<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 OCTOBER 31, 1995
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 November 30, 1995:
Class A . . . . . . . . 23,218,540
Class B . . . . . . . . 28,820,815
================================================================================
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
Page
Part I - Financial Information Number
------
<S> <C>
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 . . . . . . . . . . . . . . . . . . . . . . 13
Part II - Other Information
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . 23
</TABLE>
DEFINITIONS. As used herein, "MMBtu" means million British thermal units,
"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 1995" and "fiscal 1996" refer,
respectively, to the 12-month periods ended January 31, 1995 and 1996 and
"DD&A" means depreciation, depletion and amortization. Pipeline throughput
volumes are based on average energy content of 1,000 Btu per cubic foot. Oil,
gas and NGL volume, price and reserve information amounts include 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, 1995 and with the
Management's Discussion and Analysis of Financial Position and Results of
Operations sections of that and this report.
Applicable prior-period financial statement amounts included herein have
been restated to give effect to the Company's previously reported adoption of
the successful efforts method of accounting for its oil and gas producing
activities.
-2-
<PAGE> 4
MITCHELL ENERGY & DEVELOPMENT CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollar amounts in thousands)
<TABLE>
<CAPTION>
OCTOBER 31, January 31,
1995 1995
------------- -----------
ASSETS (unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,956 $ 11,967
Trade receivables, net of allowance for
doubtful accounts of $2,645 and $2,304 . . . . . . . . . . . . . . . . . 98,158 133,995
Gas contract buyout proceeds due February 1, 1996 (present value) . . . . . 93,533 -
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,902 13,068
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,719 24,808
------------ ------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . 235,268 183,838
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, at cost less accumulated depreci-
ation, depletion and amortization of $1,356,777 and $1,381,977
Exploration and production
Oil and gas properties . . . . . . . . . . . . . . . . . . . . . . . . . 417,505 487,981
Support equipment and facilities . . . . . . . . . . . . . . . . . . . . 25,179 28,340
Gas services
Natural gas processing . . . . . . . . . . . . . . . . . . . . . . . . . 91,994 100,139
Natural gas gathering . . . . . . . . . . . . . . . . . . . . . . . . . . 102,187 92,725
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,450 17,794
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,641 7,120
------------ ------------
668,956 734,099
------------ ------------
REAL ESTATE
The Woodlands . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 622,198 654,881
Land held for investment, development or sale . . . . . . . . . . . . . . . 87,859 157,446
Resort and other operating properties . . . . . . . . . . . . . . . . . . . 30,848 65,249
Notes and contracts receivable, at cost, net of
allowance for doubtful accounts of $622 and $515 . . . . . . . . . . . . 37,330 40,314
------------ ------------
778,235 917,890
------------ ------------
OTHER ASSETS (including $84,128 present value of
gas contract buyout proceeds due February 1, 1997) . . . . . . . . . . . 115,990 20,044
------------ ------------
$ 1,798,449 $ 1,855,871
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,510 $ 11,617
Oil and gas proceeds payable . . . . . . . . . . . . . . . . . . . . . . . 80,802 51,211
Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . 97,442 107,414
------------ ------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . 195,754 170,242
------------ ------------
LONG-TERM DEBT
Energy operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 365,063 375,869
Real estate operations . . . . . . . . . . . . . . . . . . . . . . . . . . 473,209 519,093
------------ ------------
838,272 894,962
------------ ------------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 178,995 200,722
Natural gas contract restructuring proceeds (Note 6) . . . . . . . . . . . - 35,017
Deferred income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,054 29,774
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94,541 50,124
------------ ------------
299,590 315,637
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 3 and 5)
STOCKHOLDERS' EQUITY (Note 7)
Preferred stock, $.10 par value (authorized 10,000,000 shares; none issued)
Common stock, $.10 par value
(authorized 100,000,000 Class A and 100,000,000 Class B shares) . . . . . 5,386 5,386
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . 143,302 143,472
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 341,356 347,573
Treasury stock, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . (25,211) (21,401)
------------ ------------
464,833 475,030
------------ ------------
$ 1,798,449 $ 1,855,871
============ ============
</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 Nine Months Ended
October 31 October 31
----------------------- -----------------------
1995 1994 1995 1994
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES (Note 6)
Exploration and production (including second quarter gain
from natural gas contract buyout of $95,772 in 1995) . . . . $ 38,852 $ 64,831 $ 259,233 $ 208,893
Gas services (including gains from asset sales
of $18,993 and $48,821 in the 1994 periods) . . . . . . . . 101,032 111,184 332,608 360,649
Real estate (including gain from sale of cable
television operations of $19,449 in the 1995 periods) . . . 53,335 31,639 124,744 101,055
---------- ---------- ---------- ----------
193,219 207,654 716,585 670,597
---------- ---------- ---------- ----------
OPERATING COSTS AND EXPENSES (including first quarter person-
nel reduction program costs of $14,535 in 1995) (Note 6)
Exploration and production . . . . . . . . . . . . . . . . . . 34,540 44,877 127,753 140,875
Gas services (including asset write-downs/restructuring
charges of $7,111 in the 1995 periods and $5,602
and $31,252 in the 1994 periods) . . . . . . . . . . . . . . 99,631 86,627 309,749 322,181
Real estate (including property write-downs of $112,794 in
the second quarter of 1995 and $5,661 in the 1994 periods) . 24,462 30,993 195,539 85,081
---------- ---------- ---------- ----------
158,633 162,497 633,041 548,137
---------- ---------- ---------- ----------
SEGMENT OPERATING EARNINGS (Note 6) . . . . . . . . . . . . . . 34,586 45,157 83,544 122,460
General and administrative expense (including first quarter
personnel reduction program costs of $5,665 in 1995) . . . . 9,240 10,022 35,039 30,937
---------- ---------- ---------- ----------
TOTAL OPERATING EARNINGS . . . . . . . . . . . . . . . . . . . 25,346 35,135 48,505 91,523
---------- ---------- ---------- ----------
OTHER EXPENSE
Interest expense . . . . . . . . . . . . . . . . . . . . . . . 15,643 17,263 48,313 52,598
Capitalized interest . . . . . . . . . . . . . . . . . . . . . (7,211) (7,000) (21,156) (22,013)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . (416) 1,658 127 4,608
---------- ---------- ---------- ----------
8,016 11,921 27,284 35,193
---------- ---------- ---------- ----------
EARNINGS BEFORE INCOME TAXES . . . . . . . . . . . . . . . . . 17,330 23,214 21,221 56,330
INCOME TAXES (Note 4) . . . . . . . . . . . . . . . . . . . . . 6,076 8,202 7,622 19,499
---------- ---------- ---------- ----------
NET EARNINGS . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,254 $ 15,012 $ 13,599 $ 36,831
========== ========== ========== ==========
EARNINGS PER SHARE . . . . . . . . . . . . . . . . . . . . . . $ .21 $ .28 $ .26 $ .70
===== ===== ===== =====
AVERAGE COMMON SHARES OUTSTANDING . . . . . . . . . . . . . . 52,044 52,758 52,043 52,755
====== ====== ====== ======
</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 Nine Months Ended October 31, 1995
(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, 1995 . . . . . . . . . . . . . $ 5,386 $ 143,472 $ 347,573 $ (21,401) $ 475,030
Net earnings . . . . . . . . . . . . . . . . . . . - - 13,599 - 13,599
Cash dividends (36 cents per share on Class A
and 39 3/4 cents per share on Class B) . . . . - - (19,816) - (19,816)
Treasury stock purchases . . . . . . . . . . . . . - - - (4,130) (4,130)
Exercises of stock options . . . . . . . . . . . . - (170) - 320 150
-------- --------- --------- --------- ---------
BALANCE, OCTOBER 31, 1995 . . . . . . . . . . . . . $ 5,386 $ 143,302 $ 341,356 $ (25,211) $ 464,833
======== ========= ========= ========= =========
</TABLE>
===================================
<TABLE>
<CAPTION>
Common Stock Issued Treasury Stock
------------------------------- -------------------------
SHARE AMOUNTS Class A Class B Class A Class B
- ------------- ------------ ------------ --------- ---------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 31, 1995 . . . . . . . . . . 23,978,104 29,878,104 677,577 896,478
Treasury stock purchases . . . . . . . . . . - - 94,100 167,500
Exercises of stock options . . . . . . . . . - - (12,121) (12,697)
Other . . . . . . . . . . . . . . . . . . . . (8) (8) - -
---------- ---------- ------- ---------
BALANCE, OCTOBER 31, 1995 . . . . . . . . . . 23,978,096 29,878,096 759,556 1,051,281
========== ========== ======= =========
</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>
Nine Months Ended
