 1997 earnings, as compared to 1996, was due to
increased depreciation, depletion and amortization expense (DD&A) and higher
interest costs which were partially offset by improved natural gas prices and a
utility rate increase. Revenues and operating income for the Company's major
business segments are shown in the following table.
1998 1997 1996
----------------------------------
(in thousands)
Revenues
Exploration and production $ 86,232 $100,129 $ 86,978
Gas distribution 134,711 154,155 142,730
Marketing 97,175 82,807 29,969
Other 620 704 667
Eliminations (52,433) (61,606) (57,004)
----------------------------------------------------------------
$266,305 $276,189 $203,340
================================================================
Operating Income
Exploration and production $(47,273)<F1> $33,303 $34,184
Gas distribution 16,029 16,941 13,974
Marketing 1,800 1,315 (549)
Other 493 377 387
----------------------------------------------------------------
$(28,951) $51,936 $47,996
================================================================
<F1> Includes a $66.4 million pre-tax write-down of oil and gas properties.
|
Exploration and Production
The Company's exploration and production revenues decreased 14% in 1998 and
increased 15% in 1997. The decrease in 1998 was due primarily to lower average
oil and gas prices. The increase in 1997 was due to higher average gas prices
and an increase in the Company's oil production.
Excluding the impact of the non-cash write-down of oil and gas properties,
operating income of the exploration and production segment was $19.1 million in
1998, down 43% from $33.3 million in 1997. Operating income was $34.2 million in
1996. The decrease in 1998 was primarily due to lower average oil and gas
prices, which were down 9% and 28%, respectively, from their levels in 1997.
During 1997, higher DD&A expense offset the effect of improved gas pricing and
higher oil production resulting in the small decrease in operating income.
Gas production in 1998 totaled 32.7 billion cubic feet (Bcf), compared to
33.4 Bcf in 1997. Gas production was 34.8 Bcf in 1996. The decreases in
production were the result of lower sales from the Company's Arkansas
properties, which are largely affected by the demands of the Company's utility
distribution systems. The decrease in sales to the Company's gas distribution
systems in both 1998 and 1997 was partially offset by an increase in sales to
unaffiliated purchasers.
1998 1997 1996
---------------------------
Gas Production
Affiliated sales (Bcf) 11.3 14.3 16.3
Unaffiliated sales (Bcf) 21.4 19.1 18.5
-----------------------------------------------------------
32.7 33.4 34.8
-----------------------------------------------------------
Average price per Mcf $2.34 $2.57 $2.26
===========================================================
Oil Production
Unaffiliated sales (MBbls) 703 749 391
-----------------------------------------------------------
Average price per Bbl $13.60 $19.02 $21.21
===========================================================
|
Gas sales to unaffiliated purchasers were 21.4 Bcf in 1998, up from 19.1
Bcf in 1997 and 18.5 Bcf in 1996. The increases were primarily the result of
drilling activity in New Mexico and producing properties acquired in late 1996.
Sales to unaffiliated purchasers are primarily made under contracts which
reflect current short-term prices and which are subject to seasonal price
swings.
Intersegment sales to Arkansas Western Gas Company (AWG), the utility
subsidiary which operates the Company's northwest Arkansas utility system, were
7.7 Bcf in 1998, 8.6 Bcf in 1997, and 10.1 Bcf in 1996. Unseasonably warm
weather during 1998 decreased AWG's demand for gas supply. Colder weather in
early 1996, along with the resulting need for injections to
17.
replenish the utility's storage facilities, caused higher demand for gas supply
by AWG that year. The Company's gas production provided approximately 59% of
AWG's requirements in 1998, 64% in 1997, and 62% in 1996. Most of the sales to
AWG's system during this period were pursuant to an intersegment long-term
contract entered into in 1978 with SEECO Inc. (SEECO) which was amended and
restated in 1994 as a result of the Gas Cost Settlement, discussed more fully
below under "Regulatory Matters." The sales price under this contract averaged
$2.99 per thousand cubic feet (Mcf) through November of 1998, $3.46 per Mcf in
1997, and $3.13 per Mcf in 1996. This contract expired July 24, 1998 but was
continued on a month-to-month basis through November 1998.
In March 1997, AWG filed a gas supply plan with the Arkansas Public Service
Commission (APSC) which projected system load growth patterns and long range gas
supply needs for the utility's northwest Arkansas system. The gas supply plan
also addressed replacement supplies for AWG's long-term contract with SEECO.
After discussions with the APSC it was determined that the majority of the
utility's future gas supply needs should be provided through a competitive
bidding process. On October 1, 1998, AWG sent requests for proposals to various
suppliers requesting bids on seven different packages of gas supply to be
effective December 1, 1998. These bid requests included replacement of the gas
supply and no-notice service previously provided by the long-term gas supply
contract between AWG and SEECO. Eleven potential suppliers returned bids in late
October.
SEECO along with the Company's marketing subsidiary successfully bid on
five of the seven packages with prices based on the NorAm East Index plus a
demand charge. The volumes of gas projected to be sold under these contracts in
their first year are approximately equal to the historical annual volumes sold
under the expired long-term contract. However, the volumes to be sold under
these contracts are not fixed as they were under the expired contract. The total
premium over the NorAm East Index under these contracts is estimated to be
approximately $1.0 million lower (after tax) than the annual premium earned
under the expired long-term contract. The majority of the premium will be
received through monthly demand charges which will be received regardless of
volumes actually delivered. Other sales to AWG are made under long-term
contracts with flexible pricing provisions.
The Company's intersegment sales to Associated Natural Gas Company
(Associated), a division of AWG which operates the Company's natural gas
distribution systems in northeast Arkansas and parts of Missouri, were 3.6 Bcf
in 1998, 5.7 Bcf in 1997, and 6.2 Bcf in 1996. Deliveries to Associated
decreased in 1998 and 1997 due primarily to corresponding changes in heating
weather. Effective October 1990, SEECO entered into a ten-year contract with
Associated to supply a portion of its system requirements at a price to be
redetermined annually. The sales price under this contract was $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 averaged $2.37 for 1998 compared to $2.51 for 1997.
The overall average price received at the wellhead for the Company's gas
production was $2.34 per Mcf in 1998, $2.57 per Mcf in 1997, and $2.26 per Mcf
in 1996. The changes in the average price received primarily reflects changes in
average annual spot market prices and an increase in the proportionate share of
the Company's production sold at spot market prices and under long-term
contracts with market-sensitive pricing.
The Company periodically enters into hedging activities with respect to a
portion of its projected crude oil and natural gas production through a variety
of financial arrangements intended to support oil and gas prices at targeted
levels and to minimize the impact of price fluctuations (see Note 8 of the
financial statements for additional discussion). The Company expects the average
price it receives for its total gas production to be generally higher than
average spot market prices due to the prices it receives under the contracts
covering its intersegment sales which are long-term and provide swing services
to the Company's utility systems. Future changes in revenues from sales of the
Company's gas production will be dependent upon changes in the market price for
gas, access to new markets, maintenance of existing markets, and additions of
new gas reserves.
The Company expects future increases in its gas production to come
primarily from sales to unaffiliated purchasers. The Company is unable to
predict changes in the market demand and price for natural gas, including
changes which may be induced by the effects of weather on demand of both
affiliated and unaffiliated customers for the Company's production.
Additionally, the Company holds a large amount of undeveloped leasehold acreage
and producing acreage, and has an inventory of drilling leads, prospects and
seismic data which will continue
18.
to be developed and evaluated in the future. The Company's exploration programs
have historically been directed primarily toward natural gas.
Oil production during 1998 totaled 703,000 barrels, down from 749,000
barrels in 1997. Oil production was 391,000 barrels in 1996. The increase in
1997 oil production resulted from the Company's November 1, 1996 acquisition of
oil producing and gas properties.
Gas Distribution
Gas distribution revenues fluctuate due to the pass-through of gas supply
cost changes and due to the effects of weather. Because of the corresponding
changes in purchased gas costs, the revenue effect of the pass-through of gas
cost changes has not materially affected net income.
Gas distribution revenues decreased 13% in 1998 and increased 8% in 1997.
The decrease in 1998 was due to the effects of weather which was 13% warmer than
normal and 16% warmer than the prior year. The increase in 1997 resulted from an
increase in the average utility rate caused by higher gas prices and a rate
increase implemented in late 1996.
Operating income for Southwestern's utility systems decreased 5% in 1998
and increased 21% in 1997. The decrease in 1998 was due to the effects of warmer
weather, partially offset by a $3.0 million rate increase approved in December
1997 for the Company's northeast Arkansas and Missouri systems and customer
growth. The increase in 1997 was the result of a $5.1 million annual rate
increase implemented in late 1996 for the utility's northwest Arkansas system
and customer growth which more than offset lower deliveries resulting from
warmer weather.
1998 1997 1996
---------------------------
Gas Distribution Systems
Throughput (Bcf)
Sales volumes 22.9 27.6 29.9
Transportation volumes
End-use 8.8 6.6 5.5
Off-system 1.1 2.8 3.6
-----------------------------------------------------------
32.8 37.0 39.0
-----------------------------------------------------------
Average number of
sales customers 174,642 172,200 168,568
-----------------------------------------------------------
Heating weather
Degree days 3,472 4,131 4,341
Percent of normal 87% 103% 108%
Average sales rate per Mcf $5.57 $5.36 $4.57
===========================================================
|
In 1998, AWG sold 15.1 Bcf to its customers at an average rate of $5.37 per
Mcf, compared to 17.4 Bcf at $5.34 per Mcf in 1997 and 18.8 Bcf at $4.40 per Mcf
in 1996. Additionally, AWG transported 6.0 Bcf in 1998, 5.0 Bcf in 1997, and 4.2
Bcf in 1996 for its end-use customers. Associated sold 7.8 Bcf to its customers
in 1998 at an average rate of $5.95 per Mcf, compared to 10.2 Bcf in 1997 at
$5.39 per Mcf and 11.1 Bcf at $4.87 per Mcf in 1996. Associated transported 2.8
Bcf for its end-use customers in 1998, compared to 1.6 Bcf in 1997 and 1.3 Bcf
in 1996. The decrease in the combined volumes sold and transported in both 1998
and 1997 for the utility systems resulted from warmer weather, partially offset
by customer growth. The fluctuations in the average sales rates reflect changes
in the average cost of gas purchased for delivery to the Company's customers,
which are passed through to customers under automatic adjustment clauses, and
rate increases implemented in late 1996 and 1997.
Total deliveries to industrial customers of AWG and Associated, including
transportation volumes, were 13.0 Bcf in 1998, and 13.2 Bcf in both 1997 and
1996. AWG also transported 1.1 Bcf of gas through its gathering system in 1998
for off-system deliveries, all to the NOARK Pipeline System (NOARK Pipeline),
compared to 2.8 Bcf in 1997 and 3.6 Bcf in 1996. The decreases in off-system
deliveries in 1998 and 1997 were due to the on-system demands of the Company's
gas distribution systems and normal production declines in the area served by
the utility's gathering system. The average transportation tariff was
approximately $.11 per Mcf, exclusive of fuel, in 1998 and $.16 in 1997 and
1996.
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 2% to 3% annually, while
Associated has experienced customer growth of approximately 1% or less annually.
Based on current economic conditions in the Company's service territories, the
Company expects this trend in customer growth to continue. In December 1996, AWG
received approval from the APSC for a rate increase of $5.1 million annually.
The Company received approvals in December 1997 from the APSC and the Missouri
Public Service Commission (MPSC) for rate increases and tariff changes which
allow the utility to collect an additional $3.0 million annually. Of the $3.0
million total, approximately $2.0 million is in the form of base rate increases
and $1.0 million is related to the increased cost of service of the Company's
gathering
19.
plant which is recovered through either the purchased gas adjustment clause or
through direct charges to transportation customers.
In its order approving the Missouri changes, the MPSC further ordered
Associated to modify its purchased gas adjustment tariff to remove any specific
language referencing recovery of the cost of service of its gathering
facilities. The MPSC order provided that Associated should base gathering
charges to its customers on competitive market conditions and that it would be
allowed recovery from its sales and transportation customers of all prudently
incurred gathering costs without reference to its cost of service. The MPSC will
review these gathering costs annually as part of its annual review of
Associated's gas costs. Associated believes that the MPSC lacks statutory
authority to approve charges which are not based on historical cost of service.
Associated plans to appeal this issue to the courts and intends to bill its
ratepayers gas gathering costs based on its cost of service until the matter is
resolved. If usage of the Company's gathering system to obtain system gas supply
or to source gas delivered to its industrial customers should decrease, then
recovery of these gathering costs would decrease as well. Gathering costs have
been recovered in this manner from Missouri customers since Associated's 1990
rate case. Prior to the 1997 changes, Associated's gathering costs were
recovered from Arkansas customers through its base rates.
Tariffs implemented in Arkansas as a result of both the 1996 and 1997 rate
increases contain a weather normalization clause to lessen the impact of revenue
increases and decreases which might result from weather variations during the
winter heating season. Rate increase requests which may be filed in the future
will depend on customer growth, increases in operating expenses, and additional
investments in property, plant and equipment.
