<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JULY 31, 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 August 31, 1996:
Class A . . . . . . . . 23,049,812
Class B . . . . . . . . 28,770,300
================================================================================
<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 . . . . . . . . . . . . . . . . . . . . . . 13
Part II - Other Information
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Item 4. Submission of Matters to Vote of Security Holders . . . . . . . . . . . . . . . . 21
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . 21
</TABLE>
DEFINITIONS. As used herein, "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>
JULY 31, January 31,
1996 1996
-------------- --------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . $ 53,854 $ 21,336
Trade receivables, net of allowance for
doubtful accounts of $1,889 and $2,116 . . . . . . . . . . . . . . . . 101,693 105,238
Gas contract buyout proceeds receivable (present values) . . . . . . . . 88,175 95,000
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,658 12,137
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,686 10,602
------------ ------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . 263,066 244,313
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, at cost less accumulated depreci-
ation, depletion and amortization of $1,337,684 and $1,321,004
Exploration and production
Oil and gas properties . . . . . . . . . . . . . . . . . . . . . . . . 507,725 515,383
Support equipment and facilities . . . . . . . . . . . . . . . . . . . 21,705 22,591
Gas services (including investments in equity partnerships) (Note 3)
Natural gas processing . . . . . . . . . . . . . . . . . . . . . . . . 62,886 57,301
Natural gas gathering . . . . . . . . . . . . . . . . . . . . . . . . . 81,671 86,356
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,393 29,206
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,377 8,698
------------ ------------
722,757 719,535
------------ ------------
REAL ESTATE
The Woodlands
Land development . . . . . . . . . . . . . . . . . . . . . . . . . . . 500,051 502,121
Commercial properties . . . . . . . . . . . . . . . . . . . . . . . . . 89,339 93,029
Equity investments and property management . . . . . . . . . . . . . . 32,806 29,406
Notes and contracts receivable and other . . . . . . . . . . . . . . . 40,302 44,857
------------ ------------
662,498 669,413
Other properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84,961 93,421
------------ ------------
747,459 762,834
------------ ------------
OTHER ASSETS (including, at January 31, 1996, the $85,467 present
value of gas contract buyout proceeds due February 1, 1997) . . . . . . 31,348 116,187
------------ ------------
$ 1,764,630 $ 1,842,869
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,157 $ 13,732
Current maturities of long-term debt . . . . . . . . . . . . . . . . . . 130,000 -
Oil and gas proceeds payable . . . . . . . . . . . . . . . . . . . . . . 90,427 81,696
Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . 104,203 126,515
------------ ------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . 337,787 221,943
------------ ------------
LONG-TERM DEBT (Note 4)
Energy operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151,657 375,727
Real estate operations . . . . . . . . . . . . . . . . . . . . . . . . . 453,204 455,937
------------ ------------
604,861 831,664
------------ ------------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 213,816 193,908
Deferred income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,310 25,676
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,975 87,775
------------ ------------
313,101 307,359
------------ ------------
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 . . . . . . . . . . . . . . . . . . . . . . . 143,256 143,270
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 389,138 358,281
Treasury stock, at cost . . . . . . . . . . . . . . . . . . . . . . . . . (28,899) (25,034)
------------ ------------
508,881 481,903
------------ ------------
$ 1,764,630 $ 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 Six Months Ended
July 31 July 31
----------------------- ---------------------
1996 1995 1996 1995
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
REVENUES
Exploration and production, including gain on natural gas
contract buyout of $205,256 in the 1995 periods (Note 7) . $ 59,342 $266,090 $120,894 $329,865
Gas services . . . . . . . . . . . . . . . . . . . . . . . . . 137,585 112,065 275,114 231,576
Real estate . . . . . . . . . . . . . . . . . . . . . . . . . . 44,179 39,720 82,451 71,409
--------- -------- -------- --------
241,106 417,875 478,459 632,850
--------- -------- -------- --------
OPERATING COSTS AND EXPENSES (including first quarter person-
nel reduction program costs of $14,535 in 1995 - Note 7)
Exploration and production . . . . . . . . . . . . . . . . . . 43,522 38,882 85,431 93,213
Gas services . . . . . . . . . . . . . . . . . . . . . . . . . 116,096 99,938 230,875 210,118
Real estate (including property write-downs
of $112,794 in the 1995 periods) . . . . . . . . . . . . . . 32,791 142,413 61,368 171,077
--------- -------- -------- --------
192,409 281,233 377,674 474,408
--------- -------- -------- --------
SEGMENT OPERATING EARNINGS (Note 7) . . . . . . . . . . . . . . 48,697 136,642 100,785 158,442
General and administrative expense (including first quarter
personnel reduction program costs of $5,665 in 1995) . . . . 9,395 9,246 18,507 25,799
--------- -------- -------- --------
TOTAL OPERATING EARNINGS . . . . . . . . . . . . . . . . . . . 39,302 127,396 82,278 132,643
--------- -------- -------- --------
OTHER EXPENSE
Interest expense . . . . . . . . . . . . . . . . . . . . . . . 13,962 16,229 28,126 32,670
Capitalized interest . . . . . . . . . . . . . . . . . . . . . (6,451) (7,175) (12,836) (13,945)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . (242) 159 (665) 543
--------- -------- -------- --------
7,269 9,213 14,625 19,268
--------- -------- -------- --------
EARNINGS BEFORE INCOME TAXES . . . . . . . . . . . . . . . . . 32,033 118,183 67,653 113,375
INCOME TAXES (Note 5) . . . . . . . . . . . . . . . . . . . . . 11,239 44,936 23,610 43,309
--------- -------- -------- --------
NET EARNINGS . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,794 $ 73,247 $ 44,043 $ 70,066
========= ======== ======== ========
EARNINGS PER SHARE . . . . . . . . . . . . . . . . . . . . . . $ .40 $ 1.41 $ .85 $ 1.35
========= ======== ======== ========
