<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED APRIL 30, 1996
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 May 31, 1996:
Class A . . . . . . . . . . . . . . . . . . 23,048,814
Class B . . . . . . . . . . . . . . . . . . 28,767,636
================================================================================
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
Page
Part I - Financial Information Number
------
<S> <C>
Item 1. Financial Statements
Representation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Unaudited Consolidated Statements of Earnings . . . . . . . . . . . . . . . . . . . . . 3
Unaudited Consolidated Statement of Stockholders' Equity . . . . . . . . . . . . . . . . 4
Unaudited Condensed Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . 5
Notes to Unaudited Consolidated Financial Statements . . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of
Financial Position and Results of Operations . . . . . . . . . . . . . . . . . . . . . . 12
Part II - Other Information
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . 17
</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 1996" and "fiscal 1997" refer,
respectively, to the 12-month periods ended January 31, 1996 and 1997 and
"DD&A" means depreciation, depletion and amortization. Pipeline throughput
volumes are based on average energy content of 1,000 Btu per cubic foot. Where
applicable, NGL volume, price and reserve information includes equity
partnership interests.
<PAGE> 3
Part I - Financial Information
ITEM 1. FINANCIAL STATEMENTS
REPRESENTATION. 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 Fiscal 1996 Annual Report and with the Management's
Discussion and Analysis of Financial Position and Results of Operations
sections of that and this report.
-1-
<PAGE> 4
MITCHELL ENERGY & DEVELOPMENT CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollar amounts in thousands)
<TABLE>
<CAPTION>
APRIL 30, January 31,
1996 1996
------------ ------------
ASSETS (unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . $ 47,323 $ 21,336
Trade receivables, net of allowance for
doubtful accounts of $2,094 and $2,116 . . . . . . . . . . . . . . 111,884 105,238
Gas contract buyout proceeds receivable (present values) . . . . . . . 86,795 95,000
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,327 12,137
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,233 10,602
------------ ------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . 266,562 244,313
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, at cost less accumulated depreci-
ation, depletion and amortization of $1,327,056 and $1,321,004
Exploration and production
Oil and gas properties . . . . . . . . . . . . . . . . . . . . . . 510,648 515,383
Support equipment and facilities . . . . . . . . . . . . . . . . . 22,183 22,591
Gas services (including investments in equity partnerships) (Note 3)
Natural gas processing . . . . . . . . . . . . . . . . . . . . . . 56,322 57,301
Natural gas gathering . . . . . . . . . . . . . . . . . . . . . . . 81,320 86,356
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,250 29,206
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,126 8,698
------------ ------------
713,849 719,535
------------ ------------
REAL ESTATE
The Woodlands
Land development . . . . . . . . . . . . . . . . . . . . . . . . . 502,942 502,121
Commercial properties . . . . . . . . . . . . . . . . . . . . . . . 93,791 93,029
Equity investments and property management . . . . . . . . . . . . 30,455 29,406
Notes and contracts receivable and other . . . . . . . . . . . . . 40,652 44,857
------------ ------------
667,840 669,413
Other properties . . . . . . . . . . . . . . . . . . . . . . . . . . . 86,133 93,421
------------ ------------
753,973 762,834
------------ ------------
OTHER ASSETS (including, at January 31, 1996, the $85,467 present
value of gas contract buyout proceeds due February 1, 1997) . . . . 31,027 116,187
------------ ------------
$ 1,765,411 $ 1,842,869
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,910 $ 13,732
Current maturities of long-term debt . . . . . . . . . . . . . . . . . 100,000 -
Oil and gas proceeds payable . . . . . . . . . . . . . . . . . . . . . 86,840 81,696
Accounts payable and accrued liabilities . . . . . . . . . . . . . . . 111,128 126,515
------------ ------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . 315,878 221,943
------------ ------------
LONG-TERM DEBT (Note 4)
Energy operations . . . . . . . . . . . . . . . . . . . . . . . . . . . 179,367 375,727
Real estate operations . . . . . . . . . . . . . . . . . . . . . . . . 467,934 455,937
------------ ------------
647,301 831,664
------------ ------------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . 203,036 193,908
Deferred income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,317 25,676
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 76,429 87,775
------------ ------------
306,782 307,359
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 3 and 6)
STOCKHOLDERS' EQUITY
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 . . . . . . . . . . . . . . . . . . . . . . 143,270 143,270
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . 374,922 358,281
Treasury stock, at cost . . . . . . . . . . . . . . . . . . . . . . . . (28,128) (25,034)
------------ ------------
495,450 481,903
------------ ------------
$ 1,765,411 $ 1,842,869
============ ============
</TABLE>
- ---------------
The accompanying notes are an integral part of these financial statements.
-2-
<PAGE> 5
MITCHELL ENERGY & DEVELOPMENT CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands except per-share data)
<TABLE>
<CAPTION>
Three Months Ended
April 30
-----------------------
1996 1995
----------- ----------
<S> <C> <C>
REVENUES
Exploration and production . . . . . . . . . . . . . . . . . . . . . . $ 61,552 $ 63,775
Gas services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137,529 119,511
Real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,272 31,689
----------- ----------
237,353 214,975
----------- ----------
OPERATING COSTS AND EXPENSES (including personnel
reduction program costs of $14,535 in 1995 - Note 7)
Exploration and production . . . . . . . . . . . . . . . . . . . . . . 41,909 54,331
Gas services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114,779 110,180
Real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,577 28,664
----------- ----------
185,265 193,175
----------- ----------
SEGMENT OPERATING EARNINGS (Note 7) . . . . . . . . . . . . . . . . . . 52,088 21,800
General and administrative expense (including
personnel reduction program costs of $5,665 in 1995) . . . . . . . . 9,112 16,553
----------- ----------
TOTAL OPERATING EARNINGS . . . . . . . . . . . . . . . . . . . . . . . 42,976 5,247
----------- ----------
OTHER EXPENSE
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,164 16,441
Capitalized interest . . . . . . . . . . . . . . . . . . . . . . . . . (6,385) (6,770)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (423) 384
----------- ----------
7,356 10,055
----------- ----------
EARNINGS (LOSS) BEFORE INCOME TAXES . . . . . . . . . . . . . . . . . 35,620 (4,808)
INCOME TAXES (Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . 12,371 (1,627)
----------- ----------
NET EARNINGS (LOSS) . . . . . . . . . . . . . . . . . . . . . . . . . . $ 23,249 $ (3,181)
=========== ==========
EARNINGS (LOSS) PER SHARE . . . . . . . . . . . . . . . . . . . . . . . $ .45 $ (.06)
=========== ==========
AVERAGE COMMON SHARES OUTSTANDING . . . . . . . . . . . . . . . . . . . 52,045 52,055
=========== ==========
</TABLE>
- -------------------------------------
The accompanying notes are an integral part of these financial statements.