October 31
------------------------
1995 1994
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,599 $ 36,831
Adjustments to reconcile net earnings
to cash provided by operating activities
Depreciation, depletion and amortization . . . . . . . . . . . . . . . 80,811 110,306
Exploration expenses, including dry-hole costs . . . . . . . . . . . . 11,023 9,623
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . (21,727) 10,385
Cost of land sold . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,175 25,768
Residential land development costs, net of reimbursements . . . . . . . (14,478) (12,599)
Distributions in excess of earnings of equity investees . . . . . . . . 8,461 12,027
Amortization of deferred natural gas contract restructuring proceeds . (5,950) (12,382)
Non-cash portion of natural gas contract buyout gain . . . . . . . . . (53,205) -
Write-downs of real estate properties . . . . . . . . . . . . . . . . . 112,794 5,661
Accrued personnel reduction program costs . . . . . . . . . . . . . . . 11,128 -
Gains from property sales . . . . . . . . . . . . . . . . . . . . . . . (25,100) (52,612)
Accrued restructuring costs . . . . . . . . . . . . . . . . . . . . . . - 9,830
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,156) 5,928
---------- ----------
140,375 148,766
Changes in operating assets and liabilities . . . . . . . . . . . . . . 37,822 (50,713)
---------- ----------
Cash provided by operating activities . . . . . . . . . . . . . . . . . 178,197 98,053
---------- ----------
INVESTING ACTIVITIES
Capital and exploratory expenditures
Total on accrual basis . . . . . . . . . . . . . . . . . . . . . . . . . . (184,378) (164,224)
Residential land development costs deducted above . . . . . . . . . . . . 14,478 12,599
Adjustment to cash basis . . . . . . . . . . . . . . . . . . . . . . . . . (10,808) (11,561)
---------- -----------
(180,708) (163,186)
Proceeds from major energy asset sales . . . . . . . . . . . . . . . . . . . 19,569 152,000
Proceeds from sales of real estate commercial properties . . . . . . . . . . 42,677 3,354
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,299 610
---------- -----------
Cash used for investing activities . . . . . . . . . . . . . . . . . . (116,163) (7,222)
---------- -----------
FINANCING ACTIVITIES
Proceeds from issuance of debt . . . . . . . . . . . . . . . . . . . . . . . - 129,266
Debt repayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (38,001) (200,972)
Cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (19,816) (20,086)
Treasury stock purchases . . . . . . . . . . . . . . . . . . . . . . . . . . (4,130) -
Debt prepayment premium . . . . . . . . . . . . . . . . . . . . . . . . . . . - (6,420)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,098) (782)
---------- -----------
Cash used for financing activities . . . . . . . . . . . . . . . . . . (63,045) (98,994)
---------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . . . (1,011) (8,163)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD . . . . . . . . . . . . . . . 11,967 21,832
---------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD . . . . . . . . . . . . . . . . . . $ 10,956 $ 13,669
========== ===========
</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
October 31, 1995
(1) ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Mitchell
Energy & Development Corp. 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 successful efforts method of accounting is used for the Company's
oil and gas producing activities.
In March 1995, the Financial Accounting Standards Board issued Statement
No. 121 (SFAS No. 121) which is intended to establish more consistent
accounting standards for measuring the recoverability of long-lived assets.
The Company must adopt this statement no later than for its quarter ending
April 30, 1996. The Company's analysis of the potential impact of this
statement on its oil and gas and real estate properties has been completed, and
no significant adjustments to the carrying values of these assets will result
from the adoption of SFAS No. 121. The analysis with respect to the Company's
gas services assets has not been completed, and accordingly the impact that
adoption of SFAS No. 121 will have on the carrying values of those assets has
not been determined.
Certain reclassifications of amounts previously reported have been made
to conform to the current year's presentation.
(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 principal revenues and costs for these activities, interest
income and interest expense of the Company's finance operations are reported,
respectively, as revenues and as 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 energy or real estate activities. The principal
partnership interests included the following at October 31, 1995:
<TABLE>
<CAPTION>
Ownership
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 Natural gas gathering
Gulf Coast Fractionators 38.75 Fractionation of NGLs
U. P. Bryan 45 Natural gas processing
REAL ESTATE
The Fort Crockett Hotel Limited 50 Resort hotel in Galveston, Texas
Lake Catamount Joint Venture 50 Land held for development
The Woodlands Mall Associates 50 Regional mall in The Woodlands
Woodlands Office Equities - '95 Limited 25 Office buildings in The Woodlands
</TABLE>
Other real estate partnerships own various commercial properties, essentially
all of which are located in The Woodlands.
-7-
<PAGE> 9
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 revenues or operating costs and expenses caption of the consolidated
statements of earnings.
The following paragraphs present summarized financial statement
information, which is generally reported on a one-month lag, for all entities
accounted for on the equity method. Summarized earnings information for these
entities for the three- and nine-month periods ended October 31, 1995 and 1994
follows (in thousands):
<TABLE>
<CAPTION>
Three Months Nine Months
-------------------- --------------------
1995 1994 1995 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . $136,893 $146,842 $395,167 $366,555
Operating earnings . . . . . . . . . . . . . . . . 30,822 23,749 65,422 38,160
Pretax earnings (before interest expense for
those entities whose activities are funded
by capital contributions of the owners)* . . . . 19,454 17,033 38,958 23,248
Proportionate share of pretax earnings included
in the Company's reported operating earnings* . 7,098 6,464 16,089 9,462
</TABLE>
------------------------------------
*Amounts for the 1995 nine-month period are net of $8,276 ($4,138 propor-
tionate share) of property write-downs discussed in the following
paragraph.
The Company has concluded that it would be in the best interest of the
limited partners of The Fort Crockett Hotel Limited and itself that the
partnership's property, The San Luis Hotel, be sold and the partnership
liquidated. As a result, the partnership recorded an impairment loss of
$8,276,000 during June 1995 to reduce the carrying amount for this asset to its
estimated market value. The Company's share of this loss is included in the
real estate property write-downs that were recorded during the three-month
period ended July 31, 1995 (see Note 6).
The operations of certain 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. Information concerning debt payable to third
parties by these entities at October 31, 1995 and January 31, 1995 and the
Company's proportionate share of such debt at October 31, 1995 is summarized
below (in thousands):
<TABLE>
<CAPTION>
Entity Total October 31, 1995 -- Company's Share
--------------------------- -------------------------------------
October 31, January 31, Non-
1995 1995 Recourse Recourse Total
----------- ---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
ENERGY ACTIVITIES
Belvieu Environmental Fuels (BEF) . $ 176,000 $ 176,000 $ 58,667 $ - $ 58,667
C&L Processors Partnership . . . . 89,959 101,209 24,289 20,691 44,980
Gulf Coast Fractionators (GCF) . . 77,125 79,550 3,168 26,718 29,886
----------- ---------- ---------- -------- ----------
343,084 356,759 86,124 47,409 133,533
----------- ---------- ---------- -------- ----------
REAL ESTATE ACTIVITIES
The Fort Crockett Hotel Limited . . 11,137 11,592 4,000 1,569 5,569
The Woodlands Mall Associates . . . 58,889 54,683 29,445 - 29,445
Apartment partnerships . . . . . . 32,904 41,019 107 10,863 10,970
Others . . . . . . . . . . . . . . 47,504 42,609 4,176 15,382 19,558
----------- ---------- ---------- -------- ----------
150,434 149,903 37,728 27,814 65,542
----------- ---------- ---------- -------- ----------
$ 493,518 $ 506,662 $ 123,852 $ 75,223 $ 199,075
=========== ========== ========== ======== ==========
</TABLE>
For certain of the partnership indebtedness, the Company has guaranteed
the repayment of portions of the obligations attributable to the interests of
its partners. Such amounts, which totaled $37,568,000 at January 31, 1995, are
not included in the amounts shown above as the Company's share.
-8-
<PAGE> 10
During the third quarter of fiscal 1996, the expansion portion of GCF's
fractionator was certified by the bank's engineer to be substantially complete,
and the partners' prorata guarantees of the $40,000,000 in indebtedness related
to the expansion were eliminated. In August 1995, BEF's indebtedness was
converted to a five-year term loan maturing May 31, 2000. The term loan is
severally guaranteed on a prorata basis by the partners. Once the plant passes
a production test and is certified by the lending banks' engineer, these
guaranties will be eliminated, and the loan will become nonrecourse.