AVERAGE COMMON SHARES OUTSTANDING . . . . . . . . . . . . . . . 51,821 52,031 51,932 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 Six Months Ended July 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 . . . . . . . . . . . . . . . . . . . - - 44,043 - 44,043
Cash dividends (24 cents per share on Class A
and 26 1/2 cents per share on Class B) . . . . - - (13,186) (13,186)
-
Treasury stock purchases . . . . . . . . . . . . . - - - (3,917) (3,917)
Exercises of stock options . . . . . . . . . . . . - (14) - 52 38
------- -------- -------- -------- --------
BALANCE, JULY 31, 1996 . . . . . . . . . . . . . . $ 5,386 $143,256 $389,138 $(28,899) $508,881
======= ======== ======== ======== ========
</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) (2,666)
Other . . . . . . . . . . . . . . . . . . . . (2) (2) -
---------- ---------- ------- ---------
BALANCE, JULY 31, 1996 . . . . . . . . . . . 23,978,093 29,878,093 928,279 1,107,791
========== ========== ======= =========
</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>
Six Months Ended
July 31
-------------------------
1996 1995
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 44,043 $ 70,066
Adjustments to reconcile net earnings
to cash provided by operating activities
Depreciation, depletion and amortization . . . . . . . . . . . . . . . 54,166 55,878
Exploration expenses, including dry-hole costs . . . . . . . . . . . . 7,873 7,740
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . 19,908 14,249
Cost of land sold . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,992 17,538
Residential land development costs, net of reimbursements . . . . . . . (5,890) (8,855)
Distributions in excess of earnings of equity investees . . . . . . . . 1,458 4,269
Non-cash portion of natural gas contract buyout gain . . . . . . . . . - (162,689)
Write-downs of real estate properties . . . . . . . . . . . . . . . . . - 112,794
Gains from sales of properties . . . . . . . . . . . . . . . . . . . . (1,206) (4,338)
Accrued personnel reduction program costs . . . . . . . . . . . . . . . - 11,128
Amortization of deferred natural gas contract restructuring proceeds . - (5,950)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,563 2,547
----------- -----------
145,907 114,377
Changes in operating assets and liabilities . . . . . . . . . . . . . . 76,808 58,128
----------- -----------
Cash provided by operating activities . . . . . . . . . . . . . . . . . 222,715 172,505
----------- -----------
INVESTING ACTIVITIES
Capital and exploratory expenditures
Total on accrual basis . . . . . . . . . . . . . . . . . . . . . . . . . . (93,901) (98,868)
Residential land development costs deducted above . . . . . . . . . . . . 5,890 8,855
Adjustment to cash basis . . . . . . . . . . . . . . . . . . . . . . . . . (3,420) (7,205)
----------- -----------
(91,431) (97,218)
Proceeds from sales of real estate properties . . . . . . . . . . . . . . . . 16,175 25,644
Proceeds from sales of property, plant and equipment (collection
of final portion of Winnie/Spindletop proceeds in 1995) . . . . . . . . . 6,227 12,000
Acquisition of leased equipment . . . . . . . . . . . . . . . . . . . . . . . (6,995) -
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,311 1,195
----------- -----------
Cash used for investing activities . . . . . . . . . . . . . . . . . . (74,713) (58,379)
----------- -----------
FINANCING ACTIVITIES
Debt repayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (97,378) (94,759)
Cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (13,186) (13,211)
Treasury stock purchases . . . . . . . . . . . . . . . . . . . . . . . . . . (3,917) (4,130)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,003) (879)
----------- -----------
Cash used for financing activities . . . . . . . . . . . . . . . . . . (115,484) (112,979)
----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . . . 32,518 1,147
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD . . . . . . . . . . . . . . . 21,336 11,967
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD . . . . . . . . . . . . . . . . . . $ 53,854 $ 13,114
=========== ===========
</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
July 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 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 none and $3,068,000 for the three- and six-month
periods ended July 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
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 July 31, 1996 and January 31, 1996 and its
equity in their pretax earnings (losses) for the six-month periods ended July
31, 1996 and 1995 follows (in thousands):
<TABLE>
<CAPTION>
Equity in Pretax
Net Investment Earnings (Losses)
--------------------------- -----------------------
July 31, January 31, July 31, July 31,
1996 1996 1996 1995
---------- -------------- --------- ----------
<S> <C> <C> <C> <C>
GAS SERVICES
Austin Chalk Natural Gas Marketing Services . . . . $ 2,498 $ 2,531 $ (33) $ 1,030
Belvieu Environmental Fuels . . . . . . . . . . . . 27,765 21,702 6,063 4,157
C&L Processors Partnership . . . . . . . . . . . . 15,161 14,147 1,809 42
Ferguson-Burleson County Gas Gathering System . . . 51,111 58,331 4,357 2,776
Gulf Coast Fractionators . . . . . . . . . . . . . 7,707 5,530 2,177 144
U.P. Bryan Plant . . . . . . . . . . . . . . . . . 7,007 7,180 3,331 4,851
Others . . . . . . . . . . . . . . . . . . . . . . 221 152 132 (123)
---------- ---------- ---------- --------
$ 111,470 $ 109,573 17,836 12,877
========== ========== ---------- --------
REAL ESTATE
Grogan's Mill Apartments . . . . . . . . . . . . . $ 3,854 $ 3,744 110 152
The Woodlands Mall Associates . . . . . . . . . . . 7,967 8,161 356 506
Woodlands Office Equities - '95 Limited . . . . . . 11,967 9,306 262 -
Other partnerships (which own
commercial properties in The Woodlands) . . . . 6,683 7,237 431 261
Lake Catamount Joint Venture . . . . . . . . . . . 11,308 11,504 (46) (68)
The Fort Crockett Hotel Limited
(liquidated in January 1996) . . . . . . . . . - - - (599)
---------- ---------- ---------- --------
$ 41,779 $ 39,952 1,113 252
========== ========== ---------- --------
$ 18,949 $ 13,129
========== ========
</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 six-month periods ended July 31, 1996 and 1995
follows (in thousands):
<TABLE>
<CAPTION>
Three Months Six Months
----------------------- -----------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . $206,181 $154,475 $392,053 $258,274
Operating earnings . . . . . . . . . . . . . . . 34,947 18,910 64,989 34,600
Pretax earnings (before interest expense for
those entities whose activities are funded
by capital contributions of the owners) . . . . 26,018 10,228* 47,438 19,504*
</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 the three-month
period ended July 31, 1995 (see Note 7.)