Marketing
Operating income for the marketing segment was $1.8 million on revenues of
$97.2 million in 1998, compared to $1.3 million on revenues of $82.8 million in
1997, and a loss of $.5 million on revenues of $30.0 million in 1996. The
Company increased its marketing activities when it formed a marketing group in
mid-1996 to better enable the Company to capture downstream opportunities which
arise through marketing and transportation activity. The Company marketed 49.6
Bcf in 1998, compared to 36.2 Bcf in 1997 and 13.0 Bcf in 1996. The Company
enters into hedging activities with respect to its gas marketing activities to
provide margin protection (see Note 8 of the financial statements for additional
discussion).
NOARK Pipeline
The Company has a 25% interest in the NOARK Pipeline System, Limited
Partnership (NOARK). The NOARK Pipeline was a 258-mile long intrastate gas
transmission system which extended across northern Arkansas, crossing three
major interstate pipelines and interconnecting with the Company's distribution
systems. NOARK Pipeline had been operating below capacity and generating losses
since it was placed in service in September 1992. The Company's share of the
pretax loss from operations related to its NOARK investment was $3.1 million in
1998, $4.5 million in 1997, and $3.8 million in 1996. These amounts are included
in other income (expense). The improvement in the 1998 pretax loss primarily
reflects a lower interest rate on NOARK's debt which resulted from a refinancing
discussed below in "Liquidity and Capital Resources."
In January 1998, the Company entered into an agreement with Enogex Inc.
(Enogex), a subsidiary of OGE Energy Corp., to expand NOARK Pipeline and provide
access to Oklahoma gas supplies through an integration of NOARK Pipeline with
the Ozark Gas Transmission System (Ozark). Ozark was a 437-mile interstate
pipeline system which began in eastern Oklahoma and terminated in eastern
Arkansas. On July 1, 1998, the Federal Energy Regulatory Commission (FERC)
authorized the operation and integration of Ozark and NOARK Pipeline as a
single, integrated pipeline. The FERC order also authorized the purchase of
Ozark by a subsidiary of Enogex and the construction of integration facilities.
Enogex acquired Ozark and contributed the pipeline system to the NOARK
partnership and also acquired the NOARK partnership interests not held by
Southwestern. Enogex funded the acquisition of Ozark and the expansion and
integration with NOARK Pipeline which resulted in the Company's interest in the
partnership decreasing to 25% with Enogex owning a 75% interest. There are also
provisions in the agreement with Enogex which allow for future revenue
allocations to the Company above its 25% partnership interest if certain minimum
throughput and revenue assumptions are not met. As a result of the changes
discussed above, the Company believes that it will be able to significantly
reduce the losses it has experienced on the NOARK project and expects its
investment in NOARK to be realized over the life of the system. See Note 7 of
the financial statements for additional discussion.
20.
Ozark Pipeline, the new integrated system, became operational November 1,
1998, and includes 749 miles of pipeline with a total throughput capacity of 330
MMcfd. Deliveries are currently being made by the integrated pipeline to
portions of AWG's distribution system, to Associated, and to the interstate
pipelines with which it interconnects. In 1998, NOARKPipeline had an average
daily throughput of 27.3 million cubic feet of gas per day (MMcfd) before the
integration with Ozark, compared to average daily throughput of 39.8 MMcfd in
1997, and 57.5 MMcfd in 1996. After the integration in November 1998, Ozark
Pipeline had an average daily throughput of 184.6 MMcfd. At December 31, 1998,
the Company's gas distribution subsidiary had transportation contracts with
Ozark Pipeline for 82.3 MMcfd of firm capacity. These contracts expire in 2002
and 2003 and are renewable annually thereafter until terminated with 180 days'
notice.
As further explained in Note 11 of the financial statements, the Company
has severally guaranteed 60% of NOARK's currently outstanding debt. This debt
financed a portion of the original cost to construct NOARK.
Regulatory Matters
The December 1996 rate increase order issued by the APSC also provided that
AWG cause to be filed with the APSC an independent study of its procedures for
allocating costs between regulated and non-regulated operations, its staffing
levels and executive compensation. The independent study was ordered by the APSC
to address issues raised by the Office of the Attorney General of the State of
Arkansas (AG). The study was delayed until 1999. Requests for proposals to
perform the study have been sent by the Company to independent consulting firms.
The study is expected to be completed in 1999.
During 1994, the Company entered into a settlement with the Staff of the
APSC and the AG to resolve a dispute concerning the Company's pricing of
intersegment sales (the Gas Cost Settlement). The issues involved the price of
gas sold under a long-term contract between AWG and SEECO. The Gas Cost
Settlement, which was effective July 1, 1994, increased the volumes which could
be sold by SEECO to AWG, but made the sales price equal to a spot market index
plus a premium. The amended contract provided that volumes equal to the
historical level of sales under the contract be sold at the spot market index
plus a premium of $.95 per Mcf, while incremental sales volumes receive a
premium of $.50 per Mcf. As discussed above in "Exploration and Production,"
this contract expired July 24, 1998 and was replaced through a competitive
bidding process beginning with December 1998 gas supply. Gas to be delivered
under bids secured by the Company will approximate volumes historically
delivered under the expired contract but at a lower premium.
In December 1998, the Staff of the APSC filed a motion for issuance of show
cause order asking the APSC to require Associated to demonstrate that the cost
paid under three gas purchase and transportation contracts do not violate an
Arkansas statute which requires gas utilities to buy or furnish gas from the
lowest or most advantageous market. All three of these contracts are used to
supply gas to the Associated division. If a utility fails to comply with the
statute, it is subject to disallowance of the difference in the price paid and
the market price. The APSC Staff alleges that Associated has overcharged its
customers by approximately $3.1 million since November 1993. The majority of
this amount relates to Associated's intersegment gas purchase contract. The
Staff of the Missouri Public Service Commission has, on three occasions,
proposed to disallow a portion of the costs under this contract; however,
Associated successfully defended this contract all three times before the MPSC
and the Missouri courts. The Company believes that Associated has not violated
Arkansas law and that Associated's ultimate liability, if any, will not have a
material adverse effect on the Company's financial condition or results of
operations.
AWG also purchases gas from unaffiliated producers under take-or-pay
contracts. The Company believes that it does not have a significant exposure to
liabilities resulting from these contracts and expects to be able to continue to
satisfactorily manage its exposure to take-or-pay liabilities.
Operating Costs and Expenses
The Company's operating costs and expenses, exclusive of gas purchases by
the Company's utility and marketing segments and the non-cash write-down of oil
and gas properties in 1998, increased by 1% in 1998 and by 16% in 1997. In 1998,
a 5% increase in operating and general expenses was largely offset by a decrease
in depreciation, depletion and amortization (DD&A) expense. The decrease in DD&A
expense resulted primarily from a decline in volumes produced and a second
quarter write-down of oil and gas properties which lowered the net cost basis of
that segment's depreciable assets and the amortization rate per unit of
production. The increase in 1997 was due primarily to increases in operating and
general expenses and DD&A expense, primarily related to the Company's
21.
exploration and production segment. During 1997, production costs associated
with certain oil properties acquired in November 1996 accounted for most of this
increase in operating expense. The increase in DD&A expense for 1997 was
primarily due to an increase in the amortization rate per unit of production in
the exploration and production segment. General and administrative expenses
increased in 1998 and 1997 due to inflationary increases in payroll and other
costs. Additionally, in 1998 general and administrative costs increased due to
severance related costs and other costs associated with the closing of the
Company's Oklahoma City exploration and production office.
The Company follows the full cost method of accounting for the exploration,
development, and acquisition of oil and gas properties. DD&A is calculated using
the units-of-production method. The Company's annual gas and oil production, as
well as the amount of proved reserves owned by the Company and the costs
associated with adding those reserves, are all components of the amortization
calculation. The DD&A rate in 1998 averaged $1.04 per Mcfe, compared to $1.06
per Mcfe in 1997 and $.95 per Mcfe in 1996. The overall increases in the
Company's amortization rate since 1996 are caused by increases in the Company's
average finding costs. The amortization rate declined mid-year 1998 due to the
write-down of the Company's oil and gas properties to the full cost ceiling
limitation. The average rate for the last six months of 1998 was $.96 per Mcfe.
The Company's full cost ceiling is evaluated at the end of each quarter. Market
prices, production rates, levels of reserves, and the evaluation of costs
excluded from amortization all influence the calculation of the full cost
ceiling. A decline in oil and gas prices from year-end 1998 levels or other
factors, without other mitigating circumstances, could cause an additional
write-down of capitalized costs and a noncash charge against future earnings.
Gas purchased for resale by the Company's marketing segment increased to
$73.2 million in 1998, compared to $63.1 million in 1997 and $14.1 million in
1996, due to an increase in volumes marketed. The decrease in purchased gas
costs for the Company's gas distribution segment in 1998 was primarily due to
lower volumes required by the utility's customers. The increase in purchased gas
costs for this segment in 1997 was due primarily to higher per unit gas costs.
Purchased gas costs for the gas distribution segment are influenced primarily by
changes in requirements for gas sales, the price and mix of gas purchased, and
the timing of recoveries of deferred purchased gas costs.
Inflation impacts the Company by generally increasing its operating costs
and the costs of its capital additions. The effects of inflation on the
Company's operations in recent years have been minimal due to low inflation
rates. However, during 1997 and continuing into the first half of 1998 the
impact of inflation intensified in certain areas of the Company's exploration
and production operations as shortages in drilling rigs, third party services
and qualified labor increased. With the general decline in oil and gas prices,
this impact has decreased in the second half of 1998 and is continuing into
1999. Increased competition in south Louisiana also had the impact of increasing
3-D seismic and land costs in the area. Additionally, delays inherent in the
rate-making process prevent the Company from obtaining immediate recovery of
increased operating costs of its gas distribution segment.
Other Costs and Expenses
Interest costs, net of capitalization, were up 5% in 1998 and 26% in 1997,
both as compared to prior years. The increase in 1998 was primarily due to the
lower level of capitalized interest related to the Company's oil and gas
properties. The increase in 1997 was due to an increase in long-term debt. The
changes in long-term debt are discussed below in "Liquidity and Capital
Resources." Interest capitalized decreased 13% in 1998 and increased 8% in 1997.
The changes in capitalized interest are due primarily to the change in the level
of costs excluded from amortization in the exploration and production segment.
The changes in other income in 1998, 1997, and 1996, relate primarily to
changes in the Company's share of operating losses incurred by NOARK, as
discussed above. Additionally, in 1998 the Company accrued certain costs related
to a judgment bond that the Company was required to post after receiving an
adverse verdict in October 1998. See footnote 11, Contingencies and Commitments,
of the Company's financial statements and Part I, Item 3, Legal Proceedings, of
the Company's 1998 Form 10-K for additional information regarding the class
action lawsuit.
The previously discussed second quarter write-down of the Company's oil and
gas properties resulted in a deferred tax benefit of $25.9 million. Excluding
the impact of this change in deferred income taxes, the changes in the
provisions for current and deferred income taxes recorded, as compared to 1997,
resulted primarily from the level of taxable income, the collection of
under-recovered purchased gas costs, and the
22.
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.
Liquidity and Capital Resources
The Company continues to depend principally on internally generated funds
as its major source of liquidity. However, the Company has sufficient ability to
borrow additional funds to meet its short-term seasonal needs for cash, to
finance a portion of its routine spending, if necessary, or to finance other
extraordinary investment opportunities which might arise. In 1998, 1997, and
1996, net cash provided from operating activities totaled $93.7 million, $79.5
million, and $71.8 million, respectively. The primary components of cash
generated from operations are net income, depreciation, depletion and
amortization, the write-down of oil and gas properties and the provision for
deferred income taxes. Net cash from operating activities provided 125% of the
Company's capital requirements for routine capital expenditures, cash dividends,
and scheduled debt retirements in 1998 and 79% in both 1997 and 1996.
Capital Expenditures
Capital expenditures totaled $64.4 million in 1998, $88.8 million in 1997,
and $124.9 million in 1996. The Company's exploration and production segment
expenditures included acquisitions of oil and gas producing properties totaling
$45.8 million in 1996. The Company made no producing property acquisitions in
1998 or 1997.
1998 1997 1996
-----------------------------
(in thousands)
Capital Expenditures
Exploration and production $52,376 $73,526 $110,352
Gas distribution 10,108 12,561 12,752
Other 1,875 2,734 1,809
------------------------------------------------------------
$64,359 $88,821 $124,913
============================================================
|
Capital expenditures planned for 1999 total $65.7 million, consisting of
$56.6 million for exploration and production, $8.1 million for gas distribution
system expenditures, and $1.0 million for general purposes.
The Company generally intends to adjust its level of routine capital
expenditures depending on the expected level of internally generated cash and
the level of debt in its capital structure. The Company expects that its level
of capital expenditures will be adequate to allow the Company to maintain its
present markets, explore and develop its existing gas and oil properties as well
as generate new drilling prospects, and finance improvements necessary due to
normal customer growth in its gas distribution segment.
