Southwestern Energy Announces Record Second Quarter 2005 Results

HOUSTON, July 26 /PRNewswire-FirstCall/ -- Southwestern Energy Company today announced financial and operating results for the second quarter of 2005. Highlights include:

* Record earnings of $26.8 million, up 29% from the same period in 2004 * Record net cash provided by operating activities before changes in operating assets and liabilities (a non-GAAP measure reconciled below) of $65.1 million, up 29% from the same period in 2004 * Natural gas and crude oil production of 15.0 Bcfe, up 19% over second quarter 2004 levels

For the second quarter of 2005, Southwestern reported net income of $26.8 million, or $0.36 per diluted share, up 29% from $20.8 million, or $0.28 per diluted share, for the same period in 2004. All historical per share information has been adjusted to reflect the company's two-for-one stock split effective June 3, 2005. Net cash provided by operating activities before changes in operating assets and liabilities (non-GAAP; see reconciliation below), was $65.1 million in the second quarter of 2005, up 29% from $50.3 million for the same period in 2004. A 19% increase in production volumes and higher realized natural gas and oil prices, partially offset by increased operating costs and expenses, drove the improved financial results.

Net income for the six months ended June 30, 2005 was $59.4 million, or $0.79 per diluted share, up 31% from $45.3 million, or $0.62 per diluted share, for the same period in 2004. Net cash provided by operating activities before changes in operating assets and liabilities was $138.7 million for the first six months of 2005, up 30% from $106.8 million for the same period in 2004.

"We are continuing to have excellent results in our E&P segment," stated Harold M. Korell, President and Chief Executive Officer of Southwestern Energy. "Our production volumes increased 19% over the prior year second quarter despite the curtailment of a portion of our production at our Overton Field in East Texas which was resolved late in the second quarter. We are pleased with our results for first half of 2005 and look forward to continued success in the remainder of the year."

Second Quarter of 2005 Financial Results

E&P Segment - Operating income from the company's E&P segment was $48.6 million for the three months ended June 30, 2005, up from $37.5 million for the same period in 2004. The increase was primarily due to a 19% increase in production volumes and higher realized natural gas and oil prices, partially offset by higher operating costs and expenses.

Gas and oil production totaled 15.0 Bcfe for the three months ended June 30, 2005, up from 12.6 Bcfe in the second quarter of 2004. The increase in 2005 production resulted primarily from increased production from the company's Overton Field in East Texas, the Arkoma Basin and the development of the company's River Ridge discovery in New Mexico. Production during the second quarter included the effects of curtailment of a portion of the company's production at its Overton Field due to pipeline repairs to a non- operated transmission line into which the company delivers a large portion of its gas production. The curtailment issues at Overton were resolved late in the second quarter.

Southwestern's average realized gas price was $5.71 per Mcf (including the effect of hedges) in the three months ended June 30, 2005 compared to $5.25 per Mcf in the same period of 2004. The company's hedging activities decreased the average gas price realized during the second quarter of 2005 by $0.75 per Mcf, compared to a decrease of $0.57 per Mcf during the same period of 2004. Locational differences in market prices for natural gas have continued to be wider than historically experienced. Disregarding the impact of hedges, the company's average price received for its gas production during the second quarter of 2005 was approximately $0.27 per Mcf lower than average NYMEX spot prices, compared to approximately $0.17 per Mcf during the second quarter of 2004. The company currently estimates that its average realized market differentials for the third quarter of 2005 will be in the range of $0.25 to $0.30 per Mcf.

Southwestern's average realized oil price was $40.81 per barrel, including the effect of hedges, during the second quarter of 2005 compared to $28.68 per barrel in the second quarter of 2004. The average realized oil prices for the second quarter of 2005 and 2004 were reduced by $9.27 per barrel and $8.41 per barrel, respectively, due to the effects of Southwestern's hedging activities.

