MITCHELL ENERGY & DEVELOPMENT CORP, 10-K, 1996-04-30

MITCHELL ENERGY & DEVELOPMENT CORP
10-K, 1996-04-30
CRUDE PETROLEUM & NATURAL GAS

Previous: WITTER DEAN HIGH YIELD SECURITIES INC, N-30D, 1996-04-30

Next: DREYFUS MUNICIPAL MONEY MARKET FUND INC, N14AE24, 1996-04-30

<PAGE> 1

================================================================================

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED JANUARY 31, 1996

[ ] 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 its 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

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

Name of each exchange
Title of each class on which registered
- ------------------------------------ --------------------
Class A Common Stock, $.10 Par Value New York and Pacific
Class B Common Stock, $.10 Par Value New York and Pacific

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or Section 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
--- ---

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]

The aggregate market value of voting stock held by nonaffiliates of the
registrant at March 31, 1996 was approximately $146,646,000

Shares of common stock outstanding at March 31, 1996:

Class A - 23,227,815

Class B - 28,832,037

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference into the
indicated parts of this report:
Annual Report to Stockholders for the fiscal year ended January 31, 1996
- Parts I and II.
Definitive Proxy Statement to be filed within 120 days after January 31, 1996
- Part III.

================================================================================

<PAGE> 2
PART I

ITEM 1 - BUSINESS

Except for discussions of competition and insurance, information required
by this item is incorporated by reference from portions of Mitchell Energy &
Development Corp.'s Annual Report to Stockholders for the fiscal year ended
January 31, 1996 furnished to the Commission pursuant to Rule 14a-3(b) under
the Securities Exchange Act of 1934 (Annual Report to Stockholders).

<TABLE>
<CAPTION>
CROSS REFERENCE TO APPLICABLE SECTIONS
OF ANNUAL REPORT TO STOCKHOLDERS PAGE
-------------------------------------- ------------
<S> <C>
Inside
The Company . . . . . . . . . . . . . . . . . . . . . . . Front Cover
Energy Operations - Exploration and Production . . . . . . 8 - 14
Energy Operations - Gas Services . . . . . . . . . . . . . 15 - 18
Real Estate Operations . . . . . . . . . . . . . . . . . . 20 - 26
Notes to Consolidated Financial Statements
Note 10: Segment Information . . . . . . . . . . . . . 55 - 57
</TABLE>

Competition

The Registrant is a holding company which conducts all of its operations
through its subsidiaries, collectively referred to as "the Company." The
Company is one of the nation's largest independent oil and gas producers and is
a leading real estate developer in the Houston-Galveston area. Its
energy-related operations include the exploration for and production of natural
gas and crude oil, production of natural gas liquids (NGLs) and the operation
of gas gathering systems. The Company has substantial real estate holdings,
primarily within a 50-mile radius of Houston, Texas.

Within its energy businesses, the Company competes with many companies
that have substantially larger financial and other resources or whose
operations are more fully integrated than the Company's. The oil and gas
industry is highly competitive. There is competition within the industry and
also with other industries in supplying the fuel and energy needs of commerce,
industry and individuals. Due to relatively higher domestic finding costs and
continued unfavorable price levels for oil and gas, many energy companies have
chosen in recent years to focus on international activities and to reduce or
eliminate their U.S. operations. However, the Company intends to retain its
domestic focus and hopes to benefit from lessened competition for prospects and
the availability of opportunities for producing property acquisitions. From a
competitive standpoint, those focusing on international activities have chosen
to seek potentially more prolific opportunities in areas where operations
generally are subject to much greater political risk and other uncertainties.
Alternatively, the Company has chosen to limit these risks by continuing to
operate only in the U.S.

-1-
<PAGE> 3
The Company owns or has interests in numerous natural gas processing
plants located in Texas, Oklahoma and New Mexico, and it ranked 16th in daily
domestic NGL production in calendar 1995. The Company also has fractionating
equipment at several of its processing plants and owns a 38.75% interest in a
large fractionating plant near Mont Belvieu on the upper Texas Gulf Coast.
After being fractionated into ethane, propane, butanes and natural gasoline,
the NGLs are used by others in the production of plastics, paints, solvents,
synthetic rubber, gasoline and a wide variety of other products. Propane also
is widely used as a fuel in rural areas for cooking, home heating and crop
drying. The Company participates in the downstream business through its
one-third interest in a partnership which has a plant at Mont Belvieu, Texas
that produces methyl tertiary butyl ether (MTBE), an oxygenate used in the
production of environmentally cleaner gasoline. This plant has a daily
capacity of approximately 16,000 barrels.

The Company owns or has interests in natural gas gathering systems
located in Texas with an overall length of nearly 4,600 miles. These systems,
which tend to be regional systems operating in highly competitive local
markets, intersect with numerous pipeline systems enabling the Company to buy,
sell, transport and exchange gas with other pipeline operators.

The Company's real estate activities are concentrated in The Woodlands,
a 25,000-acre planned community with a population approaching 45,000. During
each of the last six years, The Woodlands ranked first among Houston's
residential communities in new home sales. The Woodlands Mall, a
million-square-foot regional shopping center, completed its first full year of
operation in fiscal 1996. The Company believes the new mall will continue to
be a catalyst for additional commercial land sales and will further enhance
residential and commercial land values in The Woodlands. The number of
residential communities competing for new home buyers in the Houston area is
expected to increase, resulting in a reduced market share (based on the
percentage of new homes sold) for the planned communities. However, with the
related expansion in the size of the overall market, the Company anticipates
that it will be able to maintain its residential unit sales volume near the
level achieved in recent years. Several of the Houston area planned
communities are owned by companies having substantially greater financial
resources than the Company.

The Company's operations have been and may be in the future affected
from time to time in varying degree by general economic conditions and by laws
and regulations, including restrictions on production, price controls, tax
increases and environmental regulations. The Company's energy price
realizations are often volatile and generally are affected by world supply and
demand conditions. Real estate sales, on the other hand, may be affected by
available disposable income, interest rates, availability of financing and
numerous other factors.

Insurance

The Company's business is subject to all the operating risks normally
associated with exploration and production of natural gas and oil; extraction
of natural gas liquids from natural gas streams; natural gas gathering and
transportation; development of real estate and operation of commercial and
recreational facilities. Such risks include well blow-out, fire and explosion,
pollution, flood and other naturally and unnaturally occurring events which
could result in the damage to or destruction of assets owned by the Company or
third parties and the injury of employees and other persons. The Company,
following practices customary within the industries in which it operates,
maintains insurance coverage against most, but not all, of these operating
risks as protection against financial loss and believes it is adequately
insured against public liability claims and physical damage losses. Losses and
liabilities, to the extent not covered by insurance, could reduce the
Company's cash flows and increase its costs.

-2-
<PAGE> 4
ITEM 2 - PROPERTIES

Information required by this item is incorporated by reference from
portions of the Annual Report to Stockholders.

<TABLE>
<CAPTION>
CROSS REFERENCE TO APPLICABLE SECTIONS
OF ANNUAL REPORT TO STOCKHOLDERS PAGE
-------------------------------------- ----
<S> <C>
Energy Operations - Exploration and Production Division . . . 8 - 14
Energy Operations - Gas Services Division . . . . . . . . . . 15 - 18
Real Estate Operations . . . . . . . . . . . . . . . . . . . . 20 - 26
Operating Statistics . . . . . . . . . . . . . . . . . . . . . 32
Supplemental Oil and Gas Information . . . . . . . . . . . . . 61 - 64
</TABLE>

OTHER OIL AND GAS RELATED DATA

The following information is required by Sections 3, 5 and 6 of the
Securities Act Industry Guide 2, Disclosure of Oil and Gas Operations.

AVERAGE PRODUCTION COST IN EQUIVALENT UNITS

<TABLE>
<CAPTION>
Year Ended January 31
--------------------------
1996 1995 1994(a)
-------- ------- -------
<S> <C> <C> <C>
Combined natural gas, crude oil and condensate
production (thousand cubic feet per day)(b) . . 249,000 252,000 230,000
Average production cost per
equivalent thousand cubic feet . . . . . . . . $ .65 $ .70 $ .74
</TABLE>

- ---------------------------

(a) Includes equity partnership interests.

(b) Expressed in equivalent units of production with barrels
of oil converted to cubic feet of gas on a 6-to-1 basis.

<TABLE>
<CAPTION>
UNDEVELOPED ACREAGE Earliest Material
(At January 31, 1996) Expiration(a)
---------------
Gross Net Concentration % Net Calendar
Location Acres Acres (County or Area) (b) Acres Year
- -------- ------- ------- ----------------- --- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Texas . . . . . . . . . 170,500 125,000 North Texas 47 37,700 1997
South Dakota . . . . . . 84,100 24,100 Butte 100 6,600 1999
Utah . . . . . . . . . . 63,200 36,200 Uintah 100 12,000 1997
New Mexico . . . . . . . 52,700 48,900 Eddy, Lea 90 9,700 1996
Ohio . . . . . . . . . . 47,400 47,200 Lawrence 82 16,500 1997
Alabama . . . . . . . . 29,200 14,400 Baldwin, Conecuh 80 3,000 1997
Michigan . . . . . . . . 28,800 28,600 Eaton 95 18,700 1997
Other (c) . . . . . . . 59,200 37,300
--------- -------
Total undeveloped acreage 535,100 361,700
Producing acreage . . . 769,800 575,600
--------- -------
Total acreage . . . . . 1,304,900 937,300
========= =======
</TABLE>

- --------------------------

(a) Expiring leases may be renewed if conditions warrant.
(b) Percentage of the state's net acres located in the indicated areas of
concentration.
(c) Includes Arkansas, Colorado, Kansas, Louisiana, Mississippi, Montana
Oklahoma, Pennsylvania and Wyoming.

-3-
<PAGE> 5
DRILLING ACTIVITY (a)
For the year ended January 31

<TABLE>
<CAPTION>
Exploratory Development Total
------------------ ------------------ -------------------
Well Completions Total Oil Gas Dry Oil Gas Dry Oil Gas Dry
- ------------------------- ----- --- --- --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Gross Wells--1996
Texas
North Texas . . . . . . . 69 - 4 - - 65 - - 69 -
East Central Texas . . . . 22 - - 3 - 17 2 - 17 5
Gulf Coast . . . . . . . . 9 - 3 1 - 5 - - 8 1
West Texas . . . . . . . . 4 - - - 4 - - 4 - -
New Mexico . . . . . . . . . 6 1 - - 5 - - 6 - -
Colorado . . . . . . . . . . 5 - - 2 - 3 - - 3 2
Other (b) . . . . . . . . . 1 - - 1 - - - - - 1
----- ---- --- ---- ---- ---- --- ---- ---- ----
Total (c) . . . . . . . . . 116 1 7 7 9 90 2 10 97 9
===== ==== === ==== ==== ==== === ==== ==== ====

Net Wells
1996 . . . . . . . . . . . . 94.7 .3 5.1 3.8 2.2 81.6 1.7 2.5 86.7 5.5
===== ==== === ==== ==== ==== === ==== ==== ====
1995 . . . . . . . . . . . . 109.7 2.2 8.0 2.9 10.2 80.5 5.9 12.4 88.5 8.8
===== ==== === ==== ==== ==== === ==== ==== ====
1994 (c) . . . . . . . . . . 121.4 4.5 5.8 12.0 17.1 77.1 4.9 21.6 82.9 16.9
===== ==== === ==== ==== ==== === ==== ==== ====
</TABLE>

- ---------------------------

(a) Excludes service wells.
(b) An additional 18 wells (13.1 net wells) were in the process of being
drilled or completed on January 31, 1996.
(c) Includes equity partnership interests.

ITEM 3 - 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.

One such matter is the group of lawsuits involving claims that the
natural gas production operations of Mitchell Energy Corporation ("MEC"), a
wholly owned subsidiary of the Company, have affected water wells of
individuals in south central Wise County, Texas. In the first case to go to
trial, a judgment was entered on March 1, 1996 by the 271st Judicial District
Court, Wise County, Texas, in the case of James Bartlett et al vs. MEC (Cause
No. 87-04-190), awarding actual damages of $4,051,760, which included only
$339,266 in economic damages for real and personal property and out- of-pocket
expenses, plus $200,000,000 in exemplary damages to eight plaintiff groups.
Even though none of the 17 plaintiffs involved presented any medical testimony
or had ever seen a medical doctor for any condition they attributed to the
alleged problem, the actual damages also included awards totaling $3,712,494
for physical pain, mental anguish, discomfort, annoyance and inconvenience.

Much of the plaintiffs' case was based upon alleged violations of
statewide rules of the Texas Railroad Commission regulating drilling and
production operations. MEC has always operated within the Commission rules and
regulations, has cooperated fully with regard to any landowner complaints about
MEC's operations and has never been cited or fined by this agency for
noncompliance. Furthermore, a Commission hearing in 1979 dealing with alleged
pollution of the fresh water aquifers in the area confirmed protective
procedures which MEC has utilized in conducting its operations.

-4-
<PAGE> 6
In addition, similar lawsuits each claiming damages of more than
$1,000,000 have been brought against the Company on behalf of 29 other
plaintiff groups, 27 of which are represented by the same attorneys handling
the Bartlett case. Of such suits, 17 have been combined (as Carol R. Bailey et
al vs. MEC, Cause No. 95-08-422) and set for trial in June 1996, another has
been set for trial in August 1996 and trial dates have not been set for the
remianing suits. Following the March 1, 1996 judgement, the judge encouraged
mediation of the Bartlett case as well as all other lawsuits involving the same
plaintiffs' attorneys. MEC will participate in mediation as an attempt to
settle these outstanding claims at reasonable cost.

Currently, MEC is taking every step to overturn this judgment and
believes that there are numerous legal bases for a complete reversal on appeal
by rendition of a judgment in MEC's favor or, at a minimum, a reversal and
remand of the case for a new trial. In any event, the Company and its outside
counsel believe the judgment will be significantly reduced upon completion of
the appeals process.

While the exact amounts that will be incurred cannot be determined at
this time, MEC recorded a $15,000,000 accrual in January 1996 to provide for
costs associated with these lawsuits. Consistent with MEC's belief that it is
not responsible for the alleged problems, the accrual consists primarily of
expected future costs for attorneys' fees, bond and other costs required to
appeal the judgment and to defend the Company in the other suits. Based on its
current assessment, also included in the accrual is an amount for possible
disposition of all related claims.

Although the Company believes that the litigation 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.

Though not nearly so advanced, two other groups of lawsuits also should
be mentioned. While in the opinion of management and the Company's outside
counsel, the Company was not at fault in any of these matters, resources are
having to be devoted to defending the Company in these controversies.

The first of these is a multi-plaintiff, but unrelated, controversy
involving alleged underpayment of royalties on a portion of MEC's North Texas
natural gas production. Plaintiffs' attorneys, proposing to work on a
contingent fee basis, are seeking to certify a class action in The Rowan Estate
Trust et al vs. MEC et al, Cause No. 42172 in the 43rd Judicial District Court,
Parker County, Texas. The formation of a class will be fought vigorously by
MEC. The Company believes that MEC's royalty owners have benefited
substantially by MEC's procedures and MEC has filed counterclaims for refunds
of prior royalty payments against plaintiffs who seek to repudiate their
division orders. Because of the limited discovery and factual investigation
that has taken place to date, it is not possible to evaluate the range of
possible exposure. However, based on the information presently available, the
Company and its outside counsel believe it is not probable that the Company
will incur losses in connection with this litigation that will be material to
its financial statements.

The second of these legal controversies relates to flooding in the North
Houston area in October 1994. Owners of 59 homes located in The Woodlands have
sent notices of claims against The Woodlands Corporation ("TWC"), a wholly
owned subsidiary of the Company, arising out of this flood (resulting in three
lawsuits to date: Russell D. Schneider et ux vs. TWC, Cause No. 95-07-02147 and
J. Stephen Carow et al vs. TWC et al, Cause No. 95-06-1930, both in the 221st
Judicial District Court, Montgomery County, Texas and John K. O'Hara et ux vs.
TWC, Cause 95-44222 in the 215th Judicial District Court, Harris County,
Texas). Generally, the claimants are seeking reimbursements for property
damages, but some are making claims of deceptive trade practices and for mental
anguish. Additionally, a group of owners of 57 homes and seven lots in areas
adjoining The Woodlands have sued TWC, other developers and three local
government entities alleging the defendants contributed to flooding of their
homes (Daisy Adams et al vs. TWC, Cause No. 95-08-02821 in the 221st Judicial
District Court, Montgomery County, Texas). It is

-5-
<PAGE> 7
TWC's position that any such damages resulted from a record, near 500-year
flood and were not preventable with the exercise of ordinary care and generally
accepted drainage design and development and that it has not made
misrepresentations or failed to make necessary representations. 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.

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

During the fourth quarter of fiscal 1996, no matter was submitted to a
vote of security holders, either through solicitation of proxies or otherwise.

EXECUTIVE OFFICERS OF THE REGISTRANT

The following is a list of the executive officers of the Company as of
April 1, 1996.
<TABLE>
<CAPTION>
Held a
Position
Continu-
ously
Name Position Age Since
---- -------- --- ---------
<S> <C> <C> <C>
George P. Mitchell Chairman and Chief Executive Officer 76 1946

Bernard F. Clark Vice Chairman 74 1956

W. D. Stevens President and Chief Operating Officer 61 1994

Roger L. Galatas Senior Vice President, Real Estate Division 60 1979

Philip S. Smith Senior Vice President and Chief Financial Officer 59 1980

Allen J. Tarbutton, Jr. Senior Vice President, Gas Services Division 57 1974

Thomas P. Battle Senior Vice President, Legal and Governmental 53 1982
Affairs, General Counsel and Secretary
</TABLE>

All of the executive officers were elected at a Board of Directors
meeting held on June 28, 1995 for a term of one year, or until their respective
successors are qualified.

There are no significant family relationships among the officers of the
Company, either by blood, marriage or adoption.

-6-
<PAGE> 8
PART II

ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Except for the approximate number of holders of record of common stock,
information required by this item is incorporated by reference from portions of
the Annual Report to Stockholders.

CROSS REFERENCE TO APPLICABLE SECTIONS
OF ANNUAL REPORT TO STOCKHOLDERS PAGE
-------------------------------------- ----
<S> <C>
Quarterly Stock Data . . . . . . . . . . . . . . . . . . . . . 40
Corporate Information. . . . . . . . . . . . . . . . . . . . . 69
</TABLE>

The numbers of holders of record of Class A Common Stock and of Class B Common
Stock at March 31, 1996 were 2,295 and 2,296, respectively. Including those
whose shares are carried in street names, the Registrant estimates that there
are approximately 8,000 holders of each class of its common stock.

ITEM 6 - SELECTED FINANCIAL DATA

Information required by this item is incorporated by reference from
pages 65 and 66 of the Annual Report to Stockholders under the caption
"Historical Summary." Incorporation by reference from these pages is
restricted to the information provided under the following captions: Revenues,
earnings before extraordinary item and cumulative effect of change in
accounting method, net earnings, earnings before extraordinary item and
cumulative effect of change in accounting method per common share, net earnings
per common share, cash dividends per common share, ratio of earnings to fixed
charges, total assets and long-term debt for the fiscal years 1992 through
1996.

ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Information required by this item is incorporated by reference from
pages 27 through 39 of the Annual Report to Stockholders.

ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Information required by this item is incorporated by reference from
portions of the Annual Report to Stockholders.

CROSS REFERENCE TO APPLICABLE SECTIONS
OF ANNUAL REPORT TO STOCKHOLDERS Page
-------------------------------------- -------
<S> <C>
Consolidated Financial Statements . . . . . . . . . . . . 41 - 44
Notes to Consolidated Financial Statements . . . . . . . . 45 - 59
Report of Independent Public Accountants . . . . . . . . . 60
Supplemental Oil and Gas Information (unaudited) . . . . . 61 - 64
Quarterly Financial Data (unaudited) . . . . . . . . . . . 40

</TABLE>

-7-
<PAGE> 9
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE

No Form 8-K was filed by the Registrant during its fiscal years ended
January 31, 1996 and 1995 or any subsequent period reporting a change of
accountants or any disagreement on any matter of accounting principles,
practices or financial statement disclosure.

PART III

ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information required by this item is incorporated by reference from
portions of the Registrant's definitive Proxy Statement to be filed with the
Securities and Exchange Commission within 120 days after January 31, 1996
pursuant to Regulation 14A under the Securities Exchange Act of 1934 (Proxy
Statement), under the caption "Election of Directors." See page 6 of this Form
10-K for information regarding Executive Officers of the Registrant.

ITEM 11 - EXECUTIVE COMPENSATION

Information required by this item is incorporated by reference from
portions of the Proxy Statement to be filed with the Securities and Exchange
Commission within 120 days after January 31, 1996, under the captions
"Executive Compensation" and "Compensation Committee Interlocks and Insider
Participation."

ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information required by this item is incorporated by reference from
portions of the Proxy Statement to be filed with the Securities and Exchange
Commission within 120 days after January 31, 1996, under the caption "Voting
Securities and Principal Holders Thereof."

ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

-8-
<PAGE> 10
PART IV

ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

<TABLE>
<CAPTION>
CROSS REFERENCE TO APPLICABLE SECTIONS
OF ANNUAL REPORT TO STOCKHOLDERS PAGE
-------------------------------------- ----
<S> <C>
Quarterly Financial Data (unaudited) . . . . . . . . . . . . . . 40
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . 41
Consolidated Statements of Earnings . . . . . . . . . . . . . . 42
Consolidated Statements of Stockholders' Equity . . . . . . . . 43
Consolidated Statements of Cash Flows . . . . . . . . . . . . . 44
Notes to Consolidated Financial Statements . . . . . . . . . . . 45 - 59
Report of Independent Public Accountants . . . . . . . . . . . . 60
Supplemental Oil and Gas Information (unaudited) . . . . . . . . 61 - 64
</TABLE>

FINANCIAL STATEMENT SCHEDULES

<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants . . . . . . . . . . . S-1

Schedule I - Condensed Financial Information of the Registrant S-2
at January 31, 1996 and 1995 and for the Years . . thru
Ended January 31, 1996, 1995 and 1994 . . . . . . S-5
</TABLE>

Schedules not listed above are omitted as the information required to be set
forth therein is included in the consolidated financial statements or the
footnotes thereto, or the schedules are not applicable.

-9-
<PAGE> 11
EXHIBITS
3(a) Restated Articles of Incorporation of Mitchell Energy &
Development Corp., as amended through July 2, 1990 are
incorporated as an exhibit to this report by reference to exhibit
3(a) of the annual report on Form 10-K dated January 31, 1992.
The Certificate of Amendment dated June 24, 1992 is incorporated
as an exhibit to this report by reference to exhibit 3 of the
quarterly report on Form 10-Q for the quarter ended July 31,
1992.

3(b) The Bylaws of Mitchell Energy & Development Corp.

4(a) The senior indenture dated August 1, 1991 by and between Mitchell
Energy & Development Corp., as Issuer, and First City, Texas -
Houston, National Association (succeeded by Texas Commerce Bank),
as Trustee, is incorporated as an exhibit to this report by
reference to exhibit 4(b) of File No. 33-42340.

4(b) The senior and subordinated indentures dated January 1, 1993 by
and between Mitchell Energy & Development Corp., as Issuer, and
NationsBank of Texas, National Association, as Trustee, are
incorporated as exhibits to this report by reference to exhibits
4(b) and 4(c) of File No. 33-61070. The first supplement to the
senior indenture dated January 15, 1994 is incorporated as an
exhibit to this report by reference to exhibit 4(a) of the
current report on Form 8-K dated January 18, 1994. The second
supplement to the senior indenture dated January 20, 1994 is
incorporated as an exhibit to this report by reference to exhibit
4(a) of the current report on Form 8-K dated January 20, 1994.

4(c) The credit and reimbursement agreement dated as of April 8, 1996
among Mitchell Energy Corporation, as borrower, MND Energy
Corporation, as guarantor, the several banks which are parties
thereto and Chemical Bank, as administrative agent for the banks.

Upon request, the Registrant will provide to the Securities and
Exchange Commission copies of all other instruments defining the
rights of holders of long-term debt of Mitchell Energy &
Development Corp. and its consolidated subsidiaries.

The following exhibits 10(a) through 10(m) filed under paragraph 10 of Item 601
of Regulation S-K are the Company's management contracts and compensation plans
or arrangements.

10(a) Long Term Incentive and 1979 Nonqualified Stock Option Plan, as
amended through the Seventh Amendment is incorporated as an
exhibit to this report by reference to exhibit 10(c) of the
annual report on Form 10-K dated January 31, 1992. The Eighth
Amendment to such Plan is incorporated as an exhibit to this
report by reference to exhibit 10(b) of the annual report on Form
10-K dated January 31,1993.

10(b) 1989 Stock Option Plan is incorporated as an exhibit to this
report by reference to exhibit 10(d) of the annual report on Form
10-K dated January 31, 1992. The first amendment to such Plan is
incorporated as an exhibit to this report by reference to exhibit
10(c) of the annual report on Form 10-K dated January 31, 1993.

-10-
<PAGE> 12
10(d) 1991 Bonus Unit Plan is incorporated as an exhibit to this report
by reference to exhibit 10(f) of the annual report on Form 10-K
dated January 31, 1992. The first amendment to such Plan
effective as of June 24, 1992 is incorporated as an exhibit to
this report by reference to exhibit 10(e) of the annual report
on Form 10-K dated January 31, 1993. The second amendment,
effective February 9, 1993, and the third amendment, effective
January 18, 1996, to such Plan are attached hereto as exhibit
10(d).

10(f) Mitchell Energy & Development Corp. Excess Benefit Plan (formerly
the Supplemental Retirement Plan) amended and restated effective
as of January 1, 1992 is incorporated as an exhibit to this
report by reference to exhibit 10(g) of the annual report on Form
10-K dated January 31, 1994.

10(g) Deferred compensation/supplementary life insurance arrangement
between the Registrant and certain of its executive officers is
incorporated as an exhibit to this report by reference to exhibit
10(h) of the annual report on Form 10-K dated Janu-ary 31, 1992.

10(h) The Supplemental Benefit Agreement dated August 17, 1990 between
the Registrant and George P. Mitchell is incorporated as an
exhibit to this report by reference to exhibit 10(h) of the
annual report on Form 10-K dated January 31, 1991.

10(i) Employment agreement between the Registrant and W. D. Stevens
dated January 3, 1994 is incorporated as an exhibit to this
report by reference to exhibit 10(j) of the annual report on Form
10-K dated January 31, 1994.

10(j) Severance compensation contract dated April 16, 1992 between the
Registrant and Roger L. Galatas is incorporated as an exhibit to
this report by reference to exhibit 10(j) of the annual report on
Form 10-K dated January 31, 1993.

10(k) Severance compensation contract dated October 31, 1991 between
the Registrant and Philip S. Smith is incorporated as an exhibit
to this report by reference to exhibit 10(k) of the annual report
on Form 10-K dated January 31, 1993.

10(l) Severance compensation contract dated April 16, 1992 between the
Registrant and Allen J. Tarbutton, Jr., is incorporated as an
exhibit to this report by reference to exhibit 10(l) of the
annual report on Form 10-K dated January 31, 1993.

10(m) A written description (in lieu of a formal document) describing
the Registrant's commitment to contribute to the life insurance
program of George P. Mitchell.

-11-
<PAGE> 13
12 Computation of Ratio of Earnings to Fixed Charges.

13 Annual Report to Stockholders for the fiscal year ended January
31, 1996.

21 List of Subsidiaries as of January 31, 1996.

23 Consent of Independent Public Accountants.

99(a) Annual Report on Form 11-K for the fiscal year ended January 31,
1996 of Mitchell Energy & Development Corp. Thrift and Savings
Plan.

99(b) Annual Report on Form 11-K for the fiscal year ended January 31,
1996 of MND Hospitality, Inc. Thrift and Savings Plan.

REPORTS FILED ON FORM 8-K

No reports were filed on Form 8-K during the quarter ended January 31, 1996.

-12-
<PAGE> 14
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

/s/ George P. Mitchell April 22, 1996
----------------------------------------
George P. Mitchell, Chairman
and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.

/s/ George P. Mitchell April 22, 1996
----------------------------------------
George P. Mitchell, Chairman
and Chief Executive Officer

/s/ Bernard F. Clark April 22, 1996
----------------------------------------
Bernard F. Clark, Vice Chairman

/s/ W. D. Stevens April 22, 1996
----------------------------------------
W. D. Stevens, Director, President
and Chief Operating Officer

/s/ Philip S. Smith April 22, 1996
----------------------------------------
Philip S. Smith, Senior Vice President -
Administration, Chief Financial Officer
and Principal Accounting Officer

/s/ Robert W. Baldwin April 22, 1996
----------------------------------------
Robert W. Baldwin, Director

/s/ William D. Eberle April 22, 1996
----------------------------------------
William D. Eberle, Director

-13-
<PAGE> 15
SIGNATURES (continued)

/s/ Shaker A. Khayatt April 22, 1996
---------------------------------------
Shaker A. Khayatt, Director

---------------------------------------
Ben F. Love, Director

/s/ Walter A. Lubanko April 22, 1996
---------------------------------------
Walter A. Lubanko, Director

/s/ J. Todd Mitchell April 22, 1996
---------------------------------------
J. Todd Mitchell, Director

/s/ M. Kent Mitchell April 22, 1996
---------------------------------------
M. Kent Mitchell, Director

/s/ Raymond L. Watson April 22, 1996
---------------------------------------
Raymond L. Watson, Director

/s/ J. McDonald Williams April 22, 1996
---------------------------------------
J. McDonald Williams, Director

-14-
<PAGE> 16
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

Mitchell Energy & Development Corp.:

We have audited, in accordance with generally accepted auditing
standards, the consolidated financial statements included in Mitchell Energy &
Development Corp.'s Annual Report to Stockholders incorporated by reference in
this Form 10-K, and have issued our report thereon dated April 23, 1996. Our
audits were made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The financial statement schedule listed in Item 14
on page 9 is the responsibility of the Company's management and is presented
for purposes of complying with rules of the Securities and Exchange Commission,
and is not part of the basic financial statements. This financial statement
schedule has been subjected to the auditing procedures applied in the audits of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.

ARTHUR ANDERSEN LLP

Houston, Texas
April 23, 1996

S-1
<PAGE> 17
Mitchell Energy & Development Corp. and Subsidiaries
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT - PAGE 1 OF 4

================================================================================

Mitchell Energy & Development Corp.
CONDENSED BALANCE SHEETS
January 31, 1996 and 1995

(in thousands)

<TABLE>
<CAPTION>
ASSETS 1996 1995
----------- -----------
<S> <C> <C>
Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,575 $ 2,056
Investment in consolidated subsidiaries,
at cost plus equity in undistributed earnings . . . . . . . . . . . 477,118 469,038
Advances to subsidiaries . . . . . . . . . . . . . . . . . . . . . . . 715,472 710,592
Deferred financing costs . . . . . . . . . . . . . . . . . . . . . . . 3,635 4,570
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182 1,175
----------- ----------
$ 1,197,982 $1,187,431
=========== ==========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,287 $ 9,051
Long-term debt (Note C) . . . . . . . . . . . . . . . . . . . . . . . . 700,000 700,000
Deferred credits and other liabilities . . . . . . . . . . . . . . . . 3,792 3,350
Commitments and contingencies (Note D)
Stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . 481,903 475,030
----------- ----------
$ 1,197,982 $1,187,431
=========== ==========

</TABLE>

================================================================================

Mitchell Energy & Development Corp.
CONDENSED STATEMENTS OF EARNINGS
For the Years Ended January 31, 1996, 1995 and 1994

(in thousands except per-share amounts)

<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
EQUITY IN NET EARNINGS OF SUBSIDIARIES . . . . . . . . . . . $ 37,480 $ 45,785 $ 24,642
-------- -------- --------

OTHER (INCOME) EXPENSE
Interest expense--third parties . . . . . . . . . . . . . . . 54,076 55,597 55,060
Interest income on subsidiary advances . . . . . . . . . . . (54,782) (56,353) (55,816)

General and administrative expense (Note E) . . . . . . . . . - - -
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . 1,010 524 895
Income taxes (Note B) . . . . . . . . . . . . . . . . . . . . 47 203 (101)
-------- -------- --------
351 (29) 38
-------- -------- --------
NET EARNINGS . . . . . . . . . . . . . . . . . . . . . . . . $ 37,129 $ 45,814 $ 24,604
======== ======== ========
EARNINGS PER SHARE . . . . . . . . . . . . . . . . . . . . . $ .71 $ .87 $ .48
======== ======== ========

</TABLE>

- ------------------------------

The accompanying notes are an integral part of these condensed financial
statements.

S-2
<PAGE> 18
Mitchell Energy & Development Corp. and Subsidiaries
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT - PAGE 2 OF 4

================================================================================

Mitchell Energy & Development Corp.
CONDENSED STATEMENTS OF CASH FLOWS
For the Years Ended January 31, 1996, 1995 and 1994

(in thousands)

<TABLE>
<CAPTION>
1996 1995 1994
--------- ---------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 37,129 $ 45,814 $ 24,604
Adjustments to reconcile net earnings
to cash provided by operating activities
Equity in net earnings of subsidiaries . . . . . . . . . . . . . . (37,480) (45,785) (24,642)

Dividends from consolidated subsidiaries . . . . . . . . . . . . . 30,000 30,000 57,500
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . 1,154 1,939 (13)
Changes in operating assets and liabilities . . . . . . . . . . . . 3,452 (5,758) (2,932)

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,295 457 1,692
--------- ---------- ---------
Cash provided by operating activities . . . . . . . . . . . . . . . 35,550 26,667 56,209
--------- ---------- ---------

INVESTING ACTIVITIES
Investments in subsidiaries . . . . . . . . . . . . . . . . . . . . . . (600) (2,500) (153,700)

Advances (to) from subsidiaries, net . . . . . . . . . . . . . . . . . (4,880) 216,646 (349,240)

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (25) - -
--------- ---------- ---------
Cash provided by (used for) investing activities . . . . . . . . . . (5,505) 214,146 (502,940)
--------- ---------- ---------

FINANCING ACTIVITIES
Proceeds from issuance of debt . . . . . . . . . . . . . . . . . . . . - - 350,000
Debt repayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (200,000) -

Stock issuance proceeds . . . . . . . . . . . . . . . . . . . . . . . . - - 123,429
Cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . (26,421) (26,738) (25,942)

Senior note issuance costs . . . . . . . . . . . . . . . . . . . . . . - (320) (2,431)

Debt prepayment premium . . . . . . . . . . . . . . . . . . . . . . . . - (6,420)
-
Treasury stock purchases . . . . . . . . . . . . . . . . . . . . . . . (4,227) (7,635)
-
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 338 364 1,960
--------- ---------- ---------
Cash provided by (used for) financing activities . . . . . . . . . . (30,310) (240,749) 447,016
--------- ---------- ---------
CHANGE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . (265) 64 285

CASH AND CASH EQUIVALENTS, beginning of year . . . . . . . . . . . . . 350 286 1
--------- ---------- ---------
CASH AND CASH EQUIVALENTS, end of year . . . . . . . . . . . . . . . . $ 85 $ 350 $ 286
========= ========== =========
</TABLE>

- ------------------------------
The accompanying notes are an integral part of these condensed financial
statements.

S-3
<PAGE> 19
Mitchell Energy & Development Corp. and Subsidiaries
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT - PAGE 3 OF 4

================================================================================

Mitchell Energy & Development Corp.
NOTES TO CONDENSED FINANCIAL STATEMENTS
JANUARY 31, 1996, 1995 AND 1994

(A) General. The accompanying condensed financial statements of Mitchell
Energy & Development Corp. (MEDC) should be read in conjunction with the
consolidated financial statements and notes thereto included in the Annual
Report to Stockholders of Mitchell Energy & Development Corp. and subsidiaries
(the Company) for fiscal 1996, which is filed as an exhibit to this annual
report on Form 10-K. For information regarding the components of and an
analysis of the activity in stockholders' equity, refer to the Consolidated
Statements of Stockholders' Equity included in the Company's Annual Report to
Stockholders. For information regarding the issuance of Class B shares in
fiscal 1994 and the Company's stock option and bonus unit plans, see Notes 8
and 9 of Notes to Consolidated Financial Statements included in the Company's
Annual Report to Stockholders. Also, see Note 13 for information regarding an
extraordinary loss from the early retirement of debt recorded in fiscal 1994.
This charge reduced the reported equity in net earnings of subsidiaries for
fiscal 1994 by $5,426,000.

(B) Income Taxes. Deferred income taxes are provided on temporary differences
between the book and tax bases of MEDC's assets and liabilities. MEDC is
included in the consolidated tax return of the Company. As the parent company,
MEDC allocates to its subsidiaries amounts equal to the income taxes that the
subsidiaries would pay or receive as a refund if separate returns were filed.

<TABLE>
<S> <C> <C>
UNSECURED SENIOR NOTES 1996 1995
-------- --------
5.10%, due February 15, 1997 . . . . . . . . . . . $100,000 $100,000
8%, due July 15, 1999 . . . . . . . . . . . . . . 100,000 100,000
9 1/4%, due January 15, 2002 . . . . . . . . . . . 250,000 250,000
6 3/4%, due February 15, 2004 . . . . . . . . . . 250,000 250,000
-------- --------
$700,000 $700,000
======== ========
</TABLE>

The Company's senior notes have no sinking fund requirements and are not
redeemable prior to their respective maturity dates. The senior note
indentures contain certain restrictions which, among other things, limit cash
dividend payments and additional borrowings, restrict the sale or lease of
certain assets and limit MEDC's right to consolidate or merge with other
companies. Retained earnings available for the payment of cash dividends
totaled $181,903,000 at January 31, 1996.

(D) Debt Guarantees. At January 31, 1996, MEDC was contingently liable for
the repayment of approximately $108,000,000 in outstanding debt of subsidiaries
and certain of their equity investees. Also, MEDC had contingent liabilities
at that date totaling approximately $4,400,000, consisting of debt guarantees
for a nonprofit institution located in The Woodlands.

In April 1996 in connection with the execution by a subsidiary of an
agreement with a group of banks for a facility to provide letters of credit to
collateralize appeals bonds in connection with certain litigation, MEDC
guaranteed the repayment of amounts, if any, ultimately drawn for letters of
credit issued under this facility. In addition, MEDC guaranteed the repayment
of outstanding amounts under the Energy revolving credit facility that it
previously had not guaranteed. See Notes 5 and 7 of Notes to Consolidated
Financial Statements included in the Company's Annual Report to Stockholders
for further information concerning this matter.

S-4
<PAGE> 20
Mitchell Energy & Development Corp. and Subsidiaries
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT - PAGE 4 OF 4

================================================================================

(E) General and Administrative Expense Allocation. General and administrative
expense in the Condensed Statements of Earnings is net of amounts charged to
subsidiaries of $44,821,000; $42,225,000 and $43,222,000 in fiscal 1996, 1995
and 1994. Such amounts are allocated based on each subsidiaries' estimated use
of accounting, legal, information systems and other services provided by MEDC
which are managed on a companywide basis.

(F) Statements of Cash Flows. Short-term investments with a maturity of three
months or less are considered to be cash equivalents. Interest paid totaled
$53,100,000; $55,180,000 and $53,625,000 during the years ended January 31,
1996, 1995 and 1994. Income taxes paid during these same periods totaled
$21,634,000; $6,877,000 and $12,240,000. There were no significant non-cash
investing or financing activities during the three-year period ended January
31,1996.

(G) Financial Instruments. Based on quoted market prices, the aggregate fair
value of MEDC's long-term debt was $746,787,000 at January 31, 1996 (compared
with an aggregate balance sheet carrying value of $700,000,000). The carrying
amounts of MEDC's other on-balance-sheet financial instruments approximate
their fair values. The aggregate cost to terminate MEDC's off-balance-sheet
financial instruments is not material. MEDC has no direct involvement with
derivative financial instruments.

S-5
<PAGE> 21
MITCHELL ENERGY & DEVELOPMENT CORP. AND SUBSIDIARIES

EXHIBITS TO FORM 10-K

For the Fiscal Year Ended January 31, 1996
<PAGE> 22
MITCHELL ENERGY & DEVELOPMENT CORP. AND SUBSIDIARIES
INDEX TO EXHIBITS

<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------------------
<S> <C>
3(a) Restated Articles of Incorporation of Mitchell Energy &
Development Corp., as amended through July 2, 1990 are
incorporated as an exhibit to this report by reference to exhibit
3(a) of the annual report on Form 10-K dated January 31, 1992.
The Certificate of Amendment dated June 24, 1992 is incorporated
as an exhibit to this report by reference to exhibit 3 of the
quarterly report on Form 10-Q for the quarter ended July 31, 1992.

3(b) The Bylaws of Mitchell Energy & Development Corp.

4(a) The senior indenture dated August 1, 1991 by and between Mitchell
Energy & Development Corp., as Issuer, and First City,
Texas-Houston, National Association (succeeded by Texas Commerce
Bank), as Trustee, is incorporated as an exhibit to this report by
reference to exhibit 4(b) of File No. 33- 42340.

4(b) The senior and subordinated indentures dated January 1, 1993 by
and between Mitchell Energy & Development Corp., as Issuer, and
NationsBank of Texas, National Association, as Trustee, is
incorporated as an exhibit to this report by reference to exhibit
4(b) of File No. 33-61070. The first supplement to the senior
indenture dated January 15, 1994 is incorporated as an exhibit to
this report by reference to exhibit 4(a) of the current report on
Form 8-K dated January 18, 1994. The second supplement to the
senior indenture dated January 20, 1994 is incorporated as an
exhibit to this report by reference to exhibit 4(a) of the current
report on Form 8-K dated January 20, 1994.

10(a) Long Term Incentive and 1979 Nonqualified Stock Option Plan, as
amended through the seventh amendment, is incorporated as an
exhibit to this report by reference to exhibit 10(c) of the annual
report on Form 10-K dated January 31, 1992. The Eighth Amendment
to such Plan is incorporated as an exhibit to this report by
reference to exhibit 10(b) of the annual report on Form 10-K dated
January 31, 1993.

<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------------------
<S> <C>
10(c) 1995 Stock Option Plan.

10(d) 1991 Bonus Unit Plan is incorporated as an exhibit to this
report by reference to exhibit 10(f) of the annual report on Form
10-K dated January 31, 1992. The first amendment to such Plan
effective as of June 24, 1992 is incorporated as an exhibit to
this report by reference to exhibit 10(e) of the annual report on
Form 10-K dated January 31, 1993. The second amendment, effective
February 9, 1993, and the third amendment, effective January 18,
1996, to such Plan are attached hereto as exhibit 10(d).

10(e) Mitchell Energy & Development Corp. Restoration Benefit Plan
effective January 1, 1992 is incorporated as an exhibit to this
report by reference to exhibit 10(f) of the annual report on Form
10-K dated January 31, 1994.
.
10(f) Mitchell Energy & Development Corp. Excess Benefit Plan (formerly
the Supplemental Retirement Plan) amended and restated effective
as of January 1, 1992 is incorporated as an exhibit to this report
by reference to exhibit 10(g) of the annual report on Form 10-K
dated January 31, 1994.

10(h) The Supplemental Benefit Agreement dated August 17, 1990 between
the Registrant and George P. Mitchell is incorporated as an
exhibit to this report by reference to exhibit 10(h) of the annual
report on Form 10-K dated January 31, 1991.

10(i) Employment agreement between the Registrant and W. D. Stevens
dated January 3, 1994 is incorporated as an exhibit to this report
by reference to exhibit 10(j) of the annual report on Form 10-K
dated January 31, 1994.

10(k) Severance compensation contract dated October 31, 1991 between the
Registrant and Philip S. Smith is incorporated as an exhibit to
this report by reference to exhibit 10(k) of the Registrant's
annual report on Form 10-K dated January 31, 1993.
</TABLE>
<PAGE> 24
INDEX TO EXHIBITS (Continued)

<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------------------
<S> <C>
10(l) Severance compensation contract dated April 16, 1992 between the
Registrant and Allen J. Tarbutton, Jr., is incorporated as an
exhibit to this report by reference to exhibit 10(l) of the annual
report on Form 10-K dated January 31, 1993.

10(m) A written description (in lieu of a formal document) describing
the Registrant's commitment to contribute to the life insurance
program of George P. Mitchell.

12 Computation of Ratio of Earnings to Fixed Charges

13 Annual Report to Stockholders for the fiscal year ended January
31, 1996

21 List of Subsidiaries as of January 31, 1996

23 Consent of Independent Public Accountants

99(a) Annual Report on Form 11-K for the fiscal year ended January 31,
1996 of Mitchell Energy & Development Corp. Thrift and Savings
Plan

99(b) Annual Report on Form 11-K for the fiscal year ended January 31,
1996 of MND Hospitality, Inc. Thrift and Savings Plan
</TABLE>

<PAGE> 1
Exhibit 3(b)
BYLAWS OF
MITCHELL ENERGY & DEVELOPMENT CORP.
(A Texas Corporation)

ARTICLE I
Meetings of Stockholders

Section 1. Annual Meeting. The annual meeting of the stockholders of
MITCHELL ENERGY & DEVELOPMENT CORP. (the "Corporation") for the election of
directors and for the transaction of the last Wednesday in June in each year,
if not a legal holiday, and if a legal holiday, then on the next succeeding day
not a legal holiday.

Section 2. Special Meetings. Special meetings of the stockholders
may be called at any time by the holders of at least ten percent (10%) of the
outstanding stock entitled to be voted at such meeting, by the Board of
Directors, by the Chairman of the Board or by the President.

Section 3. Notice of Meetings. Written or printed notice of the
place, day and hour of the meeting and, in the case of a special meeting or
where otherwise required by the Texas Business Corporation Act, the purpose or
purposes thereof, shall be given personally or by mail in a postage prepaid
envelope to each stockholder entitled to vote at such meeting, not less than
ten or more than fifty days before the date of such meeting, and, if mailed, it
shall be directed to such stockholder at his address as it appears on the
records of the Corporation, unless he shall have filed with
<PAGE> 2
the Secretary of the Corporation a written request that notices to him be
mailed to some other address, in which case it shall be directed to him at such
other address. Notice of any meeting of stockholders shall not be required to
be given to any stockholder who shall attend such meeting in person or by proxy
and shall not, at the beginning of such meeting, object to the transaction of
any business because the meeting is not lawfully called or convened, or who
shall, either before or after the meeting, submit a signed waiver of notice, in
person or by proxy. Unless the Board shall fix after the adjournment a new
record date for an adjourned meeting, notice of such adjourned meeting need not
be given if the time and place to which the meeting shall be adjourned were
announced at the meeting at which the adjournment is taken. At the adjourned
meeting the Corporation may transact any business which might have been
transacted at the original meeting. If the adjournment is for more than thirty
days, or if after the adjournment a new record date is fixed for the adjourned
meeting, a notice of the adjourned meeting shall be given to each stockholder
of record entitled to vote at the meeting.

Section 4. Place of Meetings. Meetings of the stockholders may be
held at such place, within or without the state of Texas, as the Board of
Directors or the officer calling the same shall specify in the notice of such
meeting, or in a duly executed waiver of notice thereof.

Section 5. Quorum. At the meetings of the stockholders the holders
of a majority of the shares of stock of the Corporation

2
<PAGE> 3
issued and outstanding and entitled to vote shall be present in person or by
proxy to constitute a quorum for the transaction of any business, except when
stockholders are required to vote by class, in which event a majority of the
issued and outstanding shares of the appropriate class shall be present in
person or by proxy, or except as otherwise provided by statute or in the
Articles of Incorporation. In the absence of a quorum, the holders of a
majority of the votes of the shares of stock present in person or by proxy are
entitled to vote, or if no stockholder entitled to vote is present, then any
officer of the Corporation may adjourn the meeting from time to time. At any
such adjourned meeting at which a quorum may be present any business may be
transacted which might have been transacted at the meeting as originally
called.

Section 6. Organization. At each meeting of the stockholders the
Chairman of the Board, or in his absence or inability to act, the President, or
in the absence or inability to act of the Chairman of the Board and the
President, a Vice President, or in the absence of all of the foregoing, any
person chosen by a majority of those stockholders present, shall act as
chairman of the meeting. The Secretary, or in his absence or inability to act,
the Assistant Secretary or any person appointed by the chairman of the meeting
shall act as secretary of the meeting and keep the minutes thereof.

Section 7. Order of Business. The order of business at all meetings
of the stockholders shall be as determined by the chairman of the meeting.

3
<PAGE> 4
Section 8. Voting. Except to the extent that the voting rights of
the shares of any class or classes are limited or denied by the Articles of
Incorporation as permitted by the Texas Business Corporation Act, each holder
of record of shares of stock of the Corporation having voting power shall be
entitled at each meeting of the stockholders to one vote for every share of
such stock standing in his name on the record of stockholders of the
corporation on the date fixed by the Board as the record date for the
determination of the stockholders who shall be entitled to notice of and to
vote at such meeting; or if such record date shall not have been so fixed, then
at the close of business on the day next preceding the day on which notice
thereof shall be given, or if notice is waived, at the close of business on the
day next preceding the day on which the meeting is held; or each stockholder
entitled to vote at any meeting of stockholders may authorize another person or
persons to act for him by a proxy signed by such stockholder or his
attorney-in-fact. Any such proxy shall be delivered to the secretary of such
meeting at or prior to the time designated in the order of business for so
delivering such proxies. No proxy shall be valid after the expiration of
eleven (11) months from the date thereof, unless otherwise provided in the
proxy. Every proxy shall be revocable at the pleasure of the stockholder
executing it, unless expressly provided therein to be irrevocable and unless
otherwise made irrevocable by law. Except as otherwise provided by statute,
these Bylaws, or the Articles of Incorporation, any corporate action to be
taken by vote of the stock-

4
<PAGE> 5
holders shall be authorized by a majority of the total votes, or when
stockholders are required to vote by class by a majority of the votes of the
appropriate class, cast at a meeting of stockholders by the holders of shares
present in person or represented by proxy and entitled to vote on such action.
Unless required by statute, or determined by the chairman of the meeting to be
advisable, the vote on any question need not be by written ballot. On a vote
by written ballot, each ballot shall be signed by the stockholder voting, or by
his proxy, if there be such proxy, and shall state the number of shares voted.

Section 9. List of Stockholders. The officer who has charge of the
stock ledger of the Corporation shall prepare and make, at least ten days
before every meeting of stockholders, a complete list of the stockholders
entitled to vote at the meeting, arranged in alphabetical order, and showing
the address of each stockholder and the number of shares registered in the name
of each stockholder. Such list shall be open to the examination of any
stockholder, for any purpose germane to the meeting, during ordinary business
hours, for a period of at least ten days prior to the meeting, at the
registered office of the Corporation. The list shall also be produced and kept
at the time and place of the meeting during the whole time thereof, and may be
inspected by any stockholder who is present.

Section 10. Inspectors. The Board may, in advance of any meeting of
stockholders, appoint one or more inspectors to act at such meeting or any
adjournment thereof. If the inspectors shall

5
<PAGE> 6
not be so appointed or if any of them shall fail to appear or act, the chairman
of the meeting may, and on the request of any stockholder entitled to vote
thereat shall, appoint inspectors. Each inspector, before entering upon the
discharge of his duties, shall take and sign an oath faithfully to execute the
duties of inspector at such meeting with strict impartiality and according to
the best of his ability. The inspectors shall determine the number of shares
outstanding and the voting power of each, the number of shares represented at
the meeting, the existence of a quorum, the validity and effect of proxies, and
shall receive votes, ballots or consents, hear and determine all challenges and
questions arising in connection with the right to vote, count and tabulate all
votes, ballots or consents, determine the result, and do such acts as are
proper to conduct the election or vote with fairness to all stockholders. On
request of the chairman of the meeting or any stockholder entitled to vote
thereat, the inspectors shall make a report in writing of any challenge,
request or matter determined by them and shall execute a certificate of any
fact found by them. No director or candidate for the office of director shall
act as inspector of an election of directors. Inspectors need not be
stockholders.

