<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 OCTOBER 31, 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 November 30, 1996:
Class A . . . . . . . . 23,049,812
Class B . . . . . . . . 28,774,467
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<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 . . . . . . . . . . . . 15
Part II - Other Information
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 23
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 23
</TABLE>
DEFINITIONS. As used herein, "MMBtu" means million British thermal units,
"Mcf" means thousand cubic feet, "MMcf" means million cubic feet, "Bcf" means
billion cubic feet, "Bbl" means barrel, "MMBbls" means million barrels, "NGL"
or "NGLs" means natural gas liquids, "fiscal 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>
OCTOBER 31, January 31,
1996 1996
----------- -----------
ASSETS (unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents ................................................. $ 61,453 $ 21,336
Trade receivables, net of allowance for
doubtful accounts of $1,848 and $2,116 .................................. 106,538 105,238
Gas contract buyout proceeds receivable (present values) .................. 89,576 95,000
Inventories ............................................................... 11,712 12,137
Other ..................................................................... 13,174 10,602
----------- -----------
Total current assets .................................................. 282,453 244,313
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, at cost less accumulated depreci-
ation, depletion and amortization of $1,334,408 and $1,321,004
Exploration and production
Oil and gas properties .................................................. 523,065 515,383
Support equipment and facilities ........................................ 21,758 22,591
Gas services (including investments in equity partnerships) (Note 3)
Natural gas processing .................................................. 64,377 57,301
Natural gas gathering ................................................... 87,311 86,356
Other ................................................................... 38,949 29,206
Corporate ................................................................. 10,864 8,698
----------- -----------
746,324 719,535
----------- -----------
REAL ESTATE
The Woodlands
Land development ........................................................ 500,885 502,121
Commercial properties ................................................... 72,129 93,029
Equity investments and property management .............................. 39,949 29,406
Notes and contracts receivable and other ................................ 43,622 44,857
----------- -----------
656,585 669,413
Other properties .......................................................... 81,066 93,421
----------- -----------
737,651 762,834
----------- -----------
OTHER ASSETS (including, at January 31, 1996, the $85,467 present
value of gas contract buyout proceeds due February 1, 1997) ............. 31,176 116,187
----------- -----------
$ 1,797,604 $ 1,842,869
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt ........................................................... $ 16,660 $ 13,732
Current maturities of long-term debt ...................................... 130,000 -
Oil and gas proceeds payable .............................................. 80,701 81,696
Accounts payable and accrued liabilities .................................. 128,326 126,515
----------- -----------
Total current liabilities ............................................. 355,687 221,943
----------- -----------
LONG-TERM DEBT (Note 4)
Energy operations ......................................................... 158,982 375,727
Real estate operations .................................................... 443,639 455,937
----------- -----------
602,621 831,664
----------- -----------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes ..................................................... 216,583 193,908
Deferred income ........................................................... 29,996 25,676
Other liabilities ......................................................... 71,444 87,775
----------- -----------
318,023 307,359
----------- -----------
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 ................................................ 143,265 143,270
Retained earnings ......................................................... 401,484 358,281
Treasury stock, at cost ................................................... (28,862) (25,034)
----------- -----------
521,273 481,903
----------- -----------
$ 1,797,604 $ 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 Nine Months Ended
October 31 October 31
---------------------- ----------------------
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES
Exploration and production, including second quarter gain on
natural gas contract buyout of $205,256 in 1995 (Note 7) ..... $ 57,505 $ 38,852 $ 178,399 $ 368,717
Gas services ................................................... 141,505 101,032 416,619 332,608
Real estate, including gains from sales of commercial properties
of $6,005 in the 1996 periods and $19,449 in the 1995 periods 46,396 53,335 128,847 124,744
--------- --------- --------- ---------
245,406 193,219 723,865 826,069
--------- --------- --------- ---------
OPERATING COSTS AND EXPENSES (including first quarter person-
nel reduction program costs of $14,535 in 1995 - Note 7)
Exploration and production, including litigation
provision of $10,000 in the 1996 periods (Note 6) ............ 55,764 37,525 141,195 130,738
Gas services, including asset write-downs
of $7,111 in the 1995 periods (Note 7) ....................... 112,771 99,631 343,646 309,749
Real estate, including second quarter property
write-downs of $112,794 in 1995 (Note 7) ..................... 30,218 24,462 91,586 195,539
--------- --------- --------- ---------
198,753 161,618 576,427 636,026
--------- --------- --------- ---------
SEGMENT OPERATING EARNINGS (Note 7) ............................ 46,653 31,601 147,438 190,043
General and administrative expense, including first quarter
personnel reduction program costs of $5,665 in 1995 .......... 9,959 9,240 28,466 35,039
--------- --------- --------- ---------
TOTAL OPERATING EARNINGS ....................................... 36,694 22,361 118,972 155,004
--------- --------- --------- ---------
OTHER EXPENSE
Interest expense ............................................... 13,669 15,643 41,795 48,313
Capitalized interest ........................................... (6,459) (7,211) (19,295) (21,156)
Other, net ..................................................... 441 (416) (224) 127
--------- --------- --------- ---------
7,651 8,016 22,276 27,284
--------- --------- --------- ---------
EARNINGS BEFORE INCOME TAXES ................................... 29,043 14,345 96,696 127,720
INCOME TAXES (Note 5) .......................................... 10,120 4,267 33,730 47,576
========= ========= ========= =========
NET EARNINGS ................................................... $ 18,923 $ 10,078 $ 62,966 $ 80,144
========= ========= ========= =========
EARNINGS PER SHARE ............................................. $ .36 $ .19 $ 1.21 $ 1.54
========= ========= ========= =========
AVERAGE COMMON SHARES OUTSTANDING .............................. 51,821 52,044 51,895 52,043
========= ========= ========= =========
</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 Nine Months Ended October 31,1996
(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 ................................ - - 62,966 - 62,966
Cash dividends (36 cents per share on Class A
and 39 3/4 cents per share on Class B) ... - - (19,763) - (19,763)
Treasury stock purchases .................... - - - (3,917) (3,917)
Exercises of stock options .................. - (5) - 89 84
--------- --------- --------- --------- ---------
BALANCE, OCTOBER 31, 1996 ................... $ 5,386 $ 143,265 $ 401,484 $ (28,862) $ 521,273
========= ========= ========= ========= =========
</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 ................................ - - 179,000 64,400
Exercises of stock options .............................. - - (1,000) (5,333)
Other ................................................... (4) (4) - -
----------- ----------- ----------- -----------
BALANCE, OCTOBER 31, 1996 ............................... 23,978,091 29,878,091 928,279 1,105,124
=========== =========== =========== ===========
</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>
Nine Months Ended
October 31
----------------------
1996 1995
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings ............................................................ $ 62,966 $ 80,144
Adjustments to reconcile net earnings
to cash provided by operating activities
Depreciation, depletion and amortization ........................... 79,164 83,796
Exploration expenses, including dry-hole costs ..................... 13,183 11,023
Deferred income taxes .............................................. 22,675 18,227