Lease operating expenses per Mcfe for the company's E&P segment were $0.43 for the second quarter of 2005, compared to $0.39 for the same period in 2004. The increase in lease operating expenses per Mcfe in 2005 resulted from an increase in compression costs and generally higher oil field service costs. General and administrative expenses per Mcfe were $0.39 during the second quarter of 2005, as compared with $0.35 for the same period in 2004. General and administrative expenses for the E&P segment were higher primarily due to increased compensation costs associated with increased staffing levels. Taxes other than income taxes per Mcfe were $0.32 during the second quarter of 2005, compared to $0.28 per Mcfe during the same period in 2004. The increase in 2005 was due primarily to increased severance taxes that resulted from higher average market prices in effect for natural gas and crude oil. The company's full cost pool amortization rate increased to $1.38 per Mcfe in the second quarter of 2005, compared to $1.18 per Mcfe for the same period in 2004, primarily due to increased finding and development costs. Southwestern currently expects its full cost pool amortization rate to average between $1.40 and $1.45 per Mcfe for 2005.

Natural Gas Distribution Segment - The company's utility segment recorded a seasonal operating loss of $2.4 million for the three months ended June 30, 2005, compared to an operating loss of $1.4 million for the same period in 2004. The decrease in operating income for this segment primarily resulted from increased operating costs and expenses.

Marketing and Other - Operating income from our natural gas marketing activities was $0.9 million for the three months ended June 30, 2005, compared to $0.8 million in 2004. The company recorded pre-tax income from operations of $0.2 million relating to the company's 25% interest in the Ozark Gas Transmission System during the second quarter of 2005, compared to a pre-tax loss of $0.7 million for the same period in 2004.

First Six Months of 2005 Financial Results

E&P Segment - Operating income for the E&P segment was $96.3 million during the first six months of 2005, compared to $70.9 million during the first six months of 2004. The increase was primarily due to a 21% increase in production volumes combined with higher realized oil and gas prices. Revenues for the first six months of 2005 and 2004 also included pre-tax gains of $2.1 million and $3.0 million, respectively, related to the sale of gas in storage inventory.

Gas and oil production increased to 29.0 Bcfe for the six months ended June 30, 2005, as compared to 24.0 Bcfe for the first six months of 2004 despite the curtailment issue at Overton which was not resolved until late in the second quarter. The increase in production resulted primarily from the company's increased production from the Overton Field in East Texas, the Arkoma Basin and from the development of the company's River Ridge discovery in New Mexico.

Southwestern's average realized gas price was $5.71 per Mcf (including the effect of hedges) in the first six months of 2005 compared to $5.09 per Mcf in the first six months of 2004. The company's hedging activities decreased the average gas price realized during the first six months of 2005 by $0.39 per Mcf, compared to a decrease of $0.50 per Mcf during the same period of 2004. Southwestern's average realized oil price was $39.42 per barrel for the first six months of 2005, compared to $28.55 per barrel during the first six months of 2004. The average realized oil prices for the first six months of 2005 and 2004 were reduced by $9.46 per barrel and $6.86 per barrel, respectively, due to the effects of Southwestern's hedging activities. Disregarding the impact of hedges, the average price received for the company's gas production during the first half of 2005 was approximately $0.40 per Mcf lower than average NYMEX spot prices, compared to the average for the prior year period of approximately $0.25 per Mcf. This change was due to widening locational market differentials that have occurred since the prior year period.

Lease operating expenses per Mcfe for the company's E&P segment were $0.44 per Mcfe during the first six months of 2005, compared to $0.39 per Mcfe during the same period in 2004, due to increased compression costs and generally higher oil field service costs. General and administrative expenses per Mcfe were $0.39 during the first six months of 2005, compared to $0.37 per Mcfe in the same period in 2004, primarily due to increased compensation costs associated with increased staffing levels. Taxes other than income taxes per Mcfe were $0.32 during the first six months of 2005, compared to $0.27 per Mcfe during the same period in 2004, primarily due to increased severance taxes. The company's full cost pool amortization rate increased to $1.34 per Mcfe in the first six months of 2005, compared to $1.18 per Mcfe for the same period in 2004, primarily due to increased finding and development costs.

Natural Gas Distribution Segment - Operating income for Southwestern's utility was $5.1 million during the first six months of 2005, down from $7.4 million during the first six months of 2004. The decrease in operating income for this segment resulted from decreased deliveries caused by warmer weather for the first half of 2005, which was 10% warmer than normal and 5% warmer than the same period in 2004, and from increased operating costs and expenses.

