<PAGE> 1
________________________________________________________________________________
________________________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JULY 31, 1994
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-6959
MITCHELL ENERGY & DEVELOPMENT CORP.
(Exact name of registrant as specified in charter)
TEXAS 74-1032912
(State of incorporation) (I.R.S. Employer Identification No.)
2001 TIMBERLOCH PLACE
THE WOODLANDS, TEXAS 77380
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 377-5500
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Shares of common stock outstanding at August 31, 1994:
Class A . . . . . . . . 23,565,579
Class B . . . . . . . . 29,190,928
________________________________________________________________________________
________________________________________________________________________________
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
Part I - Financial Information
Item 1. Financial Statements
Representation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Unaudited Consolidated Statements of Earnings . . . . . . . . . . . . . . . . . . . . . 4
Unaudited Consolidated Statement of Stockholders' Equity . . . . . . . . . . . . . . . . 5
Unaudited Condensed Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . 6
Notes to Unaudited Consolidated Financial Statements . . . . . . . . . . . . . . . . . . 7
Item 2. Management's Discussion and Analysis of
Financial Position and Results of Operations . . . . . . . . . . . . . . . . . . . . . . 12
Part II - Other Information
Item 4. Submission of Matters to Vote of Security Holders . . . . . . . . . . . . . . . . 21
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . 21
</TABLE>
DEFINITIONS. As used herein, "Btu" means British Thermal Units, "MMBtu" means
million Btu, "Mcf" means thousand cubic feet, "MMcf" means million cubic feet,
"Bcf" means billion cubic feet, "Bbl" means barrel, "MMBbls" means million
barrels, "NGL" or "NGLs" means natural gas liquids, "fiscal 1994" and "fiscal
1995" refer, respectively, to the twelve-month periods ended January 31, 1994
and 1995 and "DD&A" means depreciation, depletion and amortization. Pipeline
volumes are based on average energy content of 1,000 Btu per cubic foot. Oil,
gas and NGL volume, price and reserve information includes applicable equity
partnership interests.
-1-
<PAGE> 3
Part I - Financial Information
ITEM 1. FINANCIAL STATEMENTS
The consolidated financial statements of Mitchell Energy & Development
Corp. and subsidiaries (the "Company") and related notes included herein have
been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to those rules and regulations, although the Company believes
that the disclosures included herein are adequate to make the information
presented not misleading. In the opinion of the Company's management, all
adjustments--which include only normal and recurring adjustments--necessary for
a fair presentation of the financial position and results of operations for the
periods presented have been made. These financial statements should be read in
conjunction with the financial statements and the notes thereto included in the
Company's Annual Report for the year ended January 31, 1994 and with the
Management Discussion and Analysis sections of that and this report.
-2-
<PAGE> 4
MITCHELL ENERGY & DEVELOPMENT CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollar amounts in thousands)
<TABLE>
<CAPTION>
JULY 31, January 31,
1994 1994
----------- -----------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,293 $ 21,832
Trade receivables, net of allowance for
doubtful accounts of $2,753 and $2,720 . . . . . . . . . . . . . . . . . 152,382 134,570
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,422 21,400
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,551 11,123
----------- -----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . 212,648 188,925
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, at cost
Oil and gas properties, full cost method of accounting
Costs being amortized . . . . . . . . . . . . . . . . . . . . . . . . . . 1,954,276 1,907,799
Costs not being amortized . . . . . . . . . . . . . . . . . . . . . . . . 44,201 50,389
Transmission and processing facilities . . . . . . . . . . . . . . . . . . 468,270 561,605
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126,294 175,825
----------- -----------
2,593,041 2,695,618
Less - accumulated depreciation, depletion and amortization . . . . . . . . 1,405,109 1,390,729
----------- -----------
1,187,932 1,304,889
----------- -----------
REAL ESTATE
The Woodlands . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 634,229 627,762
Land held for investment, development or sale . . . . . . . . . . . . . . . 160,436 159,949
Resort and other operating properties . . . . . . . . . . . . . . . . . . . 65,423 65,956
Notes and contracts receivable, at cost, net of
allowance for doubtful accounts of $479 and $507 . . . . . . . . . . . . 47,636 42,985
----------- -----------
907,724 896,652
----------- -----------
OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,094 25,010
----------- -----------
$ 2,331,398 $ 2,415,476
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,986 $ 9,955
Oil and gas proceeds payable . . . . . . . . . . . . . . . . . . . . . . . 58,472 64,110
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,631 92,895
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53,668 50,156
----------- -----------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . 189,757 217,116
----------- -----------
LONG-TERM DEBT
Energy operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 413,333 486,066
Real estate operations . . . . . . . . . . . . . . . . . . . . . . . . . . 515,260 502,252
----------- -----------
928,593 988,318
----------- -----------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 340,862 339,456
Natural gas contract restructuring proceeds . . . . . . . . . . . . . . . . 43,273 51,527
Deferred income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,441 30,731
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,044 36,374
----------- -----------
462,620 458,088
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 3 and 5)
STOCKHOLDERS' EQUITY
Preferred stock, $.10 par value (authorized 10,000,000 shares; none issued)
Common stock, $.10 par value
(authorized 100,000,000 shares each of Class A and Class B) . . . . . . . 5,386 5,386
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . 143,488 143,440
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 615,516 617,214
Treasury stock, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . (13,962) (14,086)
----------- -----------
750,428 751,954
----------- -----------
$ 2,331,398 $ 2,415,476
----------- -----------
----------- -----------
</TABLE>
- - --------------------
The accompanying notes are an integral part of these financial statements.
-3-
<PAGE> 5
MITCHELL ENERGY & DEVELOPMENT CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
July 31 July 31
--------------------- --------------------
1994 1993 1994 1993
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES
Exploration and production . . . . . . . . . . . . . . . . . . $ 69,653 $ 71,006 $144,062 $128,588
Transmission and processing (including gains
on asset sales of $29,828 in 1994) (Note 8) . . . . . . . . 132,490 143,162 249,465 288,282
Real estate . . . . . . . . . . . . . . . . . . . . . . . . . . 35,632 29,484 69,416 57,628
-------- -------- -------- --------
237,775 243,652 462,943 474,498
-------- -------- -------- --------
OPERATING COSTS AND EXPENSES (including DD&A) (Note 8)
Exploration and production . . . . . . . . . . . . . . . . . . 56,140 51,703 112,673 94,057
Transmission and processing (including restructuring
charges and asset write-downs of $25,650 in 1994) . . . . . 120,780 130,020 235,554 258,220
Real estate . . . . . . . . . . . . . . . . . . . . . . . . . . 27,378 24,250 54,088 48,153
-------- -------- -------- --------
204,298 205,973 402,315 400,430
-------- -------- -------- --------
SEGMENT OPERATING EARNINGS (Note 8) . . . . . . . . . . . . . . 33,477 37,679 60,628 74,068
General and administrative expense . . . . . . . . . . . . . . 10,660 11,008 20,915 22,210
-------- -------- -------- --------
TOTAL OPERATING EARNINGS . . . . . . . . . . . . . . . . . . . 22,817 26,671 39,713 51,858
-------- -------- -------- --------
OTHER EXPENSE
Interest expense . . . . . . . . . . . . . . . . . . . . . . . 17,051 18,225 35,335 36,509
Capitalized interest . . . . . . . . . . . . . . . . . . . . . (7,806) (8,646) (16,023) (17,319)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . 1,908 1,476 2,950 2,568
-------- -------- -------- --------
11,153 11,055 22,262 21,758
-------- -------- -------- --------
EARNINGS BEFORE INCOME TAXES . . . . . . . . . . . . . . . . . 11,664 15,616 17,451 30,100
INCOME TAXES (Note 4) . . . . . . . . . . . . . . . . . . . . . 3,856 4,865 5,759 9,060
-------- -------- -------- --------
NET EARNINGS . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,808 $ 10,751 $ 11,692 $ 21,040
-------- -------- -------- --------
-------- -------- -------- --------
EARNINGS PER SHARE . . . . . . . . . . . . . . . . . . . . . . $ .15 $ .21 $ .22 $ .43
----- ----- ----- -----
----- ----- ----- -----
AVERAGE COMMON SHARES OUTSTANDING . . . . . . . . . . . . . . 52,755 51,847 52,754 49,309
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
- - --------------------
The accompanying notes are an integral part of these financial statements.