Cost of land sold .................................................. 32,698 26,175
Residential land development costs, net of reimbursements .......... (9,139) (14,478)
Distributions in excess of (less than) earnings of equity investees (194) 8,461
Non-cash portion of natural gas contract buyout gain ............... - (162,689)
Write-downs of real estate properties .............................. - 112,794
Gains from sales of properties ..................................... (7,213) (25,100)
Gains from sales of non-Woodlands real estate assets ............... (2,507) -
Litigation provision ............................................... 10,000 -
Accrued personnel reduction program costs .......................... - 11,128
Amortization of deferred natural gas contract restructuring proceeds - (5,950)
Other, net ......................................................... 3,538 (3,156)
--------- ---------
205,171 140,375
Changes in operating assets and liabilities ........................ 61,625 37,822
--------- ---------
Cash provided by operating activities .............................. 266,796 178,197
--------- ---------
INVESTING ACTIVITIES
Capital and exploratory expenditures
Total on accrual basis ............................................... (160,017) (184,378)
Residential land development costs deducted above .................... 9,139 14,478
Adjustment to cash basis ............................................. (5,206) (10,808)
--------- ---------
(156,084) (180,708)
Proceeds from sales of real estate properties ........................... 43,079 42,677
Proceeds from sales of major energy assets .............................. - 19,569
Proceeds from sales of property, plant and equipment .................... 8,632 4,609
Acquisition of leased equipment ......................................... (6,995) -
Other ................................................................... 1,972 (2,310)
--------- ---------
Cash used for investing activities ................................. (109,396) (116,163)
--------- ---------
FINANCING ACTIVITIES
Debt repayments ......................................................... (92,396) (38,001)
Cash dividends .......................................................... (19,763) (19,816)
Treasury stock purchases ................................................ (3,917) (4,130)
Other ................................................................... (1,207) (1,098)
--------- ---------
Cash used for financing activities ................................. (117,283) (63,045)
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ........................ 40,117 (1,011)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD .......................... 21,336 11,967
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD ................................ $ 61,453 $ 10,956
========= =========
</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
October 31, 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 Company's exploration and production activities are accounted for
using the successful efforts method of accounting. Impairment computations for
proved oil and gas properties are performed on a field-by-field basis. Charges
for such impairments, which totaled none and $3,068,000 for the three- and
nine-month periods ended October 31, 1996 and none for the comparable
prior-year periods, 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
Woodlands Retail Equities - '96 Limited 25 Retail properties in The Woodlands
Lake Catamount Joint Venture (sold in October 1996) 50 Colorado land
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 October 31, 1996 and January 31, 1996 and its
equity in their pretax earnings (losses) for the nine- month periods ended
October 31, 1996 and 1995 follows (in thousands):
<TABLE>
<CAPTION>
Equity in Pretax
Net Investment Earnings (Losses)
------------------ --------------------
October 31,January 31,October 31,October 31,
1996 1996 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
GAS SERVICES
Austin Chalk Natural Gas Marketing Services . $ 3,528 $ 2,531 $ 997 $ 1,856
Belvieu Environmental Fuels ................. 28,050 21,702 6,348 4,850
C&L Processors Partnership .................. 17,670 14,147 4,068 171
Ferguson-Burleson County Gas Gathering System 51,609 58,331 7,048 4,478
Gulf Coast Fractionators .................... 9,005 5,530 3,475 1,293
U.P. Bryan Plant ............................ 7,054 7,180 7,150 6,957
Others ...................................... 958 152 258 (95)
-------- -------- -------- --------
$117,874 $109,573 29,344 19,510
======== ======== -------- --------
REAL ESTATE
Grogan's Mill Apartments .................... $ 3,923 $ 3,744 181 252
The Woodlands Mall Associates ............... 7,411 8,161 500 522
Woodlands Office Equities - '95 Limited ..... 11,914 9,306 411 148
Woodlands Retail Equities - '96 Limited ..... 7,625 - - -
Other partnerships (which own
commercial properties in The Woodlands) .. 6,763 7,237 642 462
Lake Catamount Joint Venture ................ - 11,504 (201) (401)
The Fort Crockett Hotel Limited
(liquidated in January 1996) ............. - - - (267)
-------- -------- -------- --------
$ 37,636 $ 39,952 1,533 716
======== ======== -------- --------
$ 30,877 $ 20,226
======== ========
</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- and nine-month periods ended October 31, 1996 and 1995
follows (in thousands):
<TABLE>
<CAPTION>
Three Months Nine Months
------------------- -------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues ................................... $168,040 $136,893 $560,093 $395,167
Operating earnings ......................... 30,668 30,822 95,657 65,422
Pretax earnings (before interest expense for
those entities whose activities are funded
by capital contributions of the owners) .. 22,522 19,454 69,960 38,958*
</TABLE>
- ---------------------------------
*Net of impairment losses of $8,276 recorded during June 1995 to reduce to
their estimated fair market values the carrying amounts of the assets of
The Fort Crockett Hotel Limited. These losses were included in the real
estate property write-downs recorded by the Company during fiscal 1996
(see Note 7).
-7-
<PAGE> 10
The operations of certain of these partnerships have been funded using
term loans secured by their assets and in some cases by contractual commitments
or guaranties of the partners. Information concerning debt payable to third
parties by these entities at October 31, 1996 and January 31, 1996 and the
Company's proportionate share of such debt at October 31, 1996 is summarized in
the table which follows (in thousands):
<TABLE>
<CAPTION>
Entity Total October 31, 1996 -- Company's Share
----------------------- -----------------------------------
October 31, January 31, Non-
1996 1996 Recourse Recourse Total
---------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
GAS SERVICES ACTIVITIES
Belvieu Environmental Fuels .......... $146,667 $176,000 $ 6,667 $ 42,222 $ 48,889
C&L Processors Partnership ........... 74,959 86,209 20,239 17,241 37,480
Gulf Coast Fractionators ............. 65,125 74,250 2,485 22,751 25,236
-------- -------- -------- -------- --------
286,751 336,459 29,391 82,214 111,605
-------- -------- -------- -------- --------
REAL ESTATE ACTIVITIES
Grogan's Mill Apartments ............. 18,496 18,799 - 9,248 9,248
The Woodlands Mall Associates ........ 59,126 59,126 - 29,563* 29,563
Woodlands Office Equities -'95 Limited 12,482 12,666 1,872 1,249 3,121
Others (which own commercial
properties in The Woodlands) ....... 37,626 37,877 2,220 15,380 17,600
-------- -------- -------- -------- --------
127,730 128,468 4,092 55,440 59,532
-------- -------- -------- -------- --------
$414,481 $464,927 $ 33,483 $137,654 $171,137
======== ======== ======== ======== ========
</TABLE>
*The partners' joint and several guaranties of this partnership's indebtedness
were terminated in connection with a November 1996 refinancing.
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). In August 1996, letters of credit of
$184,300,000 were issued by the banks supporting a supersedeas bond of
$224,850,000 that was filed in connection with the appeal of the litigation
involving the $204,000,000 judgment. Additional letters of credit can be
issued under this facility, if required, during a period extending until 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 October 31, 1996, nothing was borrowed under
the revolving credit agreements, and the Company had $200,000,000 in 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 nine-month periods ended October 31, 1996 and 1995 consist
of the following (in thousands):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
CURRENT
Federal ..................... $ 8,768 $26,699
State ....................... 2,287 2,650
------- -------
11,055 29,349
------- -------
DEFERRED
Federal ..................... 21,751 12,813
State ....................... 924 5,414
------- -------
22,675 18,227
------- -------
$33,730 $47,576
======= =======
</TABLE>
-8-
<PAGE> 11
The estimated annual tax rates used in computing the income tax provisions
for the nine-month periods ended October 31, 1996 and 1995 were 34.88% and
37.25%, respectively, versus the 35% statutory Federal income tax rate.