-3-
<PAGE> 6
MITCHELL ENERGY & DEVELOPMENT CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Three Months Ended April 30, 1996
(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, 1996 . . . . . . . . . . . $ 5,386 $ 143,270 $ 358,281 $ (25,034) $ 481,903
Net earnings . . . . . . . . . . . . . . . . . - - 23,249 - 23,249
Cash dividends (12 cents per share on Class A
and 13 1/4 cents per share on Class B) . . - - (6,608) - (6,608)
Treasury stock purchases . . . . . . . . . . . - - - (3,094) (3,094)
-------- ---------- ---------- --------- ----------
BALANCE, APRIL 30, 1996 . . . . . . . . . . . . $ 5,386 $ 143,270 $ 374,922 $ (28,128) $ 495,450
======== ========== ========== ========= ==========
</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, 1996 . . . . . . . . 23,978,095 29,878,095 750,279 1,046,057
Treasury stock purchases . . . . . . . . - - 141,400 50,800
Other . . . . . . . . . . . . . . . . . . (2) (2) - -
-------------- -------------- ---------- ------------
BALANCE, APRIL 30, 1996 . . . . . . . . . 23,978,093 29,878,093 891,679 1,096,857
============== ============== ========== ============
</TABLE>
- ---------------
The accompanying notes are an integral part of these financial statements.
-4-
<PAGE> 7
MITCHELL ENERGY & DEVELOPMENT CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
April 30
-------------------------
1996 1995
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 23,249 $ (3,181)
Adjustments to reconcile net earnings (loss)
to cash provided by operating activities
Depreciation, depletion and amortization . . . . . . . . . . . . . 28,690 30,267
Exploration expenses, including dry-hole costs . . . . . . . . . . 2,537 4,358
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . 9,128 (5,087)
Cost of land sold . . . . . . . . . . . . . . . . . . . . . . . . . 9,060 6,602
Residential land development costs, net of reimbursements . . . . . (3,933) (3,844)
Distributions in excess of earnings of equity investees . . . . . . 3,460 3,683
Gains from sales of properties . . . . . . . . . . . . . . . . . . (973) -
Accrued personnel reduction program costs . . . . . . . . . . . . . - 11,128
Amortization of deferred natural gas contract restructuring
proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (3,570)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,296 1,947
---------- ----------
72,514 42,303
Changes in operating assets and liabilities . . . . . . . . . . . . 78,830 22,455
---------- ----------
Cash provided by operating activities . . . . . . . . . . . . . . . 151,344 64,758
---------- ----------
INVESTING ACTIVITIES
Capital and exploratory expenditures
Total on accrual basis . . . . . . . . . . . . . . . . . . . . . . . . . (45,356) (50,440)
Residential land development costs deducted above . . . . . . . . . . . 3,933 3,844
Adjustment to cash basis . . . . . . . . . . . . . . . . . . . . . . . . (7,570) (3,754)
---------- ----------
(48,993) (50,350)
Proceeds from sales of properties . . . . . . . . . . . . . . . . . . . . . 13,904 12,000
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193 (311)
---------- ----------
Cash used for investing activities . . . . . . . . . . . . . . . . (34,896) (38,661)
---------- ----------
FINANCING ACTIVITIES
Proceeds from issuance of debt . . . . . . . . . . . . . . . . . . . . . . - 900
Debt repayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (80,185) (14,736)
Cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,608) (6,606)
Treasury stock purchases . . . . . . . . . . . . . . . . . . . . . . . . . (3,094) (4,130)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (574) (532)
---------- ----------
Cash used for financing activities . . . . . . . . . . . . . . . . (90,461) (25,104)
---------- ----------
INCREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . . 25,987 993
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD . . . . . . . . . . . . . . 21,336 11,967
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD . . . . . . . . . . . . . . . . . $ 47,323 $ 12,960
========== ==========
</TABLE>
- ---------------
The accompanying notes are an integral part of these financial statements.
-5-
<PAGE> 8
MITCHELL ENERGY & DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
April 30, 1996
(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. Impairment computations for proved oil and gas
properties are performed on a field-by-field basis. Charges for such
impairments, which totaled $3,068,000 and none for the three-month periods
ended April 30, 1996 and 1995, are included in DD&A expense.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
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
During fiscal 1997 and 1996, the Company's principal partnership interests
included the following:
<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 Plant 45 Natural gas processing
REAL ESTATE
Grogan's Mill Apartments 50 Apartments in The Woodlands
The Woodlands Mall Associates 50 Regional mall in The Woodlands
Woodlands Office Equities - '95 Limited 25 Office buildings in The Woodlands
Lake Catamount Joint Venture 50 Land held for sale
The Fort Crockett Limited (liquidated
after the hotel was sold in January 1996) 50 Resort hotel in Galveston, Texas
</TABLE>
-6-
<PAGE> 9
The Company's net investment in each of these entities is included in the
applicable caption of property, plant and equipment or real estate. The
Company's equity in the pretax earnings of these entities is included in the
applicable revenues caption of the consolidated statements of earnings and its
equity in pretax losses of these entities is included in the applicable
operating costs and expenses caption. A summary of the Company's net
investments in partnerships at April 30, 1996 and January 31, 1996 and its
equity in their pretax earnings (losses) for the three-month periods ended
April 30, 1996 and 1995 follows (in thousands):
<TABLE>
<CAPTION>
Equity in Pretax
Net Investment Earnings (Losses)
--------------------------- -----------------------
April 30, January 31, April 30, April 30,
1996 1996 1996 1995
---------- ---------- -------- --------
<S> <C> <C> <C> <C>
GAS SERVICES
Austin Chalk Natural Gas Marketing Services . . . $ 1,647 $ 2,531 $ (884) $ (284)
Belvieu Environmental Fuels . . . . . . . . . . . 24,348 21,702 2,646 1,081
C&L Processors Partnership . . . . . . . . . . . 15,943 14,147 796 (16)
Ferguson-Burleson County Gas Gathering System . . 52,942 58,331 2,639 1,220
Gulf Coast Fractionators . . . . . . . . . . . . 6,955 5,530 1,425 (288)
U.P. Bryan Plant . . . . . . . . . . . . . . . . 7,071 7,180 2,244 3,003
Others . . . . . . . . . . . . . . . . . . . . . 180 152 28 (180)
---------- ---------- -------- --------
$ 109,086 $ 109,573 8,894 4,536
========== ========== -------- --------
REAL ESTATE
Grogan's Mill Apartments . . . . . . . . . . . . $ 3,795 $ 3,744 51 80
The Woodlands Mall Associates . . . . . . . . . . 8,285 8,161 124 214
Woodlands Office Equities - '95 Limited . . . . . 9,271 9,306 131 -
Other partnerships (which own
commercial properties in The Woodlands) . . . 6,756 7,237 215 101
Lake Catamount Joint Venture . . . . . . . . . . 11,493 11,504 (11) (21)
The Fort Crockett Hotel Limited
(liquidated in January 1996) . . . . . . . . - - - (597)
---------- ---------- -------- --------
$ 39,600 $ 39,952 510 (223)
========== ========== -------- --------
$ 9,404 $ 4,313
======== ========
</TABLE>