-4-
<PAGE> 6
MITCHELL ENERGY & DEVELOPMENT CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Six Months Ended July 31, 1994
(dollar amounts in thousands)
<TABLE>
<CAPTION>
Additional
Common Paid-In Retained Treasury
DOLLAR AMOUNTS Stock Capital Earnings Stock Total
- - -------------- --------- ----------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 31, 1994 . . . . . . . . . . . . . $ 5,386 $143,440 $617,214 $(14,086) $751,954
Net earnings . . . . . . . . . . . . . . . . . . . - - 11,692 - 11,692
Cash dividends (24 cents per share on Class A
and 26 1/2 cents per share on Class B) . . . . - - (13,390) - (13,390)
Exercises of stock options . . . . . . . . . . . . - 48 - 124 172
------- -------- -------- -------- --------
BALANCE, JULY 31, 1994 . . . . . . . . . . . . . . $ 5,386 $143,488 $615,516 $(13,962) $750,428
------- -------- -------- -------- --------
------- -------- -------- -------- --------
</TABLE>
________________________________________________
________________________________________________
<TABLE>
<CAPTION>
Shares Issued Treasury Shares Held
--------------------------- ------------------------
SHARE AMOUNTS Class A Class B Class A Class B
- - ------------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 31, 1994 . . . . . . . . . . . . 23,978,117 29,878,117 417,477 692,128
Exercises of stock options . . . . . . . . . . . - - (4,950) (4,950)
Other . . . . . . . . . . . . . . . . . . . . . . (8) (8) - -
---------- ---------- ------- -------
BALANCE, JULY 31, 1994 . . . . . . . . . . . . . 23,978,109 29,878,109 412,527 687,178
---------- ---------- ------- -------
---------- ---------- ------- -------
</TABLE>
- - --------------------
The accompanying notes are an integral part of these financial statements.
-5-
<PAGE> 7
MITCHELL ENERGY & DEVELOPMENT CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
July 31
-----------------------
1994 1993
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,692 $ 21,040
Adjustments to reconcile net earnings to cash provided by operating activities
Depreciation, depletion and amortization (Note 8) . . . . . . . . . . . . 101,839 71,366
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 1,885 4,646
Cost of land sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,838 12,492
Residential land development costs, net of reimbursements . . . . . . . . (6,869) (8,228)
Partnership distributions in excess of earnings . . . . . . . . . . . . . 3,193 12,814
Amortization of deferred natural gas contract restructuring proceeds . . . (8,254) (9,512)
Gains on major energy asset sales (Note 8) . . . . . . . . . . . . . . . . (33,619) -
Accrued restructuring costs . . . . . . . . . . . . . . . . . . . . . . . 10,340 -
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,421 (4,289)
--------- ---------
101,466 100,329
Changes in operating assets and liabilities . . . . . . . . . . . . . . . (39,321) (41,521)
--------- ---------
Cash provided by operating activities . . . . . . . . . . . . . . . . . . 62,145 58,808
--------- ---------
INVESTING ACTIVITIES
Capital additions
Total on accrual basis (including $78,251 in 1993
related to MEC Development, Ltd. buy-out) . . . . . . . . . . . . . . . (109,519) (201,156)
Residential land development costs deducted above . . . . . . . . . . . . 6,869 8,228
Adjustment to cash basis . . . . . . . . . . . . . . . . . . . . . . . . . (10,129) 21,051
--------- ---------
(112,779) (171,877)
Proceeds from major energy asset sales . . . . . . . . . . . . . . . . . . . 117,000 -
Proceeds from other dispositions of property, plant and equipment . . . . . . 2,100 7,073
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 165
--------- ---------
Cash provided by (used for) investing activities . . . . . . . . . . . 6,412 (164,639)
--------- ---------
FINANCING ACTIVITIES
Proceeds from issuance of debt . . . . . . . . . . . . . . . . . . . . . . . 150,779 1,147
Debt repayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (200,473) (6,751)
Net proceeds from issuance of Class B common stock . . . . . . . . . . . . . - 123,400
Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (13,390) (12,570)
Debt prepayment premium . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,420) -
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (592) 227
--------- ---------
Cash provided by (used for) financing activities . . . . . . . . . . . (70,096) 105,453
--------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . . . (1,539) (378)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD . . . . . . . . . . . . . . . 21,832 28,097
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD . . . . . . . . . . . . . . . . . . $ 20,293 $ 27,719
--------- ---------
--------- ---------
</TABLE>
- - --------------------
The accompanying notes are an integral part of these financial statements.
-6-
<PAGE> 8
MITCHELL ENERGY & DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1994
(1) ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Mitchell
Energy & Development Corp. (MEDC) and its majority- owned subsidiaries (the
"Company"). All significant intercompany accounts and transactions are
eliminated in consolidation. The Company follows the equity method of
accounting for investments in 20% to 50% owned entities. The Company's net
investment in each of these entities is included in the applicable segment's
asset caption of the consolidated balance sheets, and its equity in the pretax
earnings or losses of each entity is included in the applicable caption of
revenues or operating costs and expenses of the consolidated statements of
earnings.
(2) REAL ESTATE OPERATIONS
In accordance with industry accounting practice, real estate assets are
reported as long-term assets in the consolidated balance sheets. Because they
represent the primary revenues and costs for these activities, interest income
and interest expense of the Company's finance operations are reported,
respectively, as revenues and costs and expenses in the consolidated statements
of earnings.
(3) EQUITY INVESTMENTS
Entities accounted for on the equity method include approximately 30
partnerships engaged in either energy or real estate activities. The principal
partnership interests included the following at July 31, 1994:
<TABLE>
<CAPTION>
Ownership
Name Percentage Nature of Operations
- - --------------------------------------------- ---------- ------------------------------
<S> <C> <C>
ENERGY
Austin Chalk Natural Gas Marketing Services 45 Natural gas marketing
Belvieu Environmental Fuels 33.33 Production of MTBE
C&L Processors Partnership 50 Natural gas processing
Ferguson-Burleson County Gas Gathering System 45 Gas gathering and transmission
Gulf Coast Fractionators 38.75 Fractionation of NGLs
U. P. Bryan 45 Natural gas processing
REAL ESTATE
The Fort Crockett Hotel Limited 50 Galveston, Texas resort hotel
Lake Catamount Joint Venture 50 Land held for development
The Woodlands Mall Associates 50 Regional mall
</TABLE>
Other real estate partnerships--almost all of which hold properties located in
The Woodlands--own a cable television system and various commercial and
apartment properties.
-7-
<PAGE> 9
Summarized financial information on an aggregate basis for equity
investees (which is generally on a one-month lag) and the Company's
proportionate share of the earnings of these entities for the three- and
six-month periods ended July 31, 1994 and 1993 follow (in thousands):
<TABLE>
<CAPTION>
Three Months Six Months
-------------------- --------------------
1994 1993 1994 1993
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Information for equity investees
Revenues . . . . . . . . . . . . . . . . . . . . $118,083 $120,574 $219,713 $248,539
Operating earnings . . . . . . . . . . . . . . . 10,290 18,665 14,411 45,890
Pretax earnings* . . . . . . . . . . . . . . . . 5,659 15,431 6,215 38,978
Proportionate share of pretax earnings included
in the Company's reported operating earnings . . 3,364 5,678 2,998 16,862
</TABLE>
--------------------
* Before interest expense for those entities whose activities
are funded by capital contributions of the owners.
Using a portion of the proceeds of an offering of 5,900,000 Class B
shares, the Company purchased, effective May 1, 1993, the limited partner's
interest in MEC Development, Ltd. for $52,585,000, from which the partner
repaid its proportionate share of partnership debt. The Company also repaid
its share of the partnership's debt of $25,666,000, and the partnership was
liquidated. All hydrocarbon reserves and other assets previously owned by the
partnership are now held by the Company.