(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. A supersedeas bond has been posted and the
judgment has been appealed to the Fort Worth Court of Appeals. This matter is
currently set for hearing on March 12, 1997. 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 46 other plaintiff groups, 17 of which were
filed on August 30, 1996. A June 3, 1996 trial setting for 17 of these cases
which have been combined 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 has not been set. For one of
the other cases, previously set for trial in August 1996, the original judge
was recused in an administrative hearing. Pending a final determination of the
judge that will hear this case, the trial date has been postponed indefinitely.
Trial dates have not been set for the 28 remaining suits, from which the judge
who heard the first case has now recused himself.
While the amounts that ultimately will be incurred are not determinable at
this time, aggregate charges of $25,000,000 have been recorded ($15,000,000 in
January 1996 and $10,000,000 in October 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, these provisions have consisted
primarily of expected costs for attorneys' fees, bonds, etc., to appeal the
judgment to the necessary level and to defend the Company in the other suits.
The January accrual, however, also included an amount for disposition of this
litigation.
The $10,000,000 provision in October was recorded because of increases in
estimated attorneys' fees and other defense costs to be incurred in connection
with this litigation. The factors underlying these estimated cost increases
were numerous and included the following: (i) the complexities inherent in the
process of being required to prove that the Company was not the cause of the
alleged problems; (ii) an extension to June 1997 of the time period that likely
will be required to complete the appeals process for the March 1996 judgment;
(iii) the starting and stopping of pretrial preparation activities necessitated
by ongoing changes in the timing of hearing and trial dates for the individual
cases; (iv) the filing of 17 additional lawsuits in August 1996; and (v)
additional expenditures incurred in connection with negotiating defense cost
reimbursements from insurance companies.
-9-
<PAGE> 12
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 aggregate accrual of $25,000,000. 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.
The Company believes that recoveries of at least a portion of its defense
costs (and settlement/judgment costs, if any) 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. In October
1996, a standstill agreement was executed which delayed actions in these suits
at least until August 1997 and agreed upon the venue for such cases, if they
are ultimately tried. To date, no reimbursement agreements have been entered
into with any of the Company's insurance carriers, and 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 and third- party realtors and engineers by 71
home owners in The Woodlands and against certain developers, governmental
entities and the Company by 67 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, fraud 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.
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 has appealed this judgment, but no hearing date has been
set. The Company and its outside legal counsel continue to believe it is
probable that the judgment will be overturned or its amount significantly
reduced upon completion of the appeal process.
A suit originally brought by 46 royalty owners, which was certified as a
class-action in July 1996, seeks additional royalties on gas produced in
certain North Texas counties. This suit alleges that the Company breached its
duties in marketing the gas. The plaintiffs seek an accounting, actual
damages, pre- and post-judgment interest and attorneys' fees. In September
1996, the Company requested the trial court to rule that its division orders,
which have been executed by the royalty owners and specify the method on which
royalties are to be paid, satisfy any responsibility the Company might
otherwise have to reasonably market the gas, so long as it follows their terms.
Such a ruling would have essentially negated any claim that the Company had
breached its responsibilities. In November 1996, the court ruled that
obligations in the Company's oil and gas leases to reasonably market gas are
not overridden by provisions of its division orders, leaving open the question
of whether the Company has satisfied these obligations. The Company believes
-10-
<PAGE> 13
that its royalty payment practices have been appropriate and will aggressively
defend itself in this litigation. There has been some discovery in the case,
but it is not complete. Based on their knowledge to date, management and
outside legal counsel have concluded that it is not probable that the Company
will incur a liability that would be material to its financial statements,
although it is possible a loss could be incurred. Because of the current
status of the case, the Company is unable to determine a range of possible
losses, if any, that might be incurred.
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
$150,000,000 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.
During October 1996, a definitive agreement was executed pursuant to which
a 51% interest in MMC would be sold at a gain to a financial institution. It
is expected that this transaction will close effective December 31, 1996.
-11-
<PAGE> 14
(7) SEGMENT INFORMATION
Selected industry segment data for the nine- and three-month periods ended
October 31, 1996 (fiscal 1997) and 1995 (fiscal 1996) are as follows (in
thousands):
<TABLE>
<CAPTION>
Segment Total
Outside Operating Operating
Revenues Earnings Earnings
--------------------- ---------------------- -------------------------
1996 1995 1996 1995 1996 1995
--------- --------- --------- --------- --------- ---------
Nine Months
- -----------
<S> <C> <C> <C> <C> <C> <C>
EXPLORATION AND PRODUCTION
Operations ...................... $ 174,955 $ 158,123 $ 37,825 $ 35,320 $ 29,016 $ 26,437
Gain from gas contract buyout ... - 205,256 - 205,256 - 205,256
Litigation provision (see Note 6) - - (10,000) - (10,000) -
Personnel reduction
program costs ................. - - - (7,935) - (7,935)
Severance tax refunds ........... - - 5,935 - 5,935 -
Columbia Gas contract
settlement proceeds ........... 3,444 - 3,444 - 3,444 -
Gains from sales of producing
properties and drilling rigs .. - 5,338 - 5,338 - 5,338
--------- --------- --------- --------- --------- ---------
178,399 368,717 37,204 237,979 28,395 229,096
--------- --------- --------- --------- --------- ---------
GAS SERVICES
Natural gas processing .......... 256,318 206,652 46,111 20,390 43,599 17,908
Natural gas gathering
and marketing ................. 150,392 119,550 17,884 7,663 15,153 4,940
Other ........................... 9,909 6,406 8,978 5,517 8,675 5,436
Personnel reduction
program costs ................. - - - (3,600) - (3,600)
Asset write-downs ............... - - - (7,111) - (7,111)
--------- --------- --------- --------- --------- ---------
416,619 332,608 72,973 22,859 67,427 17,573
--------- --------- --------- --------- --------- ---------
REAL ESTATE
Operations ...................... 126,340 124,744 34,754 44,999 31,198 41,036
Write-downs of properties ....... - - - (112,794) - (112,794)
Personnel reduction
program costs ................. - - - (3,000) - (3,000)
Gain from sales of certain
non-Woodlands assets .......... 2,507 - 2,507 - 2,507 -
--------- --------- --------- --------- --------- ---------
128,847 124,744 37,261 (70,795) 33,705 (74,758)
--------- --------- --------- --------- --------- ---------
CORPORATE ....................... - - - - (10,555)(b) (16,907)(b)
--------- --------- --------- --------- --------- ---------
$ 723,865 $ 826,069 $ 147,438 $ 190,043 $ 118,972 $ 155,004
========= ========= ========= ========= ========= =========
Three Months
- ------------
EXPLORATION AND PRODUCTION
Operations ...................... $ 57,505 $ 37,852 $ 11,741 $ 327 $ 8,874 $ (2,751)
Litigation provision (see Note 6) - - (10,000) - (10,000) -
Gain from sale of drilling rigs . - 1,000 - 1,000 - 1,000
