<PAGE> 1
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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, 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 August 31, 1995:
<TABLE>
<S> <C>
Class A..................... 23,216,742
Class B..................... 28,823,517
</TABLE>
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<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 ................... 12
Part II - Other Information
Item 4. Submission of Matters to Vote of Security Holders ......... 22
Item 6. Exhibits and Reports on Form 8-K .......................... 22
</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>
JULY 31, January 31,
1995 1995
----------- -----------
ASSETS (unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents ..................................................... $ 13,114 $ 11,967
Trade receivables, net of allowance for
doubtful accounts of $2,379 and $2,304 ...................................... 112,521 133,995
Gas contract buyout proceeds due February 1, 1996 (present value) ............. 92,089 -
Inventories ................................................................... 16,423 13,068
Other ......................................................................... 6,320 24,808
----------- -----------
Total current assets ..................................................... 240,467 183,838
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, at cost less accumulated depreciation, depletion
and amortization of $1,394,758 and $1,381,977
Exploration and production
Oil and gas properties ...................................................... 381,322 487,981
Support equipment and facilities ............................................ 26,498 28,340
Gas services
Natural gas processing ...................................................... 98,830 100,139
Natural gas gathering ....................................................... 96,675 92,725
Other ....................................................................... 23,611 17,794
Corporate ..................................................................... 6,690 7,120
----------- -----------
633,626 734,099
----------- -----------
REAL ESTATE
The Woodlands ................................................................. 613,937 654,881
Land held for investment, development or sale ................................. 87,846 157,446
Resort and other operating properties ......................................... 31,861 65,249
Notes and contracts receivable, at cost, net of
allowance for doubtful accounts of $621 and $515 ............................ 35,981 40,314
----------- -----------
769,625 917,890
----------- -----------
OTHER ASSETS (including $82,809 present value of
gas contract buyout proceeds due February 1, 1997) .......................... 114,008 20,044
----------- -----------
$ 1,757,726 $ 1,855,871
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt ............................................................... $ 12,301 $ 11,617
Oil and gas proceeds payable .................................................. 79,493 51,211
Accounts payable and accrued liabilities ...................................... 114,040 107,414
----------- -----------
Total current liabilities ................................................ 205,834 170,242
----------- -----------
LONG-TERM DEBT
Energy operations ............................................................. 299,234 375,869
Real estate operations ........................................................ 487,489 519,093
----------- -----------
786,723 894,962
----------- -----------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes ......................................................... 173,208 200,722
Natural gas contract restructuring proceeds (Note 7) .......................... - 35,017
Deferred income ............................................................... 29,466 29,774
Other liabilities ............................................................. 102,329 50,124
----------- -----------
305,003 315,637
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 3 and 5)
STOCKHOLDERS' EQUITY (Note 6)
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 .................................................... 143,343 143,472
Retained earnings ............................................................. 336,707 347,573
Treasury stock, at cost ....................................................... (25,270) (21,401)
----------- -----------
460,166 475,030
----------- -----------
$ 1,757,726 $ 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 Six Months Ended
July 31 July 31
----------------------- -----------------------
1995 1994 1995 1994
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES
Exploration and production (including gain on natural gas
contract buyout of $95,772 in the 1995 periods) (Note 7) ............. $ 156,606 $ 69,653 $ 220,381 $ 144,062
Gas services (including gain on asset sale
of $29,828 in the 1994 periods) (Note 7) ............................. 112,065 132,490 231,576 249,465
Real estate ............................................................. 39,720 35,632 71,409 69,416
--------- --------- --------- ---------
308,391 237,775 523,366 462,943
--------- --------- --------- ---------
OPERATING COSTS AND EXPENSES (including first quarter personnel reduction
program costs of $14,535 in 1995) (Note 7)
Exploration and production .............................................. 38,882 50,106 93,213 95,998
Gas services (including restructuring charges and
asset write-downs of $25,650 in the 1994 periods) .................... 99,938 120,780 210,118 235,554
Real estate (including property write-downs
of $112,794 in the 1995 periods) ..................................... 142,413 27,378 171,077 54,088
--------- --------- --------- ---------
281,233 198,264 474,408 385,640
--------- --------- --------- ---------
SEGMENT OPERATING EARNINGS (Note 7) ..................................... 27,158 39,511 48,958 77,303
General and administrative expense (including first quarter
personnel reduction program costs of $5,665 in 1995) ................. 9,246 10,660 25,799 20,915
--------- --------- --------- ---------
TOTAL OPERATING EARNINGS ................................................ 17,912 28,851 23,159 56,388
--------- --------- --------- ---------
OTHER EXPENSE
Interest expense ........................................................ 16,229 17,051 32,670 35,335
Capitalized interest .................................................... (7,175) (7,330) (13,945) (15,013)
Other, net .............................................................. 159 1,908 543 2,950
--------- --------- --------- ---------
9,213 11,629 19,268 23,272
--------- --------- --------- ---------
EARNINGS BEFORE INCOME TAXES ............................................ 8,699 17,222 3,891 33,116
INCOME TAXES (Note 4) ................................................... 3,173 5,821 1,546 11,297
--------- --------- --------- ---------
NET EARNINGS ............................................................ $ 5,526 $ 11,401 $ 2,345 $ 21,819
========= ========= ========= =========
EARNINGS PER SHARE ...................................................... $ .11 $ .22 $ .05 $ .42
========= ========= ========= =========
AVERAGE COMMON SHARES OUTSTANDING ....................................... 52,031 52,755 52,043 52,754
========= ========= ========= =========
</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, 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 ................................ - - 2,345 - 2,345
Cash dividends (24 cents per share on Class A
and 26 1/2cents per share on Class B) ... - - (13,211) - (13,211)
Treasury stock purchases .................... - - - (4,130) (4,130)
Exercises of stock options .................. - (129) - 261 132
--------- --------- --------- --------- ---------
BALANCE, JULY 31, 1995 ...................... $ 5,386 $ 143,343 $ 336,707 $ (25,270) $ 460,166
========= ========= ========= ========= =========
</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 .. - - (10,321) (9,397)
Other ....................... (6) (6) - -
----------- ----------- ------- ---------
BALANCE, JULY 31, 1995 ...... 23,978,098 29,878,098 761,356 1,054,581
=========== =========== ======= =========
</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
------------------------
1995 1994
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings ............................................................. $ 2,345 $ 21,819
Adjustments to reconcile net earnings
to cash provided by operating activities
Depreciation, depletion and amortization ........................... 55,878 79,099
Exploration expenses, including dry-hole costs ..................... 7,740 6,056
Deferred income taxes .............................................. (27,514) 6,250
Cost of land sold .................................................. 17,538 17,838
Residential land development costs, net of reimbursements .......... (8,855) (6,869)
Distributions in excess of earnings of equity investees ............ 4,269 3,193
Amortization of deferred natural gas contract restructuring proceeds (5,950) (8,254)
Non-cash portion of natural gas contract buyout gain ............... (53,205) -
Write-downs of real estate properties .............................. 112,794 -
Accrued personnel reduction program costs .......................... 11,128 -
Gains from energy asset sales ...................................... (4,338) (33,619)
Accrued restructuring costs ........................................ - 10,340
Other .............................................................. 2,547 4,603
--------- ---------
114,377 100,456
Changes in operating assets and liabilities ........................ 58,128 (39,321)
--------- ---------
Cash provided by operating activities .............................. 172,505 61,135
--------- ---------
INVESTING ACTIVITIES
Capital and exploratory expenditures
Total on accrual basis ................................................ (98,868) (108,509)
Residential land development costs deducted above ..................... 8,855 6,869
Adjustment to cash basis .............................................. (7,205) (10,129)
--------- ---------
(97,218) (111,769)
Proceeds from major energy asset sales (collection of
final portion of Winnie/Spindletop proceeds in 1995) .................. 12,000 117,000
Proceeds from sales of real estate commercial properties ................. 25,644 -
Other .................................................................... 1,195 2,191
--------- ---------
Cash provided by (used for) investing activities ................... (58,379) 7,422
--------- ---------
FINANCING ACTIVITIES
Proceeds from issuance of debt ........................................... - 150,779
Debt repayments .......................................................... (94,759) (200,473)
Cash dividends ........................................................... (13,211) (13,390)
Treasury stock purchases ................................................. (4,130) -
Debt prepayment premium .................................................. - (6,420)
Other .................................................................... (879) (592)
--------- ---------
Cash used for financing activities ................................. (112,979) (70,096)
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ......................... 1,147 (1,539)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ........................... 11,967 21,832
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD ................................. $ 13,114 $ 20,293
========= =========
</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, 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 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.
Since the Company has not completed its analysis of the potential impact of this
statement on all of its assets, it is unable at this time to estimate the
impact, if any, that the adoption of this statement will have on its financial
statements. However, based on the analysis that has been completed, the Company
believes that no significant adjustments to the carrying values of its oil and
gas and real estate properties will be necessary when it implements this
statement.
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 July 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 a cable television system serving The
Woodlands and various commercial properties, most 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 six-month periods ended July 31, 1995 and 1994
follows (in thousands):
<TABLE>
<CAPTION>
Three Months Six Months
--------------------- ---------------------
1995 1994 1995 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues ....................................... $156,475 $118,083 $258,274 $219,713
Operating earnings ............................. 18,910 10,290 34,600 14,411
Pretax earnings (before interest expense for
those entities whose activities are funded
by capital contributions of the owners)* ..... 10,228 5,659 19,504 6,215
Proportionate share of pretax earnings included
in the Company's reported operating earnings* 4,677 3,364 8,991 2,998
</TABLE>
-----------------
* Amounts for the 1995 periods are net of $8,276,000 ($4,138,000 proportionate
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 it recorded during the three-month
period ended July 31, 1995 (see Note 7).
