Southwestern Energy has revealed that it will be forced to selloff some unidentified assets to cover the costs associated with aruling last week by the Arkansas Supreme Court. The court affirmeda 1998 decision of a Sebastian County Circuit Court awarding morethan $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. Itis not the outcome we had anticipated. It will take some time torecoup the cost of this judgment and will involve the dispositionof some company assets,” said Southwestern CEO Harold Korell.”Fortunately, Southwestern has the financial flexibility to allowit the time to recoup settlement costs and to continue developmentof its quality exploration and production projects.”

Southwestern said that within the next few days it will disclosespecific action it will take to fund the judgment and provide moredetails on the near term impact of the judgment on the financialcondition of the company. During a conference call, the companysaid the penalty would show up as a charge against earnings andwould increase balance sheet debt to more than 70%. Its stock priceplummeted nearly 30% following the news yesterday to $6.88/share.

The class action suit was filed in May 1996 against the companyon behalf of royalty owners alleging improprieties in thedisbursement of royalties. The royalty owners charged that thecompany failed to disclose facts concerning gas purchase agreementsbetween the company’s subsidiaries. A trial was held in September1998 that resulted in a verdict against the company and itssubsidiaries in the amount of $62.1 million. The trial judgesubsequently awarded pre-judgment interest in the amount of $31.1million and post-judgment interest accrued from the date of thejudgment at the rate of 10% per year. The company was required bythe state court to post a judgment bond, which now stands at $109.3million

“Following the court’s decision today, let us be clear, ourposition is unchanged. We believe that from the beginning in thismatter Southwestern Energy has acted honestly and responsibly andhas served the best interests of its royalty owners and utilitycustomers, and we will continue to do so in the future,” saidKorell. “Despite the disappointment of the ruling, we remainoptimistic about the company’s future because the outlook for ourexploration and production operations has never been brighter.”

In late 1999 and early this year, Southwestern successfullydrilled exploratory wells in south Louisiana at Gloria and NorthGrosbec and has had continued success in its Arkoma Basin andPermian Basin investments. The exploration successes in southLouisiana are of particular note as they were the first prospectsin this area developed in-house by a new exploration team.Southwestern’s full-year 1999 and first quarter 2000 earnings wereconsistent with previous years’ levels despite the warmest winterin the company’s history.

Nevertheless, several other royalty suits are pending involvingplaintiffs – including Enron – that opted out of the class actionagainst the company, and there is an ongoing investigation by theMinerals Management Service of claims similar to those in the classaction suit. Southwestern said the Enron suit could represent aliability of up to $15 million.

Southwestern is engaged in exploration, production,transportation, distribution and marketing and has $672 million inassets. The company had operating revenues of $280 million lastyear and net income of about $10 million. At the end of last year,Southwestern had 355 Bcfe of proved reserves, the majority of whichwere located in the Arkoma Basin in the Midcontinent region. Itsgas production averaged 90 MMcf/d. Its distribution operation,Arkansas Western Gas, serves 181,000 customers in Arkansas andMissouri. Southwestern’s gas transportation business includes theNOARK (258 miles) and Ozark pipelines (749 miles) in Oklahoma andArkansas, and its marketing operations sold 63 Bcf of gas lastyear.

Rocco Canonica

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