--------- --------- --------- --------- --------- ---------
57,505 38,852 1,741 1,327 (1,126) (1,751)
--------- --------- --------- --------- --------- ---------
GAS SERVICES
Natural gas processing .......... 96,302 58,210 22,353 4,091 21,531 3,374
Natural gas gathering
and marketing ................. 43,620 40,895 5,071 2,869 4,174 2,081
Other ........................... 1,583 1,927 1,310 1,552 1,215 1,525
Asset write-downs ............... - - - (7,111) - (7,111)
--------- --------- --------- --------- --------- ---------
141,505 101,032 28,734 1,401 26,920 (131)
--------- --------- --------- --------- --------- ---------
REAL ESTATE
Operations ...................... 43,889 53,335 13,671 28,873 12,520 27,641
Gains from sales of certain
non-Woodlands assets .......... 2,507 - 2,507 - 2,507 -
--------- --------- --------- --------- --------- ---------
46,396 53,335 16,178 28,873 15,027 27,641
--------- --------- --------- --------- --------- ---------
CORPORATE ....................... - - - - (4,127)(b) (3,398)(b)
--------- --------- --------- --------- --------- ---------
$ 245,406 $ 193,219 $ 46,653 $ 31,601 $ 36,694 $ 22,361
========= ========= ========= ========= ========= =========
<CAPTION>
Capital
DD&A Expenditures(a)
--------------------- ---------------------
1996 1995 1996 1995
--------- --------- --------- ---------
Nine Months
- -----------
<S> <C> <C> <C> <C>
EXPLORATION AND PRODUCTION
Operations ...................... $ 66,874 $ 59,974 $ 92,920 $ 111,334
Gain from gas contract buyout ... - - - -
Litigation provision (see Note 6) - - - -
Personnel reduction
program costs ................. - - - -
Severance tax refunds ........... - - - -
Columbia Gas contract
settlement proceeds ........... - - - -
Gains from sales of producing
properties and drilling rigs .. - - - -
--------- --------- --------- ---------
66,874 59,974 92,920 111,334
--------- --------- --------- ---------
GAS SERVICES
Natural gas processing .......... 2,673 5,236 4,719 4,180
Natural gas gathering
and marketing ................. 2,913 5,265 14,116 20,408
Other ........................... 80 80 279 6,280
Personnel reduction
program costs ................. - - - -
Asset write-downs ............... - 4,922 - -
--------- --------- --------- ---------
5,666 15,503 19,114 30,868
--------- --------- --------- ---------
REAL ESTATE
Operations ...................... 4,250 5,783 41,924 39,515
Write-downs of properties ....... - - - -
Personnel reduction
program costs ................. - - - -
Gain from sales of certain
non-Woodlands assets .......... - - - -
--------- --------- --------- ---------
4,250 5,783 41,924 39,515
--------- --------- --------- ---------
CORPORATE ....................... 2,374 2,536 6,059 2,661
--------- --------- --------- ---------
$ 79,164 $ 83,796 $ 160,017 $ 184,378
========= ========= ========= =========
Three Months
- ------------
EXPLORATION AND PRODUCTION
Operations ...................... $ 20,756 $ 17,211 $ 43,341 $ 55,598
Litigation provision (see Note 6) - - - -
Gain from sale of drilling rigs . - - - -
--------- --------- --------- ---------
20,756 17,211 43,341 55,598
--------- --------- --------- ---------
GAS SERVICES
Natural gas processing .......... 1,036 1,831 1,505 1,390
Natural gas gathering
and marketing ................. 957 1,686 7,246 7,659
Other ........................... 27 27 205 2,635
Asset write-downs ............... - 4,922 - -
--------- --------- --------- ---------
2,020 8,466 8,956 11,684
--------- --------- --------- ---------
REAL ESTATE
Operations ...................... 1,373 1,428 12,644 16,731
Gains from sales of certain
non-Woodlands assets .......... - - - -
--------- --------- --------- ---------
1,373 1,428 12,644 16,731
--------- --------- --------- ---------
CORPORATE ....................... 849 813 1,175 1,497
--------- --------- --------- ---------
$ 24,998 $ 27,918 $ 66,116 $ 85,510
========= ========= ========= =========
</TABLE>
- ----------------------
(a) On accrual basis, including exploratory expenditures.
(b) General corporate expenses, including personnel reduction program costs of
$5,665 in the first quarter of fiscal 1996.
-12-
<PAGE> 15
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 first and second quarters of fiscal 1997, the Company recorded
severance tax refunds of $3,879,000 and $2,056,000, respectively. 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; its share of these refunds totaled
$3,879,000. In July 1996, in response to a Texas Comptroller's regulation
providing that proceeds from contract terminations may not be subject to
severance taxes, the Company requested refunds of severance taxes paid on
settlement proceeds received in previous years in connection with two contract
terminations. The Company's share of such refunds, which were collected in
August 1996, totaled $2,056,000.
During the first quarter of fiscal 1997, the Company received $3,444,000
as its share of proceeds 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.
In October, gains totaling $2,507,000 were recognized from sales of the
Company's interest in the Lake Catamount joint venture in Colorado and a
portfolio of installment notes receivable arising from resort property sales.
Proceeds from the Lake Catamount sale included cash proceeds of $4,700,000 and
secured notes receivable totaling $8,805,000 that are payable over a two-year
period.
Exploration and production segment operating earnings for the nine-month
period ended October 31, 1995 include gains of $4,338,000 from the sale during
the second quarter of certain West Texas producing oil and gas properties and
$1,000,000 in the third quarter related to the redemption of warrants that had
been obtained in connection with a prior- year sale of drilling rigs.
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.
During fiscal 1996's third quarter, Gas Services asset write-downs of
$7,111,000 were recorded to reduce to their net realizable values the carrying
values of three gas processing plants that were subsequently sold to a third
party.
-13-
<PAGE> 16
In August 1995, the Company adopted a revised business plan calling for
the disposal within the near term of most of its real estate 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, net of disposition costs. As a result,
property write-downs of $112,794,000 were recorded during fiscal 1996's second
quarter.
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 $21,046,000 and $25,252,000
during the nine-month periods ended October 31, 1996 and 1995. Income taxes
paid during these periods, including those resulting from the July 1995 natural
gas contract buyout, totaled $9,004,000 and $22,306,000. The Company's
proceeds from the sale in October 1996 of its interest in the Lake Catamount
Joint Venture included secured notes receivable totaling $8,805,000 (due
$2,085,000 in October 1997 and $6,720,000 in October 1998). A 25%-owned
partnership assumed a mortgage obligation of $12,796,000 in connection with its
July 1995 purchase of ten office buildings from the Company. There were no
other significant non-cash investing or financing activities during the
nine-month periods ended October 31, 1996 and 1995.
-14-
<PAGE> 17
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. As a result of these efforts and
favorable energy and real estate market conditions, the Company's earnings and
cash flows (exclusive of the impact of unusual items) in fiscal 1997's first
nine months were well above the levels achieved in the comparable prior-year
period. These improvements were accomplished despite the fact that the prior
period's results benefitted from the premium-priced North Texas natural gas
sales contract with Natural Gas Pipeline Company of America (Natural) that was
terminated on July 1, 1995. The pace of the Company's asset disposal program
accelerated during fiscal 1997's third quarter, and for the first nine months
of the year, cash sales proceeds totaled $51.7 million. Another $50 million of
such properties are covered by pending sales contracts that are scheduled to
close in the fourth quarter. After completion of these sales, only $20 to $25
million in assets will remain to be sold pursuant to this program.