The operations of certain of these partnerships have been funded using
term loans secured by their assets and in some cases by contractual commitments
or guaranties of the partners. Information concerning debt
-7-
<PAGE> 10
payable to third parties by these entities at July 31, 1996 and January 31,
1996 and the Company's proportionate share of such debt at July 31, 1996 is
summarized in the table which follows (in thousands):
<TABLE>
<CAPTION>
Entity Total July 31, 1996 -- Company's Share
------------------------- ------------------------------------
July 31, January 31, Non-
1996 1996 Recourse Recourse Total
---------- ---------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
GAS SERVICES ACTIVITIES
Belvieu Environmental Fuels . . . . . . . $ 156,444 $ 176,000 $ 6,667 $ 45,481 $ 52,148
C&L Processors Partnership . . . . . . . 78,709 86,209 21,252 18,103 39,355
Gulf Coast Fractionators . . . . . . . . 68,500 74,250 2,666 23,878 26,544
--------- --------- -------- -------- --------
303,653 336,459 30,585 87,462 118,047
--------- --------- -------- -------- --------
REAL ESTATE ACTIVITIES
Grogan's Mill Apartments . . . . . . . . 18,600 18,799 - 9,302 9,302
The Woodlands Mall Associates . . . . . . 59,126 59,126 29,563 - 29,563
Woodlands Office Equities -'95 Limited . 12,553 12,666 1,883 1,255 3,138
Others (which own commercial
properties in The Woodlands) . . . . . 37,756 37,877 2,229 15,425 17,654
--------- --------- -------- -------- --------
128,035 128,468 33,675 25,982 59,657
--------- --------- -------- -------- --------
$ 431,688 $ 464,927 $ 64,260 $113,444 $177,704
========= ========= ======== ======== ========
</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 $31,391,000 at July 31, 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). 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 July 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 six-month periods ended July 31, 1996 and 1995 consist of
the following (in thousands):
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
CURRENT
Federal . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,861 $ 26,700
State . . . . . . . . . . . . . . . . . . . . . . . . . . 841 2,360
-------- --------
3,702 29,060
-------- --------
DEFERRED
Federal . . . . . . . . . . . . . . . . . . . . . . . . . 19,515 8,512
State . . . . . . . . . . . . . . . . . . . . . . . . . . 393 5,737
-------- --------
19,908 14,249
-------- --------
$ 23,610 $ 43,309
======== ========
</TABLE>
-8-
<PAGE> 11
The estimated annual tax rates used in computing the income tax provisions
for the six-month periods ended July 31, 1996 and 1995 were 34.9% and 38.2%,
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, a new judge was appointed and the trial date was postponed at
least until November 4, 1996. Trial dates have not been set for the 28
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.
-9-
<PAGE> 12
OTHER LITIGATION OR POTENTIAL LITIGATION. Legal actions have been brought or
threatened against the Company and third-party realtors and engineers by 59
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. As previously
reported, 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.
Also as previously reported, 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 class-action lawsuit has been certified 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 in this litigation. The plaintiffs have not quantified their demand in
pleadings or otherwise. Because of this and since the members of the class
have not yet been determined, it is not possible at this time to determine the
range of possible loss, if any. However, based on knowledge of this case to
date, 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
$155,000,000 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.
-10-
<PAGE> 13
(7) SEGMENT INFORMATION
Selected industry segment data for the six- and three-month periods ended July
31, 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>
Six Months
- ----------
EXPLORATION AND PRODUCTION
Operations . . . . . . . . . . . . . . . $ 117,450 $ 120,271 $ 26,084 $ 34,993 $ 20,142 $ 29,188
Gain from gas contract buyout . . . . . . - 205,256 - 205,256 - 205,256
Severance tax refunds . . . . . . . . . . - - 5,935 - 5,935 -
Columbia Gas contract
settlement proceeds . . . . . . . . 3,444 - 3,444 - 3,444 -
Gain from sale of
producing properties . . . . . . . . - 4,338 - 4,338 - 4,338
Personnel reduction
program costs . . . . . . . . . . . - - - (7,935) - (7,935)
----------- --------- -------- --------- -------- ---------
120,894 329,865 35,463 236,652 29,521 230,847
----------- --------- -------- --------- -------- ---------
GAS SERVICES
Natural gas processing . . . . . . . . . 160,016 148,442 23,758 16,299 22,068 14,534
Natural gas gathering
and marketing . . . . . . . . . . . 106,772 78,655 12,813 4,794 10,979 2,859
Other . . . . . . . . . . . . . . . 8,326 4,479 7,668 3,965 7,460 3,911
Personnel reduction
program costs . . . . . . . . . . . - - - (3,600) - (3,600)
----------- --------- -------- --------- -------- ---------
275,114 231,576 44,239 21,458 40,507 17,704
----------- --------- -------- --------- -------- ---------
REAL ESTATE
Operations . . . . . . . . . . . . . . . 82,451 71,409 21,083 16,126 18,678 13,395
Write-downs of properties . . . . . . . . - - - (112,794) (112,794)
Personnel reduction
program costs . . . . . . . . . . . - - - (3,000) - (3,000)
----------- --------- -------- --------- -------- ---------
82,451 71,409 21,083 (99,668) 18,678 (102,399)
----------- --------- -------- --------- -------- ---------
CORPORATE . . . . . . . . . . . . . . . . - - - - (6,428)(b) (13,509)(b)
----------- --------- -------- --------- -------- ---------
$ 478,459 $ 632,850 $100,785 $ 158,442 $ 82,278 $ 132,643
=========== ========= ======== ========= ======== =========
Three Months
- ------------
EXPLORATION AND PRODUCTION
Operations . . . . . . . . . . . . . . . $ 59,342 $ 56,496 $ 13,764 $ 17,614 $10,876 $ 15,000
Gain from gas contract buyout . . . . . . - 205,256 - 205,256 - 205,256
Severance tax refunds . . . . . . . . . . - - 2,056 - 2,056 -
Gain from sale of
producing properties . . . . . . . . - 4,338 - 4,338 - 4,338
----------- --------- -------- --------- -------- ---------
59,342 266,090 15,820 227,208 12,932 224,594
----------- --------- -------- --------- -------- ---------
GAS SERVICES
Natural gas processing . . . . . . . . . 77,739 67,204 11,388 6,657 10,542 5,774
Natural gas gathering
and marketing . . . . . . . . . . . 55,662 41,215 6,216 2,071 5,333 1,130
Other 4,184 3,646 3,885 3,399 3,704 3,372
----------- --------- -------- --------- -------- ---------
137,585 112,065 21,489 12,127 19,579 10,276
----------- --------- -------- --------- -------- ---------
Real Estate
Operations . . . . . . . . . . . . . . . 44,179 39,720 11,388 10,101 10,195 8,853
Write-downs of properties . . . . . . . . - - - (112,794) (112,794)
----------- --------- -------- --------- -------- ---------
44,179 39,720 11,388 (102,693) 10,195 (103,941)
----------- --------- -------- --------- -------- ---------
CORPORATE . . . . . . . . . . . . . . . . - - - - (3,404)(b) (3,533)(b)
----------- --------- -------- --------- -------- ---------
$ 241,106 $ 417,875 $ 48,697 $ 136,642 $ 39,302 $ 127,396
=========== ========= ======== ========= ======== =========
<CAPTION>
Capital
DD&A Expenditures(a)
-------------------------- -------------------------