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 July 31, 1995 and January 31, 1995 and the
Company's proportionate share of such debt at July 31, 1995 is summarized below
(in thousands):
<TABLE>
<CAPTION>
Entity Total July 31, 1995 -- Company's Share
----------------------- ----------------------------------
July 31, January 31, Non-
1995 1995 Recourse Recourse Total
-------- ----------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
ENERGY ACTIVITIES
Belvieu Environmental Fuels ..... $176,000 $176,000 $ 58,667 $ - $ 58,667
C&L Processors Partnership ...... 93,709 101,209 25,302 21,553 46,855
Gulf Coast Fractionators ........ 78,900 79,550 16,572 14,002 30,574
-------- -------- -------- -------- --------
348,609 356,759 100,541 35,555 136,096
-------- -------- -------- -------- --------
REAL ESTATE ACTIVITIES
The Fort Crockett Hotel Limited.. 11,268 11,592 4,000 1,634 5,634
The Woodlands Mall Associates ... 58,481 54,683 29,241 - 29,241
Apartment partnerships .......... 33,589 41,019 593 10,430 11,023
Others .......................... 55,221 42,609 2,270 21,126 23,396
-------- -------- -------- -------- --------
158,559 149,903 36,104 33,190 69,294
-------- -------- -------- -------- --------
$507,168 $506,662 $136,645 $ 68,745 $205,390
======== ======== ======== ======== ========
</TABLE>
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.
-8-
<PAGE> 10
In August 1995, the indebtedness of Belvieu Environmental Fuels 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.
(4) INCOME TAXES
Income taxes for the six-month periods ended July 31, 1995 and 1994
consist of the following (in thousands):
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
CURRENT
Federal ........................ $ 26,700 $ 3,273
State .......................... 2,360 1,774
-------- -------
29,060 5,047
-------- -------
DEFERRED
Federal ........................ (28,767) 5,511
State .......................... 1,253 739
-------- -------
(27,514) 6,250
-------- -------
$ 1,546 $11,297
======== =======
</TABLE>
The Company's estimated annual tax rates for the six-month periods ended
July 31, 1995 and 1994 were 39.7% and 34.1%, respectively, versus the 35%
statutory Federal income tax rate. A larger-than-normal provision for state
income taxes resulting from the gas contract buyout was the principal cause of
the 1995 period's higher rate.
(5) COMMITMENTS AND CONTINGENCIES
LITIGATION AND OTHER. The Company is party to various claims and other
legal actions arising in the ordinary course of its business 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 these matters will not be material to the Company's financial
statements.
MORTGAGE ACTIVITIES. Mitchell Mortgage Company (MMC) administers
approximately $173,000,000 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.
(6) 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.
-9-
<PAGE> 11
(7) SEGMENT INFORMATION
Selected industry segment data for the six- and three-month periods ended
July 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>
Six Months
EXPLORATION AND PRODUCTION
Operations ........................ $ 120,271 $ 139,592 $ 34,993 $ 44,273 $ 42,763 $ 48,831 $ 55,736 $ 61,627
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.... - 4,470 - 3,791 - 679 - -
--------- --------- --------- --------- --------- --------- --------- ---------
220,381 144,062 127,168 48,064 42,763 49,510 55,736 61,627
--------- --------- --------- --------- --------- --------- --------- ---------
GAS SERVICES
Natural gas processing ............ 148,442 98,044 16,299 5,847 3,405 4,548 2,790 2,269
Natural gas gathering
and marketing ................... 78,655 116,968 4,794 3,597 3,579 4,693 12,749 8,342
Other ............................. 4,479 4,625 3,965 289 53 1,313 3,645 1,894
Personnel reduction program costs.. - - (3,600) - - - - -
Gain from major asset sale ........ - 29,828 - 29,828 - - - -
Restructuring charges
and asset write-downs ........... - - - (25,650) - 13,183 - -
--------- --------- --------- --------- --------- --------- --------- ---------
231,576 249,465 21,458 13,911 7,037 23,737 19,184 12,505
--------- --------- --------- --------- --------- --------- --------- ---------
REAL ESTATE
Operations ........................ 71,409 69,416 16,126 15,328 4,355 4,106 22,784 32,789
Write-downs of properties ......... - - (112,794) - - - - -
Personnel reduction program costs.. - - (3,000) - - - - -
--------- --------- --------- --------- --------- --------- --------- ---------
71,409 69,416 (99,668) 15,328 4,355 4,106 22,784 32,789
--------- --------- --------- --------- --------- --------- --------- ---------
CORPORATE ......................... - - - - 1,723 1,746 1,164 1,588
--------- --------- --------- --------- --------- --------- --------- ---------
$ 523,366 $ 462,943 $ 48,958 $ 77,303 $ 55,878 $ 79,099 $ 98,868 $ 108,509
========= ========= ========= ========= ========= ========= ========= =========
Three Months
EXPLORATION AND PRODUCTION
Operations ........................ $ 56,496 $ 69,653 $ 17,614 $ 19,547 $ 19,285 $ 26,269 $ 24,510 $ 27,044
Gain from gas contract buyout...... 95,772 - 95,772 - - - - -
Gain from producing property sale.. 4,338 - 4,338 - - - - -
--------- --------- --------- --------- --------- --------- --------- ---------
156,606 69,653 117,724 19,547 19,285 26,269 24,510 27,044
--------- --------- --------- --------- --------- --------- --------- ---------
GAS SERVICES
Natural gas processing ............ 67,204 48,735 6,657 3,530 1,700 2,261 396 1,928
Natural gas gathering
and marketing ................... 41,215 51,357 2,071 3,316 1,776 2,057 6,268 3,904
Other ............................. 3,646 2,570 3,399 686 26 649 3,553 555
Gain from major asset sale ........ - 29,828 - 29,828 - - - -
Restructuring charges
and asset write-downs ........... - - - (25,650) - 13,183 - -
--------- --------- --------- --------- --------- --------- --------- ---------
112,065 132,490 12,127 11,710 3,502 18,150 10,217 6,387
--------- --------- --------- --------- --------- --------- --------- ---------
REAL ESTATE
Operations ........................ 39,720 35,632 10,101 8,254 1,985 2,088 13,548 17,311
Write-downs of properties ......... - - (112,794) - - - - -
--------- --------- --------- --------- --------- --------- --------- ---------
39,720 35,632 (102,693) 8,254 1,985 2,088 13,548 17,311
--------- --------- --------- --------- --------- --------- --------- ---------
CORPORATE ......................... - - - - 839 897 153 800
--------- --------- --------- --------- --------- --------- --------- ---------
$ 308,391 $ 237,775 $ 27,158 $ 39,511 $ 25,611 $ 47,404 $ 48,428 $ 51,542
========= ========= ========= ========= ========= ========= ========= =========
</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 present 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
-10-
<PAGE> 12
North Texas wells. The present value of the Company's share of these 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 associated property costs of $109,484,000, 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, beginning July 1, 1995,
the Company now receives market-sensitive prices for 80 MMcf per day of natural
gas for which it had been receiving $4 per Mcf.
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 three-month
period ended July 31, 1995 include a gain of $4,338,000 from the sale of certain
West Texas producing oil and gas properties. During the three-month period ended
April 30, 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. The $3,791,000 gain from this sale, which did not include any
value for the warrants, is reported as a component of the segment operating
earnings of the Exploration and Production Division.
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, together with interest from June 1, 1994, were
received in February 1995.
Also during the three-month period ended July 31, 1994, Gas Services
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 these
businesses during the last half of fiscal 1994 and early in fiscal 1995. The
restructuring program called for the sale or disposition of a number of idle gas
processing plants, including leased equipment 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 out over an extended period as
incremental retirement and retiree medical benefits.
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.
(8) SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid--exclusive of amounts capitalized, but including amounts
reported as cost of sales for finance operations--totaled $19,664,000 and
$18,804,000 during the six-month periods ended July 31, 1995 and 1994. Income
taxes paid during these periods totaled $2,906,000 and $336,000. 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
six-month periods ended July 31, 1995 and 1994.
-11-
<PAGE> 13
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 July 31, 1995 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, 1995. Applicable
amounts shown herein for the six-month period ended July 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 and (iii) mitigate, either through new sources or 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
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, and
The San Luis Resort in Galveston was listed for sale in August 1995. The
timberlands sale is scheduled to close in the fourth quarter upon completion
of customary survey and title work. No significant gain or loss is expected on
the timberlands sale since its terms were considered in determining estimated
values in connection with the asset study.
-12-
<PAGE> 14
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 (such
agreements are filed as Exhibits 10(a) and 10(b) to this Form 10-Q). 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. 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 limits, 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 associated property costs of $109.5 million, 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 (the "wet" production volumes
associated with these sales approximate 103 MMcf per day). 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.
In concert with its longstanding strategy of using partnerships and
selling mature real estate properties to fund capital requirements, the Company
sold a 75% interest in 10 office buildings in The
-13-
<PAGE> 15
Woodlands to Crescent Real Estate Equities, Inc., in July 1995. This
transaction, which reduced the Company's long-term debt by $39 million,
established a relationship that is expected to provide funding for future office
development projects in The Woodlands.
At July 31, 1995, the Company's long-term debt totaled $787 million, down
from $895 million at the beginning of the fiscal year. The Company's committed
bank revolving credit and commercial paper facilities now provide for an
aggregate borrowing capacity of approximately $558 million, of which
approximately $494 million was unused at July 31, 1995. Exclusive of maturities
under its bank credit facilities and commercial paper program, the Company's
five-year debt maturities totaled approximately $232 million at that date.