Section 11. Consent of Stockholders in Lieu of Meeting. Whenever the
vote of stockholders at a meeting thereof is required or permitted to be taken
for or in connection with any corporate action, the meeting and vote of
stockholders can be dispensed with if all of the stockholders who would have
been entitled to vote

6
<PAGE> 7
upon the action if such meeting were held shall consent in writing to such
corporate action being taken.

Section 12. Notice of Stockholder Business: At an annual meeting of
stockholders, only such business shall be conducted as shall have been brought
before the meeting (i) by or at the direction of the Board of Directors or (ii)
by any stockholder of the Corporation who complies with the notice procedures
set forth in this Section 12. For business to be properly brought before an
annual meeting by a stockholder, the stockholder must have given timely notice
thereof in writing to the Secretary of the Corporation. To be timely, a
stockholder's notice must be delivered to or mailed and received at the
principal executive offices of the Corporation, not less than twenty (20) days
nor more than sixty (60) days prior to the meeting; provided, however, that in
the event that less than thirty (30) days' notice or prior public disclosure of
the date of the meeting is given or made to the stockholders, notice by the
stockholder to be timely must be received not later than the close of business
on the tenth (10th) day following the day on which such notice of the date of
the annual meeting was mailed or such public disclosure was made. A
stockholder's notice to the Secretary shall set forth as to each matter the
stockholder proposes to bring before the annual meeting the following
information: (a) a brief description of the business desired to be brought
before the annual meeting and the reasons for conducting such business at the
annual meeting; (b) the name and address, as they appear on the Corporation's
books, of the

7
<PAGE> 8
stockholder proposing such business; (c) the number of shares of the
Corporation which are beneficially owned by the stockholder; and (d) any
material interest of the stockholder in such business. Notwithstanding
anything in these Bylaws to the contrary, no business shall be conducted at an
annual meeting except in accordance with the procedures set forth in this
Section 12. The chairman of an annual meeting shall, if the facts warrant,
determine and declare to the meeting that business was not properly brought
before the meeting and in accordance with the provisions of this Section 12;
and if he should so determine, he shall so declare to the meeting, and any such
business not properly brought before the meeting shall not be transacted.
Notwithstanding the foregoing provisions of this Section 12, a stockholder
seeking to have a proposal included in the Corporation's proxy statement shall
comply with the requirements of Regulation 14A under the Securities Exchange
Act of 1934, as amended (including, but not limited to, Rule 14a-8 or its
successor provision.)

Section 13. Notice of Stockholder Nominees: Nominations of persons
for election to the Board of Directors of the Corporation may be made at a
meeting of stockholders (i) by or at the direction of the Board of Directors or
(ii) by any stockholder of the Corporation entitled to vote for the election of
directors at the meeting who complies with the notice procedures set forth in
this Section 13. Nominations by stockholders shall be made pursuant to timely
notice in writing to the Secretary of the Corporation. To be timely, a
stockholder's notice shall be delivered to or mailed

8
<PAGE> 9
and received at the principal executive offices of the Corporation not less
than twenty (20) days nor more than sixty (60) days prior to the meeting;
provided, however, that in the event that less than thirty (30) days' notice or
prior public disclosure of the date of the meeting is given or made to
stockholders, notice by the stockholder to be timely must be so received not
later than the close of business on the tenth (10th) day following the day on
which such notice of the date of the meeting was mailed or such public
disclosure was made. Such stockholder's notice shall set forth (a) as to each
person whom the stockholder proposes to nominate for election or re-election as
a director, all information relating to such person that is required to be
disclosed in solicitations of proxies for election of directors, or is
otherwise required, in each case pursuant Regulation 14A under the Securities
Exchange Act of 1934, as amended (including such person's written consent to
being named in the proxy statement as a nominee and to serving as a director if
elected); and (b) as to the stockholder giving the notice (i) the name and
address, as they appear on the Corporation's books, of such stockholder and
(ii) the number of shares of the Corporation which are beneficially owned by
such stockholder. At the request of the Board of Directors, any person
nominated by the Board of Directors for election as a director shall furnish to
the Secretary of the Corporation that information required to be set forth in a
stockholder's notice of nomination which pertains to the nominee. No person
shall be eligible for election as a director of the Corporation unless
nominated in

9
<PAGE> 10
accordance with the procedures set forth in these Bylaws. The chairman of the
meeting shall, if the facts warrant, determine and declare to the meeting that
a nomination was not made in accordance with the procedures prescribed by these
Bylaws; and if he should so determine, he shall so declare to the meeting, and
the defective nomination shall be disregarded.

ARTICLE II
Board of Directors

Section 1. General Powers. The business and affairs of the
Corporation shall be managed by the Board. The Board may exercise all such
authority and powers of the Corporation and do all such lawful acts and things
as are not by statute or the Articles of Incorporation directed or required to
be exercised or done by the stockholders.

Section 2. Number, Qualifications, Election and Term of Office. The
number of directors of the Corporation shall be thirteen but the Board of
Directors may by resolution increase or decrease the number of directors, but
in no event shall the number be less than three nor shall such increase have
the effect of shortening the term of any incumbent director. All of the
directors shall be of full age. No no-employee of the Company may be elected a
director if he or she has reached the age 72 during the year of his or her
election; provided, however, that until the annual stockholders' meeting in the
year 2000, any individual who is as of October 19, 1994 an outside (i.e.,
non-employee) director

10
<PAGE> 11
may be re-elected as a director so long as he will not reach the age 75 during
the year of re-election. Directors need not be stockholders nor residents of
the State of Texas. Except as otherwise provided by statute or these Bylaws,
the directors shall be elected at the annual meeting of the stockholders for
the election of directors at which a quorum is present, and the persons
receiving a plurality of the votes cast at such election shall be elected.
Each director shall hold office until the next annual meeting of the
stockholders and until his or her successor shall have been duly elected and
qualified, or until his or her death, or until he or she shall have resigned,
or have been removed as hereinafter provided in these Bylaws, or as otherwise
provided by statute or the Articles of Incorporation.

Section 3. Place of Meetings. Meetings of the Board may be held at
such place, within or without the state of Texas, as the Board may from time to
time determine or as shall be specified in the notice or waiver of notice of
such meeting.

Section 4. First Meeting. The Board shall meet for the purpose of
organization, the election of officers and the transaction of other business,
as soon as practicable after each annual meeting of the stockholders, on the
same day and at the same place where such annual meeting shall be held. Notice
of such meeting need not be given. Such meeting may be held at any other time
or place (within or without the State of Texas) which shall be specified in a
notice thereof given as hereinafter provided in Section 7 of this Article II.

11
<PAGE> 12
Section 5. Regular Meetings. Regular meetings of the Board shall be
held at such time and place as the Board may from time to time determine. If
any day fixed for a regular meeting shall be a legal holiday at the place where
the meeting is to be held, then the meeting which would otherwise be held on
that day shall be held at the same hour on the next succeeding business day.
Notice of regular meetings of the Board need not be given except as otherwise
required by statute or these Bylaws.

Section 6. Special Meetings. Special meetings of the Board may be
called by three or more directors of the Corporation or by the Chairman of the
Board or President.

Section 7. Notice of Meetings. Notice of each special meeting of the
Board (and of each regular meeting for which notice shall be required) shall be
given by the Secretary as hereinafter provided in this Section 7, in which
notice shall be stated the time and place (within or without the state of
Texas) of the meeting. Notice of each such meeting shall be delivered to each
director either personally or by telephone, telegraph, cable or wireless, at
least twenty-four hours before the time at which such meeting is to be held or
by first-class mail, postage prepaid addressed to him at his residence, or
usual place of business, at least three days before the day on which such
meeting is to be held. Notice of any such meeting need not be given to any
director who shall, either before or after the meeting, submit a signed waiver
of notice or who shall attend such meeting without protesting, prior to or at
its commencement, the lack of notice to

12
<PAGE> 13
him. Except as otherwise specifically required by these Bylaws, a notice or
waiver of notice of any regular or special meeting need not state the purposes
of such meeting. Neither the business to be transacted at, nor the purpose of,
any regular or special meeting of the Board of Directors need be specified in
the notice or waiver of notice of such meetings.

Section 8. Quorum and Manner of Acting. A majority of the entire
Board shall be present in person at any meeting of the Board in order to
constitute a quorum for the transaction of business at such meeting, and,
except as otherwise expressly required by statute or the Articles of
Incorporation, the act of a majority of the directors present at any meeting at
which a quorum is present shall be the act of the Board. In the absence of a
quorum at any meeting of the Board, a majority of the directors present
thereat, or if no director be present, the Secretary, may adjourn such meeting
to another time and place, or such meeting, unless it be the first meeting of
the Board, need not be held. At any adjourned meeting at which a quorum is
present, any business may be transacted which might have been transacted at the
meeting as originally called. Except as provided in Article III of these
Bylaws, the directors shall act only as a Board and the individual directors
shall have no power as such.

Section 9. Organization. At each meeting of the Board, the Chairman
of the Board (or, in his absence or inability to act, the President, or, in his
absence or inability to act, another director chosen by a majority of the
directors present) shall act as

13
<PAGE> 14
chairman of the meeting and preside thereat. The Secretary (or, in his absence
or inability to act, any person appointed by the chairman) shall act as
secretary of the meeting and keep the minutes thereof.

Section 10. Resignations. Any director of the Corporation may resign
at any time by giving written notice of his resignation to the Board or
Chairman of the Board or the President or the Secretary. Any such resignation
shall take effect at the time specified therein or, if the time when it shall
become effective shall not be specified therein, immediately upon its receipt;
and, unless otherwise specified therein, the acceptance of such resignation
shall not be necessary to make it effective.

Section 11. Vacancies. Vacancies may be filled by a majority of the
directors then in office, though less than a quorum, or by a sole remaining
director, and the directors so chosen shall be elected for the unexpired term
of their predecessors in office. If there are no directors in office, then an
election of directors may be held in the manner provided by statute. Any
vacancy occurring in the Board of Directors or any directorship to be filled by
reason of an increase in the number of directors may be filled by election at
an annual meeting or at a special meeting of stockholders called for that
purpose. A directorship to be filled by reason of an increase in the number of
directors may be filled by the Board of Directors for a term of office
continuing only until the next election of one or more directors by the
stockholders; provided that the Board of Directors may not fill

14
<PAGE> 15
more than two such directorships during the period between any two successive
annual meetings of stockholders.

Section 12. Removal of Directors. Except as otherwise provided in
the Articles of Incorporation or in these Bylaws, any director may be removed,
either with or without cause, at any time, by the affirmative vote of a
majority of the votes of the issued and outstanding stock entitled to vote for
the election of directors of the Corporation given at a special meeting of the
stockholders called and held for the purpose, or by the affirmative vote of a
majority of the entire Board given at a special meeting of the Board called and
held for the purpose; and the vacancy in the Board caused by any such removal
may be filled by such stockholders or Board, as the case may be, as in these
Bylaws provided for the filling of vacancies. The powers conferred upon the
stockholders and the Board of the Corporation in this Section 12 shall be in
addition to the powers conferred upon either of them by law and the Articles of
Incorporation.

Section 13. Compensation. The Board shall have authority to fix the
compensation, including fees and reimbursement of expenses, of directors for
services to the Corporation in any capacity, provided no such payment shall
preclude any director from serving the Corporation in any other capacity and
receiving compensation therefor.

Section 14. Dividends. The Board of Directors may, from time to
time, declare, and the Corporation may pay, dividends on its outstanding shares
subject to the provisions of the Texas Business

15
<PAGE> 16
Corporation Act, and the Articles of Incorporation. Subject to the provisions
of the laws of the State of Texas, and to the Articles of Incorporation, the
Board of Directors shall have full power to determine whether any, and if any,
what part of any, funds legally available for payment of dividends shall be
declared in dividends and paid to the stockholders, the division of the whole
or any part of such funds of the Corporation shall rest wholly within the
lawful discretion of the Board of Directors, and it shall not be required at
any time, against such discretion, to divide or pay any part of such funds
among or to the stockholders as dividends or otherwise; and the Board of
Directors may fix a sum which may be set aside or reserved over and above the
capital paid into the Corporation as working capital for the Corporation or as
a reserve for any proper purpose, and from time to time may increase, diminish
and vary the same in its absolute judgment and discretion.

Section 15. Interest of Directors in Contracts. No contract or other
transaction between the Corporation and any firm of which one (1) or more of
its directors are members or employees, or in which they are otherwise
pecuniarily interested, or between the Corporation and any corporation or
association in which one (1) or more of its directors are stockholders,
members, directors, officers or employees, or in which they are otherwise
interested, shall be void or voidable by reason of such directorship in this
Corporation or such interest in such other firm, corporation or association,
notwithstanding the presence of such director or directors at the meeting of
the Board of Directors of this

16
<PAGE> 17
Corporation which acts upon or in reference to such contract or transaction,
and notwithstanding his or their participation in such action, if (1) the fact
of such interest shall be disclosed or known to the Board of Directors and the
Board of Directors shall authorize, approve or ratify such contract or
transaction by vote of a majority of the directors present, such interested
director or directors to be counted in determining whether a quorum is present,
but not to be counted in calculating the majority necessary to carry such vote,
or if (2) the fact of such interest shall be disclosed or known to the
stockholders and the stockholders, by written consent or by vote of holders of
record of a majority of all the outstanding shares of stock entitled to vote
shall authorize, approve or ratify such contract or transaction, nor shall any
director be liable to account to this Corporation for any profits realized by
or from or through any such transaction or contract of the Corporation so
authorized, ratified or approved by reason of such directorship or interest.
Nothing herein contained shall create liability in the events above described
or prevent the authorization, ratification or approval of such transactions or
contracts in any other manner permitted by law. This Section shall not be
construed to invalidate any contract or other transaction which would otherwise
be valid under the common and statutory law applicable thereto.

Section 16. Other Powers Not Reserved To Stockholders. In addition
to the powers and authority expressly conferred upon them by these Bylaws, the
Board of Directors may exercise all such

17
<PAGE> 18
powers of the Corporation and do all such lawful acts and things as are not by
statute or by the Articles of Incorporation or by these Bylaws directed or
required to be exercised or done by the stockholders. Without prejudice to
such general powers and the other powers conferred by statute, by the Articles
of Incorporation and by these Bylaws, it is hereby expressly declared that the
Board of Directors shall have the following powers, that is to say:

1. To purchase, or otherwise acquire for the Corporation, any
property or rights, or privileges which the Corporation is authorized
to acquire, at such price or consideration and generally on such terms
and conditions as they may think fit; at their discretion to pay
therefor either wholly or partly in money, stock, bonds, debentures or
other securities of the Corporation.

2. To create, make and issue mortgages, bonds, deeds of
trust, trust agreements and negotiable or transferable instruments and
securities, secured by mortgage or otherwise, and to do every other
act and thing necessary to effect the same.

3. To appoint any person or corporation to accept and hold in
trust for the Corporation any property belonging to the Corporation,
or in which it is interested, or for any other purpose, and to execute
such deeds and do all things requisite in relation to any such trust.

4. To fix, from time to time, the amount of profits

18
<PAGE> 19
of the Corporation to be reserved as working capital or for any other
lawful purpose.

5. To establish bonus, profit-sharing, or other types of
incentive or compensation plans for the employees (including officers
and directors) of the Corporation, and to fix the amount of profits to
be distributed or shared and to determine the persons to participate
in any such plans and the amount of their respective participations.

6. To enter into contracts of employment, which contracts may
be for a term longer than that for which the directors are elected.

Section 17. Action Without Meeting. Any action required or permitted
to be taken at any meeting of the Board of Directors or of any executive
committee thereof may be taken without a meeting if all members of the Board of
Directors or executive committee, as the case may be, consent thereto in
writing, and the writing or writings are filed with the minutes of proceedings
of the Board of Directors or executive committee.

ARTICLE III
Executive and Other Committees

Section 1. Executive and Other Committees. The Board of Directors
may, by resolution passed by a majority of the whole Board, designate one or
more committees, each committee to consist of two or more of the directors of
the Corporation. The Board may

19
<PAGE> 20
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee. Any
such committee, to the extent provided in the resolution, shall have and may
exercise the powers of the Board in the management of the business and affairs
of the Corporation, and may authorize the seal of the Corporation to be affixed
to all papers which may require it; provided, however, that in the absence of
disqualification of any member of such committee or committees, the member or
members thereof present at any meeting and not disqualified from voting,
whether or not he or they constitute a quorum, may unanimously appoint another
member of the Board to act at the meeting in the place of any such absent or
disqualified member. Each committee shall keep minutes of its proceedings and
shall report such minutes to the Board when required. All such proceedings
shall be subject to revision or alteration by the Board; provided, however,
that third parties shall not be prejudiced by such revision or alteration.

Section 2. General. A majority of any committee may determine its
action and fix the time and place of its meetings, unless the Board shall
otherwise provide. Notice of such meetings shall be given to each member of
the committee in the manner provided for in Article II, Section 7. The Board
shall have any power at any time to fill vacancies in, to change the membership
of, or to dissolve any such committee. Nothing herein shall be deemed to
prevent the Board from appointing one or more committees consisting in whole or
in part of persons who are not directors of

20
<PAGE> 21
the Corporation; provided, however, that no such committee shall have or may
exercise any authority of the Board.

ARTICLE IV
Officers

Section 1. Number and Qualifications. The officers of the
Corporation shall include the Chairman of the Board, the Vice Chairman of the
Board, the President, one or more Vice Presidents (two of whom may be
designated Executive Vice President and one or more of whom may be designated
Senior Vice President), the Treasurer, Controller, and the Secretary. Any two
or more offices may be held by the same person except that the same person
shall not hold the office of President and Secretary or Assistant Secretary.
Such officers shall be elected from time to time by the Board, each to hold
office until the meeting of the Board following the next annual meeting of the
stockholders or until his successor shall have been duly elected and shall have
qualified, or until his death, or until he shall have resigned or have been
removed, as hereinafter provided in these Bylaws. The Board may from time to
time elect, or the Chairman of the Board or the President may appoint, such
other officers (including one or more Assistant Vice Presidents, Assistant
Secretaries, and Assistant Treasurers), and such agents as may be necessary or
desirable for the business of the Corporation. Such other officers and agents
shall have such duties and shall hold their offices for such terms as may be
prescribed by the Board or by the appointing authority.

21
<PAGE> 22
Section 2. Resignations. Any officer of the Corporation may resign
at any time by giving written notice of his resignation to the Board, the
Chairman of the Board, the President or the Secretary. Any such resignation
shall take effect at the time specified therein or, if the time when it shall
become effective shall not be specified therein, immediately upon its receipt;
and, unless otherwise specified therein, the acceptance of such resignation
shall not be necessary to make it effective.

Section 3. Removal. Any officer or agent of the Corporation may be
removed, either with or without cause, at any time, by the vote of the majority
of the entire Board at any meeting of the Board. Such removal shall be without
prejudice to the contractual rights, if any, of the person so removed.

Section 4. Vacancies. A vacancy in any office, whether arising from
death, resignation, removal or any other cause, may be filled for the unexpired
portion of the term of the office which shall be vacant, in the manner
prescribed in these Bylaws for the regular election or appointment to such
office.

Section 5. The Chairman of the Board. The Chairman of the Board
shall be the chief executive officer of the Corporation and shall have the
general and active supervision and direction over the other officers, agents
and employees and shall see that their duties are properly performed. He
shall, if present, preside at each meeting of the stockholders and of the Board
and shall be an ex officio member of all committees of the Board. He shall
perform all duties incident to the office of Chairman of the Board and

22
<PAGE> 23
chief executive officer and such other duties as may from time to time be
assigned to him by the Board.

Section 5(a). The Vice Chairman of the Board.

(1) The Vice Chairman of the Board shall be the acting chief
executive officer of the Corporation in the absence or inability to act of the
Chairman of the Board, and, while so acting, shall have all the duties, powers
and authority vested in the Chairman under these Bylaws and under the laws of
the State of Texas. In addition to such duties, he shall perform such other
duties as may from time to time be assigned to him by the Board.

(2) The Vice Chairman of the Board shall be the acting chief
operating officer of the Corporation in the absence of or inability to act of
the President, and while so acting, shall have all the duties, powers and
authority vested in the President under these Bylaws and under the laws of the
State of Texas.

Section 6. President. The President shall be the chief operating
officer of the Corporation, and, in the absence of the Chairman and Vice
Chairman of the Board, shall preside at all meetings of the stockholders and of
the Board of Directors. He shall exercise such duties as customarily pertain
to the office of President and shall have general and active supervision over
the property, business, and affairs of the Corporation. He may appoint
officers, agents, or employees other than those appointed by the Board of
Directors. He may sign, execute, and deliver in the name of the Corporation
powers of attorney, contracts, bonds, guaranties, and other obligations of the
Corporation. He shall

23
<PAGE> 24
perform such other duties as may be prescribed from time to time by the Board
of Directors or by the Bylaws.

Section 7. Vice Presidents. The Executive Vice President shall
possess the power and may perform the duties of the President in the absence or
disability of the President, Chairman and Vice Chairman, and shall exercise
such duties as customarily pertain to the office of Executive Vice President.
The Executive Vice President may sign, execute, and deliver in the name of the
Corporation powers of attorney, contracts, bonds, guaranties, and other
obligations of the Corporation and shall perform such other duties as may be
prescribed from time to time by the Board of Directors or by the Bylaws.

Each Senior Vice President shall exercise such duties as customarily
pertain to the office of Senior Vice President. Each Senior Vice President may
sign, execute, and deliver in the name of the Corporation powers of attorney,
contracts, bonds, guaranties, and other obligations of the Corporation and
shall perform such other duties as may be prescribed from time to time by the
Board of Directors or by the Bylaws.

Each other Vice President shall perform such duties as may be
prescribed from time to time by the Board of Directors, any superior officer of
the Corporation or by the Bylaws.

Section 8. The Treasurer. The Treasurer shall exercise general
supervision over the receipt, custody and disbursements of Corporate funds. He
shall have such further powers and duties as may be conferred upon him from
time to time by the President or the

24
<PAGE> 25
Board of Directors.

Section 9. The Controller. The Controller shall be the chief
accounting officer of the Corporation and shall maintain adequate records of
all assets, liabilities and transactions of the Corporation; he shall establish
and maintain internal accounting control and, in cooperation with the
independent public accountants selected by the Board, shall supervise internal
auditing. He shall have such further powers and duties as may be conferred
upon him from time to time by the President or the Board of Directors.

Section 10. The Secretary. The Secretary shall:

(a) keep or cause to be kept in one or more books provided
for the purpose, the minutes of all meetings of the Board, the
committees of the Board and the stockholders;

(b) see that all notices are duly given in accordance with
the provisions of these Bylaws and as required by law;

(c) be custodian of the records and the seal of the
Corporation and affix and attest the seal to all stock certificates of
the Corporation (unless the seal of the Corporation on such
certificates shall be a facsimile, as hereinafter provided) and affix
and attest the seal to all other documents to be executed on behalf of
the Corporation under its seal;

(d) see that the books, reports, statements, certificates and
other documents and records required by law to be kept and filed are
properly kept and filed; and

(e) in general, perform all the duties incident to the

25
<PAGE> 26
office of Secretary and such other duties as from time to time may be
assigned to him by the Board, the Chairman of the Board or the
President.

Section 11. Officers' Bonds or Other Security. If required by the
Board, any officer of the Corporation shall give a bond or other security for
the faithful performance of his duties, in such amount and with such surety or
sureties as the Board may require.

Section 12. Compensation. The compensation of the officers of the
Corporation for their services as such officers shall be fixed from time to
time by the Board; provided, however, that the Board may delegate to the
Chairman of the Board or the President the power to fix the compensation of
officers and agents appointed by the Chairman of the Board or the President, as
the case may be. An officer of the Corporation shall not be prevented from
receiving compensation by reason of the fact that he is also a director of the
Corporation, but any such officer who shall also be a director shall not have
any vote in the determination of the amount of compensation paid to him.

ARTICLE V
Indemnification and Liability of Directors

Section 1. Indemnification. The Corporation shall to the fullest
extent permitted by statute indemnify any and all persons whom it shall have
power to indemnify, including any person who may have served at the request of
the Corporation as a director or officer of any other company in which the
Corporation owns shares

26
<PAGE> 27
or of which it is a creditor, against any and all costs and expenses, including
the fees of Counsel, reasonably incurred by or imposed upon him in connection
with or arising out of any action, suit or proceeding in which he may be for
any reason involved by reason of his being or having been a director or officer
of the Corporation, or by reason of his serving or having served at the request
of the Corporation as an officer or director of another company as aforesaid,
such expense to include the cost of the reasonable settlements (other than
amounts to be paid to the Corporation itself), made with the view to
curtailment of costs of litigation. The Corporation shall not, however,
indemnify any officer or director with respect to matters as to which he shall
be finally adjudged in any such action, suit or proceeding, to have been
derelict in the performance of his duties as such director or officer, unless
the Corporation shall have received an opinion of independent legal counsel
that the officers or directors being sued acted in good faith and in a manner
he reasonably believed to be in or not opposed to the interest of the
Corporation, and in respect of any criminal action, reasonably believed that
his conduct was lawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that the director,
officer or representative did not act in good faith and in a manner he
reasonably believed to be in or not opposed to the best interest of the
Corporation; and in respect of any criminal action or proceeding, did not
reasonably

27
<PAGE> 28
believe that his conduct was lawful. The foregoing right of indemnification
shall not be exclusive of other rights to which any director or officer shall
be entitled as a matter of law. Provisions of this Section shall not be
modified or repealed except by affirmative vote of a majority of the issued and
outstanding voting shares of the Corporation.

Section 2. Liability of Directors in Certain Cases. A director shall
not be liable for his acts as such if he is excused from liability under
Section B, Section C or Section D, of Article 2.41, of the Texas Business
Corporation Act; and, in addition, to the fullest extent permitted by said Act,
each officer or director or member of any corporate committee shall, in the
discharge of any duty imposed or power conferred upon him by the Corporation,
be fully protected if, in the exercise of ordinary care, he acted in good faith
and in reliance upon the written opinion of an attorney for the Corporation,
the books of account or reports made to the Corporation by any of its
officials, or by an independent certified public accountant, or by an appraiser
selected with reasonable care by the Board of Directors or by such committee,
or in reliance upon other records of the Corporation.

Section 3. Ratification by Stockholders or Directors of Certain Acts.
The directors in their discretion may submit any contract or act for approval
or ratification at any stockholders' meeting, and any contract or act that
shall be approved or be ratified by the vote of a majority of the shares
represented in person or by proxy at such stockholders' meeting at which there
is

28
<PAGE> 29
a quorum, shall be as valid and binding upon the Corporation and upon all the
stockholders as if it had been approved or ratified by every stockholder;
provided, however, that any failure of the stockholders to approve or ratify
any such contract, transaction or act, when and if submitted, shall not be
deemed to invalidate in any way the same or deprive the Corporation, its
directors, officers or employees of any of its or their rights to proceed with
such transaction, contract or act.

Any transaction questioned in any stockholder's derivative suit on the
ground of lack of authority, defective or irregular execution, adverse interest
of director, officer or stockholder, nondisclosure, miscomputation, or the
application of improper principles or practices of accounting may be ratified,
unless prohibited by law, before or after judgment, by the Board of Directors
or by the stockholders and, if so ratified, shall have the same force and
effect as if the questioned transaction had been originally duly authorized,
and said ratification shall be binding upon the Corporation and its
stockholders and shall constitute a bar to any claim or execution of any
judgment in respect of such questioned transaction.

Section 4. Insurance. The Corporation may purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee,
or agent of the Corporation or who is or was serving at the request of the
Corporation as a director, officer, partner, venturer, proprietor, trustee,
employee, agent, or similar functionary of another foreign or domestic
corporation,

29
<PAGE> 30
partnership, joint venture, sole proprietorship, trust, or other enterprise or
employee benefit plan, against any liability asserted against him and incurred
by him in such a capacity or arising out of his status as such a person,
whether or not the Corporation would have the power or authority to indemnify
him against that liability under Article 2.01-1 of the Texas Business
Corporation Act (as same may hereafter be amended) or under these Bylaws.

ARTICLE VI
Contract, Checks, Drafts, Bank Accounts, Etc.

Section 1. Execution of Contracts. (a) Except as otherwise required
by statute, the Articles of Incorporation or these Bylaws, any contracts or
other instruments may be executed and delivered in the name and on behalf of
the Corporation by such officer or officers (including any assistant officer)
of the Corporation as the Board may from time to time direct. Such authority
may be general or confined to specific instances as the Board may determine.
Unless authorized by the Board or expressly permitted by these Bylaws, an
officer or agent or employee shall not have any power or authority to bind the
Corporation by any contract or engagement or to pledge its credit or to render
it pecuniarily liable for any purpose or to any amount.

(b) No contract or other instrument executed and delivered in the
name and on behalf of the Corporation except instruments affecting real
property, shall be required to be attested to or signed by the Secretary or an
Assistant Secretary, or have the

30
<PAGE> 31
corporate seal affixed thereto, unless otherwise required by statute, the
Articles of Incorporation or these Bylaws.

Section 2. Loans. Unless the Board shall otherwise determine, either
(a) the Chairman of the Board, the President, the Executive Vice President, or
the Senior Vice President-Financial, singly, or (b) any two Vice Presidents,
jointly, or (c) a Vice President, together with the Treasurer, may effect loans
and advances at any time for the Corporation from any bank, trust company or
other institution, or from any firm, corporation or individual, and for such
loans and advances may make, execute and deliver promissory notes, bonds or
other certificates or evidences of indebtedness of the Corporation, but no
officer or officers shall mortgage, pledge, hypothecate or transfer any
securities or other property of the Corporation, except when authorized by the
Board.

Section 3. Checks, Drafts, etc. All checks, drafts, bills of
exchange or other orders for the payment of money out of the funds of the
Corporation, and all notes or other evidences of indebtedness of the
Corporation, shall be signed in the name and on behalf of the Corporation by
such persons and in such manner as shall from time to time be authorized by the
Board.

Section 4. Deposits. All funds of the Corporation not otherwise
employed shall be deposited from time to time to the credit of the Corporation
in such banks, trust companies or other depositories as the Board may from time
to time designate or as may be designated by any officer or officers of the
Corporation to whom

31
<PAGE> 32
such power of designation may from time to time be delegated by the Board. For
the purpose of deposit and for the purpose of collection for the account of the
Corporation, checks, drafts and other orders for the payment of money which are
payable to the order of the Corporation may be endorsed, assigned and delivered
by any officer or agent of the Corporation, or in such other manner as the
Board may determine by resolution.

Section 5. General and Special Bank Accounts. The Board may from
time to time authorize the opening and keeping of general and special bank
accounts with such banks, trust companies or other depositories as the Board
may designate or as may be designated by any officer or officers of the
Corporation to whom such power of designation may from time to time be
delegated by the Board. The Board may make such special rules and regulations
with respect to such bank accounts, not inconsistent with the provisions of
these Bylaws, as it may deem expedient.

Section 6. Proxies in Respect of Securities of Other Corporations.
Unless otherwise provided by resolution adopted by the Board of Directors, the
Chairman of the Board, the President, or a Vice President may from time to time
appoint an attorney or attorneys or agent or agents, of the Corporation, in the
name and on behalf of the Corporation to cast the votes which the Corporation
may be entitled or cast as the holder of stock or other securities in any other
corporation any of whose stock or other securities may be held by the
Corporation, at meetings of the holders of the stock or other securities of
such other corporation,

32
<PAGE> 33
or to consent in writing, in the name of the Corporation as such holder, to any
action by such other corporation, and may instruct the person or persons so
appointed as to the manner of casting such votes or giving such consent, and
may execute or cause to be executed in the name and on behalf of the
Corporation and under its corporate seal, or otherwise, all such written
proxies or other instruments as he may deem necessary or proper in the
premises.

ARTICLE VII
Shares, Etc.

Section 1. Stock Certificates. Each holder of stock of the
Corporation shall be entitled to have a certificate, in such form as shall be
approved by the Board, certifying the number of shares of stock of the
Corporation owned by him. The certificates representing shares of stock shall
be signed in the name of the Corporation by the Chairman of the Board or the
President or a Vice President and by the Secretary or an Assistant Secretary or
the Treasurer or an Assistant Treasurer and sealed with the seal of the
Corporation (which seal may be a facsimile, engraved or printed); provided,
however, that where any such certificate is countersigned by a transfer agent
other than the Corporation or its employee, or is registered by a registrar
other than the Corporation or one of its employees, the signature of the
officers of the Corporation upon such certificates may be facsimiles, engraved
or printed. In case any officer who shall have signed or whose facsimile
signature has been placed upon such certificates shall have ceased to be such

33
<PAGE> 34
officer before such certificates shall be issued, they may, nevertheless, be
issued by the Corporation with the same effect as if such officer were still in
office at the date of their issue.

Section 2. Books of Account and Record of Stockholders. The books
and records of the Corporation may be kept at such places within or without the
State of Texas as the Board of Directors may from time to time determine. The
stock record books and the blank stock certificate books shall be kept by the
Secretary or by any other officer or agent designated by the Board of
Directors.

Section 3. Transfers of Shares. Transfers of shares of stock of the
Corporation shall be made on the stock records of the Corporation only upon
authorization by the registered holder thereof, or by his attorney thereunto
authorized by power of attorney, duly executed and filed with the Secretary or
with a transfer agent or transfer clerk, and on surrender of the certificate or
certificates for such shares properly endorsed or accompanied by a duly
executed stock transfer power and the payment of all taxes thereon. Except as
otherwise provided by law, the Corporation shall be entitled to recognize the
exclusive right of a person in whose name any share or shares stand on the
record of stockholders as the owner of such share or shares for all purposes,
including, without limitation, the rights to receive dividends or other
distributions, and to vote as such owner, and the Corporation may hold any such
stockholder of record liable for calls and assessments, and the Corporation
shall not be bound to recognize any equitable or legal claim to or interest in
any such share or

34
<PAGE> 35
shares on the part of any other person whether or not it shall have express or
other notice thereof. Whenever any transfers of shares shall be made for
collateral security and not absolutely, and both the transferor and transferee
request the Corporation to do so, such fact shall be stated in the entry of the
transfer.

Section 4. Regulations. The Board may make such additional rules and
regulations, not inconsistent with these Bylaws, as it may deem expedient
concerning the issue, transfer and registration of certificates for shares of
stock of the Corporation. It may appoint, or authorize any officer or officers
to appoint, one or more transfer agents or one or more transfer clerks and one
or more registrars and may require all certificates for shares of stock to bear
the signature or signatures of any of them.

Section 5. Lost, Destroyed or Mutilated Certificates. The holder of
any certificate representing shares of stock of the Corporation shall
immediately notify the Corporation of any loss, destruction or mutilation of
such certificate, and the Corporation may issue a new certificate of stock in
the place of any certificate theretofore issued by it which the owner thereof
shall allege to have been lost, stolen, or destroyed or which shall have been
mutilated and the Board may, in its discretion, require such owner or his legal
representatives to give to the Corporation a bond in such sum, limited or
unlimited, and in such form and with such surety or sureties as the Board in
its absolute discretion shall determine, to indemnify the Corporation against
any claim that may be made against it on account of the alleged loss, theft,

35
<PAGE> 36
or destruction of any such certificate, or the issuance of a new certificate.
Anything herein to the contrary notwithstanding, the Board, in its absolute
discretion, may refuse to issue any such new certificate, except pursuant to
legal proceedings under the laws of the State of Texas.

Section 6. Stockholder's Right of Inspection. Any person who shall
have been a stockholder of record of the Corporation for at least six months
immediately preceding his demand, or any person holding, or thereunto
authorized by the holders of, at least five percent of the outstanding shares
of stock of the Corporation, shall, in person or by attorney or other agent,
upon written demand under oath stating the purpose thereof, have the right
during the usual hours for business to inspect for any proper purpose the
Corporation's stock ledger, a list of its stockholders, and its other books and
records, and to make copies or extracts therefrom. A proper purpose shall mean
a purpose reasonably related to such person's interest as a stockholder. In
every instance where an attorney or other agent shall be the person who seeks
the right to inspection, the demand under oath shall be accompanied by a power
of attorney or such other writing which authorizes the attorney or other agent
to so act on behalf of the stockholder. The demand under oath shall be
directed to the Corporation at its registered office in the State of Texas or
at its principal place of business.

Section 7. Fixing of Record Date. In order that the Corporation may
determine the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof,

36
<PAGE> 37
or to express consent to corporate action in writing without a meeting, or
entitled to receive payment of any dividend or other distribution or allotment
of any rights, or entitled to exercise any rights in respect of any change,
conversion or exchange of stock or for the purpose of any other lawful action,
the Board may fix, in advance, a record date which shall not be more than fifty
nor less than ten days before the date of such meeting, nor more than fifty
days prior to any other action. A determination of stockholders of record
entitled to notice of or to vote at a meeting of stockholders shall apply to
any adjournment of the meeting; provided, however, that the Board may fix a new
record date for the adjourned meeting.

Section 8. Restrictions on Transferability. The Board of Directors
shall have the authority to impose restrictions on the sale or other
disposition of the Corporation's shares and on the transfer thereof, which do
not unreasonably restrain or prohibit transferability, and the Board of
Directors is authorized to enter into buy and sell agreements with respect to
shares of stock sold to employees and key management personnel of the
Corporation, reserving the right to the Corporation to reacquire and repurchase
said shares in the event the employee ceases to be employed by the Corporation,
in the event of the employee's death and in the event the employee wishes to
dispose of his shares while still an employee and the Board of Directors is
authorized to enter into stock repurchase agreements with its shareholders
imposing reasonable restrictions on the sale and transfer of all shares of

37
<PAGE> 38
stock of the Corporation.

ARTICLE VIII
Offices

Section 1. Registered Office. Until changed by the Board of
Directors, the registered office of the Corporation in the State of Texas shall
be 2002 Timberloch Place, The Woodlands, Texas 77380.

Section 2. Other Offices. The Corporation may also have an office or
offices other than said principal office at such place or places, either within
or without the State of Texas, as the Board shall from time to time determine
or the business of the Corporation may require.

ARTICLE IX
Fiscal Year

The fiscal year of the Corporation shall be determined by the Board.
Until changed by the Board, the fiscal year shall be from February 1st of each
year until January 31st of the following year, both dates inclusive.

ARTICLE X
Seal

The Corporate Seal of the Corporation shall consist of a circular
design having the corporate name of the Corporation engraved on the margin
thereof, so as to make an impression similar to that affixed hereto for
identification, and in the center shall

38
<PAGE> 39
be a five (5) pointed star.

ARTICLE XI
Amendments

These Bylaws may be amended or repealed, or new Bylaws may be adopted,
at any annual or special meeting of the stockholders, by a majority of the
total votes of the stockholders or when stockholders are required to vote by
class by a majority of the appropriate class, present in person or represented
by proxy and entitled to vote on such action; provided, however, that the
notice of such meeting shall have been given as provided in these Bylaws, which
notice shall mention that amendment or repeal of these Bylaws, or the adoption
of new Bylaws, is one of the purposes of such meeting. These Bylaws may also
be amended or repealed, or new Bylaws may be adopted, by the Board of Directors
at any meeting thereof; provided, however, that notice of such meeting shall
have been given as provided in these Bylaws, which notice shall mention that
amendment or repeal of the Bylaws, or the adoption of new Bylaws, is one of the
purposes of such meetings; and provided, further, that Bylaws adopted by the
Board of Directors may be amended or repealed by the stockholders as
hereinabove provided.

ARTICLE XII
Miscellaneous Provisions

Section 1. Persons and Numbers. Wherever appropriate in the
construction of these Bylaws, pronouns of the masculine gender

39
<PAGE> 40
shall include persons of the female sex; the singular number shall include the
plural, and the plural the singular.

Section 2. Section Headings. The headings or captions of the
Articles and Sections of these Bylaws are inserted for convenience of reference
only and shall not be deemed to be a part hereof or used in the construction or
interpretation hereof.

Section 3. Construction and Interpretation. The place of these
Bylaws, their status and their forum, shall be at all times in the State of
Texas; and these Bylaws shall be governed by the laws of the State of Texas as
to all matters relating to their validity, construction and interpretation. In
the event that any court of competent jurisdiction shall adjudge to be invalid
or unlawful any clause, sentence, paragraph, sub-section, section or article of
these Bylaws, such judgment or decree shall not affect, impair, invalidate or
nullify the remainder of these Bylaws, or any other provision hereof, but the
effect of such judgment or decree shall be confined to the clause, sentence,
paragraph, sub-section, section or article so adjudged to be invalid or
unlawful.

<PAGE> 1

EXECUTION COPY

================================================================================

MITCHELL ENERGY CORPORATION,
as Borrower

MND ENERGY CORPORATION,
as a Guarantor

______________________________

CREDIT AND
REIMBURSEMENT AGREEMENT

Dated as of April 8, 1996

______________________________

CHEMICAL BANK,
as Administrative Agent

CHASE SECURITIES INC.,
as Arranger

PNC BANK, NATIONAL ASSOCIATION,
as Syndication Agent

NATIONSBANK OF TEXAS, N.A.,
as Documentation Agent

================================================================================
<PAGE> 2
TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
SECTION 1. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Accounting Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
1.3 Use of Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
1.4 Defined Terms From MND Revolving Credit Agreement . . . . . . . . . . . . . . . . . . . . . . 25

SECTION 2. LETTERS OF CREDIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
2.1 Letter of Credit Commitment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
2.2 Procedure for Issuance of Letters of Credit . . . . . . . . . . . . . . . . . . . . . . . . . 26
2.3 Fees, Commissions and Other Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
2.4 Letter of Credit Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
2.5 Reimbursement Obligations of the Borrower . . . . . . . . . . . . . . . . . . . . . . . . . . 29
2.6 Obligations Absolute . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
2.7 Letter of Credit Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
2.8 L/C Documentation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
2.9 Loan Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
2.10 Repayment of Loans; Evidence of Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
2.11 Procedure for Borrowing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
2.12 Reduction of Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
2.13 Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
2.14 Interest Rates and Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
2.15 Computation of Interest and Fees; Funding Procedures . . . . . . . . . . . . . . . . . . . . . 35
2.16 Inability to Determine Interest Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
2.17 Pro Rata Treatment and Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
2.18 Illegality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
2.19 Increased Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
2.20 Reemployment Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
2.21 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
2.22 Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
2.23 Acknowledgement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

SECTION 3. REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
3.1 Organization and Qualification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
3.2 Corporate Power and Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
3.3 No Legal Bar on Borrower . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
3.4 No Material Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
3.5 Compliance With Other Instruments; None Burdensome . . . . . . . . . . . . . . . . . . . . . . 42
3.6 Ownership of Properties; Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
3.7 No Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
3.8 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
3.9 Financial Condition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
3.10 Certain Acts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
3.11 Status Under Other Federal Laws and Regulations . . . . . . . . . . . . . . . . . . . . . . . 44
3.12 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
3.13 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
</TABLE>

-i-
<PAGE> 3
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
SECTION 4. CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
4.1 Conditions to Initial Extensions of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . 45
4.2 Conditions to Each Extension of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

SECTION 5. AFFIRMATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
5.1 Financial Statements; Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
5.2 Certificates as to Financial Matters, No Default, etc. . . . . . . . . . . . . . . . . . . . 50
5.3 Payment of Taxes, etc.; Observance of Legal Requirements; Liens; Contests . . . . . . . . . . 51
5.4 Notice of Default, Litigation, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
5.5 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
5.6 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
5.7 Material Mineral Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
5.8 Maintenance of Corporate Existence, Franchises, etc. . . . . . . . . . . . . . . . . . . . . . 53
5.9 Maintenance and Improvement of Property . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
5.10 Maintenance of Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
5.11 Inspection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
5.12 Transactions with Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

SECTION 6. NEGATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
6.1 Limitation on Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
6.2 Restrictions on Incurrence of Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
6.3 Subordinated Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
6.4 Consolidated Tangible Net Worth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
6.5 Consolidated Net Current Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
6.6 Restrictions on Disposition of Stock and Debt of Restricted Subsidiaries, etc . . . . . . . . 58
6.7 Consolidation, Merger, Sales of Assets, etc. . . . . . . . . . . . . . . . . . . . . . . . . . 58
6.8 Fixed Charge Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
6.9 Limitation on Investments, Loans and Advances . . . . . . . . . . . . . . . . . . . . . . . . 59

SECTION 7. EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
7.1 Nonpayment of Interest or Principal, Insolvency of Subsidiaries and Other Defaults . . . . . . 60
7.2 Insolvency of the Borrower and Like Defaults . . . . . . . . . . . . . . . . . . . . . . . . . 63
7.3 Letter of Credit Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
7.4 Letter of Credit Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

SECTION 8. THE ADMINISTRATIVE AGENT AND THE ISSUING BANKS . . . . . . . . . . . . . . . . . . . . . . . . 67
8.1 Appointment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
8.2 Delegation of Duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
8.3 Reimbursement of Administrative Agent and Issuing Banks . . . . . . . . . . . . . . . . . . . 67
8.4 Exculpatory Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
8.5 Indemnification of Administrative Agent and Issuing Banks . . . . . . . . . . . . . . . . . . 68
8.6 Reliance by Administrative Agent and Issuing Banks . . . . . . . . . . . . . . . . . . . . . . 68
</TABLE>

-ii-
<PAGE> 4
<TABLE>
<CAPTION>
Page
----
<S> <<C> <C>
8.7 Administrative Agent and Issuing Banks in Individual Capacity . . . . . . . . . . . . . . . . 68
8.8 Non-Reliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
8.9 Successor Administrative Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
8.10 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

SECTION 9. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
9.1 Waiver of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
9.2 Request to Administrative Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
9.3 Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
9.4 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
9.5 Adjustments; Set-Off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
9.6 No Waiver; Cumulative Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
9.7 Payment of Expenses and Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
9.8 Notice of Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
9.9 Survival of Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
9.10 Successors and Assigns; Participations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
9.11 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
9.12 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
9.13 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
9.14 GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
9.15 SUBMISSION TO JURISDICTION; WAIVERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
9.16 WAIVERS OF JURY TRIAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78

Schedule 1 Applicable Margins, Letter of Credit Commission Rate, Commitment Fee Rate
Schedule 2 Subsidiaries, Restricted and Unrestricted
Schedule 3 Existing Liens
Schedule 4 Existing Debt

Exhibit A - Form of Letter of Credit
Exhibit B - Form of Legal Opinion of Counsel to the Borrower
Exhibit C - [Reserved]
Exhibit D - Form of Borrowing Certificate
Exhibit E-1 - Form of MEDC Guarantee
Exhibit E-2 - Form of MND Guarantee
Exhibit F - Form of Subordination Agreement
Exhibit G - Form of Subsidiary Guarantee
Exhibit H - Form of Assignment and Acceptance
</TABLE>

-iii-
<PAGE> 5
CREDIT AND REIMBURSEMENT AGREEMENT (as amended, supplemented
or otherwise modified, this "Credit Agreement"), dated as of April 8, 1996,
among (a) MITCHELL ENERGY CORPORATION, a Delaware corporation ("MEC" or the
"Borrower"), (b) MND ENERGY CORPORATION, a Delaware corporation, which on the
date of this Credit Agreement owns all of the issued and outstanding capital
stock of MEC ("MND"), (c) the several banks which are parties to this Credit
Agreement (collectively, the "Banks", each a "Bank"), including the Issuing
Banks (as defined herein), and (d) CHEMICAL BANK, a New York banking
corporation, as administrative agent for the Banks (in such capacity, the
"Administrative Agent").

W I T N E S S E T H :

WHEREAS, MEC has requested (i) that the Issuing Banks, on
behalf of all the Banks, issue letters of credit in an aggregate face amount
not to exceed $500,000,000 in order to back up the reimbursement obligations of
MEC in respect of various judgment bonds to be issued by surety companies for
MEC's benefit in connection with appeals arising in the Litigation (as defined
herein) and (ii) that the Banks make loans to pay reimbursement obligations in
respect of drawings upon such letters of credit; and

WHEREAS, the Issuing Banks are willing to issue such letters
of credit on behalf of the Banks and the Banks are willing to participate in
such letters of credit and to make such loans upon the terms and conditions set
forth herein.

NOW, THEREFORE, in consideration of the premises and the
mutual covenants herein contained, the parties agree as follows:

SECTION 1. DEFINITIONS

1.1 Defined Terms. As used herein the following terms shall
have the following meanings, unless the context shall otherwise require:

"ABR Rate" means the rate of interest publicly announced by
Chemical Bank in New York, New York, from time to time as its
reference rate. The reference rate is not intended to be the lowest
rate of interest charged by Chemical Bank in connection with
extensions of credit to debtors.

"ABR Rate Loans" means Loans hereunder at such time as they
are made and/or being maintained at a rate of interest based upon the
ABR Rate.

"Accountants" means Arthur Andersen & Co. or such other
independent public accountants of recognized national

<PAGE> 6
2

standing selected by MND with the prior approval of the Required
Banks.

"Advance Payment Obligation" when used with respect to any
Person, means indebtedness, obligations and liabilities of such Person
arising out of any loan, advance or take-or-pay payment (or other
payment for Petroleum or other products not delivered by such Person)
made to such Person in connection with or pursuant to the commitment
or contract of such Person to sell or offer to sell or deliver

(i) Petroleum to be produced from or
attributable to designated Mineral Interests owned or to be
acquired by such Person,

(ii) products of Gas Processing Plant Assets, or

(iii) fees, revenues or products of Gas
Gathering and Transmission Assets,

to or upon the order of the party making such loan, advance or
payment, whether or not such Person is in fact liable for such
indebtedness, obligations and liabilities or pays or is liable for
interest thereon.

"Affiliate" when used with respect to any Person, means any
other Person (i) which directly or indirectly through one or more
intermediaries controls, or is controlled by, or is under common
control with, such first mentioned Person, or (ii) which beneficially
owns or holds 10% or more of any class of Voting Stock of such first
mentioned Person, or (iii) 10% or more of whose Voting Stock (or in
the case of a Person which is not a corporation, 10% or more of the
equity interest) is beneficially owned or held by such first mentioned
Person and/or any of its Affiliates. The term "control" (including
the terms "controlled by" and "under common control with") means the
possession, directly or indirectly, of the power to direct or cause
the direction of the management or policies of a Person, whether
through the ownership of Voting Stock, by contract or otherwise;
provided, however, that no Person shall be deemed to be an Affiliate
of another Person (i) by reason of the exercise or existence of rights
or remedies granted under this Credit Agreement or (ii) by reason of
such Person's being a participant in a joint venture, partnership,
joint operating group or joint undivided ownership group with such
other Person notwithstanding the fact that such joint venture,
partnership, joint operating group or joint undivided ownership group
may be an Affiliate of such first Person.

"Aggregate Outstanding Extensions of Credit" means, as to any
Bank at any time, an amount equal to the sum of (a) the aggregate
principal amount of all Loans made by such

<PAGE> 7
3

Bank then outstanding and (b) such Bank's Commitment Percentage of the
L/C Obligations then outstanding.

"Applicable Margin" means, with respect to ABR Rate Loans, CD
Rate Loans and Eurodollar Loans, the percentage set forth opposite
said terms in the appropriate column on Schedule 1.

"Appraisal Report" means a report on the Proved Reserves of
Oil and Gas Assets or Gas Processing Plant Assets signed by an
Appraiser or MND (in the case of MND, such report to be substantially
similar to that made by an Appraiser and satisfactory to the
Determining Banks) and "Appraisal Reports" means more than one
Appraisal Report.