See Note 4 of Notes to Consolidated Financial Statements on pages 56 and
57 of the Company's Fiscal 1995 Annual Report for additional information
concerning the indebtedness of these partnerships.
(4) INCOME TAXES
Income taxes for the nine-month periods ended October 31, 1995 and 1994
consist of the following (in thousands):
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
CURRENT
Federal . . . . . . . . . . . . . . . . . . . . . . . . . $ 26,699 $ 5,860
State . . . . . . . . . . . . . . . . . . . . . . . . . . 2,650 3,254
-------- --------
29,349 9,114
-------- --------
DEFERRED
Federal . . . . . . . . . . . . . . . . . . . . . . . . . (22,779) 10,210
State . . . . . . . . . . . . . . . . . . . . . . . . . . 1,052 175
-------- --------
(21,727) 10,385
-------- --------
$ 7,622 $ 19,499
======== ========
</TABLE>
The Company's estimated annual tax rates for the nine-month periods
ended October 31, 1995 and 1994 were 35.9% and 34.6%, respectively, versus the
35% statutory Federal income tax rate.
(5) COMMITMENTS AND CONTINGENCIES
LITIGATION AND OTHER. On November 21, 1995, a jury in a District Court
in Beaumont, Texas, reached a verdict against the Company finding that, by
using the surface of a tract of land for a gas storage project, it had
unreasonably prevented the plaintiff from developing its oil rights. The
verdict was that the plaintiff was entitled to approximately $2,400,000 in
actual damages, interest and costs plus $3,300,000 in exemplary damages. The
judge has taken that verdict under advisement and has not entered a judgment.
The Company and its outside legal counsel are of the opinion that a judgment
finding no liability, notwithstanding the verdict, should be entered or, if the
verdict is entered as a judgment, that it will be overturned, or the purported
amount of damages substantially reduced, upon completion of the appeal
process. Further, they believe the possibility of exemplary damages actually
being awarded to be remote.
The Company also is party to other claims and legal actions arising in
the ordinary course of its business (including three lawsuits seeking class
action status and claiming failure of the Company to properly pay royalties and
several individual actions alleging the Company's operations have contaminated
ground water) and to recurring examinations performed by the Internal Revenue
Service and other regulatory agencies. While the outcome of such matters cannot
be predicted with certainty, management expects that adjustments, if any,
resulting from the ultimate resolution of the matters discussed in this and
the preceding paragraph will not be material to the Company's financial
statements.
MORTGAGE ACTIVITIES. Mitchell Mortgage Company (MMC) administers
approximately $168,000,000 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 limits.
Management expects that losses, if any, incurred in connection with defaults by
borrowers under FHA and VA mortgages serviced by MMC will not be material to
the Company's financial statements.
-9-
<PAGE> 11
(6) SEGMENT INFORMATION
Selected industry segment data for the nine- and three-month periods
ended October 31, 1995 and 1994 are as follows (in thousands):
<TABLE>
<CAPTION>
Segment
Outside Operating Capital
Revenues Earnings DD&A Expenditures*
------------------ ------------------- ------------------ -------------------
1995 1994 1995 1994 1995 1994 1995 1994
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Nine Months
- -----------
EXPLORATION AND PRODUCTION
Operations . . . . . . . . . . . $158,123 $204,423 $ 38,305 $ 64,227 $ 56,989 $ 71,631 $111,334 $ 89,239
Gain from gas contract buyout . . 95,772 - 95,772 - - - - -
Personnel reduction program costs - - (7,935) - - - - -
Gain from producing property sale 4,338 - 4,338 - - - - -
Gain from sale of drilling rigs . 1,000 4,470 1,000 3,791 - 679 - -
-------- -------- -------- -------- -------- -------- -------- --------
259,233 208,893 131,480 68,018 56,989 72,310 111,334 89,239
-------- -------- -------- -------- -------- -------- -------- --------
GAS SERVICES
Natural gas processing . . . . . 206,652 163,735 20,390 12,761 5,236 6,196 4,180 6,130
Natural gas gathering
and marketing . . . . . . . . . 119,550 141,587 7,663 6,813 5,265 6,359 20,408 10,436
Other . . . . . . . . . . . . . . 6,406 6,506 5,517 1,325 80 1,866 6,280 4,062
Personnel reduction program costs - - (3,600) - - - - -
Gains from major asset sales . . - 48,821 - 48,821 - - - -
Restructuring charges
and asset write-downs . . . . . - - (7,111) (31,252) 4,922 14,832 - -
-------- -------- -------- -------- -------- -------- -------- --------
332,608 360,649 22,859 38,468 15,503 29,253 30,868 20,628
-------- -------- -------- -------- -------- -------- -------- --------
REAL ESTATE
Operations . . . . . . . . . . . 124,744 101,055 44,999 21,635 5,783 6,126 39,515 51,712
Write-downs of properties . . . . - - (112,794) (5,661) - - - -
Personnel reduction program costs - - (3,000) - - - - -
-------- -------- -------- -------- -------- -------- -------- --------
124,744 101,055 (70,795) 15,974 5,783 6,126 39,515 51,712
-------- -------- -------- -------- -------- -------- -------- --------
CORPORATE . . . . . . . . . . . . - - - - 2,536 2,617 2,661 2,645
-------- -------- -------- -------- -------- -------- -------- --------
$716,585 $670,597 $ 83,544 $122,460 $ 80,811 $110,306 $184,378 $164,224
======== ======== ========= ======== ======== ======== ======== ========
Three Months
- ------------
EXPLORATION AND PRODUCTION
Operations . . . . . . . . . . . $ 37,852 $ 64,831 $ 3,312 $ 19,954 $ 14,226 $ 22,800 $ 55,598 $ 27,612
Gain from sale of drilling rigs . 1,000 - 1,000 - - - - -
-------- -------- -------- -------- -------- -------- -------- --------
38,852 64,831 4,312 19,954 14,226 22,800 55,598 27,612
-------- -------- -------- -------- -------- -------- -------- --------
GAS SERVICES
Natural gas processing . . . . . 58,210 65,691 4,091 6,914 1,831 1,648 1,390 3,861
Natural gas gathering
and marketing . . . . . . . . . 40,895 24,619 2,869 3,216 1,686 1,666 7,659 2,094
Other . . . . . . . . . . . . . . 1,927 1,881 1,552 1,036 27 553 2,635 2,168
Gains from major asset sales . . - 18,993 - 18,993 - - - -
Asset write-downs . . . . . . . . - - (7,111) (5,602) 4,922 1,649 - -
-------- -------- -------- -------- -------- -------- -------- --------
101,032 111,184 1,401 24,557 8,466 5,516 11,684 8,123
-------- -------- -------- -------- -------- -------- -------- --------
REAL ESTATE
Operations . . . . . . . . . . . 53,335 31,639 28,873 6,307 1,428 2,020 16,731 18,923
Write-downs of properties . . . . - - - (5,661) - - - -
-------- -------- -------- -------- -------- -------- -------- --------
53,335 31,639 28,873 646 1,428 2,020 16,731 18,923
-------- -------- -------- -------- -------- -------- -------- --------
CORPORATE . . . . . . . . . . . . - - - - 813 871 1,497 1,057
-------- -------- -------- -------- -------- -------- -------- --------
$193,219 $207,654 $ 34,586 $ 45,157 $24,933 $ 31,207 $ 85,510 $ 55,715
======== ======== ========= ======== ======== ======== ======== ========
</TABLE>
- ----------------------------------
*On accrual basis, including exploratory expenditures.
Effective July 1, 1995, the Company terminated its North Texas gas sales
contract with Natural Gas Pipeline Company of America (Natural) which had been
scheduled to expire on December 31, 1997. In exchange, it received proceeds
(for itself and other interest owners) consisting of $55,500,000 in cash (which
was used to pay down long-term debt), receivables with discounted values of
$91,608,000 and $82,369,000, respectively, related to payments of $95,000,000
and $91,000,000 due from Natural on February 1, 1996 and 1997 and ownership
(effective in January 1998) of Natural's gathering system that serves the
Company's 1,500 North Texas wells. The discounted value of the Company's share
of these
-10-
<PAGE> 12
early termination proceeds aggregated $176,189,000. After recognizing the
remaining $29,067,000 of previously deferred restructuring proceeds related to
this contract and deducting property costs of $109,484,000 that had been
incurred to maintain North Texas gas delivery capabilities at levels needed to
enable the Company to realize the contract's premium prices, the Company
reported a gain of $95,772,000 on the contract buyout in the second quarter of
fiscal 1996. As a result of the contract termination, effective July 1, 1995
the Company receives market-sensitive prices for 80 MMcf per day of natural gas
for which it had received $4 per Mcf (the wellhead production volumes
associated with these sales approximated 103 MMcf per day).
