Southwestern Energy sold its Missouri gas distribution assets toAtmos Energy yesterday for $32 million in cash, but SouthwesternCEO Harold M. Korell said the company isn’t ready to part with itsArkansas utility operations to complete its transformation intoentirely an exploration and production company.

The Missouri assets, which are part of Associated Natural Gas, adivision of Southwestern subsidiary Arkansas Western Gas, areoperated by 91 employees and serve 48,000 residential, commercialand industrial customers, primarily located near the towns ofSikeston, Kirksville, Butler and Jackson. Arkansas Western Gas alsoserves 131,000 customers in northwestern Arkansas and will continueto own and operate Associated’s assets in that state.

“We were small in Missouri…and were at an economicdisadvantage there. We were earning a low return and it was justnot an area where we had any competitive advantage,” said Korell inan interview with NGI. “It makes a lot of sense for Atmos who wasalready had a presence in Missouri and wants to grow bigger there.But we certainly will maintain our utility operation in the stateof Arkansas,” he said, noting that northwestern Arkansas is thenation’s eighth fastest growing community, fueled by Tyson Foodsand WallMart. “We earn a good return there. We’re a niche playerthere.”

Atmos CEO Robert W. Best said the transaction “provideseconomies of scale which will result in a greater competitiveadvantage” in Missouri. In total, Atmos provides gas and propane tomore than one million distribution customers in 13 states.

But Southwestern clearly is headed down a different path. WhenKorell came on board in April 1997 he brought more than 30 years ofexperience in exploration and production with companies such asMobil and Tenneco Oil. Last year, he completely overhauled theE&P staff. The company replaced 50% of its production employeesand 100% of its exploration staff.

“They recruited me here to succeed Charles Scharlau, who hadbeen with this company for 47 years and really had more of autility perspective than E&P. Even though the company hadgotten into E&P prior to my coming on, its results had beenpretty poor with finding and development costs ranging from $2.50to $3.50/Mcfe.” Last year finding and development costs showedmajor improvement to $1.10/Mcfe.

“We have a totally different company in the way we talk about[operations]. We have an overhauled E&P group. You can expectdifferent results out of the company than what it’s had in thepast, and I think that the way I talk about the company isdifferent than the way prior leadership talked about it, being thatthey were more utility by background, in spite of the fact thatthey were putting a lot of capital fairly unsuccessfully intoE&P.”

As a company, about 80% of Southwestern’s cash flow now comesfrom E&P and 80% of its capital investments go into E&P.About 65% of its assets currently are E&P.

Despite the strengths in E&P and expected strong growthgoing forward, however, Southwestern still finds value in utilityoperations. “The combination of the two – the gas utility, whichprovides the stability of cash flow, married up with the E&Poperation, which provides upside and growth – I think makes usunique,” said Korell.

Regarding future direction on the E&P side, he saidSouthwestern intends to maintain its “bread and butter” propertiesand drilling program in the Arkoma Basin but may eventually exitthe Anadarko in Oklahoma, where it already has begun auctioning offits property base. It will continue buying up small workinginterests in Gulf Coast prospects and in the Permian Basin.

The sale of its Missouri LDC operations is expected to becompleted by mid-year 2000.

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