Summarized earnings information (on a 100% basis), which is generally
reported on a one-month lag, for all entities accounted for on the equity
method for the three-month periods ended April 30, 1996 and 1995 follows (in
thousands):
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . . . $185,872 $101,324
Operating earnings . . . . . . . . . . . . . . . . . . . 30,042 15,561
Pretax earnings (before interest expense for those
entities whose activities are funded by capital
contributions of the owners) . . . . . . . . . . . . 21,420 9,288
</TABLE>
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 April 30, 1996 and January 31, 1996 and the
Company's proportionate share of such debt at April 30, 1996 is summarized in
the table which follows (in thousands):
-7-
<PAGE> 10
<TABLE>
<CAPTION>
Entity Total April 30, 1996 -- Company's Share
--------------------------- ------------------------------------
April 30, January 31, Non-
1996 1996 Recourse recourse Total
---------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
GAS SERVICES ACTIVITIES
Belvieu Environmental Fuels . . . . . $ 166,222 $ 176,000 $ 6,667 $ 48,740 $ 55,407
C&L Processors Partnership . . . . . 82,459 86,209 22,264 18,966 41,230
Gulf Coast Fractionators . . . . . . 71,375 74,250 3,021 24,637 27,658
---------- ---------- --------- ---------- ----------
320,056 336,459 31,952 92,343 124,295
---------- ---------- --------- ---------- ----------
REAL ESTATE ACTIVITIES
Grogan's Mill Apartments . . . . . . 18,700 18,799 - 9,352 9,352
The Woodlands Mall Associates . . . . 59,126 59,126 29,563 - 29,563
Woodlands Office Equities -'95
Limited . . . . . . . . . . . . . 12,621 12,666 1,893 1,262 3,155
Others (which own commercial
properties in The Woodlands) . . . 37,752 37,877 2,242 15,397 17,639
---------- ---------- --------- ---------- ----------
128,199 128,468 33,698 26,011 59,709
---------- ---------- --------- ---------- ----------
$ 448,255 $ 464,927 $ 65,650 $ 118,354 $ 184,004
========== ========== ========= ========== ==========
</TABLE>
For certain of the partnership indebtedness, the Company has guaranteed the
repayment of portions of the obligations attributable to the interests of its
partners. Such amounts, which totaled $31,404,000 at April 30, 1996, are not
included in the amounts shown above as the Company's share. See Note 4 of
Notes to Consolidated Financial Statements on page 49 of the Company's Fiscal
1996 Annual Report for additional information concerning the indebtedness of
these partnerships.
(4) LONG-TERM DEBT
In April 1996, the Company entered into an agreement with a group of banks for
a facility to provide letters of credit to collateralize appeals bonds in
connection with the North Texas water well litigation discussed in Note 6
(including the $204,000,000 judgment). Additional letters of credit can be
issued under this facility, if required, during a three-year period ending in
April 1999, and any amounts drawn against the letters of credit are payable in
April 2000.
In connection with entering into the letter of credit facility, the
Company's bank revolving credit agreements were also revised in April 1996 to
provide committed facilities aggregating $200,000,000 for the Company's Energy
and Real Estate operations. At April 30, 1996, the Company had $188,000,000 in
additional borrowing capacity available under these agreements. See Note 5 of
Notes to Consolidated Financial Statements on pages 50 and 51 of the Company's
Fiscal 1996 Annual Report for additional information concerning the Company's
indebtedness.
(5) INCOME TAXES
Income taxes for the three-month periods ended April 30, 1996 and 1995 consist
of the following (in thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
CURRENT
Federal . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,747 $ 3,114
State . . . . . . . . . . . . . . . . . . . . . . . . . . 496 346
-------- --------
3,243 3,460
-------- --------
DEFERRED
Federal . . . . . . . . . . . . . . . . . . . . . . . . . 8,789 (5,322)
State . . . . . . . . . . . . . . . . . . . . . . . . . . 339 235
-------- --------
9,128 (5,087)
-------- --------
$ 12,371 $ (1,627)
======== ========
</TABLE>
The estimated annual tax rates used in computing the income tax provisions
for the three-month periods ended April 30, 1996 and 1995 were 34.7% and 33.8%,
respectively, versus the 35% statutory Federal income tax rate.
-8-
<PAGE> 11
(6) COMMITMENTS AND CONTINGENCIES
NORTH TEXAS WATER WELL LITIGATION. As previously reported, a judgment was
entered in March 1996 against a subsidiary of the Company by a Wise County,
Texas court awarding $4,051,760 in actual damages (consisting of $339,266 for
economic damages and $3,712,494 for pain, mental anguish, inconvenience, etc.)
and $200,000,000 in exemplary damages to eight plaintiff groups, who claimed
that the natural gas operations of the subsidiary had affected their water
wells.
The Company believes scientific evidence indicates that its operations
were not the source of the alleged problems. Further, the economic damages
were not large relative to the total judgment, and no long-term medical
problems were even alleged. Arrangements have been made to provide the surety
bonds required to appeal this case, and the Company is taking every possible
step to overturn this judgment. The Company and its outside counsel believe
there are numerous legal bases for a complete reversal on appeal by rendition
of a judgment in the Company's favor or a reversal and remand of the case for a
new trial. In any event, the Company and its outside counsel believe that the
judgment will be reversed or significantly reduced upon completion of the
appeals process.
In addition, similar lawsuits (each claiming damages of more than
$1,000,000) have been brought by 29 other plaintiff groups, 17 of which have
been combined. A June 3, 1996 trial setting for these combined cases was
postponed when the judge who heard the earlier case recused (removed) himself
from presiding over this trial. A new judge subsequently was appointed, but a
new trial date was not set. One of the other cases has been set for trial in
August 1996, and trial dates have not been set for the 11 remaining suits.
While the amounts that ultimately will be incurred are not determinable at
this time, a $15,000,000 charge was recorded in January 1996 to provide for
costs the Company considers probable that it will incur in connection with all
the existing litigation related to this matter. Consistent with the Company's
belief that it is not responsible for the alleged problems, this provision
consisted primarily of expected future costs for attorneys' fees, bonds, etc.,
to appeal the judgment to the highest possible level and to defend the Company
in the other suits. An amount for disposition of this litigation was also
included in the accrual.
Although the Company believes that the litigation and the claims for
damages ultimately will be resolved for significantly less than the amount of
the judgment and the claims for damages, it is possible that the Company's
costs could exceed its $15,000,000 accrual. However, the Company has no basis
on which to estimate a range of such possible additional losses, if any,
because of errors it believes were made by the trial court and since the
Company believes that it was not responsible for the water well problems and
that its actions did not provide a basis for the awarding of exemplary damages.