During the three-month period ended April 30, 1995, the Company
implemented a personnel reduction program which resulted in the elimination of
approximately 300 jobs. Aggregate pretax costs of this program, including
$5,665,000 reported as general and administrative expense, totaled $20,200,000.
Of these costs, $11,128,000 represented the present value of incremental
pension and retiree medical benefits provided under a voluntary incentive
retirement program offered to 130 employees (114 of whom accepted) while
$9,072,000 represented the cash costs of severance and other benefits.
Exploration and Production segment operating earnings for the nine-month
period ended October 31, 1995 include gains of $4,338,000 from the sale during
the second quarter of certain West Texas producing oil and gas properties and
$1,000,000 in the third quarter related to the redemption of warrants that had
been obtained in connection with a prior- year drilling rig sale. During the
three-month period ended April 30, 1994, the Company reported a gain of
$3,791,000 in connection with the sale of 16 land drilling rigs for $9,000,000
in cash plus warrants to acquire common stock of the purchaser that were valued
at zero in determining the gain.
Gas Services segment revenues and operating earnings for the nine-month
period ended October 31, 1994 include $48,821,000 in gains from the major asset
sales. Specifically, during the second quarter, the Company sold its
Spindletop gas storage facility, Winnie Pipeline system and a 50% interest in a
related gas processing plant for $120,000,000. And, during the third quarter,
the Company's compression operations, including 370 compressors and associated
facilities and parts inventory, were sold for $35,000,000 in cash. Gains of
$29,828,000 and $18,993,000 were recorded on these transactions in the second
and third quarters, respectively.
During fiscal 1996's third quarter, Gas Services asset write-downs of
$7,111,000 were recorded to reduce to their net realizable values the carrying
values of three gas processing plants that the Company agreed to sell to a
third party (this transaction was subsequently completed in December).
Restructuring charges and asset write-downs totaling $31,252,000 were
recorded during fiscal 1995's second and third quarters in connection with a
restructuring of the Gas Services Division. This restructuring program was
undertaken because of the adverse economic environment, particularly prices and
margins, experienced during the last half of fiscal 1994 and early in fiscal
1995. The restructuring program called for the sale or disposition of many
idle gas processing plants, including leased equipment associated with certain
of them. In this regard, write-downs of asset carrying values and accruals of
future lease rentals 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 in future
years as additional retirement and retiree medical benefits. During the third
quarter, the Company determined that certain of its gas gathering systems
should be disposed of. Asset write-downs of $5,602,000 were recorded to reduce
the carrying values of these systems to their estimated realizable values.
Real Estate revenues and segment operating earnings for the three- and
nine-month periods ended October 31, 1995 include a gain of $19,449,000
realized in connection with the sale of the Company's remaining 50% interest in
a partnership that operated the cable television system in The Woodlands.
-11-
<PAGE> 13
In August 1995, the Company completed a real estate asset management
study and adopted a revised business plan that calls for the disposal of most
of its properties located outside The Woodlands. Because of the revised
business plan, it was necessary to reduce the carrying values of certain
properties (principally land held for investment, development or sale and
resort and other operating properties) to their estimated fair market values.
As a result, write-downs of $112,794,000 were recorded during the three-month
period ended July 31, 1995.
During fiscal 1995's third quarter, certain real estate assets which had
been held for long-term development were written down to net realizable values.
The write-downs, which totaled $5,661,000, were largely related to undeveloped
tracts outside The Woodlands that the Company decided to sell, rather than
develop.
(7) STOCK OPTIONS
In June 1995, the Board of Directors adopted the 1995 Stock Option Plan,
which provides for the issuance of options to purchase up to 2,500,000 shares
of Class B Common Stock (including a maximum of 500,000 in calendar 1995) at
prices not less than the market value of the stock on the date of grant. The
plan is administered by a committee of the Board of Directors which has the
authority to determine the employees to whom awards will be made, the amounts
of the awards and other terms and conditions of the awards. On June 28, 1995,
options were granted at $17.625 per share covering 478,300 shares (subject to
obtaining stockholder approval of the plan within one year). Such grants
become exercisable in three equal annual installments beginning one year after
grant and expire 10 years after grant. In connection with the adoption of this
plan, the directors cancelled the right to make additional grants under the
Company's 1989 Stock Option Plan.
(8) SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid--exclusive of amounts capitalized, but including amounts
reported as cost of sales for finance operations--totaled $25,252,000 and
$27,079,000 during the nine-month periods ended October 31, 1995 and 1994.
Income taxes paid during these periods, including those resulting from the July
1995 natural gas contract settlement proceeds, totaled $22,306,000 and
$9,732,000. A newly formed, 25%-owned partnership assumed a mortgage
obligation of $12,796,000 in connection with its July 1995 purchase of ten
office buildings from the Company. There were no other significant non-cash
investing or financing activities during the nine-month periods ended October
31, 1995 and 1994.
-12-
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
POSITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The discussion which follows summarizes the Company's financial position
at October 31, 1995 and the results of its operations for the nine-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, 1995. Applicable
amounts shown herein for the three- and nine-month periods ended October 31,
1994 have been restated to give effect to the Company's previously reported
adoption of the successful efforts method of accounting for its oil and gas
producing activities.
REFOCUSING OF THE COMPANY'S OPERATIONS. Beginning in fiscal 1995, management
embarked on an extensive refocusing of the Company to (i) improve stockholder
value, (ii) position the Company to better compete in volatile, and sometimes
depressed, energy markets through cost saving initiatives and more focused
exploration and development programs, and (iii) mitigate, either through new
sources or cash cost reductions, the loss of cash flows that would occur with
the scheduled expiration on December 31, 1997 of the premium-priced North Texas
sales contract covering approximately one-half of its natural gas production.
Because of the broad range of issues involved, it was understood that no
single, easily implemented measure would suffice. Rather, a number of actions
would need to be implemented over time.
Actions being implemented as a result of this effort include streamlining
operations by concentrating activities on core businesses with an appropriate
mix of near- and long-term profit potential and eliminating other activities
and the costs associated with them. Consistent with this, capital spending is
being directed almost exclusively to the drilling and recompletion of wells and
acquisitions of oil and gas properties in core areas, expanding gas processing
plants serving core areas, expansion of an Austin Chalk gas gathering system
and continued development of The Woodlands. In addition, oil and gas finding
costs are being minimized by concentrating the exploration program on core
areas where the Company has had the greatest success.
As part of the program, a companywide asset study was undertaken to
identify for sale underutilized assets or non-core holdings that have greater
value to others. Three major energy assets were sold during fiscal 1995 at a
pretax gain of $52.6 million for a total consideration of $164 million. The
Company has identified certain other energy assets that it plans to dispose of,
including marginally profitable oil and gas properties (some of which were sold
in fiscal 1996) and certain underutilized gas processing plants and gas
gathering systems. Asset write-downs and restructuring charges were recorded
in fiscal 1995 to, among other things, reduce the carrying values of the assets
to be disposed of to their estimated sales values.
During August 1995, the Company completed the real estate property
portion of its asset study, concluding that it should place even greater
emphasis on developing The Woodlands and work toward disposing of most of its
other holdings through sales or accelerated development. Based on an extensive
review of the estimated values to be realized from these dispositions, the
Company recorded pretax asset write-downs totaling $112.8 million in fiscal
1996's second quarter. The Company believes that both its profitability and
financial flexibility will be enhanced by monetizing these assets and
redeploying the proceeds instead of holding the properties for long-term
investment or development. In addition, sales of these properties will enable
the Company to concentrate its efforts, reduce real estate debt and begin
recapitalizing its remaining holdings to enhance their returns, either as part
of the corporation or as a stand-alone entity. Following these write-downs,
the remaining book value of the Company's real estate properties outside The
Woodlands totaled $119.7 million.
Consistent with the asset study conclusions, an earnest money contract
was signed during August 1995 to sell more than 22,000 acres of timberlands
northwest of The Woodlands. Further, in November 1995 a contract was executed
pursuant to which The San Luis Resort in Galveston may be sold. No significant
gains or losses will result from the completion of these transactions, which
are scheduled to close in the fourth quarter of fiscal 1996.
-13-
<PAGE> 15
As a result of the fiscal 1995 asset sales, attrition and a voluntary
incentive retirement program covering the Gas Services Division, the Company's
full-time employment level was reduced by approximately 300 (from 2,900 to
2,600) in fiscal 1995. To further lower costs, a companywide cost reduction
program was undertaken in fiscal 1996's first quarter that resulted in the
elimination of approximately 300 additional jobs. Voluntary incentive
retirement benefits were provided to 114 participants and severance benefits
were paid to terminated employees not eligible for the retirement benefits.