"Appraisers" means "Appraisers" as defined in the MND
Revolving Credit Agreement.

"Approved Borrowing Base" means the "Approved Borrowing Base"
as defined in and determined pursuant to the MND Revolving Credit
Agreement, provided that any change in the amount of the Approved
Borrowing Base hereunder after the date hereof shall be approved by
the Required Banks hereunder.

"Approved Present Value of Assets" means the "Approved Present
Value of Assets" as defined in and determined pursuant to the MND
Revolving Credit Agreement, provided that any change in the amount of
the Approved Present Value of Assets hereunder after the date hereof
shall be approved by the Required Banks hereunder.

"Assessment Rate" means, with respect to each CD Interest
Period, the annual assessment rate per annum (rounded to the nearest
1/100 of 1%, or if necessary, to the next higher 1/100 of 1%)
determined by the Administrative Agent to be the then-current
assessment rate payable by Chemical Bank to the Federal Deposit
Insurance Corporation or any successor ("FDIC") for FDIC's insuring
time deposits made in dollars at offices of Chemical in the United
States as of the day two (2) Business Days prior to the first day of
such CD Interest Period.

"Available Commitment" means, as to any Bank, an amount equal
to the excess, if any, of (a) such Bank's Commitment over (b) such
Bank's Aggregate Outstanding Extensions of Credit.

"Bartlett Litigation" shall mean, collectively, the
consolidated civil action James Bartlett et al. v. Mitchell Energy
Corporation, Case No. 87-04-190 (Consolidated) (271st Judicial
District, Wise County, Texas) and any appeals arising therefrom.

<PAGE> 8
4

"Board of Directors" or "Board" means the Board of Directors
of MND or MEC, as appropriate, or a committee of directors lawfully
exercising the relevant powers of the Board.

"Borrowing Base" means the "Borrowing Base" as defined in and
determined pursuant to the MND Revolving Credit Agreement.

"Business Day" means (a) a day other than a Saturday, Sunday
or other day on which commercial banks in New York City are authorized
or required by law to close, and (b) if a Eurodollar Loan is
concerned, a day which meets the criterion set forth in clause (a) and
upon which banks are also open for transactions in currencies and
exchange in the market where the Reference Banks are then determining
the Eurodollar Rate.

"Capital Lease" means any lease of property which, in
accordance with GAAP, should be capitalized on the lessee's balance
sheet and "Capital Lease Obligation" means the amount of the liability
which should be so capitalized.

"CD Base Rate" means with respect to each CD Interest Period
the rate per annum equal to the average (rounded to the nearest
one-one hundredth of one percent, or if necessary, to the next higher
one-one hundredth of one percent) of the prevailing rates per annum
bid at 9:00 A.M. (New York City time), or as soon thereafter as
practicable, on the first day of the relevant CD Interest Period by
New York certificate of deposit dealers of recognized standing for the
purchase at face value from each of the Reference Banks of its
certificates of deposit in an amount comparable to the CD Rate Loan to
which such CD Interest Period applies and having a maturity comparable
to such CD Interest Period.

"CD Interest Period" means with respect to any CD Rate Loan a
period beginning on, as the case may be, the relevant borrowing or
conversion date or the date of the expiration of the then current CD
Interest Period therefor, and ending on the day which is 30, 60, 90,
120 or 180 days (or 360 days, subject to availability in the opinion
of the Banks) thereafter, or, with the prior written consent of the
Banks, any other duration (as selected by the Borrower, as the case
may be, in its notice of borrowing or conversion or by irrevocable
notice received by the Administrative Agent prior to 12:00 noon (New
York City time) on the second Business Day prior to the last day of
the then current CD Interest Period therefor if the loan is to be
continued as such); provided that:

(a) if any CD Interest Period would otherwise end
on a day which is not a Business Day, that CD Interest

<PAGE> 9
5

Period shall be extended to the next succeeding Business Day;

(b) any such notice electing CD Rate Loans but
not specifying the length of a CD Interest Period therefor
shall be deemed an election of ABR Rate Loans; and

(c) any CD Interest Period that would otherwise
extend beyond the Final Maturity Date shall end on the Final
Maturity Date.

"CD Rate" means a rate per annum determined pursuant to the
following formula:

CD Base Rate
------------------------- + Assessment Rate
1.00 - Reserve Percentage

"CD Rate Loans" means Loans at such time as they are made
and/or being maintained at a rate of interest based upon the CD Rate.

"Closing Date" means the date on which (a) counterparts of
this Credit Agreement executed by MEC, MND, the Administrative Agent
and each Bank shall have been delivered to the Borrower and the
Administrative Agent and (b) the other conditions set forth in
subsections 4.1 and 4.2 shall have been satisfied.

"Code" means the Internal Revenue Code of 1986, as amended
from time to time.

"Commitment" means each Bank's obligation to issue and/or
participate in Letters of Credit issued on behalf of the Borrower
hereunder and/or to make loans to the Borrower hereunder in an
aggregate face and/or principal amount at any one time outstanding not
to exceed the amount set forth beneath such Bank's signature hereto;
collectively, as to all the Banks, the "Commitments".

"Commitment Fee Rate" means the percentage set forth opposite
Commitment Fee Rate in the appropriate column on Schedule 1.

"Commitment Percentage" means, with respect to any Bank at any
time, the percentage which such Bank's Commitment then constitutes of
the aggregate Commitments (or, at any time after the Commitments shall
have expired or terminated, the percentage which the Aggregate
Outstanding Extensions of Credit of such Bank constitutes of the
Aggregate Outstanding Extensions of Credit of all the Banks).

"Commitment Period" means the period from and including the
Closing Date to but not including the Scheduled

<PAGE> 10
6

Termination Date or such earlier date as the Commitments shall
terminate as provided herein.

"Commonly Controlled Entity" means an entity, whether or not
incorporated, which is under common control with MND or the Borrower
within the meaning of Section 4001 of ERISA.

"Common Stock" means all capital stock of any corporation
other than Preferred Stock of such corporation.

"Consolidated Current Assets", as applied to MND and its
Restricted Subsidiaries at any date, means the sum of all Current
Assets of MND and its Restricted Subsidiaries at such date, determined
on a consolidated basis, plus the amount of the unused portion of the
Commitments as in effect from time to time under and as defined in the
MND Revolving Credit Agreement.

"Consolidated Current Liabilities", as applied to MND and its
Restricted Subsidiaries at any date, means the sum of all Current
Liabilities of MND and its Restricted Subsidiaries at such date,
determined on a consolidated basis.

"Consolidated Debt", as applied to MND and its Restricted
Subsidiaries at any date, means the sum of all Debt of MND and its
Restricted Subsidiaries at such date, determined on a consolidated
basis, less (i) Intercompany Debt and Certain Other MEC Debt deducted
in determining Net Asset Value pursuant to the MND Revolving Credit
Agreement (but only to the extent such deductions, after the date
hereof, were made in connection with an Approved Borrowing Base which
was approved by the Required Banks hereunder) and (ii) the aggregate
face amount of all outstanding Letters of Credit. Consolidated Debt
shall also include the excess, if any, of (a) the aggregate amounts at
such date of Intercompany Debt and Certain Other MEC Debt over (b) the
aggregate amount, as mutually agreed to by MND and the Determining
Banks pursuant to the MND Revolving Credit Agreement, of the types of
Debt described in (a) of this definition that were deducted from the
Present Value of Assets in determining Net Asset Value pursuant to the
MND Revolving Credit Agreement (but only to the extent such
deductions, after the date hereof, were made in connection with an
Approved Borrowing Base which was approved by the Required Banks
hereunder). For purposes of this definition, "Certain Other MEC Debt"
and "Net Asset Value" shall have the meaning ascribed to such terms in
the MND Revolving Credit Agreement.

"Consolidated Tangible Net Worth", as applied to MEDC and its
Subsidiaries at any date, means stockholders' equity as reflected on
the consolidated balance sheet of MEDC and its Subsidiaries, from
which shall be subtracted the amount

<PAGE> 11
7

of all franchises, licenses, permits, patents, patent applications,
copyrights, trademarks, trade names, goodwill, experimental or
organizational expense, unamortized debt discount and all other
intangible assets, determined on a consolidated basis.

"Credit Documents" means this Credit Agreement, the
Guarantees, the Subsidiary Guarantee, the Subordination Agreement, the
L/C Documentation and any other documents prepared in connection
herewith or therewith.

"Credit Parties" means MEDC, MND, MEC, MGS and MMC.

"Current Assets", as applied to any Person at any date, means
all assets of such Person which would, in accordance with GAAP, be
classified as current assets.

"Current Liabilities", as applied to any Person at any date,
means all liabilities of such Person which would, in accordance with
GAAP, be classified as current liabilities.

"Debt" as to any Person, at a particular time, means the sum
(without duplication) of (a) all indebtedness of such Person for
borrowed money or for the deferred purchase price of property or
services, (b) the face amount of all letters of credit issued for the
account of such Person and all drafts drawn thereunder that are
classified as indebtedness on the balance sheets of such Person in
accordance with generally accepted accounting principles, (c) the
undischarged balance of any Production Payment owing by such Person,
(d) Capitalized Lease Obligations of such Person and (e) any Guarantee
Obligation of such Person of any of the foregoing. "Debt" of any
Person shall not include (i) non-recourse Production Payments; and
(ii) Debt where prior to or at the maturity thereof there shall have
been irrevocably deposited in the manner provided for in the
instrument creating such indebtedness, in trust, the funds (or
evidences of such indebtedness, if permitted by the instrument
creating such indebtedness) necessary for the redemption, payment or
satisfaction of all such indebtedness so to be redeemed, paid or
satisfied, and where all other steps prerequisite to such redemption,
payment or satisfaction shall have been duly taken or duly provided
for, and in such case the funds and evidences of indebtedness so
deposited shall not be included in any computation of the assets of
such Person; and (iii) for purposes other than subsection 6.2, any
Debt of MND or any Restricted Subsidiary as described in paragraphs
(d) (but only to the extent indicated as "Non-Recourse Debt" on
Schedule 4 hereto), (e) and (f) of subsection 6.2 hereof; and (iv) any
Advance Payment Obligation, and provided, further, that "Debt" shall
not include liabilities with respect to the refunds of prior charges
to gas purchasers required by governmental or court action to the
extent that

<PAGE> 12
8

a Person other than MND or a Restricted Subsidiary will pay such
refunds (and any interest accrued thereon) or will reimburse MND or
such Restricted Subsidiary for its payment of the same.

"Dedicated Pipeline Reserves" means reserves of natural gas
which have been identified, on the basis of analytical techniques and
procedures customarily accepted in the oil and gas industry, in the
report most recently furnished to the Banks by MND and satisfactory to
the Required Banks, provided that such natural gas reserves are (a)
owned by, or subject to a sales or transportation agreement in favor
of, or (in the case of natural gas reserves owned by MND and its
Restricted Subsidiaries) committed to, MND or any of its Restricted
Subsidiaries involved in the gas gathering and transmission business;
(b) located in the United States or its territorial waters; and (c)
located sufficiently near or otherwise available to MND's and its
Restricted Subsidiaries' pipeline system to allow it to be reasonably
expected that MND and its Subsidiaries can earn operating income from
the purchase and sale or transporting thereof. Dedicated Pipeline
Reserves shall also include additional reserves that MND reasonably
expects to sell or transport, based on historical experience, then
current operating and contractual developments and any other relevant
factors.

"Default" means an event or condition which, with the giving
of notice or lapse of time, would become an Event of Default.

"Determination Date", as used in connection with any Appraisal
Report or Officers' Certificate delivered hereunder, means the date
(which shall be specified in such Appraisal Report or Certificate) as
of which the determinations set forth in such Appraisal Report or
Officers' Certificate are made.

"Determining Banks" means the "Determining Banks" as defined
in the MND Revolving Credit Agreement.

"Dollar" and "$" means dollars in lawful currency of the
United States of America.

"Drawdown Period" means the period from and including the
Closing Date to and including the Final Expiration Date.

"ERISA" means the Employee Retirement Income Security Act of
1974, as the same may from time to time be amended or supplemented.

"Eurodollar Interest Period" means, with respect to any
Eurodollar Loan, a period beginning on, as the case may be, the
relevant borrowing or conversion date or on the date of the expiration
of the then current Eurodollar Interest

<PAGE> 13
9

Period therefor and ending one, two, three or six months (or twelve
months, subject to availability in the opinion of the Banks)
thereafter, or, with the prior written consent of the Banks and
subject to availability in the opinion of the Banks, any other
duration (as selected by the Borrower in its notice of borrowing or
conversion or by irrevocable notice received by the Administrative
Agent prior to 12:00 noon (New York City time) on the third Business
Day prior to the last day of the then current Eurodollar Interest
Period therefor if the Loan is to be continued as such); provided
that:

(a) if any Eurodollar Interest Period would
otherwise end on a day which is not a Business Day, that
Eurodollar Interest Period shall be extended to the next
succeeding Business Day unless the result of such extension
would be to extend such Eurodollar Interest Period into
another calendar month in which event such Eurodollar Interest
Period shall end on the immediately preceding Business Day;

(b) any such notice electing Eurodollar Loans but
not specifying the length of a Eurodollar Interest Period
therefor shall be deemed an election of ABR Rate Loans; and

(c) any Eurodollar Interest Period that would
otherwise extend beyond the Final Maturity Date shall end on
the Final Maturity Date.

"Eurodollar Loans" means Loans hereunder at such time as
interest thereupon accrues at a rate based upon the Eurodollar Rate.
That portion of the principal of such Loans to which a single Interest
Period applies shall be a single Eurodollar Loan.

"Eurodollar Rate" means with respect to each Eurodollar
Interest Period the rate per annum equal to the quotient of (a) the
Eurodollar Reference Rate therefor, divided by (b) a number equal to
1.00 minus the aggregate of the rates (expressed as a decimal
fraction) of reserve requirements current on the date two Business
Days prior to the beginning of such Eurodollar Interest Period
(including, without limitation, basic, supplemental, marginal and
emergency reserves) under any regulations of the Board of Governors of
the Federal Reserve System or other governmental authority having
jurisdiction with respect thereto, as now and from time to time
hereafter in effect, dealing with reserve requirements prescribed for
eurocurrency funding (currently referred to as "Eurocurrency
liabilities") of a member bank of such System (such Eurodollar Rate to
be adjusted to the nearest 1/100 of one percent or, if necessary, to
the next higher 1/100 of one percent).

<PAGE> 14
10

"Eurodollar Reference Rate" means with respect to each
Eurodollar Interest Period the average (rounded to the nearest one-one
hundredth of one percent, or if necessary, to the next higher one-one
hundredth of one percent) of the rates per annum equal to the
prevailing rates per annum two Business Days prior to the beginning of
that Eurodollar Interest Period at which the Reference Banks are
offered Dollar deposits in the interbank eurodollar market used by,
and as at or about the relevant local time of, their offices then
determining the Eurodollar Reference Rate, for delivery on the first
day of such Eurodollar Interest Period for the number of days
comprised therein and in an amount equal to the amount of the
corresponding Eurodollar Loan. As used herein, "relevant local time"
shall mean 11:00 A.M. local time in London, England, when the relevant
office normally operates on London time or 10:00 A.M., local time in
New York, New York, when such office normally operates on New York
time.

"Event of Default" means any of the events specified in
Section 7 hereof, provided that any requirement for notice or lapse of
time or any other condition has been satisfied.

"Fee Payment Date" means the last day of each January, April,
July and October.

"Final Expiration Date" means the date which is three years
following the Closing Date.

"Final Maturity Date" means the date which is four years
following the Closing Date.

"Fiscal Year" means the period of 12 consecutive calendar
months commencing on (and including) February 1 and ending on (and
including) the next following January 31. Each quarter of a Fiscal
Year is hereinafter referred to as a "fiscal quarter".

"Fixed Charge Ratio", as determined at the end of each fiscal
quarter, means the quotient of (a) total operating earnings (which
shall be the same line item as in MND's consolidated statement of
earnings for the fiscal year ended January 31, 1995), plus
depreciation, depletion and amortization for the period of four
consecutive fiscal quarters ending on the last day of such fiscal
quarter, divided by (b) total interest expense for such period of four
consecutive fiscal quarters (including any amounts capitalized).

"GAAP" means generally accepted accounting principles.

"Gas Gathering and Transmission Assets" means the fixed
property, plant and equipment of MND and its Restricted Subsidiaries
employed in the gathering and transmission of

<PAGE> 15
11

Dedicated Pipeline Reserves, including, but not limited to, pipelines,
compressors and natural gas required for line-pack. In addition,
assets (i) of a partnership or joint venture in which MND or any
Restricted Subsidiary has an investment and which has no Debt or has
outstanding Debt that is recourse to MND or any Restricted Subsidiary
and (ii) which would constitute Gas Gathering and Transmission Assets
if owned by MND or a Restricted Subsidiary shall be Gas Gathering and
Transmission Assets for purposes of this Credit Agreement.

"Gas Processing Plant Assets" means the fixed property, plant
and equipment of MND and its Restricted Subsidiaries, including
associated gathering lines with respect to which a separate gathering
fee is not charged, employed in the processing of natural gas or gas
condensate to produce ethane, propane, butanes, natural gasoline and
other liquefiable hydrocarbons. In addition, assets (i) of a
partnership or joint venture in which MND or any Restricted Subsidiary
has an investment and which has no Debt or has outstanding Debt that
is recourse to MND or any Restricted Subsidiary and (ii) which would
constitute Gas Processing Plant Assets if owned by MND or a Restricted
Subsidiary shall be Gas Processing Plant Assets for purposes of this
Credit Agreement.

"Governmental Authority" means any nation or government, any
state or other political subdivision thereof, and any entity
exercising executive, legislative, judicial, regulatory or
administrative functions of or pertaining to government, and any
corporation or other entity owned or controlled (through stock or
capital ownership or otherwise) by any of the foregoing.

"Guarantee Obligation" means, as to any Person, any obligation
of such Person guaranteeing or in effect guaranteeing any Debt (the
"primary obligations") of any other Person (the "primary obligor") in
any manner, whether directly or indirectly, including, without
limitation, any obligation of such Person, whether or not contingent
(a) to purchase any such primary obligation or any property
constituting direct or indirect security therefor, (b) to advance or
supply funds (i) for the purchase or payment of any such primary
obligation or (ii) to maintain working capital or equity capital of
the primary obligor or otherwise to maintain the net worth or solvency
of the primary obligor, (c) to purchase property, securities or
services primarily for the purpose of assuring the owner of any such
primary obligation of the ability of the primary obligor to make
payment of such primary obligation or (d) otherwise to assure or hold
harmless the owner of any such primary obligation against loss in
respect thereof; provided, however, that the term Guarantee Obligation
shall not include endorsements of instruments for deposit or

<PAGE> 16
12

collection in the ordinary course of business. The amount of any
Guarantee Obligation shall be deemed to be an amount equal to the
stated portion or determinable amount of the primary obligation in
respect of which such Guarantee Obligation is made or, if not stated
or determinable, the maximum reasonably anticipated liability in
respect thereof as determined by MND in good faith.

"Guarantees" means the MEDC Guarantee and the MND Guarantee.

"Gulf Coast Fractionators" means a Texas general partnership
among MGS, Trident NGL, Inc. and Conoco, Inc.

"Intercompany Debt" shall mean amounts payable to MEDC or any
of its Subsidiaries (other than MND or any of its Subsidiaries) and
shown as "Amounts Payable to Affiliated Companies" in the consolidated
balance sheet of MND and its Subsidiaries, and which is subordinated
to the prior payment of the Loans hereunder pursuant to the terms of
the Subordination Agreement.

"Interest Payment Date" means (a) as to ABR Rate Loans, the
last day of each January, April, July and October commencing on the
first of such days to occur after an ABR Rate Loan is made or
Eurodollar Loans or CD Rate Loans are converted to ABR Rate Loans, (b)
as to any Eurodollar Loan or CD Rate Loan having an Interest Period of
three months or less or 90 days or less, as the case may be, the last
day of each Interest Period with respect thereto, (c) as to any
Eurodollar Loan and any CD Rate Loan in respect of which the Borrower
has selected an Interest Period longer than three months or 90 days,
as the case may be, each day which is three months or 90 days, as the
case may be, or a whole multiple thereof, from the first day of such
Interest Period and the last day of such Interest Period, and (d) the
date of each prepayment as to the principal amount prepaid.

"Interest Period" means a Eurodollar Interest Period or a CD
Interest Period, as the case may be.

"Issuing Bank" means Chemical Bank or NationsBank of Texas,
N.A., each in its capacity as issuer of any Letter of Credit.

"Judgment" means any judgment, decree or order issued by a
court of law or other Governmental Authority, in each case for the
payment of money, rendered against MEDC or any of its Subsidiaries in
the Litigation.

"Judgment Interest" means pre-judgment and post-judgment
interest with respect to any Judgment, whether such interest has been
paid or remains unpaid.

<PAGE> 17
13

"Judgment Payments" means payments made on Judgments.

"L/C Documentation" means an application, in such form as any
Issuing Bank may specify from time to time, requesting such Issuing
Bank to issue a Letter of Credit and/or such other certificates,
documents and other papers and information as such Issuing Bank may
request in connection with such issuance.

"L/C Obligations" means at any time, an amount equal to the
sum of (a) the aggregate then undrawn and unexpired amount of the then
outstanding Letters of Credit and (b) the aggregate amount of drawings
under Letters of Credit which have not then been reimbursed by the
Borrower pursuant to subsection 2.5(a).

"Lending Office" means the office of each Bank designated as
such beneath its signature hereto, as well as any office notified as
such by a Bank to the Borrower via the Administrative Agent. A Bank
may designate separate "Domestic" and "Eurodollar" Lending Offices for
its loans which are a portion of CD Rate and ABR Rate Loans, and
Eurodollar Loans, respectively.

"Letters of Credit" has the meaning set forth in subsection
2.1(a).

"Letter of Credit Account" has the meaning set forth in
subsection 7.4(a).

"Letter of Credit Commission Rate" means the percentage set
forth opposite Letter of Credit Commission Rate in the appropriate
column on Schedule 1.

"Lien" means any mortgage, pledge, security interest,
encumbrance, lien or charge of any kind, including, without
limitation, any conditional sale or other title retention agreement,
any lease (including, but not limited to, any Capital Lease) in the
nature thereof, any agreement to give any mortgage, security interest,
encumbrance or pledge and the filing of or agreement to give any
financing statement under the Uniform Commercial Code of any
jurisdiction. An Advance Payment Obligation or Production Payment
shall not be deemed a Lien on Mineral Interests for purposes of this
Credit Agreement.

"Limited Subsidiary" means any Subsidiary which is a
Restricted Subsidiary or which would be a Restricted Subsidiary if
clause (a) of the definition of "Restricted Subsidiary" was not given
effect.

"Litigation" shall mean, collectively, the consolidated civil
action James Bartlett et al. v. Mitchell Energy Corporation, Case No.
87-04-190 (Consolidated) (271st

<PAGE> 18
14

Judicial District, Wise County, Texas), any other litigation relating
to allegations of surface and subsurface contamination in Wise County,
Texas or contiguous counties from natural gas well leaks similar to
the allegations in such consolidated action, and any appeals arising
from any thereof.

"Loan" or "Loans" shall refer to one or more portions of the
outstanding principal balance of loans made by the Banks to the
Borrower pursuant to subsection 2.9 hereof; a particular "Loan" shall
bear interest at a common rate (i.e., the principal amount of the ABR
Rate Loans bears interest at a rate based upon the ABR Rate, and a
particular Eurodollar or CD Rate Loan bears interest at a particular
rate for each Interest Period). References to "Eurodollar", "ABR
Rate" and "CD Rate" refer to bases for interest, not necessarily to a
source of funds or procedure actually used to make or maintain loans.
In contrast, each Bank's portion of a Loan is one of its "loans".

"Material Adverse Effect" means a material adverse effect on
(a) the business, operations, property or condition (financial or
otherwise) of any of MEDC and its Subsidiaries taken as a whole, MND
and its Subsidiaries taken as a whole, or MEC and its Subsidiaries
taken as a whole, or (b) the validity or enforceability of any of the
Credit Documents or the rights or remedies of the Administrative Agent
or the Banks thereunder; provided that the existence at any date of
determination of an aggregate amount not in excess of $500,000,000 of,
without duplication, all (i) Outstanding Judgments, (ii) Judgment
Payments, (iii) Judgment Interest, (iv) Outstanding Verdicts and (v)
Settlements shall not in and of itself be considered a Material
Adverse Effect.

"Material Subsidiary" means, for so long as they shall remain
Subsidiaries of MND, each of MEC, MMC and MGS.

"Maximum Rate" shall mean, for any Bank, the maximum lawful
non-usurious rate of interest (if any) which, under any law in effect
and applicable to such Bank, is permitted to be charged by such Bank
to the Borrower on the transactions evidenced by this Credit Agreement
from time to time in effect, including changes in such Maximum Rate
attributable to changes under such law which permit a greater rate of
interest to be contracted for, charged, collected, received or taken
as of the effective date of such respective changes.

"MEDC" means Mitchell Energy & Development Corp., a Texas
corporation, which on the date of this Credit Agreement owns all of
the issued and outstanding capital stock of MND.

<PAGE> 19
15

"MEDC Guarantee" means the Guarantee made by MEDC in favor of
the Administrative Agent for the ratable benefit of the Banks,
substantially in the form of Exhibit E-1 hereto, as the same may be
amended, supplemented or otherwise modified from time to time.

"MGS" means Mitchell Gas Services, Inc., a Delaware
corporation.

"Mineral Interests" means leasehold and other interests in
Petroleum in or under oil, gas and other mineral leases, mineral fee
interests, and overriding royalty and Production Payments, and
royalty, net profits interests and any other interests in Petroleum in
place situated in the United States or Canada or within the limits of
the territorial and offshore waters of the United States or any state
thereof or Canada or any province thereof.

"MMC" means Mitchell Marketing Company, a Louisiana
corporation.

"MND Guarantee" means the Guarantee made by MND in favor of
the Administrative Agent for the ratable benefit of the Banks,
substantially in the form of Exhibit E-2 hereto, as the same may be
amended, supplemented or otherwise modified from time to time.

"MND Revolving Credit Agreement" means the Credit Agreement
dated as of November 30, 1994 among MND, MGS (as successor by merger
to Southwestern Gas Pipeline, Inc.), the banks parties thereto and
Chemical Bank, as agent, as amended by the First Amendment thereto,
and as such Credit Agreement may be further extended, amended,
supplemented or otherwise modified.

"Multiemployer Plan" means a Plan which is a multiemployer
plan as defined in Section 4001(a)(3) of ERISA.

"Notice of Non-Renewal" has the meaning set forth in
subsection 2.1(b).

"Officers' Certificate" means a certificate signed by (a) the
chief financial officer or principal accounting officer of MND or (b)
the Chairman of the Board, the Vice Chairman of the Board, the
President or a Vice President and the Treasurer or an Assistant
Treasurer or the Secretary or an Assistant Secretary of a Person.

"Oil and Gas Assets" means at any time (a) all of MND's and
its Restricted Subsidiaries' Mineral Interests having Proved Reserves
or possible or probable reserves attributable thereto, (b) all items
(except undeveloped leases), capitalized and being amortized in
connection with

<PAGE> 20
16

the exploration, development or production of Mineral Interests (i.e.,
the "full cost" asset base) and (c) all fixed property, plant and
equipment which are employed in connection with the operation of such
Mineral Interests and the production of Petroleum therefrom, in each
case located in the United States or within the limits of the
territorial and offshore waters of the United States or any state
thereof, or Canada or within the limits of the territorial and
offshore waters of Canada or any province thereof. In addition,
assets (i) of a partnership or joint venture in which MND or any
Restricted Subsidiary has an investment and which has no Debt or has
outstanding Debt that is recourse to MND or any Restricted Subsidiary
and (ii) which would constitute Oil and Gas Assets if owned by MND or
a Restricted Subsidiary shall be Oil and Gas Assets for purposes of
this Credit Agreement.

"Outstanding Judgments" means, at any date of determination,
unpaid Judgments then in effect (regardless of whether bonded or
stayed).

"Outstanding Verdicts" means, at any date of determination,
verdicts rendered against MEDC or any of its Subsidiaries in the
Litigation which have not been finalized by entry of a Judgment.

"PBGC" means the Pension Benefit Guaranty Corporation
established pursuant to Subtitle A of Title IV of ERISA.

"Permitted Encumbrances" means as applied to MND or any of its
Restricted Subsidiaries:

(a) liens of taxes, assessments and governmental
charges not yet payable, or payable without penalty so long as
so payable, or deposits created in the ordinary course of
business as security for compliance with laws imposing taxes,
assessments or governmental charges;

(b) liens of taxes, assessments and governmental
charges the validity of which is being contested in good faith
by appropriate action promptly initiated and diligently
conducted, if such reserve or other appropriate provision, if
any, as shall be required by GAAP shall have been made
therefor;

(c) materialmen's, mechanics', repairmen's,
employees', operators' or other similar liens or charges
arising in the ordinary course of business incidental to
construction, maintenance or operation of any property which
have not at the time been filed pursuant to law and any such
liens and charges incidental to construction, maintenance or
operation of any property which, although filed, relate to
obligations not yet due or the payment of which is

<PAGE> 21
17

being withheld as provided by law, or to obligations the
validity of which is under contest in good faith by
appropriate action promptly initiated and diligently conducted
if such reserve or other appropriate provision, if any, as
shall be required by GAAP shall have been made for such
withheld payment or contested claim;

(d) liens incurred or deposits made in the
ordinary course of business in connection with workers'
compensation, unemployment insurance and other similar
statutory obligations or to secure the performance of leases,
licenses, franchises, permits, tenders, statutory obligations,
surety and appeal bonds, performance and return-of-money bonds
and other similar obligations (exclusive of obligations
incurred in connection with the borrowing of money or the
obtaining of advances or credit);

(e) any judgment lien, unless the judgment it
secures shall not, within 30 days after the entry thereof,
have been discharged or execution thereof stayed pending
appeal, or shall not have been discharged within 30 days after
the expiration of any stay, provided, however, that the
aggregate amount of such liens securing judgments which have
not been discharged or stayed within such 30-day period
(excluding Judgments in respect of which Letters of Credit
will be issued) shall not exceed $50,000,000 at any one time;

(f) (i) encumbrances (other than to secure the
payment of money), easements, rights-of-way, servitudes,
permits, leases and other rights in respect of grazing,
logging, canals, ditches, reservoirs or the like, conditions,
covenants or other restrictions, or (ii) easements for
streets, alleys, highways, pipelines, telephone lines, power
lines, railways and other rights-of-way, on, over or in
respect of property owned or leased by MND or its Restricted
Subsidiaries or over which MND or its Restricted Subsidiaries
own rights-of-way, easements, permits or licenses, provided
that such encumbrances, easements, rights-of-way, servitudes,
permits, leases, rights, conditions, covenants or other
restrictions are such that they will not either individually
or in the aggregate, if exercised or availed of, interfere
materially with the proper use or operation of the property
affected thereby or the purpose for which such property is, or
is to be, used;

(g) rights reserved to or vested in any
municipality or governmental, statutory or public

<PAGE> 22
18

authority to control or regulate any property of MND or its
Subsidiaries or to use such property in any manner;

(h) obligations or duties, affecting any property
of MND or its Restricted Subsidiaries, to any municipality or
public authority with respect to any franchise, grant, license
or permit; and any defects in title to structures or other
facilities arising solely from the fact that such structures
or facilities are constructed or installed on lands held under
government permits, leases or other grants, which defects in
the aggregate do not materially prevent the use of such
property for the purposes for which it is held by MND or its
Restricted Subsidiaries;

(i) zoning laws and ordinances and municipal
regulations;

(j) defects or irregularities in the titles to
any property which defects or irregularities have been cured
by possession under applicable statutes of limitation or which
are of a minor nature and in the aggregate will not materially
impair the use of such property for the purposes for which it
is held; and any irregularities in or deficiencies of title to
any rights-of-way for pipelines, telephone lines, power lines,
water lines and/or appurtenances thereto or improvements
thereon, and to any real estate or interest therein subject to
such rights-of-way;

(k) the lien reserved in leases for rent and for
compliance with the terms of the leases in the case of
leasehold estates; any interests which other parties to any
joint venture, common enterprise, pooling or unitization
agreement may have in the Mineral Interests to which such
agreement relates or any interests with which other parties
may be vested pursuant to orders, regulations, rules or other
official acts of any Federal, state or other governmental
agency having jurisdiction which create or declare any unit or
units embracing or relating to Mineral Interests or the
production of Petroleum therefrom;

(l) any Lien securing Debt, not created, assumed
or guaranteed by MND or its Restricted Subsidiaries and on
which neither MND nor its Restricted Subsidiaries customarily
pay interest, existing upon real estate or rights in or
relating to real estate (including rights-of-way and
easements) acquired by MND or its Restricted Subsidiaries for
the purposes of production, treatment, storage or
transportation of Petroleum but excluding Gas Processing Plant
Assets and Gas Gathering and Transmission Assets; or any such
Liens upon oil and gas leasehold interests at the date of
lease execution

<PAGE> 23
19

which are of a minor nature and in the aggregate will not
materially impair the use of such property for the purposes
for which it is held;

(m) the right reserved to, or vested in, any
municipality or governmental or other public authority or
public utility, by the terms of any franchise, grant, license,
permit or lease or by any statutory provisions specifically
relating thereto, to terminate such franchise, grant, license,
permit or lease or to purchase, condemn, expropriate or
recapture, or designate a purchaser of, any property, if the
terms of such franchise, grant, license, permit or lease or
statute do not contain any provisions giving to such authority
the right (without default by such Person under the terms and
conditions of such franchise, grant, license, permit or lease
by the Person holding the same) to take title to, or to
designate any Person to take title to, any property of MND or
its Restricted Subsidiaries located or constructed thereon
without the payment of fair consideration therefor or
consideration determined in accordance with any applicable
statutory provision in that regard; and the right reserved to
or vested in any such authority to require such property to be
altered, relocated or removed at the expense of the holder of
such franchise, grant, license, permit or lease; and

(n) production sale contracts, unitization and
pooling declarations and agreements, and any operating
agreements and other agreements which are customary in the oil
and gas exploration and development business and in the
business of processing gas and gas condensate production for
the extraction of products therefrom.

"Permitted Shortfall" shall have the meaning given such term
in subsection 2.13(a).

"Person" means an individual, a corporation (including MND or
any of its Subsidiaries), a partnership, a limited liability company,
a trust, an unincorporated organization or a government or any agency
or political subdivision thereof.

"Petroleum" means oil, gas and other liquid or gaseous
hydrocarbons, including, but not limited to, all liquefiable
hydrocarbons and other products which may be extracted from gas and
gas condensate by the processing thereof in a gas processing plant.

"Plan" means at any particular time, any employee benefit plan
which is covered by ERISA and in respect of which MND, the Borrower or
a Commonly Controlled Entity is

<PAGE> 24
20

(or, if such plan were terminated at such time, would under Section
4069 of ERISA be deemed to be) an "employer" as said term is defined
in Section 3(5) of ERISA.

"Preferred Stock" means any capital stock of any corporation
(whether now or hereafter authorized and however designated) which
shall have a priority or preference over any other class of capital
stock of such corporation with respect to the right to receive
dividends or the right to receive payments or other distributions of
assets on the voluntary or involuntary liquidation, dissolution or
winding up of such corporation.

"Present Value of Assets" means the "Present Value of Assets"
as defined in and determined pursuant to the MND Revolving Credit
Agreement.

"Production Payment" means a limited royalty or overriding
royalty interest which burdens one or more other Mineral Interests but
which has a term extending only until such time as the owner or owners
of such royalty or overriding royalty interest have realized therefrom
(i) a specified or determinable amount of the Petroleum produced from
or attributable to such other Mineral Interests or (ii) a specified or
determinable amount of the proceeds from the value of such Petroleum
production.

"Proved Reserves" means reserves of Petroleum which are still
in the ground but which have been located and (a) at least 70% of the
present value of which have been determined by an Appraiser in making
an Appraisal Report with respect to such reserves and (b) no more than
30% of the present value of which have been determined by MND in
making an Appraisal Report with respect to such reserves, in each case
(a) and (b) by reason of actual completion, successful testing,
positive core analyses or reasonable geological interpretation, to be
economically recoverable through the use of known operating techniques
and procedures being utilized in the oil and gas industry at the
Determination Date set forth in such Appraisal Report, which reserves,
under sound engineering practice, are classified as proved reserves,
which do not include any reserves classified as probable or possible,
and which also meet the following qualifications:

(a) such reserves are located in the United
States or Canada or within the limits of the territorial and
offshore waters of the United States or Canada or any state or
province thereof; and

(b) such reserves are so located in relation to
potential delivery points or pipelines for possible sales of
Petroleum therefrom that MND and its Restricted Subsidiaries
can reasonably expect to

<PAGE> 25
21

produce, deliver and sell such Petroleum at economically
practical prices.

There shall not be included in Proved Reserves any volumes of
Petroleum, which, in the opinion of MND or such Appraiser making such
Appraisal Report, as the case may be, with respect to such reserves,
will be produced and recovered from any reservoir by utilization of
secondary or enhanced recovery procedures or techniques (such as, but
not limited to, water flooding or injection of other substances into
the reservoir to effect recovery of Petroleum therefrom) unless, prior
to the date such Appraisal Report is signed, such procedures and
techniques either have actually been successfully initiated and
utilized in economically producing and recovering Petroleum from such
reservoir or from similar nearby reservoirs producing from the same
formation or have, in the opinion of MND or such Appraiser, as the
case may be, been proved economic by sufficient pilot operations for
producing and recovering Petroleum from such reservoir.

"Reference Banks" means Chemical Bank and PNC Bank, National
Association.

"Register" shall have the meaning given such term in
subsection 9.10(d).

"Reimbursement Obligation" means an obligation of the Borrower
to reimburse an Issuing Bank pursuant to subsection 2.5(a) for amounts
drawn under Letters of Credit issued by such Issuing Bank.

"Reportable Event" means any of the events set forth in
Section 4043(b) of ERISA other than those events as to which the
thirty-day notice period is waived under subsections .13, .14, .16,
.18, .19 or .20 of PBGC Reg. 2615.

"Required Banks" means Banks holding 66-2/3% or more of the
Commitment Percentages as of any determination.

"Requirement of Law" means, as to any Person, the Certificate
of Incorporation and By-Laws or other organizational or governing
documents of such Person, and any law, treaty, rule or regulation, or
determination of an arbitrator or a court or other Governmental
Authority, in each case applicable to or binding upon, such Person or
any of its property or to which such Person or any of its property is
or purports to be subject.

"Reserve Percentage" for any day with respect to any CD Rate
Loan means that percentage (expressed as a decimal) which is in effect
on such day, as prescribed by the Board of Governors of the Federal
Reserve System (or any successor) for determining the reserve
requirement for a

<PAGE> 26
22

member bank of the Federal Reserve System in New York City with
deposits exceeding one billion dollars in respect of new non-personal
time deposits in Dollars in New York City having a maturity comparable
to the CD Interest Period for such CD Rate Loan and in an amount of
$100,000 or more.

"Restricted Subsidiary" means any Subsidiary

(a) at least 80% of the outstanding shares of
every class of stock, all options, warrants or other rights to
acquire stock and all securities convertible into stock of
which are at the time owned by MND or one or more Restricted
Subsidiaries or by MND and one or more Restricted
Subsidiaries;

(b) which is organized and existing under the
laws of the United States or any state thereof or the District
of Columbia or Canada or any province thereof;

(c) all or substantially all of the properties
and assets and business operations of which are located and
conducted in (i) the United States or within the limits of the
territorial and offshore waters of the United States or any
state thereof or (ii) Canada or within the limits of the
territorial and offshore waters of Canada or any province
thereof; and

(d) which has not been designated by the Board as
an Unrestricted Subsidiary;

provided, that in no case may an Unrestricted Subsidiary be
redesignated a Restricted Subsidiary unless, at the time of such
redesignation and after giving effect thereto and to the concurrent
retirement of any Debt, (i) no Event of Default or Default shall have
occurred and be continuing and (ii) such Subsidiary could incur all of
its Debt then outstanding without violation of this Credit Agreement
and, provided, further, that each Material Subsidiary, while a
Subsidiary, shall always be a Restricted Subsidiary. Schedule 2 lists
all Restricted Subsidiaries as at the date hereof.

"Scheduled Termination Date" means the date which is one month
prior to the Final Expiration Date.

"Securities" means any stocks, any bonds, debentures, notes or
other evidences of Debt, and any other instruments generally known as
securities; any certificates of interest or participation in,
temporary or interim certificates for, receipts for, guarantees of, or
warrants or rights to subscribe to or purchase, any of the foregoing;
and any agreements, indentures, mortgages or other instruments
providing for, relating to or securing any of the foregoing.

<PAGE> 27
23

"Settlements" means amounts paid or agreed to be paid by MEDC
or any of its Subsidiaries with respect to any settlement of any
Litigation (including threatened Litigation).

"Single Employer Plan" means any Plan which is covered by
Title IV of ERISA, but which is not a Multiemployer Plan.

"Subordination Agreement" means a subordination agreement
substantially in the form of Exhibit F hereto.

"Subsidiary" means with respect to any Person, a corporation,
a majority (by number of votes) of the Voting Stock of which is at the
time owned by such Person or one or more of such Person's Subsidiaries
or by such Person and one or more of such Person's Subsidiaries.
Unless the context requires otherwise, "Subsidiary" shall be deemed to
refer to a Subsidiary of MND.

"Subsidiary Guarantee" means the Subsidiary Guarantee made by
MGS and MMC in favor of the Administrative Agent for the ratable
benefit of the Banks, in the form of Exhibit G hereto, as such
guarantee may be amended, supplemented or otherwise modified from time
to time.

"TWC" means The Woodlands Corporation, a Delaware corporation,
which on the date of this Credit Agreement is a wholly-owned
Subsidiary of MEDC.

"Type" means, as to any Loan, its nature as an ABR Rate Loan,
a CD Rate Loan or a Eurodollar Loan.

"UBS Facility" means the Term Loan Agreement, dated as of May
15, 1992, as amended, between MND and Union Bank of Switzerland.

"Uniform Customs" means the Uniform Customs and Practice for
Documentary Credits (1993 Revision), International Chamber of Commerce
Publication No. 500, as the same may be amended from time to time.

"Unrestricted Subsidiary" means any Subsidiary of MND which
has been designated an Unrestricted Subsidiary by the Board, provided,
that in no case may a Restricted Subsidiary be designated an
Unrestricted Subsidiary, and in no case may any Unrestricted
Subsidiary be designated a Restricted Subsidiary unless, at the time
of such designation or redesignation and after giving effect thereto
and to the concurrent retirement of any Debt, (i) no Event of Default
or Default shall have occurred and be continuing and (ii) MND's
Consolidated Debt does not exceed the current Approved Borrowing Base,
provided that at the time of the designation of a Restricted
Subsidiary as an Unrestricted Subsidiary, the Subsidiary so designated
does not own, directly or

<PAGE> 28
24

indirectly, any capital stock or Debt of MND or any Restricted
Subsidiary and, provided, further, that no Subsidiary that is a
Restricted Subsidiary as of the date hereof may be redesignated an
Unrestricted Subsidiary.

"Voting Stock" means stock or shares of any class or classes
(however designated) of a corporation, having ordinary voting power
for the election of a majority of the members of the board of
directors (or other governing body) of such corporation other than
stock or shares having such power only by reason of the happening of a
contingency.

1.2 Accounting Principles. (a) All financial statements
provided for in this Credit Agreement shall be prepared in accordance with GAAP
as in effect from time to time in the United States. All financial
computations hereunder required pursuant to Section 6 shall be made, and all
accounting terms used in connection therewith shall be construed, in accordance
with GAAP applied by MND and MEDC; provided however, that if GAAP or MND's or
MEDC's application of GAAP changes and such change is judged to be material by
either MND or the Administrative Agent, then MND or the Administrative Agent
shall give written notice (a "Notice of Accounting Change") to the other party
and such computations will be made in accordance with GAAP in effect and as
applied by MND and MEDC immediately prior to such material change. The
Administrative Agent or MND must give such Notice of Accounting Change to the
other party within three months of receipt by the Administrative Agent of the
notice and schedule referred to in the immediately succeeding sentence. MND
agrees to notify the Banks in writing of any material change in GAAP affecting
MND or MEDC or of any material change in MND's or MEDC's application of GAAP
and to provide a schedule which shows the effect of such change on such
financial computations or such calculations, all within five Business Days of
sending (or being required to send) to each Bank the first financial statements
pursuant to subsection 5.1(a) or subsection 5.1(b) hereof reflecting such
change.

In the event a Notice of Accounting Change is given by either
party:

(i) It is the intent of the Administrative Agent and MND
that the relevant provisions of this Credit Agreement be amended as
necessary to adjust the requirements of the aforementioned financial
computations so that the respective positions of the Banks and MND
after the accounting change conform as nearly as possible to their
respective positions as of the date of this Credit Agreement.

(ii) Until an amendment in accordance with clause (i)
above is executed, financial computations will be made in accordance
with GAAP in effect and as applied by MND and MEDC immediately prior
to the material change.

<PAGE> 29
25

(b) For purposes of all financial computations required
hereunder pursuant to Section 6, investments in partnerships or joint ventures
shall not be consolidated.

1.3 Use of Defined Terms. (a) All terms defined in this
Credit Agreement shall have the defined meanings when used in any certificates,
reports or other documents made or delivered pursuant to this Credit Agreement,
unless the context shall require otherwise.

(b) The words "hereof", "herein" and "hereunder" and
words of similar import when used in this Credit Agreement shall refer to this
Credit Agreement as a whole and not to any particular provision of this Credit
Agreement, and section, subsection, schedule and exhibit references are to this
Credit Agreement unless otherwise specified.

1.4 Defined Terms From MND Revolving Credit Agreement. With
respect to any term defined by reference to the MND Revolving Credit Agreement,
to the extent that the MND Revolving Credit Agreement shall be amended or
otherwise modified with respect to such defined terms after the Closing Date,
no such amendment or modification shall be effective hereunder unless consented
to by the Required Banks, and to the extent that the MND Revolving Credit
Agreement shall be terminated or shall be amended or otherwise modified in such
a manner that it no longer provides a definition of such term, the parties
hereto will enter into an amendment hereto providing for the definition of such
term hereunder with provisions substantially the same as those contained in the
MND Revolving Credit Agreement immediately prior to such termination or
amendment all as approved by the Borrower, the Administrative Agent and the
Required Banks. Until the execution of any such amendment hereto, such terms
will be defined by reference to the MND Revolving Credit Agreement as in effect
immediately prior to such termination or modification.

SECTION 2. LETTERS OF CREDIT

2.1 Letter of Credit Commitment. (a) Subject to the terms
and conditions hereof, each Issuing Bank, in reliance on the agreements of the
other Banks set forth in subsection 2.4(a), agrees to issue letters of credit
("Letters of Credit") for the account of the Borrower on any Business Day
during the Commitment Period; provided that no Issuing Bank shall have any
obligation to issue any Letter of Credit if, after giving effect to such
issuance, the Available Commitments would be less than zero. Each Issuing Bank
shall be obligated to issue Letters of Credit for the full amount of the then
Available Commitments irrespective of such Issuing Bank's Commitment or
Available Commitment unless it has provided written notice to the contrary to
the Borrower and the Administrative Agent prior to the execution of this Credit
Agreement.

<PAGE> 30
26

(b) Each Letter of Credit shall:

(i) be denominated in Dollars and shall be a standby letter of
credit issued to support obligations of the Borrower in order to back
up the reimbursement obligations of the Borrower owed to a surety
company in respect of a judgment bond to be issued by such surety
company for the Borrower's benefit in connection with appeals arising
in the Litigation;

(ii) expire no later than the earlier of (A) one year from
the date of issuance and (B) the Final Expiration Date, provided that
each Letter of Credit shall provide for automatic renewal on its
expiration date for additional one-year periods (not to exceed the
Final Expiration Date) unless the Issuing Bank thereof shall have
notified the beneficiary thereof at least 60 days prior to the
then-current expiration date that such Letter of Credit will not be
renewed (a "Notice of Non-Renewal"); and

(iii) be reasonably acceptable to the applicable surety
company and be substantially in the form of Exhibit A hereto with such
changes as may be agreed by the Borrower, the Issuing Bank thereof and
the Required Banks.

(c) So long as no Event of Default has occurred and is
continuing, the Issuing Bank of a Letter of Credit shall not give any Notice of
Non-Renewal unless failure to give such notice would result in the extension of
such Letter of Credit's expiration date beyond the Final Expiration Date. At
any time that an Event of Default has occurred and is continuing, the Required
Banks may, through the Administrative Agent, instruct any Issuing Bank to
deliver a Notice of Non-Renewal to the beneficiary of any Letter of Credit
issued by such Issuing Bank; absent receipt of any such instruction, no Issuing
Bank shall deliver a Notice of Non-Renewal except as provided in the
immediately preceding sentence.

(d) Each Letter of Credit shall be subject to the Uniform
Customs.

(e) No Issuing Bank shall at any time be obligated to issue
any Letter of Credit hereunder if such issuance would conflict with, or cause
such Issuing Bank or any other Bank to exceed any limits imposed by, any
applicable Requirement of Law.

2.2 Procedure for Issuance of Letters of Credit. The
Borrower may from time to time during the Commitment Period request that an
Issuing Bank designated by the Borrower issue a Letter of Credit by delivering
to such Issuing Bank at its address for notices specified herein L/C
Documentation therefor, completed to the satisfaction of such Issuing Bank,
with a copy to the Administrative Agent. Upon receipt of such L/C
Documentation, such Issuing Bank will process such L/C

<PAGE> 31
27

Documentation in accordance with its customary procedures and shall promptly
issue the Letter of Credit requested thereby (but in no event shall any Issuing
Bank be required to issue any Letter of Credit earlier than three Business Days
after its receipt of such L/C Documentation) by issuing the original of such
Letter of Credit to the beneficiary thereof or as otherwise may be agreed by
such Issuing Bank, the Administrative Agent and the Borrower. Such Issuing
Bank shall furnish a copy of such Letter of Credit to the Borrower and the
Administrative Agent promptly following the issuance thereof; upon receipt
thereof, the Administrative Agent shall promptly furnish a copy of such Letter
of Credit to the other Banks.

2.3 Fees, Commissions and Other Charges. (a) The Borrower
shall pay to the Administrative Agent, for the account of each Issuing Bank, a
fronting fee with respect to each Letter of Credit issued by such Issuing Bank,
from the date of issuance of such Letter of Credit to the date of expiration or
termination thereof, at a rate of 1/8% per annum, calculated on the basis of
the actual number of days elapsed in a 365- (or 366-, as the case may be) day
year, of the aggregate amount available to be drawn under such Letter of Credit
for the period over which such fee is calculated. Such fee shall be payable in
arrears on each Fee Payment Date to occur after such issuance and prior to the
Final Expiration Date and on the Final Expiration Date.

(b) The Borrower shall pay to the Administrative Agent, for
the account of the Banks, a letter of credit commission with respect to each
Letter of Credit, from the date of issuance of such Letter of Credit to the
date of expiration or termination thereof, at a rate per annum equal to the
Letter of Credit Commission Rate, calculated on the basis of the actual number
of days elapsed in a 365- (or 366-, as the case may be) day year, of the
aggregate amount available to be drawn under such Letter of Credit for the
period over which such commission is calculated. Such commission shall be
payable in arrears on each Fee Payment Date to occur after such issuance and
prior to the Final Expiration Date and on the Final Expiration Date and shall
be shared ratably among the Banks in accordance with their respective
Commitment Percentages.