Because the Company's borrowing capabilities now exceed any anticipated future
needs, a review is in progress that could result in reductions of the size of
its bank revolving credit and commercial paper facilities.
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.
In August, this amount was increased to $255 million to cover incremental
Exploration and Production spending for the expected 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. During
the first half of fiscal 1996, capital and exploratory expenditures totaled
$98.9 million. That period's spending was below budget largely because of timing
differences that should reverse as the year progresses.
Because of future collections of proceeds from the natural gas contract
buyout and from asset sales associated with the ongoing refocusing program, the
Company's long-term debt is expected to remain below the level that existed at
the beginning of fiscal 1996. However, because of the timing of cash receipts
from Natural and from asset sales, long-term debt balances may rise or fall
significantly during individual quarters. After decreasing by $93.2 million
during the second quarter, long-term debt likely will rise during fiscal 1996's
third quarter when capital expenditures are expected to be high and the
Company's quarterly Federal income tax deposit will include a substantial amount
related to the gas contract buyout. Additionally, as discussed below, the
Company's energy operating earnings and cash flows will likely be depressed
during the third quarter before recovering in the fourth.
SECOND-HALF OPERATIONS. The Company's operations during fiscal 1996's second
half are expected to be affected by several factors which will adversely impact
the third quarter results, but most of which should reverse during the fourth.
These include (i) a temporary shutdown of Natural's pipeline system that
transports natural gas from the Company's Bridgeport gas processing plant, (ii)
a one-month shutdown of the MTBE plant in which the Company holds a one-third
interest and (iii) a build-up of NGL inventories during the third quarter to
meet fourth quarter demand.
Natural's pipeline is scheduled to be out of operation for 20 days in
early October. During this period, the Company plans to shut down its Bridgeport
plant for 10 days for maintenance. Subsequent to the recent termination of the
Natural contract, the Company--while continuing to use Natural's pipeline to
transport its North Texas residue gas--has begun taking the steps necessary to
access alternative interstate and intrastate pipelines to transport that gas.
Unless alternative outlets are secured by early October, the Company's
Bridgeport plant will be idled and its North Texas gas production will be
curtailed during the entire 20-day period that Natural's pipeline is out of
service.
The MTBE plant was shut down on August 13 for approximately one month to
implement some plant modifications and to replace certain defective or
improperly designed equipment (largely at the cost of the respective suppliers).
After it is restarted in mid-September, the plant is expected to be capable of
producing up to 15,000 barrels per day, which compares to its original design
capacity of 12,600 barrels per day.
Market-sensitive natural gas prices have been extremely low recently (the
Company's average sales price for such production was $1.47 per Mcf in August).
This, coupled with price-related production curtailments and the factors
discussed above, will depress energy operating earnings in the third quarter.
Results could rebound in the fourth quarter, however, because of seasonal
improvements in energy markets, sales of the NGLs inventoried in the third
quarter and increased production of the MTBE plant.
-14-
<PAGE> 16
OPERATING STATISTICS
Certain operating statistics (including, where applicable, proportional
interests in equity partnerships) for the three- and six-month periods ended
July 31, 1995 and 1994 follow:
<TABLE>
<CAPTION>
Three Months Six Months
----------------------- -----------------------
1995 1994 1995 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
AVERAGE DAILY VOLUMES
Natural gas sales (Mcf) ................ 207,700 211,200 216,100 214,900
Crude oil and condensate sales (Bbls)... 5,400 6,500 5,500 6,600
Natural gas liquids produced (Bbls) .... 48,900 49,200 48,600 46,300
Pipeline throughput (Mcf)
Total ............................... 368,000 457,000 364,000 483,000
Exclusive of Winnie Pipeline
(which was sold in June 1994) .... 368,000 391,000 364,000 358,000
AVERAGE SALES PRICES
Natural gas (per Mcf) .................. $ 2.31 $ 2.75 $ 2.41 $ 2.78
Crude oil and condensate (per Bbl) ..... 16.85 17.16 17.10 15.25
Natural gas liquids produced (per Bbl).. 11.39 11.26 11.45 11.14
RESIDENTIAL LOT SALES - THE WOODLANDS
Lots sold .............................. 277 260 462 488
Average price .......................... $ 40,217 $ 36,462 $ 39,663 $ 37,158
Average price per square foot .......... 3.88 3.45 3.83 3.47
</TABLE>
RESULTS OF OPERATIONS - SIX MONTHS ENDED JULY 31, 1995
COMPARED WITH SIX MONTHS ENDED JULY 31, 1994
The Company's results for the six-month periods ended July 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 first half of fiscal 1996 of $2.3 million were $19.5 million
below those of the prior-year period. Unusual items reduced the net earnings of
the current-year period by $23.7 million but added $4.3 million to net earnings
of the comparable prior-year period.
Excluding the unusual items, fiscal 1996's first half earnings were
$8.5 million above those of the comparable prior-year period. The major
contributors to this increase included improved gas processing margins and
earnings from real estate operations, the Company's equity in the earnings of
the MTBE plant partnership and personnel-reduction-driven declines in costs and
expenses. These improvements were partially offset, however, by the negative
impact of lower market-sensitive natural gas prices in fiscal 1996 and the
one-month impact on subsequent operations of the buyout of the Natural gas sales
contract.
-15-
<PAGE> 17
The following table and discussion identify and explain the major
increases (decreases) in earnings for the six-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 ....................... $ 48.1 $ 13.9 $ 15.3 $(44.2) $ 33.1 $ 21.8
------ ------ ------ ------ ------ ------
ELIMINATE IMPACT OF FISCAL 1995
UNUSUAL ITEMS (see page 11)
Gas Services restructuring charges
and asset write-downs .................. - 25.7 - - 25.7 16.7
Gains from major energy asset sales ....... (3.8) (29.8) - - (33.6) (21.0)
------ ------ ------ ------ ------ ------
(3.8) (4.1) - - (7.9) (4.3)
------ ------ ------ ------ ------ ------
FISCAL 1995 AMOUNTS BEFORE UNUSUAL ITEMS .. 44.3 9.8 15.3 (44.2) 25.2 17.5
------ ------ ------ ------ ------ ------
MAJOR INCREASES (DECREASES)
Natural gas production
Lower market-sensitive sales price ..... (8.7) - - - (8.7) (5.7)
Contract buyout ........................ (3.8) - - .5 (3.3) (2.1)
Lower salary and benefits expenses
due to personnel reductions ............ 2.3 1.9 .3 1.4 5.9 3.8
Absence of proved property impairments .... 3.3 - - - 3.3 2.1
Increased exploratory dry hole costs ...... (2.2) - - - (2.2) (1.4)
Reduced amortization of deferred gas
contract restructuring proceeds ........ (1.9) - - - (1.9) (1.2)
Natural gas processing
Higher NGL prices ...................... - 2.3 - - 2.3 1.5
Increased production volumes ........... - .9 - - .9 .6
Lower feedstock costs due to
lower market-sensitive gas prices .... - 5.4 - - 5.4 3.5
Deferred profits on NGL inventories .... - 1.9 - - 1.9 1.2
Natural gas buy/resale gross profits
UPRC partnerships ...................... - 2.2 - - 2.2 1.4
Southwestern's North Texas system ...... - (1.4) - - (1.4) (.9)
Equity in MTBE plant earnings ............. - 3.9 - - 3.9 2.5
Real Estate--The Woodlands ................ - - 1.3 - 1.3 .8
Interest expense incurred ................. - - - 2.7 2.7 1.8
Other
SAR/Bonus unit expense accruals ........ (.3) (.2) (.3) (.5) (1.3) (.8)
Miscellaneous .......................... 2.0 (1.6) (.5) .7 .6 .4
Lower effective tax rate .................. - - - - - 1.0
------ ------ ------ ------ ------ ------
(9.3) 15.3 .8 4.8 11.6 8.5
------ ------ ------ ------ ------ ------
FISCAL 1996 AMOUNTS BEFORE UNUSUAL ITEMS .. 35.0 25.1 16.1 (39.4) 36.8 26.0
------ ------ ------ ------ ------ ------
FISCAL 1996 UNUSUAL ITEMS (see page 11)
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
------ ------ ------ ------ ------ ------
92.2 (3.6) (115.8) (5.7) (32.9) (23.7)
------ ------ ------ ------ ------ ------
FISCAL 1996 AMOUNTS AFTER UNUSUAL ITEMS ... $127.2 $ 21.5 $ (99.7) $(45.1) $ 3.9 $ 2.3
====== ====== ======= ====== ====== ======
</TABLE>
-----------------------------------
*Includes general and administrative expense and other expense.
-16-
<PAGE> 18
EXPLORATION AND PRODUCTION OVERVIEW
Exploration and Production operating earnings before unusual items declined $9.3
million during fiscal 1996's first half, to $35 million. This unfavorable
comparison was primarily the result of lower market-sensitive natural gas prices
and the adverse impact on subsequent operations of the natural gas contract
buyout effective July 1, 1995. The negative effect of these items was offset
somewhat by lower salary and benefits expenses resulting from the first quarter
personnel reduction program and the absence of proved property impairments in
the fiscal 1996 period.
NATURAL GAS - LOWER MARKET-SENSITIVE SALES PRICE ($8.7 MILLION DECREASE). For
production outside the North Texas area, the Company's average market-sensitive
natural gas sales price during the first six months of fiscal 1996 of $1.57 per
Mcf was 24% below the $2.07 realized during the comparable period of the prior
year. Prices were strong in the prior year's first quarter before declining over
the remainder of the fiscal year (the full-year average market-sensitive sales
price for fiscal 1995 was $1.90 per Mcf).