The earnings of the energy partnerships were sharply lower for the
three- and six-month periods ended July 31, 1994 for a number of reasons.
These included: the previously reported January 1994 changes to certain
natural gas sales contracts; reduced NGL margins; the temporary shutdown of
Gulf Coast Fractionator's facility following an April 1994 fire (the business
interruption insurance policy covering this loss is held by the Company, not
the partnership) and the buy-out of MEC Development, Ltd. effective May 1,
1993.
The operations of many of these partnerships have been funded using term
loans secured by their assets and in some cases by contractual commitments or
guaranties of the partners. Excluding notes payable to the Company aggregating
$9,605,000 at July 31, 1994, outstanding indebtedness of these entities at July
31, 1994 and January 31, 1994 is summarized as follows (in thousands):
<TABLE>
<CAPTION>
The Company's Pro-
portionate Share at
July 31, 1994 Entity Total
-------------------- ------------------------
Nonre- July 31, January 31,
Recourse course 1994 1994
-------- -------- --------- -----------
<S> <C> <C> <C> <C>
ENERGY OPERATIONS
Belvieu Environmental Fuels . . . . . . . . . . . . $ 58,667 $ - $176,000 $136,000
C&L Processors Partnership . . . . . . . . . . . . 29,351 25,004 108,709 116,719
Gulf Coast Fractionators . . . . . . . . . . . . . 14,262 13,987 72,900 64,250
-------- --------- -------- --------
102,280 38,991 357,609 316,969
-------- --------- -------- --------
REAL ESTATE OPERATIONS
The Fort Crockett Hotel Limited . . . . . . . . . . 4,103 1,892 11,990 12,397
The Woodlands Mall Associates . . . . . . . . . . . 15,343 - 30,685 18,689
Apartment partnerships . . . . . . . . . . . . . . 1,177 16,995 42,397 37,728
Others . . . . . . . . . . . . . . . . . . . . . . 2,270 15,576 37,817 37,729
-------- --------- -------- --------
22,893 34,463 122,889 106,543
-------- --------- -------- --------
$125,173 $ 73,454 $480,498 $423,512
-------- --------- -------- --------
-------- --------- -------- --------
</TABLE>
See Note 3 of Notes to Consolidated Financial Statements on pages 51 and 52 of
the Company's Fiscal 1994 Annual Report for additional information concerning
the indebtedness of the partnerships and the status of their operations.
-8-
<PAGE> 10
(4) INCOME TAXES
Income tax expense for the six-month periods ended July 31, 1994 and
1993 consists of the following (in thousands):
<TABLE>
<CAPTION>
1994 1993
------ ------
<S> <C> <C>
CURRENT
Federal . . . . . . . . . . . . . . . . . . . . . . . . . $3,273 $3,111
State . . . . . . . . . . . . . . . . . . . . . . . . . . 1,774 1,303
------ ------
5,047 4,414
------ ------
DEFERRED
Federal . . . . . . . . . . . . . . . . . . . . . . . . . 59 4,853
State . . . . . . . . . . . . . . . . . . . . . . . . . . 653 (207)
------ ------
712 4,646
------ ------
$5,759 $9,060
------ ------
------ ------
</TABLE>
The Company's estimated annual tax rates for the six-month periods ended
July 31, 1994 and 1993 of 33% and 30.1% were lower than the applicable
statutory Federal income tax rates of 35% and 34%, respectively, primarily
because Federal tax credits available under Section 29 of the Internal Revenue
Code were somewhat larger than the state income tax expense for these periods.
(5) COMMITMENTS AND CONTINGENCIES
LITIGATION AND OTHER. The Company is party to various claims and other
legal actions arising in the ordinary course of business and to recurring
examinations performed by the Internal Revenue Service and other governmental
agencies. Management expects that none of these matters, when ultimately
resolved, will have a material adverse effect upon the Company's financial
position or results of operations.
MORTGAGE ACTIVITIES. Mitchell Mortgage Company (MMC) administers
approximately $188,000,000 of securities backed by Federal Housing
Administration (FHA) and Department of Veterans Affairs (VA) mortgages, on
which it has guaranteed payments of principal and interest to the security
holders. These mortgages are supported by government-sponsored insurance and
are collateralized by real estate. In the event of default by a mortgagor, MMC
may incur a loss if uncollected principal and interest, together with
foreclosure and other costs, exceed established FHA or VA reimbursement
limitations. Management does not expect that losses, if any, incurred in
connection with defaults by borrowers under FHA and VA mortgages serviced by
MMC will have a significant adverse effect on the Company's financial position
or results of operations.
(6) PREPAYMENT OF SENIOR NOTES
On February 25, 1994, the parent company redeemed its $200,000,000 of 11
1/4% Senior Notes Due 1999. This early redemption was completed at a price of
103.21% of principal. This premium and related unamortized debt issuance costs
were expensed as an extraordinary charge during the fourth quarter of fiscal
1994, when the debt was called.
(7) SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid (excluding amounts capitalized, but including amounts for
finance operations that are reported as cost of sales) totaled $18,804,000 and
$19,276,000 during the six-month periods ended July 31, 1994 and 1993. Income
taxes paid during these same periods totaled $336,000 and $7,473,000. There
were no significant non-cash investing or financing activities during these
periods.
-9-
<PAGE> 11
(8) SEGMENT INFORMATION
Selected industry segment data for the three- and six-month periods
ended July 31, 1994 and 1993 follows (in thousands):
<TABLE>
<CAPTION>
Segment
Operating Capital
Revenues Earnings DD&A Additions
-------------------- ----------------- ------------------ -------------------
1994 1993 1994 1993 1994 1993 1994 1993
-------- -------- ------- ------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Six Months Ended July 31
- - ------------------------
EXPLORATION AND PRODUCTION
Oil and gas . . . . . . . . . . . $139,306 $128,497 $27,690 $34,759 $ 71,418 $55,379 $ 62,539 $146,019
Other . . . . . . . . . . . . . . 286 91 (92) (228) 153 225 98 125
Gain on sale of drilling rigs . . 4,470 - 3,791 - 679 - - -
-------- -------- ------- ------- -------- ------- -------- --------
144,062 128,588 31,389 34,531 72,250 55,604 62,637 146,144
-------- -------- ------- ------- -------- ------- -------- --------
TRANSMISSION AND PROCESSING
Gas processing . . . . . . . . . 98,044 139,271 5,574 19,195 4,548 5,110 2,269 2,995
Gas gathering and transmission . 116,968 144,553 3,597 9,520 4,693 4,415 8,342 16,933
Other . . . . . . . . . . . . . . 4,625 4,458 562 1,347 1,313 1,359 1,894 4,697
Gains on asset sales . . . . . . 29,828 - 29,828 - - - - -
Restructuring charges
and asset write-downs . . . . . - - (25,650) - 13,183 - - -
-------- -------- ------- ------- -------- ------- -------- --------
249,465 288,282 13,911 30,062 23,737 10,884 12,505 24,625
-------- -------- ------- ------- -------- ------- -------- --------
REAL ESTATE . . . . . . . . . . . 69,416 57,628 15,328 9,475 4,106 3,614 32,789 28,714
-------- -------- ------- ------- -------- ------- -------- --------
CORPORATE . . . . . . . . . . . . - - - - 1,746 1,264 1,588 1,673
-------- -------- ------- ------- -------- ------- -------- --------
$462,943 $474,498 $60,628 $74,068 $101,839 $71,366 $109,519 $201,156
-------- -------- ------- ------- -------- ------- -------- --------
-------- -------- ------- ------- -------- ------- -------- --------
Three Months Ended July 31
- - --------------------------
EXPLORATION AND PRODUCTION
Oil and gas . . . . . . . . . . . $ 69,581 $ 70,939 $13,521 $19,241 $ 35,632 $31,088 $ 27,497 $122,967
Other . . . . . . . . . . . . . . 72 67 (8) 62 46 100 23 88
-------- -------- ------- ------- -------- ------- -------- --------
69,653 71,006 13,513 19,303 35,678 31,188 27,520 123,055
-------- -------- ------- ------- -------- ------- -------- --------
TRANSMISSION AND PROCESSING
Gas processing . . . . . . . . . 48,735 65,266 4,022 7,843 2,261 2,578 1,928 1,645
Gas gathering and transmission . 51,357 75,683 3,316 4,787 2,057 2,189 3,904 7,346
Other . . . . . . . . . . . . . . 2,570 2,213 194 512 649 682 555 1,788
Gains on asset sales . . . . . . 29,828 - 29,828 - - - - -
Restructuring charges
and asset write-downs . . . . . - - (25,650) - 13,183 - - -
-------- -------- ------- ------- -------- ------- -------- --------
132,490 143,162 11,710 13,142 18,150 5,449 6,387 10,779
-------- -------- ------- ------- -------- ------- -------- --------
REAL ESTATE . . . . . . . . . . . 35,632 29,484 8,254 5,234 2,088 1,792 17,311 16,215
-------- -------- ------- ------- -------- ------- -------- --------
CORPORATE . . . . . . . . . . . . - - - - 897 624 800 1,299
-------- -------- ------- ------- -------- ------- -------- --------
$237,775 $243,652 $33,477 $37,679 $ 56,813 $39,053 $ 52,018 $151,348
-------- -------- ------- ------- -------- ------- -------- --------
-------- -------- ------- ------- -------- ------- -------- --------
</TABLE>
During the three-month period ended July 31, 1994, the Company sold its
Spindletop gas storage facility, its Winnie Pipeline system and a 50% interest
in a related gas processing plant for $120,000,000 and recorded a gain of
$29,828,000. On June 1, 1994, the Company received cash proceeds of
$108,000,000 which were used to pay down outstanding borrowings under its
revolving credit and commercial paper facilities. The remaining sales proceeds
of approximately $12,000,000--which, together with interest from June 1, are to
be received subsequently--are included in other current assets in the
accompanying July 31, 1994 balance sheet.