Management's attention is now focused on growing and 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 $255 million. This includes a $99 million reduction in fiscal 1997's
first nine months that resulted largely from the collection in February of the
second installment of the proceeds associated with the early termination of the
Natural contract. In addition, the Company had accumulated "excess" cash
balances totaling approximately $49 million at October 31, 1996, which are
expected to increase further in the fourth quarter as strong operating cash
flows and proceeds from closings of the above-mentioned asset sales provide
larger cash inflows than are required to fund the Company's stepped-up capital
program and its other spending needs. The excess cash balances, which normally
would have been used to repay long-term debt, have been temporarily invested
since none of the Company's remaining debt is immediately payable. The
then-available excess cash balances, including the third and final installment
of the Natural contract termination proceeds which is due on February 1, 1997,
should be more than sufficient to provide needed short-term liquidity and to
repay $100 million of senior notes maturing on February 15, 1997 and the $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 in a North Texas water well case and
additional similar cases are pending. The Company is taking every possible
step to overturn this judgment and has posted the $225 million supersedeas bond
required 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.
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 before fiscal 1999, a time that is expected to be after completion of
the appeals process. Because of this and since it currently has $200 million
available under committed credit facilities, the Company 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.
-15-
<PAGE> 18
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
The Company's original budget for fiscal 1997 expenditures totaled $213.5
million. In August, the budget was increased by approximately $25 million to
cover an accelerated drilling and recompletion program in exploration and
production ($21 million) and accelerated residential lot development activities
($4 million) to replenish inventories that have been sold at a rate faster than
originally contemplated. During the first nine months, capital additions
totaled $160 million, $66.1 million of which was incurred in the third quarter
when the pace of the drilling program was accelerated. Capital additions for
the full year are expected to approximate the $238.5 million revised budget as
the increased drilling pace continues in the fourth quarter and spending begins
for the recently announced Louisiana Chalk Gathering System.
OPERATING STATISTICS
Certain operating statistics (including, where applicable, proportional
interests in equity partnerships) for the three- and nine-month periods ended
October 31, 1996 and 1995 follow:
<TABLE>
<CAPTION>
Three Months Nine Months
------------------- -------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
AVERAGE DAILY VOLUMES
Natural gas sales (Mcf) .............. 226,200 194,200 226,100 208,700
Crude oil and condensate sales (Bbls) 5,300 4,900 5,400 5,300
Natural gas liquids produced (Bbls) .. 47,200 43,700 45,800 47,000
Pipeline throughput (Mcf) ............ 416,000 351,000 397,000 360,000
AVERAGE SALES PRICES
Natural gas (per Mcf) ................ $ 2.21 $ 1.66 $ 2.29 $ 2.17
Crude oil and condensate (per Bbl) ... 22.62 16.18 20.78 16.81
Natural gas liquids produced (per Bbl) 16.55 11.15 14.80 11.36
RESIDENTIAL LOT SALES - THE WOODLANDS
Lots sold ............................ 193 252 891 714
Average price per lot ................ $ 51,371 $ 43,036 $ 43,120 $ 40,733
Average price per square foot ........ 4.37 4.11 4.16 3.91
</TABLE>
RESULTS OF OPERATIONS - NINE MONTHS ENDED OCTOBER 31, 1996
COMPARED WITH NINE MONTHS ENDED OCTOBER 31, 1995
The Company's results for the nine-month periods ended October 31, 1996 and
1995--both before and after unusual items--are summarized in the table on the
following page. Unusual items added $1.2 million and $40.3 million,
respectively, to net earnings of the fiscal 1997 and 1996 periods. And, as a
result, net earnings for fiscal 1997's first nine months of $62.9 million were
$17.2 million below those of the prior-year period.
Excluding the effects of unusual items, fiscal 1997's nine-month earnings
of $61.7 million were $21.9 million (55%) above the $39.8 million of the
prior-year period, which included five months of sales under the high-priced
North Texas gas sales contract. The termination of this contract resulted in a
$23.1 million negative year-to-year impact on nine- months' operating earnings.
The period-to-period comparison was also negatively impacted by the recognition
of substantially larger gains from real estate commercial property asset sales
in the prior year ($20.3 million versus $7.2 million in fiscal 1997). The
cumulative negative impact of these items was more than offset, however, by
earnings improvements caused by higher market prices for all energy products,
improved margins in gas gathering and marketing, increased earnings from
interests in MTBE and fractionation partnerships, record residential lot sales
and reduced operating, overhead and interest expenses resulting from last year's
major restructuring program.
-16-
<PAGE> 19
The following table and discussion identify and explain the major
increases (decreases) in earnings for the nine- month periods (in millions):
<TABLE>
<CAPTION>
Segment Operating Earnings
-------------------------------
Exploration
and Gas Real Pretax Net
Production Services Estate Other* Earnings Earnings
---------- -------- ------ ------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
FISCAL 1996 AMOUNTS . . . . . . . . . . . . $ 238.0 $22.8 $(70.8) $(62.3) $127.7 $ 80.1
-------- ----- ------ ------ ------ ------
ELIMINATE IMPACT OF FISCAL 1996
UNUSUAL ITEMS--(see page 13)
Gain from gas contract buyout . . . . . . . (205.3) - - (205.3) (127.2)
-
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
Gains from sales of producing
properties and drilling rigs . . . . . . (5.3) - - (5.3) (3.3)
-
Loss from sale of NGL plants . . . . . . . - 7.1 - - 7.1 4.4
-------- ----- ------ ------ ------ ------
(202.7) 10.7 115.8 5.7 (70.5) (40.3)
-------- ----- ------ ------ ------ ------
FISCAL 1996 AMOUNTS BEFORE UNUSUAL ITEMS . 35.3 33.5 45.0 (56.6) 57.2 39.8
-------- ----- ------ ------ ------ ------
MAJOR INCREASES (DECREASES)
Natural gas
Contract buyout . . . . . . . . . . . . (23.1) - - - (23.1) (15.0)
Higher sales prices . . . . . . . . . . 28.9 - - - 28.9 18.8
Higher volumes . . . . . . . . . . . . . 5.0 - - - 5.0 3.3
Higher crude and condensate sales prices . 5.5 - - - 5.5 3.6
Lower salary and benefits expenses resulting
from April 1995 personnel reductions . . 1.5 .5 .3 1.5 3.8 2.5
Exploratory dry-hole costs . . . . . . . . (2.8) - - (2.8) (1.8)
Proved-property impairments . . . . . . . . (3.1) - - - (3.1) (2.0)
Fiscal 1996 amortization of deferred
gas contract restructuring proceeds . . (4.4) - - - (4.4) (2.9)
Natural gas processing
Higher NGL prices . . . . . . . . . . . - 43.0 - - 43.0 28.0
Higher feedstock costs . . . . . . . . - (27.0) - - (27.0) (17.6)
Other (principally expense reductions
due to previous restructuring activities) - 9.2 - - 9.2 6.0
Gas gathering and marketing . . . . . . . . - 10.3 - - 10.3 6.7
Equity in earnings of MTBE plant partnership - 1.7 - - 1.7 1.1
Equity in earnings of
fractionation plant partnership . . . . - 1.8 - - 1.8 1.2
Real Estate--The Woodlands
Gains from commercial property asset sales - - (13.1) - (13.1) (8.5)
Other . . . . . . . . . . . . . . . . . - - 3.3 - 3.3 2.1
Interest expense incurred . . . . . . . . . - - - 6.5 6.5 4.2
Capitalized interest . . . . . . . . . . . - - - (1.9) (1.9) (1.2)
Other, net . . . . . . . . . . . . . . . . (5.0) - (.7) (.3) (6.0) (3.9)
Higher effective tax rate . . . . . . . . . - - - - - (2.7)
-------- ----- ------ ------ ------ ------
2.5 39.5 (10.2) 5.8 37.6 21.9
-------- ----- ------ ------ ------ ------
FISCAL 1997 AMOUNTS BEFORE UNUSUAL ITEMS . 37.8 73.0 34.8 (50.8) 94.8 61.7
-------- ----- ------ ------ ------ ------
FISCAL 1997 UNUSUAL ITEMS--(see page 13,
except where otherwise indicated)
Litigation provision (see page 9) . . . . . (10.0) - - - (10.0) (6.2)
Severance tax refunds . . . . . . . . . . . 5.9 - - - 5.9 3.7
Columbia Gas contract settlement proceeds . 3.5 - - - 3.5 2.1
Gains from sales of non-Woodlands properties - - 2.5 - 2.5 1.6
-------- ----- ------ ------ ------ ------
(.6) - 2.5 - 1.9 1.2
-------- ----- ------ ------ ------ ------
FISCAL 1997 AMOUNTS AFTER UNUSUAL ITEMS . . $ 37.2 $73.0 $ 37.3 $(50.8) $ 96.7 $ 62.9
======== ===== ====== ====== ====== ======
</TABLE>
- -------------------------
*Includes general and administrative expense and other expense.