(c) The Borrower shall pay to the Administrative Agent, for
the account of the Banks, an issuance fee with respect to each Letter of Credit
issued (other than with respect to the first $225,000,000 in aggregate face
amount of Letters of Credit issued in respect of the Bartlett Litigation) in an
amount equal to 1/8% of the face amount of such Letter of Credit. Such fee
shall be shared ratably among the Banks in accordance with their respective
Commitment Percentages, shall be payable on the date of issuance of each Letter
of Credit and shall be nonrefundable.

(d) The Borrower shall pay to the Administrative Agent, for
the account of the Banks, a drawing fee with respect to each drawing on a
Letter of Credit in an amount equal to 1/4%

<PAGE> 32
28

of the amount of such drawing. Such fee shall be shared ratably among the
Banks in accordance with their respective Commitment Percentages, shall be
payable on the date of such drawing and shall be nonrefundable.

(e) The Borrower shall pay to the Administrative Agent during
and for the Commitment Period for the account of each Bank a commitment fee,
computed at the Commitment Fee Rate, on the Available Commitment of such Bank
during such period. Such commitment fee shall be payable in arrears on each
Fee Payment Date to occur prior to the Scheduled Termination Date and on the
Scheduled Termination Date or such earlier date as the Commitments shall
terminate as provided herein and shall be shared ratably among the Banks in
accordance with their respective Commitment Percentages.

(f) In addition to the foregoing fees and commissions, the
Borrower shall pay or reimburse each Issuing Bank for such normal and customary
costs and expenses as are incurred or charged by such Issuing Bank in issuing,
effecting payment under, amending or otherwise administering any Letter of
Credit.

(g) The Administrative Agent shall, promptly following its
receipt thereof, distribute to the Issuing Banks and the Banks all fees and
commissions received by the Administrative Agent for their respective accounts
pursuant to this subsection.

2.4 Letter of Credit Participation. (a) Each Issuing Bank
irrevocably agrees to grant and hereby grants to each other Bank (including
each other Issuing Bank) and, to induce such Issuing Bank to issue Letters of
Credit hereunder, each such other Bank irrevocably agrees to accept and
purchase and hereby accepts and purchases from such Issuing Bank, on the terms
and conditions hereinafter stated, for such other Bank's own account and risk
an undivided interest equal to such other Bank's Commitment Percentage in such
Issuing Bank's obligations and rights under each Letter of Credit issued
hereunder and the amount of each draft paid by such Issuing Bank thereunder.
Each other Bank unconditionally and irrevocably agrees with such Issuing Bank
that, if a draft is paid under any Letter of Credit for which such Issuing Bank
is not reimbursed in full by the Borrower in accordance with the terms of this
Credit Agreement, such other Bank shall pay to such Issuing Bank upon demand at
such Issuing Bank's address for notices specified herein an amount equal to
such other Bank's Commitment Percentage of the amount of such draft, or any
part thereof, which is not so reimbursed.

(b) If any amount required to be paid by any Bank to any
Issuing Bank pursuant to subsection 2.4(a) in respect of any unreimbursed
portion of any payment made by such Issuing Bank under any Letter of Credit is
paid to such Issuing Bank within three Business Days after the date such
payment is due, such Bank shall pay to such Issuing Bank on demand an amount
equal to the

<PAGE> 33
29

product of (i) such amount, times (ii) the daily average Federal funds rate, as
quoted by such Issuing Bank, during the period from and including the date such
payment is required to the date on which such payment is immediately available
to such Issuing Bank, times (iii) a fraction the numerator of which is the
number of days that elapse during such period and the denominator of which is
360. If any such amount required to be paid by any Bank to any Issuing Bank
pursuant to subsection 2.4(a) is not in fact made available to such Issuing
Bank by such Bank within three Business Days after the date such payment is
due, such Issuing Bank shall be entitled to recover from such Bank, on demand,
such amount with interest thereon calculated from such due date at the rate per
annum applicable to ABR Rate Loans hereunder. A certificate of any Issuing
Bank submitted to any Bank, with a copy to the Administrative Agent, with
respect to any amounts owing under this subsection shall be conclusive in the
absence of manifest error.

(c) Whenever, at any time after any Issuing Bank has made
payment under any Letter of Credit and has received from any other Bank its pro
rata share of such payment in accordance with subsection 2.4(a), such Issuing
Bank receives any payment related to such Letter of Credit (whether directly
from the Borrower or otherwise, including proceeds of collateral applied
thereto by such Issuing Bank), or any payment of interest on account thereof,
such Issuing Bank will distribute to such Bank its pro rata share thereof;
provided, however, that in the event that any such payment received by such
Issuing Bank shall be required to be returned by such Issuing Bank, such other
Bank shall return to such Issuing Bank the portion thereof previously
distributed by such Issuing Bank to it.

2.5 Reimbursement Obligations of the Borrower. (a) The
Borrower agrees to reimburse each Issuing Bank on each date on which such
Issuing Bank notifies the Borrower of the date and amount of a draft presented
under any Letter of Credit and paid by such Issuing Bank for the amount of (i)
such draft so paid and (ii) any taxes, fees, charges or other costs or expenses
incurred by such Issuing Bank in connection with such payment. Each such
payment shall be made to such Issuing Bank at its address for notices specified
herein in lawful money of the United States of America and in immediately
available funds.

(b) Interest shall be payable on any and all amounts
remaining unpaid by the Borrower under this subsection from the date such
amounts become payable (whether at stated maturity, by acceleration or
otherwise) until payment in full at the rate which would be payable on any
outstanding ABR Rate Loans which were then overdue.

(c) Each drawing under any Letter of Credit shall constitute
a request by the Borrower to the Administrative Agent for a borrowing pursuant
to subsection 2.11 in the amount of such

<PAGE> 34
30

drawing. The borrowing date with respect to such borrowing shall be the date
of such drawing.

2.6 Obligations Absolute. (a) The Borrower's obligations
under this Section 2 shall be absolute and unconditional under any and all
circumstances and irrespective of any set-off, counterclaim or defense to
payment which the Borrower may have or have had against any Issuing Bank or any
beneficiary of a Letter of Credit.

(b) The Borrower also agrees with each Issuing Bank that such
Issuing Bank shall not be responsible for, and the Borrower's obligations under
subsection 2.5(a) shall not be affected by, among other things, (i) the
validity or genuineness of documents or of any endorsements thereon, even
though such documents shall in fact prove to be invalid, fraudulent or forged,
or (ii) any dispute between or among the Borrower and any beneficiary of any
Letter of Credit or any other party to which such Letter of Credit may be
transferred, or (iii) any claims whatsoever of the Borrower against any
beneficiary of such Letter of Credit or any such transferee or (iv) the fact
that any drawer on any Letter of Credit shall in fact prove not to be a named
beneficiary of such Letter of Credit or an affiliate, parent or subsidiary
thereof.

(c) No Issuing Bank shall be liable for any error, omission,
interruption or delay in transmission, dispatch or delivery of any message or
advice, however transmitted, in connection with any Letter of Credit, except
for errors or omissions caused by such Issuing Bank's gross negligence or
willful misconduct.

(d) The Borrower agrees that any action taken or omitted by
any Issuing Bank under or in connection with any Letter of Credit or the
related drafts or documents, if done in the absence of gross negligence or
willful misconduct and in accordance with the standards of care specified in
the Uniform Commercial Code of the State of New York, shall be binding on the
Borrower and shall not result in any liability of such Issuing Bank to the
Borrower.

2.7 Letter of Credit Payments. If any draft shall be
presented for payment under any Letter of Credit, the Issuing Bank thereof
shall promptly notify the Borrower and the Administrative Agent of the date and
amount thereof. The responsibility of each Issuing Bank to the Borrower in
connection with any draft presented for payment under any Letter of Credit
issued by such Issuing Bank shall, in addition to any payment obligation
expressly provided for in such Letter of Credit, be limited to determining that
the documents (including each draft) delivered under such Letter of Credit in
connection with such presentment are in conformity with such Letter of Credit.

<PAGE> 35
31

2.8 L/C Documentation. To the extent that any provision of
any L/C Documentation related to any Letter of Credit is inconsistent with the
provisions of this Section 2, the provisions of this Section 2 shall apply.

2.9 Loan Commitments. (a) Subject to the terms and
conditions of this Credit Agreement, each of the Banks severally agrees to make
loans to the Borrower for the payment of Reimbursement Obligations from time to
time during the Drawdown Period in an aggregate principal amount not to exceed
the amount of its Commitment set forth beneath its signature hereto, as such
amount may be reduced as provided herein.

(b) The Loans may be (i) Eurodollar Loans, (ii) ABR Rate
Loans, (iii) CD Rate Loans or (iv) a combination thereof, as determined by the
Borrower pursuant to subsection 2.14; provided that all Loans shall initially
be made as ABR Rate Loans unless the Borrower provides notice otherwise in
accordance with subsection 2.11.

2.10 Repayment of Loans; Evidence of Debt. (a) The Borrower
hereby unconditionally promises to pay to the Administrative Agent for the
account of each Bank the then unpaid principal amount of each loan of such Bank
on the Final Maturity Date (or such earlier date on which the Loans become due
and payable pursuant to Section 7). The Borrower hereby further agrees to pay
interest on the unpaid principal amount of the Loans from time to time
outstanding from the date hereof until payment in full thereof at the rates per
annum, and on the dates, set forth in subsection 2.14.

(b) Each Bank shall maintain in accordance with its usual
practice an account or accounts evidencing indebtedness of the Borrower to such
Bank resulting from each loan of such Bank from time to time, including the
amounts of principal and interest payable and paid to such Bank from time to
time under this Credit Agreement.

(c) The Administrative Agent shall maintain the Register
pursuant to subsection 9.10(d), and a subaccount therein for each Bank, in
which shall be recorded (i) the amount of each Loan made hereunder, the Type
thereof and each Interest Period applicable thereto, (ii) the amount of any
principal or interest due and payable or to become due and payable from the
Borrower to each Bank hereunder and (iii) both the amount of any sum received
by the Administrative Agent hereunder from the Borrower and each Bank's share
thereof.

(d) The entries made in the Register and the accounts of each
Bank maintained pursuant to subsection 2.10(b) shall, to the extent permitted
by applicable law, be prima facie evidence of the existence and amounts of the
obligations of the Borrower therein recorded; provided, however, that the
failure of any Bank or the Administrative Agent to maintain the Register or any
such

<PAGE> 36
32

account, or any error therein, shall not in any manner affect the obligation of
the Borrower to pay (with applicable interest) the loans made to the Borrower
by such Bank in accordance with the terms of this Credit Agreement.

2.11 Procedure for Borrowing. The Borrower may borrow Loans
during the Drawdown Period on a date on which a drawing occurs under a Letter
of Credit in a principal amount not in excess of the amount of such drawing.
Upon receipt of notice of such a drawing from the Issuing Bank of such Letter
of Credit the Administrative Agent shall promptly notify each Bank thereof.
Each Bank will make the amount of its pro rata share of each borrowing
available to the Administrative Agent for the account of the Borrower at the
office of the Administrative Agent designated by the Administrative Agent in
the Administrative Agent's notice aforesaid prior to 12:00 noon (according to
the time of the place where such office of the Administrative Agent is located)
on the relevant borrowing date in funds immediately available to the
Administrative Agent as the Administrative Agent may direct. The Borrower
hereby irrevocably directs that the proceeds of all such loans will immediately
thereafter be paid to the Issuing Bank of such Letter of Credit by the
Administrative Agent, on behalf of the Borrower, in like funds as received by
the Administrative Agent, in payment of the Reimbursement Obligations arising
from such drawing. All Loans shall be initially made as ABR Rate Loans, unless
the Borrower shall have provided an irrevocable notice of borrowing to the
Agent prior to 12:00 noon, New York City time, (a) three Business Days prior to
the borrowing date, in the case of Eurodollar Loans or (b) two Business Days
prior to the borrowing date, in the case of CD Rate Loans, specifying (i) the
borrowing date, (ii) whether the borrowings are to be Eurodollar Loans, CD Rate
Loans, ABR Rate Loans or a combination thereof and (iii) if the borrowing (or
any portion thereof) is a Eurodollar Loan or a CD Rate Loan, the length of the
initial Interest Period or periods therefor (subject to the definitional
provisions hereof).

2.12 Reduction of Commitments. (a) All payments by the
Borrower in respect of principal amounts of Reimbursement Obligations (other
than those paid with the proceeds of Loans) and of Loans, including prepayments
pursuant to subsection 2.13, shall reduce permanently the amount of the
Commitments then in effect.

(b) The Borrower shall have the right, upon not less than
three Business Days' written, telecopy or telephone notice (to be confirmed
promptly in writing) to the Administrative Agent, to from time to time
terminate or reduce the Commitments by an amount not exceeding the amount of
the then Available Commitments. Any such reduction by the Borrower shall be in
an amount of $5,000,000 or a whole multiple thereof and shall reduce
permanently the amount of the Commitments then in effect. Termination of the
Commitments shall also terminate the obligation of the Issuing Banks to issue
the Letters of Credit.

<PAGE> 37
33

2.13 Prepayments. (a) If, following a determination of the
Approved Borrowing Base resulting in a reduction thereof, Consolidated Debt
exceeds such reduced Approved Borrowing Base (any such excess on the date of
such determination (solely to the extent of such reduction), as decreased by
any subsequent reduction in Consolidated Debt or increase in the Approved
Borrowing Base, a "Permitted Shortfall"), the Borrower shall, on the date which
is six months following the date of such determination, prepay Reimbursement
Obligations and/or Loans in an aggregate principal amount equal to the amount
of such Permitted Shortfall, if any, on such date of prepayment. If
Consolidated Debt exceeds the Approved Borrowing Base as a result of the
incurrence of Reimbursement Obligations and/or Loans hereunder, the Borrower
shall, on the date which is 60 days following the date of such incurrence,
prepay Reimbursement Obligations and/or Loans in an aggregate principal amount
equal to the amount, if any, by which Consolidated Debt exceeds the Approved
Borrowing Base on such date of prepayment (excluding any Permitted Shortfall
which is subject to prepayment pursuant to the immediately preceding sentence).
If Consolidated Debt exceeds the Approved Borrowing Base other than as a result
of (i) a determination of the Approved Borrowing Base resulting in a reduction
thereof or (ii) the incurrence of Reimbursement Obligations and/or Loans
hereunder, the Borrower shall immediately prepay Reimbursement Obligations
and/or Loans in an aggregate principal amount equal to the amount of such
excess until such excess has been reduced to zero (whether such reduction
results from such prepayments, from other reductions in Consolidated Debt or
otherwise).

(b) The Borrower may as provided in this subsection at any
time and from time to time prepay the Loans, in whole or in part, without
premium or penalty, upon at least three Business Days' prior written or
telecopy notice to the Administrative Agent, specifying the date and amount of
prepayment. Prepayments of Loans shall first be applied to ABR Rate Loans to
the extent thereof, before prepayment of Eurodollar Loans or CD Rate Loans.
Prepayment of any of the Eurodollar Loans or CD Rate Loans may only be made
upon the last day of the relevant Interest Period. Upon receipt of such
notice, the Administrative Agent shall promptly notify each Bank thereof. The
payment amount specified in such notice shall be due and payable on the date
specified, together with accrued interest to such date on the amount prepaid.
Partial optional prepayments of Loans shall be in an aggregate principal amount
of $5,000,000 or a whole multiple thereof. All amounts of Loans prepaid may
not be reborrowed.

2.14 Interest Rates and Options. (a) The Loans may be (i)
Eurodollar Loans, (ii) ABR Rate Loans, (iii) CD Rate Loans or (iv) a
combination thereof, as determined by the Borrower pursuant to subsection 2.11
or this subsection 2.14.

<PAGE> 38
34

(b) The entire outstanding principal amount of the Loans
hereunder shall bear interest at one of the following rates per annum, or a
combination thereof, until repaid in full:

(i) ABR Rate Loans shall bear interest at a
rate per annum equal to the ABR Rate plus the Applicable
Margin;

(ii) Eurodollar Loans shall bear interest at a
rate per annum equal to the Eurodollar Rate determined by the
Administrative Agent for the relevant Eurodollar Interest
Period plus the Applicable Margin; and

(iii) CD Rate Loans shall bear interest at a rate
per annum equal to the CD Rate determined by the
Administrative Agent for the relevant CD Interest Period plus
the Applicable Margin.

The rates specified in clauses (i), (ii) and (iii) shall apply until the unpaid
principal amount of any Loan shall become due and payable (whether at the
stated maturity, by acceleration or otherwise), and thereafter such principal
amount not paid when due shall bear interest at 2% per annum above the rate
otherwise applicable thereto until paid in full, except that each Eurodollar
Loan and CD Rate Loan not paid when due shall be automatically and irrevocably
converted into an ABR Rate Loan on the last day of the Interest Period therefor
in effect when such amount becomes due and payable.

(c) A conversion to an ABR Rate Loan may occur on any
Business Day upon irrevocable telephonic notice (confirmed in writing) received
by the Administrative Agent prior to 12:00 noon (New York City time) on such
Business Day, provided that conversions from any Eurodollar Loan or CD Rate
Loan must occur on the last day of the current Interest Period therefor.

(d) A continuation as, or conversion to, one or more
Eurodollar Loans may occur on any Business Day upon irrevocable telephonic
notice (confirmed in writing) received by the Administrative Agent prior to
12:00 noon (New York City time) on the third Business Day prior to the first
day of the Eurodollar Interest Period therefor, provided that no continuation
as or conversion to a Eurodollar Loan may be made upon the occurrence and
during the continuance of a Default or an Event of Default, and provided,
further, that any continuation as a Eurodollar Loan or conversion from a CD
Rate Loan to a Eurodollar Loan must occur on the last day of the current
Interest Period for such continued or converted Loan.

(e) A continuation as, or conversion to, one or more CD Rate
Loans may occur on any Business Day upon irrevocable telephonic notice
(confirmed in writing) received by the Administrative Agent prior to 12:00 noon
(New York City time) on the second Business Day prior to the first day of the
Interest

<PAGE> 39
35

Period therefor, provided that no continuation as or conversion to a CD Rate
Loan may be made upon the occurrence and during the continuance of a Default or
an Event of Default, and provided, further, that any continuation as a CD Rate
Loan or conversion from a Eurodollar Loan to a CD Rate Loan must occur on the
last day of the current Interest Period for such continued or converted Loan.

(f) The minimum principal amount to which any such
election upon conversion or continuation may apply if more than one category of
interest rate option is then in effect shall be at least $5,000,000 (i.e., the
ABR Rate Loans, each Eurodollar Loan and each CD Rate Loan shall each have a
minimum principal amount of $5,000,000 unless only one such option applies to
the entire principal amount then outstanding).

(g) Interest shall be payable on each Interest Payment
Date.

2.15 Computation of Interest and Fees; Funding Procedures.
(a) Interest on ABR Rate Loans and commitment fees shall be calculated on the
basis of a 365- (or 366- as the case may be) day year for the actual number of
days elapsed. Interest on Eurodollar and CD Rate Loans shall be calculated on
the basis of a 360-day year for the actual number of days elapsed. The
Administrative Agent shall notify the Borrower of each determination of a
Eurodollar Rate or CD Rate. Any change in the interest rate on a Loan shall
become effective as of the opening of business on the day on which such change
shall become effective. The Administrative Agent shall notify the Borrower and
the Banks of the effective date and the amount of each such change in the
interest rate on a Loan.

(b) Each determination of an interest rate by the
Administrative Agent pursuant to any provision of this Credit Agreement shall
be conclusive and binding on the Borrower in the absence of manifest error.

(c) References to the purchase of deposits in the
inter-bank eurodollar market are included only for the purpose of determining
the rate of interest to be paid upon Eurodollar Loans by reference to rates
prevailing in such market. Each Bank shall be entitled to fund the loans
hereunder in any manner it sees fit, but each Eurodollar Rate and other
provisions applicable to Eurodollar Loans shall be construed and applied upon
the conclusive assumption that each Bank actually funded such portions through
the purchase of interbank eurodollar deposits having a term corresponding to
the relevant Interest Periods and through the transfer of such deposits from a
non-United States office to a United States office.

2.16 Inability to Determine Interest Rate. In the event that
the Administrative Agent shall have determined (which determination shall be
conclusive and binding upon the Borrower)

<PAGE> 40
36

that by reason of circumstances affecting the interbank eurodollar market or
the domestic certificate of deposit market, adequate and reasonable means do
not exist for ascertaining the Eurodollar Rate or the CD Rate for any
Eurodollar or CD Interest Period for (a) a proposed loan that the Borrower has
requested be made as a Eurodollar or CD Rate Loan, (b) a Eurodollar or CD Rate
Loan that will result from the requested conversion into a Eurodollar or CD
Rate Loan or (c) the continuation of a Eurodollar or CD Rate Loan as such for
an additional Interest Period (any such Eurodollar or CD Rate Loan with an
Interest Period so affected being herein called an "Affected Loan"), the
Administrative Agent shall forthwith give telephone or telecopy notice of such
determination, confirmed in writing, to the Borrower at least one day prior to,
as the case may be, the requested borrowing or conversion date for such
Affected Loan or the first day of a requested succeeding Interest Period. If
such notice is given, (i) any requested Affected Loan shall be made as an ABR
Rate Loan unless the Borrower cancels its request therefor prior to the
relevant borrowing date, (ii) any such conversion into an Affected Loan shall
not be effected and (iii) any outstanding Affected Loan shall be converted, on
the last day of the then current Interest Period therefor, into any other
interest option permitted by subsection 2.14 which is not so affected as
selected by the Borrower. Until such notice has been withdrawn by the
Administrative Agent, no further borrowings as or conversions to Affected Loans
may be made.

2.17 Pro Rata Treatment and Payments. (a) Each borrowing by
the Borrower from the Banks, each payment (including each prepayment) by the
Borrower on account of the principal of and interest on the Loans and on
account of any fee or commission hereunder for the account of the Banks and any
reduction of the Commitments of the Banks hereunder shall be made pro rata
according to the original Commitments, except that payments specifically for
the account of a particular Bank under the terms of subsections 2.18, 2.19,
2.20 or 2.21 or for the account of an Issuing Bank shall be made to such Bank
or Issuing Bank.

(b) All payments (including prepayments) to be made by
the Borrower on account of principal (including Reimbursement Obligations),
interest and fees shall be made without setoff or counterclaim and shall be
made to the Administrative Agent on behalf of the Banks or an Issuing Bank, as
the case may be, at the Administrative Agent's office located at Chemical Bank,
Agent Bank Services Group, 140 East 45th Street, New York, New York 10017,
Attention Frank Giacalone, Mitchell Energy Corporation Clearing Account,
#323220312, at or before 12:00 noon, New York time, for the account of the
Banks or an Issuing Bank, as the case may be, in lawful money of the United
States of America and in immediately available funds. The Administrative Agent
shall distribute such payments to the Banks or Issuing Bank, as the case may
be, entitled thereto promptly upon receipt in like funds as received. If any
payment hereunder (other than payments on the Eurodollar Loans) becomes due and
payable on a day other than

<PAGE> 41
37

a Business Day, such payment shall be extended to the next succeeding Business
Day and, with respect to payments of principal, interest thereon shall be
payable at the then applicable rate during such extension. If any payment on a
Eurodollar Loan becomes due and payable on a day other than a Business Day, the
maturity thereof shall be extended to the next succeeding Business Day unless
the result of such extension would be to extend such payment into another
calendar month in which event such payment shall be made on the immediately
preceding Business Day.

2.18 Illegality. Notwithstanding any other provisions
herein, if any law, regulation or treaty, or directive of a central bank or
other monetary authority, or any change therein or in the interpretation or
application thereof, shall make it unlawful for any Bank to make or maintain
Eurodollar Loans as contemplated by this Credit Agreement, the Commitment of
such Bank hereunder to make Eurodollar Loans and to convert its portion of ABR
Rate or CD Rate Loans to Eurodollar Loans shall forthwith be cancelled and any
loans then outstanding as Eurodollar Loans, if any, shall be converted
automatically to ABR Rate Loans. If any such conversion of a Eurodollar Loan
is made on a day which is not the last day of an Interest Period, the Borrower
shall pay to such Bank, upon its request, such amount or amounts as may be
necessary to compensate it for any costs incurred by such Bank in making any
such conversion prior to the last day of an Interest Period pursuant to
subsection 2.20. A certificate as to any additional amounts payable pursuant
to the foregoing sentence submitted by such Bank to the Borrower shall be
conclusive absent manifest error.

2.19 Increased Costs. (a) In the event that any applicable
law, treaty or governmental regulation, or any change therein or in the
interpretation or application thereof or compliance by any Bank with any
request or directive (whether or not having the force of law) from any central
bank or other Governmental Authority:

(i) does or shall subject such Bank to any tax
of any kind whatsoever with respect to this Credit Agreement,
any L/C Documentation, any Letter of Credit or any loan
hereunder, or change the basis of taxation of payments to such
Bank of principal, commitment fee, interest or any other
amount payable hereunder (except for changes in the rate of
tax on the overall net income of such Bank);

(ii) does or shall impose, modify or hold
applicable any reserve, special deposit, compulsory loan or
similar requirement against assets held by, or deposits or
other liabilities in or for the account of, advances or loans
by, or other credit extended by, or any other acquisition of
funds by, any office of such Bank which are not otherwise
taken into account in

<PAGE> 42
38

computing the Eurodollar or CD Rate for such Interest Period; or

(iii) does or shall impose on such Bank any other condition;

and the result of any of the foregoing is to increase the cost to such Bank of
making, renewing or maintaining advances or extensions of credit as Eurodollar
or CD Rate Loans or issuing or participating in Letters of Credit or to reduce
any amount receivable hereunder in respect of any thereof then, in any such
case, the Borrower shall promptly pay such Bank, upon its demand, such
additional amount which will compensate it for such additional cost or reduced
amount receivable which such Bank deems to be material and in the amount
determined by it to be applicable to this Credit Agreement or its loans
hereunder. If any Bank becomes entitled to claim any additional amounts
pursuant to this subsection 2.19, it shall promptly notify the Borrower of the
event by reason of which it has become so entitled. A certificate as to any
additional amounts payable pursuant to this subsection 2.19 submitted by any
Bank to the Borrower shall be conclusive absent manifest error.

(b) In the event that any Bank shall have determined that
the adoption of any law, rule or regulation regarding capital adequacy, or any
change therein or in the interpretation or application thereof or compliance by
any Bank with any request or directive regarding capital adequacy (whether or
not having the force of law) from any central bank or Governmental Authority,
does or shall have the effect of reducing the rate of return on such Bank's
capital as a consequence of its obligations hereunder or under any Letter of
Credit to a level below that which such Bank could have achieved but for such
adoption, change or compliance (taking into consideration such Bank's policies
with respect to capital adequacy) by an amount deemed by such Bank to be
material, then from time to time, after submission by such Bank to the Borrower
(with a copy to the Administrative Agent) of a written request therefor,
showing in reasonable detail the assumptions upon which such amount was
computed (provided that such Bank shall not be required to disclose information
not available to the public), the Borrower shall pay to such Bank such
additional amount or amounts as will compensate such Bank for such reduction.
In such event, the Borrower shall have the right, upon payment to such Bank of
such additional amount or amounts which have accrued, to prepay in full the
loans made by such Bank and to terminate the Commitment of such Bank; provided
that upon such termination, the Borrower shall have replaced such Bank as a
Bank under this Credit Agreement with another bank with the consent of the
Issuing Banks and the Administrative Agent, or by increasing the Commitments of
some or all of the other Banks with their consent. To effect such replacement,
MND, the Borrower, the Administrative Agent, the Bank to be replaced and the
designated bank shall enter into a supplement to this Credit Agreement, which
designates the new

<PAGE> 43
39

bank as a Bank, fixes its Commitment as such, releases the Bank to be replaced
from its obligations under the Credit Agreement and contains the agreement of
the designated Bank to become a party to the Credit Agreement with all rights,
duties and obligations of a Bank hereunder and provides for the effective date
of such supplement to be the date the Commitment of the Bank being replaced is
terminated. The agreements in this subsection 2.19 shall survive termination
of this Credit Agreement, expiration of the Letters of Credit and payment of
the Loans and the Reimbursement Obligations until the obligations of the
Borrower under this subsection have been paid in full.

2.20 Reemployment Costs. The Borrower agrees to indemnify
each Bank and to hold each Bank harmless from any cost, loss or expense which
each Bank may sustain or incur as a consequence of (a) default by the Borrower
in making a borrowing, continuation or conversion after it has given a notice
in accordance with subsection 2.14, (b) receipt by the Administrative Agent of
a payment of principal of a Eurodollar or CD Rate Loan on a day which is not
the last day of an Interest Period therefor, and (c) conversion of all or any
portion of a Eurodollar Loan or a CD Rate Loan on a day which is not the last
day of an Interest Period therefor. In each case, such costs, losses or
expenses shall include but not be limited to any interest or other amounts
payable by such Bank to lenders of funds obtained by it in order to make or
maintain its portion of the Eurodollar and CD Rate Loans and the cost of
liquidating any time deposit prior to the maturity thereof. This agreement
shall survive termination of this Credit Agreement and payment of the Loans
until the obligations of the Borrower under this subsection 2.20 shall have
been paid in full.

2.21 Taxes. All payments made by the Borrower under this
Credit Agreement shall be made free and clear of, and without reduction for or
on account of, any present or future income, stamp or other taxes, levies,
imposts, duties, charges, fees, deductions, withholdings, restrictions or
conditions of any nature whatsoever now or hereafter imposed, levied,
collected, withheld or assessed by any country (or by any political subdivision
or taxing authority thereof or therein) excluding income and franchise taxes
now or hereafter imposed by the United States of America or any political
subdivision or taxing authority thereof or therein, or by the country in which
any Bank's Eurodollar Lending Office is located or any political subdivision or
taxing authority thereof or therein (such non-excluded taxes being called
"Foreign Taxes"). If any Foreign Taxes are required to be withheld from any
amounts payable to any Bank (including any Issuing Bank) hereunder, the amounts
so payable to such Bank shall be increased to the extent necessary to yield to
such Bank (after payment of all Foreign Taxes) interest or any such other
amounts payable hereunder at the rates or in the amounts specified in this
Credit Agreement. Whenever any Foreign Tax is payable by the Borrower, as
promptly as possible thereafter, the Borrower shall send the Administrative

<PAGE> 44
40

Agent an original official receipt showing payment thereof. This agreement
shall survive termination of this Credit Agreement and payment of the Loans and
Reimbursement Obligations until the obligations of the Borrower under this
subsection have been paid in full.

2.22 Use of Proceeds. The Borrower agrees that the proceeds
of the loans obtained by the Borrower hereunder shall be used solely to repay
Reimbursement Obligations outstanding hereunder.

2.23 Acknowledgement. The Borrower hereby acknowledges that
all funds paid to a beneficiary of a Letter of Credit pursuant to a drawing
thereunder (including any investment income earned on such funds) shall, to the
extent they exceed the total amount of all loss, cost and expense of such
beneficiary under the related judgment bond, be the property of the Issuing
Bank of such Letter of Credit (and of the other Banks to the extent of their
participation pursuant to subsection 2.4) and pursuant to such Letter of Credit
shall be repaid solely to such Issuing Bank for its (and such other Banks') own
account, and further acknowledges that all such excess funds shall be the
property solely of such Issuing Bank (and such other Banks) and not of the
Borrower; provided that any such excess funds shall be first, applied to the
payment (or prepayment) of all outstanding Reimbursement Obligations and Loans
(whether or not then due and owing) and all other amounts owing under the
Credit Documents; second, to the extent of any remainder after such
application, if an Event of Default has occurred and is continuing, deposited
in the Letter of Credit Account pursuant to subsection 7.4(b); and third, to
the extent of any remainder after the applications specified in clauses "first"
and "second", paid over to the Borrower.

SECTION 3. REPRESENTATIONS AND WARRANTIES

In order to induce each Bank to enter into this Credit
Agreement and to issue or participate in the Letters of Credit and make the
loans to be made by it hereunder, each of MND and the Borrower represents and
warrants to each Bank that:

3.1 Organization and Qualification. MEDC, MND and MEC and
each of their Restricted Subsidiaries is a corporation duly organized, validly
existing and in good standing under the laws of its respective jurisdiction of
incorporation, and each is duly qualified and in good standing in each
jurisdiction wherein the conduct of its respective business or the ownership of
its respective properties requires such qualification. MND owns, directly, all
of the issued and outstanding capital stock of MEC and, directly or through
Restricted Subsidiaries, all of the issued and outstanding stock of each other
Material Subsidiary, in each case free and clear of any Liens and each of MND,
MEC, and each other Material Subsidiary has the corporate power and

<PAGE> 45
41

authority and the legal right to own its property, to lease and encumber its
property and to conduct the business in which it is currently engaged.
Schedule 2 lists all Restricted Subsidiaries of MND as of the date hereof.

3.2 Corporate Power and Authorization. The Borrower has the
corporate power to make, deliver and perform this Credit Agreement and the L/C
Documentation and to obtain extensions of credit hereunder and thereunder, and
has taken all necessary corporate action to authorize the extensions of credit
under this Credit Agreement and under the L/C Documentation on the terms and
conditions hereof and thereof and the execution, delivery and performance of
this Credit Agreement and the L/C Documentation. MND has the corporate power
to make, deliver and perform this Credit Agreement and has taken all necessary
corporate action to authorize the execution, delivery and performance of this
Credit Agreement. This Credit Agreement constitutes, and (in the case of the
Borrower) any L/C Documentation when executed will constitute, a valid
obligation of each of MND and the Borrower legally binding upon it and
enforceable in accordance with its respective terms. No consent of any other
party (including, without limitation, stockholders of MND or the Borrower) and
no consent, license, approval or authorization of, or registration or
declaration with, any governmental authority, bureau or agency is currently
required in connection with the execution, delivery, performance, validity or
enforceability of this Credit Agreement and the L/C Documentation.

3.3 No Legal Bar on Borrower. The execution, delivery and
performance of this Credit Agreement and the L/C Documentation, and the
extensions of credit hereunder and thereunder, will not violate any provision
of any existing law or regulation (including, without limitation, any Texas
usury law) in each case applicable to MND or the Borrower, or order or decree
of any court, Governmental Authority, bureau or agency, or of the articles of
incorporation or of the by-laws of MND or the Borrower, or of any material
mortgage, indenture, security agreement, contract, undertaking or other
agreement to which the Borrower, MND, MEDC or any of their Subsidiaries is a
party or which purports to be binding upon them or any of their property or
assets, and will not result in any default under, violation of, or the creation
or imposition of any lien, charge or encumbrance on, or security interest in,
any of their properties pursuant to the provisions of, any such material
undertaking or other agreement.

3.4 No Material Litigation. No litigation or administrative
proceeding of or before any Governmental Authority is currently pending, nor,
to the knowledge of MND and the Borrower, is any litigation or proceeding
currently threatened, against MND, MEC, MEDC or any of their Subsidiaries or
any of their properties which has or is likely to have a Material Adverse
Effect, other than as disclosed in the financial statements referred to in
subsection 3.9.

<PAGE> 46
42

3.5 Compliance With Other Instruments; None Burdensome. None
of MEDC, MND, nor any Subsidiary of MND is in violation of any term or
provision of its charter or by-laws or in violation of any evidence of
indebtedness, judgment, decree or order or of any statute, rule, governmental
regulation, franchise, certificate, permit or the like applicable to MEDC, MND
or any such Subsidiary or in violation of any term of any other agreement or
instrument applicable to MEDC, MND, or any such Subsidiary which violation,
individually or in the aggregate, has a Material Adverse Effect; no such
violation of any statute, rule, governmental regulation, franchise,
certificate, permit or the like or any term of any agreement or instrument,
individually or in the aggregate, has or will have a Material Adverse Effect;
the execution, delivery and performance of this Credit Agreement and the L/C
Documentation will not result in any violation of or be in conflict with or
constitute a material default under any such term, or result in the creation
of, or the arising of any obligation to create, any Lien upon any of the
properties or assets of MND, MEC or any of their Subsidiaries pursuant to any
such term; and there is no such term which has, or in the future (to the best
of the knowledge of MND and MEC) is likely to have, a Material Adverse Effect.

3.6 Ownership of Properties; Liens. MND, the Borrower, their
Subsidiaries and MEDC have valid leases or good and marketable title to
substantially all their respective properties and assets, real and personal,
subject to no mortgage, security interest, pledge, Lien, charge, encumbrance or
title retention or other security agreement or arrangement of any nature
whatsoever, except as permitted by subsection 6.1 of this Credit Agreement or
as described in Schedule 3 annexed hereto.

3.7 No Default. None of MND, MEC, MEDC nor any of their
Material Subsidiaries is in default in the payment or performance of any of its
obligations for borrowed money, and no Default or Event of Default (including
after giving effect to the execution of this Credit Agreement and the
extensions of credit hereunder) has occurred and is continuing with respect to
any of them, except for (i) non-recourse indebtedness for borrowed money or the
deferred purchase price of assets where the assets, respectively, of MEC, MGS
or MEDC securing the same are not, in MEC'S, MGS's or MEDC's good faith
estimation, necessary in, or a material part of, MEC's, MGS's or MEDC's
business, and (ii) obligations for borrowed money having an outstanding
principal amount (either individually or as a part of a related series) of
$15,000,000 or less (including any obligations under any conditional sale or
other title retention agreement or any obligation issued or assumed as full or
partial payment for properties transferred to MEDC or any of the Material
Subsidiaries, whether or not secured by a purchase money security interest).

3.8 Taxes. MEDC, MND and each of the Restricted Subsidiaries
has filed all federal income tax returns required to

<PAGE> 47
43

be filed and paid all taxes shown thereon to be due, including interest and
penalties, or provided adequate reserves for payment thereof. All other tax
returns of MEDC, MND and the Restricted Subsidiaries the filing of which is
required by any law of the United States or of any state, municipality or
political subdivision thereof or by any foreign taxing authority and of which
the failure to file might have a Material Adverse Effect have been duly filed
and all taxes, assessments, contributions, fees and other governmental charges
of material amount (other than those presently payable without penalty or
interest and those currently being contested in good faith by appropriate
proceedings) which have been asserted against MEDC, MND or the Restricted
Subsidiaries or upon any of their respective properties or assets which are due
and payable have been paid. Except as disclosed in the most recent financial
statements delivered pursuant to subsection 3.9 or 5.1 hereof, none of MEDC,
MND or any of the Restricted Subsidiaries is a party to any material action or
proceeding by any governmental authority for the assessment or collection of
taxes, nor has any material claim for assessment or collection of taxes been
asserted against MEDC, MND or any of the Restricted Subsidiaries, other than
those which are not likely to have a Material Adverse Effect and those
currently being contested in good faith by appropriate proceedings.

3.9 Financial Condition. (a) The consolidated balance
sheet of MEDC and its Subsidiaries and the consolidating and consolidated
balance sheets of MND and its Subsidiaries at January 31, 1995, and the
respective related statements of consolidated (and, in the case of MND,
consolidating) earnings and consolidated changes in the financial position for
the fiscal year ended January 31, 1995, which consolidated statements are
certified by Arthur Andersen & Co., are complete and correct in all material
respects and present fairly the financial position of MEDC and of MND and their
respective Subsidiaries as at January 31, 1995 and the consolidated (or
consolidating, as the case may be) results of their respective operations for
the fiscal year then ended. All of the foregoing consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles applied on a basis consistently maintained throughout the period
involved and prior periods.

(b) The unaudited consolidated balance sheet of MEDC and its
Subsidiaries and the unaudited consolidating and consolidated balance sheets of
MND and its Subsidiaries at October 31, 1995, and the respective related
unaudited statements of consolidated (and, in the case of MND, consolidating)
earnings and consolidated changes in financial position for the nine months
ended October 31, 1995, are complete and correct in all material respects and
present fairly the financial position of MEDC and of MND and their respective
Subsidiaries at October 31, 1995 and the consolidated (or consolidating, as the
case may be) results of their operations for the nine months then ended.

<PAGE> 48
44

MEDC's financial statements have been prepared 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 from MEDC's statements pursuant to such rules and regulations, although
management believes that the disclosures are adequate to make the information
presented not misleading. The financial statements of MEDC and MND include all
adjustments which, in the opinion of management, are necessary for a fair
presentation of the consolidated (and, in the case of MND, consolidating)
financial position and consolidated (and, in the case of MND, consolidating)
results of operations of MEDC and of MND and their respective Subsidiaries for
the periods presented.

3.10 Certain Acts. To the best of its knowledge, MEDC, MND
and their Subsidiaries have conducted their business in substantial compliance
with the Emergency Petroleum Allocation Act of 1973 and the Federal Energy
Administration Act of 1974 and the rules and regulations promulgated under each
such Act and have incurred no liability in connection therewith which is likely
to have a Material Adverse Effect.

3.11 Status Under Other Federal Laws and Regulations. MEDC,
MND, MEC and the other Material Subsidiaries are not, and are not directly or
indirectly controlled by or acting on behalf of any Person which is, an
"investment company", within the meaning of the Investment Company Act of 1940.
Neither MEDC, MEC, MND nor any other Subsidiary of MEDC is a "gas utility
company", a "holding company", or a "subsidiary company" of a "holding company"
or an "affiliate" of a "holding company", as such terms are defined in the
Public Utility Holding Company Act of 1935 and the rules and regulations
thereunder. No part of the proceeds of the loans hereunder will be used,
directly or indirectly, for the purpose, whether immediate, incidental, or
ultimate, (i) of purchasing any equity security of a class registered pursuant
to Section 12 of the Securities Exchange Act of 1934 or (ii) of "purchasing" or
"carrying" any "margin stock" within the meaning of Regulation U of the Board
of Governors of the Federal Reserve System or reducing or retiring any Debt
which was originally incurred to purchase any such margin stock, or engaging in
any transaction prohibited by any other rule or regulation of said Board.

3.12 Disclosure. Neither this Credit Agreement, nor any
certificate, report, statement or document furnished in writing to the
Administrative Agent or any Bank by or on behalf of MEDC, MND, MEC or any other
Material Subsidiary pursuant hereto nor any other certificate, report,
statement or document furnished in writing to any of them in connection
herewith, at the date the same were so furnished, or as subsequently

<PAGE> 49
45

supplemented, contains any untrue statement of a material fact or omits to
state a material fact necessary to make the statements contained herein and
therein not misleading. There is no fact known to MEDC, MND or MEC which has
or, insofar as MEDC, MND or MEC has knowledge, will be likely to have a
Material Adverse Effect, which MEDC, MND or MEC has not disclosed to the Banks
in writing.

3.13 ERISA. No Reportable Event has occurred during the
immediately preceding six-year period with respect to any Plan, and each Plan
has complied with and has been administered in all material respects in
accordance with applicable provisions of ERISA and the Code. The present value
of all benefits vested under each Single Employer Plan maintained by MND, MEC
or any Commonly Controlled Entity (based on those assumptions used to fund such
Plan) did not, as of the last annual valuation date applicable thereto, exceed
the value of the assets of such Plan allocable to such vested benefits.
Neither MND, MEC nor any Commonly Controlled Entity has any obligations in
respect of a Multiemployer Plan, and neither MND, MEC nor any Commonly
Controlled Entity will have any obligations in respect of Multiemployer Plan
for the duration of this Credit Agreement.

SECTION 4. CONDITIONS PRECEDENT

4.1 Conditions to Initial Extensions of Credit. The
agreement of each Bank to make the initial extension of credit requested to be
made by it is subject to the satisfaction, immediately prior to or concurrently
with the making of such extension of credit on the Closing Date, of the
following conditions precedent:

(a) Credit Documents. The Administrative Agent shall have
received (i) this Credit Agreement, executed and delivered by a duly
authorized officer of each of the Borrower and MND, with a counterpart
for each Bank and (ii) each of the Guarantees, the Subsidiary
Guarantee and the Subordination Agreement, each executed and delivered
by a duly authorized officer of each party thereto, with a counterpart
or a conformed copy for each Bank.

(b) Fees. The Administrative Agent shall have received the
fees to be received on the Closing Date.

(c) Corporate Proceedings. The Administrative Agent shall
have received, with a counterpart for each Bank, a copy of the
resolutions, in form and substance satisfactory to the Administrative
Agent, of the Board of Directors of each Credit Party authorizing (i)
the execution, delivery and performance of the Credit Documents to
which it is a party and (ii) the transactions contemplated thereunder,
certified by the Secretary or an Assistant Secretary of such Credit
Party as of the Closing Date, which certificate shall

<PAGE> 50
46

be in form and substance satisfactory to the Administrative Agent and
shall state that the resolutions thereby certified have not been
amended, modified, revoked or rescinded.

(d) Incumbency Certificates. The Administrative Agent shall
have received, with a counterpart for each Bank, a Certificate of each
Credit Party, dated the Closing Date, as to the incumbency and
signature of the officers of such Credit Party executing any Credit
Document, satisfactory in form and substance to the Administrative
Agent, executed by the President or any Vice President and the
Secretary or any Assistant Secretary of such Credit Party.

(e) Corporate Documents. The Administrative Agent shall have
received, with a counterpart for each Bank, true and complete copies
of the certificate of incorporation and by-laws of each Credit Party,
certified as of the Closing Date as complete and correct copies
thereof by the Secretary or an Assistant Secretary of such Credit
Party.

(f) Legal Opinions. The Administrative Agent shall have
received, with a counterpart for each Bank, the executed legal opinion
of Thomas P. Battle, Esq., Counsel to the Borrower, MND, MEDC, MGS and
MMC, substantially in the form of Exhibit B.

4.2 Conditions to Each Extension of Credit . The agreement
of each Bank to make any extension of credit requested to be made by it on any
date (including, without limitation, its initial extension of credit and the
making of any loan, but not including any extension or renewal of any Letter of
Credit as provided in subsection 2.1) is subject to the satisfaction of the
following conditions precedent:

(a) Representations and Warranties. Each of the
representations and warranties made by MEDC, MND, the Borrower and any
of their Subsidiaries in or pursuant to the Credit Documents shall be
true and correct in all material respects on and as of such date as if
made on and as of such date.

(b) No Default. No Default (other than a Default arising
solely from the existence of an Outstanding Judgment which will be
stayed pending appeal upon the issuance of the requested Letter(s) of
Credit and related judgment bond and, solely in the case of the making
of any loan, other than a Default under subsection 6.2 arising solely
from Consolidated Debt being greater than the Approved Borrowing Base
under the circumstances described in clause (i) or (ii) of such
subsection) or Event of Default shall have occurred and be continuing
on such date or after giving effect to the extension of credit
requested to be made on such date.

<PAGE> 51
47

(c) Bonding Arrangements. If Letters of Credit are to be
issued, all bonding arrangements in respect of the judgment bonds to
be obtained in connection with such Letters of Credit and all
arrangements in respect of funds drawn under such Letters of Credit to
be held by the surety company and not paid immediately in the
Litigation shall be satisfactory to the Issuing Banks of such Letters
of Credit and to the Required Banks.

(d) Judgments, Verdicts and Settlements. The aggregate
amount of, without duplication, all (i) Outstanding Judgments, (ii)
Judgment Payments, (iii) Judgment Interest, (iv) Outstanding Verdicts
and (v) Settlements shall not exceed $500,000,000.

(e) Borrowing Certificate. The Administrative Agent shall
have received, with a counterpart for each Bank, a certificate of the
Borrower, dated the date of such extension of credit, substantially in
the form of Exhibit D, with appropriate insertions and attachments,
satisfactory in form and substance to the Administrative Agent,
executed by the President or any Vice President and the Secretary or
any Assistant Secretary of the Borrower.

Each Letter of Credit issued on behalf of the Borrower hereunder and each
borrowing by the Borrower hereunder shall constitute a representation and
warranty by the Borrower as of the date thereof that the conditions contained
in this subsection have been satisfied.

SECTION 5. AFFIRMATIVE COVENANTS

Each of MND and the Borrower covenants that from and after the
date hereof and so long as the Commitments are in effect or any Letter of
Credit remains outstanding or any amounts remain unpaid on account of the
Reimbursement Obligations or Loans:

5.1 Financial Statements; Reports. It shall furnish to each
Bank:

(a) as soon as practicable after the end of each of the
first three quarterly periods in each Fiscal Year of MND and of MEDC,
respectively, and in any event within 60 days thereafter, (i)
consolidating and consolidated balance sheets of MND and its
Restricted Subsidiaries and consolidated balance sheets of MEDC and
its Subsidiaries as at the end of such quarterly period, (ii)
consolidating and consolidated statements of earnings of MND and its
Restricted Subsidiaries and consolidated statements of earnings of
MEDC and its Subsidiaries for such quarterly period and for the
portion of the Fiscal Year ended with such quarterly period, setting
forth in each case of

<PAGE> 52
48

consolidated statements (beginning with such reports due for periods
ending on or after April 30, 1996), in comparative form, figures of
the corresponding periods of the previous Fiscal Year. In each
instance, such financial statements are to be presented in reasonable
detail and certified as complete and correct by a principal financial
or accounting officer of MND and of MEDC, respectively, subject to
year-end adjustments, provided, that, insofar as the information
pertaining to MEDC required to be delivered by this paragraph (a) is
contained in financial statements or reports furnished pursuant to
subsection 5.1(d), delivery of such financial statements or reports
pursuant to such subsection 5.1(d) shall constitute delivery of such
information pertaining to MEDC pursuant to this subsection 5.1(a);

(b) as soon as practicable after the end of each such
Fiscal Year (commencing with the Fiscal Year ending January 31, 1996),
and in any event within 120 days thereafter, consolidating and
consolidated balance sheets of MND and its Restricted Subsidiaries and
consolidated balance sheets of MEDC and its Subsidiaries as at the end
of such year and consolidating and consolidated statements of earnings
and consolidated statements of stockholders' equity of MND and its
Restricted Subsidiaries and consolidated statements of earnings and
stockholders' equity of MEDC and its Subsidiaries for such year,
setting forth in each case of consolidated statements, in comparative
form, figures for the previous Fiscal Year, all in reasonable detail
and, in the case of the aforesaid MND and MEDC consolidated
statements, certified by Accountants; and, in the case of the
aforesaid consolidating statements, certified by a principal financial
or accounting officer of MND, provided, that, insofar as the
information pertaining to MEDC required to be delivered by this
subsection 5.1(b) is contained in financial statements or reports
furnished pursuant to subsection 5.1(d), delivery of such financial
statements or reports pursuant to such subsection 5.1(d) shall
constitute delivery of such information pertaining to MEDC pursuant to
this subsection 5.1(b);

(c) promptly upon receipt thereof, copies of all detailed
reports with respect to any material inadequacies of accounting
controls or absences of accounting controls submitted to MEDC, MND or
any Restricted Subsidiaries by Accountants in connection with any
annual, special or interim audit of the books of MEDC, MND or any
Restricted Subsidiaries made by such Accountants;

(d) promptly upon transmission thereof, copies of all
financial statements, reports and proxy statements, if any, sent by
MEDC to its stockholders pursuant to the requirements of the
Securities Exchange Act of 1934, as amended, and of all regular and
periodic reports, if any,

<PAGE> 53
49

and any registration statement or prospectus filed by MEDC or any
Subsidiary of MEDC with the Securities and Exchange Commission or any
governmental authority succeeding to the functions of such Commission;

(e) immediately upon becoming aware of the existence of
any condition or event which constitutes a Default or an Event of
Default, a written notice specifying the nature and period of
existence thereof and the action MND and/or the Borrower is taking or
proposes to take with respect thereto;

(f) immediately upon becoming aware that the holder of
any Debt of MND or any Restricted Subsidiary has given notice or taken
any action with respect to a claimed default or event of default with
respect to such Debt, a written notice specifying the notice given or
such action taken by such holder and the nature of the claim, default
or event of default and the action MND or such Restricted Subsidiary
is taking or proposes to take with respect thereto;

(g) on or before each April 30 of each year, Appraisal
Reports on Proved Reserves of Oil and Gas Assets and Gas Processing
Plant Assets specifying the immediately preceding January 31 as the
Determination Date (such Appraisal Reports to be made by an Appraiser
with respect to at least 70% of the present value of such Proved
Reserves and by MND with respect to no more than 30% of the present
value of such Proved Reserves);

(h) together with each Appraisal Report delivered
pursuant to subsection 5.1(g), an Officers' Certificate, dated as of
the date it is delivered to the Banks, stating (i) that the
information set forth therein is complete in all material respects on
and as of the dates thereof, (ii) that the information furnished by
MND or any Affiliate of MND for use, or used by MND or any such
Affiliate, in connection with, or as a basis for, each such Appraisal
Report was and is complete and accurate in all material respects, and
(iii) in case more than one Appraisal Report is delivered pursuant to
subsection 5.1(g), that the summary of such Appraisal Reports for MND
and its Restricted Subsidiaries set forth in such Officers'
Certificate is complete and accurate in all material respects;

(i) with reasonable promptness, such other information
and data relating to the business, affairs and financial condition of
MND and its Restricted Subsidiaries and oil and gas, gas processing
plant, gas gathering and transmission and compression operations of
MEDC and its Subsidiaries as from time to time may reasonably be
requested by any Bank;

(j) on or before each May 31 of each year, an Officers'
Certificate, dated as of the date it is delivered to the Banks and
specifying the immediately preceding

<PAGE> 54
50

January 31 as the Determination Date, setting forth the discounted
projected net revenues from Gas Gathering and Transmission Assets;

(k) within 60 days after the end of each fiscal quarter,
a certificate setting forth the difference between the Approved
Borrowing Base and Consolidated Debt as at the end of such quarter,
including in reasonable detail the calculations used to make such
determination; and

(l) promptly upon (i) the rendering of any verdict or
entry of any Judgment against MEDC or any of its Subsidiaries in the
Litigation, (ii) any affirmance of any appeal of any such Judgment,
(iii) the entry by MEDC or any of its Subsidiaries into any settlement
with respect to the Litigation, or (iv) any other material development
in the Litigation which is a matter of public record or which MEDC is
required to disclose publicly, notice of and information regarding
such verdict, judgment, affirmance, settlement or other material
development, as the case may be.