Financing Requirements
At year-end 1998, Southwestern's total debt was $283.4 million. This
compares to year-end 1997 total debt of $299.5 million. Revolving credit
facilities with two banks provide the Company access to $80.0 million of
variable rate capital. Borrowings outstanding under these credit facilities
totaled $34.9 million at the end of 1998 and $46.4 million at the end of 1997.
In May 1997, the Company issued $60.0 million of 7.625% Medium-Term Notes
due 2027. The notes may be repaid prior to maturity on May 1, 2009, at the
noteholder's option. In October 1997, the Company issued $40.0 million of
Medium-Term Notes due 2017 at a weighted average interest rate of 7.21%.
Proceeds from the issuance of these notes were used to repay certain borrowings
under the Company's revolving credit facilities. All of these notes were issued
under a supplement to the Company's $250.0 million shelf registration statement
filed with the Securities and Exchange Commission in February 1997, for the
issuance of up to $125.0 million of Medium-Term Notes. The Company has $25.0
million of capacity remaining under the shelf registration statement. At
December 31, 1998, the Company's public notes were rated BBB+ by Standard and
Poor's and Baa2 by Moody's.
In connection with the Enogex transaction discussed above under "NOARK
Pipeline", the Company and a previous general partner converted certain of their
loans to the NOARK partnership, plus accrued interest, into equity, and
contributed approximately $10.7 million to the partnership to fund costs
incurred in connection with the prepayment of NOARK's 9.74% Senior Secured
notes. The Company's share of the contribution was $6.5 million and is the
primary reason for the increase in investments during 1998. In June 1998, the
NOARK partnership issued $80.0 million of 7.15% Notes due 2018. Proceeds from
the issue of the notes were used to repay the Senior Secured Notes and amounts
borrowed under the partnership's bank revolving line of credit. The notes
require semi-annual principal payments of $1.0 million which began in December
1998. The Company and the other general partner of NOARK have severally
guaranteed the principal and interest payments on the NOARK debt. The Company's
23.
share of the several guarantee is 60%. The Company advanced $2.2 million to
NOARK to fund its share of debt service payments in 1998 and advanced $5.0
million in 1997. The Company expects to advance approximately $.5 million to
NOARK during 1999 in connection with its guarantees.
Under its existing debt agreements, the Company may not issue long-term
debt in excess of 65% of its total capital and may not issue total debt in
excess of 70% of its total capital. To issue additional long-term debt, the
Company must also have, after giving effect to the debt to be issued, a ratio of
earnings to fixed charges of at least 1.5 or higher (for any period of 12
consecutive months within the preceeding 24 months). At the end of 1998, the
capital structure consisted of 60.3% debt (excluding the current portion of
long-term debt and the Company's several guarantee of NOARK's obligations) and
39.7% equity, with a ratio of earnings to fixed charges of 1.6. Over the long
term, the Company expects to lower the debt portion of its capital structure by
limiting its routine capital spending.
Working Capital
The Company maintains access to funds which may be needed to meet seasonal
requirements through the revolving lines of credit explained above. The Company
had net working capital of $17.5 million at the end of 1998, compared to $39.0
million at the end of 1997. Current assets decreased by 18% to $72.3 million in
1998, while current liabilities increased 12% to $54.8 million. The decrease in
current assets at December 31, 1998, was due primarily to decreases in accounts
receivable and under-recovered purchased gas costs. The decrease in accounts
receivable was due primarily to lower weather-related sales and lower oil and
gas prices at year-end 1998. The decrease in under-recovered purchased gas costs
relates to the collection of higher cost natural gas purchased during 1997.
Purchased gas costs are recovered from the Company's utility customers in
subsequent months through automatic cost of gas adjustment clauses included in
the utility's filed rate tariffs. At December 31, 1998 the Company had
over-recovered gas costs of $1.5 million recorded in current liabilities. An
increase in accounts payable, due to the timing of invoices received, also
contributed to the increase in current liabilities.
Year 2000 Readiness Disclosure
State of Readiness
The Company is working diligently to be prepared for the year 2000. In late
1996, the Company began an initial review of its processing systems and the
ability of those systems to process year 2000 data. The primary financial
information systems of the Company that are supported by outside vendors are
designed to accommodate the century date or have been upgraded and tested in
1998 to a year 2000 compliant version at no additional cost to the Company.
Other information systems supported internally by the Company are either
scheduled for replacement at which time they will become year 2000 compliant, or
have been modified to support year 2000 processing. Scheduled implementation and
final testing of these systems should be completed no later than mid-year 1999.
The total costs associated with the modification of these systems are expected
to be approximately $.8 million. Of this amount, approximately $.5 million
relates to planned improvements that were not directly related to the year 2000
problem.
The Company has also identified internal processes and areas of
non-information technology (e.g. equipment with embedded chips) that require
modification to process year 2000 data or that require further verification
testing. During 1998, the Company substantially replaced the operating system of
its personal computers to the NT version of Windows, which also resulted in the
replacement of noncompliant personal computers and related software that was not
already year 2000 compliant. This rollout of NT was a scheduled replacement not
directly related to the year 2000 problem. It was completed at a cost of
approximately $.5 million. Assessments were also taken in other non-information
technology areas related to electronic meter reading and field measurement.
Replacement of electronic meter reading equipment was done in 1998 at a cost of
approximately $.2 million. Necessary replacements related to field measurement
and monitoring/regulation equipment have been done with some testing remaining
to be completed after the 1998-1999 winter heating season. The Company expects
to have this equipment year 2000 compliant by June 30, 1999, at an estimated
cost of less than $.1 million.
24.
Costs
The costs to purchase, replace, and modify the Company's systems have been
shown above under each category. Additional costs may be incurred by the Company
related to testing, due diligence, and implementation of contingency plans.
These costs, while unknown at this time, are not expected to have a material
impact on the Company's financial condition or its results of operations.
Risks
The highest risk area for the Company related to the year 2000 issues is
noncompliance by third parties. At this time, the most reasonably likely worst
case scenario would be year 2000 noncompliance by third parties that comprised a
significant level of business conducted with the Company. Depending upon the
level of noncompliance, the Company could be adversely impacted by such things
as late or incorrect revenue receipts or expense disbursements, communication
problems, or scheduling or delivery problems related to the transportation and
distribution of natural gas. The Company is addressing this risk through
communication with industry partners, suppliers, financial institutions and
others. The major risk areas associated with third party noncompliance have been
identified, and the third parties within these areas have been further
risk-weighted based upon the Company's level of business reliance. These third
parties are being contacted and the Company is in the process of evaluating
responses and corresponding with those parties that have not responded or that
have responded inadequately.
Contingency Plans
The Company will develop contingency plans that it deems necessary based on
its evaluations of third party readiness. The Company began its contingency
planning process in March 1999. It is anticipated that not all third party
information will be available by March; therefore, the contingency plans will be
updated as additional information is being received from third parties. The
Company anticipates completion of its initial contingency plans by mid-year 1999
with revisions to follow as information is received. Based upon its assessment
of third party assurances at this time, the Company does not anticipate any
material disruptions in its business activities as a result of third party year
2000 noncompliance, although it cannot be certain that such disruptions will not
occur. If such disruptions do occur, the materiality of their impact on the
Company's financial condition and results of operations will depend on the
extent and duration of the disruptions and the nature of any legal proceedings
resulting from the disruptions.
The information contained in this disclosure is covered under the Year 2000 Information Readiness Disclosure Act.
Forward-Looking Information
All statements, other than historical financial information, included in
this discussion and analysis of financial condition and results of operations
may be deemed to be forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Although the Company believes the expectations
expressed in such forward-looking statements are based on reasonable
assumptions, such statements are not guarantees of future performance and actual
results or developments may differ materially from those in the forward-looking
statements. Important factors that could cause actual results to differ
materially from those in the forward-looking statements herein include, but are
not limited to, the timing and extent of changes in commodity prices for gas and
oil, the timing and extent of the Company's success in discovering, developing,
producing, and estimating reserves, the effects of weather and regulation on the
Company's gas distribution segment, increased competition, legal and economic
factors, changing market conditions, the comparative cost of alternative fuels,
conditions in capital markets and changes in interest rates, availability of oil
field services, drilling rigs, and other equipment, as well as various other
factors beyond the Company's control.
25.
Reports of Management and
Independent Public Accountants
Report of Management
Management is responsible for the preparation and integrity of the
Company's financial statements. The financial statements have been prepared in
accordance with generally accepted accounting principles consistently applied,
and necessarily include some amounts that are based on management's best
estimates and judgment.
The Company maintains a system of internal accounting and administrative
controls and an ongoing program of internal audits that management believes
provide reasonable assurance that assets are safeguarded and that transactions
are properly recorded and executed in accordance with management's
authorization. The Company's financial statements have been audited by its
independent auditors, Arthur Andersen LLP. In accordance with generally accepted
auditing standards, the independent auditors obtained a sufficient understanding
of the Company's internal controls to plan their audit and determine the nature,
timing, and extent of other tests to be performed.
The Audit Committee of the Board of Directors, composed solely of outside
directors, meets with management, internal auditors, and Arthur Andersen LLP to
review planned audit scopes and results and to discuss other matters affecting
internal accounting controls and financial reporting. The independent auditors
have direct access to the Audit Committee and periodically meet with it without
management representatives present.
Report of Independent Public Accountants
To the Board of Directors and Shareholders of Southwestern Energy Company:
We have audited the consolidated balance sheets of SOUTHWESTERN ENERGY
COMPANY (an Arkansas corporation) AND SUBSIDIARIES as of December 31, 1998 and
1997, and the related consolidated statements of income, retained earnings, and
cash flows for each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Southwestern Energy Company
and Subsidiaries as of December 31, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Tulsa, Oklahoma
February 3, 1999
26.
Statements of Income
Southwestern Energy Company and Subsidiaries
For the Years Ended December 31, 1998 1997 1996
--------------------------------------------------------------------------------------------------------------------
($ in thousands, except per share amounts)
Operating Revenues
Gas sales $ 172,790 $ 190,298 $ 174,738
Gas marketing 76,367 65,435 14,153
Oil sales 9,557 14,258 8,294
Gas transportation and other 7,591 6,198 6,155
--------------------------------------------------------------------------------------------------------------------
266,305 276,189 203,340
--------------------------------------------------------------------------------------------------------------------
Operating Costs and Expenses
Gas purchases - utility 39,863 46,806 42,851
Gas purchases - marketing 73,235 63,054 14,114
Operating and general 61,915 59,167 50,509
Depreciation, depletion and amortization 46,917 48,208 42,394
Write-down of oil and gas properties 66,383 - -
Taxes, other than income taxes 6,943 7,018 5,476
--------------------------------------------------------------------------------------------------------------------
295,256 224,253 155,344
--------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) (28,951) 51,936 47,996
--------------------------------------------------------------------------------------------------------------------
Interest Expense
Interest on long-term debt 19,600 19,818 15,982
Other interest charges 1,470 1,083 1,204
Interest capitalized (3,884) (4,487) (4,142)
--------------------------------------------------------------------------------------------------------------------
17,186 16,414 13,044
--------------------------------------------------------------------------------------------------------------------
Other Income (Expense) (3,956) (5,017) (4,015)
--------------------------------------------------------------------------------------------------------------------
Income (Loss) Before Provision (Benefit) for Income Taxes (50,093) 30,505 30,937
--------------------------------------------------------------------------------------------------------------------
Provision (Benefit) for Income Taxes
Current (6,029) (732) (5,569)
Deferred (13,467) 12,522 17,320
--------------------------------------------------------------------------------------------------------------------
(19,496) 11,790 11,751
--------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ (30,597) $ 18,715 $ 19,186
====================================================================================================================
Basic Earnings (Loss) Per Share $ (1.23) $ .76 $ .78
====================================================================================================================
Weighted Average Common Shares Outstanding 24,882,170 24,738,882 24,705,256
====================================================================================================================
Diluted Earnings (Loss) Per Share $ (1.23) $ .76 $ .77
====================================================================================================================
Diluted Weighted Average Common Shares Outstanding 24,882,170 24,777,906 24,788,587
====================================================================================================================
The accompanying notes are an integral part of the financial statements.
|
27.