Marketing and Other - Operating income for the company's natural gas marketing activities was $2.0 million during the first six months of 2005, compared to $1.7 million in the same period in 2004. The company recorded pre-tax income from operations related to its investment in NOARK of $0.3 million during the first six months of 2005, compared to pre-tax loss of $0.5 million in the same period in 2004.

Explanation and Reconciliation of Non-GAAP Financial Measures

Net cash provided by operating activities before changes in operating assets and liabilities is presented because of its acceptance as an indicator of an oil and gas exploration and production company's ability to internally fund exploration and development activities and to service or incur additional debt. The company has also included this information because changes in operating assets and liabilities relate to the timing of cash receipts and disbursements which the company may not control and may not relate to the period in which the operating activities occurred. Net cash provided by operating activities before changes in operating assets and liabilities should not be considered in isolation or as a substitute for net cash provided by operating activities prepared in accordance with generally accepted accounting principles. The table below reconciles net cash provided by operating activities before changes in operating assets and liabilities with net cash provided by operating activities as derived from the company's financial information.

3 Months Ended June 30, 6 Months Ended June 30, 2005 2004 2005 2004 (in thousands) Net cash provided by operating activities before changes in operating assets and liabilities $65,065 $50,303 $138,681 $106,822 Add back (deduct): Change in operating assets and liabilities (3,773) (6,570) 25,710 13,651 Net cash provided by operating activities $61,292 $43,733 $164,391 $120,473

Southwestern will host a teleconference call on Wednesday, July 27, 2005, at 10:00 a.m. Eastern to discuss the company's second quarter 2005 financial and operating results. The toll-free number to call is 800-500-0177 and the reservation number is 5284680. The teleconference can also be heard "live" over the Internet at the company's website: http://www.swn.com/ .

Southwestern Energy Company is an integrated natural gas company whose wholly-owned subsidiaries are engaged in oil and gas exploration and production, natural gas gathering, transmission, and marketing, and natural gas distribution. Additional information on the company can be found on the Internet at http://www.swn.com/ .