-17-
<PAGE> 20
EXPLORATION AND PRODUCTION OVERVIEW
Exclusive of unusual items, exploration and production segment operating
earnings of $37.8 million during fiscal 1997's first nine months were $2.5
million above the $35.3 million of the prior-year's comparable period, which
benefitted through June 1995 from the premium-priced Natural contract. The
contract buyout's $23.1 million negative period-to- period impact on operating
earnings was more than offset, however, by fiscal 1997's higher
market-sensitive gas prices.
NATURAL GAS - CONTRACT BUYOUT ($23.1 MILLION DECREASE). 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 a substantially higher contract price of $4.00 per MMBtu. As a result,
North Texas gas sales revenues for the first five months of fiscal 1997 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 $2.01
per MMBtu during the first five months of fiscal 1997, and consequently
operating earnings on a period-to-period basis were lowered by $23.1 million.
NATURAL GAS - HIGHER SALES PRICES ($28.9 MILLION INCREASE). The Company's
natural gas sales price averaged $2.29 per Mcf during the first nine months of
fiscal 1997, 34% higher than the $1.71 realized during the comparable
prior-year period on non-Natural-contract sales.
NATURAL GAS - HIGHER VOLUMES ($5.0 MILLION INCREASE). Natural gas sales
volumes averaged 226.1 MMcf per day during the nine months ended October 31,
1996, up from 208.7 during the prior-year period. This increase resulted
principally from 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 1995.
HIGHER CRUDE AND CONDENSATE PRICES ($5.5 MILLION INCREASE). The average sales
price for crude and condensate during fiscal 1997's first nine months was $20.78
per barrel, up 24% from the $16.81 of the corresponding prior-year period,
improving operating earnings by $5.5 million.
HIGHER EXPLORATORY DRY-HOLE COSTS ($2.8 MILLION DECREASE). During the first
nine months of fiscal 1997, the Company incurred $5.6 million in exploratory
dry-hole costs, or $2.8 million more than during the same period of the prior
year.
PROVED-PROPERTY IMPAIRMENTS ($3.1 MILLION DECREASE). Disappointing drilling
results for one well and downward revisions in reserve estimates for others
resulted in the recording of a $3.1 million impairment for one field in the
Gulf of Mexico during fiscal 1997's first quarter. No such impairments
occurred in the first nine months of fiscal 1996.
FISCAL 1996 AMORTIZATION OF DEFERRED GAS CONTRACT RESTRUCTURING PROCEEDS ($4.4
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 $4.4 million to
operating earnings in the first nine months of fiscal 1996.
GAS SERVICES OVERVIEW
Gas services operating earnings before unusual items rose $39.5 million (to
$73.0 million) during the first nine months of fiscal 1997 as gas processing
and gas gathering and marketing earnings rose by $25.7 million and $10.3
million, respectively. Gas processing margins were much higher as NGL prices
rose at a faster rate than natural gas feedstock costs. Also contributing
substantially to the improved gas processing earnings were cost reductions
resulting from the Company's restructuring efforts of the last two years.
Price-related increases in onsystem and offsystem margins and
restructuring-related expense reductions were the principal causes of the
higher gas gathering and marketing earnings. Increased earnings from the
Company's interests in fractionation and MTBE plant partnerships also added to
the favorable Gas Services earnings comparisons.
-18-
<PAGE> 21
NGL production volumes averaged 45,800 barrels per day, down from 47,000 in the
prior-year period because of the December 1, 1995 sale of three plants which
produced an average of 2,100 barrels per day in the fiscal 1996 period and the
rejection and sale as natural gas of approximately 1,000 barrels per day of
ethane during fiscal 1997's first six months. This was done to remove
excessive quantities of carbon dioxide and thereby allow the NGL product
pipeline's quality specifications to be met. With the installation of
additional equipment at the Bridgeport plant in late July, the need to reject
ethane was eliminated.
NATURAL GAS PROCESSING - HIGHER NGL PRICES ($43.0 MILLION INCREASE). The
average price for NGLs produced during fiscal 1997's first nine months of
$14.80 per barrel was $3.44 (30%) above the average for the corresponding
prior-year period, increasing operating earnings by $43.0 million. NGL prices
rose because of strong demand last winter and remained above the prior-year's
level because of strong demand for chemical feedstocks and relatively low NGL
storage levels.
NATURAL GAS PROCESSING - HIGHER FEEDSTOCK COSTS ($27.0 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 prices for market-sensitive gas and
NGLs, feedstock costs rose during the first nine months of fiscal 1997,
lowering operating earnings by $27.0 million.
GAS GATHERING AND MARKETING ($10.3 MILLION INCREASE). Substantially better
markets for natural gas during the fiscal 1997 period resulted in significant
improvements in margins for the Company's onsystem and offsystem marketing
activities. While some of this incremental profit should continue, a large
portion of it resulted from unusual volatility in natural gas sales prices in
the first and third quarters.
EQUITY IN EARNINGS OF MTBE PLANT PARTNERSHIP ($1.7 MILLION INCREASE). During
the first nine months of fiscal 1997, the Company's equity in the pretax
earnings of this partnership totaled $5.9 million, or $1.7 million more than 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 approximately
12,900 barrels during the first nine months of fiscal 1997. Third quarter
volumes were lower because of an August turnaround for regular maintenance and
an 18-day shut-down in September to correct an equipment problem that occurred
during plant start-up after the turnaround.