Balance Sheets
Southwestern Energy Company and Subsidiaries
December 31, 1998 1997
--------------------------------------------------------------------------------------------------------------------
(in thousands)
Assets
Current Assets
Cash $ 1,622 $ 4,603
Accounts receivable 40,655 45,752
Income taxes receivable 2,008 3,074
Inventories, at average cost 22,812 20,465
Under-recovered purchased gas costs - 9,428
Other 5,174 4,633
--------------------------------------------------------------------------------------------------------------------
Total current assets 72,271 87,955
--------------------------------------------------------------------------------------------------------------------
Investments 14,015 7,039
--------------------------------------------------------------------------------------------------------------------
Property, Plant and Equipment, at cost
Gas and oil properties, using the full cost method, including $53,110,000
in 1998 and $69,304,000 in 1997 excluded from amortization 758,863 708,094
Gas distribution systems 217,741 212,779
Gas in underground storage 24,279 23,748
Other 27,582 25,319
--------------------------------------------------------------------------------------------------------------------
1,028,465 969,940
Less: Accumulated depreciation, depletion and amortization 478,790 366,638
--------------------------------------------------------------------------------------------------------------------
549,675 603,302
--------------------------------------------------------------------------------------------------------------------
Other Assets 11,659 12,570
--------------------------------------------------------------------------------------------------------------------
$ 647,620 $ 710,866
====================================================================================================================
Liabilities and Shareholders' Equity
Current Liabilities
Current portion of long-term debt $ 1,536 $ 3,071
Accounts payable 37,780 29,903
Taxes payable 3,408 3,893
Interest payable 2,471 2,569
Customer deposits 5,635 5,307
Other 3,956 4,246
--------------------------------------------------------------------------------------------------------------------
Total current liabilities 54,786 48,989
--------------------------------------------------------------------------------------------------------------------
Long-Term Debt, less current portion above 281,900 296,472
--------------------------------------------------------------------------------------------------------------------
Other Liabilities
Deferred income taxes 121,413 139,256
Other 3,665 4,584
--------------------------------------------------------------------------------------------------------------------
125,078 143,840
--------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies
--------------------------------------------------------------------------------------------------------------------
Shareholders' Equity
Common stock, $.10 par value; authorized 75,000,000 shares,
issued 27,738,084 shares 2,774 2,774
Additional paid-in capital 21,249 21,475
Retained earnings, per accompanying statements 194,102 230,669
--------------------------------------------------------------------------------------------------------------------
218,125 254,918
Less: Common stock in treasury, at cost, 2,803,527 shares in 1998 and
2,904,519 shares in 1997 31,248 32,357
Unamortized cost of restricted shares issued under stock incentive
plan, 133,172 shares in 1998 and 90,375 shares in 1997 1,021 996
--------------------------------------------------------------------------------------------------------------------
185,856 221,565
--------------------------------------------------------------------------------------------------------------------
$ 647,620 $ 710,866
====================================================================================================================
The accompanying notes are an integral part of the financial statements.
|
28.
Statements of Cash Flows
Southwestern Energy Company and Subsidiaries
For the Years Ended December 31, 1998 1997 1996
--------------------------------------------------------------------------------------------------------------------
(in thousands)
Cash Flows From Operating Activities
Net income (loss) $ (30,597) $ 18,715 $ 19,186
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation, depletion and amortization 48,267 49,271 43,373
Write-down of oil and gas properties 66,383 - -
Deferred income taxes (13,467) 12,522 17,320
Equity in loss of partnership 3,087 4,523 3,778
Change in assets and liabilities:
(Increase) decrease in accounts receivable 5,097 (5,824) (4,387)
Decrease in income taxes receivable 1,066 3,549 1,598
(Increase) decrease in under-recovered
purchased gas costs 10,931 (6,398) (10,357)
Increase in inventories (2,347) (2,894) (2,123)
Increase in accounts payable 7,877 4,259 1,655
Net change in other current assets and liabilities (2,589) 1,760 1,787
--------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 93,708 79,483 71,830
--------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Capital expenditures (64,359) (88,821) (124,913)
Investment in partnership (10,062) (4,962) (1,266)
(Increase) decrease in gas stored underground (531) 1,888 (2,190)
Other items 340 1,048 (4,190)
--------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (74,612) (90,847) (132,559)
--------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Net increase (decrease) in revolving long-term debt (11,500) (50,100) 73,600
Payments on other long-term debt (4,607) (28,643) (6,143)
Proceeds from issuance of long-term debt - 98,348 -
Dividends paid (5,970) (5,935) (5,929)
--------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (22,077) 13,670 61,528
--------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash (2,981) 2,306 799
Cash at beginning of year 4,603 2,297 1,498
--------------------------------------------------------------------------------------------------------------------
Cash at end of year $ 1,622 $ 4,603 $ 2,297
====================================================================================================================
|
Statements of Retained Earnings
Southwestern Energy Company and Subsidiaries
For the Years Ended December 31, 1998 1997 1996
--------------------------------------------------------------------------------------------------------------------
(in thousands)
Retained Earnings, beginning of year $ 230,669 $ 217,889 $ 204,632
Net income (loss) (30,597) 18,715 19,186
Cash dividends declared ($.24 per share) (5,970) (5,935) (5,929)
--------------------------------------------------------------------------------------------------------------------
Retained Earnings, end of year $ 194,102 $ 230,669 $ 217,889
====================================================================================================================
The accompanying notes are an integral part of the financial statements.
|
29.
Notes to Financial Statements
Southwestern Energy Company and Subsidiaries
December 31, 1998, 1997 and 1996
(1) Summary of Significant Accounting Policies
Nature of Operations and Consolidation
Southwestern Energy Company (Southwestern or the Company) is an integrated
energy company primarily focused on natural gas. Through its wholly-owned
subsidiaries, the Company is engaged in oil and gas exploration and production,
natural gas gathering, transmission and marketing, and natural gas distribution.
Southwestern's exploration and production activities are concentrated in
Arkansas, New Mexico, Texas, Oklahoma, Louisiana, and the Gulf Coast (primarily
onshore). The gas distribution segment operates in northern Arkansas and parts
of Missouri, and obtains approximately 60% of its gas supply from one of the
Company's exploration and production subsidiaries. The customers of the gas
distribution segment consist of residential, commercial, and industrial users of
natural gas. Southwestern's marketing and transportation business is
concentrated in its core areas of operations.
The consolidated financial statements include the accounts of Southwestern
Energy Company and its wholly-owned subsidiaries, Southwestern Energy Production
Company, SEECO, Inc., Arkansas Western Gas Company, Southwestern Energy Services
Company, Diamond "M" Production Company, Southwestern Energy Pipeline Company,
A.W. Realty Company and Arkansas Western Pipeline Company. All significant
intercompany accounts and transactions have been eliminated. The Company
accounts for its general partnership interest in the NOARK Pipeline System,
Limited Partnership (NOARK) using the equity method of accounting. In accordance
with Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for
the Effects of Certain Types of Regulation," the Company recognizes profit on
intercompany sales of gas delivered to storage by its utility subsidiary.
Certain reclassifications have been made to the prior years' financial
statements to conform with the 1998 presentation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities, if any, at the date of the
financial statements, and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Property, Depreciation, Depletion and Amortization Gas and Oil Properties - The Company follows the full cost method of accounting for the exploration, development, and acquisition of gas and oil reserves. Under this method, all such costs (productive and nonproductive) including salaries, benefits, and other internal costs directly attributable to these activities are capitalized and amortized on an aggregate basis over the estimated lives of the properties using the units-of-production method. The Company excludes all costs of unevaluated properties from immediate amortization. The Company's unamortized costs of oil and gas properties are limited to the sum of the future net revenues attributable to proved oil and gas reserves discounted at 10 percent plus the cost of any unproved properties. If the Company's unamortized costs in oil and gas properties exceed this ceiling amount, a provision for additional depreciation, depletion and amortization is required. At June 30, 1998, the Company recognized a $40.5 million non-cash charge to earnings by recording a write-down of its oil and gas properties of $66.4 million and a related reduction in the provision for deferred income taxes of $25.9 million. At December 31, 1998, 1997, and 1996, the Company's net book value of oil and gas properties did not exceed the ceiling amounts. Market prices, production rates, levels of reserves, and the evaluation of costs excluded from amortization all influence the calculation of the full cost ceiling. A decline in oil and gas prices from year-end 1998 levels or other factors, without other mitigating circumstances, could cause an additional future write-down of capitalized costs and a noncash charge to earnings.
30.
Gas Distribution Systems - Costs applicable to construction activities,
including overhead items, are capitalized. Depreciation and amortization of the
gas distribution system is provided using the straight-line method with average
annual rates for plant functions ranging from 2.2% to 5.7%. Gas in underground
storage is stated at average cost.
Other property, plant and equipment is depreciated using the straight-line
method over estimated useful lives ranging from 5 to 40 years.
The Company charges to maintenance or operations the cost of labor,
materials, and other expenses incurred in maintaining the operating efficiency
of its properties. Betterments are added to property accounts at cost.
Retirements are credited to property, plant and equipment at cost and charged to
accumulated depreciation, depletion and amortization with no gain or loss
recognized, except for abnormal retirements.
Capitalized Interest - Interest is capitalized on the cost of unevaluated
gas and oil properties excluded from amortization. In accordance with
established utility regulatory practice, an allowance for funds used during
construction of major projects is capitalized and amortized over the estimated
lives of the related facilities.
Gas Distribution Revenues and Receivables
Customer receivables arise from the sale or transportation of gas by the
Company's gas distribution subsidiary. The Company's gas distribution customers
represent a diversified base of residential, commercial, and industrial users.
Approximately 110,000 of these customers are served in northwest Arkansas and
approximately 69,000 are served in northeast Arkansas and Missouri.
The Company records gas distribution revenues on an accrual basis, as gas
volumes are used, to provide a proper matching of revenues with expenses.
The gas distribution subsidiary's rate schedules include purchased gas
adjustment clauses whereby the actual cost of purchased gas above or below the
level included in the base rates is permitted to be billed or is required to be
credited to customers. Each month, the difference between actual costs of
purchased gas and gas costs recovered from customers is deferred. The deferred
differences are billed or credited, as appropriate, to customers in subsequent
months. Rate schedules for the Company's Arkansas systems include a weather
normalization clause to lessen the impact of revenue increases and decreases
which might result from weather variations during the winter heating season. The
pass-through of gas costs to customers is not affected by this normalization
clause.
Gas Production Imbalances
The exploration and production subsidiaries record gas sales using the
entitlement method. The entitlement method requires revenue recognition of the
Company's revenue interest share of gas production from properties in which gas
sales are disproportionately allocated to owners because of marketing or other
contractual arrangements. The Company's net imbalance position at December 31,
1998 and 1997 was not significant.
Income Taxes
Deferred income taxes are provided to recognize the income tax effect of
reporting certain transactions in different years for income tax and financial
reporting purposes.
Risk Management
The Company has limited involvement with derivative financial instruments
and does not use them for trading purposes. They are used to manage defined
commodity price risks. The Company uses commodity swap agreements and options to
hedge sales of natural gas and crude oil. Gains and losses resulting from
hedging activities are recognized when the related physical transactions are
recognized. Gains or losses from commodity swap agreements and options that do
not qualify for accounting treatment as hedges are recognized currently as other
income or expense. See Note 8 for a discussion of the Company's commodity
hedging activity.
Earnings Per Share and Shareholders' Equity The Company applies SFAS No. 128, "Earnings Per Share". Basic earnings per common share is computed by dividing net income by the weighted average number of common shares outstanding during each year. The diluted earnings per share calculation adds to the weighted average number of common shares outstanding the incremental
31.
shares that would have been outstanding assuming the exercise of dilutive stock
options. Due to the Company's net loss for 1998 any incremental shares would
have an anti-dilutive effect and were, therefore, not considered.
During 1998 and 1997, the Company issued 105,488 and 117,740 treasury
shares, respectively, under a compensatory plan and for stock awards and
returned to treasury 4,496 and 3,059 shares, respectively, canceled from earlier
issues under the compensatory plan. The net effect of these transactions was a
$1.1 million decrease in 1998 and a $1.2 million decrease in 1997 in treasury
stock.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income", establishing standards for reporting and
displaying comprehensive income (loss) and its components in financial
statements. SFAS No. 130 defines comprehensive income as the total of net income
and all other nonowner changes in equity. The Company had no nonowner changes in
equity other than net income or loss during the years ended December 31, 1998
and 1997.
(2) Long-Term Debt
Long-term debt as of December 31, 1998 and 1997 consisted of the following:
1998 1997
-------------------------
(in thousands)
Senior Notes
8.86% Series due in annual installments through 1999 $ 1,536 $ 6,143
9.36% Series due in annual installments of $2.0 million beginning 2001 22,000 22,000
6.70% Series due 2005 125,000 125,000
7.625% Series due 2027, putable at the holders option in 2009 60,000 60,000
7.21% Series due 2017 40,000 40,000
--------------------------------------------------------------------------------------------------------------------------
248,536 253,143
Other
Variable rate (5.42% at December 31, 1998) unsecured revolving credit arrangements 34,900 46,400
--------------------------------------------------------------------------------------------------------------------------
Total long-term debt 283,436 299,543
Less: Current portion of long-term debt 1,536 3,071
--------------------------------------------------------------------------------------------------------------------------
$ 281,900 $ 296,472
==========================================================================================================================
|
The Company has several prepayment options under the terms of certain of
its Senior Notes. Prepayments made without premium are subject to certain
limitations. Other prepayment options involve the payment of premiums based in
some instances on market interest rates at the time of prepayment.
Variable rate credit facilities provide the Company access to $80.0 million
of revolving credit. Borrowings outstanding under these credit facilities
totaled $34.9 million at December 31, 1998, all of which was classified as
long-term debt. Each facility allows the Company four interest rate options -
the floating prime rate, a fixed rate tied to either short-term certificate of
deposit or Eurodollar rates, or a fixed rate based on the lenders' cost of
funds. The revolving credit facilities expire in 2001 and 2002. The Company
intends to renew or replace the facilities prior to expiration.