-10-
<PAGE> 12
Also during the three-month period ended July 31, 1994, Transmission and
Processing Division restructuring charges and asset write-downs totaling
$25,650,000 were recorded. This restructuring program was undertaken because
of the adverse economic environment, particularly prices and margins,
experienced by the Company's transmission and processing business during the
last half of fiscal 1994 and early in the current year. A number of the
Company's gas processing plants have been idle in recent periods, and the
restructuring program calls for the sale or disposition of many of these
plants, including leased equipment that is associated with certain of them. In
this regard, asset write-downs and other non-cash charges totaling $18,286,000
were recorded. In addition, a voluntary incentive retirement program was
undertaken to bring the division's employment level in line with the expected
future needs. The costs associated with this program aggregated $7,364,000,
most of which will be paid over future years as additional retirement and
retiree medical benefits.
On April 7, 1994, the Company sold 16 land drilling rigs for $9,000,000
in cash and warrants to acquire common stock of the purchaser under which as
much as an additional $1,000,000 may be realized during the two-year period
following the sale. This sale effectively completed the Company's withdrawal
from the contract drilling business. Segment operating earnings for "Other
Exploration and Production" activities for fiscal 1995's first six months
included a $3,791,000 gain on this sale, which did not include any value for
the warrants.
(8) SUBSEQUENT EVENT
On August 26, 1994, an agreement was entered into with Tidewater Inc.
under which the Company is to sell at a gain the assets of its Brazos Gas
Compressing Company subsidiary for approximately $35,000,000 in cash. It is
expected that closing of the transaction, which is subject to the receipt of
regulatory approvals, will occur during the third quarter of fiscal 1995.
-11-
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
POSITION AND RESULTS OF OPERATIONS
The discussion which follows summarizes the Company's financial position
at July 31, 1994 and the results of its operations for the six-month period
then ended, and should be read in conjunction with the summarized financial
statements and notes thereto included elsewhere in this Form 10-Q and the
financial statements, notes thereto and other financial data included in the
Company's Annual Report for the fiscal year ended January 31, 1994.
LIQUIDITY AND CAPITAL RESOURCES
A principal strategy of the Company has been to acquire well-positioned
energy and real estate assets and to enhance their value through long-term
development programs. This strategy requires major front-end capital
investments, which are recovered over extended periods of time as energy
reserves are produced and real estate investments are developed and operated or
sold. The Company generally has funded its investment activities using cash
provided by operating activities and sales of varying interests in mature real
estate assets supplemented to the extent necessary with proceeds from long-term
borrowings. In recent years, the primary sources of such borrowed funds have
been bank credit agreements of the energy and real estate subsidiaries and
senior notes of the parent company. Needed funds initially have been borrowed
under the bank credit agreements, and the credit availability under these
facilities periodically has been restored by paying down outstanding borrowings
using proceeds from public offerings of parent company senior notes.
Additionally, during May 1993, the Company sold 5.9 million shares of its Class
B common stock. The $123.4 million proceeds of this offering were used to fund
the Company's buy-out of the MEC Development, Ltd. partnership and drilling
costs that otherwise would have been expenditures of that partnership.
During January 1994, the Company issued $250 million of 6 3/4% Senior
Notes Due 2004 and $100 million of 5.10% Senior Notes Due 1997. The proceeds
of these borrowings were used to prepay $200 million of 11 1/4% Senior Notes
Due 1999 and to pay down outstanding borrowings under the Company's bank credit
agreements as discussed above. The 11 1/4% senior notes were redeemed on
February 25, 1994 at a price of 103.21% of principal. The $6.4 million debt
prepayment premium paid in connection with this redemption was expensed in
January 1994 when the Company gave notice that the notes would be redeemed. In
addition to lowering the Company's interest costs, these transactions increased
the Company's credit availability, extended the maturities of its indebtedness,
reduced its exposure to floating interest rates and increased the percentage of
the Company's indebtedness that is unsecured, parent company debt.
The Company's bank revolving credit and commercial paper facilities
provide for aggregate borrowings of approximately $558 million. The Company
had unused capacity of $355 million under these committed credit facilities at
July 31, 1994. Exclusive of maturities under its bank credit facilities and
commercial paper program which are periodically extended, the Company's
aggregate five-year debt maturities totaled approximately $136 million at July
31, 1994.
During fiscal 1995, management has undertaken a Company-wide asset
review to identify and sell underutilized assets or non- core holdings that
have greater value to others. To date, agreements have been reached to sell
three major energy assets for a total consideration of $164 million--$120
million for Winnie/Spindletop, $35 million for the assets of Brazos Gas
Compressing Company and $9 million for drilling rigs. Although no other major
sales transactions are currently pending, additional sales may occur as this
ongoing review is completed. Such transactions, if any, would likely include
selected idle gas processing plants and non-core real estate assets located
outside The Woodlands. Alternatively, the Company expects to develop new
opportunities for certain of its presently idle gas processing plants.
Through July 31, 1994, cash proceeds of $117 million have been received
in connection with the above-mentioned asset sales. These proceeds have been
used to pay down outstanding borrowings under the Company's revolving credit
and commercial paper facilities. At July 31, 1994, long-term debt totaled
$928.6 million, $59.7 million below the balance at the beginning of the year,
and the Company's debt/equity ratio was 1.24, down from 1.31 at the beginning
of the year.
-12-
<PAGE> 14
The fiscal 1995 debt decline would have been larger had it not been for
an April 1994 fire at Gulf Coast Fractionators' (GCF's) facility in Mont
Belvieu, Texas. Because of the resultant shutdown of this facility,
approximately 2.4 million barrels of the Company's NGL production had not been
fractionated at July 31, 1994. These quantities are likely to increase until
the plant resumes full operations (scheduled for mid-September). It is
expected that six to nine months will be required for the unfractionated
quantities to be reduced to normal levels. Largely because of this situation,
the Company's working capital increased substantially in fiscal 1995. At
July 31, 1994, the book value of the Company's unfractionated NGL's totaled
approximately $25.6 million, most of which is reported as trade receivables in
the Company's balance sheet since the related NGLs have been exchanged with
third parties. Future realizations from sales of these unfractionated liquids
based on August 31, 1994 prices are estimated to total approximately $28.9
million.