If the Company ultimately is determined to have significant liabilities in
connection with this litigation, it believes that recoveries should be available
from the companies that have participated in its longstanding insurance program.
Accordingly, the Company has notified the numerous insurance carriers whose
policies covered the Company's North Texas operations over the period that might
relate to the alleged problems. In May 1996, a lawsuit was filed by one of the
Company's insurers seeking a declaratory judgment that it does not have a duty
to indemnify the Company in these lawsuits. In June 1996, the Company filed a
declaratory action in another court seeking to have the court declare respective
rights of the parties, including duties of the insurance carriers to defend and
indemnify the Company under its insurance policies. Because of uncertainties
regarding the Company's ultimate liability and when the alleged problems
occurred and the large number of insurance carriers that might be involved, the
Company is presently unable to predict the outcome of the insurance-related
legal actions or to estimate the magnitude or timing of any such recoveries.
OTHER LITIGATION OR POTENTIAL LITIGATION. Legal actions have been brought or
threatened against the Company by 59 home owners in The Woodlands and against
certain developers, governmental entities and the Company by 64 property owners
in surrounding communities related to flooding in the North Houston area in
October 1994. These claimants generally are seeking reimbursements for
property damages, but some are making claims for deceptive trade practices or
mental anguish or are claiming that the Company contributed to the flooding of
their homes. The Company contends that it was not responsible for these
damages, which it believes resulted from a record, near 500-year flood and were
not preventable with the exercise of ordinary care and generally accepted
drainage design. The Company and its outside counsel believe it is not
probable that the Company will incur losses in connection with these legal
actions that will be material to its financial statements.
-9-
<PAGE> 12
On November 21, 1995, a jury in a district court in Beaumont, Texas,
rendered a judgment against the Company finding that, by using the surface of a
tract of land for a gas storage project, it had unreasonably prevented the
plaintiff from developing its oil rights. The judgment included approximately
$1,600,000 in actual damages, interest and costs plus $3,000,000 in exemplary
damages. The Company and its outside legal counsel believe it is probable that
the judgment will be overturned or its amount significantly reduced upon
completion of the appeal process.
A group of plaintiffs' attorneys is attempting to convert to class-action
status a lawsuit that challenges the Company's royalty payment practices in
North Texas. The Company believes that its royalty payment practices have been
appropriate and will aggressively defend itself against any such litigation.
Because of the limited discovery and factual investigation that has taken place
to date, it is not possible to evaluate the range of possible exposure.
However, based on the information presently available, the Company and its
outside counsel believe it is not probable that the Company will incur losses
in connection with this litigation that will be material to its financial
statements.
The Company also is party to other claims and 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
losses, if any, resulting from the ultimate resolution of the matters discussed
in this paragraph will not be material to the Company's financial statements.
MORTGAGE ACTIVITIES. Mitchell Mortgage Company (MMC) administers approximately
$158,000,000 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.
(7) SEGMENT INFORMATION
Selected industry segment data for the three-month periods ended April 30, 1996
and 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
Segment Total
Outside Operating Operating
Revenues Earnings Earnings
---------------------- --------------------- ----------------------
1996 1995 1996 1995 1996 1995
---------- ---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
EXPLORATION AND PRODUCTION
Operations . . . . . . . . . . . . . . . . . . . $ 58,108 $ 63,775 $ 12,320 $ 17,379 $ 9,266 $ 14,188
Unusual earnings items . . . . . . . . . . . . . 3,444 - 7,323 - 7,323 -
Personnel reduction
program costs . . . . . . . . . . . . . . . . . - - - (7,935) - (7,935)
---------- ---------- -------- -------- -------- --------
61,552 63,775 19,643 9,444 16,589 6,253
---------- ---------- -------- -------- -------- --------
GAS SERVICES
Natural gas processing . . . . . . . . . . . . . 82,277 81,238 12,370 9,642 11,526 8,760
Natural gas gathering
and marketing . . . . . . . . . . . . . . . . . 51,110 37,440 6,597 2,723 5,646 1,729
Other . . . . . . . . . . . . . . . . . . . . . . 4,142 833 3,783 566 3,756 539
Personnel reduction
program costs . . . . . . . . . . . . . . . . . - - - (3,600) - (3,600)
---------- ---------- -------- -------- -------- --------
137,529 119,511 22,750 9,331 20,928 7,428
---------- ---------- -------- -------- -------- --------
REAL ESTATE
Operations . . . . . . . . . . . . . . . . . . . 38,272 31,689 9,695 6,025 8,483 4,542
Personnel reduction
program costs . . . . . . . . . . . . . . . . . - - - (3,000) - (3,000)
---------- ---------- -------- -------- -------- --------
38,272 31,689 9,695 3,025 8,483 1,542
---------- ---------- -------- -------- -------- --------
CORPORATE . . . . . . . . . . . . . . . . . . . . - - - - (3,024)(b) (9,976)(b)
---------- ---------- -------- -------- -------- --------
$ 237,353 $ 214,975 $ 52,088 $ 21,800 $ 42,976 $ 5,247
========== ========== ======== ======== ======== ========
<CAPTION>
Capital
DD&A Expenditures(a)
------------------- ---------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
EXPLORATION AND PRODUCTION
Operations . . . . . . . . . . . . . . . . . . . $24,819 $23,478 $24,140 $31,226
Unusual earnings items . . . . . . . . . . . . . - - -
Personnel reduction
program costs . . . . . . . . . . . . . . . . . - - -
-------- -------- -------- --------
24,819 23,478 24,140 31,226
-------- -------- -------- --------
GAS SERVICES
Natural gas processing . . . . . . . . . . . . . 764 1,705 1,795 2,400
Natural gas gathering
and marketing . . . . . . . . . . . . . . . . . 940 1,803 3,113 6,566
Other . . . . . . . . . . . . . . . . . . . . . . 27 27 74 1
Personnel reduction
program costs . . . . . . . . . . . . . . . . . - - -
-------- -------- -------- --------
1,731 3,535 4,982 8,967
-------- -------- -------- --------
REAL ESTATE
Operations . . . . . . . . . . . . . . . . . . . 1,442 2,370 14,178 9,236
Personnel reduction
program costs . . . . . . . . . . . . . . . . . - - - -
-------- -------- -------- --------
1,442 2,370 14,178 9,236
-------- -------- -------- --------
CORPORATE . . . . . . . . . . . . . . . . . . . . 698 884 2,056 1,011
-------- -------- -------- --------
$ 28,690 $ 30,267 $ 45,356 $ 50,440
======== ======== ======== ========
</TABLE>
- ---------------
(a) On accrual basis, including exploratory expenditures.
(b) General corporate expenses, including personnel reduction program costs of
$5,665 in 1995.