All statements, other than historical financial information, 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 extent to which the Fayetteville Shale play can replicate the results of other productive shale gas plays, the potential for significant variability in reservoir characteristics of the Fayetteville Shale over such a large acreage position, the extent of the company's success in drilling and completing horizontal wells, the company's ability to determine the most effective and economic fracture stimulation for the Fayetteville Shale formation, lack of experience owning and operating drilling rigs, the timing and extent of the company's success in discovering, developing, producing and estimating reserves, property acquisition or divestiture activities, the effects of weather and regulation on the company's gas distribution segment, increased competition, the impact of federal, state and local government regulation, the financial impact of accounting regulations and critical accounting policies, changing market conditions and prices (including regional basis differentials), the comparative cost of alternative fuels, conditions in capital markets and changes in interest rates, availability of oil field personnel, services, drilling rigs and other equipment, and any other factors listed in the reports filed by the company with the Securities and Exchange Commission (the "SEC"). For additional information with respect to certain of these and other factors, see reports filed by the company with the SEC. The company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Financial Summary Follows OPERATING STATISTICS (Unaudited) Southwestern Energy Company and Subsidiaries Three Months Six Months Periods Ended June 30 2005 2004 2005 2004 Exploration & Production Production Gas production (MMcf) 13,940 11,781 26,959 22,296 Oil production (MBbls) 182 140 343 292 Total equivalent production (MMcfe) 15,032 12,621 29,019 24,048 Commodity Prices Average realized gas price per Mcf $5.71 $5.25 $5.71 $5.09 Average realized oil price per Bbl $40.81 $28.68 $39.42 $28.55 Operating Expenses per Mcfe Lease operating expenses $0.43 $0.39 $0.44 $0.39 Taxes, other than income taxes $0.32 $0.28 $0.32 $0.27 General & administrative expenses $0.39 $0.35 $0.39 $0.37 Full cost pool amortization $1.38 $1.18 $1.34 $1.18 Marketing Gas volumes marketed (MMcf) 15,021 13,143 29,386 25,424 Gas Distribution Deliveries (Bcf) Sales and end-use transportation 3.8 3.9 13.0 13.7 Off-system transportation --- --- --- 1.0 Number of customers - period end 143,855 140,227 143,855 140,227 Average sales rate per Mcf $12.57 $11.06 $9.89 $8.73 Heating weather - degree days 315 261 2,217 2,322 - percent of normal 98% 84% 90% 95% STATEMENTS OF OPERATIONS (Unaudited) Southwestern Energy Company and Subsidiaries Three Months Six Months Periods Ended June 30 2005 2004 2005 2004 (in thousands, except share/per share amounts) Operating Revenues Gas sales $93,192 $73,838 $219,463 $174,857 Gas marketing 30,203 15,674 54,750 24,860 Oil sales 7,428 4,008 13,539 8,342 Gas transportation and other 1,640 2,907 5,764 8,158 132,463 96,427 293,516 216,217 Operating Costs and Expenses Gas purchases - utility 5,078 3,518 38,901 35,050 Gas purchases - marketing 28,932 14,572 52,130 22,635 Operating expenses 12,413 10,498 24,346 20,210 General and administrative expenses 10,308 8,264 20,611 16,274 Depreciation, depletion and amortization 23,009 17,091 43,256 32,617 Taxes, other than income taxes 5,542 4,238 10,865 7,878 85,282 58,181 190,109 134,664 Operating Income 47,181 38,246 103,407 81,553 Interest Expense Interest on long-term debt 5,241 4,376 10,164 8,797 Other interest charges 358 316 668 828 Interest capitalized (944) (745) (1,639) (1,293) 4,655 3,947 9,193 8,332 Other Income (Expense) 15 (868) 199 (547) Income Before Income Taxes and Minority Interest 42,541 33,431 94,413 72,674 Minority Interest in Partnership (315) (431) (408) (830) Income Before Income Taxes 42,226 33,000 94,005 71,844 Provision for Income Taxes - Deferred 15,412 12,210 34,570 26,582 Net Income $26,814 $20,790 $59,435 $45,262 Earnings Per Share:(A) Basic $0.37 $0.29 $0.82 $0.64 Diluted $0.36 $0.28 $0.79 $0.62 Weighted Average Common Shares Outstanding:(A) Basic 72,474,987 71,342,912 72,363,971 71,220,908 Diluted 75,202,033 73,650,562 75,057,761 73,439,858 (A) 2004 restated to reflect a two-for-one stock split effected in June 2005. BALANCE SHEETS (Unaudited) Southwestern Energy Company and Subsidiaries June 30 2005 2004 (in thousands) ASSETS Current Assets $109,454 $91,370 Investments 15,738 13,295 Property, Plant and Equipment, at cost 1,947,090 1,596,303 Less: Accumulated depreciation, depletion and amortization 