Southwestern Hit Hard By $109M Royalty Ruling
Southwestern Energy has revealed that it will be forced to sell
off some unidentified assets to cover the costs associated with a
ruling last week by the Arkansas Supreme Court. The court affirmed
a 1998 decision of a Sebastian County Circuit Court awarding more
than $109 million in a class action to royalty owners of SEECO,
Inc., a wholly-owned Southwestern Energy subsidiary.
"Southwestern is disappointed at the Supreme Court decision. It
is not the outcome we had anticipated. It will take some time to
recoup the cost of this judgment and will involve the disposition
of some company assets," said Southwestern CEO Harold Korell.
"Fortunately, Southwestern has the financial flexibility to allow
it the time to recoup settlement costs and to continue development
of its quality exploration and production projects."
Southwestern said that within the next few days it will disclose
specific action it will take to fund the judgment and provide more
details on the near term impact of the judgment on the financial
condition of the company. During a conference call, the company
said the penalty would show up as a charge against earnings and
would increase balance sheet debt to more than 70%. Its stock price
plummeted nearly 30% following the news yesterday to $6.88/share.
The class action suit was filed in May 1996 against the company
on behalf of royalty owners alleging improprieties in the
disbursement of royalties. The royalty owners charged that the
company failed to disclose facts concerning gas purchase agreements
between the company's subsidiaries. A trial was held in September
1998 that resulted in a verdict against the company and its
subsidiaries in the amount of $62.1 million. The trial judge
subsequently awarded pre-judgment interest in the amount of $31.1
million and post-judgment interest accrued from the date of the
judgment at the rate of 10% per year. The company was required by
the state court to post a judgment bond, which now stands at $109.3
"Following the court's decision today, let us be clear, our
position is unchanged. We believe that from the beginning in this
matter Southwestern Energy has acted honestly and responsibly and
has served the best interests of its royalty owners and utility
customers, and we will continue to do so in the future," said
Korell. "Despite the disappointment of the ruling, we remain
optimistic about the company's future because the outlook for our
exploration and production operations has never been brighter."
In late 1999 and early this year, Southwestern successfully
drilled exploratory wells in south Louisiana at Gloria and North
Grosbec and has had continued success in its Arkoma Basin and
Permian Basin investments. The exploration successes in south
Louisiana are of particular note as they were the first prospects
in this area developed in-house by a new exploration team.
Southwestern's full-year 1999 and first quarter 2000 earnings were
consistent with previous years' levels despite the warmest winter
in the company's history.
Nevertheless, several other royalty suits are pending involving
plaintiffs - including Enron - that opted out of the class action
against the company, and there is an ongoing investigation by the
Minerals Management Service of claims similar to those in the class
action suit. Southwestern said the Enron suit could represent a
liability of up to $15 million.
Southwestern is engaged in exploration, production,
transportation, distribution and marketing and has $672 million in
assets. The company had operating revenues of $280 million last
year and net income of about $10 million. At the end of last year,
Southwestern had 355 Bcfe of proved reserves, the majority of which
were located in the Arkoma Basin in the Midcontinent region. Its
gas production averaged 90 MMcf/d. Its distribution operation,
Arkansas Western Gas, serves 181,000 customers in Arkansas and
Missouri. Southwestern's gas transportation business includes the
NOARK (258 miles) and Ozark pipelines (749 miles) in Oklahoma and
Arkansas, and its marketing operations sold 63 Bcf of gas last
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