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 Mcf, respectively, in calendar 1995 and
1994). Because of seasonal and other market factors, July 1995 production was
sold at $1.25 per Mcf, causing gas sales revenues to be substantially less than
they had been in July 1994. 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 year-to-year basis were lowered by $3.8 million. After interest
income accrued on the Company's share of the receivables from Natural and
income taxes, the net earnings impact was $2.1 million.
ABSENCE OF PROVED PROPERTY IMPAIRMENTS ($3.3 MILLION INCREASE). Downward
revisions in reserve estimates for certain oil and gas properties resulted in
the recording of impairments totaling $3.3 million during the prior year's
second quarter. No such impairments have occurred in fiscal 1996.
INCREASED EXPLORATORY DRY HOLE COSTS ($2.2 MILLION DECREASE). Exploratory dry
hole costs totaled $2.2 million during fiscal 1996's first six months; virtually
no such costs were expensed in the comparable prior-year period.
REDUCED AMORTIZATION OF DEFERRED GAS CONTRACT RESTRUCTURING PROCEEDS ($1.9
MILLION DECREASE). Prior to the buyout of the Natural contract effective July 1,
1995, certain volume-related deferred contract restructuring proceeds were
amortized. Although not increasing cash flows, such amortization -- net of
related costs -- added $6.3 million to operating earnings in fiscal 1995's first
half. Exclusive of the $29.1 million separately recognized in connection with
the natural gas contract buyout, such amortization added $4.4 million, or $1.9
million less, to the operating earnings of fiscal 1996's first half.
GAS SERVICES OVERVIEW
Gas Services operating earnings before unusual items rose $15.3 million during
fiscal 1996's first half largely because of lower natural gas feedstock costs,
higher NGL sales prices and increased earnings from the Company's one-third
interest in an MTBE plant partnership. Lower feedstock costs because of the
period's depressed market-sensitive natural gas prices, coupled with higher NGL
prices, caused natural gas processing margins to be substantially better during
the first six months of fiscal 1996. NGL production volumes averaged 48,600
barrels per day, up from 46,300 during the first half of fiscal 1995. Natural
gas buy/resale gross profits also rose during the period largely because of the
lower market-sensitive natural gas prices, which caused margins under
fixed-price sales contracts to increase. Also contributing to the improvement
were personnel-reduction-related cost savings.
NATURAL GAS PROCESSING - HIGHER NGL PRICES ($2.3 MILLION INCREASE). The average
price for NGLs produced during the current period of $11.45 per barrel was $.31
above the average for the comparable prior-year period, increasing operating
earnings by $2.3 million.
-17-
<PAGE> 19
NATURAL GAS PROCESSING - INCREASED PRODUCTION VOLUMES ($.9 MILLION INCREASE).
NGL production volumes averaged 48,600 barrels per day in fiscal 1996's first
half, up 5% from the prior-year period's 46,300. Certain "keep whole" plants
were temporarily idled early in fiscal 1995 when they were uneconomical to
operate because market-sensitive natural gas feedstock costs were high at the
same time NGL prices were depressed. These plants operated in fiscal 1996 and
this--coupled with an expansion of the Madison plant, which was completed in
January 1995, and increased gas production of the Ferguson-Burleson
system--caused current-period volumes to increase.
NATURAL GAS PROCESSING - LOWER FEEDSTOCK COSTS DUE TO LOWER MARKET-SENSITIVE GAS
PRICES ($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. Consequently, lower market-sensitive
gas prices during fiscal 1996's first half caused feedstock costs under
keep-whole agreements to decline, increasing operating earnings by $5.4 million.
DEFERRED PROFITS ON NGL INVENTORIES ($1.9 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 were
reduced by 1.2 million barrels 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. As a result, $.6
million of previously deferred profits were recognized. Conversely, inventories
increased by 2.4 million barrels in the prior-year period, largely due to the
fire-related shutdown of GCF, resulting in the deferral of $1.3 million in
profits.
NATURAL GAS BUY/RESALE GROSS PROFITS - UPRC PARTNERSHIPS ($2.2 MILLION
INCREASE). The Company's equity in the buy/resale gross profits of this
45%-owned venture with Union Pacific Resources Company (UPRC) were $2.2 million
higher during the first half 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.
Also, the Company purchased smaller volumes under fixed-price contracts in
fiscal 1996 and at somewhat lower prices.
NATURAL GAS BUY/RESALE GROSS PROFITS - SOUTHWESTERN'S NORTH TEXAS SYSTEM ($1.4
MILLION DECREASE). Gross profits from the buy/resale activities of this system
during the first half of fiscal 1996 were $1.4 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 ($3.9 MILLION INCREASE). During the first half of
fiscal 1996, the Company recorded $3.9 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 one-month shutdown in the
third quarter to make certain modifications and to replace some defective
equipment, the plant is expected to be capable of producing up to 15,000 barrels
per day.
-18-
<PAGE> 20
REAL ESTATE AND OTHER
THE WOODLANDS ($1.3 MILLION INCREASE). Excluding unusual items, operating
earnings from real estate activities in The Woodlands totaled $16 million, or
$1.3 million more than was earned during the first six months of fiscal 1995.
The increase was the result of a $2.4 million rise in earnings from commercial
properties, which was attributable to several factors, including: (i) receipt of
a $.6 million construction management fee, (ii) higher rental rates and
occupancies, (iii) improved earnings for The Woodlands Executive Conference
Center, (iv) higher earnings of a mortgage subsidiary and (v) earnings from The
Woodlands Mall, which opened in October 1994.
Earnings from residential lot sales were essentially flat as a 5% decline
in the number of lots sold (462 in the current period, compared with 488 in the
corresponding prior-year period) was offset by a 7% increase in the average
sales price. In response to declining mortgage interest rates, second quarter
lot sales were almost 7% above the prior period's level; conversely, largely
because of higher interest rates, first quarter lot sales trailed those of the
prior-year period by 19%. Operating earnings from commercial land sales also
were essentially even as profits from fiscal 1996 sales, including 14.1 acres in
the Town Center, matched gains recognized in the prior period on sales to
partnerships of sites for the Cochran's Crossing retail center and the Forest
View Apartments.
INTEREST EXPENSE INCURRED. Interest expense incurred during fiscal 1996's first
half (of $32.7 million) was $2.7 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 cash proceeds from current and
prior-year asset sales and the gas contract buyout were used to pay down debt.
The interest savings from the debt balance decline were partially offset,
however, by the impact of higher short-term (variable) interest rates during
fiscal 1996's first quarter.
OTHER - SAR/BONUS UNIT EXPENSE ACCRUALS ($1.3 MILLION DECREASE). During the
fiscal 1996 period, $.3 million in SAR/Bonus unit expense accruals were recorded
as the average price of the Company's stock rose $.50 per share. Conversely, in
the comparable prior-year period, SAR/Bonus expense accrual reversals of $1
million were recorded because of declines in the stock price.
-19-
<PAGE> 21
RESULTS OF OPERATIONS - THREE MONTHS ENDED JULY 31, 1995
COMPARED WITH THREE MONTHS ENDED JULY 31, 1994
The Company's results for the three-month periods ended July 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 second quarter of fiscal 1996 of $5.5 million were $5.9 million below those
of the prior year's second quarter. Unusual items reduced net earnings of the
current-year period by $11.2 million, or $9.4 million more than during the
prior-year period.
Excluding the unusual items, fiscal 1996's second quarter earnings were
$7.1 million above those of the prior-year period largely because of increases
in segment operating earnings for Gas Services and Real Estate activities and
reductions in general and administrative expense and other expense.
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 .......................... $ 19.5 $ 11.7 $ 8.3 $ (22.3) $ 17.2 $ 11.4
-------- -------- -------- -------- -------- --------
ELIMINATE IMPACT OF FISCAL 1995
UNUSUAL ITEMS (see page 11)
Gas Services restructuring charges
and asset write-downs ..................... - 25.7 - - 25.7 16.7
Gain on sale of Winnie/Spindletop ............ - (29.8) - - (29.8) (18.5)
-------- -------- -------- -------- -------- --------
- (4.1) - - (4.1) (1.8)
-------- -------- -------- -------- -------- --------
FISCAL 1995 AMOUNTS BEFORE UNUSUAL ITEMS ..... 19.5 7.6 8.3 (22.3) 13.1 9.6
-------- -------- -------- -------- -------- --------
MAJOR INCREASES (DECREASES)
Natural gas production
Lower market-sensitive sales price ........ (2.9) - - - (2.9) (1.9)
Contract buyout (see page 17) ............. (3.8) - - .5 (3.3) (2.1)
Lower salary and benefits expenses
due to personnel reductions ............... 1.8 .9 .3 1.4 4.4 2.9
Reduced amortization of deferred gas
contract restructuring proceeds ........... (1.4) - - - (1.4) (.9)
Proved property impairments (see page 17) .... 3.3 - - - 3.3 2.1
Natural gas processing - Lower feedstock costs
due to lower market-sensitive gas prices .. - 2.1 - - 2.1 1.4
Equity in MTBE plant earnings ................ - 3.0 - - 3.0 2.0
Real Estate--The Woodlands ................... - - 1.0 - 1.0 .7
Lower interest expense incurred
due to average balance decline ............ - - - .8 .8 .5
Other ........................................ 1.1 (1.5) .5 1.2 1.3 .8
Lower effective tax rate ..................... - - - - - 1.6
-------- -------- -------- -------- -------- --------
(1.9) 4.5 1.8 3.9 8.3 7.1
-------- -------- -------- -------- -------- --------
FISCAL 1996 AMOUNTS BEFORE UNUSUAL ITEMS ..... 17.6 12.1 10.1 (18.4) 21.4 16.7
-------- -------- -------- -------- -------- --------
FISCAL 1996 UNUSUAL ITEMS (see page 11)
Gain from natural gas contract buyout ........ 95.8 - - - 95.8 59.4
Write-downs of real estate properties ........ - - (112.8) - (112.8) (73.3)
Gain from sale of producing properties ....... 4.3 - - - 4.3 2.7
-------- -------- -------- -------- -------- --------
100.1 - (112.8) - (12.7) (11.2)
-------- -------- -------- -------- -------- --------
FISCAL 1996 AMOUNTS AFTER UNUSUAL ITEMS ...... $ 117.7 $ 12.1 $ (102.7) $ (18.4) $ 8.7 $ 5.5
======== ======== ======== ======== ======== ========
</TABLE>
-----------------------------------
*Includes general and administrative expense and other expense.