The $20.2 million pretax cost of this program, which the Company expects to
recover in approximately one year, was accrued during the first quarter of
fiscal 1996.
To facilitate its transition to the market-sensitive environment, the
Company entered into agreements with Natural Gas Pipeline Company of America
(Natural) terminating effective July 1, 1995 the Company's North Texas gas
sales contract that otherwise would have expired on December 31, 1997.
Effective with the contract buyout, the Company gained operational control of
Natural's gathering system that services the Company's North Texas wells and
will obtain ownership of that system on January 1, 1998 for no additional
consideration. In addition, for itself and other interest owners, the Company
received a $55.5 million cash payment on July 1, 1995 and receivables with
present values of $91.6 million and $82.4 million related to payments due from
Natural on February 1, 1996 and 1997 of $95 million and $91 million. The timing
of these payments accelerates the Company's receipt of the premium financial
benefits of the contract, making these funds available earlier for debt
repayment or funding acquisitions or other investments to replace a portion of
the operating cash flows previously provided by the North Texas contract.
Further, the buyout freed the Company from contract-related production
limitations, and the gain resulting from the buyout accelerated its use of
approximately $25 million in Federal income tax credit carryforwards.
The present value of the Company's share of the early termination
proceeds totaled approximately $176.2 million. After recognizing $29.1 million
of previously deferred restructuring revenues related to the Natural contract
and deducting property costs of $109.5 million that had been incurred to
maintain North Texas gas delivery capabilities at levels needed to realize the
contract's premium prices, the Company reported a pretax gain of $95.8 million
on the contract buyout in fiscal 1996's second quarter.
As a result of the contract termination, the Company now receives
market-sensitive prices for the approximately 80 MMcf per day of residue gas
that Natural had been buying for $4 per Mcf. Because of this, beginning in
July 1995, the Company's ongoing natural gas revenues have been substantially
reduced. From a cash flow standpoint, however, this will be mitigated by the
cash receipts from Natural on February 1, 1996 and 1997 and proceeds from asset
sales as well as reduced outlays resulting from past and future actions
associated with the Company's refocusing efforts.
FUNDING OF THE COMPANY'S OPERATIONS. The Company generally has funded its
investing activities using cash provided from operating activities and sales of
varying interests in mature real estate assets, supplemented to the extent
necessary with proceeds from long-term borrowings. The primary sources of
borrowed funds in recent years 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 or Class B common stock.
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 operating cash flows, proceeds from the North
Texas gas contract buyout and sales of non-core assets, will be sufficient to
allow it to provide for its short- and long-term liquidity needs. Incremental
short-term needs, if any, can be met by borrowing under existing committed bank
credit facilities, while public debt and equity markets can be accessed to
provide for longer-term needs.
-14-
<PAGE> 16
In concert with its longstanding strategy of using partnerships and
selling mature real estate properties to fund capital requirements, the
Company's long-term debt was reduced by approximately $56 million as a result
of the following fiscal 1996 transactions: the October 1995 sale of its
remaining one-half interest in a partnership that operated the cable television
system in The Woodlands and the July 1995 sale of a 75% interest in 10 office
buildings in The Woodlands to Crescent Real Estate Equities, Inc. The Crescent
transaction established a relationship that is expected to provide a potential
source of funding for future office development projects in The Woodlands.
At October 31, 1995, the Company's long-term debt totaled $838.3 million,
down from $895 million at the beginning of the fiscal year. The Company's
committed bank revolving credit and commercial paper facilities provided for an
aggregate borrowing capacity of approximately $558 million at October 31, 1995,
of which approximately $494 million was unused at that date. Exclusive of
maturities under its bank credit facilities and commercial paper program, the
Company's five-year debt maturities totaled approximately $232 million at
October 31, 1995.
The Company has decided to reduce the size of its credit facilities to
eliminate unneeded borrowing capacity and the related costs. To accomplish
this, the Company and its banks have orally agreed to revisions of the bank
revolving credit agreements. Under these agreements, the Company would have a
$250 million five-year energy facility (replacing its previous $150 million
five-year and $100 million 364-day facilities) and a $150 million five-year
real estate facility (down from $165 million). Also, once the amendments
necessary to complete these changes are completed, which is scheduled to occur
in December, the Company will terminate its $125 million commercial paper
program. After these actions are completed, the Company's committed credit
facilities will total $418 million, or $140 million less than under the
now-existing agreements.
The Company's fiscal 1996 budget for capital and exploratory expenditures
initially was set at $228.7 million, 4.1% above fiscal 1995's actual spending.
This amount was increased to $255 million in August (to cover incremental
Exploration and Production spending for a $26 million third quarter producing
property acquisition and expenditures in North Texas to take advantage of the
opportunity to increase production levels after the gas contract buyout by
accelerating the connection of previously drilled wells and enhancing the
operation of the gathering system) and to $259 million in December (to cover a
$4 million Real Estate build-to-suit project in The Woodlands). During the
first nine months of fiscal 1996, capital and exploratory expenditures totaled
$184.4 million.
ENERGY OPERATIONS OUTLOOK. As discussed elsewhere herein, the Company's
operations during fiscal 1996's third quarter were adversely affected by
several factors, including (i) a 23-day shutdown of a third- party-owned
pipeline system that transports natural gas from the Company's Bridgeport gas
processing plant to Midwest markets, (ii) a 47-day shutdown of the MTBE plant
in which the Company holds a one-third interest and (iii) low market-sensitive
natural gas prices.
The Company's average sales price for natural gas has risen sharply early
in the fourth quarter. Such realizations averaged $1.87 per Mcf in November and
have risen further early in December. This compares with the third quarter's
$1.66 per Mcf average. This improvement, coupled with the absence of the
above-mentioned third quarter shutdowns and the increased production
capabilities of the MTBE plant, should result in fourth quarter energy
operating earnings rising from their depressed third-quarter level.
-15-
<PAGE> 17
OPERATING STATISTICS
Certain operating statistics (including, where applicable, proportional
interests in equity partnerships) for the three- and nine-month periods ended
October 31, 1995 and 1994 follow:
<TABLE>
<CAPTION>
Three Months Nine Months
----------------------- -----------------------
1995 1994 1995 1994
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
AVERAGE DAILY VOLUMES
Natural gas sales (Mcf) . . . . . . . . . . 194,200 203,900 208,700 211,200
Crude oil and condensate sales (Bbls) . . . 4,900 6,200 5,300 6,500
Natural gas liquids produced (Bbls) . . . . 43,700 48,900 47,000 47,200
Pipeline throughput (Mcf)
Total . . . . . . . . . . . . . . . . . 350,800 355,200 359,800 443,700
Exclusive of Winnie Pipeline
(which was sold in June 1994) . . . . 350,800 355,200 359,800 360,900
AVERAGE SALES PRICES
Natural gas (per Mcf) . . . . . . . . . . . $ 1.66 $ 2.65 $ 2.17 $ 2.74
Crude oil and condensate (per Bbl) . . . . 16.18 16.26 16.81 15.58
Natural gas liquids produced (per Bbl) . . 11.15 11.67 11.36 11.32
RESIDENTIAL LOT SALES - THE WOODLANDS
Lots sold . . . . . . . . . . . . . . . . . 252 237 714 725
Average price per lot . . . . . . . . . . . $43,036 $40,262 $40,733 $37,989
Average price per square foot . . . . . . . 4.11 3.85 3.91 3.62
</TABLE>
RESULTS OF OPERATIONS - NINE MONTHS ENDED OCTOBER 31, 1995
COMPARED WITH NINE MONTHS ENDED OCTOBER 31, 1994
The Company's results for the nine-month periods ended October 31, 1995
and 1994--both before and after unusual items--are summarized in the table on
the following page. Because of the impact of unusual items, the Company's net
earnings for the nine months ended October 31, 1995 of $13.6 million were well
below the $36.8 million of the prior-year period (unusual items reduced the net
earnings of the current year period by $27.5 million and increased those of the
prior-year period by $8.7 million).
Excluding the unusual items, earnings for the nine months ended October
31, 1995 were $13 million above those of the comparable prior-year period. A
major contributor to this increase was improved earnings from real estate
operations, including a $19.4 million gain ($12.6 million after tax) resulting
from the sale of the Company's remaining 50% interest in a partnership that
operated the cable television system in The Woodlands. Also contributing to
this improvement were earnings from the Company's one-third interest in an MTBE
plant partnership and personnel-reduction-driven declines in costs and
expenses. These improvements were partially offset, however, by the negative
impact on subsequent operations of the July 1, 1995 buyout of the Natural gas
sales contract and the effect of fiscal 1996's lower market-sensitive natural
gas prices.
