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Southwestern Hit Hard By $109M Royalty Ruling

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 million

"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 year.

Rocco Canonica

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