The Company's business plan includes the use of energy and real estate
partnerships and sales in the normal course of business of mature real estate
properties to provide for some of its funding needs. The Company believes that
these resources, together with additional borrowings supported by its asset
values and cash flows, will be sufficient to allow it to provide for both its
short-term and long-term liquidity needs. Such short-term needs can be met by
supplementing operating cash flows with borrowings under committed bank credit
and commercial paper facilities. Public debt and equity markets will be
accessed periodically to meet the Company's longer-term liquidity needs.
Largely because of low crude oil prices and their adverse impact on NGL
prices and margins, the Company initially chose to scale back its fiscal 1995
capital spending plans. The planned level of spending is believed adequate to
allow the Company to more than replace the oil and gas reserves that will be
produced in fiscal 1995, to fund ongoing transmission and processing projects
and to provide for continued residential and commercial development within The
Woodlands. During the second quarter, the fiscal 1995 consolidated capital
budget was increased by $11.8 million, to $242.6 million. The budget increase
was largely for additional development drilling.
OTHER MATTERS
PARTNERSHIP PROJECTS
In addition to its fiscal 1995 consolidated capital budget, the Company
is participating through partnerships in several significant construction
projects. These projects, which are funded principally with proceeds of loan
agreements of the partnerships, include an MTBE plant, expansion of GCF's
fractionation facility and construction of a regional mall in The Woodlands.
These projects are expected to make contributions to the Company's operating
earnings as they are completed during fiscal 1995 and reach normal operating
levels.
A partnership in which the Company has a one-third interest has
constructed an MTBE plant at Mont Belvieu, Texas, with a design capacity of
12,500 barrels per day. MTBE (methyl tertiary butyl ether) is an oxygenate
used in the production of environmentally cleaner gasoline. Each of the three
partners in this venture provides one-third of the plant's isobutane feedstock,
and one of the partners, Sun Company, Inc., is contractually obligated to
purchase all of the MTBE production for a period of ten years. Plant
construction costs, which totaled $225 million, were funded through the
partnership's $176 million loan agreement and capital contributions from the
partners. The plant commenced operations in June 1994 and is expected to
contribute to the Company's third quarter operating earnings.
Through its 38.75% ownership interest in GCF, the Company is
participating in a 40,000-barrel-per-day expansion of an NGL fractionation
plant at Mont Belvieu, Texas. In spite of an April 1994 fire which has idled
the fractionator, the expanded facility is expected to commence operations by
September 1994. In connection with the $40 million expansion project and the
entrance of Conoco, Inc. into the partnership, GCF arranged an $85 million term
loan in June 1993. Of the loan proceeds, $40 million was distributed to the
partners in fiscal 1994, the Company's share of which was $15.5 million. The
remainder is being used to fund the expansion. Each of the partners has
executed long-term contracts with GCF for the fractionation of production from
certain of their gas processing plants.
-13-
<PAGE> 15
The Woodlands Mall, a one million-square-foot regional mall, scheduled
to open in October 1994, is being developed by a partnership equally owned by
the Company and Homart Development Co., a subsidiary of Sears, Roebuck and Co.
Costs of the 345,000- square-foot gross leasable area being constructed by the
partnership, together with site development and other general costs, are being
funded using proceeds of the partnership's $65 million loan agreement.
TRANSMISSION AND PROCESSING DIVISION RESTRUCTURING
In response to today's business environment, the Transmission and
Processing Division has undertaken a reengineering program that involves an
extensive restructuring of its activities. Operational changes began to be
implemented late last year with the consolidation of certain gas processing
plants into larger, more efficient facilities and continued during fiscal
1995's second quarter with a voluntary incentive retirement program, which
reduced the division's full-time employment level by approximately 10%, and the
sale of the Winnie/Spindletop operations. In addition, the Company is pursuing
the disposition or relocation of certain of its gas processing plants--many of
which have been idle for some time--and on August 25, 1994 entered into a
contract to sell at a gain the assets of Brazos Gas Compressing Company for
approximately $35 million in cash. This sale is expected to close during the
third quarter. These actions are not expected to negatively impact the
Company's NGL production volumes.
During the second quarter of fiscal 1995, Transmission and Processing
Division restructuring charges and asset write-downs totaling $25.7 million
were recorded. These consisted of non-cash charges of $18.3 million related to
idle gas processing plants and early retirement and other miscellaneous costs
totaling $7.4 million. It is expected that the early retirement costs--
approximately 70% of which will be paid over the years as incremental
retirement benefits--will be recouped in less than two years through salary and
benefits expense savings. The plant write-downs are expected to allow the
Company to dispose of or redeploy these plants without incurring additional
losses and to concentrate its longer term efforts on larger plants with better
economies of scale.
OPERATING STATISTICS
Certain operating statistics for the six-month periods ended July 31,
1994 and 1993 follow:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
July 31 July 31
--------------------- ---------------------
1994 1993 1994 1993
------- ------- ------- -------
<S> <C> <C> <C> <C>
AVERAGE DAILY VOLUMES
Natural gas sales (Mcf) . . . . . . . . . . . . 211,200 192,700 214,900 180,900
Crude oil and condensate sales (Bbls) . . . . . 6,500 6,100 6,600 5,900
Natural gas liquids produced (Bbls) . . . . . . 49,200 54,000 46,300 54,100
Pipeline throughput (Mcf) . . . . . . . . . . . 457,000 546,000 483,000 552,000
AVERAGE SALES PRICES
Natural gas (per Mcf) . . . . . . . . . . . . . $ 2.75 $ 2.91 $ 2.78 $ 2.88
Crude oil and condensate (per Bbl) . . . . . . 17.16 17.04 15.25 17.84
Natural gas liquids produced (per Bbl) . . . . 11.26 12.59 11.14 13.10
RESIDENTIAL LOTS SOLD - THE WOODLANDS . . . . . 260 186 488 405
Average sales price . . . . . . . . . . . . . . $36,462 $38,022 $37,158 $39,343
</TABLE>
-14-
<PAGE> 16
RESULTS OF OPERATIONS - SIX MONTHS ENDED JULY 31, 1994
COMPARED WITH SIX MONTHS ENDED JULY 31, 1993
The following table and discussion identify and explain the major
increases (decreases) in earnings (in millions):
<TABLE>
<CAPTION>
Segment Operating Earnings
-----------------------------------
Exploration Transmission
and and Real Pretax Net
Production Processing Estate Other* Earnings Earnings
----------- ------------ ------ ------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
SIX MONTHS ENDED JULY 31, 1993 . . . . $34.5 $ 30.1 $ 9.5 $(44.0) $ 30.1 $ 21.0
----- ------ ----- ------ ------ ------
MAJOR INCREASES (DECREASES)
Natural gas
Market-sensitive sales . . . . . . . 4.2 - - - 4.2 2.7
Sales under fixed-price contracts . . .9 - - - .9 .6
Oil and condensate sales . . . . . . . (1.3) - - - (1.3) (.9)
Oil and gas DD&A rate increase
MEC Development, Ltd. buy-out . . . (2.1) - - - (2.1) (1.4)
Other . . . . . . . . . . . . . . . (3.2) - - - (3.2) (2.1)
Gas processing
NGL price . . . . . . . . . . . . . - (16.3) - - (16.3) (10.6)
Production volumes . . . . . . . . . - (3.9) - - (3.9) (2.5)
Decreased per unit cost of sales . . - 4.8 - - 4.8 3.1
Gas gathering and transmission . . . . - (6.3) - - (6.3) (4.1)
Real estate . . . . . . . . . . . . . . - - 4.6 - 4.6 3.0
Other
SAR/Bonus unit expense accruals . . 2.2 .9 1.2 2.1 6.4 4.2
One-time earnings items
recorded in prior-year period . . (6.9) - - - (6.9) (4.5)
Expensing of insurance deductibles
related to April 1994 fire . . . - (1.0) - - (1.0) (.7)
Miscellaneous . . . . . . . . . . . (.7) 1.5 - (1.2) (.4) (.3)
Higher effective income tax rate . . . - - - - - (.1)
----- ------ ----- ------ ------ ------
(6.9) (20.3) 5.8 .9 (20.5) (13.6)
----- ------ ----- ------ ------ ------
SIX MONTHS ENDED JULY 31, 1994
BEFORE UNUSUAL ITEMS . . . . . . . . 27.6 9.8 15.3 (43.1) 9.6 7.4
----- ------ ----- ------ ------ ------
FISCAL 1994 UNUSUAL ITEMS
T&P Division restructuring charges
and asset write-downs (see page 14) . - (25.7) - - (25.7) (16.7)
Gains on major energy asset sales
Winnie/Spindletop (see page 10) . . - 29.8 - - 29.8 18.5
Drilling rigs (see page 11) . . . . 3.8 - - - 3.8 2.5
----- ------ ----- ------ ------ ------
3.8 4.1 - - 7.9 4.3
----- ------ ----- ------ ------ ------
SIX MONTHS ENDED JULY 31, 1994
AFTER UNUSUAL ITEMS . . . . . . . . $31.4 $ 13.9 $15.3 $(43.1) $ 17.5 $ 11.7
----- ------ ----- ------ ------ ------
----- ------ ----- ------ ------ ------
</TABLE>
- - --------------------
* Includes general and administrative expense and other expense.