EQUITY IN EARNINGS OF FRACTIONATION PLANT PARTNERSHIP ($1.8 MILLION INCREASE).
The Company's equity in the earning of Gulf Coast Fractionators totaled $3.1
million during fiscal 1997's first nine months, or $1.8 million more than
during 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.
REAL ESTATE OVERVIEW
Because of a $13.1 million reduction in gains from commercial property asset
sales, real estate segment operating earnings (exclusive of unusual items)
during the first nine months of fiscal 1997 of $34.8 million were $10.2 million
less than was earned during the comparable fiscal 1996 period. Earnings from
residential lot sales were up sharply, however, primarily because lot sales
were at record levels in the fiscal 1997 period.
REAL ESTATE - THE WOODLANDS -- GAINS FROM COMMERCIAL PROPERTY ASSET SALES
($13.1 MILLION DECREASE). Gains totaling $7.2 million were recorded during the
fiscal 1997 period from sales of commercial property assets (including $6.0
million in the third quarter). The most significant of these gains resulted
from the October 1996 sale of retail properties to a partnership with Crescent
Real Estate Equities that is 25% owned and managed by the Company. In the
prior-year period, gains totaling $20.3 million were recorded, including a third
quarter gain of $19.4 million in connection with the sale of the Company's 50%
interest in a partnership that operated the cable television system in The
Woodlands.
-19-
<PAGE> 22
REAL ESTATE - THE WOODLANDS -- OTHER ($3.3 MILLION INCREASE). The Company sold
891 residential lots to builders during the first nine months of fiscal 1997,
177 (25%) more than in the corresponding period of the prior year. Builders in
The Woodlands sold 858 new homes in the first three quarters of calendar 1996,
the most for any nine-month period in the community's history. 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. The Company's average per-square-foot
sales price for residential lots was 6% higher in the fiscal 1997 period.
OTHER
INTEREST EXPENSE INCURRED ($6.5 MILLION INCREASE). Interest expense incurred
was $6.5 million lower during fiscal 1997's first nine months because of a $119
million decline in the average balance of outstanding debt. This occurred
primarily because of paydowns using proceeds received from the Natural gas
contract buyout (in July 1995 and February 1996) and proceeds realized from
fiscal 1996 and 1997 property sales.
CAPITALIZED INTEREST ($1.9 MILLION DECREASE). Because of declines in the
balances of energy and real estate assets subject to capitalization, $1.9
million less interest was capitalized during the fiscal 1997 period.
-20-
<PAGE> 23
RESULTS OF OPERATIONS - THREE MONTHS ENDED OCTOBER 31, 1996
COMPARED WITH THREE MONTHS ENDED OCTOBER 31, 1995
The Company's results for the three-month periods ended October 31, 1996 and
1995--both before and after unusual items-- are summarized in the table which
follows. Net earnings for the third quarter of fiscal 1997, which were reduced
by $4.6 million in unusual items, were $18.9 million, compared with $10.1
million in the prior-year period, when unusual items reduced net earnings by
$3.8 million.
Excluding the unusual items, earnings for fiscal 1997's third quarter
totaled $23.5 million, up 69% from the $13.9 million of the prior year's
comparable period. Major contributors to this improvement included higher
energy sales prices and volumes and improved margins for gas processing and gas
gathering and marketing activities.
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 . . . . . . . . . . . . $ 1.3 $ 1.4 $28.9 $(17.3) $14.3 $10.1
------ ------ ------ ------- ------ ------
ELIMINATE IMPACT OF FISCAL 1996
UNUSUAL ITEMS--(see page 13)
Loss from sale of NGL plants . . . . . . . - 7.1 - - 7.1 4.4
Gain from sale of drilling rigs . . . . . . (1.0) - - - (1.0) (.6)
------ ------ ------ ------- ------ ------
(1.0) 7.1 - - 6.1 3.8
------ ------ ------ ------- ------ ------
FISCAL 1996 AMOUNTS BEFORE UNUSUAL ITEMS . .3 8.5 28.9 (17.3) 20.4 13.9
------ ------ ------ ------- ------ ------
MAJOR INCREASES (DECREASES)
Natural gas
Higher market-sensitive sales prices . . 10.8 - - - 10.8 7.0
Higher volumes . . . . . . . . . . . . . 2.2 - - - 2.2 1.4
Higher crude and condensate sales prices . 3.0 - - - 3.0 2.0
Higher exploratory dry-hole costs . . . . . (2.4) - - - (2.4) (1.6)
Natural gas processing
NGL price . . . . . . . . . . . . . . . - 23.5 - - 23.5 15.3
Higher feedstock costs . . . . . . . . - (10.3) - - (10.3) (6.7)
Other (including expense reductions
due to previous restructuring activities) - 5.1 - - 5.1 3.3
Gas gathering and marketing . . . . . . . . - 2.3 - - 2.3 1.5
Real Estate--The Woodlands
Gains from commercial property
asset sales (see page 19) . . . . . . - - (13.4) - (13.4) (8.7)
Other . . . . . . . . . . . . . . . . . - - (1.1) - (1.1) (.7)
Interest expense incurred (see page 20) . . - - - 2.0 2.0 1.3
Capitalized interest (see page 20) . . . . - - - (.7) (.7) (.5)
Other
SAR/Bonus unit expense accruals . . . . (.3) (.3) (.3) (.4) (1.3) (.8)
Miscellaneous . . . . . . . . . . . . . (1.9) (.1) (.4) (1.2) (3.6) (2.3)
Higher effective tax rate . . . . . . . . . - - - - - (.9)
------ ------ ------ ------- ------ ------
11.4 20.2 (15.2) (.3) 16.1 9.6
------ ------ ------ ------- ------ ------
FISCAL 1997 AMOUNTS BEFORE UNUSUAL ITEMS . 11.7 28.7 13.7 (17.6) 36.5 23.5
------ ------ ------ ------- ------ ------
FISCAL 1997 UNUSUAL ITEMS
Litigation provision (see page 9) . . . . . (10.0) - - - (10.0) (6.2)
Gains from sales of non-Woodlands
assets (see page 13) . . . . . . . . . . - - 2.5 - 2.5 1.6
------ ------ ------ ------- ------ ------
(10.0) - 2.5 - (7.5) (4.6)
------ ------ ------ ------- ------ ------
FISCAL 1997 AMOUNTS AFTER UNUSUAL ITEMS . . $ 1.7 $ 28.7 $ 16.2 $ (17.6) $ 29.0 $ 18.9
====== ====== ====== ======= ====== ======
</TABLE>
- -----------------------------------
*Includes general and administrative expense and other expense.
-21-
<PAGE> 24
EXPLORATION AND PRODUCTION OVERVIEW
Excluding unusual items, exploration and production segment operating earnings
during fiscal 1997's third quarter of $11.7 million were $11.4 million above
those of fiscal 1996's period. The quarter-to-quarter earnings improvement was
largely the result of improved sales prices for natural gas and crude and
condensate and higher natural gas production volumes.
NATURAL GAS - HIGHER SALES PRICES ($10.8 MILLION INCREASE). The Company's
average natural gas sales price during the third quarter of fiscal 1997 was
$2.21 per Mcf, or 33% higher than the $1.66 realized during the comparable
period of the prior year.