The terms of the long-term debt instruments and agreements contain
covenants which impose certain restrictions on the Company, including limitation
of additional indebtedness and restrictions on the payment of cash dividends. At
December 31, 1998, approximately $92.5 million of retained earnings was
available for payment as dividends.
Aggregate maturities of long-term debt for each of the years ending
December 31, 1999 through 2003, are $1.5 million, $0, $22.0 million, $16.9
million, and $2.0 million. Total interest payments of $19.6 million, $18.8
million, and $15.6 million were made in 1998, 1997, and 1996, respectively.
32.
(3) Income Taxes
The provision (benefit) for income taxes included the following components:
1998 1997 1996
--------------------------------------------------
(in thousands)
Federal:
Current $ (6,673) $ (1,614) $ (5,788)
Deferred (10,098) 11,422 15,799
State:
Current 644 882 219
Deferred (3,250) 1,219 1,833
Investment tax credit amortization (119) (119) (312)
--------------------------------------------------------------------------------------------------------------------------
Provision (benefit) for income taxes $(19,496) $ 11,790 $ 11,751
==========================================================================================================================
|
The provision (benefit) for income taxes was an effective rate of 38.9% in 1998, 38.6% in 1997, and 38.0% in 1996. The following reconciles the provision (benefit) for income taxes included in the consolidated statements of income with the provision (benefit) which would result from application of the statutory federal tax rate to pretax financial income:
1998 1997 1996
--------------------------------------------------
(in thousands)
Expected provision (benefit) at federal statutory rate of 35% $(17,532) $10,677 $10,828
Increase (decrease) resulting from:
State income taxes, net of federal income tax effect (1,694) 1,365 1,334
Other (270) (252) (411)
--------------------------------------------------------------------------------------------------------------------------
Provision (benefit) for income taxes $(19,496) $11,790 $11,751
==========================================================================================================================
|
The components of the Company's net deferred tax liability as of December 31, 1998 and 1997 were as follows:
1998 1997
------------------------------
(in thousands)
Deferred tax liabilities:
Differences between book and tax basis of property $ 109,538 $ 124,634
Stored gas difference 7,583 7,133
Deferred purchased gas costs 1,997 5,223
Prepaid pension costs 2,036 1,779
Book over tax basis in partnerships 8,647 6,071
Other 1,091 665
--------------------------------------------------------------------------------------------------------------------------
130,892 145,505
--------------------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Accrued compensation 647 754
Alternative minimum tax credit carryforward 3,034 4,593
Net operating loss carryforward 6,949 -
Other 1,234 534
--------------------------------------------------------------------------------------------------------------------------
11,864 5,881
--------------------------------------------------------------------------------------------------------------------------
Net deferred tax liability $ 119,028 $ 139,624
==========================================================================================================================
|
Total income tax payments of $3.3 million, $4.2 million, and $4.0 million were made in 1998, 1997, and 1996 respectively.
33.
(4) Pension Plan and Other Postretirement Benefits
Effective December 31, 1998, the Company adopted SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits". The provisions of
SFAS No. 132 revise employers' disclosures about pension and other
postretirement benefit plans. It does not change the measurement or recognition
of these plans. It standardizes the disclosure requirements for pensions and
other postretirement benefits to the extent practicable.
Substantially all employees are covered by the Company's defined benefit
pension and postretirement benefit plans. The following provides a
reconciliation of the changes in the plans' benefit obligations, fair value of
assets, and funded status as of December 31, 1998 and 1997:
Other Postretirement
Pension Benefits Benefits
-------------------------------------------------------------
1998 1997 1998 1997
-------------------------------------------------------------
(in thousands)
Change in Benefit Obligations:
Benefit obligation at January 1 $ 47,257 $ 42,395 $ 3,067 $ 2,289
Service cost 2,060 1,744 87 90
Interest cost 3,644 3,213 242 213
Actuarial loss 7,920 1,267 616 673
Benefits paid (1,687) (1,362) (180) (198)
--------------------------------------------------------------------------------------------------------------------------------
Benefit obligation at December 31 $ 59,194 $ 47,257 $ 3,832 $ 3,067
================================================================================================================================
Change in Plan Assets:
Fair value of plan assets at January 1 $ 65,966 $ 56,457 $ - $ -
Actual return on plan assets 7,168 10,862 (12) -
Employer contributions - - 537 198
Benefit payments (1,616) (1,353) (180) (198)
--------------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at December 31 $ 71,518 $ 65,966 $ 345 $ -
================================================================================================================================
Funded Status:
Funded status at December 31 $ 12,324 $ 18,709 $ (3,487) $ (3,067)
Unrecognized net actuarial (gain) loss (7,441) (14,205) 1,284 711
Unrecognized prior service cost 308 354 - -
Unrecognized transition obligation (403) (586) 1,368 1,472
--------------------------------------------------------------------------------------------------------------------------------
Prepaid (accrued) benefit cost $ 4,788 $ 4,272 $ (835) $ (884)
================================================================================================================================
|
The Company's supplemental retirement plan has an accumulated benefit
obligation in excess of plan assets. The plan's accumulated benefit obligation
was $198,000 and $216,000 at December 31, 1998 and 1997,respectively. There are
no plan assets in the supplemental retirement plan due to the nature of the
plan.
Net periodic pension and other postretirement benefit costs include the
following components for 1998, 1997 and 1996:
Other Postretirement
Pension Benefits Benefits
-------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996
-------------------------------------------------------------------------
(in thousands)
Service cost $ 2,060 $ 1,744 $ 1,562 $ 87 $ 90 $ 61
Interest cost 3,644 3,213 2,872 242 213 161
Expected return on plan assets (5,863) (5,007) (4,381) - - -
Amortization of transition obligation (183) (183) (183) 103 103 103
Recognized net actuarial (gain) loss (150) (211) (93) 55 40 4
Amortization of prior service costs 46 49 52 - - -
------------------------------------------------------------------------------------------------------------------------------
$ (446) $ (395) $ (171) $ 487 $ 446 $ 329
==============================================================================================================================
|
34.
Prior to 1998, the Company's pension plans provided for benefits based on
years of benefit service and the employee's "average compensation" as defined.
During 1998, the Company amended its plans to become "cash balance" plans on a
prospective basis. A cash balance plan provides benefits based upon a fixed
percentage of an employee's annual compensation. The Company's funding policy is
to contribute amounts which are actuarially determined to provide the plans with
sufficient assets to meet future benefit payment requirements and which are tax
deductible.
The postretirement benefit plans provide contributory health care and life
insurance benefits. Employees become eligible for these benefits if they meet
age and service requirements. Generally, the benefits paid are a stated
percentage of medical expenses reduced by deductibles and other coverages.
During 1998, the Company established trusts to partially fund its postretirement
benefit obligations.
The weighted average assumptions used in the measurement of the Company's
benefit obligations for 1998 and 1997 are as follows:
Other Postretirement
Pension Benefits Benefits
---------------------------------------------------------------
1998 1997 1998 1997
---------------------------------------------------------------
Discount rate 6.75% 7.50% 6.75% 7.50%
Expected return on plan assets 9.00% 9.00% 5.00% n/a
Rate of compensation increase 5.00% 5.00% n/a n/a
========================================================================================================================
|
For measurement purposes a 9% annual rate of increase in the per capita
cost of covered medical benefits and an 8% annual rate of increase in the per
capita cost of dental benefits was assumed for 1999. These rates were assumed to
gradually decrease to 6% for medical benefits and 5% for dental benefits for
2011 and remain at that level thereafter.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one percentage point change in
assumed health care cost trend rates would have the following effects:
1% Increase 1% Decrease
----------------------------------
(in thousands)
Effect on the total service and interest cost components $ 20 $ (18)
Effect on postretirement benefit obligation $ 349 $ (304)
=======================================================================================================
|
(5) Natural Gas and Oil Producing Activities
All of the Company's gas and oil properties are located in the United States. The table below sets forth the results of operations from gas and oil producing activities:
1998 1997 1996
------------------------------------------------
(in thousands)
Sales $ 86,232 $ 100,129 $ 86,978
Production (lifting) costs (15,807) (17,155) (10,607)
Depreciation, depletion and amortization (38,768) (40,340) (35,533)
Write-down of oil and gas properties (66,383) - -
------------------------------------------------------------------------------------------------------------------------
(34,726) 42,634 40,838
Income tax benefit (expense) 13,651 (16,331) (15,528)
------------------------------------------------------------------------------------------------------------------------
Results of operations $ (21,075) $ 26,303 $ 25,310
========================================================================================================================
|
35.
The results of operations shown above exclude overhead and interest costs.
Income tax expense is calculated by applying the statutory tax rates to the
revenues less costs, including depreciation, depletion and amortization, and
after giving effect to permanent differences and tax credits.
The table below sets forth capitalized costs incurred in gas and oil
property acquisition, exploration, and development activities during 1998, 1997,
and 1996:
1998 1997 1996
------------------------------------------------
(in thousands)
Property acquisition costs $ 12,729 $ 10,911 $ 60,748
Exploration costs 14,273 33,225 25,436
Development costs 24,709 28,825 23,667
-------------------------------------------------------------------------------------------------------------------------
Capitalized costs incurred $ 51,711 $ 72,961 $ 109,851
=========================================================================================================================
Amortization per Mcf equivalent $1.039 $1.057 $ .949
=========================================================================================================================
|
Capitalized interest is included as part of the cost of oil and gas
properties. The Company capitalized $3.9 million, $4.5 million, and $4.1 million
during 1998, 1997, and 1996, respectively, based on the Company's weighted
average cost of borrowings used to finance the expenditures.
In addition to capitalized interest, the Company also capitalized internal
costs of $7.7 million, $6.0 million, and $5.9 million during 1998, 1997, and
1996, respectively. These internal costs were directly related to acquisition,
exploration and development activities and are included as part of the cost of
oil and gas properties.
The following table shows the capitalized costs of gas and oil properties
and the related accumulated depreciation, depletion and amortization at December
31, 1998 and 1997:
1998 1997
-----------------------------
(in thousands)
Proved properties $ 703,669 $ 628,549
Unproved properties 55,194 79,545
-------------------------------------------------------------------------------------------------------------------------
Total capitalized costs 758,863 708,094
Less: Accumulated depreciation, depletion and amortization 386,384 281,595
-------------------------------------------------------------------------------------------------------------------------
Net capitalized costs $ 372,479 $ 426,499
=========================================================================================================================
|
The table below sets forth the composition of net unevaluated costs excluded from amortization as of December 31, 1998. Included in these costs is $5.1 million representing leasehold and seismic costs related to the remaining unevaluated portion of acreage located on the Fort Chaffee military reservation. These costs are expected to be evaluated and subjected to amortization within the next several years as this acreage is further explored and developed. Also included in these costs is $15.8 million related to 3-D seismic projects in south Louisiana. These costs and subsequent costs to be incurred will be evaluated over several years as the seismic data is interpreted and the acreage is explored. The remaining costs excluded from amortization are related to properties which are not individually significant and on which the evaluation process has not been completed. The Company is, therefore, unable to estimate when these costs will be included in the amortization computation.
1998 1997 1996 Prior Total
--------------------------------------------------------------
(in thousands)
Property acquisition costs $ 10,637 $ 2,701 $ 3,380 $ 6,332 $ 23,050
Exploration costs 4,915 7,721 3,175 5,218 21,029
Capitalized interest 3,428 2,456 2,341 806 9,031
-------------------------------------------------------------------------------------------------------------------------
$ 18,980 $ 12,878 $ 8,896 $12,356 $ 53,110
=========================================================================================================================
|
36.
(6) Natural Gas and Oil Reserves (Unaudited)
The following table summarizes the changes in the Company's proved natural gas and oil reserves for 1998, 1997, and 1996:
1998 1997 1996
-----------------------------------------------------------------------
Gas Oil Gas Oil Gas Oil
(MMcf) (MBbls) (MMcf) (MBbls) (MMcf) (MBbls)
-----------------------------------------------------------------------
Proved reserves, beginning of year 291,378 7,852 297,467 8,238 294,876 2,152
Revisions of previous estimates 1,064 (696) 861 (51) (11,772) 74
Extensions, discoveries, and other additions 44,814 442 26,430 426 16,429 61
Production (32,668) (703) (33,355) (749) (34,758) (391)
Acquisition of reserves in place - - 76 - 32,713 6,350
Disposition of reserves in place (921) (45) (101) (12) (21) (8)
-------------------------------------------------------------------------------------------------------------------------
Proved reserves, end of year 303,667 6,850 291,378 7,852 297,467 8,238
=========================================================================================================================
Proved, developed reserves:
Beginning of year 252,393 7,312 255,234 7,804 248,714 1,975
End of year 258,092 6,370 252,393 7,312 255,234 7,804
=========================================================================================================================
|
The "Standardized Measure of Discounted Future Net Cash Flows Relating to
Proved Oil and Gas Reserves" (standardized measure) is a disclosure required by
SFAS No. 69, "Disclosures About Oil and Gas Producing Activities." The
standardized measure does not purport to present the fair market value of a
company's proved gas and oil reserves. In addition, there are uncertainties
inherent in estimating quantities of proved reserves. Substantially all
quantities of gas and oil reserves owned by the Company were estimated or
audited by the independent petroleum engineering firm of K & A Energy
Consultants, Inc.