-20-
<PAGE> 22
EXPLORATION AND PRODUCTION OVERVIEW
Exclusive of unusual items, Exploration and Production Division fiscal 1996
second quarter operating earnings were $1.9 million below those of the
comparable prior-year period principally due to lower market-sensitive natural
gas prices, the previously discussed impact of the natural gas contract buyout
on operations and reduced amortization of deferred gas contract restructuring
proceeds. These unfavorable variances were substantially offset by the absence
of proved property impairments, which reduced the prior-period's earnings by
$3.3 million, and personnel-reduction-related decreases in operating costs and
expenses. During fiscal 1996's second quarter, natural gas sales averaged
207,700 Mcf per day at $2.31 per Mcf versus the prior period's 211,200 at $2.75.
The volume decline resulted from price-related production curtailments.
NATURAL GAS - LOWER MARKET-SENSITIVE SALE PRICE ($2.9 MILLION DECREASE). The
Company's average market-sensitive natural gas sales price during the current
quarter was $1.64 per Mcf, down from the corresponding prior-year period's
$1.96, reducing operating earnings by $2.9 million.
REDUCED AMORTIZATION OF DEFERRED GAS CONTRACT RESTRUCTURING PROCEEDS ($1.4
MILLION DECREASE). As discussed on page 17, this amortization declined in
fiscal 1996 and ceased with the buyout of the Natural contract. Such
amortization added $1.8 million to the operating earnings of the second quarter
of fiscal 1996, $1.4 million less than the amount for the comparable prior-year
period.
GAS SERVICES
Exclusive of unusual items, Gas Services operating earnings before unusual items
increased by $4.5 million (from $7.6 million to $12.7 million) during the fiscal
1996 period. This improvement was largely due to the Company's $3 million equity
in the pretax earnings of the MTBE plant, which began producing on a test basis
during the prior-year period. Also contributing to the rise were improved NGL
margins, which were boosted by a $2.1 million decline in feedstock costs caused
by the period's lower market-sensitive natural gas prices.
REAL ESTATE
THE WOODLANDS ($1 MILLION INCREASE). Operating earnings from real estate
activities in The Woodlands increased $1 million during fiscal 1996's second
quarter. The current period's earnings benefitted from increased residential lot
sales in The Woodlands (277, versus 260 during last year's second quarter) and
higher lot sales prices. Also contributing to the favorable quarter-to-quarter
variance were earnings from the Company's 50% interest in The Woodlands Mall,
which opened in October 1994.
-21-
<PAGE> 23
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 28, 1995 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, 1996. The vote was as follows:
<TABLE>
<CAPTION>
Per-
Number cent
---------- -----
<S> <C> <C>
Shares voted "for" ............... 21,856,825 99.76
Shares voted "against" ........... 16,257 .07
Shares abstaining ................ 36,493 .17
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10(a) Settlement Agreement dated July 1, 1995 between Mitchell
Energy Corporation, Mitchell Gas Services, Inc. and Natural
Gas Pipeline Company of America.
10(b) Agreement to Terminate Gas Purchase Contract and Associated
Agreements dated July 1, 1995 between Natural Gas Pipeline
Company of America and Mitchell Energy Corporation.
12 Computation of ratio of earnings to fixed charges
27 Financial Data Schedule
(b) No reports were filed on Form 8-K during the three-month period
ended July 31, 1995.
-22-
<PAGE> 24
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, 1995 By: /s/ Philip S. Smith
--------------------------------------
Philip S. Smith
Senior Vice President - Administration
and Chief Financial Officer
-23-
<PAGE> 25
INDEX TO EXHIBITS
10(a) Settlement Agreement dated July 1, 1995 between Mitchell Energy
Corporation, Mitchell Gas Services, Inc. and Natural Gas Pipeline
Company of America.
10(b) Agreement to Terminate Gas Purchase Contract and Associated
Agreements dated July 1, 1995 between Natural Gas Pipeline
Company of America and Mitchell Energy Corporation.
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>
Six
Months
Fiscal Year Ended January 31 Ended
-------------------------------------------------------------------- July 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 $ 3,891
Add (Deduct):
Previously capitalized interest
charged against pretax earnings ..... 8,776 14,887 9,545 11,552 22,158 55,629(e)
Losses of less-than-50%-owned persons... 23 26 99 32 1,104 3
Fixed charges (see below) .............. 98,633 90,107 85,169 84,788 85,988 40,436
Reverse effect of inclusion of interest
capitalized in fixed charges ........ (44,253) (37,460) (34,161) (33,956) (33,011) (13,945)
Undistributed earnings of
less-than-50%-owned persons ......... (11,690) (10,521) (10,305) (3,594) (914) (1,688)
--------- --------- --------- --------- --------- -------
$ 111,973 $ 130,227 $ 110,369 $ 106,198 $ 145,876 $84,326
========= ========= ========= ========= ========= =======
FIXED CHARGES
Interest expense incurred
Consolidated (a) (c) ................... $ 92,874 $ 84,025 $ 77,451 $ 75,252 $ 71,570 $ 33,566
50%-owned persons ...................... 3,670 3,284 4,609 6,236 7,912 5,270
Less-than-50%-owned persons ............ - - - - 3,032(b) -
--------- --------- --------- --------- --------- --------
96,544 87,309 82,060 81,488 82,514 38,836
Portion of rental expense
representing interest (d) .............. 2,089 2,798 3,109 3,300 3,474 1,600
--------- --------- --------- --------- --------- -------
$ 98,633 $ 90,107 $ 85,169 $ 84,788 $ 85,988 $40,436
========= ========= ========= ========= ========= =======
RATIO OF EARNINGS TO FIXED CHARGES ....... 1.14 1.45 1.30 1.25 1.70 2.09
========= ========= ========= ========= ========= =======
</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) Related to the Company's guaranty covering $58,667,000 of indebtedness of
Belvieu Environmental Fuels (BEF), a 33.33%-owned entity, under which it
could have been required to perform prior to the conversion of this
indebtedness to a five-year term loan in August 1995.
(c) At July 31, 1995, the Company had outstanding guaranties of approximately
$81,800,000 of indebtedness of less-than-50%-owned partnerships and
approximately $4,400,000 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 $3,300,000 for the six-month period
ended July 31, 1995, have been excluded from the reported fixed charges.
(d) Represents one-third of rental expense under operating lease agreements.
(e) Second quarter real estate property write-downs included $48,707,000 of
previously capitalized interest.
<PAGE> 1
EXHIBIT 10(a)
SETTLEMENT AGREEMENT
THIS SETTLEMENT AGREEMENT ("Settlement Agreement") is dated and
effective the 1st day of July, 1995, (the "Effective Date") by and between
MITCHELL ENERGY CORPORATION, hereinafter referred to as "Mitchell", MITCHELL
GAS SERVICES, INC. hereinafter referred to as "Mitchell Gas", and NATURAL GAS
PIPELINE COMPANY OF AMERICA, hereinafter referred to as "Natural".
WHEREAS, Mitchell and Natural are parties to a certain Gas Purchase
Contract dated as of March 29, 1989 but effective as of April 1, 1990, as
amended ("Contract"), which provides for the purchase by Natural and the sale
by Mitchell of certain gas in the "Wise County Area" as defined in the
Contract; and
WHEREAS, Mitchell or its affiliates or predecessors-in-interest and
Natural also are parties to certain other agreements that relate to the gas
subject to the Contract, such other agreements being a February 2, 1960 Letter
Agreement between CM&M Gas Products Plant, Inc. and Natural regarding the
installation of pigging facilities on gathering pipelines ("1960 Pigging
Agreement"); an October 7, 1980 letter from Natural to Mitchell concerning pipe
line credit ("Line Credit Letter"); a February 1, 1979 BTU Balancing Agreement
between Natural and Mitchell Energy Production Corp., as subsequently amended
or supplemented by documents dated February 19, 1982, March 1, 1983, December
31, 1984, December 31, 1984, September 25, 1985, November 1, 1985, December 3,
1985, August 1, 1986 and November 20, 1989 ("BTU Balancing Agreement"), an
August
<PAGE> 2
31, 1990 Letter Agreement between Mitchell Energy & Development Corp.
and Natural regarding pigging by Natural upstream of Liquid Energy
Corporation's Bridgeport Gas Plant ("1990 Pigging Agreement"); a November 8,
1991 Letter Agreement between Mitchell and Natural concerning the connection of
wells completed in the Barnett Shale ("Barnett Shale Agreement"), a Rhome Gas
Gathering Agreement between Southwestern Gas Pipeline, Inc., predecessor to
Mitchell Gas dated June 24, 1987 ("Rhome Agreement"); and a June 4, 1993
Contract between Mitchell and Natural regarding measurement services in
connection with Natural's Wise County Area Gathering System ("Measurement
Contract"); the 1960 Pigging Agreement, the Line Credit Letter, the BTU
Balancing Agreement, the 1990 Pigging Agreement, the Barnett Shale Agreement,
the Rhome Agreement and the Measurement Contract being collectively referred to
as the "Associated Agreements";
WHEREAS, the parties desire to resolve certain issues and to terminate
the Contract and all of the Associated Agreements except for the BTU Balancing
Agreement and the Line Credit Letter.