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Six Months
- ----------
EXPLORATION AND PRODUCTION
Operations . . . . . . . . . . . . . . . $ 46,118 $ 42,763 $ 49,579 $ 55,736
Gain from gas contract buyout . . . . . . - - - -
Severance tax refunds . . . . . . . . . . - - - -
Columbia Gas contract
settlement proceeds . . . . . . . . - - - -
Gain from sale of
producing properties . . . . . . . . - - - -
Personnel reduction
program costs . . . . . . . . . . . - - - -
--------- --------- -------- --------
46,118 42,763 49,579 55,736
--------- --------- -------- --------
GAS SERVICES
Natural gas processing . . . . . . . . . 1,637 3,405 3,214 2,790
Natural gas gathering
and marketing . . . . . . . . . . . 1,956 3,579 6,870 12,749
Other . . . . . . . . . . . . . . . 53 53 74 3,645
Personnel reduction
program costs . . . . . . . . . . . - - - -
--------- --------- -------- --------
3,646 7,037 10,158 19,184
--------- --------- -------- --------
REAL ESTATE
Operations . . . . . . . . . . . . . . . 2,877 4,355 29,280 22,784
Write-downs of properties . . . . . . . . - - - -
Personnel reduction
program costs . . . . . . . . . . . - - -
-
--------- --------- -------- --------
2,877 4,355 29,280 22,784
--------- --------- -------- --------
CORPORATE . . . . . . . . . . . . . . . . 1,525 1,723 4,884 1,164
--------- --------- -------- --------
$ 54,166 $ 55,878 $ 93,901 $ 98,868
========= ========= ======== ========
Three Months
- ------------
EXPLORATION AND PRODUCTION
Operations . . . . . . . . . . . . . . . $21,299 $19,285 $25,439 $24,510
Gain from gas contract buyout . . . . . . - - - -
Severance tax refunds . . . . . . . . . . - - - -
Gain from sale of
producing properties . . . . . . . . - - - -
--------- --------- -------- --------
21,299 19,285 25,439 24,510
--------- --------- -------- --------
GAS SERVICES
Natural gas processing . . . . . . . . . 873 1,700 1,419 396
Natural gas gathering
and marketing . . . . . . . . . . . 1,016 1,776 3,757 6,268
Other 26 26 - 3,553
--------- --------- -------- --------
1,915 3,502 5,176 10,217
--------- --------- -------- --------
Real Estate
Operations . . . . . . . . . . . . . . . 1,435 1,985 15,102 13,548
Write-downs of properties . . . . . . . . - - -
--------- --------- -------- --------
1,435 1,985 15,102 13,548
--------- --------- -------- --------
CORPORATE . . . . . . . . . . . . . . . . 827 839 2,828 153
--------- --------- -------- --------
$ 25,476 $ 25,611 $ 48,545 $ 48,428
========= ========= ======== ========
</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 1995.
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
-11-
<PAGE> 14
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.
Exploration and production segment operating earnings for the three-month
period ended July 31, 1995 include a gain of $4,338,000 from the sale of
certain West Texas producing oil and gas properties.
During the three-month period ended April 30, 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.
In August 1995, the Company completed a real estate asset management study
and adopted a revised business plan calling for the disposal within the near
term of most of its properties located outside The Woodlands. Because of the
revised business plan, it was necessary to reduce the carrying values of
certain properties (principally land held for investment, development or sale
and resort and other operating properties) to their estimated fair market
values, net of disposition costs. As a result, property write-downs of
$112,794,000 were recorded during the three-month period ended July 31, 1995.
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 $17,960,000 and $19,664,000
during the six-month periods ended July 31, 1996 and 1995. Income taxes paid
during these periods totaled $5,631,000 and $2,906,000. A newly formed,
25%-owned partnership assumed a mortgage obligation of $12,796,000 in
connection with its July 1995 purchase of ten office buildings from the
Company. There were no other significant non-cash investing or financing
activities during the six-month periods ended July 31, 1996 and 1995.
-12-
<PAGE> 15
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
half 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. While sales transactions are pending for real
estate properties previously identified for sale with a total book value of
approximately $65 million, 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 $253 million. This includes a $96 million reduction in fiscal
1997's first six 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. Financial forecasts indicate that the Company's cash
flows (including receipt of the third and final installment of the Natural
contract termination proceeds and substantial asset sales proceeds) 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. To the extent that the cash flows are not sufficient to
accomplish this, the Company has the ability to borrow up to $200 million under
its currently unused committed bank credit agreements.
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 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.
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.
A new judge subsequently was appointed, but a new trial date has not been set.
A trial date of November 4, 1996 has been set for another of these cases.
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 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.
-13-
<PAGE> 16
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 six months, such spending totaled
$93.9 million and was at a level below one-half of the original 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 revised budget amounts.
OPERATING STATISTICS
Certain operating statistics (including, where applicable, proportional
interests in equity partnerships) for the three- and six-month periods ended
July 31, 1996 and 1995 follow:
<TABLE>
<CAPTION>
Three Months Six Months
------------------------ -----------------------
1996 1995 1996 1995
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
AVERAGE DAILY VOLUMES
Natural gas sales (Mcf) . . . . . . . . . . . . 220,400 207,700 226,100 216,100
Crude oil and condensate sales (Bbls) . . . . . 5,200 5,400 5,400 5,500
Natural gas liquids produced (Bbls) . . . . . . 45,700 48,900 45,100 48,600
Pipeline throughput (Mcf) . . . . . . . . . . 384,000 368,000 412,000 364,000
AVERAGE SALES PRICES
Natural gas (per Mcf) . . . . . . . . . . . . . $ 2.40 $ 2.31 $ 2.34 $ 2.41
Crude oil and condensate (per Bbl) . . . . . . 20.28 16.85 19.86 17.10
Natural gas liquids produced (per Bbl) . . . . 13.62 11.39 13.88 11.45
RESIDENTIAL LOT SALES - THE WOODLANDS
Lots sold . . . . . . . . . . . . . . . . . . . 328 277 698 462
Average price per lot . . . . . . . . . . . . . $42,210 $40,217 $40,838 $39,663
Average price per square foot . . . . . . . . . 4.06 3.88 4.06 3.83
</TABLE>
RESULTS OF OPERATIONS - SIX MONTHS ENDED JULY 31, 1996
COMPARED WITH SIX MONTHS ENDED JULY 31, 1995
The Company's results for the six-month periods ended July 31, 1996 and
1995--both before and after unusual items--are summarized in the table on the
following page. Because of unusual items, net earnings for the first half of
fiscal 1997 of $44.0 million were $26.1 million below those of the prior-year
period. Unusual items increased net earnings of the fiscal 1997 and 1996
periods by $5.8 million and $44.1 million, respectively.