Following is the standardized measure relating to proved gas and oil
reserves at December 31, 1998, 1997, and 1996:
1998 1997 1996
-------------------------------------------------
(in thousands)
Future cash inflows $ 820,522 $ 973,536 $1,340,804
Future production and development costs (176,130) (197,021) (187,825)
Future income tax expense (206,097) (261,173) (398,625)
-------------------------------------------------------------------------------------------------------------------------
Future net cash flows 438,295 515,342 754,354
10% annual discount for estimated timing of cash flows (215,502) (256,279) (383,410)
-------------------------------------------------------------------------------------------------------------------------
Standardized measure of discounted future net cash flows $ 222,793 $ 259,063 $ 370,944
=========================================================================================================================
|
Under the standardized measure, future cash inflows were estimated by applying year-end prices, adjusted for known contractual changes, to the estimated future production of year-end proved reserves. Future cash inflows were reduced by estimated future production and development costs based on year-end costs to determine pretax cash inflows. Future income taxes were computed by applying the year-end statutory rate, after consideration of permanent differences, to the excess of pretax cash inflows over the Company's tax basis in the associated proved gas and oil properties. Future net cash inflows after income taxes were discounted using a 10% annual discount rate to arrive at the standardized measure.
37.
Following is an analysis of changes in the standardized measure during 1998, 1997, and 1996:
1998 1997 1996
---------------------------------------------
(in thousands)
Standardized measure, beginning of year $ 259,063 $ 370,944 $ 203,522
Sales and transfers of gas and oil produced, net of production costs (70,425) (82,975) (76,371)
Net changes in prices and production costs (71,400) (173,730) 185,234
Extensions, discoveries, and other additions,
net of future production and development costs 61,146 41,267 40,264
Acquisition of reserves in place - 116 98,245
Revisions of previous quantity estimates (3,024) 646 (19,839)
Accretion of discount 38,445 55,852 31,043
Net change in income taxes 23,714 62,186 (80,662)
Changes in production rates (timing) and other (14,726) (15,243) (10,492)
------------------------------------------------------------------------------------------------------------------------
Standardized measure, end of year $ 222,793 $ 259,063 $ 370,944
========================================================================================================================
|
(7) Investment in Unconsolidated Partnership
At December 31, 1998, the Company held a 25% general partnership interest
in the NOARK Partnership. NOARK Pipeline was formerly a 258-mile long intrastate
gas transmission system which extended across northern Arkansas. In January
1998, the Company entered into an agreement with Enogex Inc. (Enogex) that
resulted in the expansion of the NOARK Pipeline and provided the pipeline with
access to Oklahoma gas supplies through an integration of NOARK with the Ozark
Gas Transmission System (Ozark). Enogex is a subsidiary of OGE Energy Corp.
Ozark was a 437-mile interstate pipeline system which began in eastern Oklahoma
and terminated in eastern Arkansas. Enogex acquired the Ozark system and
contributed it to the NOARK partnership. Enogex also acquired the NOARK
partnership interests not owned by Southwestern. The acquisition of Ozark and
its integration with NOARK Pipeline was approved by the Federal Energy
Regulatory Commission in late 1998 at which time NOARK Pipeline was converted to
an interstate pipeline and operated in combination with Ozark. Enogex funded the
acquisition of Ozark and the expansion and integration with NOARK Pipeline which
resulted in the Company's ownership interest in the partnership decreasing to
25% from 48%.
The Company's investment in NOARK totaled $13.8 million at December 31,
1998 and $7.0 million at December 31, 1997. The Company's investment in NOARK
includes advances of $10.1 million made during 1998, $5.0 million made during
1997, and $1.3 million made during 1996. Advances in 1998 included the Company's
share of costs related to the prepayment of NOARK's Senior Secured Notes as
discussed below. Other advances are made primarily to provide certain minimum
cash balances to service NOARK's long-term debt.
In connection with the Enogex transaction, the Company and a previous
general partner converted certain of their loans to the partnership, plus
accrued interest, into equity, and contributed approximately $10.7 million to
the partnership to fund costs incurred in connection with the prepayment of
NOARK's 9.74% Senior Secured Notes. See Note 11 for further discussion of
NOARK's funding requirements and the Company's investment in NOARK.
NOARK's financial position at December 31, 1998 and 1997 is summarized
below:
1998 1997
-----------------------------
(in thousands)
Current assets $ 9,535 $ 923
Noncurrent assets 175,361 92,856
-------------------------------------------------------------------------------------------------------------------------
$ 184,896 $ 93,779
=========================================================================================================================
Current liabilities $ 8,576 $ 9,762
Long-term debt 77,000 75,000
Loans from general partners - 21,885
Partners' capital (deficit) 99,320 (12,868)
-------------------------------------------------------------------------------------------------------------------------
$ 184,896 $ 93,779
=========================================================================================================================
|
38.
The Company's share of NOARK's pretax loss, before the effect of accrued
interest expense on general partner loans, was $3.1 million, $4.5 million, and
$3.8 million for 1998, 1997, and 1996, respectively. The Company records its
share of NOARK's pretax loss in other income (expense) on the statements of
income.
NOARK's results of operations for 1998, 1997, and 1996 are summarized
below:
1998 1997 1996
------------------------------------------------
(in thousands)
Operating revenues $ 17,445 $ 4,963 $ 5,114
Pretax loss $ (4,114) $ (8,850) $ (8,106)
=========================================================================================================================
|
(8) Financial Instruments and Risk Management
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
the value:
Cash and Customer Deposits: The carrying amount is a reasonable estimate of
fair value.
Long-Term Debt: The fair value of the Company's long-term debt is estimated
based on the expected current rates which would be offered to the Company for
debt of the same maturities.
Commodity Hedges: The fair value of all hedging financial instruments is
the amount at which they could be settled, based on quoted market prices or
estimates obtained from dealers. The carrying amounts and estimated fair values
of the Company's financial instruments as of December 31, 1998 and 1997 were as
follows:
1998 1997
---------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------------------------------------------------------------------
(in thousands)
Cash $ 1,622 $ 1,622 $ 4,603 $ 4,603
Customer deposits $ 5,635 $ 5,635 $ 5,307 $ 5,307
Long-term debt $ 283,436 $ 292,157 $ 299,543 $ 304,392
Commodity hedges $ 1,276 $ 8,227 $ 1,442 $ 2,454
=========================================================================================================================
|
Anticipated regulatory treatment of the excess of fair value over carrying value of the portion of the Company's long-term debt attributable to its regulatory activities, if such debt were settled at amounts approximating those above, would dictate that these amounts be used to increase the Company's rates over a prescribed amortization period. Accordingly, any settlement would not result in a material impact on the Company's financial position or results of operations.
Derivatives and Price Risk Management
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate, and assess the effectiveness of transactions that receive
hedge accounting.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. A
company may also implement the statement as of the beginning of any fiscal
quarter after issuance (that is, fiscal quarters beginning June 16, 1998 and
thereafter). SFAS No. 133 cannot be applied retroactively and must be applied to
(a) derivative instruments and (b) certain derivative instruments embedded in
hybrid contracts that were issued, acquired, or substantively modified after
December 31, 1997 (and, at the company's election, before January 1, 1998).
39.
The Company has not yet quantified the impacts of adopting SFAS No. 133 on
its financial statements, nor has it determined the timing of or method of
adoption. However, it should be noted that SFAS No. 133 could increase
volatility in future reported earnings and other comprehensive income.
The Company uses natural gas and crude oil swap agreements and options to
reduce the volatility of earnings and cash flow due to fluctuations in the
prices of natural gas and oil. The Board of Directors has approved risk
management policies and procedures to utilize financial products for the
reduction of defined commodity price risks. These policies prohibit speculation
with derivatives and limit swap agreements to counterparties with appropriate
credit standings.
The Company uses over-the-counter natural gas and crude oil swap agreements
and options to hedge sales of Company production and marketing activity against
the inherent price risks of adverse price fluctuations or locational pricing
differences between a published index and the NYMEX (New York Mercantile
Exchange) futures market. These swaps include (1) transactions in which one
party will pay a fixed price (or variable price) for a notional quantity in
exchange for receiving a variable price (or fixed price) based on a published
index (referred to as price swaps), and (2) transactions in which parties agree
to pay a price based on two different indices (referred to as basis swaps).
At December 31, 1998, the Company had outstanding natural gas price swaps
on total notional volumes of 11.5 Bcf. Of the total, the Company will receive
fixed prices ranging from $2.20 to $2.71 per MMBtu on 10.1 Bcf. Under contracts
covering the remaining 1.4 Bcf, the Company will make average fixed price
payments of $2.25 per MMBtu and receive variable prices based on the NYMEX
futures market. At December 31, 1998, the Company held outstanding basis swaps
on a notional volume of 6.4 Bcf. At December 31, 1997, the Company had
outstanding natural gas price swaps on total notional volumes of 2.2 Bcf. Of the
total, the Company received fixed prices ranging from $2.49 to $3.27 per MMBtu
on 2.0 Bcf. Under contracts covering the remaining .2 Bcf, the Company made
average fixed price payments of $2.42 per MMBtu and received variable prices
based on the NYMEX futures market. At December 31, 1997, the Company held
outstanding basis swaps on a notional volume of 1.9 Bcf. The Company also had
outstanding a price floor on a notional volume of 400,000 barrels of crude oil
for calendar year 1998 at a price of $18.00 per barrel. During 1998, the Company
recognized gains from price risk management activities of $7.4 million, which
were partially offset by corresponding lower revenue receipts from physical
transactions. In 1997 and 1996, the Company recognized price risk management
losses of $2.7 million and $3.4 million, respectively.
The Company uses options to fix a floor, a ceiling, or both a floor and
ceiling (a "collar") for prices on its production volumes. At December 31, 1998,
the Company had a crude oil price floor of $18.00 per barrel (based on the NYMEX
futures market) on total notional volumes of 1,050,000 barrels covering
production during calendar years 1999 through 2001.
The primary market risk related to these derivative contracts is the
volatility in market prices for natural gas and crude oil. However, this market
risk is offset by the gain or loss recognized upon the related sale of the
natural gas or oil that is hedged. Credit risk relates to the risk of loss as a
result of non-performance by the Company's counterparties. The counterparties
are primarily major investment and commercial banks which management believes
present minimal credit risks. The credit quality of each counterparty and the
level of financial exposure the Company has to each counterparty are
periodically reviewed to ensure limited credit risk exposure.
(9) Stock Options
The Southwestern Energy Company 1993 Stock Incentive Plan (1993 Plan) provides for the compensation of officers and key employees of the Company and its subsidiaries. The 1993 Plan provides for grants of options, shares of restricted stock, and stock bonuses that in the aggregate do not exceed 1,700,000 shares, the grant of stand-alone stock appreciation rights (SARs), shares of phantom stock and cash awards, the shares related to which in the aggregate do not exceed 1,700,000 shares, and the grant of limited and tandem SARs (all terms as defined in the 1993 Plan). The types of incentives which may be awarded are comprehensive and are intended to enable the Board of Directors to structure the most appropriate incentives and to address changes in income tax laws which may be enacted over the term of the plan.
40.
The Southwestern Energy Company 1993 Stock Incentive Plan for Outside
Directors provides for annual stock option grants of 12,000 shares (with 12,000
limited SARs) to each non-employee director. Options may be awarded under the
plan on no more than 240,000 shares.
The Company's 1985 Nonqualified Stock Option Plan expired in 1992, except
with respect to awards then outstanding. The following table summarizes stock
option activity for the years 1998, 1997, and 1996:
1998 1997 1996
-------------------------------------------------------------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price
-------------------------------------------------------------------------------------------------------------------------
Options outstanding at January 1 1,619,114 $ 13.37 1,501,641 $ 13.39 1,552,558 $ 13.39
Granted 394,900 $ 8.00 433,248 $ 12.58 129,000 $ 14.89
Exercised 22,200 $ 5.58 56,850 $ 5.96 6,000 $ 12.81
Canceled 356,913 $ 13.48 258,925 $ 13.82 173,917 $ 14.51
-------------------------------------------------------------------------------------------------------------------------
Options outstanding at December 31 1,634,901 $ 12.15 1,619,114 $ 13.37 1,501,641 $ 13.39
=========================================================================================================================
Options exercisable at December 31 528,134 $ 13.12 521,782 $ 12.61 588,695 $ 11.71
=========================================================================================================================
|
All options are issued at fair market value at the date of grant and expire
ten years from the date of grant. The options outstanding at December 31, 1998
had a range of exercise prices from $6.81 to $17.50 and a weighted average
remaining contractual life of 7 years. Options generally vest to employees and
directors over a three to four year period from the date of grant. Of the total
options outstanding, 350,000 performance accelerated options were granted in
1994 at an option price of $145/8. These options vest over a four-year period
beginning six years from the date of grant or earlier if certain corporate
performance criteria are achieved.
The Company has granted 203,015 shares of restricted stock to employees
through 1998. Of this total, 160,465 shares vest over a three year period and
the remaining shares vest over a five year period. The related compensation
expense is being amortized over the vesting periods. As of December 31, 1998,
60,860 shares have vested to employees and 8,983 shares have been cancelled and
returned to treasury shares.