NOW, THEREFORE, for and in consideration of the mutual promises and
covenants contained herein, and the other benefits to be received by the
parties, the parties do hereby faithfully covenant and agree as follows:
1. Natural agrees to pay Mitchell on or before July 1, 1995, by wire transfer
in immediately available funds to a bank account in accordance with written
instructions to be provided by Mitchell, the non-recoupable, non-refundable sum
of
2
<PAGE> 3
Fifty-Five Million Five Hundred Thousand Dollars ($55,500,000.00). In
addition, Natural agrees to pay Mitchell, or to such third parties as Mitchell
may designate in accordance with written instructions to be provided by
Mitchell (not to exceed a total of 10 such third parties), the additional
non-recoupable, non-refundable sum of Ninety Five Million Dollars
($95,000,000.00) on or before February 1, 1996, and Natural agrees to pay
Mitchell, or to such third parties as Mitchell may designate in accordance with
written instructions to be provided by Mitchell (not to exceed a total of 10
such third parties), the additional non-recoupable, non-refundable sum of
Ninety One Million Dollars ($91,000,000.00) on or before February 1, 1997.
2. Contemporaneously herewith, the parties are executing: (a) an "Agreement to
Terminate Gas Purchase Contract and Associated Agreements" concerning the
Contract and the Associated Agreements to which both Mitchell and Mitchell Gas
will be parties as their respective interests may appear; (b) a new
"Transportation Agreement" between Natural and Mitchell Gas covering the
gathering by Natural of the gas formerly subject to the Contract to Mitchell's
Bridgeport Plant; (c) a "Purchase and Sale Agreement" from Natural to Mitchell
Gas for the Gathering System to be effective at 8:00 a.m. C.S.T. on January 1,
1998; (d) an "Operating Agreement" for the Gathering System, (e) an "Operating
Balancing Agreement" between Natural and Mitchell Gas, and (f) a "Discount Rate
Agreement" between Natural and Mitchell Gas.
3. The terms "day", "Contract Year", "gas", "Contract Gas", "Component Parts",
"Bridgeport Plant", "Chico Plant", "Residue Gas", "Gathering System",
3
<PAGE> 4
"Wise County Area", "cubic foot", "Mcf", and "Btu" shall have the same
definitions as those set forth in Article I of the Contract, and said Article I
is hereby incorporated herein as if written herein. In addition, the term
"Delivery Points" shall mean each and every point on the Gathering System at
which custody and control of gas passes from Mitchell to Natural.
4. Mitchell recognizes that MidCon Gas Services Corp. (MGS), an affiliate of
Natural, purchases gas at the wellhead in the Wise County Area pursuant to
those certain third parties gas purchase agreements identified in Schedule A
attached hereto ("MGS Third-Party Contracts"), and has that gas gathered by
Natural on the Gathering System for delivery to Mitchell's Bridgeport Plant,
and that upon termination of any of such MGS Third Party Contracts, Natural may
have to transport for others the gas formerly subject thereto. In order to
facilitate Natural's accounting for these other transactions, Mitchell agrees
that as long as, any of the MGS Third Party Contracts remain in effect in
accordance with their terms as of June 15, 1995, Mitchell shall furnish or
cause to be furnished to Natural or its designee on or before the fifteenth
work day of each calendar month an allocation tape ("Residue Gas Allocation
Tape") setting forth the respective volumes of the total quantity of Residue
Gas received by Natural at the outlet of the Bridgeport Plant during the
preceding calendar month allocated to the Delivery Points for Mitchell and each
of such other parties from whom Natural received gas during such month. The
Residue Gas Allocation Tape will identify the following: (a) a single meter
volume of Mitchell's gas delivered at the outlet of the Bridgeport Plant,
4
<PAGE> 5
and (b) wellhead and residue volumes for all wells where Natural has gas
transportation agreements with MGS or others.
5. Provided that Mitchell or an assignee to whom Natural has consented
obtains title to the Gathering System on or about January 1, 1998 pursuant to
the Purchase and Sale Agreement of even date herewith, Mitchell agrees to
gather or cause to be gathered through the Gathering System for a commodity
fee of 31 cents per MMBtu and no demand charge, all gas which Natural's
successor-in-interest, MGS, is obligated to purchase under the MGS Third Party
Contracts, as such contracts were constituted as of June 15, 1995. Mitchell's
gathering service for MGS shall commence on the date Mitchell acquires title
to the Gathering System and continue until all of the MGS Third Party
Contracts terminate.
6. Mitchell agrees that in the event it ever acquires any of the interests of
the "Seller" under any of the MGS Third Party Contracts, the Daily Contract
Volume under any such MGS Third Party Contract shall never exceed that set
forth on Schedule A for such MGS Third Party Contract, the annual quantity of
gas which MGS is obligated under any such MGS Third Party Contract shall not
exceed the Daily Contract Volume multiplied by the number of days in the
applicable year, and that Mitchell will tender for sale under any such MGS
Third Party Contract only gas which is produced from the specific properties
dedicated under such MGS Third Party Contract.
7. Mitchell hereby represents and warrants to Natural that as of the date
first written above Mitchell has neither conveyed nor is obligated to convey
to any other
5
<PAGE> 6
person, firm or other business entity or governmental agency any interest in
the Contract, except Mitchell is obligated, and hereby agrees to, disburse a
portion of the payments received pursuant to Paragraph 1 hereof, as
appropriate, to the "Et. Al. Owners" listed on Schedule B attached hereto.
Mitchell also hereby represents and warrants that it is the
successor-in-interest to, or is otherwise authorized to execute this Agreement
and the Agreement to Terminate Gas Purchase Contract and Associated Agreements
on behalf of CM&M Gas Products Plant, Inc., Mitchell Energy Production Corp.,
Mitchell Energy & Development Corp., and Southwestern Gas Pipeline, Inc..
Mitchell agrees to indemnify Natural and to hold it harmless from any and all
suits, actions, debts, accounts, damages, costs, losses and expenses arising
from or out of any adverse claims of any and all persons, firms and other
business entities relating to claims of any such third party that it is
entitled any portion of the payments made pursuant to Paragraph 1 hereof but
only to the extent of payments received by Mitchell and its assigns hereunder.
8. This Settlement Agreement and the documents referenced in Paragraph 2
hereof constitute the entire agreement between the parties with respect to the
matters described herein and supersede all prior agreements, arrangements, and
understandings relating to the subject matter hereof, including, without
limitation, that certain letter agreement between them dated June 15, 1995.
Any modification hereto shall be valid only if set forth in writing and
executed by all applicable parties. Furthermore, should there be any other
agreements outstanding between Mitchell and Natural and not included as an
Associated Agreement that
6
<PAGE> 7
need to be terminated to accomplish the intent of this Settlement Agreement,
the parties shall in good faith do what is necessary to terminate them.
9. In reliance upon the continuation of Mitchell's indemnity obligations to
Natural under Paragraph 7 hereof, Natural consents to a sale or sales by
Mitchell to a third party or parties (not to exceed a total of 10 such third
parties) of all or part of the 1996 and 1997 payments and agrees, upon written
notification to it by Mitchell that Mitchell has assigned or sold its right to
receive payment of any of the foregoing amounts to another person (the
"Assignee"), that Natural will execute and deliver to the Assignee a written
notice (i) acknowledging the assignment and (ii) agreeing to pay all such
amounts assigned to Assignee directly to Assignee (or its designee) to an
account designated by Assignee, provided that Mitchell agrees to deliver to
Natural such additional evidence of the fact of any such assignment or sale as
Natural may reasonably request. Natural agrees to provide upon Mitchell's
request to prospective purchasers of these payments a copy of Natural's most
current FERC Form No. 2 and other data which in Natural's opinion are not
confidential.
10. All of the stipulations, terms and conditions of this Agreement shall be
binding upon and inure to the benefit of the parties and their respective
successors and assigns.
11. Each party represents and warrants to the others as of the date hereof
that:
(a) Organization and Good Standing. It has the power to
carry on its business as it is now being conducted, to enter into this
Agreement, and to
7
<PAGE> 8
perform its obligations hereunder. It is a corporation formed, duly organized,
validly existing and in good standing under the laws of the State of its
incorporation, which has the power to carry on its business as it is now being
conducted, to enter into this Agreement and to perform its obligations
hereunder, and is duly qualified and in good standing as a foreign or domestic
corporation in the state of Texas.
(b) Authority Relative to this Agreement. The execution,
delivery and performance of this Agreement by each party, and the sales,
transfers, conveyances, assignments, deliveries and other transactions
contemplated hereby, have been duly and validly authorized by all requisite
corporate action by such party, and constitute valid and binding obligations of
such party, enforceable against such party in accordance with their respective
terms, subject to applicable bankruptcy laws.
12. Authority of Signatories. Each signatory executing this Agreement on
behalf of a party represents to the other parties that he is authorized to
execute this Agreement on behalf of such party.