EXPLORATION AND PRODUCTION OVERVIEW
Exploration and Production Division operating earnings before "unusual" items
declined $6.9 million in fiscal 1995's first half, to $27.6 million. This
occurred largely because of the nonrecurrence of one-time earnings items which
added $6.9 million to the prior- period's oil and gas operating earnings.
Other variances included the negative impact of lower prices for oil and
leasehold NGLs and a higher DD&A rate, which were largely offset by earnings
from the increased production of natural gas and oil. Primarily as a result of
the Company's increased fiscal 1994 drilling program and to a lesser extent the
buy-out of MEC Development, Ltd. effective May 1, 1993, average daily natural
gas sales volumes rose to 214,900
-15-
<PAGE> 17
Mcf, up from 180,900 in the comparable period of the prior year. The Company's
weighted average natural gas sales price declined to $2.78 per Mcf from $2.88
last year. This occurred because of a change in the "mix" of the Company's
production (more lower-priced, market-sensitive gas was sold this year) and
because of lower realizations for fixed-price contract gas for the reasons
discussed below.
NATURAL GAS - MARKET-SENSITIVE SALES ($4.2 MILLION INCREASE). This favorable
variance was principally the result of increased natural gas production.
Market-sensitive production volumes averaged 108,700 Mcf per day at a price of
$2.07 per Mcf, up from 80,800 and $2.03 in the corresponding period of the
prior year. The production rise was primarily attributable to wells drilled in
fiscal 1994; production from the Calhoun Unit, where the Company ceased
reinjecting gas and began selling it in August 1993; and the previously
mentioned buy-out of MEC Development, Ltd., which added approximately 3,100 Mcf
per day to the average volume.
NATURAL GAS - SALES UNDER FIXED-PRICE CONTRACTS ($.9 MILLION INCREASE).
Production under fixed-price contracts averaged 106,200 Mcf per day at a price
of $3.51 per Mcf; such amounts were 100,100 Mcf and $3.57, respectively, during
the comparable prior-year period. These volumes consist largely of sales under
a long-term contract with Natural Gas Pipeline Company of America (NGPL) which
covers most of the Company's North Texas production. This contract provides
for annual increases of $.25 per MMBtu on January 1 in the fixed sales price
through its expiration in December 1997. The volume increase resulted
principally from the limited partnership buy-out, which added approximately
5,700 Mcf per day to the fiscal 1995 volumes. The positive impact of the $.25
per MMBtu annual price increase under the NGPL contract was more than offset by
lower realizations for leasehold NGLs and the lack in fiscal 1995 of any
amortization of price-related deferred contract restructuring proceeds since
this amortization was completed during the prior year. Amortization of such
price-related proceeds added $.16 per Mcf to the prior-period's average price
for sales under fixed- price contracts.
OIL AND CONDENSATE SALES ($1.3 MILLION DECREASE). The average price for oil
and condensate for fiscal 1995's first six months of $15.25 per barrel was 15%
below the $17.84 realized during the comparable period of the prior year,
reducing operating earnings by $2.3 million. This downturn in prices occurred
during the first quarter principally because of perceived overproduction of
crude oil on a worldwide basis. Partially offsetting the effect of the lower
prices was an increase of 700 barrels per day in production volumes (to 6,600
barrels per day), which added $1 million to operating earnings. The production
increase resulted both from fiscal 1994's successful drilling program and the
buy-out of MEC Development, Ltd.
OIL AND GAS DD&A RATE INCREASE ($5.3 MILLION DECREASE). The Company's DD&A
rate was higher during fiscal 1995's first half because of the previously
reported impact of the buy-out of MEC Development, Ltd. ($2.1 million) and for
other reasons ($3.2 million) principally involving changes in the mix of the
Company's reserves. Oil and gas DD&A is determined by multiplying the Company's
net investment in its oil and gas properties by the percentage of aggregate
future net revenues from proved reserves that were produced during the period.
The Company's aggregate future net revenues are being negatively impacted by
the replacement of high-priced reserves produced under fixed-priced contracts
with reserves priced at market-sensitive prices. As a result, the percentage
of the remaining future net revenues produced in the fiscal 1995 period
exceeded that of the prior-year period.
TRANSMISSION AND PROCESSING OVERVIEW
Transmission and Processing Division operating earnings before unusual items
declined $20.3 million in fiscal 1995's first six months largely because of the
impact of lower NGL sales prices and a decline in earnings from gas gathering
and transmission activities. NGL production volumes averaged 46,300 Bbls per
day--down from 54,100 during the corresponding period of the prior year--as
facilities were idled early in the year in response to inadequate margins for
most plants operating principally under keep- whole processing arrangements.
NGL margins improved during the second quarter, and certain of the larger
keep-whole plants that were idle in the first quarter resumed operations.
-16-
<PAGE> 18
GAS PROCESSING - NGL PRICE ($16.3 MILLION DECREASE). The average price for
NGLs produced of $11.14 per barrel was 15% lower than the $13.10 average of
last year's first six months, reducing operating earnings by $16.3 million.
The lower prices were largely the result of lower prices for crude oil during
the first quarter--which adversely affected NGL prices--and a soft world
economy, which reduced the demand for chemical feedstocks.
GAS PROCESSING - PRODUCTION VOLUMES ($3.9 MILLION DECREASE). NGL production
volumes averaged 46,300 barrels per day, down 14% from the level of the
prior-year's first six months. As a result of the relatively high
market-sensitive feedstock costs during fiscal 1995's first quarter when NGL
prices were severely depressed, most plants with keep-whole processing
agreements were uneconomical to operate and accordingly were shut down during
that period. Certain of these plants resumed operations in the second quarter
and production volumes averaged 49,200 barrels per day, up from the first
quarter's 43,200.
GAS PROCESSING - DECREASED PER UNIT COST OF SALES ($4.8 MILLION INCREASE). Gas
processing cost of sales consists primarily of amounts paid to the natural gas
producers. Such amounts are based either on the value of natural gas consumed
in processing under keep-whole agreements or on a percentage of the value of
NGLs produced under percent-of-proceeds agreements. Per unit cost of sales was
lower during the first six months of fiscal 1995 principally because of the
effect on these costs of lower NGL prices and the second quarter's lower
market-sensitive natural gas prices, increasing operating earnings by $4.8
million.
GAS GATHERING AND TRANSMISSION ($6.3 MILLION DECREASE). Excluding the impact
of lower SAR/Bonus unit expense accruals, operating earnings from gas gathering
and transmission activities were $6.3 million below those of the comparable
prior-year period. This decline was primarily the result of lower margins on
the buy/resale activities of a 45%-owned equity partnership, much of which was
related to previously reported revisions effective late in the prior fiscal
year of natural gas sales contracts with Texas Utilities Fuel Company (TUFCO).