-10-
<PAGE> 13
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,
receivables with discounted values of $91,608,000 and $82,369,000,
respectively, related to payments of $95,000,000 and $91,000,000 due from
Natural on February 1, 1996 and 1997 and ownership (effective in January 1998)
of Natural's gathering system that serves 1,500 of the Company's North Texas
wells. The discounted 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, the
Company reported a gain of $205,256,000 on the contract buyout in the second
quarter of fiscal 1996. Effective with the contract's termination on July 1,
1995, the Company began receiving market-sensitive prices for 80,000 Mcf per
day of natural gas for which previously it had received $4.00 per MMBtu in
calendar 1995.
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.
Two unusual earnings items contributed a total of $7,323,000 to
exploration and production segment operating earnings during fiscal 1997's
first quarter. The first of these items consisted of $3,879,000 of severance
tax refunds (net to the Company). Acting on an application filed by the
Company, the Texas Railroad Commission in February 1996 designated a portion of
the Boonsville field in Wise County as a "tight gas formation area." This
allowed the Company to apply for and receive severance tax exemptions covering
production from this field for the period from September 1991 through August
2001.
Second, the Company received $3,444,000 in settlement of breach of
contract claims brought against Columbia Gas Transmission Company. In
conjunction with its filing for protection under the bankruptcy laws in July
1991, Columbia unilaterally rejected its high-priced, long-term natural gas
purchase contracts, including one with the Company. During fiscal 1997's first
quarter, the Company reached an agreement with Columbia as to the amount of the
contract termination damages; after approval by the bankruptcy court, Columbia
paid such damages to the Company.
Because of their magnitude and unusual nature, and in accordance with
Accounting Principles Board Opinion No. 30, the items discussed in the
preceding paragraphs have been reported as separate components of segment
operating earnings.
(8) SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid--exclusive of amounts capitalized, but including amounts reported
as cost of sales for finance operations- -totaled $5,308,000 and $7,148,000
during the three-month periods ended April 30, 1996 and 1995. Income taxes
paid during these periods totaled $190,000 and $1,875,000. There were no
signif icant non-cash investing or financing activities during the three-month
periods ended April 30, 1996 and 1995.
-11-
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
POSITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING INFORMATION
This Form 10-Q includes forward-looking statements. These include, among
others, the discussions below concerning the Company's liquidity and capital
resources. Although the Company believes that its expectations are based on
reasonable assumptions, it can give no assurances that its goals will be
achieved. Important factors that could cause actual results to differ
materially from those in the forward-looking statements included herein
include, among others, the timing and extent of changes in commodity prices for
natural gas, NGLs and crude oil, the impact of pending North Texas water well
litigation against the Company and related insurance recoveries, the completion
of asset sales as projected, the attainment of forecasted operating levels and
reserve replacement, and general economic conditions such as the level of
interest rates and (in the case of real estate operations) disposable income of
and the availability and cost of mortgage financing to prospective property
purchasers.
LIQUIDITY AND CAPITAL RESOURCES
As discussed in more detail on pages 27 through 29 of the Company's Fiscal 1996
Annual Report, over the last two years an extensive refocusing of the Company's
business activities has been undertaken and the groundwork for improved
profitability has been laid. As a result of these efforts and favorable energy
and real estate market conditions, the Company's earnings and cash flows in
fiscal 1997's first quarter were well above the levels achieved in the
comparable prior-year period. This was accomplished despite the fact that the
prior period's results benefitted from the premium- priced Natural contract
that was terminated on July 1, 1995. While assets previously identified for
sale with a total book value of approximately $75 million currently are being
marketed, the refocusing program is well along the road to being accomplished,
and management's attention increasingly is being directed toward maximizing the
value of the Company's core assets and other initiatives to increase
shareholder value.
Since the beginning of fiscal 1995, the Company's long-term debt has been
reduced by $241 million. This includes an $84 million reduction in fiscal
1997's first quarter that resulted largely from the collection in February of
the second installment of the proceeds associated with the early termination
effective July 1, 1995 of the Company's premium-priced North Texas natural gas
sales contract with Natural Gas Pipeline Company of America (Natural).
Financial forecasts indicate that the Company's cash flows (including receipt
of the third installment of the Natural contract termination proceeds),
supplemented as necessary with borrowings under its committed bank credit
agreements, will be sufficient to provide needed short-term liquidity and to
repay $100 million of senior notes maturing on February 15, 1997 and a $30
million term loan maturing on May 15, 1997.
As discussed in the Company's Fiscal 1996 Annual Report and Form 10-K and
in Note 6 on page 9 of this Form 10-Q, a $204 million judgment was entered on
March 1, 1996 against a subsidiary and additional similar cases are pending.
The Company is taking every possible step to overturn this judgment and in
April 1996 made arrangements to post the surety bonds needed to proceed with
the appeal. The Company and its outside counsel continue to believe that the
judgment will be reversed or significantly reduced upon completion of the
appeals process. Also, the trial date for 17 of the remaining cases was
postponed from June 3, 1996 when the judge presiding over this trial removed
himself from any further involvement in the case after the Company filed
motions seeking to remove him. See "Legal Proceedings" on page 17 of this
Form 10-Q for additional information concerning the North Texas water well
litigation.
While the judgment and pending cases remain outstanding, the Company
expects that its access to public debt and equity markets will be reduced and
its costs for any such transactions will be increased. Presently, however, the
Company's plans do not contemplate the need to access public debt or equity
markets during fiscal 1997 or 1998, a period that is expected to be sufficient
for completing the appeals process. Because of this and since the Company's
credit agreements have been amended (as previously reported) to allow their
continued use as the primary means of funding its short-term liquidity needs,
the Company currently believes the litigation will not have a significant
adverse impact on its ability to meet its financial obligations or to fund its
ongoing operations during the appeals process.
However, the success or failure of the appeals and the results of the
pending cases could have a significant impact on the Company's liquidity and
funding needs. If, as the Company expects, the judgment ultimately is
overturned or significantly reduced, the litigation should not have a material
impact on the Company's financial position. Conversely, should the judgment
ultimately be affirmed, this would have a material adverse affect on both the
Company's liquidity and its financial statements.
-12-
<PAGE> 15
COMMON STOCK REPURCHASES
During April and May 1996, the Company purchased in the open market 243,400
shares of its common stock at an aggregate cost of $3.9 million. This
completed purchases under the 1,000,000-share reacquisition authority approved
by the Board of Directors in December 1994.
CAPITAL AND EXPLORATORY EXPENDITURES
As previously reported, the Company's budget for fiscal 1997 expenditures
totaled $213.5 million. During the first quarter, such spending totaled $45.4
million and was at a level below one-fourth of the annual budget. This was
largely related to the timing of drilling and real estate commercial property
construction expenditures, and it is expected for the full year that spending
will more nearly approximate the budgeted amounts. In response to
price-related improvements in well economics and cash flows, management has
decided to increase the pace of exploration and production capital
expenditures. It is expected that this will result in an increase in the fiscal
1997 capital budget ranging from $15 to $25 million.