820,277 738,020 1,126,813 858,283 Other Assets 17,470 15,490 $1,269,475 $978,438 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities $163,579 $107,591 Long-Term Debt 328,100 278,000 Deferred Income Taxes 226,763 173,397 Other Liabilities 51,025 27,007 Commitments and Contingencies Minority Interest in Partnership 12,074 12,483 Shareholders' Equity Common stock, $.10 par value; authorized 220,000,000 shares, issued 74,451,168 shares in 2005 and 2004 (A) 7,445 7,445 Additional paid-in capital (A) 131,388 120,958 Retained earnings 409,896 292,147 Accumulated other comprehensive income (loss) (50,334) (24,201) Common stock in treasury, at cost, 964,815 shares in 2005 and 2,116,490 shares in 2004 (A) (5,374) (11,789) Unamortized cost of restricted shares issued under stock incentive plans, 617,662 shares in 2005 and 836,250 shares in 2004 (A) (5,087) (4,600) 487,934 379,960 $1,269,475 $978,438 (A) 2004 restated to reflect a two-for-one stock split effected in June 2005. STATEMENTS of CASH FLOWS (Unaudited) Southwestern Energy Company and Subsidiaries Six Months Periods Ended June 30 2005 2004 (in thousands) Cash Flows From Operating Activities Net income $59,435 $45,262 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization 45,264 34,372 Deferred income taxes 34,570 26,582 Ineffectiveness of cash flow hedges (531) 1,239 Gain on sale of other property, plant & equipment --- (1,534) Equity in (income) loss of NOARK partnership (273) 545 Minority interest in partnership 216 356 Change in operating assets and liabilities 25,710 13,651 Net cash provided by operating activities 164,391 120,473 Cash Flows From Investing Activities Capital expenditures (176,981) (124,234) Proceeds from sale of property, plant and equipment 1,040 1,906 Other items (297) (74) Net cash used in investing activities (176,238) (122,402) Cash Flows From Financing Activities Payments on revolving long-term debt (179,100) (210,300) Borrowings under revolving long-term debt 182,200 209,500 Debt issuance costs (1,180) (1,514) Change in bank drafts outstanding 5,743 898 Proceeds from exercise of common stock options 3,694 3,154 Net cash provided by financing activities 11,357 1,738 Decrease in cash (490) (191) Cash at beginning of year 1,235 1,277 Cash at end of period $745 $1,086 SEGMENT INFORMATION (Unaudited) Southwestern Energy Company and Subsidiaries Exploration Gas Marketing & Production Distribution & Other Eliminations Total (in thousands) Quarter Ending June 30, 2005 Revenues $87,040 $24,433 $92,414 $(71,424) $132,463 Gas purchases --- 14,237 91,031 (71,258) 34,010 Operating expenses 6,417 6,029 --- (33) 12,413 General & administrative expenses 5,899 4,169 373 (133) 10,308 Depreciation, depletion & amortization 21,286 1,688 35 --- 23,009 Taxes, other than income taxes 4,839 671 32 --- 5,542 Operating Income (Loss) $48,599 $(2,361) $943 $--- $47,181 Capital Investments $103,068(A) $2,701 $53 $--- $105,822 Quarter Ending June 30, 2004 Revenues $65,872 $23,012 $73,925 $(66,382) $96,427 Gas purchases --- 12,994 71,332 (66,236) 18,090 Operating expenses 4,954 5,569 --- (25) 10,498 General & administrative expenses 4,434 3,645 306 (121) 8,264 Depreciation, depletion & amortization 15,444 1,616 31 --- 17,091 Taxes, other than income taxes 3,588 616 34 --- 4,238 Operating Income (Loss) $37,452 $(1,428) $2,222 $--- $38,246 Capital Investments $66,428(A) $1,241 $533 $--- $68,202 Six Months Ending June 30, 2005 Revenues $169,583 $87,184 $171,591 $(134,842) $293,516 Gas purchases --- 56,732 168,747 (134,448) 91,031 Operating expenses 12,714 11,758 --- (126) 24,346 General & administrative expenses 11,343 8,829 707 (268) 20,611 Depreciation, depletion & amortization 39,800 3,387 69 --- 43,256 Taxes, other than income taxes 9,396 1,392 77 --- 10,865 Operating Income $96,330 $5,086 $1,991 $--- $103,407 Capital Investments $181,523(A) $4,783 $377 $--- $186,683 Six Months Ending June 30, 2004 Revenues $124,943 $84,271 $135,453 $(128,450) $216,217 Gas purchases --- 54,342 131,470 (128,127) 57,685 Operating expenses 9,328 10,962 --- (80) 20,210 General & administrative expenses 8,870 7,084 563 (243) 16,274 Depreciation, depletion & amortization 29,336 3,217 64 --- 32,617 Taxes, other than income taxes 6,528 1,284 66 --- 7,878 Operating Income $70,881 $7,382 $3,290 $--- $81,553 Capital Investments $123,011(A) $3,180 $648 $--- $126,839 (A) Exploration and Production capital expenditures include $8.9 million and $10.6 million for the three and six month periods ended June 30, 2005, respectively, and ($5.5) million and $2.6 million for the three and six month periods ended June 30, 2004, respectively, relating to the change in accrued expenditures between periods.