5.2 Certificates as to Financial Matters, No Default, etc. .
The financial statements required by subsection 5.1 shall be accompanied by

(a) in the case of the financial statements of MND and
its Restricted Subsidiaries required by subsections 5.1(a) and (b), an
Officers' Certificate setting forth computations in reasonable detail
showing as at the end of such quarter or Fiscal Year:

(i) the Consolidated Tangible Net Worth of MEDC
and its Subsidiaries;

(ii) the Consolidated Current Assets and
Consolidated Current Liabilities of MND and its Restricted
Subsidiaries;

(iii) the Fixed Charge Ratio with respect to MND
and its Restricted Subsidiaries;

and stating that, based, upon such examination or investigation as the
officers signing such certificate shall have deemed necessary to
enable them to render an informed opinion in respect thereof, in their
opinion, no Default or Event of Default existed at any time during
such quarter or Fiscal Year and to the date of such certificate except
for those, if any, described in such certificate in reasonable detail,
with a statement of MND's or the Borrower's action with respect
thereto taken or proposed to be taken, and

(b) in the case of the financial statements of MND
required by subsection 5.1(b), a certificate of its Accountants
referred to therein to the effect that in making

<PAGE> 55
51

such Accountants' examination such Accountants have become aware of no
condition or event which constitutes a Default or an Event of Default,
or if such Accountants have become aware of any such condition or
event, specifying the nature and existence thereof.

The receipt by any Bank of the certificates and calculations referred to in
this subsection 5.2 shall not constitute a waiver by or estop or prejudice any
Bank with respect to any subsequent challenge it may have to any interpretation
by MND or the Borrower of the terms of this Credit Agreement.

5.3 Payment of Taxes, etc.; Observance of Legal Requirements;
Liens; Contests.

(a) It will duly pay and discharge or cause to be paid
and discharged, as the same shall become due and payable, all taxes,
assessments, rates, excises, levies, fees and other charges levied and imposed
upon or with respect to any property of it or any of its Subsidiaries, or upon
or with respect to any income or profits therefrom, or upon or measured by
income, profits or business of it or any of its Subsidiaries.

(b) It will promptly discharge or cause to be discharged
any mechanics', materialmen's, laborers', operators' or other similar Liens now
existing or hereafter created on the property of it and its Subsidiaries or any
part thereof.

(c) It will, and will cause each of its Subsidiaries to,
duly observe and comply in all material respects with all valid laws, statutes,
codes, acts, ordinances, orders, judgments, decrees, injunctions, rules,
regulations, certificates, franchises, permits, licenses, authorizations,
directions and requirements of all Federal, state, county, parish, municipal
and other governments and all governmental departments, commissions, boards,
courts, authorities, officials and officers, domestic or foreign, which now or
at any time hereafter may be applicable to it or its Subsidiaries or any of
their respective properties or operations or any part thereof, or any use,
manner of use or condition of their properties or any part thereof (including
applicable statutes, regulations, orders and restrictions relating to
environmental standards or controls).

(d) Nothing contained in this subsection 5.3 shall be
deemed to require MND or the Borrower to pay or discharge or cause to be paid
or discharged any such tax, assessment, rate, excise, levy, fee or charge, or
any mechanics', materialmen's, laborers', operators' or other similar Lien, or
to observe or comply with or to cause to be observed or complied with any such
legal requirement, so long as MND or the Borrower in good faith by appropriate
action promptly initiated and diligently conducted, shall contest or cause to
be contested the validity, amount, extent or application thereof, and MND or
the Borrower shall have set up on its books such reserve or other appropriate

<PAGE> 56
52

provision, if any, with respect thereto as shall be required by GAAP.

5.4 Notice of Default, Litigation, etc. . It shall promptly
give notice in writing to the Administrative Agent (which shall promptly give
such notice to each Bank) (a) of the occurrence of any Event of Default or
Default under this Credit Agreement or of the occurrence of any event of
default by MEDC, MND, MEC or any of their Subsidiaries under any other
obligation for borrowed money or (b) of the occurrence of any material
litigation or proceedings affecting MEDC, MND, MEC or any of their Subsidiaries
and of any dispute between MEDC, MND, MEC or any of their Subsidiaries and any
governmental regulatory body or any other party if such litigation, proceedings
or dispute might substantially interfere with the normal operations of the
total enterprise represented by MEDC and its Subsidiaries, or by MND, and its
Subsidiaries. As soon as possible and in any event within 30 days after MND or
the Borrower knows or has reason to know of the following events: (i) the
occurrence or expected occurrence of any Reportable Event with respect to any
Plan or any withdrawal from, or the termination or reorganization of, any Plan
or (ii) the institution of proceedings or the taking of any other action by the
PBGC, MND, the Borrower or any Commonly Controlled Entity, with respect to the
withdrawal from, or the terminating or reorganizing of, any Plan, it shall
deliver to the Administrative Agent and each Bank a certificate of the chief
financial officer of it setting forth the details thereof and the action that
it or the Commonly Controlled Entity proposes to take with respect thereto.

5.5 Insurance. It will keep or cause to be kept all of its
and its Restricted Subsidiaries' property and business of a character usually
insured by companies of established reputation similarly situated insured by
reputable insurance companies or associations of high standing against loss or
damage by fire and such other hazards and risks (including, but not limited to,
public liability and workmen's compensation) as are customarily insured against
by companies of established reputation similarly situated, in such amount as
such property and business is usually insured by such companies, and will
comply and will cause its Restricted Subsidiaries to comply with all the terms
and conditions of all insurance policies with respect to its and their property
and business or any part thereof and with all requirements of boards of
underwriters (or similar bodies) applicable thereto.

5.6 ERISA. It shall, and shall cause each of its
Subsidiaries to, substantially comply in all material respects with all
applicable provisions of ERISA.

5.7 Material Mineral Interests. It shall make available to
the Banks in its offices during working hours all of the following documents
pertaining to all material Mineral Interests of it and its Subsidiaries:

<PAGE> 57
53

(a) all computer runs and other geological or geophysical
data of the sorts used or useful in preparing an Appraisal Report; and

(b) any estimates (which MND or the Borrower may prepare
internally or have prepared for it) of the projected value, costs of
production or net present value associated with any such material
Mineral Interests.

5.8 Maintenance of Corporate Existence, Franchises, etc.
It will at all times maintain and keep and cause to be maintained and kept in
full force and effect its corporate existence, rights and franchises and the
corporate existence, rights and franchises of each of its Restricted
Subsidiaries, except as otherwise permitted by subsections 6.6 and 6.7 and
except that the corporate existence, rights and franchises of any Restricted
Subsidiary (other than, subject to the provisions of subsection 6.7, the
Material Subsidiaries) or the rights and franchises of MND or the Borrower may
be abandoned or terminated if, in the good faith opinion of its Board, such
abandonment or termination is in the best interests of it and not prejudicial
in any material respect to the Banks.

5.9 Maintenance and Improvement of Property. It will, and
will cause each of its Restricted Subsidiaries to, at all times, maintain,
develop and operate, or cause to be maintained, developed and operated, its oil
and gas properties in a good and workmanlike manner and will observe and comply
with all the terms and provisions, express or implied, of the oil and gas
leases which (or interest in which) constitute a part thereof and any
assignments or subleases thereof under which any of them holds, or its
predecessors-in-interest held, title in order to keep such leases or
assignments in full force and effect so long as such leases are capable of
producing Petroleum in commercial quantities. It will, and will cause each of
its Restricted Subsidiaries to, at all times maintain, preserve and keep all of
its property used or useful for the continued efficient and profitable
operation of their property and business in proper repair, working order and
condition, and make all necessary or appropriate repairs, renewals,
replacements, additions, betterments and improvements to such property, so that
the efficiency of all such property shall at all times be properly preserved
and maintained, provided that no such action as to any item of property need be
taken if MND shall in good faith determine that it is not necessary or
desirable for the continued efficient and profitable operation of the property
and business of MND, the Borrower or any of their Restricted Subsidiaries, as
the case may be, and that the failure to take such action will not prejudice
the interests of the Banks.

5.10 Maintenance of Accounts. It will at all times maintain,
and will cause each of its Subsidiaries to maintain, a standard, modern system
of accounting, in accordance with generally accepted accounting principles in
which entries,

<PAGE> 58
54

complete and correct in all material respects, shall be made of all
transactions of it or such Subsidiary, and will administer and cause to be
administered each such system of accounting in accordance with generally
accepted accounting principles.

5.11 Inspection. At any and all reasonable times, upon the
request of any Bank, it will permit such Bank, or any agents or representatives
designated by such Bank,

(a) to examine the books of account, records, reports and
other papers of it and its Subsidiaries (and to make copies and
extracts therefrom),

(b) to inspect any property of it or any of its
Subsidiaries, and

(c) to discuss the business and affairs of it and its
Subsidiaries with its and their officers and its and their Accountants
and each Appraiser (and by this provision each of them authorizes said
Accountants and each Appraiser to discuss with such Bank or such
agents or representatives the business and affairs of it and its
Subsidiaries).

5.12 Transactions with Affiliates. Except with respect to
the allocation of taxes and general and administrative expenses, it will not
enter into or participate in, or permit any Restricted Subsidiary to enter into
or participate in, any transaction with any Affiliate of MND other than in the
ordinary course of business and on an arm's length basis involving terms no
less favorable to it than would be the terms of a similar transaction with a
Person other than such Affiliate. In the case of tax allocations, MND agrees
that tax expenses and benefits will be allocated among MEDC and its
Subsidiaries on a basis no less advantageous to MND and its Restricted
Subsidiaries than the tax allocation being used by MEDC and its Subsidiaries at
January 31, 1989 (which allocation is generally based on the premise that such
expenses and benefits shall be apportioned as if each such Subsidiary were a
separate taxpayer). MND agrees that general and administrative overhead will
be allocated among MEDC and its Subsidiaries on the basis of usage or benefits
received to the extent practicable in MND's judgment, and otherwise consistent
with generally recognized cost accounting methods.

SECTION 6. NEGATIVE COVENANTS

Each of MND and the Borrower covenants that from and after the
date of this Credit Agreement and so long as the Commitments are in effect or
any Letter of Credit remains outstanding or any amounts remain unpaid on
account of the Reimbursement Obligations or Loans:

6.1 Limitation on Liens. It will not, nor will it permit any
Restricted Subsidiary to, directly or indirectly,

<PAGE> 59
55

create, incur, assume or suffer to exist any Lien upon any property or assets
owned by it or subject such property to the prior payment of any Debt other
than the Letters of Credit, Reimbursement Obligations and Loans; provided, that
the foregoing restriction shall not apply to or prevent the creation,
assumption or continued existence of any of the following:

(a) Permitted Encumbrances;

(b) any Lien on any property hereafter acquired or
constructed by MND or any Restricted Subsidiary thereof, created or
assumed contemporaneously with, or within one year after, such
acquisition or completion of such construction to secure Debt incurred
to provide for the payment of not greater than 100% of the purchase
price or the cost of such construction thereof; provided, however,
that such Lien shall not apply to any other property owned by MND or
any Restricted Subsidiary thereof;

(c) any Lien on any property existing at the time of
acquisition thereof securing Debt not exceeding 100% of the purchase
price or cost of such property; provided, however, that such Lien
shall not extend to any other property owned by MND or any Restricted
Subsidiary;

(d) any Lien on property of a corporation existing at the
time such corporation is merged or consolidated with MND or a
Restricted Subsidiary or at the time of a sale, lease or other
disposition of the properties of such corporation (or a division
thereof) as an entirety or substantially as an entirety to MND or a
Restricted Subsidiary; provided, however, that such Lien shall not
extend to any other property owned by MND or any Restricted
Subsidiary;

(e) any Lien on property of a corporation existing at the
time such corporation first becomes a Restricted Subsidiary so long as
such Subsidiary shall not have previously been a Restricted Subsidiary
under this Credit Agreement; provided, however, that such Lien shall
not extend to any other property owned by MND or any Restricted
Subsidiary;

(f) any Lien securing any presently existing Advance
Payment Obligation of MND or a Restricted Subsidiary and any Lien
securing an Advance Payment Obligation hereafter incurred by MND or
any Restricted Subsidiary through the receipt of any take-or-pay
payment;

(g) the Liens listed in Schedule 3 hereto;

(h) any Lien on assets acquired or financed with the
proceeds of any Debt of MND or any Restricted Subsidiary referred to
in clause (f) of subsection 6.2 hereof and securing such Debt; and

<PAGE> 60
56

(i) any other Lien securing Debt if at the time of, and
after giving effect to, the creation or assumption of any such Lien,
(1) no event which is a Default or would become an Event of Default
has occurred and is continuing and (2) the aggregate amount of all
Debt of MND and its Restricted Subsidiaries secured by Liens described
in paragraphs (b), (c), (d), (e), (g) and (i) of this subsection 6.1
shall not exceed 10% of the Approved Present Value of Assets;

provided, however, that notwithstanding anything to the contrary in this
subsection 6.1, MND may acquire a corporation which becomes a Restricted
Subsidiary with outstanding secured Debt if MND could incur an equal amount of
Debt under subsection 6.2.

6.2 Restrictions on Incurrence of Debt. It will not, and
will not permit any Restricted Subsidiary to, directly or indirectly, create,
incur, issue, assume, or suffer to exist, guarantee, agree to purchase or
repurchase or provide funds in respect of or otherwise become liable in respect
of any Debt other than:

(a) Debt owed by MND to a Restricted Subsidiary or by a
Restricted Subsidiary to MND or to another Restricted Subsidiary and
Intercompany Debt;

(b) Short-term money market Debt in an aggregate
principal amount not in excess of $35,000,000, subject to the
restrictions contained in paragraph (k) below;

(c) Any extension, modification, renewal or refunding,
without increase in the principal amount, of Debt by MND or a
Restricted Subsidiary so long as the Debt of MND and its Restricted
Subsidiaries is not thereby increased;

(d) Debt under the agreements in effect on January 31,
1996 and indicated on Schedule 4 hereto;

(e) Debt of a partnership or joint venture in which MND
or any Restricted Subsidiary is a partner or joint venturer incurred
after the Closing Date, and with respect to which a written waiver has
been obtained from each holder of such Debt waiving all liability of
MND or any Restricted Subsidiary with respect thereto;

(f) Debt of MND or any Restricted Subsidiary (i) which is
recourse only to the assets of MND or such Restricted Subsidiary
acquired or financed with the proceeds of such Debt and the provisions
of which Debt with respect to its limited recourse nature shall have
been approved by the Required Banks at least 10 days prior to its
incurrence, (ii) with respect to which a written waiver shall have
been obtained from each holder of such Debt waiving all liability of
MND or such Restricted Subsidiary with respect thereto

<PAGE> 61
57

and (iii) with respect to which a written waiver has been obtained
from each holder of such Debt waiving, to the extent such holder may
legally do so, all of such holder's rights under 11 U.S.C. Section
1111(b)(1)(A) of the U.S. Bankruptcy Code in a proceeding thereunder
wherein MND or any Restricted Subsidiary is the debtor; provided that
the aggregate principal amount of all such Debt does not exceed
$50,000,000;

(g) Debt under the UBS Facility in an aggregate principal
amount not to exceed $32,000,000;

(h) Debt of the nature described in paragraphs (b) and (c) of
subsection 6.1 and Debt of any Person acquired by MND provided such
Debt is in existence at the time of such acquisition and is not
created in anticipation of such acquisition so long as after the
incurrence of all Debt described in this paragraph (h) Consolidated
Debt would not exceed the Approved Borrowing Base;

(i) Debt hereunder;

(j) Debt under the MND Revolving Credit Facility; and

(k) any other Debt so long as the aggregate amount of all
Debt outstanding pursuant to paragraphs (b), (j) and (k) of this
subsection 6.2 does not exceed $150,000,000;

provided, however, that in no event shall Consolidated Debt exceed the Approved
Borrowing Base except (i) solely as a result of the incurrence of Reimbursement
Obligations and/or Loans hereunder for a period of less than 60 days following
such incurrence or (ii) solely as a result of a determination of the Approved
Borrowing Base resulting in a reduction thereof by an amount not in excess of
the Permitted Shortfall in respect thereof for a period of less than six months
from the date of such determination; and provided, further, that no Restricted
Subsidiary shall directly or indirectly create, incur, issue, assume or suffer
to exist, guarantee, agree to purchase or repurchase or provide funds in
respect of or otherwise become liable in respect of any Debt (other than Debt
of such Restricted Subsidiary existing on the date hereof and any extensions or
renewals on substantially the same terms) which would otherwise be permitted by
this subsection 6.2 if the terms of such Debt or any related agreement restrict
the repayment of loans or advances made to it by MND, or require that any loans
or advances by MND to such Restricted Subsidiary be subordinated in any respect
to such Debt, or adversely affect the ability of MEC, MGS or MMC to perform
their respective obligations hereunder or under the Subsidiary Guarantee.

6.3 Subordinated Debt. MND and its Restricted
Subsidiaries will not incur subordinated debt other than
Intercompany Debt.

<PAGE> 62
58

6.4 Consolidated Tangible Net Worth. The Consolidated
Tangible Net Worth of MEDC and its Subsidiaries will not be, at any time, less
than $300,000,000.

6.5 Consolidated Net Current Assets. It will not permit
Consolidated Current Assets of MND and its Restricted Subsidiaries to be, at
any time, less than 100% of Consolidated Current Liabilities of MND and its
Restricted Subsidiaries.

6.6 Restrictions on Disposition of Stock and Debt of
Restricted Subsidiaries, etc.

(a) It will not permit any Restricted Subsidiary to
issue, sell, assign, pledge or otherwise transfer any shares of the stock of
such Restricted Subsidiary (other than directors' qualifying shares if required
by law) except to MND or a wholly-owned Restricted Subsidiary; provided,
however, that dispositions by a Restricted Subsidiary of its stock in
connection with the sale of such Restricted Subsidiary as an entirety in
accordance with the proviso of subsection 6.6(b) shall not be prohibited.

(b) It will not, and will not permit any Restricted
Subsidiary to, sell, assign, pledge, transfer or dispose of, or in any way part
with control of, any shares of the stock of any Restricted Subsidiary (other
than directors' qualifying shares if required by law) or any Debt owing by a
Restricted Subsidiary to MND or another Restricted Subsidiary or by MND to a
Restricted Subsidiary, in each case other than to MND or a wholly-owned
Restricted Subsidiary ; provided, however, that all shares of the stock and all
Debt of any Restricted Subsidiary may, subject to compliance with subsection
6.7, be sold as an entirety to any Person if the Restricted Subsidiary being
sold does not at the time of sale own directly or indirectly, any shares or
Debt of MND or of another Restricted Subsidiary not simultaneously being sold.
If MND wishes to sell the stock of any Material Subsidiary, MND must first
obtain the prior written consent of the Required Banks.

(c) In every case in which directors' qualifying shares
are transferred to directors, options to acquire such shares by MND or a
Restricted Subsidiary for a nominal consideration shall be obtained, together
with certificates for such shares duly endorsed in blank or accompanied by
stock powers duly endorsed in blank.

6.7 Consolidation, Merger, Sales of Assets, etc.. MND will
not, and will not permit any of its Restricted Subsidiaries to, directly or
indirectly, consolidate or merge with, or sell, lease, transfer or otherwise
dispose of any of its property and assets to, any Person, except that:

(a) MND may permit any corporation to be consolidated
with or merged into MND if after giving effect to such

<PAGE> 63
59

transaction, MND is the surviving corporation, no Default or Event of
Default shall have occurred and be continuing and the resultant
Consolidated Debt does not exceed the current Approved Borrowing Base
under this Credit Agreement;

(b) MND or any of its Restricted Subsidiaries may sell,
lease or otherwise dispose of any of its assets in the ordinary course
of business;

(c) any Restricted Subsidiary of MND may (i) consolidate
with or merge into MND if MND is the continuing or surviving
corporation and if after giving effect to such transaction, MND's
Consolidated Debt does not exceed the current Approved Borrowing Base
or (ii) consolidate with or merge into any wholly-owned Restricted
Subsidiary of MND or a corporation which thereupon becomes a
wholly-owned Restricted Subsidiary of MND;

(d) any Restricted Subsidiary may sell, lease, transfer
or otherwise dispose of all or any part of its assets to MND or any
other wholly-owned Restricted Subsidiary; and

(e) subject to the covenants set forth in this Section 6,
MND or any of its Restricted Subsidiaries may sell, lease, transfer or
otherwise dispose of any of its assets including, but not limited to,
sales of Production Payments if:

(i) such sale, lease, transfer or other
disposition is for fair market value as determined by the
Board of MND; and

(ii) (A) the aggregate Present Value of Assets
so disposed of during any period of twelve consecutive months
does not exceed $20,000,000 or (B) the amount by which the
aggregate Present Value of Assets so disposed of during such
period exceeds $20,000,000 is applied to reduce the Borrowing
Base and after such reduction the Approved Borrowing Base
exceeds Consolidated Debt.

6.8 Fixed Charge Ratio. The Fixed Charge Ratio with respect
to MND and its Restricted Subsidiaries, taken as a whole, shall not be less
than 1.5 to 1 at the end of any fiscal quarter.

6.9 Limitation on Investments, Loans and Advances. MEDC,
MND, its Limited Subsidiaries, TWC and its Subsidiaries shall not make any
advance, loan, extension of credit or capital contribution to, or purchase any
stock, bonds, notes, debentures or other securities of, or make any other
investment in, any Subsidiary of MEDC (other than MND, its Limited
Subsidiaries, TWC and its Subsidiaries) in excess of an aggregate amount per
year for all such investments of $10,000,000.

<PAGE> 64
60

SECTION 7. EVENTS OF DEFAULT

7.1 Nonpayment of Interest or Principal, Insolvency of
Subsidiaries and Other Defaults. If any of the following Events of Default
shall occur and be continuing:

(a) failure by the Borrower to pay any principal of any
Loan or Reimbursement Obligation when and as the same shall become due
and payable, whether upon demand, at maturity, on a date fixed for
prepayment, or otherwise; or

(b) failure by the Borrower for five days to pay any
interest on any Loan or any Reimbursement Obligation, or any fee or
any other amount owing by it hereunder, when and as the same shall
become due and payable; or

(c) failure by MND or the Borrower to perform and comply
with any term, covenant, agreement or condition of Section 6; or

(d) failure by MND or the Borrower to perform, comply
with or observe any other term, covenant, agreement or condition of
this Credit Agreement applicable to it and such failure shall have
continued for 30 days after written notice specifying such failure
shall have been given to the Borrower by the Required Banks; or

(e) failure by MEDC, MND, MEC or any other Material
Subsidiary which is also a Restricted Subsidiary (as principal or as
guarantor or other surety) to make any payment or payments in the
aggregate amount of more than $15,000,000 on any Debt for borrowed
money (other than the Loans or the Reimbursement Obligations), or any
Guarantee Obligation therefor (including any obligations under any
conditional sale or other title retention agreement or any obligation
issued or assumed as full or partial payment for property transferred
to MND or any of its Restricted Subsidiaries, whether or not secured
by a purchase money security interest) and the continuance of such
failure beyond the applicable period of grace; or the occurrence of
any event (other than the mere passage of time or the failure to pay
money when due) or the existence of any condition in respect of any
such Debt described in this paragraph (e) or any Securities of MEDC,
MND, MEC or any such other Material Subsidiary, or under any agreement
securing or relating to such Debt or Securities, the effect of which
is (x) to cause or permit any holder or holders of such Debt (or a
trustee or trustees on behalf of such holder or holders) to cause,
with the giving of notice if required, such Debt, or a portion
thereof, to become due prior to its stated maturity or prior to its
regularly scheduled dates of payment, or (y) to permit a trustee or
the holder of any Securities (other than Common Stock of MEDC, MND or
any Restricted Subsidiary) to elect a majority of the directors

<PAGE> 65
61

on the Board of Directors of MEDC, MND, MEC or any such other
Restricted Subsidiary and such event or condition shall have continued
for 5 days; or

(f) if any representation, warranty or other statement
made in writing by or on behalf of MEC, MND, any Material Subsidiary
or MEDC in or in connection with this Credit Agreement, the Guarantees
or the Subsidiary Guarantee shall prove to have been false or
misleading in any material respect on the date as of which made; or

(g) (i) the existence of Outstanding Judgments, Judgment
Payments, Judgment Interest and/or Settlements in an aggregate amount,
without duplication, in excess of $500,000,000, or (ii) the expiration
of 60 days after the entry of a final judgment, decree or order for
the payment of money undischarged against MEDC, MND or any Material
Subsidiary which is also a Restricted Subsidiary which, together with
all other such outstanding undischarged final judgments against MEDC,
MND and any Material Subsidiary which is also a Restricted Subsidiary
exceeds an aggregate of $15,000,000, provided that if such decree,
order or judgment shall be stayed or bonded pending appeal (or further
appeal) or otherwise or said judgment shall be discharged prior to the
occurrence of an Event of Default pursuant to this clause (ii) of
subsection 7.1(g), such Event of Default shall not occur until 60 days
after the expiration of such stay, and in the case of a judgment,
shall not occur if said judgment is discharged within 60 days after
expiration of such stay; or

(h) If (i) any of the following events or conditions
described in clauses (1) through (5) below shall occur or exist: (1)
any Person shall engage in any "prohibited transaction" (as defined in
Section 406 of ERISA or Section 4975 of the Code) involving any Plan,
(2) any "accumulated funding deficiency" (as defined in Section 302 of
ERISA), whether or not waived, shall exist with respect to any Plan,
(3) a Reportable Event shall occur with respect to, or proceedings
shall commence to have a trustee appointed, or a trustee shall be
appointed, to administer or to terminate, any Single Employer Plan,
which Reportable Event or commencement of proceedings or appointment
of a trustee is, in the reasonable opinion of the Required Banks,
likely to result in the termination of such Plan for purposes of Title
IV of ERISA, and, in the case of a Reportable Event, the continuance
of such Reportable Event unremedied for ten days after notice of such
Reportable Event pursuant to Section 4043(a), (c) or (d) of ERISA is
given or the continuance of such proceedings for ten days after
commencement thereof, as the case may be, (4) any Single Employer Plan
shall terminate for purposes of Title IV of ERISA, or (5) any other
event or condition with respect to any Plan shall occur or exist, and
(ii) such event or condition (A)

<PAGE> 66
62

subjects MND, the Borrower or any of their Subsidiaries to any tax,
penalty or other liability in excess of $15,000,000; and (B) continues
unsatisfied, uncured or otherwise unremedied for 30 days after notice
from the Required Banks; or

(i) (1) If MEDC, MND or any Material Subsidiary which is
also a Restricted Subsidiary shall commence any case, proceeding or
other action (A) under any existing or future law of any jurisdiction,
domestic or foreign, relating to bankruptcy, insolvency,
reorganization or relief of debtors, seeking to have an order for
relief entered with respect to it, or seeking to adjudicate it a
bankrupt or insolvent, or seeking reorganization, arrangement,
adjustment, winding-up, liquidation, dissolution, composition or other
relief with respect to it or its debts, or (B) seeking appointment of
a receiver, trustee, custodian or other similar official for it or for
all or any substantial part of its assets, or MEDC, MND or any such
Restricted Subsidiary shall make a general assignment for the benefit
of its creditors; or (2) there shall be commenced against MEDC, MND or
any such Restricted Subsidiary any case, proceeding or other action of
a nature referred to in clause (1) above which (A) results in the
entry of an order for relief or any such adjudication or appointment
or (B) remains undismissed, undischarged or unbonded for a period of
90 days; or (3) there shall be commenced against MEDC, MND or any such
Restricted Subsidiary any case, proceeding or other action seeking
issuance of a warrant of attachment, execution, distraint or similar
process against all or any substantial part of its assets, which
results in the entry of an order for any such relief which shall not
have been vacated, discharged, or stayed or bonded pending appeal
within 90 days from the entry thereof; or (4) MEDC, MND or any such
Restricted Subsidiary shall take any action in furtherance of, or
indicating its consent to, approval of, or acquiescence in, any of the
acts set forth in clause (1), (2) or (3) above; or (5) MEDC, MND or
any such Restricted Subsidiary shall generally not, or shall be unable
to, or shall admit in writing its inability to, pay its debts as they
become due; or

(j) MEDC shall cease to be the owner of all of the issued
and outstanding capital stock of MND, or MND shall cease to be the
owner, directly or through Restricted Subsidiaries, of all of the
issued and outstanding stock of any Material Subsidiary other than as
permitted by subsections 6.6 and 6.7 hereof; or

(k) Any Guarantee or the Subsidiary Guarantee shall cease
for any reason to be in full force and effect or any party thereto or
its successors or assigns shall assert in writing that it has no
liability thereunder;

<PAGE> 67
63

then, and in any such event, the Administrative Agent, upon the written request
of the Required Banks, shall (x) terminate forthwith the Commitments and/or (y)
declare, by notice of default given to the Borrower, all Loans and all other
amounts owing hereunder to be forthwith due and payable, whereupon the
principal amount of all outstanding Loans, together with accrued interest
thereon, and all other amounts owing hereunder (including, without limitation,
all amounts of L/C Obligations, whether or not the beneficiaries of the then
outstanding Letters of Credit shall have presented the documents required
thereunder) shall become immediately due and payable without presentment,
demand, protest or other notice of any kind, all of which are hereby expressly
waived, anything contained herein or in any L/C Documentation to the contrary
notwithstanding.

7.2 Insolvency of the Borrower and Like Defaults. Upon the
occurrence of any of the following events of default:

(i) If the Borrower shall commence any
case, proceeding or other action (A) under any existing or
future law of any jurisdiction, domestic or foreign, relating
to bankruptcy, insolvency, reorganization, or relief of
debtors, seeking to have an order for relief entered with
respect to it, or seeking to adjudicate it a bankrupt or
insolvent, or seeking reorganization, arrangement, adjustment,
winding-up, liquidation, dissolution, composition or other
relief with respect to it or its debts, or (B) seeking
appointment of a receiver, trustee, custodian or other similar
official for it or for all or any substantial part of its
assets, or the Borrower shall make a general assignment for
the benefit of its creditors; or (ii) there shall be commenced
against the Borrower any case, proceeding or other action of a
nature referred to in clause (i) above which (A) results in
the entry of an order for relief or any such adjudication or
appointment or (B) remains undismissed, undischarged or
unbonded for a period of 90 days; or (iii) there shall be
commenced against the Borrower any case, proceeding or other
action seeking issuance of a warrant of attachment, execution,
distraint or similar process against all or any substantial
part of its assets, which results in the entry of an order for
any such relief which shall not have been vacated, discharged,
or stayed or bonded pending appeal within 90 days from the
entry thereof; or (iv) if the Borrower shall take any action
in furtherance of, or indicating its consent to, approval of,
or acquiescence in, any of the acts set forth in clauses (i),
(ii) or (iii) above; or (v) if the Borrower shall generally
not, or shall be unable to, or shall admit in writing its
inability to, pay its debts as they become due;

<PAGE> 68
64

then, and in any such event during the continuance thereof, the Commitments
shall immediately and without notice terminate and the principal amount of all
outstanding Loans, together with accrued interest thereon, and all other
amounts owing hereunder (including, without limitation, all amounts of L/C
Obligations, whether or not the beneficiaries of the then outstanding Letters
of Credit shall have presented the documents required thereunder) shall become
immediately due and payable without presentment, demand, protest or notice of
any kind, all of which are hereby expressly waived, anything contained herein
or in any L/C Documentation to the contrary notwithstanding.

7.3 Letter of Credit Remedies. (a) Upon the occurrence of
an Event of Default and so long as such event shall continue unremedied, upon
the request of the Required Banks, the Administrative Agent shall, by notice of
default to the Borrower, declare any or all of the L/C Obligations, although
contingent and unmatured, immediately due and payable, unless automatically due
and payable pursuant to subsection 7.2, whereupon the same shall immediately
become due and payable to the Administrative Agent for deposit and application
pursuant to subsection 7.4, without any other presentment, demand, protest or
other notice of any kind, all of which are hereby expressly waived by the
Borrower.

(b) The Borrower shall defend the funds from time to time on
deposit in the Letter of Credit Account against any Lien or other claim adverse
to the interests of the Issuing Banks and the Banks in such funds, and shall
take any other action appropriate in the circumstances to satisfy, or cause to
be released or discharged, any such claim or Lien.

(c) The Borrower hereby agrees to take any action expressly
contemplated to be taken by the Borrower pursuant to paragraphs (a) and (b) of
this subsection 7.3, together with any other action incidental thereto which,
under the circumstances, is reasonably requested by the Administrative Agent,
any Issuing Bank or the Banks. The Borrower further agrees that a breach by it
of the provisions of said paragraphs (a) and (b) or the first sentence of this
paragraph (c) will cause irreparable injury to the Banks, that the Banks may
have no adequate remedy at law in respect of any such breach and that, as a
consequence, each of such provisions shall be specifically enforceable against
the Borrower. In connection with the foregoing, the Borrower hereby waives and
agrees not to assert any defenses against an action for specific performance of
such provisions, except for a defense that an Event of Default has not occurred
or is not continuing.

(d) In addition to all actions set forth in the preceding
provisions of this Section 7, upon the occurrence of an Event of Default and so
long as such event shall continue unremedied, the Required Banks, the Issuing
Banks and the Administrative Agent may take the actions specified in subsection
2.1(c).

<PAGE> 69
65

7.4 Letter of Credit Account.

(a) Establishment of the Letter of Credit Account. The
Borrower and the Administrative Agent agree that upon the L/C Obligations
becoming due and payable pursuant to subsections 7.1, 7.2 or 7.3(a) or upon any
deposit to the Letter of Credit Account being required pursuant to clause
"second" of subsection 2.23, there shall be established, and that thereafter
there shall be maintained, in the names of the Borrower, as debtor, and the
Administrative Agent, as secured party for the ratable benefit of the Banks, on
the books of the Administrative Agent at the office of the Administrative Agent
at 270 Park Avenue, New York, N.Y. 10017, and under the sole dominion and
control of the Administrative Agent, and otherwise on the terms and conditions
hereof a cash collateral account designated as the "MEC Letter of Credit
Account" (the "Letter of Credit Account").

(b) Deposits and Withdrawals. (i) There shall be deposited
in the Letter of Credit Account any amount paid to the Administrative Agent in
respect of L/C Obligations pursuant to subsections 2.5, 7.1, 7.2 or 7.3 and any
funds specified in clause "second" of subsection 2.23. The Borrower hereby
authorizes and instructs the Banks (or the Administrative Agent, as the case
may be) to deposit in the Letter of Credit Account any such amount, and hereby
agrees that any such amount, from the time of such deposit and so long as it
remains in the Letter of Credit Account in whole or in part, shall be and
constitute collateral security for the prompt and complete payment when due of
the indebtedness, obligations and liabilities of the Borrower under this Credit
Agreement and the L/C Documentation.

(ii) Funds from time to time on deposit in the Letter of
Credit Account shall be withdrawn and distributed by the Administrative Agent
only as follows:

(A) if any Issuing Bank has made any payment under any
Letter of Credit and has not been reimbursed by the Borrower in full
therefor, such Issuing Bank shall, to the extent there are sufficient
funds on deposit in the Letter of Credit Account, receive and apply
such funds on account of such unreimbursed amount, or the
Administrative Agent shall apply such funds on account of any unpaid
amount provided for in subsection 2.5(a) and on account of unpaid
letter of credit fees and commissions as provided in subsection 2.3;

(B) if the principal of or interest on any Loan has not
been paid when due (whether at the stated maturity thereof, by
acceleration or otherwise), or any other indebtedness, obligation or
liability of the Borrower under this Credit Agreement or any L/C
Documentation has not been paid when due (after giving effect to any
applicable grace period), the Administrative Agent shall, upon the
request of the Required Banks and to the extent there are sufficient

<PAGE> 70
66

funds on deposit in the Letter of Credit Account, withdraw and apply
such funds on account thereof;

(C) if at any time there shall be no Default or Event of
Default continuing and uncured, the Administrative Agent shall, at the
request of the Borrower, disburse to the Borrower all funds then on
deposit in the Letter of Credit Account;

(D) if at any time the amount on deposit in the Letter of
Credit Account shall exceed the L/C Obligations, (x) the
Administrative Agent shall upon the Borrower's direction apply the
amount of such excess on account of the outstanding principal amount
of and accrued interest upon the Loans (notwithstanding any minimum
prepayment amounts set forth herein), or any other amounts payable
hereunder, or (y) if no such obligations are then outstanding, the
Administrative Agent shall pay to the Borrower upon its direction, the
excess, if any, of such amount then on deposit over the L/C
Obligations; and

(E) upon the full and complete payment of all the
obligations described in clauses (A) and (B) above and the expiration
or cancellation of each Letter of Credit, the funds on deposit in the
Letter of Credit Account shall be withdrawn and distributed to the
Borrower or as a court of competent jurisdiction shall direct.

(c) Investment of Funds. Funds from time to time on deposit
in the Letter of Credit Account shall be invested in U.S. Treasury securities
(which may be subject to repurchase agreements with substantial United States
commercial banks) or instruments of comparable security and liquidity with
yields at prevailing market rates for comparable instruments, as selected by
the Borrower. All income received by the Administrative Agent earned in
respect of such investments shall be deposited in the Letter of Credit Account,
and any losses (including, without limitation, any losses in liquidating such
investments or withdrawals and disbursements pursuant to the terms of
subsection 7.4(b)) shall be for the account of, and shall be deducted from, the
Letter of Credit Account.

(d) Exculpatory Provisions. The Borrower agrees that any
action taken or omitted to be taken by the Administrative Agent or any Issuing
Bank in connection with the Letter of Credit Account, if taken or omitted to be
taken in good faith and in the absence of gross negligence and willful
misconduct, shall be binding upon the Borrower and shall not create any
liability for the Administrative Agent, such Issuing Bank or the other Banks to
the Borrower.

<PAGE> 71
67

SECTION 8. THE ADMINISTRATIVE AGENT AND THE ISSUING BANKS

8.1 Appointment. Chemical Bank is hereby appointed as the
Administrative Agent hereunder, and each of the Banks hereby irrevocably
authorizes said Chemical Bank, as the Administrative Agent for such Bank, to
take such action on its behalf under the provisions of this Credit Agreement
and the other Credit Documents and to exercise such powers and to perform such
duties hereunder and thereunder as are specifically delegated to or required of
the Administrative Agent by the terms hereof or thereof, together with such
powers as are reasonably incidental thereto. Notwithstanding any provision to
the contrary elsewhere in this Credit Agreement or any other Credit Document,
the Administrative Agent shall not have any duties or responsibilities, except
those expressly set forth herein, or any fiduciary relationship with any Bank,
and no implied covenants, functions, responsibilities, duties, obligations or
liabilities shall be read into this Credit Agreement or any other Credit
Document or otherwise exist against the Administrative Agent.

8.2 Delegation of Duties. The Administrative Agent and each
Issuing Bank may execute any of its duties hereunder by or through agents or
employees and shall be entitled to advice of counsel concerning all matters
pertaining to its duties hereunder.

8.3 Reimbursement of Administrative Agent and Issuing Banks.
Each Bank, without limiting the Borrower's obligations under subsection 9.7,
agrees to reimburse the Administrative Agent and each Issuing Bank in the
amount of its pro rata share for any out-of-pocket expenses incurred for the
benefit of the Banks and not reimbursed by the Borrower, and for any counsel
fees and compensation of agents and employees paid for services rendered on
behalf of the Banks and not reimbursed by the Borrower.

8.4 Exculpatory Provisions. Neither the Administrative Agent
nor any Issuing Bank nor any of their officers, directors, employees or agents
shall be liable for any action lawfully taken or omitted to be taken by it or
them under this Credit Agreement or any other Credit Document or in connection
herewith or therewith, except for its or their own gross negligence or willful
misconduct. Neither the Administrative Agent nor any Issuing Bank shall be
responsible in any manner to any of the Banks for the effectiveness,
enforceability, genuineness, validity or the due execution of this Credit
Agreement or any other Credit Document or any certificate, report or other
document used under or in connection with this Credit Agreement or be under any
obligation to any of the Banks to ascertain or to inquire as to the performance
or observance of any of the terms, covenants or conditions hereof on the part
of MND or MEC. The Administrative Agent and each Issuing Bank shall be fully
justified in failing or refusing to

<PAGE> 72
68

take any action hereunder unless it shall first be indemnified to its
satisfaction by the Banks against any and all liability and expense which may
be incurred by it by reason of taking or continuing to take any such action.
Subject to the provisions of subsection 9.3 of this Credit Agreement, the
Administrative Agent and each Issuing Bank shall in all cases be fully
protected in acting, or in refraining from acting, hereunder in accordance with
written instructions signed by the Required Banks and such instructions and any
action taken or failure to act pursuant thereto shall be binding on all the
Banks and on all holders of the Loans.

8.5 Indemnification of Administrative Agent and Issuing
Banks. The Banks agree to indemnify the Administrative Agent and each Issuing
Bank (to the extent not reimbursed by the Borrower) ratably according to their
respective Commitment Percentages from and against any and all liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses or disbursements of any kind or nature whatsoever which may be imposed
on, incurred by or asserted against the Administrative Agent or such Issuing
Bank in any way relating to or arising out of this Credit Agreement or any
other Credit Document or any action taken or omitted by the Administrative
Agent or such Issuing Bank under this Credit Agreement or any other Credit
Document, including without limitation if any drawer on any Letter of Credit
shall in fact prove not to be a named beneficiary of such Letter of Credit or
an affiliate, parent or subsidiary thereof; provided that no Bank shall be
liable for any portion of such liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs or disbursements resulting from the
Administrative Agent's or any Issuing Bank's gross negligence or willful
misconduct.

8.6 Reliance by Administrative Agent and Issuing Banks. The
Administrative Agent and each Issuing Bank shall be entitled to rely on any
notice, consent, certificate, affidavit, letter, telegram, teletype message,
statement, order or other document believed by it to be genuine and correct and
to have been signed and sent by the proper person or persons and, in respect of
legal matters, upon opinion of counsel selected by the Administrative Agent or
such Issuing Bank.

8.7 Administrative Agent and Issuing Banks in Individual
Capacity. With respect to loans made or renewed by it and with respect to any
Letter of Credit issued or participated in by it, the Administrative Agent and
each Issuing Bank shall have the same rights and powers hereunder as any Bank
and may exercise the same as though it were not the Administrative Agent or an
Issuing Bank, and the term "Bank" or "Banks" shall, unless the context
otherwise indicates, include the Administrative Agent and each Issuing Bank in
its individual capacity.

8.8 Non-Reliance. Each Bank expressly acknowledges that
neither the Administrative Agent nor any Issuing Bank nor

<PAGE> 73
69

any of their officers, directors, employees, agents, attorneys-in-fact or
Affiliates has made any representations or warranties to it and that no act by
the Administrative Agent or any Issuing Bank hereinafter taken, including any
review of the affairs of the Borrower, shall be deemed to constitute any
representation or warranty by the Administrative Agent or such Issuing Bank to
any Bank. Each Bank represents to the Administrative Agent and each Issuing
Bank that it has, independently and without reliance upon the Administrative
Agent or any other Issuing Bank or Bank, and based on such documents and
information as it has deemed appropriate, made its own appraisal of and
investigation into the business, operations, property, financial or other
condition and creditworthiness of the Borrower and made its own decision to
make extensions of credit hereunder and enter into this Credit Agreement. Each
Bank also represents to the Administrative Agent and each Issuing Bank that it
will, independently and without reliance upon the Administrative Agent or any
other Issuing Bank or Bank, and based on such documents and information as it
shall deem appropriate at the time, continue to make its own credit analysis,
appraisals and decisions in taking or not taking action under this Credit
Agreement, and to make such investigation as it deems necessary to inform
itself as to the business, operations, property, financial and other condition
and creditworthiness of the Borrower. Except for notices, reports and other
documents expressly required to be furnished to the Banks by the Administrative
Agent or any Issuing Bank hereunder, neither the Administrative Agent nor any
Issuing Bank shall have any duty or responsibility to provide any Bank with any
credit or other information concerning the business, operations, property,
financial and other condition or creditworthiness of the Borrower which may
come into the possession of the Administrative Agent or such Issuing Bank or
any of its officers, directors, employees, agents, attorneys-in-fact or
Affiliates.

8.9 Successor Administrative Agent. The Administrative Agent
may resign as Administrative Agent upon 10 days' notice to the Banks. If the
Administrative Agent shall resign as Administrative Agent under this Credit
Agreement, then the Required Banks shall appoint from among the Banks a
successor agent for the Banks which successor agent shall be approved by MND,
whereupon such successor agent shall succeed to the rights, powers and duties
of the Administrative Agent, and the term "Administrative Agent" shall mean
such successor agent effective upon its appointment, and the former
Administrative Agent's rights, powers and duties as Administrative Agent shall
be terminated, without any other or further act or deed on the part of such
former Administrative Agent or any of the parties to this Credit Agreement or
any holders of the Loans or the L/C Obligations. After any retiring
Administrative Agent's resignation hereunder as Administrative Agent, the
provisions of this Section 8 shall inure to its benefit as to any actions taken
or omitted to be taken by it while it was Administrative Agent under this
Credit Agreement.

<PAGE> 74
70

8.10 Fees. The Borrower agrees to pay to the Administrative
Agent such fees on such dates as may from time to time be specified by such
parties in writing.

SECTION 9. MISCELLANEOUS

9.1 Waiver of Default. Subject to the proviso clause of
subsection 9.3 below, the Administrative Agent may, by written notice to the
Borrower (if thereunto authorized by the Required Banks), on behalf of all the
Banks, at any time and from time to time, waive any default in the performance
or observance of any condition, covenant or other term hereof or any Default or
Event of Default which shall have occurred hereunder and its consequences. Any
such waiver shall be for such period and subject to such conditions as shall be
specified in any such notice. In the case of any such waiver, the Borrower,
the Banks and the Administrative Agent shall be restored to their former
position and rights hereunder, and any Default or Event of Default so waived
shall be deemed to be cured and not continuing; but no such waiver shall extend
to any subsequent or other Event of Default, or impair any right consequent
thereon.

9.2 Request to Administrative Agent. Whenever the
Administrative Agent is authorized and empowered hereunder on behalf of each of
the Banks to give any approval or consent, or to make any request, or to take
any action on behalf of the Banks, the Administrative Agent shall be required
to give such approval or consent, to make such request or to take such action
when so requested by the Required Banks, except that any action specified in
subsection 9.3 below to require a different percentage shall be taken only on
the percentage specified therein.

9.3 Amendments. With the written consent of the Required
Banks, the Administrative Agent and the Borrower may, subject to the provisions
of this subsection, from time to time, enter into agreements amendatory or
supplemental hereto for the purpose of adding any provisions to this Credit
Agreement or changing in any manner the rights of the Banks or of the Borrower
hereunder; provided, however, that no such amendatory or supplemental agreement
shall (a) change the maturity of any Loan or the Final Expiration Date or the
Scheduled Termination Date or change the rate or amount of interest or any fee,
commission or other charge, in each case for the account of the Banks, or the
time of payment or prepayment of any thereof or change the principal amount of
any Bank's loan, Reimbursement Obligation or Commitment or the duration thereof
or release or limit MEDC's, MND's or any Material Subsidiaries' obligations
under the Guarantees or the Subsidiary Guarantee without the written consent of
all the Banks, or (b) change (i) the provisions of subsections 2.17(a) or 2.22
or (ii) the percentages specified in Section 7 or this Section 9 or in the
definition of Required Banks, without the written consent of all the Banks, or
(c)

<PAGE> 75
71

change any provision of Section 8 without the consent of the Administrative
Agent and the Issuing Banks. Any such amendatory or supplemental agreement
shall apply equally to each Bank and shall be binding upon the Borrower, all
the Banks and the Administrative Agent.

9.4 Notices. All notices, requests and demands to or upon
the respective parties hereto shall be in writing (including by facsimile
transmission if followed promptly by hard copy) and shall be deemed to have
been duly given or made three days after being deposited in the mails, postage
prepaid, or, in the case of telecopy notice, when received by the addressee,
addressed as follows or to such other address as may be hereafter designated in
writing by the respective parties hereto:

MND: MND Energy Corporation
Attn: Chief Financial Officer
P.O. Box 4000
The Woodlands, TX 77380
Telecopy: 713-377-6192

MEC: Mitchell Energy Corporation
P.O. Box 4000
The Woodlands, TX 77380
Attn: Chief Financial Officer
Telecopy: 713-377-6192

The Banks: Their respective names and
addresses set forth beneath their
respective signatures hereto

The Administrative Chemical Bank, as
Agent: Administrative Agent
270 Park Avenue
New York, NY 10017
Attn: John Gehebe
Vice President
Credit and Lending
Telecopy: 212-270-4711

With a copy to: Chemical Bank
Agent Bank Services Group
140 East 45th Street
New York, New York 10017
Attention: Frank Giacalone
Telecopy: 212-622-0002

except in cases where it is expressly herein provided that such notice, request
or demand is not effective until received by the party to whom it is addressed.