OPERATING STATISTICS
Certain operating statistics (including, where applicable, proportional
interests in equity partnerships) for the three-month periods ended April 30,
1996 and 1995 follow:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
AVERAGE DAILY VOLUMES
Natural gas sales (Mcf) . . . . . . . . . . . . . . . . . . . . . 231,900 224,900
Crude oil and condensate sales (Bbls) . . . . . . . . . . . . . . 5,600 5,500
Natural gas liquids produced (Bbls) . . . . . . . . . . . . . . . 44,500 48,400
Pipeline throughput (Mcf) . . . . . . . . . . . . . . . . . . . 441,100 360,800
AVERAGE SALES PRICES
Natural gas (per Mcf) . . . . . . . . . . . . . . . . . . . . . . $ 2.27 $ 2.51
Crude oil and condensate (per Bbl) . . . . . . . . . . . . . . . 19.45 17.35
Natural gas liquids produced (per Bbl) . . . . . . . . . . . . . 14.15 11.51
RESIDENTIAL LOT SALES - THE WOODLANDS
Lots sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . 370 185
Average price per lot . . . . . . . . . . . . . . . . . . . . . . $39,622 $38,833
Average price per square foot . . . . . . . . . . . . . . . . . . 4.06 3.78
</TABLE>
RESULTS OF OPERATIONS - THREE MONTHS ENDED APRIL 30, 1996
COMPARED WITH THREE MONTHS ENDED APRIL 30, 1995
The Company's results for the three-month periods ended April 30, 1996 and
1995--both before and after unusual items--are summarized in the table on the
following page. Net earnings for the three months ended April 30, 1996 were
$23.2 million, compared with a net loss of $3.2 million in the prior-year
period (unusual items increased the current-year period's net earnings by $4.5
million and decreased those of the prior-year period by $12.5 million).
Excluding the unusual items, earnings for the three months ended April 30,
1996 of $18.7 million were $9.4 million above those of the comparable
prior-year period. Major contributors to the earnings improvement included
higher energy prices for market-sensitive natural gas and NGLs and strong
residential lots sales in The Woodlands. Also contributing to this improvement
were sharply higher earnings from the Company's interests in MTBE and NGL
fractionation plant partnerships and declines in operating costs and expenses
(due to fiscal 1996 personnel reductions), interest expense (because of debt
paydowns) and gas services' depreciation expense (because of asset sales and
write-downs). The quarter-to-quarter earnings improvement was particularly
noteworthy considering the fact that the prior-year period benefitted from the
higher sales prices for the Company's North Texas natural gas production that
existed prior to the buyout of the Natural contract effective July 1, 1995.
-13-
<PAGE> 16
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 1996 AMOUNTS . . . . . . . . . . . $ 9.5 $ 9.3 $ 3.0 $(26.6) $ (4.8) $ (3.2)
ELIMINATE IMPACT OF FISCAL 1996
UNUSUAL ITEM--Personnel reduction
program costs (see page 11) . . . . . 7.9 3.6 3.0 5.7 20.2 12.5
------ ------ ------ ------ ------ ------
FISCAL 1996 AMOUNTS BEFORE UNUSUAL ITEM . 17.4 12.9 6.0 (20.9) 15.4 9.3
------ ------ ----- ------ ------ ------
MAJOR INCREASES (DECREASES)
Natural gas
Contract buyout . . . . . . . . . . . (13.2) - - .4 (12.8) (8.3)
Higher market-sensitive sales price . 5.7 - - - 5.7 3.7
Higher volumes . . . . . . . . . . . . 1.5 - - - 1.5 1.0
Higher crude and condensate
prices and volumes . . . . . . . . . . 1.2 - - - 1.2 .8
Lower salary and benefits expenses resulting
from April 1995 personnel reductions . 1.5 .5 .3 1.5 3.8 2.5
Proved-property impairments . . . . . . . (3.1) - - - (3.1) (2.0)
Reduced exploratory dry-hole costs . . . 1.2 - - - 1.2 .8
Fiscal 1996 amortization of deferred
gas contract restructuring proceeds . (2.6) - - - (2.6) (1.7)
Natural gas processing
NGL price . . . . . . . . . . . . . . - 10.4 - - 10.4 6.8
Higher feedstock costs . . . . . . . - (7.8) - - (7.8) (5.1)
Lower depreciation and lease expenses due
to fiscal 1996 asset sales and
write-downs . . . . . . . . . . . . . - 2.9 - - 2.9 1.9
Higher offsystem gas marketing margins . - 1.9 - - 1.9 1.2
Equity in fractionation plant earnings . - 1.7 - - 1.7 1.1
Equity in MTBE plant earnings . . . . . . - 1.5 - - 1.5 1.0
Real Estate--Residential lot
sales in The Woodlands . . . . . . . . - - 2.9 - 2.9 1.9
Interest expense incurred . . . . . . . . - - - 2.3 2.3 1.5
Other . . . . . . . . . . . . . . . . . . 2.7 (1.2) .5 .2 2.2 2.3
------ ------ ------ ------ ------ ------
(5.1) 9.9 3.7 4.4 12.9 9.4
------ ------ ----- ------ ------ ------
FISCAL 1997 AMOUNTS BEFORE UNUSUAL ITEMS 12.3 22.8 9.7 (16.5) 28.3 18.7
FISCAL 1997 UNUSUAL ITEMS--Unusual
earnings items (see page 11) . . . . . 7.3 - - - 7.3 4.5
------ ------ ------ ------ ------ ------
FISCAL 1997 AMOUNTS AFTER UNUSUAL ITEMS . $ 19.6 $ 22.8 $ 9.7 $(16.5) $ 35.6 $ 23.2
====== ====== ====== ====== ====== ======
</TABLE>
- ---------------
*Includes general and administrative expense and other expense.
EXPLORATION AND PRODUCTION OVERVIEW
Exploration and Production operating earnings before unusual items declined
$5.1 million during the three months ended April 30, 1996 to $12.3 million.
This unfavorable comparison was primarily the result of the adverse impact of
lower natural gas realizations after the Natural contract buyout effective July
1, 1995. The effect of this was substantially offset, however, by other
factors.
NATURAL GAS - CONTRACT BUYOUT. Effective with the contract buyout, the Company
began receiving market-sensitive prices for approximately 80 MMcf per day of
North Texas residue gas previously sold at a substantially higher contract
price of $4.00 per MMBtu. As a result, gas sales revenues were substantially
less than they had been in the prior-year period. The Company's realizations
for its North Texas gas previously sold to Natural averaged $1.99 per MMBtu
during fiscal 1997's first quarter--a price that was favorably affected by
seasonal and other market factors--and operating earnings on a period-to-
period basis were lowered by $13.2 million. After interest income accrued on
the Company's share of the receivables from Natural and income taxes, the net
earnings impact was $8.3 million.