NATURAL GAS - HIGHER VOLUMES ($2.2 MILLION INCREASE). Natural gas production
volumes averaged 226.2 MMcf per day during fiscal 1997's third quarter, up from
194.2 MMcf per day during the third quarter of the prior year. This increase
occurred both for the reasons discussed on page 18 and because the prior
period's volumes were negatively impacted by a 23-day shutdown of North Texas
production during October 1995 while Natural's interstate pipeline was down for
maintenance.
HIGHER CRUDE AND CONDENSATE SALE PRICES ($3.0 MILLION INCREASE). The average
sales price for crude and condensate during fiscal 1997's third quarter was
$22.62 per barrel, 40% above the $16.18 of the corresponding prior-year period.
HIGHER EXPLORATORY DRY-HOLE COSTS ($2.4 MILLION DECREASE). Exploratory dry-hole
costs during fiscal 1997's third quarter totaled $3.1 million, or $2.4 million
more than was incurred in the comparable period of the prior year. Two
Matagorda Bay wells accounted for $2.0 million of the current period's spending.
GAS SERVICES OVERVIEW
Gas services operating earnings before unusual items increased to $28.7 million
from $8.5 million in last year's third quarter principally because of an $18.3
million increase in operating earnings of the gas processing segment. Margins
were sharply higher in the fiscal 1997 period because per barrel NGL prices
rose more rapidly than did natural gas feedstock costs. NGL production volumes
averaged 47,200 barrels per day, up from 43,700 in the prior-year period when
production was adversely impacted by a 23-day shutdown of the Bridgeport plant.
NATURAL GAS PROCESSING - NGL PRICE ($23.5 MILLION INCREASE). The average price
for NGLs produced of $16.55 per barrel during fiscal 1997's third quarter was
$5.40 (48%) above the average for the corresponding prior-year period,
increasing operating earnings by $23.5 million.
NATURAL GAS PROCESSING - HIGHER FEEDSTOCK COSTS ($10.3 MILLION DECREASE). As
discussed on page 19, higher market- sensitive gas and NGL prices during fiscal
1997's third quarter caused NGL feedstock costs to rise, lowering operating
earnings by $10.3 million.
GAS GATHERING AND MARKETING ($2.3 MILLION INCREASE). Increased onsystem margins
were the principal cause of the $2.3 million quarter-to-quarter increase in gas
gathering and marketing operating earnings. These margins were favorably
impacted by natural-gas-price-related rises in the per unit margins and
increased volumes, particularly on the recently constructed, 45%-owned lean gas
system whose throughput increased steadily during fiscal 1997 and by early
December was nearing the system's capacity.
REAL ESTATE OVERVIEW
Almost exclusively because of the previously discussed reduction in gains from
commercial property asset sales, real estate segment operating earnings
(exclusive of unusual items) during fiscal 1997's third quarter were $15.2
million below the $28.9 million of the prior year's quarter. Although the pace
of residential lot sales in The Woodlands slowed in the third quarter, fiscal
1997 annual sales should exceed 1,100 for the first time in the community's
history.
-22-
<PAGE> 25
Part II - Other Information
ITEM 1. LEGAL PROCEEDINGS
See Note 6 of Notes to Unaudited Consolidated Financial Statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
12 Computation of ratio of earnings to fixed charges
(b) No reports were filed on Form 8-K during the three-month period
ended October 31, 1996.
-23-
<PAGE> 26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MITCHELL ENERGY & DEVELOPMENT CORP.
-----------------------------------
(Registrant)
Dated: December 12, 1996 By: /s/ Philip S. Smith
-----------------------------------
Philip S. Smith
Senior Vice President -
Administration and Chief Financial
Officer
-24-
<PAGE> 27
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
12 - Computation of ratio of earnings to fixed charges
27 - Financial Data Schedule
</TABLE>
<PAGE> 1
Exhibit 12
Mitchell Energy & Development Corp.
Computation of Ratio of Earnings to Fixed Charges
(dollar amounts in thousands)
<TABLE>
<CAPTION>
Nine
Months
Ended
Fiscal Year Ended January 31 October 31,
---------------------------------------------------------------- ---------
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 $ 96,696
Add (Deduct):
Previously capitalized interest
charged against pretax earnings ..... 14,887 9,545 11,552 22,158 79,499(d) 13,154
Losses of less-than-50%-owned persons . 26 99 32 1,104 9 1
Fixed charges (see below) ............. 90,107 85,169 84,788 85,988 78,992 50,910
Reverse effect of inclusion of interest
capitalized in fixed charges ........ (37,460) (34,161) (33,956) (33,011) (28,561) (19,295)
Undistributed earnings of
less-than-50%-owned persons ......... (10,521) (10,305) (3,594) (914) (4,321) (10,541)
--------- --------- --------- --------- --------- ---------
$ 130,227 $ 110,369 $ 106,198 $ 145,876 $ 183,949 $ 130,925
========= ========= ========= ========= ========= =========
FIXED CHARGES
Interest expense incurred
Consolidated (a) (b) .................. $ 84,025 $ 77,451 $ 75,252 $ 71,570 $ 65,802 $ 43,062
50%-owned persons ..................... 3,284 4,609 6,236 7,912 9,957 5,997
Less-than-50%-owned persons ........... - - - 3,032(e) -
--------- --------- --------- --------- --------- ---------
87,309 82,060 81,488 82,514 75,759 49,059
Portion of rental expense
representing interest (c) ............. 2,798 3,109 3,300 3,474 3,233 1,851
--------- --------- --------- --------- --------- ---------
$ 90,107 $ 85,169 $ 84,788 $ 85,988 $ 78,992 $ 50,910
========= ========= ========= ========= ========= =========
RATIO OF EARNINGS TO FIXED CHARGES ....... 1.45 1.30 1.25 1.70 2.33 2.57
========= ========= ========= ========= ========= =========
</TABLE>
- -------------------------------------
(a) Consists of interest expense as reported in consolidated statements of
earnings and interest expense related to finance operations which is
reported as costs and expenses in the consolidated statements of earnings.
(b) At October 31, 1996, the Company had outstanding guaranties of the
indebtedness of third parties totaling approximately $17,000,000 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 $900,000 for the nine months ended October 31, 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> 9-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-END> OCT-31-1996
<CASH> 61,453
<SECURITIES> 0
<RECEIVABLES> 108,386
<ALLOWANCES> 1,848
<INVENTORY> 11,712
<CURRENT-ASSETS> 282,453
<PP&E> 2,080,732
<DEPRECIATION> 1,334,408
<TOTAL-ASSETS> 1,797,604
<CURRENT-LIABILITIES> 355,687
<BONDS> 602,621
0
0
<COMMON> 5,386
<OTHER-SE> 515,887
<TOTAL-LIABILITY-AND-EQUITY> 1,797,604
<SALES> 720,421
<TOTAL-REVENUES> 723,865
<CGS> 0
<TOTAL-COSTS> 576,427
<OTHER-EXPENSES> 28,242
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,500
<INCOME-PRETAX> 96,696
<INCOME-TAX> 33,730
<INCOME-CONTINUING> 62,966
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 62,966
<EPS-PRIMARY> 1.21
<EPS-DILUTED> 1.21
</TABLE>