TUFCO's purchases under these contracts averaged 50,200 MMBtu per day during
fiscal 1995's first six months (22,600 for the Company's 45% interest),
contrasted with 63,500 (28,600) during the comparable prior-year period.
System volumes not sold to TUFCO were sold to other purchasers at significantly
lower margins. Contributing only marginally to this decline was the sale of
the Winnie/Spindletop assets effective June 1, 1994. During the months of June
and July 1993, Winnie/Spindletop added $.2 million to the Company's operating
earnings.
REAL ESTATE AND OTHER
REAL ESTATE ($4.6 MILLION INCREASE). Excluding the impact of lower SAR/Bonus
unit expense accruals, Real Estate Division operating earnings rose by $4.6
million during the fiscal 1995 period principally due to increased profits from
commercial land and residential lot sales and improved earnings from other
commercial activities.
Operating earnings from commercial and institutional land sales in The
Woodlands rose by $2.3 million during the first half of fiscal 1995 principally
because of increased sales of retail sites. During that period, $1.7 million
was earned from sales of four retail sites totaling 21.4 acres (including 50%
of the profit on the sale to a 50%-owned partnership of a 16.3-acre site for
the Cochran's Crossing Retail Center). Earnings from sales of non-retail
commercial sites totaled $.8 million, twice the amount for the same period of
the prior year, while profits on institutional land sales rose by $.2 million.
Although residential activity was strong and the number of residential
lots sold in The Woodlands increased by 20% (488 versus 405 in the prior-year
period), operating earnings from such sales were only $.9 million higher
because of a change in the sales mix. The number of production lots sold rose
by 45% both because of the sales impetus in fiscal 1995 provided by rising
interest rates and because such sales had been adversely affected last year by
inventory shortages related to delays in the opening of the Village
-17-
<PAGE> 19
of Alden Bridge. Conversely, the number of higher-priced estate and custom
lots sold declined sharply in the fiscal 1995 period. This decline
corresponded with a national downward trend in larger home sales as concerns
about corporate restructuring and other economic factors apparently caused
upper-income buyers to be more conservative in their home purchases.
Higher earnings from other commercial activities in The Woodlands
accounted for $1 million of the increased real estate operating earnings.
Several factors contributed to this increase, including greater corporate
conference activity at The Woodlands Executive Conference Center and Resort and
higher earnings from office and research/technology buildings.
SAR/BONUS UNIT EXPENSE ACCRUALS ($6.4 MILLION). At July 31, 1994, the average
market price of the Company's Class A and Class B common shares was $2.75 per
share lower than it was at the beginning of the year; whereas this price rose
by $8.94 per share in the prior-year period. Primarily because of the
differing price trends, reversals of previous SAR/Bonus unit expense accruals
of $1 million were recorded in fiscal 1995 versus charges of $5.4 million in
the prior-year period. This resulted in an aggregate favorable year-to-year
variance of $6.4 million.
ONE-TIME EARNINGS ITEMS RECORDED IN PRIOR-YEAR PERIOD ($6.9 MILLION). One-time
items added $5 million and $1.9 million, respectively, to the oil and gas
operating earnings of the prior-year's second and first quarters. During last
year's second quarter, the Company recognized certain natural gas revenues
($3.9 million) which previously had been deferred because of future obligations
for which the Company was no longer liable and recorded a gain of $1.1 million
on the sale of certain Exploration and Production Division assets. During the
first quarter of fiscal 1994, a $1.9 million contingent liability related to
contractual matters--which had been recorded several years earlier--was
reversed when it was determined that it was no longer needed.
EXPENSING OF INSURANCE DEDUCTIBLES RELATED TO AN APRIL 1994 FIRE ($1 MILLION).
The Company's fiscal 1995 results were reduced by a $1 million accrual for
insurance deductibles related to an April 1994 fire at GCF's plant, which is
operated by a third party. Damages incurred by the Company in excess of this
amount, including losses attributable to business interruption, are covered by
insurance. Estimated business interruption insurance proceeds have been
accrued, essentially eliminating the unfavorable variances that otherwise would
have been reported as a result of the shutdown of the fractionator, which is
expected to resume operations in mid-September.
-18-
<PAGE> 20
RESULTS OF OPERATIONS - THREE MONTHS ENDED JULY 31, 1994
COMPARED WITH THREE MONTHS ENDED JULY 31, 1993
The following table and discussion identify and explain the major
increases (decreases) in earnings (in millions):
<TABLE>
<CAPTION>
Segment Operating Earnings
------------------------------------
Exploration Transmission
and and Real Pretax Net
Production Processing Estate Other* Earnings Earnings
----------- ------------ ------ ------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
THREE MONTHS ENDED JULY 31, 1993 . . . $19.3 $ 13.2 $5.2 $(22.1) $ 15.6 $ 10.7
----- ------ ---- ------ ------ ------
MAJOR INCREASES (DECREASES)
Market-sensitive natural gas sales . . (.8) - - - (.8) (.5)
Oil and gas DD&A rate increase . . . . (.8) - - - (.8) (.5)
Gas processing
NGL price . . . . . . . . . . . . . - (6.0) - - (6.0) (3.9)
Production volumes . . . . . . . . . - (1.0) - - (1.0) (.7)
Decreased per unit cost
of sales (see page 17) . . . . . . - 3.0 - - 3.0 2.0
Gas gathering and transmission . . . . - (1.7) - - (1.7) (1.1)
Real estate . . . . . . . . . . . . . . - - 2.5 - 2.5 1.6
Other
One-time earnings items recorded
in prior-year period (see page 18) . (5.0) - - - (5.0) (3.3)
SAR/Bonus unit expense accruals . . 1.1 .4 .6 1.0 3.1 2.0
Miscellaneous . . . . . . . . . . . (.3) (.3) - (.7) (1.3) (.8)
Lower effective income tax rate . . . . - - - - - .5
----- ------ ---- ------ ------ ------
(5.8) (5.6) 3.1 .3 (8.0) (4.7)
----- ------ ---- ------ ------ ------
THREE MONTHS ENDED JULY 31, 1994
BEFORE UNUSUAL ITEMS . . . . . . . . 13.5 7.6 8.3 (21.8) 7.6 6.0
----- ------ ---- ------ ------ ------
FISCAL 1994 UNUSUAL ITEMS
Gain on sale of Winnie/Spindletop
(see page 10) . . . . . . . . . . . - 29.8 - - 29.8 18.5
T&P Division restructuring charges
and asset write-downs (see page 11) . - (25.7) - - (25.7) (16.7)
----- ------ ---- ------ ------ ------
- 4.1 - - 4.1 1.8
----- ------ ---- ------ ------ ------
THREE MONTHS ENDED JULY 31, 1994
AFTER UNUSUAL ITEMS . . . . . . . . $13.5 $ 11.7 $8.3 $(21.8) $ 11.7 $ 7.8
----- ------ ---- ------ ------ ------
----- ------ ---- ------ ------ ------
</TABLE>
- - --------------------
* Includes general and administrative expense and other expense.
EXPLORATION AND PRODUCTION OVERVIEW
Exploration and Production operating earnings for fiscal 1995's second quarter
were $5.8 million below those of the comparable prior-year period largely
because of one-time earnings items discussed on page 18 which added $5 million
to the prior-period's results. Also, earnings in the fiscal 1995 quarter were
adversely affected by lower realizations for leasehold NGLs, which contributed
significantly to the decline in the average price for natural gas sales ($2.75
per Mcf versus $2.91 during the corresponding prior-year period). Overall,
daily natural gas sales volumes averaged 211,200 during the current period, up
10% from the 192,700 of the same period of the prior year.
NATURAL GAS - MARKET-SENSITIVE SALES ($0.8 MILLION DECREASE). This earnings
decline was due to lower prices ($1.96 per Mcf versus $2.14), which more than
offset the favorable impact of higher production volumes. Market-sensitive
natural gas sales averaged 103,500 Mcf per day, up from 85,100. The volume
increase was principally from wells drilled in fiscal 1994 and production from
the Calhoun Unit, where the Company ceased injecting gas and began selling it
during the third quarter of the prior year.