9.5 Adjustments; Set-Off. (a) If any Bank shall at any time
receive payment of all or part of any of the Loans or

<PAGE> 76
72

Reimbursement Obligations owing to it, whether by set-off or otherwise, in a
greater proportion than the payments made on the Loans or Reimbursement
Obligations owing to the other Banks, such Bank shall purchase for cash,
ratably from each of the other Banks, an undivided participating interest in a
portion of the Loans or Reimbursement Obligations owing to such other Banks so
that after such purchase each Bank will hold an interest in an unpaid principal
amount of Loans or Reimbursement Obligations bearing the same proportion to the
total principal amount of Loans or Reimbursement Obligations at such time
outstanding as existed in the Loans or Reimbursement Obligations outstanding
hereunder prior to such payment. In the event that at any time any Bank shall
be required to refund any amounts which have been paid to or received by it on
account of any of the Loans or Reimbursement Obligations held by such Bank and
which have been applied to the purchase of an undivided participating interest
in the portion of Loans or Reimbursement Obligations held by other Banks
pursuant to this subsection 9.5(a) then, upon notice from such Bank, each of
the other Banks shall repurchase said portions for cash to the extent of their
ratable share of such refund.

(b) In addition to any rights and remedies of the Banks
provided by law (including, without limitation, other rights of set-off), upon
the occurrence of any Event of Default specified in paragraph (a) or (b) of
subsection 7.1, each Bank shall have the right, without prior notice to the
Borrower, any such notice being expressly waived by the Borrower to the extent
permitted by applicable law, upon any amount becoming due and payable by the
Borrower hereunder (whether at the stated maturity, by acceleration or
otherwise) to set-off and appropriate and apply against such amount any and all
deposits (general or special, time or demand, provisional or final), in any
currency, and any other credits, indebtedness or claims, in any currency, in
each case whether direct or indirect, absolute or contingent, matured or
unmatured, at any time held or owing by such Bank or any branch or agency
thereof to or for the credit or the account of the Borrower. Each Bank agrees
promptly to notify the Borrower and the Administrative Agent after any such
set-off and application made by such Bank, provided that the failure to give
such notice shall not affect the validity of such set-off and application.

9.6 No Waiver; Cumulative Remedies. No failure to exercise
and no delay in exercising, on the part of the Administrative Agent or any
Bank, any right, power or privilege hereunder, shall operate as a waiver
thereof, nor shall any single or partial exercise of any right, power or
privilege hereunder preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. The rights and remedies
herein provided are cumulative and not exclusive of any rights or remedies
provided by law.

9.7 Payment of Expenses and Taxes. The Borrower agrees (a)
to pay or reimburse the Administrative Agent and each

<PAGE> 77
73

Issuing Bank for all its reasonable out-of-pocket costs and expenses incurred
in connection with the development, preparation and execution of, and any
amendment, supplement or modification to, this Credit Agreement, the other
Credit Documents and any other documents prepared in connection herewith, and
the consummation of the transactions contemplated hereby and thereby,
including, without limitation, the reasonable fees and disbursements of counsel
to the Administrative Agent, (b) to pay or reimburse each Bank and the
Administrative Agent for all its costs and expenses incurred in connection with
the enforcement or preservation of any rights under this Credit Agreement, the
other Credit Documents and any such other documents, including, without
limitation, fees and disbursements of counsel (including, without limitation,
in-house counsel) to the Administrative Agent and to the several Banks, and (c)
to pay, indemnify and hold each Bank and the Administrative Agent and each of
their officers, directors, employees, agents, attorneys-in-fact and Affiliates
harmless from any and all recording and filing fees and any and all liabilities
with respect to, or resulting from any delay in paying, stamp, excise and other
similar taxes, if any, which may be payable or determined to be payable in
connection with the execution and delivery of, or consummation of any of the
transactions contemplated by, or any amendment, supplement or modification of,
or any waiver or consent under or in respect of, this Credit Agreement, the
other Credit Documents and any such other documents; provided, however, that
with respect to subparagraph (c), the Borrower shall not be liable for the
payment of any losses, costs, penalties, judgments, suits, liabilities,
damages, penalties, actions, expenses or disbursements resulting solely from
the gross negligence or wilful misconduct of any such Bank. The agreements in
this subsection shall survive termination of the Letters of Credit and
repayment of the Loans and all other amounts payable hereunder.

9.8 Notice of Action. In the event the Administrative Agent
or any Bank or Banks should take any action or give any consent or notice
provided for by this Credit Agreement, notice of such action, consent or notice
shall be given forthwith to all the Banks by the Administrative Agent or the
Bank or Banks taking such action or giving such consent or notice; provided,
however, that the failure to give any such notice shall not invalidate any such
action, consent or notice in respect of the Borrower.

9.9 Survival of Agreements. All agreements, representations
and warranties made herein shall survive the execution and delivery of this
Credit Agreement and the issuances of Letters of Credit and the making and
renewal of loans hereunder.

9.10 Successors and Assigns; Participations. (a) This
Credit Agreement shall be binding upon and inure to the benefit of the
Borrower, MND, the Banks, the Administrative Agent, all future holders of the
Loans and the L/C Obligations, and their respective successors and assigns,
except that the

<PAGE> 78
74

Borrower and MND may not assign or transfer any of their rights or obligations
under this Credit Agreement without the prior written consent of each Bank.

(b) Any Bank may, in the ordinary course of its commercial
banking business and in accordance with applicable law, at any time sell to one
or more banks or other entities ("Participants") participating interests in any
Loan or Reimbursement Obligations owing to such Bank, any Commitment of such
Bank or any other interest of such Bank hereunder. In the event of any such
sale by a Bank of participating interests to a Participant, such Bank's
obligations under this Credit Agreement to the other parties to this Credit
Agreement shall remain unchanged, such Bank shall remain solely responsible for
the performance thereof, and the Borrower and the Administrative Agent shall
continue to deal solely and directly with such Bank in connection with such
Bank's rights and obligations under this Credit Agreement. The Borrower agrees
that if amounts outstanding under this Credit Agreement are due and unpaid, or
shall have been declared or shall have become due and payable upon the
occurrence of an Event of Default, each Participant shall be deemed to have the
right of setoff in respect of its participating interest in amounts owing under
this Credit Agreement to the same extent as if the amount of its participating
interest were owing directly to it as a Bank under this Credit Agreement;
provided, that such right of setoff shall be subject to the obligation of such
Participant to share with the Banks, and the Banks agree to share with such
Participant, as provided in subsection 9.5(a). The Borrower also agrees that
each Participant shall be entitled to the benefits of subsections 2.19, 2.20,
2.21 and 9.5(b) with respect to its participation in the Commitments and the
Loans and other amounts outstanding from time to time; provided, that no
Participant shall be entitled to receive any greater amount pursuant to such
subsections than the transferor Bank would have been entitled to receive in
respect of the amount of the participation transferred by such transferor Bank
to such Participant had no such transfer occurred.

(c) Any Bank may, in the ordinary course of its commercial
banking business and in accordance with applicable law, at any time and from
time to time assign to any Bank or, with the prior consent of the Borrower, the
Issuing Banks and the Administrative Agent (which in the case of the Borrower
shall not be unreasonably withheld), to an affiliate of any Bank or to an
additional bank or financial institution (each, an "Assignee") all or any part
of its rights and obligations under this Credit Agreement and the other Credit
Documents pursuant to an Assignment and Acceptance, substantially in the form
of Exhibit H, executed by such Assignee, such assigning Bank (and, in the case
of an Assignee that is not then a Bank, by the Borrower, the Issuing Banks and
the Administrative Agent) and delivered to the Administrative Agent for its
acceptance and recording in the Register. Upon such execution, delivery,
acceptance and recording, from and after the effective date determined pursuant

<PAGE> 79
75

to such Assignment and Acceptance, (x) the Assignee thereunder shall be a party
hereto and, to the extent provided in such Assignment and Acceptance, have the
rights and obligations of a Bank hereunder with a Commitment as set forth
therein, and (y) the assigning Bank thereunder shall, to the extent provided in
such Assignment and Acceptance, be released from its obligations under this
Credit Agreement (and, in the case of an Assignment and Acceptance covering all
or the remaining portion of an assigning Bank's rights and obligations under
this Credit Agreement, such assigning Bank shall cease to be a party hereto).

(d) The Administrative Agent, on behalf of the Borrower,
shall maintain at the address of the Administrative Agent referred to in
subsection 9.4 a copy of each Assignment and Acceptance delivered to it and a
register (the "Register") for the recordation of the names and addresses of the
Banks and the Commitment of, and principal amount of the Loan and the
Reimbursement Obligation owing to, each Bank from time to time. The entries in
the Register shall be conclusive, in the absence of manifest error, and the
Borrower, the Administrative Agent and the Banks shall treat each Person whose
name is recorded in the Register as the owner of a Loan or other obligation
hereunder as the owner thereof for all purposes of this Credit Agreement and
the other Credit Documents, notwithstanding any notice to the contrary. Any
assignment of any Loan or other obligation hereunder shall be effective only
upon appropriate entries with respect thereto being made in the Register. The
Register shall be available for inspection by the Borrower or any Bank at any
reasonable time and from time to time upon reasonable prior notice.

(e) Upon its receipt of an Assignment and Acceptance executed
by an assigning Bank and an Assignee (and, in the case of an Assignee that is
not then a Bank, by the Borrower, the Issuing Banks and the Administrative
Agent) together with payment to the Administrative Agent of a registration and
processing fee of $3,000, the Administrative Agent shall (i) promptly accept
such Assignment and Acceptance and (ii) on the effective date determined
pursuant thereto record the information contained therein in the Register and
give notice of such acceptance and recordation to the Banks and the Borrower.

(f) The Borrower authorizes each Bank to disclose to any
Participant or Assignee (each, a "Transferee") and any prospective Transferee
(but, in the case of a prospective Assignee as to which consent of the Borrower
must be obtained pursuant to subsection 9.10(c), only if the Borrower shall
have given such consent) any and all financial information in such Bank's
possession concerning the Borrower and its Affiliates which has been delivered
to such Bank by or on behalf of the Borrower pursuant to this Credit Agreement
or which has been delivered to such Bank by or on behalf of the Borrower in
connection with such Bank's credit evaluation of the Borrower and its
Affiliates prior to becoming a party to this Credit

<PAGE> 80
76

Agreement; provided that each such Transferee or prospective Transferee agrees
to keep confidential such financial information and any other written or oral
information provided to it by or on behalf of MND or any of its Subsidiaries,
or by such Bank regarding MND or any of its Subsidiaries, pursuant to or in
connection with this Credit Agreement.

9.11 Counterparts. This Credit Agreement may be executed in
any number of separate counterparts each of which shall be an original and all
of said counterparts taken together shall be deemed to constitute one and the
same agreement. Promptly after the execution hereof, the Administrative Agent
shall transmit to each Bank a conformed copy of this Credit Agreement. A set
of the copies hereof signed by all the parties hereto shall be lodged with the
Borrower and the Administrative Agent.

9.12 Severability. Any provision of this Credit Agreement
which is prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof, and any
such prohibition or unenforceability in any jurisdiction shall not invalidate
or render unenforceable such provision in any other jurisdiction.

9.13 Interest. It is the intent of each Bank and the
Borrower in the execution and performance of this Credit Agreement and all
matters incidental and related hereto and any agreement or instrument executed
in connection herewith or with any Debt of the Borrower to any of the Banks to
remain in strict compliance with all laws applicable to such Bank from time to
time in effect, including, without limitation, usury laws. In furtherance
hereof, each Bank and the Borrower stipulates and agrees that none of the terms
and provisions contained in or pertaining to this Credit Agreement or any other
agreement or instrument ("Other Agreement") executed in connection herewith or
with any Debt of the Borrower to any Bank shall ever be construed to create a
contract to pay for the use, forbearance or detention of money with interest at
a rate or in an amount in excess of the Maximum Rate for such Bank or maximum
amount of interest permitted to be charged by such Bank under all laws in
effect and applicable to such Bank. For purposes of this Credit Agreement,
"interest" shall include the aggregate of all amounts which constitute or are
deemed to constitute interest under the respective laws in effect and
applicable to the Banks that are contracted for, chargeable, receivable
(whether received or deemed to have been received) or taken under this Credit
Agreement or any Other Agreement. The Borrower shall never be required to pay
to any Bank unearned interest hereunder or under any Other Agreement and shall
never be required to pay interest hereunder or on any Other Agreement at a rate
or in an amount in excess of the Maximum Rate for such Bank or maximum amount
of interest that may be lawfully charged by such Bank under any law

<PAGE> 81
77

which is in effect and applicable to such Bank and the provisions of this
paragraph shall control over all other provisions of this Credit Agreement or
any Other Agreement which may be in apparent conflict herewith. If the
effective rate or amount of interest which would otherwise be payable under
this Credit Agreement or any Other Agreement, or all of them, would exceed the
Maximum Rate for any Bank or the maximum amount of interest any Bank or any
holder of any Other Agreement is allowed by the relevant applicable law to
charge, contract for, take or receive, or in the event a Bank or any holder of
any Other Agreement shall charge, contract for, take or receive monies that are
deemed to constitute interest which could, in the absence of this provision,
increase the effective rate or amount of interest payable under this Credit
Agreement or any Other Agreement, or all of them, to a rate or amount in excess
of that permitted to be charged, contracted for, taken or received under the
applicable laws then in effect with respect to such Bank, then the principal
amount of the obligations of the Borrower to such Bank under this Credit
Agreement or any Other Agreement or the amount of interest which would
otherwise be payable to or for the account of such Bank under this Credit
Agreement or any Other Agreement, or all of them, shall be reduced to the
amount allowed under said laws as now or hereafter construed by the courts
having jurisdiction, and all such monies so charged, contracted for, or
received that are deemed to constitute interest in excess of the Maximum Rate
for such Bank or maximum amount of interest permitted by the relevant
applicable laws shall be immediately returned to or credited to the account of
the Borrower upon such determination. All amounts paid or agreed to be paid in
connection with the indebtedness arising pursuant to this agreement which would
under any law in effect and applicable to such Bank be deemed "interest" shall,
to the extent permitted by such applicable law, be amortized, prorated,
allocated and spread throughout the full term of this Credit Agreement.

9.14 GOVERNING LAW. THIS CREDIT AGREEMENT AND THE RIGHTS AND
OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER SHALL BE GOVERNED BY, AND
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.

9.15 SUBMISSION TO JURISDICTION; WAIVERS. MND AND THE
BORROWER EACH HEREBY IRREVOCABLY AND UNCONDITIONALLY:

(i) SUBMITS FOR ITSELF AND ITS PROPERTY IN ANY LEGAL
ACTION OR PROCEEDING RELATING TO THIS CREDIT AGREEMENT, OR FOR
RECOGNITION AND ENFORCEMENT OF ANY JUDGMENT IN RESPECT THEREOF, TO THE
NON-EXCLUSIVE GENERAL JURISDICTION OF THE COURTS OF THE STATE OF NEW
YORK, THE COURTS OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN
DISTRICT OF NEW YORK, AND APPELLATE COURTS FROM ANY THEREOF;

(ii) CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY BE
BROUGHT IN SUCH COURTS, AND WAIVES ANY OBJECTION THAT IT MAY NOW OR
HEREAFTER HAVE TO THE VENUE OF ANY SUCH ACTION OR

<PAGE> 82
78

PROCEEDING IN ANY SUCH COURT OR THAT SUCH ACTION OR PROCEEDING WAS
BROUGHT IN AN INCONVENIENT COURT AND AGREES NOT TO PLEAD OR CLAIM THE
SAME;

(iii) AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION
OR PROCEEDING MAY BE EFFECTED BY MAILING A COPY THEREOF BY REGISTERED
OR CERTIFIED MAIL (OR ANY SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE
PREPAID, TO IT AT ITS ADDRESS SET FORTH IN SUBSECTION 9.4 HEREOF OR AT
SUCH OTHER ADDRESS OF WHICH THE ADMINISTRATIVE AGENT SHALL HAVE BEEN
NOTIFIED PURSUANT THERETO; AND

(iv) AGREES THAT NOTHING HEREIN SHALL AFFECT THE RIGHT
TO EFFECT SERVICE OF PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR
SHALL LIMIT THE RIGHT TO SUE IN ANY OTHER JURISDICTION.

9.16 WAIVERS OF JURY TRIAL. THE BORROWER, MND, THE
ADMINISTRATIVE AGENT AND THE BANKS HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVE
TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS CREDIT
AGREEMENT OR ANY OTHER CREDIT DOCUMENT AND FOR ANY COUNTERCLAIM THEREIN.

<PAGE> 83
79

IN WITNESS WHEREOF, the parties have caused this Credit
Agreement to be duly executed and delivered by their proper and duly authorized
officers as of the day and year first above written.

MITCHELL ENERGY CORPORATION

By /s/ W. BROOKE HAMILTON
--------------------------
Title: W. Brooke Hamilton
Vice President

MND ENERGY CORPORATION

By /s/ W. BROOKE HAMILTON
--------------------------
Title: W. Brooke Hamilton
Vice President

CHEMICAL BANK, as Administrative
Agent and as an Issuing Bank

By /s/ JAMES H. RAMAGE
---------------------------
Title: JAMES H. RAMAGE
VICE PRESIDENT

Commitment: $250,000,000

Office and Address for Notices:
CHEMICAL BANK
270 Park Avenue
New York, NY 10017
Attn: Mr. John Gehebe

<PAGE> 84
NATIONSBANK OF TEXAS, N.A., as an
Issuing Bank

By: /s/ KRISTI B. PALMER
--------------------------
Title: V.P.
-----------------------

Commitment: $125,000,000

Office and Address for Notices:
NATIONSBANK OF TEXAS, N.A.
700 Louisiana, 8th Floor
Houston, Texas 77002
Attn: Kristin B. Palmer

<PAGE> 85

PNC BANK, NATIONAL ASSOCIATION, as
a Bank

By: /s/ [ILLEGIBLE]
--------------------------
Title: Vice President
-----------------------

Commitment: $125,000,000

Office and Address for Notices:
PNC BANK, NATIONAL ASSOCIATION
Fifth Avenue and Wood Street
Pittsburgh, Pennsylvania 15265
Attn: Mr. Michael J. Beyer

<PAGE> 86
Schedule 1

The Applicable Margin, Letter of Credit Commission Rate and Commitment Fee Rate
will be based on ratings (the "Bond Rating") of MEDC's senior unsecured debt by
Standard & Poor's Ratings Group ("S&P") and Moody's Investors Service Inc.
("Moody's"). Any change in such margins and fees resulting from a change in
the Bond Rating shall be effective immediately.

<TABLE>
<CAPTION>
========================================================================================================
Level 1 Level 2 Level 3 Level 4 Level 5
Rating S&P/Moody's* BBB/ BBB-/ BB+/ BB/ BB-/
Baa2 or Baa3 Ba1 Ba2 Ba3 or
higher lower
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Letter of Credit Commission .35 .50 .75 1.00 1.375
Rate
-------------------------------------------------------------------------------------------------------
Applicable Margin- .35 .50 .75 1.00 1.375
Eurodollar Loans
-------------------------------------------------------------------------------------------------------
Applicable Margin- 0 0 0 0 .375
ABR Rate Loans
-------------------------------------------------------------------------------------------------------
Applicable Margin- .475 .625 .875 1.125 1.50
CD Rate Loans
-------------------------------------------------------------------------------------------------------
Commitment Fee Rate .12 .20 .30 .375 .50
========================================================================================================
</TABLE>

* In the event such Bond Ratings fall within different Levels, the
foregoing will be based on the higher of the two Bond Ratings,
provided that if the higher (i.e. lower numbered) Level shall be two
or more Levels higher than the lower Level, the Level immediately
below such higher Level shall govern. In the event no Bond Rating is
in effect, Level 5 shall govern.

<PAGE> 87
Schedule 2

MND Energy Corporation
Restricted Subsidiaries

Mitchell Energy Corporation
Mitchell Energy Twenty-Two, Inc.(1)

Mitchell Gas Services, Inc.
Acacia Natural Gas Corporation
Liquid Energy Fuels Corporation

Mitchell Marketing Company

Liquid Energy Corporation(2)

MND Energy Eight, Inc.(1)

Southwestern Gas Pipeline, Inc.(2)

MND Energy Nine, Inc.(1)

MND Energy Ten, Inc.(1)

- -------------------------

(1) Currently only a shell corporation. No assets are owned nor are
business activities performed under this entity.

(2) Currently a shell corporation used only to preserve a business name.
No assets are owned nor are business activities performed under this
entity.
<PAGE> 88
Schedule 3

MND Energy Corporation
Existing Liens
January 31, 1996
(in thousands)

<TABLE>
<S> <C>
Belvieu Environmental Fuels $ 58,667
C&L Processors Partnership 43,105
Gulf Coast Fractionators 28,772
--------
$130,544
========
</TABLE>
<PAGE> 89
Schedule 4

MND Energy Corporation
Existing Debt
January 31, 1996
(in thousands)

<TABLE>
<CAPTION>
Mitchell Gas Services' Interest
-------------------------------
Non-
Total Recourse Recourse
Debt Debt Debt
-------- ------- --------
<S> <C> <C> <C>
Belvieu Environmental Fuels $ 58,667 $ 6,667 $ 52,000
C&L Processors Partnership 43,105 23,277 19,828
Gulf Coast Fractionators 28,772 3,028 25,744
-------- ------- --------
Total $130,544 $32,972 $97,572
======== ======= ========
</TABLE>
<PAGE> 90

EXHIBIT A
TO CREDIT AGREEMENT

[Must be printed on Issuing Bank's Letterhead]

[Name and Address
of Surety Company]

Date
---------------------------------

On all communications please refer to
LETTER OF CREDIT NO.
-----------------

Attention: ____________________

Ladies and Gentlemen:

We hereby establish our Irrevocable Letter of Credit in your favor and
authorize you, your affiliates, parent, and subsidiaries (individually and
collectively, "you") to draw on us, up to the aggregate amount of $_________,
and we engage with you that all drafts drawn under and in compliance with the
terms of this credit will be fully honored by us if presented at this office on
or before ________________ or any
(Expiration Date)

extended date, provided:

1. This Letter of Credit shall be automatically extended for
additional periods of one year from the present or each future expiration date
unless we have notified you in writing, not less than sixty (60) days before
such date, that we elect not to renew this Letter of Credit. Our notice of
such election shall be sent by registered mail or by hand to the above address,
attention of "_____________________________" or at such other address
previously notified to us at our above address.

2. Any draft(s) drawn by you under this Letter of Credit shall be
accompanied by your written certification that you, as Surety, have executed or
procured the execution of supersedeas appeal bonds in connection with the
judgment in _________________________ (No. ___________________) in the District
Court of Wise County, Texas (the "Bond(s)") at the request of Mitchell Energy
Corporation and that either of the following alternatives exists: (a) Claim(s)
have been made or may be made under the Bond(s) and that in your sole judgment
as Surety the funds represented by your draft(s) are required for your
protection and for the protection of your Co-Surety(ies) and Re-Insurer(s) if
any; (b) Our notice of election not to renew has been received and that you
have not been released from liability under the
<PAGE> 91
2

Bond(s), and the proceeds of your draft(s) will be held by you as collateral
against loss, cost or expense thereunder.

3. We hereby represent and affirm that the execution of this Letter
of Credit will not constitute a violation of any law or regulation which may
limit the amount of credit which can be extended by this bank to any single
borrower or customer.

4. Your acceptance of this credit will constitute your agreement to
repay to us funds (including any investment income earned on such funds) paid
to you hereunder to the extent that such funds (and any such investment income)
exceed the total of your loss, cost and expense (including unpaid premiums)
under the Bond(s).

5. This Letter of Credit shall be subject to the Uniform Customs and
Practice for Documentary Credits, 1993 Revision, International Chamber of
Commerce Publication 500, as amended and restated from time to time.

Yours very truly,

______________________________________(BANK)

______________________________________ __________________________________
Authorized Signature Print Name and Title
<PAGE> 92
EXHIBIT B
TO CREDIT AGREEMENT

FORM OF
LEGAL OPINION OF COUNSEL TO THE BORROWER

April 8, 1996

To each of the Banks which is a party to the
Credit and Reimbursement Agreement, dated as of
April 8, 1996 (the "MEC Credit Agreement"),
among the Banks, including the Issuing Banks,
referred to in the MEC Credit Agreement (the "Banks"),
Chemical Bank, as Administrative Agent, Mitchell
Energy Corporation, as Borrower, and MND Energy
Corporation, as Guarantor

Gentlemen:

We have acted as counsel for MND Energy Corporation, a Delaware
corporation ("MND"), Mitchell Gas Services, Inc., a Delaware corporation
("MGS"), Mitchell Energy Corporation, a Delaware corporation ("MEC"), Mitchell
Marketing Company, a Louisiana corporation ("MMC") and Mitchell Energy &
Development Corp., a Texas corporation ("MEDC"), in connection with the
negotiation, preparation, execution and delivery of the MEC Credit Agreement
and the other Credit Documents. Terms defined in the MEC Credit Agreement and
not herein shall have such defined meanings when used in this opinion letter.

As such counsel we have examined the MEC Credit Agreement, the
Guarantees, the Subsidiary Guarantee, the Subordination Agreement, and the
originals, or copies certified to our satisfaction of such corporate records,
certificates of public officials and other persons and other documents,
agreements and instruments as we deemed necessary as a basis for the opinions
hereinafter expressed.

Based upon the foregoing, we are of the following opinion:

1. Each of MEDC, MND, MEC and the other Material Subsidiaries is
a corporation duly incorporated and validly existing under the law of the
jurisdiction in which it is incorporated, in good standing therein, duly
qualified and in good standing in each jurisdiction wherein the conduct of its
business or the ownership of its properties requires such qualifications.

2. Each of MND and MEC has the corporate power and authority
under the laws of its jurisdiction of incorporation to execute, deliver and
perform the MEC Credit Agreement; each of MEDC and MND has the corporate power
and authority under the laws of its jurisdiction of incorporation to execute,
deliver and perform the Guarantee to which it is a party; each of MGS and MMC
has the corporate power and authority under the laws of its jurisdiction of
incorporation to execute, deliver and perform the Subsidiary Guarantee; and

MITCHELL ENERGY & DEVELOPMENT CORP. 2002 TIMBERLOCH PLACE
P.O. BOX 4000. THE WOODLANDS, TEXAS 77387-4000 713/377-6782 FAX 713/377-7080
<PAGE> 93
April 8, 1996
Page 2

MEDC has the corporate power and authority under the laws of its jurisdiction
of incorporation to execute, deliver and perform the Subordination Agreement.

3. The execution, delivery and performance by each of MND and MEC
of the MEC Credit Agreement, by each of MEDC and MND of the Guarantee to which
it is a party, by each of MGS and MMC of the Subsidiary Guarantee, and by MEDC
of the Subordination Agreement has in each case been duly and validly
authorized by its board of directors and by all other necessary corporation
action.

4. Each of MND and MEC has duly executed and delivered the MEC
Credit Agreement; each of MEDC and MND has duly executed and delivered the
Guarantee to which it is a party; each of MGS and MMC has executed and
delivered the Subsidiary Guarantee; MEDC has duly executed and delivered the
Subordination Agreement; and the MEC Credit Agreement, the Guarantees, the
Subsidiary Guarantee, and the Subordination Agreement each constitutes a valid
and legally binding obligation of such party or parties thereto, enforceable in
accordance with its terms, subject to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights and to general equity principles.

5. No consent of any other party (including, without limitation,
stockholders of MND or MEC), and no consent, license, approval or authorization
of, or registration or declaration with, any governmental authority, bureau or
agency is required to be obtained in connection with the execution, delivery or
performance, validity or enforceability of the MEC Credit Agreement, the
Guarantees, the Subsidiary Guarantee or the Subordination Agreement.

6. The execution, delivery and performance of the MEC Credit
Agreement, the Guarantees, the Subsidiary Guarantee and the Subordination
Agreement will not (A) violate or contravene any provision of any law or
regulation (including without limitation any Texas usury law) applicable to
MEDC, MND, MEC or any other Material Subsidiary, (B) conflict with, or result
in a breach or violation of, any of the provisions of, or constitute a default
under, the Certificate of Incorporation or By-laws of MEDC, MND, MEC or any
other Material Subsidiary or any material indenture, loan agreement or other
agreement or instrument to which MEDC, MND, MEC or any other Material
Subsidiary is a party or under which it or any of its properties are or may be
bound, or (C) violate any order, award, judgment, determination, writ,
injunction or decree applicable to MEDC, MND, MEC or any other Material
Subsidiary, of any regulatory, administrative or other governmental or public
body or authority, arbitrator or court of the United States or any state of
other jurisdiction thereof.
<PAGE> 94
April 8, 1996
Page 3

7. Neither MEDC, MND, MEC nor any other Material Subsidiary is a
"holding company", a "subsidiary company" of a "holding company" or an
"affiliate" of a "holding company" or of a "subsidiary company" of a "holding
company," within the meaning of the Public Utility Holding Company Act of 1935,
as amended.

8. Neither MEDC, MND, MEC nor any other Material Subsidiary is an
"investment company" or a company "controlled" by an "investment company,"
within the meaning of the Investment Company Act of 1940, as amended.

9. MEDC is the legal and beneficial owner of all of the issued
and outstanding capital stock of MND and MND is the legal and beneficial owner
of all of the issued and outstanding capital stock of MEC and each other
Material Subsidiary, in each case free and clear, to the best of our knowledge,
of any Liens, claims, security interests or encumbrances of any nature.

The opinions in paragraphs 2 through 9 above are based upon and limited
to the laws of the State of Texas and the United States of America and the
corporate law of the States of Delaware and Louisiana. We note that, by their
terms, the MEC Credit Agreement, the Guarantees, the Subsidiary Guarantee and
the Subordination Agreement are governed by the laws of the State of New York.
For purposes of the opinion given in paragraph 4, we have assumed, with your
permission, that the laws of the State of New York are identical to the laws of
the State of Texas.

This opinion is furnished to you in connection with the MEC Credit
Agreement and may not be relied upon by any person or by you in any other
context without our prior written consent.

Very truly yours,

MITCHELL ENERGY & DEVELOPMENT CORP.
LEGAL DEPARTMENT

By:
<PAGE> 95
EXHIBIT C
TO CREDIT AGREEMENT

[RESERVED]
<PAGE> 96

EXHIBIT D
TO CREDIT AGREEMENT

[Form of]
Borrowing Certificate

I, ____________, _______________ of Mitchell Energy
Corporation (the "Corporation"), a corporation organized under the laws of the
State of Delaware, as required by Section 4 of the Credit Agreement among the
Corporation, MND Energy Corporation, the Banks party thereto, and Chemical
Bank, as administrative agent, dated as of April 5, 1996 (as the same may have
been heretofore amended, supplemented or otherwise modified, the "Credit
Agreement"), do hereby certify that, on and as of the date set forth below:

(i) No Default [(other than a Default arising solely from
the existence of an Outstanding Judgment which will be stayed pending
appeal upon the issuance of the requested Letter[s] of Credit and
related judgment bond and, solely in the case of the making of any
loan, other than a Default under subsection 6.2 of the Credit
Agreement arising solely from Consolidated Debt being greater than the
Approved Borrowing Base under the circumstances described in clause
(i) or (ii) of such subsection)] or Event of Default has occurred and
is continuing, both before and after giving effect to the [issuance[s]
of the Letter[s] of Credit requested to be issued] [Loans requested to
be made] on the date hereof;

(ii) The representations and warranties contained in
Section 3 of the Credit Agreement are true and correct on and as of
the date hereof;

(iii) As of the date hereof, the aggregate amount of,
without duplication, all (i) Outstanding Judgments, (ii) Judgment
Payments, (iii) Judgment Interest, (iv) Outstanding Verdicts and (v)
Settlements is not in excess of $500,000,000 in the aggregate; and

(iv) Attached as Schedule 1 hereto is a true and complete
list, as of the date hereof, of all pending and past Litigation
proceedings, setting forth in the case of each proceeding (a) the
total amount of any Outstanding
<PAGE> 97
Verdict, Outstanding Judgment, Judgment Payment, Judgment Interest
and/or Settlement with respect thereto to the extent applicable, and
(b) the total amount claimed against any and all of the Credit Parties
in such proceeding otherwise.

IN WITNESS WHEREOF, I have signed this Borrowing Certificate
on behalf of the Corporation on this ____ day of ________, 199__.

------------------------------
Name:
Title:

<PAGE> 98

EXHIBIT E-1
TO CREDIT AGREEMENT

FORM OF
MEDC GUARANTEE

GUARANTEE dated as of April 5, 1996 by MITCHELL ENERGY &
DEVELOPMENT CORP., a Texas corporation (the "Guarantor"), in favor of CHEMICAL
BANK, as administrative agent (in such capacity, the "Administrative Agent")
for the banks (the "Banks"), including the Issuing Banks (as defined in the
Credit Agreement defined herein), from time to time party to the Credit and
Reimbursement Agreement, dated as of April 5, 1996, among Mitchell Energy
Corporation, a Delaware Corporation (the "Borrower"), MND Energy Corporation,
the Banks, and the Administrative Agent (hereinafter, as the same may from time
to time be amended, supplemented or otherwise modified, the "Credit
Agreement").

W I T N E S S E T H :

WHEREAS, pursuant to the Credit Agreement the Banks have
agreed, among other things, to make extensions of credit to, or for the account
of, the Borrower, including issuing Letters of Credit and making Loans from
time to time in an aggregate face and/or principal amount up to but not
exceeding $500,000,000; and

WHEREAS, the Guarantor indirectly owns all the issued and
outstanding capital stock of the Borrower and it is to the advantage of the
Guarantor that the Banks make such extensions of credit to, or for the account
of, the Borrower; and

WHEREAS, the Banks are willing to make such extensions of
credit under the Credit Agreement upon the condition, among others, that the
Guarantor shall have executed and delivered this Guarantee to the
Administrative Agent for the ratable benefit of the Banks;

NOW, THEREFORE, in consideration of the premises and of the
mutual covenants herein contained and for other good and valuable
consideration, the receipt of which is hereby acknowledged, the parties hereto
agree as follows:

1. Defined Terms. Unless otherwise defined herein, as used
in this Guarantee, terms defined in the Credit Agreement shall have their
defined meanings when used herein. As used herein, "Obligations" shall mean
the unpaid principal of and interest on the Loans and Reimbursement Obligations
and all other indebtedness, obligations and liabilities of the Borrower to the
Administrative Agent and the Banks, whether direct or indirect, absolute or
contingent, due or to become due, or now existing or hereafter incurred, which
may arise under, out of, or in connection with, the Credit Agreement, the other
Credit Documents and any other document made, delivered or given in connection
<PAGE> 99
2

therewith, due or to become due, or now existing or hereafter incurred, of the
Borrower to the Banks, whether on account of principal, interest, reimbursement
obligations, fees, indemnities, costs, expenses (including, without limitation,
all reasonable fees and disbursements of counsel to the Administrative Agent or
to the Banks that are required to be paid by the Borrower pursuant to the terms
of the Credit Agreement) or otherwise.

2. Guarantee. (a) The Guarantor hereby unconditionally and
irrevocably guarantees to the Administrative Agent, for the ratable benefit of
the Banks, the prompt and complete payment when due (whether upon demand, at
the stated maturity, by acceleration or otherwise) of the Obligations. The
Guarantor further agrees to pay any and all expenses (including, without
limitation, fees and disbursements of counsel) which may be paid or incurred by
the Administrative Agent in collecting any or all of the Obligations and/or
enforcing any rights under this Guarantee or under the Obligations. This
Guarantee shall remain in full force and effect until the Obligations are paid
in full, no Letters of Credit are outstanding and the Commitments are
terminated, notwithstanding that from time to time prior thereto the Borrower
may be free from any Obligations.

(b) No payment or payments made by the Borrower, the
Guarantor or any other Person received or collected by the Administrative Agent
or any Bank from the Borrower, the Guarantor or any other Person by virtue of
any action or proceeding or any set-off or appropriation or application at any
time or from time to time in reduction of or in payment of the Obligations
shall be deemed to modify, reduce, release or otherwise affect the liability of
the Guarantor hereunder which shall, notwithstanding any such payment or
payments, remain liable for the Obligations until the Obligations are paid in
full, no Letters of Credit are outstanding and the Commitments are terminated.

3. Set-off. Upon the occurrence of any Event of Default in
the payment on any Loan or Reimbursement Obligation, the Administrative Agent
and each Bank is hereby irrevocably authorized by the Guarantor at any time and
from time to time without notice to the Guarantor, any such notice being
expressly waived by the Guarantor, to set off and appropriate and apply any and
all deposits (general or special, time or demand, provisional or final), in any
currency, and any other credits, indebtedness or claims, in any currency, in
each case whether direct or indirect, absolute or contingent, or matured or
unmatured, at any time held or owing by the Administrative Agent or such Bank
to or for the credit or the account of the Guarantor, or any part thereof in
such amounts as the Administrative Agent or such Bank may elect, against and on
account of the obligations and liabilities of the Guarantor to the
Administrative Agent or such Bank hereunder, and claims of every nature and
description of the Administrative Agent or such Bank against the Guarantor, in
any
<PAGE> 100
3

currency, whether arising hereunder, under the Credit Agreement, any other
Credit Document or otherwise, as the Administrative Agent or such Bank may
elect, whether or not the Administrative Agent or such Bank has made any demand
for payment and although such obligations, liabilities and claims may be
contingent or unmatured. The Administrative Agent and each Bank agrees to
notify the Guarantor promptly of any such set-off and the application made by
it of the proceeds thereof, provided that the failure to give such notice shall
not affect the validity of such set-off and application. The rights of the
Administrative Agent and each Bank under this Section 3 are in addition to
other rights and remedies (including, without limitation, other rights of
set-off) which the Administrative Agent or such Bank may have.

4. No Subrogation. Notwithstanding any payment or payments
made by the Guarantor hereunder or any set-off or application of funds of the
Guarantor by the Administrative Agent or any Bank, the Guarantor shall not be
entitled to be subrogated to any of the rights of the Administrative Agent or
any Bank against the Borrower or against any collateral security or guarantee
or right of offset held by the Administrative Agent or any Bank for the payment
of the Obligations, nor shall the Guarantor seek any reimbursement from the
Borrower in respect of payments made by the Guarantor hereunder, until all
amounts owing to the Administrative Agent and each Bank by the Borrower for or
on account of the Obligations are paid in full, no Letters of Credit are
outstanding and the Commitments are terminated. If any amount shall be paid to
the Guarantor on account of such subrogation rights at any time when all of the
Obligations shall not have been paid in full, such amount shall be held by the
Guarantor in trust for the Banks, segregated from other funds of the Guarantor,
and shall, forthwith upon receipt by the Guarantor, be turned over to the
Administrative Agent in the exact form received by the Guarantor (duly indorsed
by the Guarantor to the Administrative Agent, if required), to be applied
against the Obligations, whether matured or unmatured, in such order as the
Administrative Agent may determine.

5. Renewals, Extensions, Modifications, etc. The Guarantor
shall remain obligated hereunder notwithstanding that, without any reservation
of rights against the Guarantor, and without notice to or further assent by the
Guarantor, any demand for payment of any of the Obligations made by the
Administrative Agent or any Bank may be rescinded by the Administrative Agent
or such Bank and any of the Obligations continued, and the Obligations, or the
liability of any other party upon or for any part thereof, or any collateral
security or guarantee therefor or right of offset with respect thereto, may,
from time to time, in whole or in part, be renewed, extended, amended,
modified, accelerated, compromised, waived, surrendered or released by the
Administrative Agent or any Bank and the Credit Agreement, any other Credit
Document or any other document in connection therewith may be amended,
modified, supplemented or terminated, in whole or in part, as the Banks (or the
Required Banks, as the
<PAGE> 101
4

case may be) may deem advisable from time to time, and any collateral security
or guarantee or right of offset at any time held by the Administrative Agent or
any Bank for the payment of the Obligations may be sold, exchanged, waived,
surrendered or released. Neither the Administrative Agent nor any Bank shall
have any obligation to protect, secure, perfect or insure any Lien at any time
held as security for the Obligations or this Guarantee or any property subject
thereto.

6. Guarantee Absolute and Unconditional. The Guarantor
waives any and all notice of the creation, renewal, extension or accrual of any
of the Obligations and notice of or proof of reliance by the Administrative
Agent or any Bank upon this Guarantee or acceptance of this Guarantee; the
Obligations, and any of them, shall conclusively be deemed to have been
created, contracted or incurred and extended, amended and waived in reliance
upon this Guarantee; and all dealings between the Borrower or the Guarantor, on
the one hand, and the Administrative Agent and the Banks, on the other, shall
likewise be conclusively presumed to have been had or consummated in reliance
upon this Guarantee. The Guarantor waives diligence, presentment, protest,
demand for payment and notice of default or nonpayment to or upon the Borrower
or the Guarantor with respect to the Obligations. This Guarantee shall be
construed as a continuing, absolute and unconditional guarantee of payment
without regard (a) to the validity, regularity or enforceability of the Credit
Agreement, any other Credit Document, any of the Obligations or any collateral
security document or guarantee therefor or right of offset with respect thereto
at any time or from time to time held by the Administrative Agent or any Bank,
(b) any defense, set-off or counterclaim which may at any time be available to
or be asserted by the Borrower against the Administrative Agent or any Bank, or
(c) any other circumstance whatsoever (with or without notice to or knowledge
of the Borrower or the Guarantor) which constitutes, or might be construed to
constitute, an equitable or legal discharge of the Borrower for the
Obligations, or of the Guarantor under this Guarantee, in bankruptcy or in any
other instance. When making any demand or pursuing its rights and remedies
hereunder against the Guarantor, the Administrative Agent or any Bank may, but
shall be under no obligation to, make a similar demand upon or pursue such
rights and remedies as it may have against the Borrower or any other Person or
against any collateral security or guarantee for the Obligations or any right
of offset with respect thereto, and any failure by the Administrative Agent or
any Bank to make any such similar demand or to pursue such other rights or
remedies or to collect any payments from the Borrower or any such other Person
or to realize upon any such collateral security or guarantee or to exercise any
such right of offset, or any release of the Borrower or any such other Person
or any such collateral security, guarantee or right of offset, shall not
relieve the Guarantor of any liability hereunder, and shall not impair or
affect the rights and remedies, whether express, implied or available as a
matter of law, of the Administrative
<PAGE> 102
5

Agent and the Banks. This Guarantee shall continue in full force and effect
and be binding in accordance with and to the extent of its terms upon the
Guarantor and its successors and assigns, and shall inure to the benefit of the
Administrative Agent and the Banks, and their respective successors, indorsees,
transferees and assigns, until all the Obligations and the obligations of the
Guarantor under this Guarantee shall have been satisfied by payment in full, no
Letters of Credit are outstanding and the Commitments are terminated. For the
purposes hereof, "demand" shall include the commencement and continuance of any
legal proceedings.

7. Reinstatement of Guarantee. This Guarantee shall continue
to be effective, or be reinstated, as the case may be, if at any time payment,
or any part thereof, of any of the Obligations is rescinded or must otherwise
be restored or returned by the Administrative Agent or any Bank upon the
insolvency, bankruptcy, dissolution, liquidation or reorganization of the
Borrower,the Guarantor or any other Person, or upon or as a result of the
appointment of a receiver, intervenor or conservator of, or trustee or similar
officer for, the Borrower or the Guarantor or any substantial part of its
property, or otherwise, all as though such payments had not been made.

8. Payment of Obligations. The Guarantor hereby guarantees
that the Obligations will be paid to the Administrative Agent, for the ratable
benefit of the Banks, without set-off or counterclaim in lawful currency of the
United States of America at the office of the Administrative Agent located at
Agent Bank Services Group, Chemical Bank, 140 East 45th Street, New York, New
York 10017, Attention: Frank Giacalone, Mitchell Energy Corporation Clearing
Account #323220312 (or at such other office as shall be notified by the
Administrative Agent to the Guarantor).

9. Representations and Warranties. The Guarantor represents
and warrants to the Administrative Agent and the Banks that:

(a) it is a corporation duly organized, validly existing and
in good standing under the laws of the jurisdiction of its
incorporation and has the corporate power and authority and the legal
right to own and operate its property, to lease the property it
operates and to conduct the business in which it is currently engaged;

(b) it has the corporate power and authority and the legal
right to execute and deliver, and to perform its obligations under,
this Guarantee, and has taken all necessary corporate action to
authorize its execution, delivery and performance of this Guarantee;
<PAGE> 103
6

(c) this Guarantee constitutes a legal, valid and binding
obligation of it enforceable in accordance with its terms, except as
enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement
of creditors' rights generally;

(d) the execution, delivery and performance of this Guarantee
will not violate any provision of any Requirement of Law or material
contractual obligation of it and will not result in or require the
creation or imposition of any Lien on any of the properties or
revenues of it pursuant to any Requirement of Law or material
contractual obligation of it; and

(e) no consent or authorization of, filing with, or other act
by or in respect of, any arbitrator or Governmental Authority and no
consent of any other Person (including, without limitation, any
stockholder or creditor of it) is required in connection with the
execution, delivery, performance, validity or enforceability of this
Guarantee.

10. Severability. Any provision of this Guarantee which is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.

11. No Waiver; Cumulative Remedies. Neither the
Administrative Agent nor any Bank shall by any act (except by a written
instrument pursuant to Section 13 hereof), delay, indulgence, omission or
otherwise be deemed to have waived any right or remedy hereunder or to have
acquiesced in any Default or Event of Default or in any breach of any of the
terms and conditions hereof. No failure to exercise, nor any delay in
exercising, on the part of the Administrative Agent or any Bank, any right,
power or privilege hereunder shall operate as a waiver thereof. No single or
partial exercise of any right, power or privilege hereunder shall preclude any
other or further exercise thereof or the exercise of any other right, power or
privilege. A waiver by the Administrative Agent or any Bank of any right or
remedy hereunder on any one occasion shall not be construed as a bar to any
right or remedy which the Administrative Agent or any Bank would otherwise have
on any future occasion. The rights and remedies herein provided are
cumulative, may be exercised singly or concurrently and are not exclusive of
any rights or remedies provided by law.

12. Notices. Notices by the Administrative Agent to the
Guarantor may be in the same manner and to the same address
<PAGE> 104
7

set forth in subsection 9.4 of the Credit Agreement for notices to the
Borrower.

13. Waivers, Amendments; Assignments. None of the terms or
provisions of this Guarantee may be waived, altered, modified or amended except
by a written instrument executed by the Guarantor and the Administrative Agent;
provided that any provision of this Guarantee may be waived by the
Administrative Agent in a letter or agreement executed by the Administrative
Agent or by facsimile transmission from the Administrative Agent. This
Guarantee shall be binding upon the successors and assigns of the Guarantor and
shall inure to the benefit of the Administrative Agent and the Banks and their
successors and assigns, except that the Guarantor may not assign or transfer
any of its rights or obligations hereunder without the prior written consent of
all the Banks.

14. Authority of Administrative Agent. The Guarantor
acknowledges that the rights and responsibilities of the Administrative Agent
under this Guarantee with respect to any action taken by the Administrative
Agent or the exercise or non-exercise by the Administrative Agent of any
option, right, request, judgment or other right or remedy provided for herein
or resulting or arising out of this Guarantee shall, as between the
Administrative Agent and the Banks, be governed by the Credit Agreement and by
such other agreements with respect thereto as may exist from time to time among
them, but, as between the Administrative Agent and the Guarantor, the
Administrative Agent shall be conclusively presumed to be acting as agent for
the Banks with full and valid authority so to act or refrain from acting, and
the Guarantor shall not be under any obligation, or entitlement, to make any
inquiry respecting such authority.

15. GOVERNING LAW. THIS GUARANTEE SHALL BE GOVERNED BY, AND
SHALL BE CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF
NEW YORK.

16. SUBMISSION TO JURISDICTION; WAIVERS. THE GUARANTOR
HEREBY IRREVOCABLY AND UNCONDITIONALLY:

(i) SUBMITS FOR ITSELF AND ITS PROPERTY IN ANY LEGAL
ACTION OR PROCEEDING RELATING TO THIS GUARANTEE, OR FOR RECOGNITION
AND ENFORCEMENT OF ANY JUDGMENT IN RESPECT THEREOF, TO THE
NON-EXCLUSIVE GENERAL JURISDICTION OF THE COURTS OF THE STATE OF NEW
YORK, THE COURTS OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN
DISTRICT OF NEW YORK, AND APPELLATE COURTS FROM ANY THEREOF;

(ii) CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY BE
BROUGHT IN SUCH COURTS, AND WAIVES ANY OBJECTION THAT IT MAY NOW OR
HEREAFTER HAVE TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING IN ANY
SUCH COURT OR THAT SUCH ACTION OR PROCEEDING WAS BROUGHT IN AN
INCONVENIENT COURT AND AGREES NOT TO PLEAD OR CLAIM THE SAME;
<PAGE> 105
8

(iii) AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR
PROCEEDING MAY BE EFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR
CERTIFIED MAIL (OR ANY SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE
PREPAID, TO THE GUARANTOR AT ITS ADDRESS SET FORTH IN SUBSECTION 9.4
OF THE CREDIT AGREEMENT OR AT SUCH OTHER ADDRESS OF WHICH THE
ADMINISTRATIVE AGENT SHALL HAVE BEEN NOTIFIED PURSUANT THERETO; AND

(iv) AGREES THAT NOTHING HEREIN SHALL AFFECT THE RIGHT TO
EFFECT SERVICE OF PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR
SHALL LIMIT THE RIGHT TO SUE IN ANY OTHER JURISDICTION.

17. WAIVER OF JURY TRIAL. THE GUARANTOR HEREBY IRREVOCABLY
AND UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING
RELATING TO THIS GUARANTEE OR ANY OTHER CREDIT DOCUMENT AND FOR ANY
COUNTERCLAIM THEREIN.
<PAGE> 106
9

IN WITNESS WHEREOF, the undersigned has caused this Guarantee
to be duly executed and delivered by its duly authorized officer as of the day
and year first above written.

MITCHELL ENERGY & DEVELOPMENT CORP.

By:
-------------------------------
Title:
<PAGE> 107

EXHIBIT E-2
TO CREDIT AGREEMENT

FORM OF
MND GUARANTEE

GUARANTEE dated as of April 5, 1996 by MND ENERGY CORPORATION,
a Delaware corporation ("MND") (the "Guarantor"), in favor of CHEMICAL BANK, as
administrative agent (in such capacity, the "Administrative Agent") for the
banks (the "Banks"), including the Issuing Banks (as defined in the Credit
Agreement defined herein), from time to time party to the Credit and
Reimbursement Agreement, dated as of April 5, 1996, among Mitchell Energy
Corporation, a Delaware Corporation (the "Borrower"), the Guarantor, the Banks,
and the Administrative Agent (hereinafter, as the same may from time to time be
amended, supplemented or otherwise modified, the "Credit Agreement").

W I T N E S S E T H :

WHEREAS, the Guarantor owns all the issued and outstanding
capital stock of the Borrower and it is to the advantage of the Guarantor that
the Banks make such extensions of credit to, or for the account of, the
Borrower; and

principal, interest, reimbursement obligations, fees, indemnities, costs,
expenses (including, without limitation, all reasonable fees and disbursements
of counsel to the Administrative Agent or to the Banks that are required to be
paid by the Borrower pursuant to the terms of the Credit Agreement) or
otherwise.

<PAGE> 109
3

Agent or such Bank has made any demand for payment and although such
obligations, liabilities and claims may be contingent or unmatured. The
Administrative Agent and each Bank agrees to notify the Guarantor promptly of
any such set-off and the application made by it of the proceeds thereof,
provided that the failure to give such notice shall not affect the validity of
such set-off and application. The rights of the Administrative Agent and each
Bank under this Section 3 are in addition to other rights and remedies
(including, without limitation, other rights of set-off) which the
Administrative Agent or such Bank may have.

<PAGE> 110
4

the Obligations may be sold, exchanged, waived, surrendered or released.
Neither the Administrative Agent nor any Bank shall have any obligation to
protect, secure, perfect or insure any Lien at any time held as security for
the Obligations or this Guarantee or any property subject thereto.