13. Except as otherwise expressly provided in Paragraphs 4, 5 and 9 herein,
there is no third party beneficiary to this Settlement Agreement. The parties
agree that the provisions of this Settlement Agreement shall not impart
rights to any person, firm or organization not a signatory to this Settlement
Agreement except as otherwise expressly provided in Paragraphs 4, 5 and 9.
8
<PAGE> 9
14. Each party to this Settlement Agreement represents that it has read this
Settlement Agreement in full and that it has had the opportunity to seek advice
of legal counsel prior to executing this Settlement Agreement. It is expressly
understood, agreed and warranted that in entering into this Agreement, no party
has acted in reliance upon any representation, advice or action by any other
party except as specifically set forth herein.
15. This Settlement Agreement was prepared jointly by the parties hereto and
not by any one party to the exclusion of the other.
16. Each party agrees to execute such additional documents and provide such
additional information as the other party may reasonably request in order to
accomplish the purposes of this Settlement Agreement.
17. If any provision, term or condition in this Settlement Agreement shall be
held invalid, illegal, or unenforceable by any court, regulatory agency or
tribunal of competent jurisdiction, the parties agree to negotiate in good
faith to reach the legal and enforceable agreements that will restore to each
the benefits originally bargained for.
18. This Agreement shall be governed by the substantive laws of the State of
Texas without regard to conflicts of law principles.
9
<PAGE> 10
THIS SETTLEMENT IS EXECUTED effective as of the date first written
above.
MITCHELL ENERGY CORPORATION
By: /s/ ALLEN J. TARBUTTON, JR.
------------------------------
Name: Allen J. Tarbutton, Jr.
Title: Executive Vice President
NATURAL GAS PIPELINE COMPANY OF AMERICA
By: /s/ R.L. KITCHENS
------------------------------------
Name: R.L. Kitchens
Title: Vice President
MITCHELL GAS SERVICES, INC.
By: /s/ ALLEN J. TARBUTTON, JR.
------------------------------
Name: Allen J. Tarbutton, Jr.
Title: President
10
<PAGE> 11
SCHEDULE "A"
MGS THIRD PARTY CONTRACTS
VOLUMES STATED IN MMBTU/D
<TABLE>
<CAPTION>
MGS DATE OF DAILY
CONTRACT FIRST EXPIRATION CONTRACT
NO. SELLER NAME DELIVERY DATE VOLUME
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
23 RAY RICHEY & CO., INC. 19670825 20070825 85
27 RAY RICHEY & CO., INC. 19691106 20091106 30
1010 MCCOMMONS OIL CO. 19761004 19961004 60
1048 HOLOTIK, LONNIE 19761212 19961212 2
1178 DE CLEVA, PAUL 19800115 20000115 53
1226 GAGE, COKE L. 19780511 19980515 94
1334 EAGLE OIL & GAS CO. 19790614 19990614 541
1339 PATTON EXPLORATION, INC. 19790713 19990713 39
1352 BURK ROYALTY CO. 19790802 19990802 60
1477 GENE ROBERTSON OIL CO. 19800201 19950301 19
1479 RAY RICHEY & CO., INC. 19800125 20000125 64
1497 SAUDER, A. L. JR. 19800122 20000122 0
1584 KEENE, ROY J., JR. 19800618 19950701 10
1622 DE CLEVA, PAUL 19800805 20000805 56
1664 VAREL, D. W. 19801229 20001229 59
1764 WAYMAR OIL & GAS CO. 19810418 19960501 9
1848 TWIN MONTANA, INC. (TX) 19810724 20010724 2
1897 SAUDER, A. L. JR. 19820407 20020407 85
1907 WALSH & WATTS, INC. (TX) 19790909 19990909 22
1922 COMBINED SYSS., INC. 19820820 20020820 23
2455 BURK PETRO. CO. 19841205 20041205 11
2520 CARTER ENERGY CORP. 19850215 20050215 91
2598 ALAMOSA OPER. CO. 19850620 20000620 0
2935 SAUDER, A. L. JR. 0 19980331 119
3132 MARCON OPER. CO. 19800728 20000728 69
3136 TAYLOR, G. E. 19790214 19940301 0
3180 BRISTOL RESOURCES CORP. (OK) 19890511 20000501 48
3181 HAMLIN, J. R. 19850408 20000501 2
3200 STEVENS, L.B. & T. L. HUSTON 19850408 20000501 7
3201 CROSLAND, ROBERT 19850408 20000501 2
3202 FONVILLE, H. D. 19850408 20000501 2
3205 SEIGLER, JAMES 19850408 20000501 4
3206 HARTLEY, ANNE S. 19850408 20000501 4
3222 WAGGONER-BALDRIDGE ENERGY CO. 19640803 20040803 16
3229 BERISFORD OIL CO. 19640910 20250910 0
3230 BOLAND, ROBERT J. 19640910 20040910 108
3233 SAUDER, A. L. JR. 19650921 20050921 49
3235 WAGGONER-BALDRIDGE OPER. CO. 19650921 20050921 35
3239 WAGGONER-BALDRIDGE ENERGY CO. 19660616 20060616 0
3242 WAGGONER-BALDRIDGE ENERGY CO. 19670825 20070825 95
3650 TWIN MONTANA, INC. (TX) 19761212 19961212 17
3651 TALUS, INC. 19761212 19961212 4
</TABLE>
1
<PAGE> 12
SCHEDULE "A"
MGS THIRD PARTY CONTRACTS
VOLUMES STATED IN MMBTU/D
<TABLE>
<CAPTION>
MGS DATE OF DAILY
CONTRACT FIRST EXPIRATION CONTRACT
NO. SELLER NAME DELIVERY DATE VOLUME
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
3652 BRAZOS RESOURCES, INC. 19761212 19961212 9
3653 ENSERCH EXPLOR., INC. 19770414 19970414 0
3668 NORTH CENTRAL OIL CORP. 19771227 19971227 256
3674 MILES PROD. CO. 19771227 19971227 24
3686 UMC PETRO. CORP. 19780511 19980515 545
3688 SANDERS OIL & GAS CO. 19780511 19980515 32
3745 MARCON OPER. CO. 19791110 19991110 78
3747 ALBERT, DAVID 19791208 19991208 32
3900 BEARD, C. W. 19800321 20000321 1
3901 DALLAS PETRO. CO. 1979-1 19800603 20000603 12
3904 BEARD, C. W. 19800603 20000603 1
3911 BELL, O. M. 19800722 20000722 31
4357 GRAND ENERGY, INC. 19831004 19931004 17
4663 MORGAN, V. L. 19850408 20000501 2
4664 EGERTON, TOM OR JEWELL 19850408 20000501 4
4668 SPARGER, HARVEY 19850408 20000501 4
4669 SPARGER, EDNA 19850408 20000501 4
4670 PARKS, WELDON 19850408 20000501 4
4671 PARKS, CHRISTINE 19850408 20000501 4
4675 CARTER ENERGY CORP. 19810424 20010424 70
4706 PETRAKI, LAWRENCE T., M.D. 19850408 20000501 4
4711 LEACH, W. H. OR WALTER B. 0 20000501 2
4717 STANFIELD, GARY 19850408 20000501 2
4718 HENLEY, CHARLES 19850408 20000501 2
4719 HODGES, THOMAS 19770801 19970801 21
4729 WILSON, DON D., PENSION FUND 19850408 20000501 4
4734 DIAMONDBACK OIL CO. 19850408 20000501 2
4735 NICHOLS, DON OR VICKIE 19850408 20000501 2
4736 SEWELL, STEWART 19850408 20000501 4
4748 BRISTOL RESOURCES CORP. (OK) 19850408 20000501 4
4784 CLEGHORN, M. M. 0 20000501 4
4970 ROBINSON, ALTON R. 0 19960901 0
4999 S & J OPER. CO. (TX) 19790614 19990614 36
5024 WOODS, BERNICE M. 0 0 86
5077 S & J OPER. CO. (TX) 19811214 20011214 0
5106 CONCORD ENERGY CORP. 19790615 19990615 90
5179 S & J OPER. CO. (TX) 19801113 20001113 15
5180 PETROJARL, INC. 19780511 19980515 37
5205 WISE, GENE D. 19790417 19940501 0
5213 CONSOLID. OIL & GAS, INC. 19771227 19971227 159
5218 HEADINGTON PENN CORP. 19780511 19980515 0
5238 H & H EXPLOR., INC. 19801002 20001002 26
</TABLE>
2
<PAGE> 13
SCHEDULE "A"
MGS THIRD PARTY CONTRACTS
VOLUMES STATED IN MMBTU/D
<TABLE>
<CAPTION>
MGS DATE OF DAILY
CONTRACT FIRST EXPIRATION CONTRACT
NO. SELLER NAME DELIVERY DATE VOLUME
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
5287 NEVCO OPERATING CO., INC. 19771227 19971227 10
5333 UMC PETRO. CORP. 19780511 19980511 14
5411 3-R PROD., INC. 19800428 20000428 29
5469 ROVER OPER., INC. 19771222 20001003 76
5563 LESIKAR, L. W. 0 19931231 102
5703 WISE PRODUCTION 0 19990731 116
6012 WILLIAMSON, RICHARD F. 0 19980630 0
6013 SWAN PRODUCTION COMPANY 19771222 20001003 0
TOTAL VOLUME 3,967
3
</TABLE>
<PAGE> 14
SCHEDULE "B"
"Listing of "ET AL. Owners"
Craig H. Christie, Trust I
Kay Christie, Trust I
Carter B. Christie, Trust I
Mr. John Evans
Mrs. Natalie Haar
Mr. John A. Jackson, for himself and doing business as Katie Petroleum
Mr. George P. Mitchell
Mrs. Karan Rae Bergstrom
A.L. Payne Jr.