-16-
<PAGE> 18
The following table and discussion identify and explain the major
increases (decreases) in earnings for the nine-month periods (in millions):
<TABLE>
<CAPTION>
Segment Operating Earnings
-------------------------------
Exploration
and Gas Real Pretax Net
Production Services Estate Other* Earnings Earnings
---------- -------- ------ ------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
FISCAL 1995 AMOUNTS . . . . . . . . . . . . $ 68.0 $ 38.5 $ 16.0 $(66.1) $ 56.4 $ 36.8
------- ------ ------ ------ ------ ------
ELIMINATE IMPACT OF FISCAL 1995
UNUSUAL ITEMS (see pages 11 and 12)
Gas Services restructuring charges
and asset write-downs . . . . . . . . . - 31.2 - - 31.2 20.3
Gains from major energy asset sales . . . (3.8) (48.8) - (52.6) (32.7)
Real estate asset write-downs . . . . . . . - - 5.7 - 5.7 3.7
------- ------ ------ ------ ------ ------
(3.8) (17.6) 5.7 - (15.7) (8.7)
------- ------ ------ ------ ------ ------
FISCAL 1995 AMOUNTS BEFORE UNUSUAL ITEMS . 64.2 20.9 21.7 (66.1) 40.7 28.1
------- ------ ------ ------ ------ ------
MAJOR INCREASES (DECREASES)
Natural gas
Contract buyout . . . . . . . . . . . . (15.9) - - 2.1 (13.8) (9.0)
Lower market-sensitive sales price . . . (9.4) - - - (9.4) (6.1)
Curtailment for North Texas
pipeline maintenance . . . . . . . . . (2.5) (2.9) - - (5.4) (3.5)
Lower salary and benefits expenses
due to personnel reductions . . . . . . 3.4 2.3 .6 2.8 9.1 5.9
Absence of proved property impairments . . 3.4 - - - 3.4 2.2
Increased exploratory dry hole costs . . . (2.3) - - - (2.3) (1.5)
Reduced amortization of deferred gas
contract restructuring proceeds . . . . (5.0) - - - (5.0) (3.3)
Natural gas processing
Lower feedstock costs . . . . . . . . . - 5.4 - - 5.4 3.5
Deferred profits on NGL inventories . . - 3.8 - - 3.8 2.5
Natural gas buy/resale gross profits
UPRC partnerships . . . . . . . . . . . - 2.0 - - 2.0 1.3
Southwestern's North Texas system . . . - (2.0) - - (2.0) (1.3)
Equity in MTBE plant earnings . . . . . . . - 3.3 - - 3.3 2.2
Real Estate--The Woodlands
Gain on sale of interest in
cable television partnership . . . . . - - 19.4 - 19.4 12.6
Other . . . . . . . . . . . . . . . . . - - 3.4 - 3.4 2.2
Interest expense incurred . . . . . . . . . - - - 4.3 4.3 2.8
Other
SAR/Bonus unit expense accruals . . . . (.4) (.2) (.3) (.5) (1.4) (.9)
Miscellaneous . . . . . . . . . . . . . 2.8 .9 .2 .8 4.7 3.4
------- ------ ------ ------ ------ ------
(25.9) 12.6 23.3 9.5 19.5 13.0
------- ------ ------ ------ ------ ------
FISCAL 1996 AMOUNTS BEFORE UNUSUAL ITEMS . 38.3 33.5 45.0 (56.6) 60.2 41.1
------- ------ ------ ------ ------ ------
FISCAL 1996 UNUSUAL ITEMS (see pages 10-12)
Gain from natural gas contract buyout . . . 95.8 - - - 95.8 59.4
Write-downs of real estate properties . . . - - (112.8) - (112.8) (73.3)
Personnel reduction program costs . . . . . (7.9) (3.6) (3.0) (5.7) (20.2) (12.5)
Gain from sale of producing properties . . 4.3 - - - 4.3 2.7
Loss from sale of NGL plants . . . . . . . - (7.1) - - (7.1) (4.4)
Gain from sale of drilling rigs . . . . . . 1.0 - - - 1.0 .6
------- ------ ------ ------ ------ ------
93.2 (10.7) (115.8) (5.7) (39.0) (27.5)
------- ------ ------ ------ ------ ------
FISCAL 1996 AMOUNTS AFTER UNUSUAL ITEMS . . $ 131.5 $ 22.8 $(70.8) $(62.3) $ 21.2 $ 13.6
======= ====== ====== ====== ====== ======
</TABLE>
- -----------------------------------
*Includes general and administrative expense and other expense.
-17-
<PAGE> 19
EXPLORATION AND PRODUCTION OVERVIEW
Exploration and Production operating earnings before unusual items declined
$25.9 million during the nine months ended October 31, 1995 to $38.3 million.
This unfavorable comparison was primarily the result of the adverse impact on
subsequent operations of the gas contract buyout effective July 1, 1995 and
lower market-sensitive natural gas prices.
NATURAL GAS - CONTRACT BUYOUT. Effective with the contract buyout on July 1,
1995, the Company began receiving market-sensitive prices for approximately 80
MMcf per day of North Texas residue gas previously sold at substantially higher
contract prices ($4.00 and $3.75 per MMBtu, respectively, in calendar 1995 and
1994). As a result, gas sales revenues were substantially less than they had
been in the prior-year period. During the four-month period subsequent to the
contract buyout, the Company's realizations for its North Texas gas averaged
$1.31 per MMBtu, a price that was adversely affected by seasonal and other
market factors. After price-related cost reductions and the impact of lower
DD&A charges (because the carrying values of the North Texas producing
properties were reduced in connection with the buyout), oil and gas operating
earnings on a period-to-period basis were lowered by $15.9 million. After
interest income accrued on the Company's share of the receivables from Natural
and income taxes, the net earnings impact was $9 million.
NATURAL GAS - LOWER MARKET-SENSITIVE SALES PRICE ($9.4 MILLION DECREASE). For
production outside the North Texas area, the Company's average market-sensitive
natural gas sales price during the first nine months of fiscal 1996 of $1.59
per Mcf was 19% below the $1.96 realized during the comparable period of the
prior year.
CURTAILMENT FOR NORTH TEXAS PIPELINE MAINTENANCE ($5.4 MILLION DECREASE).
During October 1995, North Texas natural gas production was shut in for 23 days
because of scheduled maintenance on the interstate pipeline that transports the
Company's residue gas from this area to markets in the Midwest. This
production curtailment, which necessitated the shut-down of the Company's
largest gas processing plant at Bridgeport Texas, lowered exploration and
production operating earnings by $2.5 million and gas processing operating
earnings by $2.9 million.
ABSENCE OF PROVED PROPERTY IMPAIRMENTS ($3.4 MILLION INCREASE). Downward
revisions in reserve estimates for certain oil and gas properties resulted in
the recording of impairments totaling $3.4 million during the prior year's
second quarter. No such impairments have occurred in fiscal 1996.
INCREASED EXPLORATORY DRY HOLE COSTS ($2.3 MILLION DECREASE). Exploratory dry
hole costs totaled $2.8 million during fiscal 1996's first nine months versus
$.5 million in the comparable prior-year period.
REDUCED AMORTIZATION OF DEFERRED GAS CONTRACT RESTRUCTURING PROCEEDS ($5
MILLION DECREASE). Prior to the buyout of the Natural contract effective July
1, 1995, certain deferred contract restructuring proceeds had been amortized.
Although not increasing cash flows, such amortization added $9.4 million to
operating earnings in fiscal 1995's first nine months. Exclusive of the $29.1
million separately recognized in connection with the gas contract buyout, such
amortization added $4.4 million to fiscal 1996 operating earnings, or $5
million less than in the comparable period of the prior year.
-18-
<PAGE> 20
GAS SERVICES OVERVIEW
Gas Services operating earnings before unusual items rose $12.6 million during
the nine months ended October 31, 1995 largely because of improved NGL margins
caused by lower natural gas feedstock costs, the deferral of NGL profits in the
prior-year period due to an inventory build-up related to the April 1994 fire
at the Gulf Coast Fractionators facility, and fiscal 1996 earnings from the
Company's one-third-owned MTBE plant that went into service effective April 1,
1995. NGL production volumes averaged 47,000 barrels per day, down from 47,200
during the first nine months of fiscal 1995 because of October's 23-day
shutdown of the Bridgeport plant. The average price for NGLs produced during
the current period of $11.36 per barrel was slightly higher than the $11.32
average of the comparable prior-year period.