Excluding the effects of unusual items, fiscal 1997's first half earnings
of $38.2 million were $12.2 million (47%) above the $26 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 six- months' operating earnings.
This impact was more than offset 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.
-14-
<PAGE> 17
The following table and discussion identify and explain the major
increases (decreases) in earnings for the six-month periods (in millions):
<TABLE>
<CAPTION>
Segment Operating Earnings
-------------------------------
Exploration
and Gas Real Pretax Net
Production Services Estate Other* Earnings Earnings
---------- -------- ------ ------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
FISCAL 1996 AMOUNTS . . . . . . . . . . . . $ 236.7 $ 21.5 $(99.7) $(45.1) $ 113.4 $ 70.1
--------- ------- ------ ------ -------- --------
ELIMINATE IMPACT OF FISCAL 1996
UNUSUAL ITEMS--(see pages 11 and 12)
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
Gain from sale of producing properties . . (4.3) - - - (4.3) (2.7)
--------- ------- ------ ------ -------- --------
(201.7) 3.6 115.8 5.7 (76.6) (44.1)
--------- ------- ------ ------ -------- --------
FISCAL 1996 AMOUNTS BEFORE UNUSUAL ITEMS . 35.0 25.1 16.1 (39.4) 36.8 26.0
--------- ------- ------ ------ -------- --------
MAJOR INCREASES (DECREASES)
Natural gas
Contract buyout . . . . . . . . . . . . (23.1) - .9 (22.2) (14.4)
Higher market-sensitive sales prices . . 16.0 - - 16.0 10.4
Higher volumes . . . . . . . . . . . . . 2.7 - - - 2.7 1.8
Higher crude and condensate sales prices . 2.5 - - - 2.5 1.6
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)
Fiscal 1996 amortization of deferred
gas contract restructuring proceeds . . (4.4) - - - (4.4) (2.9)
Natural gas processing
Higher NGL prices . . . . . . . . . . . - 19.7 - - 19.7 12.8
Higher feedstock costs . . . . . . . . - (17.0) - - (17.0) (11.0)
Other (principally expense reductions
due to previous restructuring
activities) . . . . . . . . . . . . . - 4.2 - - 4.2 2.7
Gas gathering and marketing
Onsystem and offsystem marketing
margins and transportation revenues . - 3.9 - - 3.9 2.5
Other (principally expense reductions
and miscellaneous revenues) . . . . . - 4.1 - - 4.1 2.7
Equity in earnings of MTBE plant
partnership . . . . . . . . . . . . . . - 1.9 - - 1.9 1.2
Equity in earnings of fractionation plant
partnership . . . . . . . . . . . . . . - 2.0 - - 2.0 1.3
Real Estate--The Woodlands . . . . . . . . - - 5.6 - 5.6 3.6
Interest expense incurred . . . . . . . . . - - - 4.5 4.5 2.9
Other, net . . . . . . . . . . . . . . . . (1.0) (.2) (.9) (.6) (2.7) (1.7)
Higher effective tax rate (rate for second
quarter of fiscal 1996 was unusually low) - - - - - (1.8)
--------- ------- ------ ------ -------- --------
(8.9) 19.1 5.0 6.3 21.5 12.2
--------- ------- ------ ------ -------- --------
FISCAL 1997 AMOUNTS BEFORE UNUSUAL ITEMS . 26.1 44.2 21.1 (33.1) 58.3 38.2
--------- ------- ------ ------ -------- --------
FISCAL 1997 UNUSUAL ITEMS--(see page 12)
Severance tax refunds . . . . . . . . . . . 5.9 - - - 5.9 3.7
Columbia Gas contract settlement proceeds . 3.5 - - - 3.5 2.1
--------- ------- ------ ------ -------- --------
9.4 - - - 9.4 5.8
--------- ------- ------ ------ -------- --------
FISCAL 1997 AMOUNTS AFTER UNUSUAL ITEMS . . $ 35.5 $ 44.2 $ 21.1 $(33.1) $ 67.7 $ 44.0
========= ======= ====== ====== ======== ========
</TABLE>
- -----------------------------
*Includes general and administrative expense and other expense.
-15-
<PAGE> 18
EXPLORATION AND PRODUCTION OVERVIEW
Exclusive of unusual items, exploration and production segment operating
earnings of $26.1 million during fiscal 1997's first six months were $8.9
million below the $35.0 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 substantially offset, however, by fiscal 1997's higher
market-sensitive gas prices and sales volumes.
NATURAL GAS - CONTRACT BUYOUT. Effective with the contract buyout on July 1,
1995, the Company began receiving market-sensitive prices for approximately 80
MMcf per day of North Texas residue gas previously sold at a substantially
higher contract price of $4.00 per MMBtu. As a result, North Texas 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 $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. After interest income accrued on the Company's share of the
receivables from Natural and income taxes, the net earnings impact was $14.4
million.
NATURAL GAS - HIGHER MARKET-SENSITIVE SALES PRICE ($16.0 MILLION INCREASE).
For production outside the North Texas area, the Company's average
market-sensitive natural gas sales price during the first half of fiscal 1997
was $2.28 per Mcf, 37% higher than the $1.66 realized during the comparable
prior-year period.
NATURAL GAS - HIGHER VOLUMES ($2.7 MILLION INCREASE). The increase in natural
gas sales volumes (to 226.1 MMcf per day from 216.1 during the prior year's
first six months) 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 1995.
HIGHER CRUDE AND CONDENSATE PRICES ($2.5 MILLION INCREASE). The average sales
price for crude and condensate during fiscal 1997's first half was $19.86 per
barrel, up 16% from the $17.10 of the corresponding prior-year period,
improving operating earnings by $2.5 million.
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 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 half 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 half of fiscal 1996.