-14-
<PAGE> 17
NATURAL GAS - HIGHER MARKET-SENSITIVE SALES PRICE ($5.7 MILLION INCREASE). For
production outside the North Texas area, the Company's average market-sensitive
natural gas sales price during the first quarter of fiscal 1997 was $2.23 per
Mcf, or 47% higher than the $1.52 realized during the comparable period of the
prior year.
NATURAL GAS - HIGHER VOLUMES ($1.5 MILLION INCREASE). The increase in natural
gas sales volumes (to 231.9 MMcf per day from 224.9 during the prior year's
first quarter) was principally due to the elimination of volume constraints
imposed by the Natural contract and actions taken by the Company after it
gained operational control of Natural's gathering system in July of the prior
year.
HIGHER CRUDE AND CONDENSATE PRICES AND VOLUMES ($1.2 MILLION INCREASE). The
average sales price for crude and condensate during fiscal 1997's first quarter
was $19.45 per barrel, up 12% from the $17.35 of the corresponding prior-year
period, improving operating earnings by $1.0 million. An increase in average
production volumes--to 5,600 barrels per day from 5,500--improved operating
earnings by $.2 million. This volume increase was principally attributable to
production from the Lake Creek field, which the Company acquired in September
1995.
PROVED-PROPERTY IMPAIRMENTS ($3.1 MILLION DECREASE). Disappointing drilling
results for one well and downward revisions in reserve estimates for other
properties resulted in the recording during fiscal 1997's first quarter of an
impairment of $3.1 million for one field in the Gulf of Mexico. No such
impairments occurred in the prior-year period.
REDUCED EXPLORATORY DRY-HOLE COSTS ($1.2 MILLION INCREASE). Exploratory
dry-hole costs totaled only $.1 million during fiscal 1997's first quarter,
down from $1.3 million in the comparable prior-year period.
FISCAL 1996 AMORTIZATION OF DEFERRED GAS CONTRACT RESTRUCTURING PROCEEDS ($2.6
MILLION DECREASE). Prior to the buyout of the Natural contract effective July
1, 1995, certain deferred contract restructuring proceeds had been amortized.
Although not increasing cash flows, such amortization added $2.6 million to
operating earnings in fiscal 1996's first quarter.
GAS SERVICES OVERVIEW
Gas Services operating earnings before unusual items rose $9.9 million during
the three months ended April 30, 1996 largely because of improved NGL prices,
higher offsystem gas marketing margins and increased earnings from the
Company's equity interests in fractionation and MTBE plant partnerships. The
favorable impact of these items was partially offset by higher NGL feedstock
costs which resulted from the fiscal 1997 period's higher prices for
market-sensitive natural gas and NGLs. NGL production volumes averaged 44,500
barrels per day, down from 48,400 in the prior-year period. Contributing to
this decline was the December 1995 sale of three plants which produced an
average of 2,400 barrels per day in the fiscal 1996 period and other
nonrecurring factors which reduced production during fiscal 1997's first
quarter.
NATURAL GAS PROCESSING - NGL PRICE ($10.4 MILLION INCREASE). The average price
for NGLs produced during fiscal 1997's first quarter of $14.15 per barrel was
$2.64 (23%) above the average for the corresponding prior-year period,
increasing segment operating earnings by $10.4 million. NGL prices rose
largely in response to strong winter demand and low inventory levels.
NATURAL GAS PROCESSING - HIGHER FEEDSTOCK COSTS ($7.8 MILLION DECREASE).
Feedstock costs consist primarily of amounts paid to the natural gas producers.
Such amounts are based either on the value of natural gas consumed in
processing under keep-whole agreements or on a percentage of the value of NGLs
produced under percent-of-proceeds agreements. Accordingly, feedstock costs
under keep-whole agreements vary directly with market-sensitive natural gas
prices while costs under percentage-of-proceeds agreements vary directly with
NGL prices. Largely because of higher market-sensitive gas and NGL prices
during fiscal 1997's first quarter, feedstock costs rose, lowering operating
earnings by $7.8 million.
-15-
<PAGE> 18
HIGHER OFFSYSTEM GAS MARKETING MARGINS ($1.9 MILLION INCREASE). Strong winter
demand throughout much of the country, coupled with low storage levels,
resulted in unusual volatility in natural gas sales prices throughout much of
fiscal 1997's first quarter. Since much of the gas supply costs of the
Company's offsystem marketing activities are based on market indices set on the
first day of each month, sales price increases after costs had been set in
February and March caused gas marketing profits to be larger than normal.
EQUITY IN FRACTIONATION PLANT EARNINGS ($1.7 MILLION INCREASE). The Company's
equity in the earnings of Gulf Coast Fractionators totaled $1.4 million during
fiscal 1997's first quarter versus a loss of $.3 million in the comparable
prior-year period. This earnings improvement was primarily the result of
higher revenues (due to increased throughput and per-unit fractionation fees)
and lower operating costs.
EQUITY IN MTBE PLANT EARNINGS ($1.5 MILLION INCREASE). During the first
quarter of fiscal 1997, the Company's one-third share of the pretax earnings of
the MTBE plant partnership totaled $2.6 million, or $1.5 million more than was
recorded in the comparable prior-year period. The plant, which began producing
in the summer of 1994, experienced start-up problems which extended into the
first quarter of fiscal 1996. The plant's daily production averaged 14,500
barrels during the first quarter of fiscal 1997.
REAL ESTATE OVERVIEW
Operating earnings from real estate activities during the first three months of
fiscal 1996 totaled $9.7 million, or $3.7 million more than was earned
(exclusive of unusual items) during the fiscal 1996 period. This improvement
was largely attributable to record residential lot sales in The Woodlands but
also included the benefit of increases in occupancy and room rates at The
Woodlands Executive Conference Center and Resort.
THE WOODLANDS - RESIDENTIAL LOT SALES ($2.9 MILLION INCREASE). The Company
sold 370 residential lots to builders during the three months ended April 30,
1996. This represents the highest level ever for a single quarter and was
twice the amount for the Company's prior-year period. A strong Houston housing
market, favorable interest rates for home buyers and the wide variety of lots
available in The Woodlands were the primary factors contributing to this strong
performance.
OTHER
INTEREST EXPENSE INCURRED. Interest expense incurred during fiscal 1997's
first quarter (of $14.2 million) declined by $2.3 million because of a $136.5
million decline in the average balance of outstanding debt. This occurred
principally because of debt paydowns using proceeds received in July 1995 and
February 1996 from the Natural gas contract buyout and from fiscal 1996 sales
of properties.
-16-
<PAGE> 19
Part II - Other Information
ITEM 1. LEGAL PROCEEDINGS
Over the years, the Company has generally been successful in managing its
business affairs so that legal controversies have been substantially mitigated
or prevented. In addition, the ultimate outcome of lawsuits brought against
the Company has not resulted in material payments by the Company. However,
from time-to-time there are potentially significant legal developments which
require comment, including several which were reported in the Company's Fiscal
1996 Form 10-K. The information which follows updates that discussion for
subsequent material developments.