The Company adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" in 1996. Accordingly, no compensation
cost has been recognized for the stock option plans. Had compensation cost for
the Company's stock option plans been determined consistent with the provisions
of SFAS No. 123, the Company's net income (loss) and earnings (loss) per share
would have been reduced to the pro forma amounts indicated below:
1998 1997 1996
-------------------------------------------------
Net income (loss), in thousands
As reported $ (30,597) $ 18,715 $ 19,186
Pro forma $ (31,201) $ 18,378 $ 19,055
Basic earnings (loss) per share
As reported $ (1.23) $ .76 $ .78
Pro forma $ (1.25) $ .74 $ .77
Diluted earnings (loss) per share
As reported $ (1.23) $ .76 $ .77
Pro forma $ (1.25) $ .74 $ .77
=========================================================================================================================
|
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions: dividend yield of 1.6% to 3.0%; expected volatility of 24.9% to
29.1%; risk-free interest rate of 5.3% to 7.4%; and expected lives of 6 years.
41.
(10) Common Stock Purchase Rights
One common share purchase right is attached to each outstanding share of
the Company's common stock. Each right entitles the holder to purchase one share
of common stock at an exercise price of $25.00, subject to adjustment. These
rights will become exercisable in the event that a person or group acquires or
commences a tender offer for 20% or more of the Company's outstanding shares or
the Board determines that a holder of 10% or more of the Company's outstanding
shares presents a threat to the best interests of the Company. At no time will
these rights have any voting power.
If any person or entity actually acquires 20% of the common stock (10% or
more if the Board determines such acquiror is adverse), rightholders (other than
the 20% or 10% stockholder) will be entitled to buy, at the right's then current
exercise price, the Company's common stock with a market value of twice the
exercise price. Similarly, if the Company is acquired in a merger or other
business combination, each right will entitle its holder to purchase, at the
right's then current exercise price, a number of the surviving company's common
shares having a market value at that time of twice the right's exercise price.
The rights may be redeemed by the Board for $.003 per right prior to the
time that they become exercisable. In the event, however, that redemption of the
rights is considered in connection with a proposed acquisition of the Company,
the Board may redeem the rights only on the recommendation of its independent
directors (nonmanagement directors who are not affiliated with the proposed
acquiror). These rights expire in 1999.
(11) Contingencies and Commitments
At December 31, 1998 the Company and the other general partner of NOARK
have severally guaranteed the principal and interest payments on $79.0 million
of 7.15% Notes due 2018. The Company's share of the several guarantee is 60%.
The 7.15% Notes were issued in June 1998 and require semi-annual principal
payments of $1.0 million. The proceeds from the issuance of the Notes were used
to repay temporary financing provided by the other general partner and
outstanding amounts under an unsecured revolving credit agreement. The temporary
financing provided by the other general partner was incurred in connection with
the prepayment in early 1998 of NOARK's 9.74% Senior Secured notes.
Additionally, the Company's gas distribution subsidiary has transportation
contracts for firm capacity of 82.3 MMcfd on NOARK's integrated pipeline system.
These contracts expire in 2002 and 2003, and are renewable year-to-year
thereafter until terminated by 180 days' notice.
Under the several guarantee, the Company is required to fund its share of
NOARK's debt service which is not funded by operations of the pipeline. As a
result of the integration of NOARK Pipeline with the Ozark Gas Transmission
System, as discussed further in Note 7, management of the Company believes that
it will realize its investment in NOARK over the life of the system. Therefore,
no provision for any loss has been made in the accompanying financial
statements.
In May 1996, a class action suit was filed against the Company on behalf of
royalty owners alleging improprieties in the disbursements of royalty proceeds.
A trial was held on the class action suit beginning in late September 1998 that
resulted in a verdict against the Company and two of its wholly-owned
subsidiaries, SEECO, Inc. and Arkansas Western Gas Company, in the amount of
$62.1 million. The trial judge subsequently awarded pre-judgment interest in an
amount of $31.1 million, and post-judgment interest accrued from the date of the
judgment at the rate of 10% per annum simple interest. The Company has been
required by the state court to post a judgment bond in the amount of $102.5
million (verdict amount plus pre-judgment interest and one year of post-judgment
interest) in order to stay the jury's verdict and proceed with an appeal
process. The bond was placed by a surety company and was collateralized by
unsecured letters of credit.
The verdict was returned following a trial on the issues of the class
action lawsuit brought by certain royalty owners of SEECO, Inc., who contend
that since 1979 the defendants breached implied covenants in certain oil and gas
leases, misrepresented or failed to disclose material facts to royalty owners
concerning gas purchase contracts between the Company's subsidiaries, and failed
to fulfill other alleged common law duties to the members of the royalty owner
plaintiff class. The litigation was commenced in May 1996 and was disclosed by
the Company at that time.
42.
The Company believes that the jury's verdict was wrong as a matter of law
and fact and that incorrect rulings by the trial judge (including evidentiary
rulings and prejudicial jury instructions) provide grounds for a successful
appeal. The Company had asked the trial judge to recuse himself due to his
apparent bias toward the plaintiffs and had also filed a motion with the trial
court for judgement notwithstanding the verdict or, in the alternative, for a
new trial. These motions were denied. The Company has filed and will vigorously
prosecute an appeal in the Arkansas Supreme Court. Management of the Company
believes that the jury's verdict will be overturned and the case remanded for a
new trial. If the Company is not successful in its appeal from the jury verdict,
the Company's financial condition and results of operations would be materially
and adversely affected. However management believes that the Company's ultimate
liability, if any, resulting from this case will not be material to its
financial position or results of operations. At December 31, 1998, no amounts
have been accrued on this matter.
In its Form 8-K filed July 2, 1996, the Company disclosed that a lawsuit
relating to overriding royalty interests in certain Arkansas oil and gas
properties had been filed against it and two of its wholly owned subsidiaries.
The lawsuit, which was brought by a party who was originally included in (but
opted out of) the class action litigation described above, involves claims
similar to those upon which judgment was rendered against the Company and its
subsidiaries. In September 1998, another party who opted out of the class
threatened the Company with similar litigation. While the amounts of these
pending and threatened claims could be significant, management believes, based
on its investigations, that the Company's ultimate liability, if any, will not
be material to its consolidated financial position or results of operations.
The United States Minerals Management Service (MMS), a federal agency
responsible for the administration of federal oil and gas leases, is
investigating the Company and its subsidiaries in respect of claims similar to
those in the class action litigation. MMS was included in the class action
litigation against its objections, but has not pursued further action to remove
itself from the class. If MMS does remove itself from the class, its claims may
be brought separately under federal statutes that provide for treble damages and
civil penalties. In such event, the Company believes it would have defenses that
were not available in the class action litigation. While the aggregate amount of
MMS's claims could be significant, management believes, based on its
investigations, that the Company's ultimate liability, if any, will not be
material to its consolidated financial position or results of operations.
In 1997, the Company's subsidiary, Southwestern Energy Production Company
(SEPCO), filed suit against several parties, including an outside consultant
previously employed by SEPCO, alleging breach of contract, fraud, and other
causes of action in connection with services performed on SEPCO's south
Louisiana exploration projects. On June 23, 1998, the outside consultant filed a
counterclaim against SEPCO. The consultant's primary cause of action relates to
a claim that he is contractually entitled to a 25% interest in the Boure'
project, one of SEPCO's south Louisiana exploration projects. The counterclaim
alleges seven different claims for relief, including breach of contract, fraud,
and defamation and requests damages in excess of $10,000,000 for each claim plus
punitive damages in excess of $10,000,000. The Company feels these claims are
without merit and intends to vigorously contest them. Although the total amount
of these 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 operation.
The Company is subject to laws and regulations relating to the protection
of the environment. The Company's policy is to accrue environmental and cleanup
related costs of a noncapital nature when it is both probable that a liability
has been incurred and when the amount can be reasonably estimated. Management
believes any future remediation or other compliance related costs will not have
a material effect on the financial condition or reported results of operations
of the Company.
The Company is subject to other litigation and claims that have arisen in
the ordinary course of business. The Company accrues for such items when a
liability is both probable and the amount can be reasonably estimated. In the
opinion of management, the results of such litigation and claims will not have a
material effect on the results of operations or the financial position of the
Company.
43.
(12) Segment Information
The Company adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information," in 1998 which changes the way the Company
reports information about its operating segments. The information for 1997 and
1996 has been restated from the prior year's presentation to conform to the 1998
presentation.
The Company's reportable business segments have been identified based on
the differences in products or services provided. Revenues for the exploration
and production segment are derived from the production and sale of natural gas
and crude oil. Revenues for the gas distribution segment arise from the
transportation and sale of natural gas at retail. The marketing segment
generates revenue through the marketing of both Company and third party produced
gas volumes. The Company utilizes operating income to evaluate segment profit or
loss.
Summarized financial information for the Company's reportable segments is
shown in the following table. The "Other" column includes items related to
non-reportable segments (real estate and pipeline operations) and corporate
items.
Exploration
and Gas
Production Distribution Marketing Other Total
----------------------------------------------------------------
(in thousands)
1998
Revenues from external customers $ 55,347 $ 134,579 $ 76,367 $ 12 $ 266,305
Intersegment revenues 30,885 132 20,808 608 52,433
Depreciation, depletion and amortization expense 38,768 6,616 19 1,514 46,917
Write-down of oil and gas properties 66,383 - - - 66,383
Operating income (loss) (47,273) 16,029 1,800 493 (28,951)
Assets 408,193 192,396 8,905 38,126<F1> 647,620
Capital expenditures 52,376 10,108 8 1,867 64,359
==========================================================================================================================
1997
Revenues from external customers $ 56,658 $ 153,993 $ 65,435 $ 103 $ 276,189
Intersegment revenues 43,471 162 17,372 601 61,606
Depreciation, depletion and amortization expense 40,340 6,553 16 1,299 48,208
Operating income 33,303 16,941 1,315 377 51,936
Assets 460,193 204,223 7,085 39,365<F1> 710,866
Capital expenditures 73,526 12,561 45 2,689 88,821
==========================================================================================================================
1996
Revenues from external customers $ 46,562 $ 142,587 $ 14,153 $ 38 $ 203,340
Intersegment revenues 40,416 143 15,816 629 57,004
Depreciation, depletion and amortization expense 35,533 5,694 7 1,160 42,394
Operating income (loss) 34,184 13,974 (549) 387 47,996
Assets 423,321 195,716 3,752 37,401<F1> 660,190
Capital expenditures 110,352 12,752 112 1,697 124,913
==========================================================================================================================
<F1> Other assets includes the Company's equity investment in the operations of
NOARK (see Note 7), corporate assets not allocated to segments, and assets
for non-reportable segments.
|
Intersegment sales by the exploration and production segment to the gas distribution and marketing segments are priced in accordance with terms of existing contracts and current market conditions. Parent company assets include furniture and fixtures, prepaid debt costs and prepaid pension costs. Parent company general and administrative costs, depreciation expense and taxes other than income are allocated to segments. All of the Company's operations are located within the United States.
44.
(13) Quarterly Results (Unaudited)
The following is a summary of the quarterly results of operations for the years ended December 31, 1998 and 1997:
Quarter Ended March 31 June 30 September 30 December 31
---------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
1998
-----------------------------------------------------------------------
Operating revenues $ 82,956 $ 56,334 $ 53,551 $ 73,464
Operating income (loss) $ 19,923 $ (63,835) $ 2,914 $ 12,047
Net income (loss) $ 9,072 $ (42,058) $ (1,331) $ 3,720
Basic and diluted earnings (loss) per share $ .37 $ (1.70) $ (.05) $ .15
1997
-----------------------------------------------------------------------
Operating revenues $ 88,919 $ 51,244 $ 48,644 $ 87,382
Operating income $ 25,094 $ 5,089 $ 3,121 $ 18,632
Net income (loss) $ 12,319 $ 29 $ (1,267) $ 7,634
Basic and diluted earnings (loss) per share $ .50 $ .00 $ (.05) $ .31
===========================================================================================================================
|
45.