GAS SERVICES OVERVIEW
Gas services operating earnings before unusual items rose $19.1 million (to
$44.2 million) during the first six months of fiscal 1997 as gas processing and
gas gathering and marketing earnings rose by $7.4 million and $8.0 million,
respectively. Gas processing margins were somewhat better as NGL prices and
feedstock cost both rose sharply in response to market conditions. Much of the
improvement in gas processing earnings was due to cost reductions resulting
from the Company's restructuring efforts of the last two years. Improved
onsystem and offsystem margins, lower depreciation expense and increases in
field service, transportation and miscellaneous revenues were the principal
causes of the increase in gas gathering and marketing earnings. Also
contributing to the favorable gas services earnings comparison were increased
earnings from the Company's interests in fractionation and MTBE plant
partnerships.
NGL production volumes averaged 45,100 barrels per day, down from 48,600 in the
prior-year period because of the December 1, 1995 sale of three plants which
produced an average of 2,000 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.
-16-
<PAGE> 19
NATURAL GAS PROCESSING - NGL PRICE ($19.7 MILLION INCREASE). The average price
for NGLs produced during fiscal 1997's first six months of $13.88 per barrel
was $2.43 (21%) above the average for the corresponding prior-year period,
increasing operating earnings by $19.7 million. NGL prices rose because of
strong winter demand and remained above the prior-year's level in response to
continued demand and relatively low NGL storage levels.
NATURAL GAS PROCESSING - HIGHER FEEDSTOCK COSTS ($17.0 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 half of fiscal 1997, lowering
operating earnings by $17.0 million.
HIGHER ONSYSTEM AND OFFSYSTEM MARKETING MARGINS AND TRANSPORTATION REVENUES
($3.9 MILLION INCREASE). Substantially better markets for natural gas during
the fiscal 1997 period resulted in substantial improvements in the profit
margins earned on the Company's onsystem and offsystem marketing and
transportation activities. While some of this incremental profit should
continue, a portion of it, which resulted from unusual volatility in natural
gas sales prices particularly in the first quarter, is expected to recur only
infrequently.
EQUITY IN EARNINGS OF MTBE PLANT PARTNERSHIP ($1.9 MILLION INCREASE). During
the first six months of fiscal 1997, the Company's equity in the pretax earnings
of this partnership totaled $6.1 million, or $1.9 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 15,300 barrels
during the first half of fiscal 1997. Third quarter volumes will be lower
because of a turnaround that caused the plant to be down during most of the
month of August.
EQUITY IN EARNINGS OF FRACTIONATION PLANT PARTNERSHIP ($2.0 MILLION INCREASE).
The Company's equity in the earnings of Gulf Coast Fractionators totaled $2.1
million during fiscal 1997's first six months, or $2.0 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
Operating earnings from real estate activities during the first half of fiscal
1997 totaled $21.1 million, or $5.0 million more than was earned (exclusive of
unusual items) during the fiscal 1996 period. This improvement was primarily
attributable to record residential lot sales in The Woodlands. Largely because
of price-related reductions in timber harvesting activities, earnings from
operations outside The Woodlands were lower in the fiscal 1997 period.
REAL ESTATE - THE WOODLANDS ($5.6 MILLION INCREASE). The Company sold 698
residential lots to builders during the six months ended July 31, 1996, 236
(51%) more than in the corresponding period of the prior year. Builders in The
Woodlands sold 636 new homes in the first half of calendar 1996, the most for
any six-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 rose 6% in the fiscal 1997 period.
OTHER
INTEREST EXPENSE INCURRED. Interest expense incurred during fiscal 1997's
first half (of $28.1 million) declined by $4.5 million because of a $130
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 and because of strong cash flows resulting from fiscal 1997's
improved energy sales prices.
-17-
<PAGE> 20
RESULTS OF OPERATIONS - THREE MONTHS ENDED JULY 31, 1996
COMPARED WITH THREE MONTHS ENDED JULY 31, 1995
The Company's results for the three-month periods ended July 31, 1996 and
1995--both before and after unusual items--are summarized in the table which
follows. Net earnings for the second quarter of fiscal 1997 were $20.8
million, compared with $73.3 million in the prior-year period, when unusual
items added $56.6 million to net earnings.
Excluding the unusual items, earnings for fiscal 1997's second quarter
totaled $19.5 million, up 17% from the $16.7 million of the prior year's
comparable period. An unusually low effective tax rate in the prior year's
second quarter (22.3% versus the current period's 34.9%) masked an even better
period-to-period earnings comparison. Earnings before income taxes totaled
$30.0 million during the quarter, or 40% more than the $21.4 million of the
comparable prior-year period. Major contributors to this improvement included
higher energy sales prices, increased gas volumes, stronger residential lot
sales and lower interest expense. The quarter-to-quarter earnings improvement
was particularly noteworthy considering the fact that results for two months of
the prior-year period benefitted from sales under the Natural contract.