NATURAL GAS PROCESSING - LOWER FEEDSTOCK COSTS ($5.4 MILLION INCREASE).
Feedstock costs consist 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. Accordingly, feedstock costs
under keep-whole agreements vary directly with market-sensitive natural gas
prices, while costs under percentage-of-proceeds agreements vary directly with
NGL prices. Largely because of lower market-sensitive gas prices during fiscal
1996's first nine months, feedstock costs declined, increasing gas processing
operating earnings by $5.4 million.
DEFERRED PROFITS ON NGL INVENTORIES ($3.8 MILLION INCREASE). Since for plant
settlement purposes all plant production is presumed to be sold, the earnings
applicable to production inventoried by the marketing department must be
eliminated for accounting purposes. This elimination typically decreases
earnings (defers profit) when NGL inventory volumes increase and vice versa
when volumes decrease. In the current period, the Company's NGL inventories
declined by .5 million barrels (and $.3 million of previously deferred profits
were recognized) as essentially all the remaining volumes of unfractionated
liquids associated with the April 1994 fire at Gulf Coast Fractionators' (GCF)
facility were fractionated and sold. Conversely, largely due to the
fire-related shutdown of GCF, inventories increased by 3.9 million barrels in
the prior-year period (when $3.5 million in profits were deferred). The
cumulative effect of these changes resulted in a $3.8 million period-to-period
favorable earnings variance.
NATURAL GAS BUY/RESALE GROSS PROFITS - UPRC PARTNERSHIPS ($2 MILLION INCREASE).
The Company's equity in the buy/resale gross profits of this 45%-owned venture
with Union Pacific Resources Company (UPRC) were $2 million higher during the
first nine months of fiscal 1996. The increase was principally related to
fixed-price sales contracts and occurred largely because gas purchase costs
declined as a result of the period's lower market-sensitive gas prices.
NATURAL GAS BUY/RESALE GROSS PROFITS - SOUTHWESTERN'S NORTH TEXAS SYSTEM ($2
MILLION DECREASE). Gross profits from the buy/resale activities of this system
during the first nine months of fiscal 1996 were $2 million below those of the
comparable prior-year period largely because of increased purchases of gas at
fixed prices. To secure NGL processing feedstock volumes during times of
limited drilling in its service area, this system in recent years has entered
into one- and two-year gas supply contracts. Because of fiscal 1996's lower
market-sensitive gas prices, the system's revenues from residue gas sales
declined. This, coupled with the absence of a corresponding decline in gas
purchase costs (because of the fixed-price agreements), caused margins to be
narrowed.
EQUITY IN MTBE PLANT EARNINGS ($3.3 MILLION INCREASE). During the nine months
ended October 31,1995, the Company recorded $3.3 million as its one-third share
of the pretax earnings of Belvieu Environmental Fuels, which owns and operates
an MTBE plant. The plant, which began producing in the summer of 1994,
suffered a series of start-up problems which extended into the first quarter of
the current year. After resuming operations in March, the plant was deemed to
be in service effective April 1, 1995. During the Company's second quarter,
the plant produced approximately 12,000 barrels per day of MTBE. After a
47-day shutdown in the third quarter to make certain modifications and to
replace some defective equipment, the plant produced an average of almost
16,000 barrels per day in November. Considering recurring downtime for
maintenance, this plant's production is now expected to average 14,000 to
15,000 barrels per day over a full year.
-19-
<PAGE> 21
REAL ESTATE OVERVIEW
Exclusive of unusual items, operating earnings from real estate activities
totaled $45 million, or $23.3 million more than was earned during the first
nine months of fiscal 1995. This improvement was almost exclusively
attributable to the Company's activities in The Woodlands.
THE WOODLANDS - GAIN ON SALE OF INTEREST IN CABLE TELEVISION PARTNERSHIP ($19.4
MILLION INCREASE). In accordance with its strategy of periodically monetizing
interests in mature real estate assets, the Company sold its remaining one-half
interest in a partnership that operated the cable television system in The
Woodlands during October 1995. A gain of $19.4 million was recorded in
connection with this transaction, including the recognition of $2.5 million in
deferred profits from the earlier sale of an interest in this system.
THE WOODLANDS - OTHER ($3.4 MILLION INCREASE). This increase was the result of
several factors, including increased earnings from residential lot and
commercial land sales, improved earnings for The Woodlands Executive Conference
Center and Resort and earnings from the Company's one-half interest in The
Woodlands Mall, which opened in October 1994.
Earnings from residential lot sales improved by $.5 million as a 2%
decline in the number of lots sold (714 in the current period, compared with
725 in the corresponding prior-year period) was offset by an 8% increase in the
average sales price per square foot. Largely because of the impact of changing
outlooks for mortgage interest rates, the number of lots sold in the first
quarter trailed the prior-year period's amount by 19% before rising above the
prior-period volumes by 6% during the last six months. Operating earnings from
commercial land sales rose by $.5 million as profits from fiscal 1996 sales,
including 14.1 acres in the Town Center, exceeded gains recognized in the prior
period on sales to partnerships of sites for the Cochran's Crossing retail
center and the Forest View Apartments.
OTHER
INTEREST EXPENSE INCURRED. Interest expense incurred during fiscal 1996's
first nine months (of $48.3 million) was $4.3 million below that of the
prior-year period because of a $109 million decline in the average balance of
outstanding debt. This decline occurred principally because of debt paydowns
using cash proceeds from asset sales and the gas contract buyout. Interest
savings from the debt balance decline were partially offset, however, by the
impact of higher short-term (variable) interest rates in the fiscal 1996
period.
OTHER - SAR/BONUS UNIT EXPENSE ACCRUALS ($1.4 MILLION DECREASE). During the
fiscal 1996 period, $.1 million in SAR/Bonus unit expense accruals were
recorded as the average price of the Company's stock rose slightly.
Conversely, in the comparable prior-year period, SAR/Bonus expense accrual
reversals of $1.3 million were recorded because of declines in the stock price.
-20-
<PAGE> 22
RESULTS OF OPERATIONS - THREE MONTHS ENDED OCTOBER 31, 1995
COMPARED WITH THREE MONTHS ENDED OCTOBER 31, 1994
The Company's results for the three-month periods ended October 31, 1995
and 1994--both before and after unusual items--are summarized in the table that
follows. Because of the impact of unusual items, the Company's net earnings
for the third quarter of fiscal 1996 of $11.2 million were $3.8 million below
those of the prior year's third quarter. Unusual items reduced net earnings of
the current-year period by $3.8 million, but increased those of the prior-year
period by $4.4 million.
Excluding the unusual items, fiscal 1996's third quarter earnings were
$4.4 million above those of the prior-year period because of increases in
segment operating earnings for Real Estate activities, which included the
previously mentioned gain on the sale of the Company's one-half interest in The
Woodlands cable television operations.