Financial and Operating Statistics
Southwestern Energy Company and Subsidiaries
1998 1997 1996 1995 1994 1993
------------------------------------------------------------------------------------------------------------------------
Financial Review (in thousands)
Operating revenues
Exploration and production $ 86,232 $100,129 $ 86,978 $ 63,285 $ 79,787 $ 79,374
Gas distribution 134,711 154,155 142,730 119,452 126,667 131,731
Energy services and other 97,795 83,511 30,636 31,622 29,225 423
Intersegment revenues (52,433) (61,606) (57,004) (47,534) (60,055) (36,684)
------------------------------------------------------------------------------------------------------------------------
266,305 276,189 203,340 166,825 175,624 174,844
------------------------------------------------------------------------------------------------------------------------
Operating costs and expenses
Gas purchases - utility 39,863 46,806 42,851 37,133 36,395 42,962
Gas purchases - marketing 73,235 63,054 14,114 13,714 5,438 -
Operating and general 61,915 59,167 50,509 44,436 42,506 40,093
Depreciation, depletion and amortization 46,917 48,208 42,394 35,992 35,546 30,944
Write-down of oil and gas properties 66,383 - - - - -
Taxes, other than income taxes 6,943 7,018 5,476 4,362 3,657 3,281
------------------------------------------------------------------------------------------------------------------------
295,256 224,253 155,344 135,637 123,542 117,280
------------------------------------------------------------------------------------------------------------------------
Operating income (28,951) 51,936 47,996 31,188 52,082 57,564
Interest expense, net (17,186) (16,414) (13,044) (11,167) (8,867) (9,025)
Other income (expense) (3,956) (5,017) (4,015) (1,227) (2,362) (1,657)
------------------------------------------------------------------------------------------------------------------------
Income before income taxes, extraordinary item and
the cumulative effect of accounting change (50,093) 30,505 30,937 18,794 40,853 46,882
------------------------------------------------------------------------------------------------------------------------
Income taxes:
Current (6,029) (732) (5,569) (4,908) 9,288 13,704
Deferred (13,467) 12,522 17,320 12,167 6,441 6,128
------------------------------------------------------------------------------------------------------------------------
(19,496) 11,790 11,751 7,259 15,729 19,832
------------------------------------------------------------------------------------------------------------------------
Income before extraordinary item and
cumulative effect of accounting change (30,597) 18,715 19,186 11,535 25,124 27,050
Extraordinary item - - - (295) - -
Cumulative effect of change in accounting for
income taxes - - - - - 10,126
------------------------------------------------------------------------------------------------------------------------
Net income $(30,597) $ 18,715 $ 19,186 $ 11,240 $ 25,124 $ 37,176
========================================================================================================================
Cash flow from operations, net of working
capital changes (in thousands) $ 93,708 $ 79,483 $ 71,830 $ 56,177 $ 66,857 $ 70,373
Return on equity n/a 8.45% 9.23% 5.78% 12.35% 14.66%<F1>
========================================================================================================================
Common Stock Statistics
Basic earnings per share before extraordinary item
and cumulative effect of accounting change $(1.23 $.76 $.78 $.46 $.98 $1.05
Basic earnings per share $(1.23) $.76 $.78 $.45 $.98 $1.44
Cash dividends declared and paid per share $.24 $.24 $.24 $.24 $.24 $.22
Book value per share $7.45 $8.92 $8.41 $7.87 $7.92 $7.18
Market price at year-end $7.50 $12.88 $15.13 $12.75 $14.88 $18.00
Number of shareholders of record at year-end 2,333 2,379 2,572 2,759 2,875 3,005
Average shares outstanding 24,882,170 24,738,882 24,705,256 25,130,781 25,684,110 25,684,110
========================================================================================================================
<F1> Before the cumulative effect of accounting change.
|
46.
1998 1997 1996 1995 1994 1993
------------------------------------------------------------------------------------------------------------------------
Capitalization (in thousands)
Long-term debt, including current portion $283,436 $299,543 $278,285 $210,828 $142,300 $127,000
Common shareholders' equity 185,856 221,565 207,941 194,504 203,456 184,530
------------------------------------------------------------------------------------------------------------------------
Total capitalization $469,292 $521,108 $486,226 $405,332 $345,756 $311,530
------------------------------------------------------------------------------------------------------------------------
Total assets $647,620 $710,866 $660,190 $569,093 $486,074 $445,454
------------------------------------------------------------------------------------------------------------------------
Capitalization ratios:
Debt (excluding current portion) 60.27% 57.23% 56.96% 51.65% 40.10% 40.19%
Equity 39.73% 42.77% 43.04% 48.35% 59.90% 59.81%
========================================================================================================================
Capital Expenditures (in millions)
Exploration and production $52.4 $73.5 $110.3 $ 82.2 $55.4 $37.4
Gas distribution 10.1 12.6 12.8 18.5 17.6 19.9
Other 1.9 2.7 1.8 .9 3.9 1.9
------------------------------------------------------------------------------------------------------------------------
$64.4 $88.8 $124.9 $101.6 $76.9 $59.2
========================================================================================================================
Exploration and Production
Natural gas:
Production, Bcf 32.7 33.4 34.8 34.5 37.7 35.7
Average price per Mcf $2.34 $2.57 $2.26 $1.72 $2.04 $2.18
Oil:
Production, MBbls 703 749 391 229 200 97
Average price per barrel $13.60 $19.02 $21.21 $17.15 $15.89 $17.20
Average production (lifting) cost per Mcf equivalent $.43 $.45 $.29 $.22 $.17 $.18
Proved reserves at year-end:
Natural gas, Bcf 303.7 291.4 297.5 294.9 316.1 318.8
Oil, MBbls 6,850 7,852 8,238 2,152 1,231 479
Total reserves, Bcf equivalent 344.8 338.5 346.9 307.8 323.5 321.7
========================================================================================================================
Gas Distribution
Sales and transportation volumes, Bcf:
Residential 11.1 12.6 13.4 12.1 11.6 12.9
Commercial 7.6 8.4 8.8 7.6 7.2 7.8
Industrial 4.2 6.6 7.7 7.7 7.5 6.1
End-use transportation 8.8 6.6 5.5 5.2 4.8 5.6
------------------------------------------------------------------------------------------------------------------------
31.7 34.2 35.4 32.6 31.1 32.4
Off-system transportation 1.1 2.8 3.6 9.8 10.7 11.7
------------------------------------------------------------------------------------------------------------------------
32.8 37.0 39.0 42.4 41.8 44.1
------------------------------------------------------------------------------------------------------------------------
Customers - year-end
Residential 156,384 154,864 151,880 147,267 144,486 140,761
Commercial 22,229 21,431 20,845 20,109 19,489 19,121
Industrial 303 311 326 340 348 348
------------------------------------------------------------------------------------------------------------------------
178,916 176,606 173,051 167,716 164,323 160,230
------------------------------------------------------------------------------------------------------------------------
Degree days 3,472 4,131 4,341 4,064 3,823 4,598
Percent of normal 87% 103% 108% 102% 96% 115%
========================================================================================================================
|
47.
SHAREHOLDER INFORMATION
Annual Meeting
The Annual Meeting of Shareholders of Southwestern Energy Company will be held
at the Northwest Arkansas Convention Center in Springdale, Arkansas, on Tuesday,
May 18, 1999, at 11:00 a.m. Central Daylight Time.
Stock Exchange Listing
Southwestern Energy Company's common stock is traded on the New York Stock
Exchange under the symbol SWN and is listed in alphabetical quotation listings
in most major newspapers as SowestEngy.
Independent Public Accountants
Arthur Andersen LLP
6450 South Lewis
Suite 300
Tulsa, Oklahoma 74136-1068
Financial Information
Financial analysts and investors who need additional information should contact
Greg D. Kerley, Senior Vice President and Chief Financial Officer, at corporate
headquarters, 501-521-1141. Additional information on the Company can be found
on the Internet at http://www.swn.com.
Transfer Agent and Registrar
EQUISERVE
First Chicago Trust Division
Post Office Box 2500
Jersey City, New Jersey 07303-2500
Phone 1-800-446-2617
Dividend Reinvestment Plan
The Company is currently implementing a DirectSERVICE Investment Program to
replace its Dividend Reinvest-ment Program. This enhanced program will enable
any interested investor to purchase shares directly from the Company or reinvest
dividends without the aid of a broker. The Company expects the program to be
effective April 1999. Information about the Plan is available from the
administrator:
EQUISERVE
First Chicago Trust Division
Dividend Reinvestment Service
Post Office Box 2598
Jersey City, New Jersey 07303-2598
Phone 1-800-446-2617
Annual Report
The 1998 Annual Report filed with the Securities and Exchange Commission on Form
10-K is available to shareholders upon request by writing to the Secretary at
corporate headquarters.
CORPORATE HEADQUARTERS
Southwestern Energy Company
1083 Sain Street
Post Office Box 1408
Fayetteville, Arkansas 72702-1408
501-521-1141
501-521-0328 (fax)
SUBSIDIARY OFFICES
Southwestern Energy Production Company
2350 N. Sam Houston Parkway East, Suite 300
Houston, Texas 77032
281-618-4700
SEECO, Inc.
1083 Sain Street
Post Office Box 1408
Fayetteville, Arkansas 72702-1408
501-521-1141
Arkansas Western Gas Company
1001 Sain Street
Post Office Box 1288
Fayetteville, Arkansas 72702-1288
501-521-5400
Southwestern Energy Services Company and
Southwestern Energy Pipeline Company
2200 Mid-Continent Tower
401 S. Boston
Tulsa, Oklahoma 74103
918-584-4200
MARKET PRICES AND QUARTERLY DIVIDENDS PAID
Range of Market Prices Cash Dividends Paid
--------------------------------------------------------------
1998 1997 1998 1997
--------------------------------------------------------------
March 31 $12.94 $10.63 $15.75 $13.25 $.06 $.06
June 30 $12.00 $8.75 $13.75 $11.63 $.06 $.06
September 30 $10.38 $6.75 $14.31 $12.00 $.06 $.06
December 31 $8.50 $5.50 $13.13 $11.25 $.06 $.06
|
Market prices represent transactions on the New York Stock Exchange.
48.
Southwestern Energy Company and Subsidiaries
APPENDIX to 1998 ANNUAL REPORT TO SHAREHOLDERS
Description of Exploration & Production Operating Areas:
Southwestern conducts its exploration and production efforts primarily in four areas; the Arkoma Basin, the Anadarko Basin, the Gulf Coast, and the Permian Basin. The Arkoma Basin is located in the central section of western Arkansas and the central section of eastern Oklahoma. Southwestern's activities are concentrated in the historically productive Arkansas section of the Arkoma Basin.The Anadarko Basin covers most of the western part of Oklahoma and extends to the northwest into the northern panhandle of Texas and the panhandle area of Oklahoma. Southwestern's Gulf Coast operations include both onshore and offshore activity along both the Texas and Louisiana coasts. The Permian Basin is located in west Texas and the southeast corner of New Mexico.
Description of Gas Distribution Operating Areas:
Arkansas Western Gas Company's (AWG) northwest Arkansas gas utility system gathers its gas supply from the Arkoma Basin where it also provides distribution service to communities in that area, including the towns of Ozark and Clarksville. AWG's transmission and distribution lines extend north and supply communities in the northwest part of the state, including the towns of Fayetteville, Springdale, and Rogers. AWG's service area also extends east to the Harrison and Mountain Home areas. This eastern section of the AWG system receives a portion of its gas supply from a lateral line off of the OZARK Gas Transmission System (OZARK) as discussed below. Through its division, Associated Natural Gas Company (Associated), AWG provides distribution of natural gas to communities in northeast Arkansas and parts of Missouri. Major communities served in northeast Arkansas include Blytheville, Piggott, and Osceola. The Associated distribution system also serves the "bootheel" area in southeast Missouri, including the communities of Sikeston, New Madrid, and Caruthersville and extends north to the Jackson area. In addition, Associated provides service to Butler, Missouri, near the state's western border and Kirksville, Missouri, near the state's northern border through connections off of interstate pipelines in those areas.
Description of NOARK Pipeline System Operating Area:
Southwestern Energy Pipeline Company owns a general partnership interest in the NOARK Pipeline System (NOARK). NOARK is the partnership that owns the Ozark system which is a 749-mile interstate pipeline system that stretches from eastern Oklahoma across norhtern Arkansas and interconnects with three major interstate pipeline systems as well as Southwestern's gas distribution systems.
| ARTICLE 5 |
| MULTIPLIER: 1,000 |
| PERIOD TYPE | YEAR |
| FISCAL YEAR END | DEC 31 1998 |
| PERIOD END | DEC 31 1998 |
| CASH | 1,622 |
| SECURITIES | 0 |
| RECEIVABLES | 40,655 |
| ALLOWANCES | 0 |
| INVENTORY | 22,812 |
| CURRENT ASSETS | 72,271 |
| PP&E | 1,028,465 |
| DEPRECIATION | 478,790 |
| TOTAL ASSETS | 647,620 |
| CURRENT LIABILITIES | 54,786 |
| BONDS | 281,900 |
| PREFERRED MANDATORY | 0 |
| PREFERRED | 0 |
| COMMON | 2,774 |
| OTHER SE | 183,082 |
| TOTAL LIABILITY AND EQUITY | 647,620 |
| SALES | 258,714 |
| TOTAL REVENUES | 266,305 |
| CGS | 0 |
| TOTAL COSTS | 295,256 |
| OTHER EXPENSES | 0 |
| LOSS PROVISION | 0 |
| INTEREST EXPENSE | 17,186 |
| INCOME PRETAX | (50,093) |
| INCOME TAX | (19,496) |
| INCOME CONTINUING | (30,597) |
| DISCONTINUED | 0 |
| EXTRAORDINARY | 0 |
| CHANGES | 0 |
| NET INCOME | (30,597) |
| EPS PRIMARY | (1.23) |
| EPS DILUTED | (1.23) |
| The information has been prepared in accordance with SFAS No. 128. Basic and diluted EPS have been entered in place of primary and fully diluted, respectively. |