<PAGE> 111
5

shall inure to the benefit of the Administrative Agent and the Banks, and their
respective successors, indorsees, transferees and assigns, until all the
Obligations and the obligations of the Guarantor under this Guarantee shall
have been satisfied by payment in full, no Letters of Credit are outstanding
and the Commitments are terminated. For the purposes hereof, "demand" shall
include the commencement and continuance of any legal proceedings.

7. Reinstatement of Guarantee. This Guarantee shall continue
to be effective, or be reinstated, as the case may be, if at any time payment,
or any part thereof, of any of the Obligations is rescinded or must otherwise
be restored or returned by the Administrative Agent or any Bank upon the
insolvency, bankruptcy, dissolution, liquidation or reorganization of the
Borrower, the Guarantor or any other Person, or upon or as a result of the
appointment of a receiver, intervenor or conservator of, or trustee or similar
officer for, the Borrower or the Guarantor or any substantial part of its
property, or otherwise, all as though such payments had not been made.

9. Representations and Warranties. The Guarantor represents
and warrants to the Administrative Agent and the Banks that:

<PAGE> 112
6

similar laws affecting the enforcement of creditors' rights generally;

12. Notices. Notices by the Administrative Agent to the
Guarantor may be in the manner and to the address set forth in subsection 9.4
of the Credit Agreement.

13. Waivers, Amendments; Assignments. None of the terms or
provisions of this Guarantee may be waived, altered, modified or amended except
by a written instrument executed by

<PAGE> 113
7

the Guarantor and the Administrative Agent; provided that any provision of this
Guarantee may be waived by the Administrative Agent in a letter or agreement
executed by the Administrative Agent or by facsimile transmission from the
Administrative Agent. This Guarantee shall be binding upon the successors and
assigns of the Guarantor and shall inure to the benefit of the Administrative
Agent and the Banks and their successors and assigns, except that the Guarantor
may not assign or transfer any of its rights or obligations hereunder without
the prior written consent of all the Banks.

15. GOVERNING LAW. THIS GUARANTEE SHALL BE GOVERNED BY, AND
SHALL BE CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF
NEW YORK.

16. SUBMISSION TO JURISDICTION; WAIVERS. THE GUARANTOR
HEREBY IRREVOCABLY AND UNCONDITIONALLY:

(iii) AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR
PROCEEDING MAY BE EFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR
CERTIFIED MAIL (OR ANY SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE
PREPAID, TO THE GUARANTOR AT ITS ADDRESS SET FORTH IN SUBSECTION 9.4
OF THE CREDIT AGREEMENT

<PAGE> 114
8

OR AT SUCH OTHER ADDRESS OF WHICH THE ADMINISTRATIVE AGENT SHALL HAVE
BEEN NOTIFIED PURSUANT THERETO; AND

(iv) AGREES THAT NOTHING HEREIN SHALL AFFECT THE RIGHT TO
EFFECT SERVICE OF PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR
SHALL LIMIT THE RIGHT TO SUE IN ANY OTHER JURISDICTION.

<PAGE> 115
9

IN WITNESS WHEREOF, the undersigned has caused this Guarantee
to be duly executed and delivered by its duly authorized officer as of the day
and year first above written.

MND ENERGY CORPORATION

By:
-------------------------
Title:

<PAGE> 116

EXHIBIT F
TO CREDIT AGREEMENT

FORM OF
SUBORDINATION AGREEMENT

SUBORDINATION AGREEMENT, dated as of April 8, 1996, among
MITCHELL ENERGY & DEVELOPMENT CORP., a Texas corporation (together with its
successors and assigns, the "Subordinated Creditor"), and CHEMICAL BANK, as
administrative agent for the banks from time to time parties to the Credit
Agreement referred to below.

The parties hereto agree as follows:

SECTION 1. DEFINITIONS.

1.1 Certain Defined Terms. As used herein the following
terms shall have the following meanings:

"Bank Agent" shall have the meaning assigned to the term
"Administrative Agent" in the Credit Agreement.

"Borrower" shall mean MEC and its successors and assigns.

"Credit Agreement" shall mean the Credit and Reimbursement
Agreement, dated as of April 8, 1996, among the Borrower, MND, the
Banks from time to time parties thereto and Chemical Bank as
Administrative Agent, as the same may from time to time be further
amended, modified or otherwise supplemented.

"Debtors" shall mean, collectively, the Borrower and the
Guarantors.

"Event of Default" shall mean any one or more of the Events of
Default specified in Section 7 of the Credit Agreement.

"Guarantees" shall mean (a) the Guarantee, dated as of April
8, 1996, made by MND in favor of the Bank Agent pursuant to the Credit
Agreement and (b) the Subsidiary Guarantee, dated as of April 8, 1996,
made by Mitchell Gas Services, Inc., a Delaware corporation, and
Mitchell Marketing Company, a Louisiana corporation, in favor of the
Bank Agent pursuant to the Credit Agreement, as each of the same shall
be amended, supplemented or modified.

"Guarantors" shall mean, collectively, each of the Guarantors
under, and as defined in, each of the Guarantees.

"MEC" shall mean Mitchell Energy Corporation, a Delaware
corporation.
<PAGE> 117
2

"MND" shall mean MND Energy Corporation, a Delaware
corporation.

"Obligations" shall mean (a) all obligations of the Borrower
now or hereafter existing under the Credit Agreement and any other
Credit Document and (b) all obligations of the Guarantors now or
hereafter existing under the Guarantees, in all cases whether for
principal, interest (including, without limitation, any interest which
accrues after the commencement of any case, proceeding or other action
relating to the bankruptcy, insolvency or reorganization of such
Borrower or Guarantor), fees, expenses or otherwise and any deferrals,
renewals or extensions of any such obligations, notes or other
evidences of indebtedness issued in exchange therefor.

"Required Banks" shall have the meaning assigned to the term
"Required Banks" in the Credit Agreement.

"Senior Creditors" shall mean the holders or beneficiaries
from time to time of Obligations.

"Subordinated Debt" shall mean the aggregate principal amount
of, and accrued interest (including, without limitation, any interest
which accrues after the commencement of any case, proceeding or other
action relating to the bankruptcy, insolvency or reorganization of any
Debtor) on, any long-term loan or advance made by the Subordinated
Creditor to any Debtor and characterized as "Intercompany Debt" under
the Credit Agreement, now existing or hereafter incurred or created.

"Superior Debt" shall mean (a) the Obligations, (b) all other
indebtedness of each Debtor for borrowed money and guarantees by each
Debtor for money borrowed by any other Person, unless by the terms of
the instrument creating or evidencing such indebtedness or guarantee,
it is provided that such indebtedness or guarantee is not superior to
the Subordinated Debt or to other indebtedness which is pari passu
with, or subordinated to, the Subordinated Debt, and (c) any
deferrals, renewals, extensions, modifications and refundings of any
such Obligations, indebtedness or guarantees.

1.2 Other Definitional Provisions. (a) The words "hereof",
"herein" and "hereunder" and words of similar import when used in this
Agreement shall refer to this Agreement as a whole and not to any particular
provision of this Agreement, and section, subsection, schedule and exhibit
references are to this Agreement unless otherwise specified.

(b) All terms used herein shall have the meanings given to
them under the Credit Agreement unless otherwise defined herein.
<PAGE> 118
3

SECTION 2. TERMS OF SUBORDINATION.

2.1 Subordination. (a) The Subordinated Creditor agrees for
itself and each future holder of the Subordinated Debt that the Subordinated
Debt is expressly subordinated, to the extent and in the manner hereinafter set
forth, to the prior payment of all Superior Debt:

(1) Upon the maturity of any Superior Debt by lapse of time,
acceleration or otherwise, all principal thereof and interest thereon shall
first be paid in full, or such payment duly provided for in cash or in a manner
satisfactory to the holder or holders of such Superior Debt, before any payment
is made on account of the principal of or premium, if any, or interest on the
Subordinated Debt or to acquire any of the Subordinated Debt or on account of
any sinking fund which may be therein provided for.

(2) No payment shall be made with respect to the principal of
or premium, if any, or interest on the Subordinated Debt or to acquire any of
the Subordinated Debt or on account of any sinking fund for the Subordinated
Debt, if, at any time of such payment, or immediately after giving effect
thereto, a Default or Event of Default with respect to the Obligations or an
event of default permitting acceleration of any Superior Debt shall exist.

(3) In the event that notwithstanding the provisions hereof
any Debtor shall make any payment on account of the principal of or premium, if
any, or interest on the Subordinated Debt, or on account of said sinking fund,
after the happening of a default in payment of, or in respect of, the principal
of or interest on Superior Debt, or after receipt by such Debtor of written
notice of a Default or an Event of Default with respect to the Obligations or
an event of default permitting the acceleration of any Superior Debt, then,
unless and until such Default or Event of Default or other event of default
shall have been cured or waived or shall have ceased to exist, such payment
shall be held by the holders of the Subordinated Debt, in trust for the benefit
of, and shall be forthwith paid over and delivered to, the holders of Superior
Debt with respect to which a Default, Event of Default or other event of
default permitting the acceleration thereof shall have occurred (pro rata as to
each of such holders on the basis of the respective amounts of Superior Debt
held by them), for application to the payment of all Superior Debt remaining
unpaid to the extent necessary to pay all Superior Debt, after giving effect to
any concurrent payment or distribution to or for the holders of such Superior
Debt.

(4) Upon any distribution of assets of any Debtor upon any
dissolution, winding up, liquidation or reorganization of such Debtor (whether
in bankruptcy, insolvency or receivership
<PAGE> 119
4

proceedings or upon an assignment for the benefit of creditors or otherwise),

(i) the holders of Superior Debt shall first be entitled to
receive payment in full in cash of, or in respect of, the principal
thereof, and interest due thereon, including interest accruing after
the commencement of any insolvency or bankruptcy proceeding, before
the holders of the Subordinated Debt are entitled to receive any
payment on account of the principal of, premium, if any, or interest
on the Subordinated Debt;

(ii) any payment or distribution of assets of such Debtor of
any kind or character, whether in cash, property or securities, to
which the holders of the Subordinated Debt would be entitled except
for the provisions hereof, shall be paid by the liquidating trustee or
agent or other person making such payment or distribution, whether a
trustee in bankruptcy, a receiver or liquidating trustee or other
trustee or agent, directly to the holders of Superior Debt (pro rata
as to each of such holders on the basis of the respective amounts of
Superior Debt held by them), to the extent necessary to make payment
in full of all Superior Debt remaining unpaid, after giving effect to
any concurrent payment or distribution or provision therefor to the
holders of the Superior Debt; and

(iii) in the event that notwithstanding the foregoing
provisions, any payment or distribution of assets of any Debtor of any
kind or character, whether in cash, property or securities, shall be
received by the holders of the Subordinated Debt before the Superior
Debt is paid in full, or effective provision made for its payment,
such payment or distribution shall be received and held in trust for
and shall be paid over to the holders of the Superior Debt remaining
unpaid or unprovided for (pro rata as to each of such holders on the
basis of the respective amounts of Superior Debt held by them), for
application to the payment of such Superior Debt until all such
Superior Debt shall have been paid in full, after giving effect to any
concurrent payment or distribution or provision therefor to the
holders of such Superior Debt.

(b) Subject to the payment in full of all Superior Debt, the
holders of the Subordinated Debt shall be subrogated to the rights of the
holders of Superior Debt to receive payments or distributions of assets of each
Debtor applicable to the Superior Debt until all amounts owing on the
Subordinated Debt shall be paid in full, and for the purpose of such
subrogation no payments or distributions to the holders of the Superior Debt by
or on behalf of any Debtor or by or on behalf of the holders of the
Subordinated Debt by virtue hereof which otherwise would have been made to the
holders of the Subordinated Debt shall, as between such Debtor and the holders
of the Subordinated Debt, be
<PAGE> 120
5

deemed to be payment by such Debtor to or on account of the Superior Debt, it
being understood that the provisions hereof are and are intended solely for the
purpose of defining the relative rights of the holders of the Subordinated
Debt, on the one hand, and the holders of the Superior Debt, on the other hand.

(c) Nothing contained herein is intended to or shall impair,
as between each Debtor and the holders of the Subordinated Debt, the obligation
of such Debtor to the holders of the Subordinated Debt.

(d) Any holder of Superior Debt is hereby authorized to
demand specific performance of these provisions, whether or not any Debtor
shall have complied with any of the provisions hereof applicable to it, at any
time when the holder of the Subordinated Debt shall have failed to comply with
any of these provisions.

(e) The holders of the Superior Debt may, at any time and
from time to time, without any consent of or notice to the holder of the
Subordinated Debt or any other holder of the Subordinated Debt and without
impairing or releasing the obligations of the Subordinated Debt under these
provisions (i) change the manner, place or terms of payment or change or extend
the time of payment of, or renew or alter, Superior Debt (including any change
in the rate of interest thereon), or amend in any manner any agreement under
which any Superior Debt is outstanding; (ii) sell, exchange, release, not
perfect and otherwise deal with any property at any time pledged, assigned or
mortgaged to secure Superior Debt; (iii) release anyone liable in any manner
under or in respect of Superior Debt; (iv) exercise or refrain from exercising
any rights against any Debtor and others; and (v) apply any sums from time to
time received to Superior Debt.

2.2 Power of Attorney; Agreement to Cooperate. The
Subordinated Creditor irrevocably authorizes and empowers the Senior Creditors
(or their representatives), under the circumstances set forth in paragraph (4)
of subsection 2.1(a), to demand, sue for, collect and receive every such
payment or distribution referred to in such paragraph to which the Subordinated
Creditor is entitled and give acquittance therefor, and to file claims and
proofs of claim in any statutory or non-statutory proceeding, to vote such
claim in any such proceeding and take such other actions, in their own name as
Senior Creditors, or in the name of the Subordinated Creditor or otherwise, as
the Senior Creditors (or their representatives) may deem necessary or advisable
for the enforcement of the provisions of this agreement. The Subordinated
Creditor hereby agrees, under the circumstances set forth in paragraph (4) of
subsection 2.1(a), duly and promptly to take such action as may be requested at
any time and from time to time by the Senior Creditors (or their
representatives), to file appropriate proofs of claim in respect of the
Subordinated Debt held by it, and to execute and
<PAGE> 121
6

deliver such powers of attorney, assignments or proofs of claim or other
instruments as may be requested by the Senior Creditors, in order to enable the
Senior Creditors to enforce any and all claims upon or in respect of such
Subordinated Debt and to collect and receive any and all payments or
distributions which may be payable or deliverable at any time upon or in
respect of such Subordinated Debt.

SECTION 3. REPRESENTATIONS.

The Subordinated Creditor represents and warrants to the
Senior Creditors that:

3.1 Power and Authority; Authorization; No Violation. The
Subordinated Creditor has full power, authority and legal right to execute,
deliver and perform this Agreement, and the execution, delivery and performance
of this Agreement have been duly authorized by all necessary action on the part
of the Subordinated Creditor, do not require any approval or consent of any
trustee or holders of any indebtedness or obligations of the Subordinated
Creditor and will not violate any provision of law, governmental regulation,
order or decree or any provision of any indenture, mortgage, contract or other
agreement to which the Subordinated Creditor is party or by which it is bound.

3.2 Consents. No consent, license, approval or authorization
of, or registration or declaration with, any governmental instrumentality,
domestic or foreign, is required in connection with the execution, delivery and
performance by the Subordinated Creditor of this Agreement.

3.3 Binding Obligation. This Agreement constitutes a legal,
valid and binding obligation of the Subordinated Creditor enforceable in
accordance with its terms.

SECTION 4. MODIFICATION OF OBLIGATIONS; RELIANCE

4.1 No Consent Required. The Subordinated Creditor shall
remain obligated hereunder notwithstanding that, without any reservation of
rights against the Subordinated Creditor, and without notice to or further
assent by the Subordinated Creditor, (a) any demand for payment of any Superior
Debt may be rescinded in whole or in part, and any Superior Debt may be
continued, and the Superior Debt, or the liability of any Debtor or any other
party upon or for any part thereof, or any collateral security or guaranty
therefor or right of offset with respect thereto, may, from time to time, in
whole or in part, be renewed, extended, modified, accelerated, compromised,
waived, surrendered, or released and (b) the Credit Agreement, any L/C
Documentation, the Guarantees or any other document in connection therewith may
be amended, modified, supplemented or terminated, in whole or in part, as the
Bank Agent or any Senior Creditor may deem advisable from time to time, and any
collateral security or guarantee or right of offset at any time held by the
Bank Agent or any Senior
<PAGE> 122
7

Creditor for the payment of any of the Superior Debt may be sold, exchanged,
waived, surrendered or released, all without impairing, abridging, releasing or
affecting the subordination provided for herein. Neither the Bank Agent nor
any Senior Creditor shall have any obligation to protect, secure, perfect or
insure any Lien at any time held as security for the Superior Debt or any
property subject thereto. The Subordinated Creditor waives any and all notice
of the creation, renewal, extension or accrual of any of the Superior Debt and
notice of or proof of reliance by the Senior Creditors upon this Agreement, and
the Obligations, and any of them, shall conclusively be deemed to have been
created, contracted or incurred and extended, amended and waived in reliance
upon this agreement, and all dealings between the Debtors and the Senior
Creditors shall be conclusively presumed to have been had or consummated in
reliance upon this agreement. The Subordinated Creditor acknowledges and
agrees that the Senior Creditors have relied upon the subordination provided
for herein in entering into the Credit Agreement and in making extensions of
credit available to the Borrowers thereunder. The Subordinated Creditor waives
notice of or proof of reliance on this agreement and waives diligence,
presentment, protest, demand for payment and notice of default or nonpayment
with respect to the Superior Debt.

4.2 Reliance on Court Orders. Upon any payment or
distribution of assets of a Debtor referred to in paragraph (4) of subsection
2.1(a), the Subordinated Creditor shall be entitled to rely upon a certificate
of the receiver, trustee in bankruptcy, liquidating trustee, agent or other
person making such payment or distribution, delivered to the Subordinated
Creditor, for the purpose of ascertaining the persons entitled to participate
in such distribution, the Senior Creditors and other indebtedness of such
Debtor, the amount thereof or payable thereon, the amount or amounts paid or
distributed thereon and all other facts pertinent thereto or to this agreement.

SECTION 5. TRANSFER OF SUBORDINATED DEBT.

The Subordinated Creditor will not (a) sell, assign or
otherwise transfer, in whole or in part, the Subordinated Debt or any interest
therein to any other person or entity (a "Transferee") or (b) create, incur or
suffer to exist any security interest, lien, charge or other encumbrance
whatsoever upon the Subordinated Debt in favor of any Transferee unless, in
either case, (x) if the Obligations or any Letters of Credit are outstanding,
the Subordinated Creditor shall have received prior written consent from the
Required Banks for such action (which consent shall not be unreasonably
withheld), and (y) such Transferee expressly acknowledges to the Bank Agent, if
the Obligations or any Letters of Credit are outstanding, or to the Debtors
thereon if neither the Obligations nor any Letters of Credit are any longer
outstanding, in writing, the subordination provided for herein and agrees to be
bound by all the terms hereof.
<PAGE> 123
8

SECTION 6. MISCELLANEOUS.

6.1 No Waiver; Cumulative Remedies. No failure to exercise,
and no delay in exercising, on the part of the Bank Agent or any Senior
Creditor from time to time of any right, power or privilege under the
Obligations, or of any right, power or privilege under this Agreement, shall
operate as a waiver thereof; nor shall any single or partial exercise of any
right, power or privilege under this Agreement preclude any other or further
exercise thereof or the exercise of any other right, power or privilege. The
rights and remedies provided in this Agreement and in any agreement relating to
any of the Obligations and all other agreements, instruments and documents
referred to in any of the foregoing are cumulative and shall not be exclusive
of any rights or remedies provided by law.

6.2 Further Assurances. The Subordinated Creditor agrees to
execute and deliver such further documents and to do such other acts and things
as the Bank Agent may reasonably request in order fully to effect the purposes
of this Agreement.

6.3 Notices. All notices, requests and demands to or upon
the respective parties hereto to be effective shall be in writing (including by
facsimile transmission if promptly confirmed by mail) and, unless otherwise
expressly provided herein, shall be deemed to have been duly given or made when
delivered by hand, or three days after being deposited in the mail, postage
prepaid, or, in the case of facsimile notice, when received by the addressee,
addressed as set forth in this Agreement by the parties signatory hereto or to
such address or other address as may be hereafter notified by the respective
parties hereto.

6.4 Counterparts. This Agreement may be executed by the
parties hereto in any number of separate counterparts all of which taken
together shall constitute one and the same instrument.

6.5 Waivers, Amendments. Etc. The subordination provisions
contained herein are for the benefit of the Bank Agent, the Senior Creditors,
and their respective successors and assigns as holders from time to time of
Superior Debt and may not be rescinded or cancelled or modified in any way,
nor, unless otherwise expressly provided for herein, may any provision of this
agreement be waived or changed without the express prior written consent
thereto of the Subordinated Creditor and, so long as any Superior Debt is
outstanding under the Credit Agreement, the Senior Creditors and, thereafter,
of the Debtors.

6.6 Action by Senior Creditors. Whenever in this Agreement
the Senior Creditors may, or are required to, take any action, such action may
be taken by them or their respective representatives with the consent of Senior
Creditors holding a
<PAGE> 124
9

majority in amount of the Superior Debt (exclusive of interest) and any such
action shall be binding upon all Senior Creditors.

6.7 Exculpation. Neither any Senior Creditor, nor any
director, officer, agent or employee thereof, shall be liable to any other
Senior Creditor for any action taken or omitted to be taken by it or them in
connection with this Agreement. Without limiting the foregoing, neither the
Bank Agent nor any Senior Creditor has any obligations or duties to any of the
other Senior Creditors with respect to this Agreement and are not, and shall
not be, agents, trustees or fiduciaries for the other Senior Creditors.

6.8 Legend. In the event that any Subordinated Debt is
evidenced by a promissory note or other instrument, the Subordinated Creditor
will cause such note or instrument to bear a statement or legend to the effect
that such Subordinated Debt evidenced thereby is subordinate and junior in
right of payment to the Superior Debt in the manner and to the extent herein
set forth.

6.9 GOVERNING LAW; SUCCESSORS AND ASSIGNS. THIS AGREEMENT
AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS AGREEMENT SHALL BE
GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE
STATE OF NEW YORK, SHALL BE BINDING UPON AND INURE TO THE BENEFIT OF THE BANK
AGENT, THE SENIOR CREDITORS, THE SUBORDINATED CREDITOR, AND THEIR RESPECTIVE
SUCCESSORS, TRANSFEREES AND ASSIGNS.

6.10 SUBMISSION TO JURISDICTION; WAIVERS. THE SUBORDINATED
CREDITOR HEREBY IRREVOCABLY AND UNCONDITIONALLY:

(i) SUBMITS FOR ITSELF AND ITS PROPERTY IN ANY LEGAL ACTION
OR PROCEEDING RELATING TO THIS AGREEMENT, OR FOR RECOGNITION AND
ENFORCEMENT OF ANY JUDGEMENT IN RESPECT THEREOF, TO THE NON-EXCLUSIVE
GENERAL JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK, THE
COURTS OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF
NEW YORK, AND APPELLATE COURTS FROM ANY THEREOF;

(iii) AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR
PROCEEDING MAY BE EFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR
CERTIFIED MAIL (OR ANY SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE
PREPAID TO SUCH SUBORDINATED CREDITOR AT 2001 TIMBERLOCH PLACE, THE
WOODLANDS, TEXAS 77380 OR AT SUCH OTHER ADDRESS OF WHICH THE BANK
AGENT SHALL HAVE BEEN NOTIFIED PURSUANT THERETO; AND
<PAGE> 125
10

(iv) AGREES THAT NOTHING HEREIN SHALL AFFECT THE RIGHT TO
EFFECT SERVICE OF PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR
SHALL LIMIT THE RIGHT TO SUE IN ANY OTHER JURISDICTION.

6.11 WAIVER OF JURY TRIAL. THE SUBORDINATED CREDITOR HEREBY
IRREVOCABLY AND UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR
PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER CREDIT DOCUMENT AND FOR ANY
COUNTERCLAIM THEREIN.
<PAGE> 126
11

IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed and delivered as of the day and year first above
written.

CHEMICAL BANK, for itself and as
Administrative Agent for the Senior
Creditors

By
----------------------------------
Title:

Chemical Bank
270 Park Avenue
New York, New York 10017
Attn: John Gehebe
Credit and Lending Group
Telecopy: 212-270-4711

MITCHELL ENERGY & DEVELOPMENT CORP.

By
----------------------------------
Title:

Mitchell Energy & Development Corp.
2001 Timberloch Place
The Woodlands, Texas 77380
Attn: Chief Financial Officer
Telecopy: 713-377-6192
<PAGE> 127
12

CONSENT AND AGREEMENT

Each of the undersigned hereby consents to all of the
provisions of the foregoing agreement and agrees to comply with all of the
terms thereof.

MND ENERGY CORPORATION

By
----------------------------------
Title:

MITCHELL GAS SERVICES, INC.

By
----------------------------------
Title:

MITCHELL MARKETING COMPANY

By
----------------------------------
Title:
<PAGE> 128

EXHIBIT G
TO CREDIT AGREEMENT

FORM OF
SUBSIDIARY GUARANTEE

GUARANTEE, dated as of April 5, 1996, made by MITCHELL
MARKETING COMPANY ("MMC"), a Louisiana corporation, and MITCHELL GAS SERVICES,
INC. ("MGS"), a Delaware corporation, and each hereinafter called a "Guarantor"
and collectively the "Guarantors", in favor of (a) Chemical Bank, as
administrative agent (in such capacity, the "Administrative Agent") for the
banks (the "Banks"), including the Issuing Banks (as defined in the Credit
Agreement defined herein), from time to time parties to the Credit and
Reimbursement Agreement, dated as of April 5, 1996 (as amended, supplemented or
otherwise modified from time to time, the "Credit Agreement"), among MND Energy
Corporation ("MND"), Mitchell Energy Corporation (the "Borrower"), the Banks
and the Administrative Agent, and (b) the Banks.

W I T N E S S E T H :

WHEREAS, pursuant to the Credit Agreement, the Banks will
severally agree to make extensions of credit to the Borrower upon the terms and
subject to the conditions set forth therein; and

WHEREAS, it is a condition precedent to the obligation of the
Banks to make their respective extensions of credit to the Borrower under the
Credit Agreement that the Guarantors shall have executed and delivered this
Guarantee to the Administrative Agent for the benefit of the Banks; and

WHEREAS, MND owns all of the issued and outstanding capital
stock of the Borrower and the Guarantors; and

WHEREAS, the Guarantors will receive economic benefits from
the proceeds of extensions of credit to the Borrower in connection with the
operation of the Guarantors' businesses;

NOW, THEREFORE, in consideration of the premises and to induce
the Banks and the Administrative Agent to enter into, and to make extensions of
credit to the Borrower under, the Credit Agreement, and for other good and
valuable consideration receipt of which is hereby acknowledged, the Guarantors
hereby agree with the Administrative Agent, for the ratable benefit of the
Banks, as follows:

1. Defined Terms. Unless otherwise defined herein, terms
which are defined in the Credit Agreement and used herein are so used as so
defined and the following terms shall have the following meanings:
<PAGE> 129
"Obligations" shall mean the unpaid principal of and interest
on the Loans and Reimbursement Obligations and all other indebtedness,
obligations and liabilities of the Borrower to the Administrative
Agent or the Banks, whether direct or indirect, absolute or
contingent, due or to become due, or now existing or hereafter
incurred, which may arise under, out of, or in connection with, the
Credit Agreement, the other Credit Documents and any other document
made, delivered or given in connection therewith, due or to become
due, or now existing or hereafter incurred, of the Borrower to the
Banks, whether on account of principal, interest, reimbursement
obligations, fees, indemnities, costs, expenses (including, without
limitation, all reasonable fees and disbursements of counsel to the
Administrative Agent or to the Banks that are required to be paid by
the Borrower pursuant to the terms of the Credit Agreement) or
otherwise.

2. Guarantee. (a) Each Guarantor hereby unconditionally and
irrevocably guarantees to the Administrative Agent and the Banks and their
successors, indorsees, transferees and assigns, the prompt and complete payment
by the Borrower when due (whether upon demand, at the stated maturity, by
acceleration or otherwise) of the Obligations, and each Guarantor further
agrees to pay any and all expenses (including, without limitation, all fees and
disbursements of counsel) which may be paid or incurred by the Administrative
Agent or any Bank in enforcing any rights with respect to, or collecting, any
or all of the Obligations and/or enforcing any rights with respect to, or
collecting against, such Guarantor under this Guarantee; provided, however,
that, anything herein or in any other Credit Document to the contrary
notwithstanding, the maximum liability of any Guarantor hereunder shall in no
event exceed the amount which can be guaranteed by such Guarantor under
applicable federal and state laws relating to the insolvency of debtors. This
Guarantee shall remain in full force and effect until the Obligations are paid
in full, the Commitments are terminated and no Letters of Credit are
outstanding, notwithstanding that from time to time prior thereto the Borrower
may be free from any Obligations.

(b) Each Guarantor agrees that the Obligations may at any
time or from time to time exceed the amount of the liability of such Guarantor
hereunder without impairing this Guarantee or affecting the rights and remedies
of the Administrative Agent and the Banks hereunder.

(c) Each Guarantor agrees that whenever, at any time, or from
time to time, it shall make any payment to the Administrative Agent or any Bank
on account of its liability hereunder, it will notify the Administrative Agent
and such Bank in writing that such payment is made under this Guarantee for
such purpose. No payment or payments made by the Borrower, any Guarantor or
any other Person received or collected by the
<PAGE> 130
3

Administrative Agent or any Bank from the Borrower, any Guarantor or any other
Person by virtue of any action or proceeding or any set-off or appropriation or
application at any time or from time to time in reduction of or in payment of
the Obligations shall be deemed to modify, reduce, release or otherwise affect
the liability of any Guarantor hereunder which shall, notwithstanding any such
payment or payments, remain liable for the Obligations up to the maximum
liability of such Guarantor until the Obligations are paid in full, the
Commitments are terminated, and no Letters of Credit are outstanding.

3. Right of Set-off. Upon the occurrence of any Event of
Default specified in paragraph (a), (b) or (k) (as to the Subsidiary Guarantee
only) of subsection 7.1 of the Credit Agreement or in subsection 7.2 of the
Credit Agreement, or if the maturity of the Obligations shall be accelerated
pursuant to Section 7 of the Credit Agreement, the Administrative Agent and
each Bank are hereby irrevocably authorized by each Guarantor at any time and
from time to time without notice to such Guarantor, any such notice being
hereby waived by such Guarantor, to set off and appropriate and apply any and
all deposits (general or special, time or demand, provisional or final), in any
currency, and any other credits, indebtedness or claims, in any currency, in
each case whether direct or indirect, absolute or contingent, matured or
unmatured, at any time held or owing by the Administrative Agent or such Bank
to or for the credit or the account of such Guarantor, or any part thereof in
such amounts as the Administrative Agent or such Bank may elect, on account of
the Obligations, as the Administrative Agent or such Bank may elect, whether or
not the Administrative Agent or such Bank has made any demand for payment and
although such Obligations, liabilities and claims may be contingent or
unmatured. The Administrative Agent and each Bank shall notify such Guarantor
promptly of any such set-off made by it and the application made by it of the
proceeds thereof, provided that the failure to give such notice shall not
affect the validity of such set-off and application. The rights of the
Administrative Agent and each Bank under this paragraph are in addition to
other rights and remedies (including, without limitation, other rights of
set-off) which the Administrative Agent or such Bank may have.

4. No Subrogation. Notwithstanding any payment or payments
made by a Guarantor hereunder, or any set-off or application of funds of such
Guarantor by the Administrative Agent or any Bank, such Guarantor shall not be
entitled to be subrogated to any of the rights of the Administrative Agent or
any Bank against the Borrower or against any collateral security or guarantee
or right of offset held by the Administrative Agent or any Bank for the payment
of the Obligations, nor shall such Guarantor seek or be entitled to seek any
contribution or reimbursement from the Borrower in respect of payments made by
such Guarantor hereunder, until all amounts owing to the Administrative Agent
and the Banks by the Borrower on account of the Obligations are paid in full,
the Commitments are terminated,
<PAGE> 131
4

and no Letters of Credit are outstanding. If any amount shall be paid to a
Guarantor on account of such subrogation rights at any time when all of the
Obligations shall not have been paid in full, such amount shall be held by such
Guarantor in trust for the Administrative Agent and the Banks, segregated from
other funds of such Guarantor, and shall, forthwith upon receipt by such
Guarantor, be turned over to the Administrative Agent in the exact form
received by such Guarantor (duly indorsed by such Guarantor to the
Administrative Agent, if required), to be applied against the Obligations,
whether matured or unmatured, in such order as the Administrative Agent may
determine.

5. Amendments, etc. with respect to the Obligations. The
Guarantors shall remain obligated hereunder notwithstanding that, without any
reservation of rights against the Guarantors, and without notice to or further
assent by the Guarantors, any demand for payment of any of the Obligations made
by the Administrative Agent or any Bank is rescinded by the Administrative
Agent or such Bank, and any of the Obligations continued, and the Obligations,
or the liability of any other party upon or for any part thereof, or any
collateral security or guarantee therefor or right of offset with respect
thereto, may, from time to time, in whole or in part, be renewed, extended,
amended, modified, accelerated, compromised, waived, surrendered or released by
the Administrative Agent or any Bank, and the Credit Documents and any other
documents executed and delivered in connection therewith may be amended,
modified, supplemented or terminated, in whole or in part, as the
Administrative Agent and/or any Bank may deem advisable from time to time, and
any collateral security, guarantee or right of offset at any time held by the
Administrative Agent or any Bank for the payment of the Obligations may be
sold, exchanged, waived, surrendered or released. Neither the Administrative
Agent nor any Bank shall have any obligation to protect, secure, perfect or
insure any Lien at any time held by it as security for the Obligations or for
this Guarantee or any property subject thereto.

6. Guarantee Absolute and Unconditional. The Guarantors
waive any and all notice of the creation, renewal, extension or accrual of any
of the Obligations and notice of or proof of reliance by the Administrative
Agent or any Bank upon this Guarantee or acceptance of this Guarantee; the
Obligations, and any of them, shall conclusively be deemed to have been
created, contracted, incurred or renewed, extended, amended or waived, in
reliance upon this Guarantee; and all dealings between the Borrower and the
Administrative Agent and the Banks shall likewise be conclusively presumed to
have been had or consummated in reliance upon this Guarantee. The Guarantors
waive diligence, presentment, protest, demand for payment and notice of default
or nonpayment to or upon the Borrower with respect to the Obligations. This
Guarantee shall be construed as a continuing, absolute and unconditional
guarantee of payment without regard to (a) the validity or enforceability of
the Credit Documents, any of the Obligations or any collateral security
therefor or
<PAGE> 132
5

guarantee or right of offset with respect thereto at any time or from time to
time held by the Administrative Agent or any Bank, (b) any defense, set-off or
counterclaim (other than a defense of payment or performance) which may at any
time be available to or be asserted by the Borrower against the Administrative
Agent or any Bank, or (c) any other circumstance whatsoever (with or without
notice to or knowledge of the Borrower or any Guarantor) which constitutes, or
might be construed to constitute, an equitable or legal discharge of the
Borrower from the Obligations, or of any Guarantor under this Guarantee, in
bankruptcy or in any other instance. When making any demand upon or pursuing
its rights and remedies hereunder against any Guarantor, the Administrative
Agent or any Bank may, but shall be under no obligation to, make a similar
demand upon or pursue such rights and remedies as it may have against the
Borrower, any Guarantor or any other Person or against any collateral security
or guarantee for the Obligations or any right of offset with respect thereto,
and any failure by the Administrative Agent or any Bank to make any such
similar demand or to pursue such other rights or remedies or to collect any
payments from the Borrower, any Guarantor or any such other Person or to
realize upon any such collateral security or guarantee or to exercise any such
right of offset, or any release of the Borrower, any Guarantor or any such
other Person or of any such collateral security, guarantee or right of offset,
shall not relieve such Guarantor of any liability hereunder, and shall not
impair or affect the rights and remedies, whether express, implied or available
as a matter of law, of the Administrative Agent and the Banks. This Guarantee
shall continue in full force and effect and be binding in accordance with and
to the extent of its terms upon such Guarantor and its successors and assigns,
and shall inure to the benefit of the Administrative Agent and the Banks, and
their respective successors, indorsees, transferees and assigns, until all the
Obligations and the obligations of such Guarantor under this Guarantee shall
have been satisfied by payment in full, the Commitments are terminated, and no
Letters of Credit are outstanding. For the purposes hereof, "demand" shall
include the commencement and continuance of any legal proceedings.

7. Reinstatement. This Guarantee shall continue to be
effective, or be reinstated, as the case may be, if at any time payment, or any
part thereof of any of the Obligations is rescinded or must otherwise be
restored or returned by the Administrative Agent or any Bank upon the
insolvency, bankruptcy, dissolution, liquidation or reorganization of the
Borrower, any Guarantor or any other Person or upon or as a result of the
appointment of a receiver, intervenor or conservator of, or trustee or similar
officer for, the Borrower or any Guarantor or any substantial part of its
property, or otherwise, all as though such payment had not been made.

8. Payments. The Guarantors hereby agree that the
Obligations will be paid to the Administrative Agent without set-off or
counterclaim in U.S. Dollars at the office of the
<PAGE> 133
6

Administrative Agent located at Agent Bank Services Group, Chemical Bank, 140
East 45th Street, New York, New York 10017, Attention: Frank Giacalone,
Mitchell Energy Corporation Clearing Account #323220312.

9. Representations and Warranties. Each Guarantor hereby
represents and warrants that it has the corporate power and authority to make,
deliver and perform this Guarantee and has taken all necessary corporate action
to authorize the execution, delivery and performance of this Guarantee; no
consent or authorization of, filing with or act by or in respect of any
Governmental Authority is required in connection with the execution, delivery
or performance by it, or the validity or enforceability against it of this
Guarantee, and this Guarantee has been duly executed and delivered on its
behalf; this Guarantee constitutes a legal, valid and binding obligation of
such Guarantor, enforceable in accordance with its terms.

11. Paragraph Headings. The paragraph headings used in this
Guarantee are for convenience of reference only and are not to affect the
construction hereof or be taken into consideration in the interpretation
hereof.

12. No Waiver; Cumulative Remedies. Neither the
Administrative Agent nor any Bank shall by any act (except by a written
instrument pursuant to paragraph 13 hereof), delay, indulgence, omission or
otherwise be deemed to have waived any right or remedy hereunder or to have
acquiesced in any Default or Event of Default or in any breach of any of the
terms and conditions hereof. No failure to exercise, nor any delay in
exercising, on the part of the Administrative Agent or any Bank, any right,
power or privilege hereunder shall operate as a waiver thereof. No single or
partial exercise of any right, power or privilege hereunder shall preclude any
other or further exercise thereof or the exercise of any other right, power or
privilege. A waiver by the Administrative Agent or any Bank of any right or
remedy hereunder on any one occasion shall not be construed as a bar to any
right or remedy which the Administrative Agent or such Bank would otherwise
have on any future occasion. The rights and remedies herein provided are
cumulative, may be exercised singly or concurrently and are not exclusive of
any rights or remedies provided by law.

13. Waivers and Amendments: Successors and Assigns; Governing
Law. None of the terms or provisions of this Guarantee may be waived, amended,
supplemented or otherwise modified except
<PAGE> 134
7

by a written instrument executed by the Guarantors and the Administrative
Agent, provided that any provision of this Guarantee may be waived by the
Administrative Agent in a letter or agreement executed by the Administrative
Agent or by facsimile transmission from the Administrative Agent. This
Guarantee shall be binding upon the successors and assigns of the Guarantors
and shall inure to the benefit of the Administrative Agent and the Banks and
their respective successors and assigns, except that the Guarantors may not
assign or transfer any of their rights hereunder without the prior written
consent of all the Banks. THIS GUARANTEE SHALL BE GOVERNED BY, AND CONSTRUED
AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.

14. Notices. Notices by the Administrative Agent to any
Guarantor may be given by mail or by telecopy (if promptly confirmed by mail),
addressed to such Guarantor at its address or telecopy number set forth under
its signature below and shall be effective (a) in the case of mail, 3 days
after deposit in the postal system, first class postage pre-paid and (b) in the
case of telecopy, when received by the addressee. Any Guarantor may change its
address and telecopy number by written notice to the Administrative Agent.

15. SUBMISSION TO JURISDICTION; WAIVERS. EACH GUARANTOR
HEREBY IRREVOCABLY AND UNCONDITIONALLY;

(i) SUBMITS FOR ITSELF AND ITS PROPERTY IN ANY LEGAL
ACTION OR PROCEEDING RELATING TO THIS GUARANTEE OR ANY OTHER DOCUMENT
EXECUTED OR DELIVERED IN CONNECTION HEREWITH, OR FOR RECOGNITION AND
ENFORCEMENT OF ANY JUDGMENT IN RESPECT THEREOF, TO THE NON-EXCLUSIVE
GENERAL JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK, THE
COURTS OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF
NEW YORK, AND APPELLATE COURTS FROM ANY THEREOF;

(ii) WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREAFTER
HAVE TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING IN ANY SUCH COURT
OR THAT SUCH PROCEEDING WAS BROUGHT IN AN INCONVENIENT COURT AND
AGREES NOT TO PLEAD OR CLAIM THE SAME;

(iii) AGREES THAT SERVICE OF PROCESS IN ANY SUCH LEGAL
ACTION OR PROCEEDING MAY BE EFFECTED BY MAILING OF A COPY THEREOF (BY
REGISTERED OR CERTIFIED MAIL OR ANY SUBSTANTIALLY SIMILAR FORM OF MAIL
POSTAGE PREPAID) TO SUCH GUARANTOR AT ITS ADDRESS SET FORTH UNDER ITS
SIGNATURE BELOW OR AT SUCH OTHER ADDRESS OF WHICH THE ADMINISTRATIVE
AGENT SHALL HAVE BEEN NOTIFIED PURSUANT TO THIS GUARANTEE.

16. WAIVER OF JURY TRIAL. EACH GUARANTOR HEREBY IRREVOCABLY
AND UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING
RELATING TO THIS GUARANTEE OR ANY OTHER CREDIT DOCUMENT AND FOR ANY
COUNTERCLAIM THEREIN.
<PAGE> 135
8

17. Authority of Administrative Agent. The Guarantors
acknowledge that the rights and responsibilities of the Administrative Agent
under this Guarantee with respect to any action taken by the Administrative
Agent or the exercise or non-exercise by the Administrative Agent of any
option, right, request, judgment or other right or remedy provided for herein
or resulting or arising out of this Guarantee shall, as between the
Administrative Agent and the Banks, be governed by the Credit Agreement, and by
such other agreements with respect thereto as may exist from time to time among
them, but, as between the Administrative Agent and the Guarantors, the
Administrative Agent shall be conclusively presumed to be acting as agent for
the Banks with full and valid authority so to act or refrain from acting, and
the Guarantors shall not be under any obligation, or entitlement, to make any
inquiry respecting such authority.

18. Counterparts. This Guarantee may be executed by one or
more of the parties hereto on any number of separate counterparts and all of
said counterparts taken together shall be deemed to constitute one and the same
instrument.
<PAGE> 136
9

IN WITNESS WHEREOF, the undersigned have caused this Guarantee
to be duly executed and delivered by their duly authorized officers as of the
date first above written.

MITCHELL MARKETING COMPANY

By:
-----------------------------
Title:

Address for Notices:

2001 Timberloch Place
The Woodlands, Texas 77380
Telecopy: 713-377-6192
Attn: Chief Financial Officer

MITCHELL GAS SERVICES, INC.

By:
-----------------------------
Title:

Address for Notices:

2001 Timberloch Place
The Woodlands, Texas 77380
Telecopy: 713-377-6192
Attn: Chief Financial Officer
<PAGE> 137

EXHIBIT H
TO CREDIT AGREEMENT
[FORM OF]
ASSIGNMENT AND ACCEPTANCE

Reference is made to the Credit and Reimbursement Agreement, dated as
of April 5, 1996 (as amended, supplemented or otherwise modified from time to
time, the "Credit Agreement"), among Mitchell Energy Corporation (the
"Borrower"), MND Energy Corporation, the Banks parties thereto, including the
Issuing Banks, and Chemical Bank, as administrative agent for the Banks (in
such capacity, the "Administrative Agent"). Unless otherwise defined herein,
terms defined in the Credit Agreement and used herein shall have the meanings
given to them in the Credit Agreement.

____________________ (the "Assignor") and ____________________ (the
"Assignee") agree as follows:

1. The Assignor hereby irrevocably sells and assigns to the Assignee
without recourse to the Assignor, and the Assignee hereby irrevocably purchases
and assumes from the Assignor without recourse to the Assignor, as of the
Effective Date (as defined below), a ___% interest (the "Assigned Interest") in
and to the Assignor's rights and obligations under the Credit Agreement with
respect to those credit facilities contained in the Credit Agreement as are set
forth on SCHEDULE 1 (individually, an "Assigned Facility"; collectively, the
"Assigned Facilities"), in a principal amount for each Assigned Facility as set
forth on SCHEDULE 1.

2. The Assignor (a) makes no representation or warranty and assumes
no responsibility with respect to any statements, warranties or representations
made in or in connection with the Credit Agreement or with respect to the
execution, legality, validity, enforceability, genuineness, sufficiency or
value of the Credit Agreement, any other Credit Document or any other
instrument or document furnished pursuant thereto, other than that the Assignor
has not created any adverse claim upon the interest being assigned by it
hereunder and that such interest is free and clear of any such adverse claim;
and (b) makes no representation or warranty and assumes no responsibility with
respect to the financial condition of the Borrower, MND, MEDC, any of their
Subsidiaries or any other obligor or the performance or observance by the
Borrower, any of its Subsidiaries or any other obligor of any of their
respective obligations under the Credit Agreement or any other Credit Document
or any other instrument or document furnished pursuant hereto or thereto.

3. The Assignee (a) represents and warrants that it is legally
authorized to enter into this Assignment and Acceptance; (b) confirms that it
has received a copy of the Credit Agreement, together with copies of the
financial statements delivered pursuant to subsection 3.9 thereof and such
other documents and information as it has deemed appropriate to make its own
credit analysis and decision to enter into this Assignment and
<PAGE> 138
Acceptance; (c) agrees that it will, independently and without reliance upon
the Assignor, the Administrative Agent or any other Bank and based on such
documents and information as it shall deem appropriate at the time, continue to
make its own credit decisions in taking or not taking action under the Credit
Agreement, the other Credit Documents or any other instrument or document
furnished pursuant hereto or thereto; (d) appoints and authorizes the
Administrative Agent to take such action as agent on its behalf and to exercise
such powers and discretion under the Credit Agreement, the other Credit
Documents or any other instrument or document furnished pursuant hereto or
thereto as are delegated to the Administrative Agent by the terms thereof,
together with such powers as are incidental thereto; and (e) agrees that it
will be bound by the provisions of the Credit Agreement and will perform in
accordance with its terms all the obligations which by the terms of the Credit
Agreement are required to be performed by it as a Bank.

4. The effective date of this Assignment and Acceptance shall be
__________ ___, 19__ (the "Effective Date"). Following the execution of this
Assignment and Acceptance, it will be delivered to the Administrative Agent for
acceptance by it and recording by the Administrative Agent pursuant to the
Credit Agreement, effective as of the Effective Date (which shall not, unless
otherwise agreed to by the Administrative Agent, be earlier than five Business
Days after the date of such acceptance and recording by the Administrative
Agent).

5. Upon such acceptance and recording, from and after the Effective
Date, the Administrative Agent shall make all payments in respect of the
Assigned Interest (including payments of principal, interest, fees and other
amounts) to the Assignee to the extent such amounts accrue subsequent to the
Effective Date. The Assignor and the Assignee shall make all appropriate
adjustments in payments by the Administrative Agent for periods prior to the
Effective Date or with respect to the making of this assignment directly
between themselves.

6. From and after the Effective Date, (a) the Assignee shall be a
party to the Credit Agreement and, to the extent provided in this Assignment
and Acceptance, have the rights and obligations of a Bank thereunder and under
the other Credit Documents and shall be bound by the provisions thereof and (b)
the Assignor shall, to the extent provided in this Assignment and Acceptance,
relinquish its rights and be released from its obligations under the Credit
Agreement.

7. This Assignment and Acceptance shall be governed by and construed
in accordance with the laws of the State of New York.

IN WITNESS WHEREOF, the parties hereto have caused this Assignment and
Acceptance to be executed as of the date first above written by their
respective duly authorized officers on Schedule 1 hereto.
<PAGE> 139
SCHEDULE 1
TO ASSIGNMENT AND ACCEPTANCE
RELATING TO THE CREDIT AND REIMBURSEMENT AGREEMENT,
DATED AS OF APRIL 5, 1996, AMONG
MITCHELL ENERGY CORPORATION, MND ENERGY CORPORATION,
THE BANKS PARTIES THERETO, INCLUDING THE ISSUING BANKS,
AND
CHEMICAL BANK, AS ADMINISTRATIVE AGENT FOR THE BANKS
(IN SUCH CAPACITY, THE "ADMINISTRATIVE AGENT")
- --------------------------------------------------------------------------------

Name of Assignor:

Name of Assignee:

Effective Date of Assignment:
Credit Principal Commitment Percentage

Facility Assigned Amount Assigned Assigned1/
----------------- --------------- ----------------------------
$ . %
------------- --- ---------------

[Name of Assignee] [Name of Assignor]

By By
---------------------------- ------------------------------
Name: Name:
Title: Title:

Office and Address for Notices:

-------------------------------

Attn: -------------------------

____________________

1/ Calculate the Commitment Percentage that is assigned to at
least 15 decimal places and show as a percentage of the
aggregate commitments of all Banks.
<PAGE> 140
2

Accepted [and Consented to]: [Consented To:]

CHEMICAL BANK, as MITCHELL ENERGY CORPORATION
Administrative Agent [and as
an Issuing Bank]

By By
------------------------------ ------------------------------
Name: Name:
Title:
Title:

[Consented To:]

NATIONSBANK OF TEXAS, N.A.

By
------------------------------
Name:
Title:

PNC BANK, NATIONAL ASSOCIATION

By
------------------------------
Name:
Title:

<PAGE> 1
Exhibit 10(c)
MITCHELL ENERGY & DEVELOPMENT CORP.
1995 STOCK OPTION PLAN

I. PURPOSE OF THE PLAN

The MITCHELL ENERGY & DEVELOPMENT CORP. 1995 STOCK OPTION PLAN (the
"Plan") is intended to provide a means whereby certain employees of MITCHELL
ENERGY & DEVELOPMENT CORP., a Texas corporation (the "Company"), and its
subsidiaries may develop a sense of proprietorship and personal involvement in
the development and financial success of the Company, and to encourage them to
remain with and devote their best efforts to the business of the Company,
thereby advancing the interests of the Company and its shareholders.
Accordingly, the Company may grant to certain employees ("Optionees") the
option ("Option") to purchase shares of Class B Common Stock, par value $0.10,
of the Company ("Stock"), as hereinafter set forth. Options granted under the
Plan may be either incentive stock options, within the meaning of section
422(b) of the Internal Revenue Code of 1986, as amended (the "Code"),
("Incentive Stock Options") or options which do not constitute Incentive Stock
Options.