The following table and discussion identify and explain the major
increases (decreases) in earnings for the three-month periods (in millions):
<TABLE>
<CAPTION>
Segment Operating Earnings
-------------------------------
Exploration
and Gas Real Pretax Net
Production Services Estate Other* Earnings Earnings
---------- -------- ------ ------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
FISCAL 1995 AMOUNTS . . . . . . . . . . . . $ 19.9 $ 24.6 $ .6 $(21.9) $ 23.2 $ 15.0
------ ------ ------ ------ ------ ------
ELIMINATE IMPACT OF FISCAL 1995
UNUSUAL ITEMS (see pages 11 and 12)
Gains from major energy asset sales . . . . - (19.0) - - (19.0) (11.7)
Gas Services restructuring charges
and asset write-downs . . . . . . . . . - 5.6 - - 5.6 3.6
Real estate asset write-downs . . . . . . . - - 5.7 - 5.7 3.7
------ ------ ------ ------ ------ ------
- (13.4) 5.7 - (7.7) (4.4)
------ ------ ------ ------ ------ ------
FISCAL 1995 AMOUNTS BEFORE UNUSUAL ITEMS . 19.9 11.2 6.3 (21.9) 15.5 10.6
------ ------ ------ ------ ------ ------
MAJOR INCREASES (DECREASES)
Natural gas--Contract buyout . . . . . . . (12.1) - - 1.6 (10.5) (6.8)
Curtailment for North Texas pipeline
maintenance (see page 18) . . . . . . . (2.5) (2.9) - - (5.4) (3.5)
Lower salary and benefits expenses
due to personnel reductions . . . . . . 1.4 .4 .3 1.4 3.5 2.3
Reduced amortization of deferred gas
contract restructuring proceeds . . . . (3.1) - - - (3.1) (2.0)
Natural gas processing
Lower NGL prices . . . . . . . . . . . . - (2.4) - - (2.4) (1.6)
Lower feedstock costs due to
lower market-sensitive gas prices . . - .6 - - .6 .4
Real Estate--The Woodlands
Gain from sale of interest in cable tele-
vision partnership (see page 19) . . . - - 19.4 - 19.4 12.6
Other . . . . . . . . . . . . . . . . . - - 2.1 - 2.1 1.4
Lower interest expense incurred
due to decline in average debt balance - - - 1.6 1.6 1.0
Other . . . . . . . . . . . . . . . . . . . (.3) 1.6 .8 - 2.1 .6
------ ------ ------ ------ ------ ------
(16.6) (2.7) 22.6 4.6 7.9 4.4
------ ------ ------ ------ ------ ------
FISCAL 1996 AMOUNTS BEFORE UNUSUAL ITEMS . 3.3 8.5 28.9 (17.3) 23.4 15.0
------ ------ ------ ------ ------ ------
FISCAL 1996 UNUSUAL ITEMS (see page 11)
Loss from sale of NGL plants . . . . . . . - (7.1) - - (7.1) (4.4)
Gain from sale of drilling rigs . . . . . . 1.0 - - - 1.0 .6
------ ------ ------ ------ ------ ------
1.0 (7.1) - - (6.1) (3.8)
------ ------ ------ ------ ------ ------
FISCAL 1996 AMOUNTS AFTER UNUSUAL ITEMS . . $ 4.3 $ 1.4 $ 28.9 $(17.3) $ 17.3 $ 11.2
====== ====== ====== ====== ====== ======
</TABLE>
- -----------------------------------
*Includes general and administrative expense and other expense.
-21-
<PAGE> 23
EXPLORATION AND PRODUCTION OVERVIEW
Exclusive of unusual items, Exploration and Production Division fiscal 1996
third quarter operating earnings were $16.6 million below those of the
comparable prior-year period principally due to the adverse impact on
subsequent operations of the previously discussed natural gas contract buyout,
the 23-day curtailment of natural gas production in North Texas for pipeline
maintenance and reduced amortization of deferred gas contract restructuring
proceeds. During fiscal 1996's third quarter, natural gas sales averaged
194,200 Mcf per day at $1.66 per Mcf versus the prior period's 203,900 at
$2.65.
NATURAL GAS - CONTRACT BUYOUT. As discussed on page 18, the Company's gas
sales revenues were substantially lower in the current period because it began
receiving market-sensitive prices effective July 1, 1995 for approximately 80
MMcf per day of North Texas residue gas that had been sold under a contract for
$3.75 per MMBtu during fiscal 1995's third quarter (production during the
current quarter was sold at an average price of $1.34 per MMBtu). After
price-related cost reductions and the impact of lower DD&A charges, oil and gas
operating earnings on a period-to-period basis were lowered by $12.1 million.
After interest income accrued on the Company's share of the receivables from
Natural and income taxes, the net earnings impact was $6.8 million.
REDUCED AMORTIZATION OF DEFERRED GAS CONTRACT RESTRUCTURING PROCEEDS ($3.1
MILLION DECREASE). As discussed on page 18, this amortization ceased with the
buyout of the Natural contract on July 1, 1995. Such amortization added $3.1
million to the operating earnings of the prior year's third quarter.
GAS SERVICES
Exclusive of unusual items, Gas Services operating earnings declined $2.7
million (from $11.2 million to $8.5 million) during the fiscal 1996 period due
to lower NGL prices and the 23-day shutdown of the Bridgeport plant (see page
18). Because of the shutdown, fiscal 1996 third quarter NGL production volumes
of 43,700 barrels per day were below the 48,900 in the comparable prior-year
period. NGL prices averaged $11.15 per barrel during the current period, down
from $11.67 during the third quarter of the prior year.
REAL ESTATE
Operating earnings from real estate activities increased $22.6 million during
fiscal 1996's third quarter, almost exclusively attributable to activities in
The Woodlands. As discussed on page 20, the current period's earnings included
a $19.4 million gain from the sale of an interest in a cable television
partnership. Also contributing to the favorable quarter-to-quarter variance
were increased earnings from residential lot sales--due to increases in the
number of lots sold (252 versus 237) and lot sales prices--and improved
earnings of The Woodlands Executive Conference Center and Resort.
-22-
<PAGE> 24
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 5 of Notes to Unaudited Consolidated Financial Statements.
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 October 31, 1995.
-23-
<PAGE> 25
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: December 14, 1995 By: /s/ Philip S. Smith
--------------------------------------
Philip S. Smith
Senior Vice President - Administration
and Chief Financial Officer
-24-
<PAGE> 26
INDEX TO EXHIBITS
EX-12 Computation of ratio of earnings to fixed charges
EX-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>
Nine
Months
Fiscal Year Ended January 31 Ended
----------------------------------------------------- October 31,
1991 1992 1993 1994 1995 1995
-------- -------- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
EARNINGS
Pretax earnings . . . . . . . . . . . . . . $ 60,484 $ 73,188 $ 60,022 $ 47,376 $ 70,551 $ 21,221
Add (Deduct):
Previously capitalized interest
charged against pretax earnings . . . 8,776 14,887 9,545 11,552 22,158 58,759(d)
Losses of less-than-50%-owned persons . 23 26 99 32 1,104 7
Fixed charges (see below) . . . . . . . 98,633 90,107 85,169 84,788 82,956 59,700
Reverse effect of inclusion of interest
capitalized in fixed charges . . . . . (44,253) (37,460) (34,161) (33,956) (33,011) (21,156)
Undistributed earnings of
less-than-50%-owned persons . . . . . (11,690) (10,521) (10,305) (3,594) (914) (3,185)
-------- -------- -------- -------- -------- --------
$111,973 $130,227 $110,369 $106,198 $142,844 $115,346
======== ======== ======== ======== ======== ========
FIXED CHARGES
Interest expense incurred
Consolidated (a) (b) . . . . . . . . . . $ 92,874 $ 84,025 $ 77,451 $ 75,252 $ 71,570 $ 49,566
50%-owned persons . . . . . . . . . . . 3,670 3,284 4,609 6,236 7,912 7,734
-------- -------- -------- -------- -------- --------
96,544 87,309 82,060 81,488 79,482 57,300
Portion of rental expense
representing interest (c) . . . . . . . 2,089 2,798 3,109 3,300 3,474 2,400
-------- -------- -------- -------- -------- --------
$ 98,633 $ 90,107 $ 85,169 $ 84,788 $ 82,956 $ 59,700
======== ======== ======== ======== ======== ========
RATIO OF EARNINGS TO FIXED CHARGES . . . . 1.14 1.45 1.30 1.25 1.72 1.93
======== ======== ======== ======== ======== ========
</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 October 31, 1995, the Company had outstanding guaranties of
approximately $62,200 of indebtedness of less-than-50%-owned partnerships
and approximately $4,400 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 $1,900 for the nine-month period
ended October 31, 1995, have been excluded from the reported fixed
charges.
(c) Represents one-third of rental expense under operating lease agreements.
(d) Real estate property write-downs during the nine months ended October 31,
1995 included $48,707 of previously capitalized interest.
<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 OCTOBER 31, 1995 AND FOR THE NINE
MONTH PERIOD THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1995
<PERIOD-START> JAN-31-1995
<PERIOD-END> OCT-31-1995
<CASH> 10,956
<SECURITIES> 0
<RECEIVABLES> 198,961
<ALLOWANCES> 2,645
<INVENTORY> 22,902
<CURRENT-ASSETS> 235,268
<PP&E> 2,025,733
<DEPRECIATION> 1,356,777
<TOTAL-ASSETS> 1,798,449
<CURRENT-LIABILITIES> 195,754
<BONDS> 838,272
<COMMON> 0
0
5,386
<OTHER-SE> 459,447
<TOTAL-LIABILITY-AND-EQUITY> 1,798,449
<SALES> 716,585
<TOTAL-REVENUES> 716,585
<CGS> 0
<TOTAL-COSTS> 633,041
<OTHER-EXPENSES> 35,166
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,157
<INCOME-PRETAX> 21,221
<INCOME-TAX> 7,622
<INCOME-CONTINUING> 13,599
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,599
<EPS-PRIMARY> .26
<EPS-DILUTED> .26
</TABLE>