In the suits known as Carol R. Bailey et al versus MEC (Cause No. 95-08-422 in
the 271st Judicial District Court, Wise County, Texas), the Company filed a
motion to recuse (remove) or disqualify (reverse past actions and remove) the
judge primarily on the grounds that he has strong, continuing financial ties to
the plaintiffs' law firm. At a May 20, 1996 proceeding to hear this motion,
the judge voluntarily recused himself. Subsequently, a new judge was appointed
to preside in this case, and the Company's motion to disqualify the original
judge was denied. The previously set June 3, 1996 trial date was postponed,
with no new trial setting.
In the suits known as James Bartlett et al versus Mitchell Energy Corporation
(Cause No. 87-04-190 in the same court) which were tried in January 1996 and
resulted in a $204 million judgement against the Company, the Company filed a
motion on June 7, 1996 to recuse or disqualify the judge, together with a
motion for a new trial. The judge who heard this case was the same one that
recused himself in the Bailey case mentioned above. These motions have not
been set for hearing. This lawsuit was the subject of mediation on May 2,
1996, but no settlement was reached.
The Company is continuing to analyze the extent to which carriers that have
participated in its longstanding insurance program should provide recoveries if
the Company ultimately is determined to have liabilities in the Bartlett, Bailey
and other related cases. On May 24, 1996, one of the Company's excess insurance
insurers filed a complaint for declaratory judgment in the United States
District Court for the Northern District of Texas, Dallas Division, in United
States Fire Insurance Company et al versus Mitchell Energy & Development
Corporation et al (Cause No. 3-96CV1478-4), seeking a judgment that it does not
have a duty to indemnify the Company in these lawsuits. On June 5, 1996, the
Company filed a declaratory action proceeding in Mitchell Energy & Development
Corp. et al versus United States Fire Insurance Company, et al (Cause No.
96-06-01878-CV in the 221st Judicial District Court, Montgomery County, Texas)
seeking to have the court declare respective rights of the parties, including
duties of its insurance carriers to defend and indemnify the Company under the
terms and conditions of its insurance policies. No further action has been
taken to date in these lawsuits.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
12 Computation of ratio of earnings to fixed charges
(b) No reports were filed on Form 8-K during the three-month period
ended April 30, 1996.
-17-
<PAGE> 20
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: June 12, 1996 By: /s/ Philip S. Smith
--------------------------------------
Philip S. Smith
Senior Vice President - Administration
and Chief Financial Officer
-18-
<PAGE> 21
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
------- -----------
12 Computation of ratio of earnings to fixed charges
<PAGE> 1
Exhibit 12
Mitchell Energy & Development Corp.
Computation of Ratio of Earnings to Fixed Charges
(dollar amounts in thousands)
<TABLE>
<CAPTION>
Three
Months
Fiscal Year Ended January 31 Ended
----------------------------------------------------------- April 30,
1992 1993 1994 1995 1996 1996
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
EARNINGS
Pretax earnings . . . . . . . . . . . . $ 73,188 $ 60,022 $ 47,376 $ 70,551 $ 58,331 $ 35,620
Add (Deduct):
Previously capitalized interest
charged against pretax earnings . 14,887 9,545 11,552 22,158 79,499(d) 4,966
Losses of less-than-50%-owned
persons . . . . . . . . . . . . . 26 99 32 1,104 9 884
Fixed charges (see below) . . . . . 90,107 85,169 84,788 85,988 78,992 17,226
Reverse effect of inclusion of interest
capitalized in fixed charges . . . (37,460) (34,161) (33,956) (33,011) (28,561) (6,385)
Undistributed earnings of
less-than-50%-owned persons . . . (10,521) (10,305) (3,594) (914) (4,321) (3,997)
---------- ---------- ---------- ---------- ---------- ----------
$ 130,227 $ 110,369 $ 106,198 $ 145,876 $ 183,949 $ 48,314
========== ========== ========== ========== ========== ==========
FIXED CHARGES
Interest expense incurred
Consolidated (a) (b) . . . . . . . . $ 84,025 $ 77,451 $ 75,252 $ 71,570 $ 65,802 $ 14,557
50%-owned persons . . . . . . . . . 3,284 4,609 6,236 7,912 9,957 2,052
Less-than-50%-owned persons . . . . - - - 3,032(e) - -
---------- ---------- ---------- ---------- ---------- ----------
87,309 82,060 81,488 82,514 75,759 16,609
Portion of rental expense
representing interest (c) . . . . . 2,798 3,109 3,300 3,474 3,233 617
---------- ---------- ---------- ---------- ---------- ----------
$ 90,107 $ 85,169 $ 84,788 $ 85,988 $ 78,992 $ 17,226
========== ========== ========== ========== ========== ==========
RATIO OF EARNINGS TO FIXED CHARGES . . 1.45 1.30 1.25 1.70 2.33 2.80
========== ========== ========== ========== ========== ==========
</TABLE>
- ---------------
(a) Consists of interest expense as reported in consolidated statements of
earnings and interest expense related to finance operations which is
reported as costs and expenses in the consolidated statements of earnings.
(b) At April 30, 1996, the Company had outstanding guaranties of the
indebtedness of third parties totaling approximately $17,600,000 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 $300,000 for the three months ended April 30, 1996, have
been excluded from the reported fixed charges.
(c) Represents one-third of rental expense under operating lease agreements.
(d) Includes charges totaling $66,073,000 in connection with real estate
property write-downs and timberlands sales.
(e) At January 31, 1995, the Company had an outstanding 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 on
May 31, 1995. Because of this, interest expense incurred during fiscal
1995 of $3,032,000 attributable to the Company's share of BEF's debt (all
of which was capitalized by BEF) was included in the fixed charges of the
Company. This guaranty was subsequently eliminated when BEF's debt was
converted to a term loan during fiscal 1996.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1996
<PERIOD-END> APR-30-1996
<CASH> 47,323
<SECURITIES> 0
<RECEIVABLES> 113,978
<ALLOWANCES> 2,094
<INVENTORY> 10,327
<CURRENT-ASSETS> 266,562
<PP&E> 2,040,905
<DEPRECIATION> 1,327,056
<TOTAL-ASSETS> 1,765,411
<CURRENT-LIABILITIES> 315,878
<BONDS> 647,301
<COMMON> 5,386
0
0
<OTHER-SE> 490,064
<TOTAL-LIABILITY-AND-EQUITY> 1,765,411
<SALES> 233,909
<TOTAL-REVENUES> 237,353
<CGS> 0
<TOTAL-COSTS> 185,265
<OTHER-EXPENSES> 8,689
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,779
<INCOME-PRETAX> 35,620
<INCOME-TAX> 12,371
<INCOME-CONTINUING> 23,249
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,249
<EPS-PRIMARY> .45
<EPS-DILUTED> .45
</TABLE>