Mrs. Esther J. Payne
Mr. Charles W. Payne
Mrs. Patricia Ann Wright
J.L. Oshman Estate
Mr. Robert Zinn
<PAGE> 1
EXHIBIT 10(b)
AGREEMENT TO TERMINATE GAS PURCHASE CONTRACT
AND ASSOCIATED AGREEMENTS
THIS AGREEMENT made and effective as July 1, 1995 by and between
Natural Gas Pipeline Company of America, hereinafter referred to as "Buyer";
Mitchell Energy Corporation, hereinafter referred to as "Seller"; and Mitchell
Gas Services, Inc. (for limited purposes as stated herein below), hereinafter
referred to as "Mitchell Gas";
W I T N E S S E T H
WHEREAS, Buyer and Seller are parties to that certain Gas Purchase
Contract dated March 29, 1989 but effective April 1, 1990, as it may have been
amended (Contract), relating to the sale and purchase of natural gas; and
WHEREAS, Seller, Mitchell Gas, or their predecessors-in-interest and
Buyer also are parties to certain other agreements that relate to the gas
subject to the Contract, such other agreements being a February 2, 1960 Letter
Agreement between CM&M Gas Products Plant, Inc. and Buyer regarding the
installation of pigging facilities on gathering pipelines ("1960 Pigging
Agreement"); an October 7, 1980 letter from Buyer to Seller concerning pipe
line credit ("Line Credit Letter"), a February 1, 1979 BTU Balancing Agreement
between Buyer and Mitchell Gas as subsequently amended or supplemented by
documents dated February 19, 1982, March 1, 1983, December 31, 1984, December
31, 1984, September 25, 1985, November 1, 1985, December 3, 1985, August 1,
1986 and November 20, 1989 ("BTU Balancing Agreement"), an August 31, 1990
Letter Agreement between Mitchell Energy & Development Corp. and Buyer
regarding pigging by Buyer upstream of Liquid Energy Corporation's Bridgeport
Gas Plant ("1990 Pigging Agreement"), a November 8, 1991 Letter Agreement
between Seller and Buyer concerning the connection of wells completed in the
Barnett Shale ("Barnett Shale Agreement") a Rhome Gas Gathering Agreement
between Southwestern Gas Pipeline, Inc., predecessor to Mitchell Gas, dated
June 24, 1987; and a June 4, 1993 Contract between Seller and Buyer regarding
measurement services in connection with Buyer's Wise County Gathering System
("Measurement Contract"), the 1960 Pigging Agreement, the Line Credit Letter,
the BTU Balancing Agreement, the 1990 Pigging Agreement, the Barnett Shale
Agreement, Rhome Agreement and the Measurement Contract being collectively
referred to as the "Associated Agreements";
WHEREAS, Buyer and Seller desire to terminate the Contract and all of
the Associated Agreements except for the Line Credit Letter and BTU Balancing
Agreement and release each other from the terms and provisions thereof except
as otherwise expressly set forth herein;
NOW THEREFORE, in consideration of the premises and of the mutual
covenants and agreements contained herein, the parties hereto do hereby agree
as follows:
<PAGE> 2
A. Except as provided in Paragraphs B, C, E and F herein, Buyer
and Seller do hereby release, remise and discharge each other from the terms
and provisions of the Contract and all of the Associated Agreements, except the
Line Credit Letter and the BTU Balancing Agreement, and the Contract and the
Associated Agreements except the Line Credit Letter and the BTU Balancing
Agreement are hereby terminated and no longer binding upon the parties hereto.
Seller specifically releases Buyer from any obligation that Buyer may have had
under Article VI of the Contract to connect to Buyer's Gathering System any
well or source of supply tendered by Seller for connection after the date first
written above other than those wells and that supply source subject to
Paragraph E hereof.
B. Nothing contained herein shall affect in any way (i) Buyer's
obligation to pay, pursuant to the Contract, for gas delivered by Seller and
received by Buyer prior to the effective date hereof and any other obligations
specifically set forth herein, (ii) any rights or obligations of Buyer or
Seller with respect to the right to correct metering, accounting and/or
allocation errors in connection with the deliveries of gas prior to the
effective date hereof, or (iii) Seller's warranty obligations with respect to
gas delivered to Buyer prior to the effective date hereof. In this regard, the
parties agree that notwithstanding the terms hereof, the rights and obligations
of the parties under Paragraph 2 of Article XVII of the Contract shall remain
in effect until the expiration of two (2) years after the date first
hereinabove written.
C. Pursuant to that certain Letter Agreement between Buyer and Seller
dated August 17, 1994, Buyer has the right to subject any deliveries of gas
under the Contract during the final Contract Year in excess of the greater of
Buyer's actual annual request or 37.595 Bcf ("overdeliveries")to an alternate
sales arrangement between Seller and Buyer, or their affiliates. Seller and
Buyer agree that, as provided in that August 17, 1994 Letter Agreement, Seller
and Buyer shall determine the final volume of such overdeliveries, if any,
delivered by Seller under the Contract as promptly as possible after the
effective date hereof. Seller shall refund to Buyer all sums paid by Buyer for
such overdeliveries in excess of $1.48 per MMBtu.
D. Buyer represents to Seller that, as of the date hereof Buyer has
no plans to change, and is not studying whether to change, its existing
operating conditions, including but not limited to quality standards and
delivery pressures on Buyer's transmission system at the outlet of the Liquid
Energy Corporation Bridgeport Plant and the Trident NGL Chico Plant. Buyer
agrees that if it decides to make any such changes in the future, it will
comply with all Federal Energy Regulatory Commission requirements relative
thereto prior to implementation of such changes.
E. Buyer agrees to promptly connect at its own expense those 6 Seller
wells and 1 pipeline tie-in identified on Schedule A attached hereto, which
facilities were tendered to Buyer for connection and qualified under the
Contract for connection prior to July 1, 1995. Any outstanding pipeline credit
balances under the Line
2
<PAGE> 3
Credit Letter shall be determined finally by the parties hereto and any
adjustments therefor paid as required as soon as reasonably practical, and the
parties shall enter into a letter agreement evidencing such final determination
and the termination of the Line Credit Letter.
F. Nothing contained herein shall affect in any way the BTU
Balancing Agreement, which the parties expressly agree remains in full force
and effect.
G. Buyer and Seller each, on behalf of itself and its officers,
directors, employees, agents, counsel, affiliates, predecessors-in-interest,
and successors and assigns, hereby releases, acquits, waives, discharges and
holds the other, its officers, directors, employees, agents, counsel,
affiliates, predecessors-in-interest, and successors and assigns, harmless from
and against any and all claims, demands, liabilities, losses, damages, costs
and causes of action, known and unknown, now existing or that arise hereafter,
arising out of, associated with or in any way connected with the Contract or
the Associated Agreements or directly or indirectly attributable to the
performance or failure of performance of any and all duties and obligations
under the Contract or the Associated Agreements, except as expressly provided
in Paragraphs B, C, E and F above or the Settlement Agreement between the
parties of the same date hereof.
H. Seller warrants that it has not made any assignment for the
benefit of creditors, and Seller and Buyer each warrant that no proceeding in
bankruptcy, receivership or insolvency has been instituted by, against, or on
behalf of Seller or Buyer, respectively.
I. This Agreement shall be effective as of 8:00 a.m. on the date
first written above.
IN WITNESS WHEREOF, this Agreement has been executed by the parties
hereto as of the date first hereinabove written.
MITCHELL ENERGY CORPORATION
By: /s/ ALLEN J. TARBUTTON, JR.
---------------------------------
Name: Allen J. Tarbutton, Jr.
Title: Executive Vice President
NATURAL GAS PIPELINE COMPANY OF AMERICA
By: /s/ R.L. KITCHENS
------------------------------------
Name: R. L. Kitchens
Title: Vice President
3
<PAGE> 4
MITCHELL GAS SERVICES, INC.
(for the limited purposes of
terminating certain of the
Associated Agreements
pursuant to Paragraph A hereof)
By: /s/ ALLEN J. TARBUTTON, JR.
--------------------------------
Name: Allen J. Tarbutton, Jr.
Title: President
4
<PAGE> 5
SCHEDULE A
LIST OF WELL/SOURCE SUBMITTALS
TO BE CONNECTED BY BUYER
WELL/SOURCE NAME
M. L. Barzun #1 (Dunston)
Paul Curtner #4
DCCO 2 - Lewis Jones #5
WCCO 1 - TP Sims A-#2
WCCO 1 - Truett Wilson #3
WCCO1 - Thomas P. Sims #2
SWGPL - Decatur Tie In
<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, 1995 AND FOR THE SIX MONTH PERIOD
THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1995
<PERIOD-START> JAN-31-1995
<PERIOD-END> JUL-31-1995
<CASH> 13,114
<SECURITIES> 0
<RECEIVABLES> 114,900
<ALLOWANCES> 2,379
<INVENTORY> 16,423
<CURRENT-ASSETS> 240,467
<PP&E> 2,028,384
<DEPRECIATION> 1,394,758
<TOTAL-ASSETS> 1,757,726
<CURRENT-LIABILITIES> 205,834
<BONDS> 786,723
<COMMON> 0
0
5,386
<OTHER-SE> 454,780
<TOTAL-LIABILITY-AND-EQUITY> 1,757,726
<SALES> 523,366
<TOTAL-REVENUES> 523,366
<CGS> 474,408
<TOTAL-COSTS> 474,408
<OTHER-EXPENSES> 26,342
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,725
<INCOME-PRETAX> 3,891
<INCOME-TAX> 1,546
<INCOME-CONTINUING> 2,345
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,345
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