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 . . . . . . . . . . . . $ 227.2 $ 12.1 $(102.7) $(18.4) $ 118.2 $ 73.3
-------- ------- ------- ------ ------- -------
ELIMINATE IMPACT OF FISCAL 1996
UNUSUAL ITEMS--(see page 11 and 12)
Gain from gas contract buyout . . . . . . . (205.3) - - - (205.3) (127.2)
Write-downs of real estate properties . . . -- - 112.8 - 112.8 73.3
Gain from sale of producing properties . . (4.3) - - - (4.3) (2.7)
-------- ------- ------- ------ ------- -------
(209.6) - 112.8 - (96.8) (56.6)
-------- ------- ------- ------ ------- -------
FISCAL 1996 AMOUNTS BEFORE UNUSUAL ITEMS . 17.6 12.1 10.1 (18.4) 21.4 16.7
-------- ------- ------- ------ ------- -------
MAJOR INCREASES (DECREASES)
Natural gas
Contract buyout . . . . . . . . . . . . (9.9) - - .5 (9.4) (6.1)
Higher market-sensitive sales prices . . 9.5 - - - 9.5 6.2
Higher volumes . . . . . . . . . . . . . 1.2 - - - 1.2 .8
Higher crude and condensate sales prices . 1.5 - - - 1.5 1.0
Higher DD&A rate . . . . . . . . . . . . . (2.6) - - - (2.6) (1.7)
Higher exploratory dry-hole costs . . . . . (1.7) - - - (1.7) (1.1)
Fiscal 1996 amortization of deferred gas
contract restructuring proceeds (see
page 16) . . . . . . . . . . . . . . . . (1.8) - - - (1.8) (1.2)
Natural gas processing
NGL price . . . . . . . . . . . . . . . - 9.3 - - 9.3 6.0
Higher feedstock costs . . . . . . . . - (8.6) - - (8.6) (5.6)
Other (principally expense reductions due
to previous restructuring activities) - 4.1 - - 4.1 2.7
Gas gathering and marketing
Onsystem and offsystem marketing
margins and transportation revenues . - 2.2 - - 2.2 1.4
Other (principally expense reductions
and miscellaneous revenues) . . . . . - 2.1 - - 2.1 1.4
Equity in earnings of MTBE and
fractionation plant partnerships . . . . - .7 - - .7 .4
Real Estate--The Woodlands . . . . . . . . - - 2.3 - 2.3 1.5
Interest expense incurred . . . . . . . . . - - - 2.2 2.2 1.4
Other
SAR/Bonus unit expense accruals . . . . (.2) (.2) (.2) (.4) (1.0) (.6)
Miscellaneous . . . . . . . . . . . . . .2 (.2) (.8) (.6) (1.4) (.9)
Higher effective tax rate (rate for fiscal
1996's period was unusually low) . . . . - - - - - (2.8)
-------- ------- ------- ------ ------- -------
(3.8) 9.4 1.3 1.7 8.6 2.8
-------- ------- ------- ------ ------- -------
FISCAL 1997 AMOUNTS BEFORE UNUSUAL ITEM . . 13.8 21.5 11.4 (16.7) 30.0 19.5
FISCAL 1997 UNUSUAL ITEM--(see page 12)
Severance tax refund . . . . . . . . . . . 2.0 - - - 2.0 1.3
-------- ------- ------- ------ ------- -------
FISCAL 1997 AMOUNTS AFTER UNUSUAL ITEM . . $ 15.8 $ 21.5 $ 11.4 $(16.7) $ 32.0 $ 20.8
======== ======= ======= ====== ======= =======
</TABLE>
- -------------------------------
*Includes general and administrative expense and other expense.
-18-
<PAGE> 21
EXPLORATION AND PRODUCTION OVERVIEW
Excluding unusual items, exploration and production segment operating earnings
during fiscal 1997's second quarter of $13.8 million were $3.8 million below
those of fiscal 1996's period. The Natural contract buyout's $9.9 million
period-to-period negative impact on earnings was more than offset by the
effect on the latest quarter's results of higher prices for market-sensitive
gas and increased gas sales volumes. The quarter-to-quarter earnings decline
was largely the result of increases in dry-hole costs and DD&A expense.
NATURAL GAS - CONTRACT BUYOUT. See page 16.
NATURAL GAS - HIGHER MARKET-SENSITIVE SALES PRICES ($9.5 MILLION INCREASE).
The Company's average market-sensitive natural gas sales price during the
second quarter of fiscal 1997 was $2.35 per Mcf, or 40% higher than the $1.68
realized during the comparable period of the prior year.
NATURAL GAS - HIGHER VOLUMES ($1.2 MILLION INCREASE). The increase in natural
gas sales volumes (to 220.4 MMcf per day from 207.7 during the prior year's
second quarter) 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 SALE PRICES ($1.5 MILLION INCREASE). The average
sales price for crude and condensate during fiscal 1997's second quarter was
$20.28 per barrel, 20% above the $16.85 of the corresponding prior-year period.
HIGHER EXPLORATORY DRY-HOLE COSTS ($1.7 MILLION DECREASE). Exploratory
dry-hole costs during fiscal 1997's second quarter totaled $2.5 million, up
from $.8 million in the comparable period of the prior year. The current
period's increased exploratory spending was principally related to wells
drilled in North Texas to determine the extent of the Barnett Shale and to
evaluate 3-D seismic shot in another area and an exploratory test in East
Texas.
GAS SERVICES OVERVIEW
Gas services operating earnings before unusual items increased to $21.5 million
from $12.1 million in last year's second quarter principally because of
increases of $4.7 million and $4.2 million in earnings from the gas processing
and gas gathering and marketing segments. The improvement for gas processing
was principally due to cost reductions since aggregate gross profits (sales
price less feedstock costs) rose by only $.7 million as both revenues and
feedstock costs rose sharply in response to market conditions. Contributing to
the gas gathering and marketing earnings improvement were higher onsystem and
offsystem gas marketing margins and transportation revenues, reduced
depreciation expense resulting from fiscal 1996's asset upgrading program and
several miscellaneous upward variances. NGL production volumes averaged 45,700
barrels per day, down from 48,900 in the prior-year period largely because of
the December 1995 sale of three plants which produced an average of 2,000
barrels per day in the fiscal 1996 period.
NATURAL GAS PROCESSING - NGL PRICE ($9.3 MILLION INCREASE). The average price
for NGLs produced of $13.62 per barrel during fiscal 1997's second quarter was
$2.33 (20%) above the average for the corresponding prior-year period,
increasing operating earnings by $9.3 million.
NATURAL GAS PROCESSING - HIGHER FEEDSTOCK COSTS ($8.6 MILLION DECREASE). As
discussed on page 17, higher market-sensitive gas and NGL prices during fiscal
1997's second quarter caused NGL feedstock costs to rise, lowering operating
earnings by $8.6 million.
HIGHER ONSYSTEM AND OFFSYSTEM MARGINS AND TRANSPORTATION REVENUES ($2.2 MILLION
INCREASE). As discussed on page 17, onsystem and offsystem margins improved in
fiscal 1997, increasing earnings. Also, in fiscal 1997's second quarter
transportation revenues rose because of small increases in volumes and rates.
-19-
<PAGE> 22
REAL ESTATE OVERVIEW
Operating earnings from real estate activities rose $1.3 million during the
second quarter of fiscal 1997 principally on the strength of residential lot
and commercial land sales in The Woodlands. Earnings from operations outside
The Woodlands were lower in the fiscal 1997 period largely because of
price-related reductions in timber harvesting activities.
THE WOODLANDS ($2.3 MILLION INCREASE). For the reasons discussed on page 17,
residential lot sales to builders during the current period were 18% above
those in the corresponding quarter of fiscal 1996 (328 versus 277), increasing
operating earnings by $1.6 million. Also contributing to the higher earnings
were increased profits from commercial land sales. The favorable earnings
impact of substantially increased volumes during the fiscal 1997 period (27
acres versus 11) was partially offset by the current period's lower average
sales price, which occurred because sales during the prior-year period
consisted almost exclusively of prime sites in the Town Center, whereas the
current quarter's transactions included several sites outside the Town Center.
OTHER
INTEREST EXPENSE INCURRED. For the reasons discussed on page 17, interest
expense incurred during fiscal 1997's second quarter declined by $2.2 million.