-19-
<PAGE> 21
OIL AND GAS DD&A RATE INCREASE ($.8 MILLION DECREASE). For the reason
discussed on page 16, the Company's DD&A for fiscal 1995's second quarter was
higher than the rate for the comparable prior-year period, reducing operating
earnings by $.8 million.
TRANSMISSION AND PROCESSING OVERVIEW
Transmission and Processing operating earnings before unusual items declined
$5.6 million during the second quarter of fiscal 1995 largely because of lower
gas processing margins. Lower NGL sales prices ($11.26 per barrel versus
$12.59) were the primary cause of this decline.
GAS PROCESSING - NGL PRICE ($6 MILLION DECREASE). The average price for NGLs
produced was $1.33 per barrel (11%) below the average for the same period of
the prior year, reducing operating earnings by $6 million. As discussed
previously, lower prices for crude oil and reduced demand for chemical
feedstocks were the principal causes of the price decline.
GAS PROCESSING - PRODUCTION VOLUME ($1 MILLION DECREASE). Primarily because
of the lower margins, NGL production volumes of 49,200 barrels per day during
fiscal 1995's second quarter were 4,800 barrels per day (9%) below those of the
prior-year period, reducing operating earnings by $1 million.
GAS GATHERING AND TRANSMISSION ($1.7 MILLION DECREASE). This unfavorable
earnings comparison was primarily due to lower volumes and margins for the
Company's North Texas system, where drilling activity has been too low in
recent years to offset normal production declines for existing wells in its
service area.
REAL ESTATE AND OTHER
REAL ESTATE ($2.5 MILLION INCREASE). This operating earnings increase, which
excludes the effect of lower SAR/Bonus unit expense accruals, was principally
due to increased profits from commercial and institutional land sales and
residential lot sales in The Woodlands. Profits of $1.6 million were earned in
fiscal 1995's second quarter from sales of four retail sites near the Cochran's
Crossing and Pinecroft retail centers and an institutional land sale of 12.9
acres. Profits on such sales in the prior-year period totaled $.5 million.
Operating earnings from residential lot sales were $.9 million higher during
fiscal 1995's second quarter because of increased sales of production lots for
the reasons discussed on page 17. Residential lot sales totaled 260, 40% above
the level of the corresponding period of the prior year.
SAR/BONUS UNIT EXPENSE ACCRUALS ($3.1 MILLION). Because of declines in market
prices of the Company's Class A and Class B shares, reversals of previous
SAR/Bonus unit expense accruals of $.3 million were recorded during fiscal
1995's second quarter. Charges of $2.8 million were made during the
corresponding period of the prior year, when the average price of these shares
rose $8.38 per share.
-20-
<PAGE> 22
Part II - Other Information
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of Mitchell Energy & Development
Corp. was held on June 29, 1994 for the purpose of electing a Board of 12
directors and considering and acting upon a proposal regarding the appointment
of independent public accountants. Proxies for the meeting were solicited
pursuant to Section 14A of the Securities Exchange Act of 1934, and there was
no solicitation in opposition to the Company's solicitations. Each of the
nominees for the Board of Directors was elected by the Class A common
stockholders.
Stockholders of the Company approved a proposal to appoint Arthur
Andersen LLP, independent public accountants, to examine the accounts of the
Company for the fiscal year ending January 31, 1995. The vote was as follows:
<TABLE>
<CAPTION>
Per-
Number cent
---------- ------
<S> <C> <C>
Shares voted "for" . . . . . . . . . . 22,377,918 99.85
Shares voted "against" . . . . . . . . 15,590 .07
Shares abstaining . . . . . . . . . . 17,761 .08
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
12 Computation of ratio of earnings to fixed charges
(b) No reports were filed on Form 8-K during the three-month period
ended July 31, 1994.
-21-
<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MITCHELL ENERGY & DEVELOPMENT CORP.
(Registrant)
Dated: September 13, 1994 By /s/ Philip S. Smith
Philip S. Smith
Senior Vice President - Administration
and Chief Financial Officer
-22-
<PAGE> 24
EXHIBIT INDEX
Exhibits
12 Computation of ratio of earnings to fixed charges
27 Financial Data Schedule
<PAGE> 1
Exhibit 12
Mitchell Energy & Development Corp.
Computation of Ratio of Earnings to Fixed Charges
(dollar amounts in thousands)
<TABLE>
<CAPTION>
6 Months
Fiscal Year Ended January 31 Ended
---------------------------------------------------- July 31,
1990 1991 1992 1993 1994 1994
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
EARNINGS
Pretax earnings . . . . . . . . . . . . . . $ 46,135 $ 71,598 $ 68,300 $ 47,324 $ 47,538 $ 17,451
Add (Deduct):
Previously capitalized interest
charged against pretax earnings . . . 12,401 14,694 21,937 14,346 17,098 17,115
Losses of less-than-50%-owned persons . 44 23 26 99 32 1,038
Fixed charges (see below) . . . . . . . 103,166 98,633 90,107 85,169 84,788 41,115
Reverse effect of inclusion of interest
capitalized in fixed charges . . . . . (46,993) (45,427) (39,426) (36,205) (35,721) (16,023)
Undistributed earnings of
less-than-50%-owned persons . . . . . (6,201) (11,690) (10,521) (10,305) (3,594) -
-------- -------- -------- -------- -------- --------
$108,552 $127,831 $130,423 $100,428 $110,141 $ 60,696
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
FIXED CHARGES
Interest expense incurred
Consolidated (a) (b) . . . . . . . . . . $ 95,792 $ 92,874 $ 84,025 $ 77,451 $ 75,252 $ 36,043
50%-owned persons . . . . . . . . . . . 4,974 3,670 3,284 4,609 6,236 3,505
-------- -------- -------- -------- -------- --------
100,766 96,544 87,309 82,060 81,488 39,548
Portion of rental expense
representing interest (c) . . . . . . . 2,400 2,089 2,798 3,109 3,300 1,567
-------- -------- -------- -------- -------- --------
$103,166 $ 98,633 $ 90,107 $ 85,169 $ 84,788 $ 41,115
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
RATIO OF EARNINGS TO FIXED CHARGES . . . . 1.05 1.30 1.45 1.18 1.30 1.48
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
</TABLE>
- - --------------------
(a) Consists of interest expense as reported in consolidated statements of
earnings and interest expense related to finance operations which is
reported as costs and expenses in the consolidated statements of earnings.
(b) At July 31, 1994, the Company had outstanding guaranties of approximately
$73,800,000 of indebtedness of less-than-fifty percent owned partnerships
and approximately $4,900,000 of indebtedness of unaffiliated, nonprofit
institutions under which it has not been, nor is it expected that it will
be, required to perform. Fixed charges related to these outstanding
borrowings, estimated at approximately $1,700,000 for the six months ended
July 31, 1994, have been excluded from the reported fixed charges.
(c) Represents one-third of rental expense under operating lease agreements.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements and related notes of Mitchell Energy &
Development Corp. and subsidiaries at July 31, 1994 and for the six-month
period then ended and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1995
<PERIOD-START> FEB-1-1994
<PERIOD-END> JUL-31-1994
<CASH> 20,293
<SECURITIES> 0
<RECEIVABLES> 155,135
<ALLOWANCES> 3,232
<INVENTORY> 18,422
<CURRENT-ASSETS> 212,648
<PP&E> 2,593,041
<DEPRECIATION> 1,405,109
<TOTAL-ASSETS> 2,331,398
<CURRENT-LIABILITIES> 189,757
<BONDS> 928,593
<COMMON> 5,386
0
0
<OTHER-SE> 745,042
<TOTAL-LIABILITY-AND-EQUITY> 2,331,398
<SALES> 462,943
<TOTAL-REVENUES> 462,943
<CGS> 402,315
<TOTAL-COSTS> 402,315
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,312
<INCOME-PRETAX> 17,451
<INCOME-TAX> 5,759
<INCOME-CONTINUING> 11,692
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,692
<EPS-PRIMARY> .22
<EPS-DILUTED> .22
</TABLE>