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 and updated in its Form 10-Q for the quarter ended April 30,
1996. The information which follows updates those discussions for subsequent
material developments.
In the suits known as James Bartlett et al versus Mitchell Energy Corporation
(Cause No. 87-04-190 in the 271st Judicial District Court, Wise County, Texas)
which were tried in January 1996 and resulted in a $204 million judgment
against the Company. The Company appealed the judgement to the Fort Worth Court
of Appeals in August 1996. This matter is currently set for hearing on
March 12, 1997.
The Company has been informed that on August 30, 1996, 17 additional lawsuits
making claims similar to those in the Bartlett case were filed in the same
court. The Company has not yet been able to evaluate such claims in detail,
but does expect to treat them in the same manner as the 29 other similar suits
brought, but not yet tried.
-20-
<PAGE> 23
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of Mitchell Energy & Development Corp.
was held on June 26, 1996 for the purpose of electing a Board of 13 directors
and considering and acting upon proposals regarding the adoption of the
Company's 1995 Stock Option Plan and the appointment of independent public
accountants. Proxies for the meeting were solicited pursuant to Section 14A of
the Securities Exchange Act of 1934, and there was no solicitation in
opposition to the Company's solicitations. Each of the nominees for the Board
of Directors was elected by the Class A common stockholders.
The Company's stockholders approved adoption of the Company's 1995 Stock
Option Plan. The vote was as follows:
<TABLE>
<CAPTION>
Per-
Number cent
---------- ------
<S> <C> <C>
Shares voted "for" . . . . . . . . . . . . . . 18,932,936 88.49
Shares voted "against" . . . . . . . . . . . . 944,563 4.42
Shares abstaining . . . . . . . . . . . . . . 92,437 .43
Broker non-votes . . . . . . . . . . . . . . . 1,425,057 6.66
</TABLE>
Stockholders also approved the appointment of Arthur Andersen LLP,
independent public accountants, to examine the accounts of the Company for the
fiscal year ending January 31, 1997. The vote was as follows:
<TABLE>
<CAPTION>
Per-
Number cent
---------- ------
<S> <C> <C>
Shares voted "for" . . . . . . . . . . . . . . 21,358,974 99.83
Shares voted "against" . . . . . . . . . . . . 12,050 .06
Shares abstaining . . . . . . . . . . . . . . 23,969 .11
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
12 Computation of ratio of earnings to fixed charges
(b) No reports were filed on Form 8-K during the three-month period
ended July 31, 1996.
-21-
<PAGE> 24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MITCHELL ENERGY & DEVELOPMENT CORP.
-----------------------------------
(Registrant)
Dated: September 10, 1996 By: /s/ Philip S. Smith
-------------------------------------
Philip S. Smith
Senior Vice President - Administration
and Chief Financial Officer
-22-
<PAGE> 25
EXHIBIT INDEX
12 Computation of ratio of earnings to fixed charges
27 Financial Data Schedule
<PAGE> 1
Exhibit 12
Mitchell Energy & Development Corp.
Computation of Ratio of Earnings to Fixed Charges
(dollar amounts in thousands)
<TABLE>
<CAPTION>
Six
Months
Fiscal Year Ended January 31 Ended
------------------------------------------------------ July 31,
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 $ 67,653
Add (Deduct):
Previously capitalized interest
charged against pretax earnings . . . 14,887 9,545 11,552 22,158 79,499(d) 8,880
Losses of less-than-50%-owned persons . 26 99 32 1,104 9 33
Fixed charges (see below) . . . . . . . 90,107 85,169 84,788 85,988 78,992 34,243
Reverse effect of inclusion of interest
capitalized in fixed charges . . . . . (37,460) (34,161) (33,956) (33,011) (28,561) (12,836)
Undistributed earnings of
less-than-50%-owned persons . . . . . (10,521) (10,305) (3,594) (914) (4,321) (8,166)
-------- -------- -------- -------- -------- --------
$130,227 $110,369 $106,198 $145,876 $183,949 $ 89,807
======== ======== ======== ======== ======== ========
FIXED CHARGES
Interest expense incurred
Consolidated (a)(b) . . . . . . . . . . $ 84,025 $ 77,451 $ 75,252 $ 71,570 $ 65,802 $ 28,976
50%-owned persons . . . . . . . . . . . 3,284 4,609 6,236 7,912 9,957 4,033
Less-than-50%-owned persons . . . . . . - - - 3,032(e) - -
-------- -------- -------- -------- -------- --------
87,309 82,060 81,488 82,514 75,759 33,009
Portion of rental expense
representing interest (c) . . . . . . . 2,798 3,109 3,300 3,474 3,233 1,234
-------- -------- -------- -------- -------- --------
$ 90,107 $ 85,169 $ 84,788 $ 85,988 $ 78,992 $ 34,243
======== ======== ======== ======== ======== ========
RATIO OF EARNINGS TO FIXED CHARGES . . . . 1.45 1.30 1.25 1.70 2.33 2.62
======= ======== ======== ======== ======== ========
</TABLE>
- -------------------------------
(a) Consists of interest expense as reported in consolidated statements of
earnings and interest expense related to finance operations which is
reported as costs and expenses in the consolidated statements of earnings.
(b) At July 31, 1996, the Company had outstanding guaranties of the
indebtedness of third parties totaling approximately $17,200,000 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 $600,000 for the six months ended July 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> 4-MOS
<FISCAL-YEAR-END> APR-30-1996
<PERIOD-END> JUL-31-1996
<CASH> 53,854
<SECURITIES> 0
<RECEIVABLES> 103,582
<ALLOWANCES> 1,889
<INVENTORY> 11,658
<CURRENT-ASSETS> 263,066
<PP&E> 2,060,441
<DEPRECIATION> 1,337,684
<TOTAL-ASSETS> 1,764,630
<CURRENT-LIABILITIES> 337,787
<BONDS> 604,861
<COMMON> 5,386
0
0
<OTHER-SE> 503,495
<TOTAL-LIABILITY-AND-EQUITY> 1,764,630
<SALES> 475,015
<TOTAL-REVENUES> 478,459
<CGS> 0
<TOTAL-COSTS> 377,674
<OTHER-EXPENSES> 17,842
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,290
<INCOME-PRETAX> 67,653
<INCOME-TAX> 23,610
<INCOME-CONTINUING> 44,043
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 44,043
<EPS-PRIMARY> .85
<EPS-DILUTED> .85
</TABLE>