II. ADMINISTRATION

The Plan shall be administered by a committee (the "Committee") of,
and appointed by, the Board of Directors of the Company (the "Board"), and the
Committee shall be (a) comprised solely of two or more outside directors
(within the meaning of section 162(m) of the Code and applicable interpretive
authority thereunder), and (b) constituted so as to permit the Plan to comply
with Rule 16b-3 ("Rule 16b-3"), promulgated under the Securities Exchange Act
of 1934, as amended (the "1934 Act"). The Committee shall have sole authority
to select the Optionees from among those individuals eligible hereunder and to
establish the number of shares which may be issued under each Option; provided,
however, that, notwithstanding any provision in the Plan to the contrary, the
maximum number of shares that may be subject to Options granted under the Plan
to an individual Optionee during any calendar year may not exceed 150,000
(subject to adjustment in the same manner as provided in Paragraph VIII hereof
with respect to shares of Stock subject to Options then outstanding). The
limitation set forth in the preceding sentence shall be applied in a manner
which will permit compensation generated under the Plan to constitute
"performance-based" compensation for purposes of section 162(m) of the Code,
including, without limitation, counting against such maximum number of shares,
to the extent required under section 162(m) of the Code and applicable
interpretive authority thereunder, any shares subject to Options that are
cancelled or repriced. In selecting the Optionees from among individuals
eligible hereunder and in establishing the number of shares
<PAGE> 2
that may be issued under each Option, the Committee may take into account the
nature of the services rendered by such individuals, their present and
potential contributions to the Company's success and such other factors as the
Committee in its discretion shall deem relevant. The Committee is authorized
to interpret the Plan and may from time to time adopt such rules and
regulations, consistent with the provisions of the Plan, as it may deem
advisable to carry out the Plan. All decisions made by the Committee in
selecting the Optionees, in establishing the number of shares which may be
issued under each Option and in construing the provisions of the Plan shall be
final.

III. OPTION AGREEMENTS

(a) Each Option shall be evidenced by a written agreement between
the Company and the Optionee ("Option Agreement") which shall contain such
terms and conditions as may be approved by the Committee. The terms and
conditions of the respective Option Agreements need not be identical.
Specifically, an Option Agreement may provide for the surrender of the right to
purchase shares under the Option in return for a payment in cash or shares of
Stock or a combination of cash and shares of Stock equal in value to the excess
of the fair market value of the shares with respect to which the right to
purchase is surrendered over the option price therefor ("Stock Appreciation
Rights"), on such terms and conditions as the Committee in its sole discretion
may prescribe; provided, that, except as provided in Subparagraph VIII(c)
hereof, the Committee may retain final authority (i) to determine whether an
Optionee shall be permitted, or (ii) to approve an election by an Optionee, to
receive cash in full or partial settlement of Stock Appreciation Rights.
Further, an Option Agreement may authorize and provide for an Optionee to
exercise the Option and direct immediate market sale of any treasury Stock
thereby acquired pursuant to an extension of credit by the Company to such
Optionee for the aggregate exercise price and upon such other terms and
conditions as the Committee may determine. Moreover, an Option Agreement may
provide for the payment of the option price, in whole or in part, by the
delivery of a number of shares of Stock (plus cash if necessary) having a fair
market value equal to such option price.

(b) For all purposes under the Plan, the fair market value of a
share of Stock on a particular date shall be equal to the closing price of the
Stock reported on the New York Stock Exchange Composite Tape on that date; or,
if no prices are reported on that date, on the last preceding date on which
such prices of the Stock are so reported. If the Stock is traded over the
counter at the time a determination of its fair market value is required to be
made hereunder, its fair market value shall be deemed to be equal to the
average between the reported high and low or closing bid and asked prices of
Stock on the most recent date on which Stock was publicly traded. In the event
Stock is not publicly traded at the time a determination of its value is
required to be made hereunder, the determination of its fair market value shall
be made by the Committee in such manner as it deems appropriate.
<PAGE> 3
(c) Each Option and all rights granted thereunder shall not be
transferable other than by will or the laws of descent and distribution and
shall be exercisable during the Optionee's lifetime only by the Optionee or the
Optionee's guardian or legal representative.

IV. ELIGIBILITY OF OPTIONEE

Options may be granted only to individuals who are employees
(including officers and directors who are also employees) of the Company or any
parent or subsidiary corporation (as defined in section 424 of the Code) of the
Company at the time the Option is granted. Options may be granted to the same
individual on more than one occasion. No Incentive Stock Option shall be
granted to an individual if, at the time the Option is granted, such individual
owns stock possessing more than 10% of the total combined voting power of all
classes of stock of the Company or of its parent or subsidiary corporation,
within the meaning of section 422(b)(6) of the Code, unless (i) at the time
such Option is granted the option price is at least 110% of the fair market
value of the Stock subject to the Option and (ii) such Option by its terms is
not exercisable after the expiration of five years from the date of grant. To
the extent that the aggregate fair market value (determined at the time the
respective Incentive Stock Option is granted) of stock with respect to which
Incentive Stock Options are exercisable for the first time by an individual
during any calendar year under all incentive stock option plans of the Company
and its parent and subsidiary corporations exceeds $100,000, such excess
Incentive Stock Options shall be treated as Options which do not constitute
Incentive Stock Options. The Committee shall determine, in accordance with
applicable provisions of the Code, Treasury Regulations and other
administrative pronouncements, which of an Optionee's Incentive Stock Options
will not constitute Incentive Stock Options because of such limitation and
shall notify the Optionee of such determination as soon as practicable after
such determination.

V. SHARES SUBJECT TO THE PLAN

The aggregate number of shares which may be issued under Options
granted under the Plan shall not exceed 2,500,000 shares of Stock. No more
than 500,000 shares of stock may be issued under Options granted under the Plan
during 1995. Such shares may consist of authorized but unissued shares of
Stock or previously issued shares of Stock reacquired by the Company. Any of
such shares which remain unissued and which are not subject to outstanding
Options at the termination of the Plan shall cease to be subject to the Plan,
but, until termination of the Plan, the Company shall at all times make
available a sufficient number of shares to meet the requirements of the Plan.
Should any Option hereunder expire or terminate prior to its exercise in full,
the shares theretofore subject to such Option may again be subject to an Option
granted under the Plan to the extent permitted under Rule 16b-3. The aggregate
number of shares which may be issued under the Plan shall be subject to
adjustment in the same manner as provided in Paragraph VIII hereof with respect
to shares
<PAGE> 4
of Stock subject to Options then outstanding. Exercise of an Option in any
manner, including an exercise involving a Stock Appreciation Right, shall
result in a decrease in the number of shares of Stock which may thereafter be
available, both for purposes of the Plan and for sale to any one individual, by
the number of shares as to which the Option is exercised. Separate stock
certificates shall be issued by the Company for those shares acquired pursuant
to the exercise of an Incentive Stock Option and for those shares acquired
pursuant to the exercise of any Option which does not constitute an Incentive
Stock Option.

VI. OPTION PRICE

The purchase price of Stock issued under each Option shall be
determined by the Committee, but such purchase price shall not be less than the
fair market value of Stock subject to the Option on the date the Option is
granted.

VII. TERM OF PLAN

The Plan shall be effective upon the date of its adoption by the
Board, provided the Plan is approved by the shareholders of the Company within
twelve months thereafter. Notwithstanding any provision in this Plan or in any
Option Agreement, no Option shall be exercisable prior to such shareholder
approval. Except with respect to Options then outstanding, if not sooner
terminated under the provisions of Paragraph IX, the Plan shall terminate upon
and no further Options shall be granted after the expiration of ten years from
the date of its adoption by the Board.

VIII. RECAPITALIZATION OR REORGANIZATION

(a) The existence of the Plan and the Options granted hereunder
shall not affect in any way the right or power of the Board or the shareholders
of the Company to make or authorize any adjustment, recapitalization,
reorganization or other change in the Company's capital structure or its
business, any merger or consolidation of the Company, any issue of debt or
equity securities, the dissolution or liquidation of the Company or any sale,
lease, exchange or other disposition of all or any part of its assets or
business or any other corporate act or proceeding.

(b) The shares with respect to which Options may be granted are
shares of Stock as presently constituted, but if, and whenever, prior to the
expiration of an Option theretofore granted, the Company shall effect a
subdivision or consolidation of shares of Stock or the payment of a stock
dividend on Stock without receipt of consideration by the Company, the number
of shares of Stock with respect to which such Option may thereafter be
exercised (i) in the event of an increase in the number of outstanding shares
shall be proportionately
<PAGE> 5
increased, and the purchase price per share shall be proportionately reduced,
and (ii) in the event of a reduction in the number of outstanding shares shall
be proportionately reduced, and the purchase price per share shall be
proportionately increased. If prior to the expiration of an Option theretofore
granted, the Company shall effect a spinoff of a subsidiary by issuance of
shares of stock in the subsidiary to shareholders of the Company or effect any
other transaction which essentially accomplishes the same result, the Committee
shall adjust the exercise price of an Option to reflect any decrease in the
value of the Stock resulting from such spinoff or transaction.

(c) If the Company recapitalizes, reclassifies its capital stock,
or otherwise changes its capital structure (a "recapitalization"), the number
and class of shares of Stock covered by an Option theretofore granted shall be
adjusted so that such Option shall thereafter cover the number and class of
shares of stock and securities to which the Optionee would have been entitled
pursuant to the terms of the recapitalization if, immediately prior to the
recapitalization, the Optionee had been the holder of record of the number of
shares of Stock then covered by such Option. If (i) the Company shall not be
the surviving entity in any merger, consolidation or other reorganization (or
survives only as a subsidiary of an entity other than a previously wholly-owned
subsidiary of the Company), (ii) the Company sells, leases or exchanges all or
substantially all of its assets to any other person or entity (other than a
wholly-owned subsidiary of the Company), (iii) the Company is to be dissolved
and liquidated, (iv) any person or entity, including a "group" as contemplated
by Section 13(d)(3) of the 1934 Act, acquires or gains ownership or control
(including, without limitation, power to vote) of more than 50% of the
outstanding shares of the Company's voting stock (based upon voting power), or
(v) as a result of or in connection with a contested election of directors, the
persons who were directors of the Company before such election shall cease to
constitute a majority of the Board (each such event is referred to herein as a
"Corporate Change"), provided, however, in the event of the death of George P.
Mitchell, the majority shareholder of the Company and the Chief Executive
Officer of the Company, the transfer of George P. Mitchell's shares of the
Company's stock upon his death shall not result in or constitute a Corporate
Change, no later than (a) ten days after the approval by the shareholders of
the Company of such merger, consolidation, reorganization, sale, lease or
exchange of assets or dissolution or such election of directors or (b) thirty
days after a change of control of the type described in Clause (iv), the
Committee, acting in its sole discretion without the consent or approval of any
Optionee, shall act to effect one or more of the following alternatives, which
may vary among individual Optionees and which may vary among Options held by
any individual Optionee: (1) accelerate the time at which Options then
outstanding may be exercised so that such Options may be exercised in full for
a limited period of time on or before a specified date (before or after such
Corporate Change) fixed by the Committee, after which specified date all
unexercised Options and all rights of Optionees thereunder shall terminate, (2)
require the mandatory surrender to the Company by selected Optionees of some or
all of the outstanding Options held by such Optionees (irrespective of whether
such Options are then exercisable under the provisions of the Plan) as of a
date, before or after such Corporate Change, specified by the Committee, in
which event the
<PAGE> 6
Committee shall thereupon cancel such Options and the Company shall pay to each
Optionee an amount of cash per share equal to the excess, if any, of the amount
calculated in Subparagraph (d) below (the "Change of Control Value") of the
shares subject to such Option over the exercise price(s) under such Options for
such shares, (3) make such adjustments to Options then outstanding as the
Committee deems appropriate to reflect such Corporate Change (provided,
however, that the Committee may determine in its sole discretion that no
adjustment is necessary to Options then outstanding) or (4) provide that the
number and class of shares of Stock covered by an Option theretofore granted
shall be adjusted so that such Option shall thereafter cover the number and
class of shares of stock or other securities or property (including, without
limitation, cash) to which the Optionee would have been entitled pursuant to
the terms of the agreement of merger, consolidation or sale of assets and
dissolution if, immediately prior to such merger, consolidation or sale of
assets and dissolution, the Optionee had been the holder of record of the
number of shares of Stock then covered by such Option.

(d) For the purposes of clause (2) in Subparagraph (c) above, the
"Change of Control Value" shall equal the amount determined in clause (i), (ii)
or (iii), whichever is applicable, as follows: (i) the per share price offered
to shareholders of the Company in any such merger, consolidation,
reorganization, sale of assets or dissolution transaction, (ii) the price per
share offered to shareholders of the Company in any tender offer or exchange
offer whereby a Corporate Change takes place, or (iii) if such Corporate Change
occurs other than pursuant to a tender or exchange offer, the fair market value
per share of the shares into which such Options being surrendered are
exercisable, as determined by the Committee as of the date determined by the
Committee to be the date of cancellation and surrender of such Options. In the
event that the consideration offered to shareholders of the Company in any
transaction described in this Subparagraph (d) or Subparagraph (c) above
consists of anything other than cash, the Committee shall determine the fair
cash equivalent of the portion of the consideration offered which is other than
cash.

(e) Any adjustment provided for in Subparagraphs (b) or (c) above
shall be subject to any required shareholder action.

(f) Except as hereinbefore expressly provided, the issuance by the
Company of shares of stock of any class or securities convertible into shares
of stock of any class, for cash, property, labor or services, upon direct sale,
upon the exercise of rights or warrants to subscribe therefor, or upon
conversion of shares or obligations of the Company convertible into such shares
or other securities, and in any case whether or not for fair value, shall not
affect, and no adjustment by reason thereof shall be made with respect to, the
number of shares of Stock subject to Options theretofore granted or the
purchase price per share.
<PAGE> 7
IX. AMENDMENT OR TERMINATION OF THE PLAN

The Board in its discretion may terminate the Plan at any time with
respect to any shares for which Options have not theretofore been granted. The
Board shall have the right to alter or amend the Plan or any part thereof from
time to time; provided, that no change in any Option theretofore granted may be
made which would impair the rights of the Optionee without the consent of such
Optionee; and provided, further, that (i) the Board may not make any alteration
or amendment which would decrease any authority granted to the Committee
hereunder in contravention of Rule 16b-3 and (ii) the Board may not make any
alteration or amendment which would materially increase the benefits accruing
to participants under the Plan, increase the aggregate number of shares which
may be issued pursuant to the provisions of the Plan, change the class of
individuals eligible to receive Options under the Plan or extend the term of
the Plan, without the approval of the shareholders of the Company.

X. SECURITIES LAWS

(a) The Company shall not be obligated to issue any Stock pursuant
to any Option granted under the Plan at any time when the offering of the
shares covered by such Option have not been registered under the Securities Act
of 1933 and such other state and federal laws, rules or regulations as the
Company or the Committee deems applicable and, in the opinion of legal counsel
for the Company, there is no exemption from the registration requirements of
such laws, rules or regulations available for the offering and sale of such
shares.

(b) It is intended that the Plan and any grant of an Option made
to a person subject to Section 16 of the 1934 Act meet all of the requirements
of Rule 16b-3. If any provision of the Plan or any such Option would
disqualify the Plan or such Option under, or would otherwise not comply with,
Rule 16b-3, such provision or Option shall be construed or deemed amended to
conform to Rule 16b-3.

<PAGE> 1
Exhibit 10(d)

SECOND AMENDMENT TO
MITCHELL ENERGY & DEVELOPMENT CORP.
1991 BONUS UNIT PLAN

This Second Amendment to the Mitchell Energy & Development Corp. 1991
Bonus Unit Plan (the "Plan"), authorized by the Compensation Committee of the
Board of Directors of the Company, is effective as of February 9, 1993.

Article XIV. "Special Grant" is added as follows:

XIV. Special Grant

An aggregate of 8800 "Special" A bonus Units and 11,800 "Special" B
Bonus Units may be granted by the Company under the Plan on February 9, 1993.
Notwithstanding any other provision of the Plan, the "value" of each such
special Bonus Unit on the Designation Date shall be $8.75, and each Special
Bonus Unit, if so granted, shall be 100% Vested as of February 9, 1993. Also
notwithstanding any other provision of the Plan, any Special Bonus Unit must be
redeemed on or before February 9, 1994, and any Special Bonus Unit which is not
redeemed before such date shall be automatically redeemed on February 9, 1994.
any Special Bonus Unit shall be redeemed pursuant to the provisions of Section
VI.(b).(c) and (d) of the Plan.

MITCHELL ENERGY & DEVELOPMENT CORP.

By: /s/ Bernard F. Clark
----------------------------------
Bernard F. Clark
Vice Chairman
<PAGE> 2
THIRD AMENDMENT TO
MITCHELL ENERGY & DEVELOPMENT CORP.
1991 BONUS UNIT PLAN

This Third Amendment to the Mitchell Energy & Development Corp. 1991
Bonus Unit Plan (the "Plan"), authorized by the Compensation Committee of the
Board of Directors of the Company, is effective as of January 18, 1996.

Article XIV. "Special Grant" is amended to add the following language
to the end of such section:

An aggregate of 7,050 "Special" B Bonus Units may be granted by the
Company under the Plan on January 18, 1996. Notwithstanding any other
provision of the Plan, the "value" of each such Special Bonus Unit on
the Designation Date shall be $8.75, and each Special Bonus Unit, if
so granted, shall be 100% Vested as of January 18, 1996. Also,
notwithstanding any other provision of the Plan, any Special Bonus
Unit must be redeemed on or before January 18, 1997, and any Special
Bonus Unit which is not redeemed before such date shall be
automatically redeemed on January 18, 1997. Any Special Bonus Unit
shall be redeemed pursuant to the provisions of Section VI.(b) (c) and
(d) of the Plan.

MITCHELL ENERGY & DEVELOPMENT CORP.

By: /s/ BERNARD F. CLARK
-------------------------------
Bernard F. Clark
Vice Chairman

<PAGE> 1
Exhibit 10(m)

Mitchell Energy & Development Corp.
CONTRIBUTION TO LIFE INSURANCE PROGRAM OF GEORGE P. MITCHELL

On February 21, 1996, the Company's Board of Directors agreed to make
contributions of $210,000 per year in calendar 1996, 1997 and 1998 toward the
life insurance program on the life of George P. Mitchell. The carrier(s) and
beneficiaries of such program will be determined solely by George P. Mitchell.

<PAGE> 1
Exhibit 12

Mitchell Energy & Development Corp. and Subsidiaries
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
FOR THE YEARS ENDED JANUARY 31, 1996, 1995, 1994, 1993 AND 1992
(dollar amounts in thousands)

<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
EARNINGS
Pretax earnings . . . . . . . . . . . . . . . $ 58,331 $ 70,551 $ 47,376 $ 60,022 $ 73,188
Add (Deduct)
Previously capitalized interest
charged against pretax earnings . . . . 79,499(d) 22,158 11,552 9,545 14,887

Losses of less-than-50%-owned persons . . 9 1,104 32 99 26
Fixed charges (see below) . . . . . . . . 78,992 85,988 84,788 85,169 90,107
Reverse effect of inclusion of interest
capitalized in fixed charges above . . (28,561) (33,011) (33,956) (34,161) (37,460)

Undistributed earnings of
less-than-50%-owned persons . . . . . . (4,321) (914) (3,594) (10,305) (10,521)
-------- -------- -------- -------- --------
$183,949 $145,876 $106,198 $110,369 $130,227
======== ======== ======== ======== ========

FIXED CHARGES
Interest expense incurred
Consolidated (a) (b) . . . . . . . . . . $ 65,802 $ 71,570 $ 75,252 $ 77,451 $ 84,025
50%-owned persons . . . . . . . . . . . . 9,957 7,912 6,236 4,609 3,284
Less-than-50%-owned persons . . . . . . . - 3,032(e) - - -
-------- -------- -------- -------- --------
75,759 82,514 81,488 82,060 87,309
Portion of rental expense representing
interest (c) . . . . . . . . . . . . . . 3,233 3,474 3,300 3,109 2,798
-------- -------- -------- -------- --------
$ 78,992 $ 85,988 $ 84,788 $ 85,169 $ 90,107
======== ======== ======== ======== ========

RATIO OF EARNINGS TO FIXED CHARGES . . . . . 2.33 1.70 1.25 1.30 1.45
======== ======== ======== ======== ========
</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 January 31, 1996, the Company had other outstanding guaranties of
approximately $17,600,000 of indebtedness of third parties 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 $800,000 for fiscal 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 guarantee was subsequently eliminated when
BEF's debt was converted to a term loan during fiscal 1996.

<PAGE> 1
EXHIBIT 13

===================

-----------
50th ANNIVERSARY

MITCHELL ENERGY &
DEVELOPMENT CORP.

===================

Fiscal
1996
Annual
Report

Year Ended January 31, 1996
<PAGE> 2
THE COMPANY

Mitchell Energy & Development Corp., one of the nation's largest independent
oil and gas companies, traces its origins to a small wildcatting firm formed in
1946. It also is a major real estate developer, primarily in the Houston
region. At January 31, 1996, the Company had approximately 2,000 full-time
employees.

Principal energy operations include the exploration for and production of
natural gas and oil, processing to recover natural gas liquids and operation of
gas gathering systems to facilitate these operations. In its most recent fiscal
year, the Company produced 82.5 billion cubic feet of natural gas and 18.9
million barrels of liquid hydrocarbons (natural gas liquids, oil and
condensate). At year end, it owned or had interests in 3,047 wells, 1.3 million
acres of leases, 16 operating gas processing plants and nearly 5,000 miles of
gas gathering pipelines.

The Company's real estate operations are concentrated in The Woodlands, a
25,000-acre community located 27 miles north of downtown Houston. At year end,
the community had almost 45,000 residents and a non-construction employment
base of 16,500 jobs.

CONTENTS

<TABLE>
<S> <C>
Letter to Shareholders . . . . . . . . . . . . . . 2
Energy Operations . . . . . . . . . . . . . . . . . 7
Real Estate Operations . . . . . . . . . . . . . . 19
Management's Discussion and Analysis of
Financial Position and Results of Operations . . 27
Consolidated Financial Statements . . . . . . . . . 41
Notes to Consolidated Financial Statements . . . . 45
Report of Independent Public Accountants . . . . . 60
Supplemental Oil and Gas Information . . . . . . . 61
Historical Summary . . . . . . . . . . . . . . . . 65
Principal Officers . . . . . . . . . . . . . . . . 67
Board of Directors . . . . . . . . . . . . . . . . 68
Corporate Information . . . . . . . . . . . . . . . 69
</TABLE>

DEFINITIONS

<TABLE>
<S> <C>
MMBtu . . . . million British thermal units
Mcf . . . . . thousand cubic feet (measure of gas volume)
MMcf . . . . million cubic feet
Bcf . . . . . billion cubic feet
Bbl . . . . . barrel (measure of liquid hydrocarbon volume)
MMBbls . . . million barrels
NGL or NGLs . natural gas liquids (ethane, propane, butanes
and natural gasoline)
DD&A . . . . depreciation, depletion and amortization
</TABLE>

Note: Natural gas volumes in this report are stated at the legal pressure base
of the area in which the reserves are located and at 60 degrees Fahrenheit.
Pipeline throughput volumes are based on an average energy content of 1,000 Btu
per cubic foot. Where applicable, NGL volume, price and reserve information
includes equity partnership interests.
<PAGE> 3
FINANCIAL HIGHLIGHTS

MITCHELL ENERGY & DEVELOPMENT CORP. AND SUBSIDIARIES

Year Ended January 31 (in thousands, except per-share data)

<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Net earnings . . . . . . . . . . . . . . $ 37,129 $ 45,814
============== ==============

Earnings per share . . . . . . . . . . . $ .71 $ .87
============== ==============

Revenues . . . . . . . . . . . . . . . . $ 1,071,747 * $ 894,571
============== ==============

Segment operating earnings Energy
Exploration and production . . . . . . . $ 35,775 $ 84,115
Natural gas processing . . . . . . . . . 30,994 23,253
Natural gas gathering and marketing . . . 14,063 12,335
Other gas services . . . . . . . . . . . 9,059 (846)
Unusual items
Gain from natural gas contract buyout 205,256 -
Gains from major asset sales . . . . . 5,338 52,612
Asset write-downs . . . . . . . . . . (52,715) (23,888)
Litigation provision . . . . . . . . . (15,000) -
Personnel reduction program costs . . (11,535) (7,364)
-------------- --------------

221,235 140,217
-------------- --------------

Real estate
Operations . . . . . . . . . . . . . . . 48,848 25,793
Unusual items
Write-downs of properties . . . . . . (123,916) (5,661)
Personnel reduction program costs . . (3,000) -
-------------- --------------

(78,068) 20,132
-------------- --------------

$ 143,167 $ 160,349
============== ==============

Capital and exploratory expenditures . . $ 246,083 $ 219,575
============== ==============

Total assets . . . . . . . . . . . . . . $ 1,842,869 $ 1,855,871
============== ==============

Operating statistics
(average daily amounts)
Natural gas sales (Mcf) . . . . . . . . . 216,200 214,100
Crude oil and condensate sales (Bbls) . . 5,400 6,300
Natural gas liquids production (Bbls) . . 46,400 47,500
Pipeline throughput (Mcf) (excluding
Winnie system, sold in fiscal 1995) . 354,000 353,000
</TABLE>

* Includes gain from natural gas contract buyout of $205,256.

[BAR CHART]

MITCHELL ENERGY & DEVELOPMENT CORP.

1996 marks the Golden Anniversary
of its founding. The events cited
below and running through the
first 25 pages of this annual report
mark the milestones of accomplishment
of the Company's first 50 years.

1946
--------

***************************************************************************
* *
* George P. Mitchell, 26, is mustered out of the army. He does *
* engineering and geology consulting for Roxoil Drilling, Inc., as well *
* as for several other independent companies. Roxoil is named for Roxie *
* Wright, a long-time wildcatter. Its founding partner is H. Merlyn *
* Christie, an oil business broker. Toward year end, Roxoil's name is *
* changed to Oil Drilling, Inc., and several months later, Mitchell *
* buys out the interests of one of Oil Drilling's partners. Beginning *
* in 1946 and through its early years, the Company makes important *
* petroleum discoveries and extends existing fields, including the *
* Madisonville, Pinehurst, Palacios, Vienna, Buffalo South, LaSal Vieja *
* and Keeran fields, among many others, all in the Gulf Coast area. *
* *
***************************************************************************

1
<PAGE> 4
[GRAPHIC INSERT]
1952
--------

***************************************************************************
* *
* A Chicago-based bookie's tip, relayed through a friend, piques George *
* Mitchell's interest in some North Texas acreage. He joins John A. *
* Jackson, a consulting geologist, and Ellison Miles, a drilling *
* contractor, who are already aware of the prospect. Together they *
* lease the 3,000-acre Hughes Ranch in Wise County. The first well, the *
* D.J. Hughes No. 1, is successful, as are the next 10 consecutive *
* wells. Mitchell and Jackson perceive a huge stratigraphic trap *
* underlying the entire area, and Mitchell buys leases on 400,000 *
* acres. Today, Mitchell Energy & Development Corp.'s cumulative gas *
* production in North Texas totals almost 1.5 trillion cubic feet; the *
* area still accounts for half the Company's gas production. *
* *
***************************************************************************

LETTER TO SHAREHOLDERS

Fifty years ago, we started with a used drilling rig, some ideas and a whole
lot of enthusiasm. Since then, Mitchell Energy & Development Corp. has drilled
more than 8,500 wells, almost half of them in North Texas, to become one of the
nation's largest independent producers and processors of natural gas. While
we've had our ups and downs, we've always ended up each year in the black. In
better days, we expanded and diversified. More recently, we've refocused and
restructured to adapt to today's energy prices.

Two years ago, we began a wide-ranging program to position the Company to
be more profitable under whatever conditions the future may bring. The program
involved a number of essential elements, including concentrating our resources
on core areas in each business segment, cutting operating and overhead costs,
identifying underperforming and noncore assets for disposal and enhancing our
financial structure.

The decisions resulting from a companywide asset management study, together
with other initiatives taken during the year, represent the completion of major
steps in the Company's refocusing efforts. Noncore asset sales to date have
generated $240 million in proceeds, helping to reduce long-term debt by more
than $150 million over the last two years, with more to come. But the real
payoff comes from improved focus on enhancing the profitability of our core
assets through stepped-up development programs, operating efficiencies and
niche trades that add value to these assets.

In fiscal 1996, refocusing initiatives resulted in asset write-downs
totaling $177 million, as we repositioned various properties for disposal, and
a personnel reduction program costing $20 million. These charges, however, were
offset by a $205 million gain from the buyout of a premium-priced gas sales
contract with Natural Gas Pipeline Company of America (Natural).

In a move to optimize its inevitable transition to a market-sensitive gas
price environment, the Company entered into an agreement with Natural to
terminate its North Texas gas sales contract, effective July 1, 1995. This
contract, under which we were receiving $4 per MMBtu, would otherwise have
expired at the end

2
<PAGE> 5
of calendar 1997. The buyout accelerated the premium value of the contract,
making funds available earlier to reduce debt or to fund other investments to
replace a portion of the operating cash flow previously provided by the
contract.

Of more significance, however, was that effective with the buyout, we
gained control of the gas gathering system that serves 1,500 of our wells in
North Texas. This allowed us to optimize field operations in this area and to
access new intrastate markets through pipeline interconnects completed in
October. With these improvements and the elimination of contract-related
production constraints, we accelerated well completions and hookups, increasing
North Texas daily gas production by more than 20 percent. As a result, total
Company gas production reached a record 238 MMcf per day during the fourth
quarter of fiscal 1996. More benefits from assuming control (and ultimately
ownership) of the system are expected.

In exploration and production, we replaced 114 percent of the gas we
produced, with total remaining gas reserves reaching a record 697 Bcf at year
end. These results were largely accomplished through the Company's development
drilling program. We continued extensive use of three-dimensional seismic
technology to enhance both the development and exploratory drilling programs.
While it may be a little early to judge, we are encouraged by the results of
our redirected exploration efforts.

The Company also acquired the Lake Creek field in Southeast Texas, which
adjoins the Pinehurst field where we have been active since 1988. We booked 30
Bcf of gas reserves and believe there is substantial upside potential. This
purchase is a good example of how niche acquisitions can complement existing
operations by allowing us to expand nearby operations at a relatively low cost.

In gas services, we made good progress in rationalizing gas processing
operations, reducing operating plants from 23 to 16 without significant loss of
natural gas liquids production volumes. In Central Texas, the Company extended
its Austin Chalk joint venture east into Grimes and Washington counties by
investing $20 million in the construction of a new gas gathering system and
treating facility that went on-line in August 1995, almost doubling the
system's prior capacity of

[PHOTO]
1953
--------

***************************************************************************
* *
* George Mitchell and his brother, Johnny, buy out the Roxie Wright *
* estate's interests in Oil Drilling, which, along with third parties, *
* continues to invest in oil and gas exploration. They create a new *
* company to conduct operations -- Christie, Mitchell & Mitchell Co. *
* Above, left to right: George Mitchell, Merlyn Christie and Johnny *
* Mitchell *
* *
***************************************************************************

3
<PAGE> 6
[PHOTO]
1957
--------

***************************************************************************
* *
* MEDC starts delivery under a 20-year contract with Natural Gas *
* Pipeline Company of America (Natural) and becomes a major supplier of *
* natural gas to the Chicago area. Natural obtains a reliable source of *
* natural gas, and MEDC receives premium prices and guaranteed "takes" *
* for much of its North Texas production. The agreement requires the *
* Company to process the liquids-rich North Texas gas. The contract is *
* subsequently revised and renewed, then bought out by Natural in 1995, *
* two- and-a-half years before its ultimate expiration. *
* *
***************************************************************************

280 MMcf per day. The Company's jointly owned MTBE gasoline additive plant
became fully operational in April 1995, and modifications completed during the
third quarter increased plant capacity by more than 3,000 barrels a day to
16,000 barrels a day.

As a result of an extensive study, the Company decided to focus its real
estate operations almost exclusively on The Woodlands. In fiscal 1996, The
Woodlands set an all-time record for new home sales and led the Houston region
in that category for the sixth consecutive year. In national rankings of similar
communities, The Woodlands ranked eighth. Additionally, we sold a 75 percent
interest in 10 office buildings and entered into other joint ventures that
enhance the franchise value of existing properties. By developing and monetizing
properties through such joint ventures, we expect higher returns than we now
receive from full ownership.

After all of these positive developments in fiscal 1996, we began the
current year on a down note when a jury found that Company wells in North Texas
had adversely affected the plaintiffs' water wells -- a claim we believe was
countered with expert testimony and scientific evidence. Nevertheless, the
plaintiffs were awarded $4 million in actual and $200 million in exemplary
damages. Since we believe any award is unwarranted, the Company is taking
vigorous actions to challenge this judgment and believes it will be overturned
or at least dramatically reduced. A $15 million accrual was made in the fiscal
1996 financial statements primarily for costs associated with appeals to the
highest possible levels.

In the current year, we are encouraged by the weather-related tightness of
supplies and consequent higher prices for the Company's principal products.
However, while there will be occasional spikes and dips caused by weather
fluctuations and dramatic geopolitical events, we are still managing our
business on the assumption that energy prices will remain flat to modestly
higher over the longer term. In such a price environment, Providence smiles on
the efficient producer. That's why we'll continue to make progress in
implementing the Company's revised business strategy, getting more from core
properties and restructuring to reduce both operating costs and long-term debt,
all directed toward improving profitability and enhancing shareholder value.

4
<PAGE> 7
[PHOTO] George P. Mitchell, left,
and W.D. Stevens.

In this annual report, we've listed some of the more notable events in
the Company's 50-year history. These accomplishments reflect the contributions
of thousands of hard-working employees over the years and set forth our long-
term success in creating shareholder value. It's a tradition we're not likely
to change in the next half-century.

/s/ GEORGE P. MITCHELL /s/ W.D. STEVENS
George P. Mitchell W.D. Stevens
Chairman and President and
Chief Executive Officer Chief Operating Officer

April 12, 1996

[PHOTO]
1958
--------

***************************************************************************
* *
* The GM&A Gas Products Plant, in which MEDC is one of several *
* partners, comes on stream in Bridgeport, Texas. (Eleven years later, *
* MEDC takes full ownership.) The facility strips liquids from gas to *
* make it of acceptable pipeline quality. The liquids sold separately *
* command a premium over the price that would be realized if they were *
* left in the gas stream. Today MEDC is the nation's 16th-largest *
* producer of natural gas liquids, and the Bridgeport plant accounts *
* for more than one-third of its production. *
* *
***************************************************************************

5
<PAGE> 8
[GRAPHIC INSERT]
1962
--------

***************************************************************************
* *
* George and Johnny Mitchell buy out the interests of Merlyn Christie *
* by consolidating the assets formerly held by Johnny Mitchell, *
* trustee, with those of Oil Drilling. They change the name of the *
* corporation to Mitchell & Mitchell Gas & Oil Corporation. At the same *
* time, the Company acquires the stock of Christie, Mitchell & Mitchell *
* Co. and changes its name to George Mitchell & Associates, Inc., which *
* becomes the wholly owned operating subsidiary. *
* *
***************************************************************************

After a certain point in the annual report preparation process, the "Boss"
normally turns his attention elsewhere. With that in mind, this salute to him
on the occasion of the Company's 50th anniversary was prepared at the last
minute. He will learn of it only after the report has been distributed and it
is too late for him to say, "Thank you, but no."
- --------------------------------------------------------------------------------

GEORGE P. MITCHELL -- FOUNDER

George Mitchell was asked a few years ago to name his proudest accomplishment.
His answer was that his role in creating the Houston Advanced Research Center
was most important because of HARC's potential to benefit not only the Houston
area, but the rest of the state, as well.

If asked the next day, he might very well have pointed to his
accomplishments in the energy field: Building a company that has produced 2
trillion cubic feet of gas, created jobs for thousands and discovered hundreds
of new fields.

But he might have said that he was proudest of building The Woodlands.

Or he could have said that his greatest satisfaction has come from rearing,
with wife Cynthia, a large, close family, now grown into productive,
responsible adults.

If, in the end, he selected HARC or energy or The Woodlands or his family,
he'd be skipping over his role in helping to revitalize his home town of
Galveston. Or chairing a task force of leading Texans to help his beloved Texas
A&M plan its future. Or establishing programs that he hopes will come up with
solutions to the many problems associated with unlimited population growth in
the face of limited resources.

He is a restless, energetic and thoughtful citizen of the world, with
achievements spanning the arts and sciences, industry and commerce, education
and government. He's led the Texas Independent Producers & Royalty Owners and
he's an All-American Wildcatter. He and Cynthia give the Mitchell Prize to
encourage research into environmental and growth issues. The University of
Houston has awarded him an honorary doctorate. He has received high recognition
from organizations ranging from the Horatio Alger Association to Texas A&M to
the Boy Scouts, including election to the Texas Business Hall of Fame. He and
Cynthia have provided a major endowment to the Houston Symphony. The list goes
on and on.

Mitchell was born poor in Galveston, the son of immigrant Greek parents.
Still, as with many aspiring immigrants, so it was with the Mitchell family: In
America, the keys to the future lie in family, education, hard work,
enterprise.

At age 16, he went off to Texas A&M. A mountainous academic load was no
great problem, but he almost had to leave the university because of trouble
meeting tuition and other expenses. He earned a degree in petroleum engineering
(emphasis on geology), then soon went into World War II army service. He left
the army in 1946 as a captain, became a geology and engineering consultant and
started his whirlwind career of broad-ranging accomplishment.

If George Mitchell were given to sentiment, he might pause to reflect on
the good things he's done. But that's not his style. Instead, with
characteristic intensity, he continues to devote himself to building, solving,
creating.

6
<PAGE> 9
[PHOTO]

ENERGY

The Anderson treating plant removes
CO2 from gas gathered by the
Company's recently expanded joint
venture gathering system in the
Austin Chalk.

7
<PAGE> 10
EXPLORATION & PRODUCTION

EXPLORATION & PRODUCTION FINANCIAL HIGHLIGHTS
Year Ended January 31 (in thousands)

<TABLE>
<CAPTION>
1996 1995
----------- ------------
<S> <C> <C>
Revenues
Operations . . . . . . . . . . . . . . . . $ 214,067 $ 272,629
Unusual items
Gain from natural gas contract buyout . 205,256 --
Gains from sales of producing
properties and drilling rigs . . . . 5,338 4,470
----------- ------------

$ 424,661 $ 277,099
=========== ============

Segment operating earnings
Operations . . . . . . . . . . . . . . . . $ 35,775 $ 84,115
Unusual items
Gain from natural gas contract buyout . 205,256 --
Gains from sales of producing
properties and drilling rigs . . . . 5,338 3,791
Litigation provision . . . . . . . . . (15,000) --
Personnel reduction program costs . . . (7,935) --
----------- ------------

$ 223,434 $ 87,906
=========== ============

Capital and exploratory expenditures . . . $ 141,667 $ 115,073
=========== ============
</TABLE>

Excluding the effect of unusual items, operating earnings from exploration and
production declined by 57 percent in fiscal 1996 to $35.8 million. The main
cause of the decline was significantly lower natural gas prices in North Texas
following the buyout of a premium-priced natural gas sales contract effective
July 1, 1995. Weak spot-market gas prices during most of the year also
contributed to the downturn. Operating earnings benefited, however, from
unusual pretax gains of $205.3 million from the buyout of the gas sales
contract and $5.3 million from the sale of assets. These gains were reduced by
a $15 million accrual for estimated future legal and other costs related to a
recent court judgment and a $7.9 million charge for a first-quarter personnel
reduction program. Including the effect of these unusual items, operating
earnings totaled $223.4 million, compared with $87.9 million in the prior year.

Capital spending for exploration and production operations was relatively
flat in fiscal 1996. However, the $26 million acquisition of the Lake Creek
field properties in Montgomery County, Texas, boosted total segment capital
spending by 23 percent to $141.7 million.

[BAR CHART]

CONTRACT BUYOUT

In order to capture the premium financial benefits up-front and to optimize and
fully integrate its North Texas gas producing and sales operations, the Company
negotiated an

8
<PAGE> 11
early termination agreement with Natural Gas Pipeline Company of America
(Natural) of a premium-priced natural gas contract that was otherwise scheduled
to expire on December 31, 1997. Under this agreement, Natural agreed to pay the
Company and other interest owners a total of $241 million in cash. It also
agreed to transfer operations immediately and ownership in January 1998 of
Natural's system that gathers gas from 1,500 of Mitchell's wells in the area.
The accelerated receipt of the contract premium allows the Company to reduce
debt and creates increased financial flexibility to make other investments that
will replace part of the earnings and cash flows lost by canceling the
contract. Also as a result of the termination agreement, the Company was able
to substantially accelerate the use of approximately $25 million in Federal
income tax credit carryforwards.

Perhaps most importantly, the contract buyout enabled the Company to
accomplish two important goals. First, by eliminating contract volume
restraints, it allowed the Company to increase production from its most
important core operating area by more than 20 percent. To achieve that
increase, the Company accelerated completion and connection of 40 wells that
had been delayed because contract volumes were already being met. Second,
gaining control of the gathering system assured availability to the Company of
post-1997 gathering capabilities and created added gas marketing and processing
opportunities.

The present value of the Company's share of the early termination proceeds
totaled $176.2 million. After recognizing $29.1 million of previously deferred
restructuring revenues related to the Natural contract, the Company reported a
pretax gain of $205.3 million.

GAS AND OIL SALES

The Company turned in its third consecutive year of record natural gas sales
volumes in fiscal 1996, despite a 23-day maintenance-related curtailment in
North Texas during October. Daily volumes averaged 216.2 MMcf, compared with
214.1 MMcf in fiscal 1995. Gas production reached 238.5 MMcf a day in the
fourth quarter, both due to accelerated well completion work in North Texas and
new production from the Lake Creek field, purchased in September 1995 from
Mobil, Amoco and Amerada Hess.

The gas that Natural purchased at the contract price of $4 per MMBtu during
the first five months of the year -- which accounted for about 45 percent of
overall Company gas production -- reverted to spot prices averaging $1.57 per
MMBtu during the rest of the year. For the full year, the Company's overall gas
sales price averaged $2.16 per Mcf, versus $2.71 in the previous year. While
low spot gas prices depressed exploration and production earnings for much of
the year, cold weather beginning in November brought a larger seasonal price
uptick than in fiscal 1995. Spot prices during the November-to-January quarter
averaged $2.08 per Mcf, versus $1.77 in the prior-year period.

Prices for crude and condensate improved, averaging $16.91 per barrel in
fiscal 1996, versus $15.75 the previous year. The benefit of the price
improvement was

[PHOTO]
1964
--------

***************************************************************************
* *
* Partly as a hedge against uncertainty in the energy industry, *
* Mitchell buys the Grogan-Cochran Land Company and its 50,000 heavily *
* wooded acres north and west of Houston. The purchase includes 2,500 *
* acres which will form the nucleus of The Woodlands. It will take 10 *
* more years and 300 transactions to put together the original block of *
* land in what will grow ultimately to be a 25,000-acre community. *
* *
***************************************************************************

9
<PAGE> 12
1967
--------

***************************************************************************
* *
* MEDC buys out R. E. "Bob" Smith's interests in a $12 million *
* transaction. Smith is a renowned Houston oilman who also has *
* widespread real estate interests. *
* *
***************************************************************************

[PHOTO]
1968
--------

***************************************************************************
* *
* MEDC discovers gas in the Limestone County area of East Central *
* Texas, which -- with technological advances in producing "tight" gas *
* -- will become the Company's second most prolific production area. *
* The same year, Mitchell discovers the Lafitte's Gold Field in *
* Galveston. The area, onshore and offshore, also becomes a major *
* source of production. A Company brochure mentions "Woodland Village," *
* a "comprehensively developed city to be built on Company-owned *
* properties north of Houston . . ." *
* *
***************************************************************************

mostly offset by lower production resulting from field declines and the fact
that most of the Company's drilling opportunities are for gas rather than oil.

EXPLORATION AND PRODUCTION

For the eighth year in a row, the Company more than replaced the gas reserves
it produced during the year. Gas reserves reached a record 697.2 Bcf at year
end, compared with 685.7 Bcf at the end of fiscal 1995. The Company replaced
114 percent of the 82.5 Bcf of gas it produced during fiscal 1996 -- 91 percent
from extensions and discoveries and 23 percent from reserve purchases, net of
sales and revisions. Oil and lease condensate reserves declined during the year
to 13.2 MMBbls from 14.3 MMBbls at the end of fiscal 1995. The Company replaced
45 percent of the 2 MMBbls it produced during fiscal 1996.

As a result of the exploration refocusing and downsizing program that began
two years ago, the Company's finding cost per barrel of oil equivalent averaged
$4.92 during that two-year period, down sharply from previous levels. Because a
significant portion of the Company's reserves developed in fiscal 1996 were
booked as proved developed reserves the previous year, the Company's finding
cost per barrel equivalent was $7.05 in fiscal 1996, versus $3.82 in fiscal
1995.

Production and other operating costs continued their favorable trend,
declining to 74 cents per Mcf of gas equivalent in the fourth quarter from an
average of 86 cents in fiscal 1995. This reduction was achieved through lower
personnel expense, higher gas production and cost efficiencies gained from the
sale of marginal producing properties.

The Company continued steps to improve core operating areas in North Texas,
East Texas and the Gulf Coast during fiscal 1996. In keeping with this
strategy, it sold $10 million worth of marginal or noncore oil and gas
properties; the largest was a $6.6 million package, the Sonora field in West
Texas. Niche acquisitions completed in fiscal 1996 also enhanced the Company's
core operations. These included the previously mentioned Lake Creek properties,
which are adjacent to the Company's existing Pinehurst field operations in
Montgomery County; a $6 million acquisition of producing properties in East
Texas; and a number of smaller trades in North Texas. Operational
infrastructures in place in these areas allow the Company to develop and
operate the new properties at relatively low incremental costs.

[BAR CHART]

10
<PAGE> 13
Danny Gonzalez supervises the workover of a
well at the Lake Creek field. Since acquiring [PHOTO]
it in September 1995, the Company has more
than doubled the field's daily production
of natural gas and condensate.

In North Texas, the Barnett Shale formation remains the Company's most
active development area. During the year, 65 wells were completed in this play,
including 62 development wells and three exploratory step-outs. The exploratory
tests were drilled late in the year, and initial production performance is
still being evaluated. These and future exploratory tests will evaluate acreage
that could increase the Barnett's productive area to as much as 100,000 acres
from its current 60,000 acres.

Three-dimensional (3-D) seismic technology -- which has made major strides
during the last five years -- has enabled the Company to leverage its many
years of experience and familiarity with oil- and gas-bearing formations in its
core producing areas into new prospects and additional energy reserves. This
year, leading-edge 3-D will play an even larger role in our exploratory
programs.

In North Texas, an area expected to benefit significantly from this
technology, the Company is drilling a series of Caddo and Atoka tests on two
recent 3-D projects, a 19-square-mile survey in southwest Wise County and a
13-square-mile survey in west central Jack County. Initial results have been
quite encouraging, and at least two additional surveys are planned for this
area in the current year.

[BAR CHART]

1969
--------

***************************************************************************
* *
* A discovery is made in Polk County, Texas, which will become a *
* sizable contributor to the Company's gas production over the years. *
* *
***************************************************************************

1970
--------

***************************************************************************
* *
* After a nationwide search, a team of consultants is selected to make *
* The Woodlands a reality. Ian McHarg of Philadelphia, author of *
* "Design with Nature" and considered by many to be the father of the *
* environmental movement, will be in charge of environmental planning. *
* William L. Pereira of Los Angeles, whose achievements include *
* planning new towns in the United States and abroad, will concentrate *
* on planning and design. Other widely recognized leaders are retained *
* for economics and marketing, engineering and liaison with government *
* agencies. *
* *
***************************************************************************

11
<PAGE> 14
[GRAPHIC INSERT]
1972
--------

***************************************************************************
* *
* Mitchell Energy & Development Corp. (the former Mitchell & Mitchell *
* Gas & Oil Corporation) sells 770,000 common shares to the public. *
* After stock dividends and splits, each 1972 share is equivalent to *
* more than 10 shares in 1996. MEDC receives a $50 million loan *
* guarantee from the U.S. Department of Housing and Urban Development *
* for development of its new, planned community, The Woodlands. *
* Ultimately, The Woodlands is the only commercially successful HUD new *
* town, retiring the $50 million in debentures in 1992. *
* *
***************************************************************************

The Company recently began drilling in Throckmorton County in North Texas
to evaluate Caddo and Mississippian Reef prospects identified in a
55-square-mile 3-D survey shot early last year. Two oil discoveries have been
drilled to date, and three additional tests are planned for the first quarter.
A second, 30-square-mile 3-D survey is in progress on an adjoining ranch.

Advances in 3-D technology also are making it possible to revisit mature,
oil-prone areas in West Texas, where the Company recently participated in a
40-square-mile survey and will begin another 200-square-mile survey soon.
Drilling is expected to commence on the first survey within the next several
months.

Roughnecks make a connection at
a rig in North Texas, where the
[PHOTO] Company is exploring the outer
edges of the prolific Barnett
Shale field.

On the Gulf Coast, a 100-square-mile 3-D survey has been shot in the
shallow waters of Matagorda Bay southeast of Palacios, Texas, where the Company
and its partners made an apparent lower Frio gas discovery in fiscal 1996.
Shell Western Exploration and Production is the operator of that well, which
will be tested shortly. The Company holds a one- eighth interest in leases
totaling 7,200 acres in that prospect area and a one-quarter interest in an
additional 9,600 acres acquired last year on three separate prospects on trend.

In Orange County, Texas, following up on a Yegua gas discovery made in
January 1995, the Company participated in two additional discoveries nearby,
the Bean-Donner No. 1 and the Koster-Vastar No. 1, both in the Hackberry
formation. The larger of the two is producing 4.2 MMcf a day of gas and 180
barrels of condensate. The Company and its partners are pursuing the Hackberry
eastward into Calcasieu Parish, Louisiana, with a recently completed
58-square-mile 3-D survey.

The acquisition of the Lake Creek field, along with some excellent results
from the adjoining Pinehurst field, led to increased activity and production in
Montgomery County. One of the two wells drilled in Pinehurst during fiscal 1996
was among the Company's best of the year, encountering more than 200 feet of
pay in four zones in the Wilcox formation. Two offsets to this well are
planned in fiscal 1997.

In Lake Creek, where the Company holds under lease 2,770 acres, there is an
excellent opportunity to increase production by recompleting idle or marginally
productive wells at a relatively modest cost, thus developing new gas and
condensate reserves from previously undrained zones, as the Company is doing at
Pinehurst.

12
<PAGE> 15
Four workovers to date have increased Lake Creek production from 3.5 MMcf and
300 barrels of condensate to 9 MMcf and 725 barrels of condensate per day. By
recompleting seven more wells, the Company expects to raise total field
production to 20 MMcf equivalent per day by the end of the current year.

In its second-largest field, North Personville in East Texas, the Company
completed a 10-well pilot program to evaluate whether increased well density
(80-acre spacing as opposed to the current 160-acre) would enhance the ultimate
gas recovery from the tight Cotton Valley Limestone formation. Preliminary
results are encouraging.

The Company is continuing to limit its capital spending in New Mexico
because of low prices for gas in that market. However, it did participate in
five successful oil wells in fiscal 1996 and expects to participate in at least
five more development wells in the current year. To realize value from existing
holdings, the Company has negotiated farm-outs on some 14,000 acres of
undeveloped leases in Lea and Eddy counties, retaining an overriding or carried
interest in as many as 10 exploratory tests that likely will be drilled on the
properties during fiscal 1997.

At Hell's Hole, in northwestern Colorado, the Company drilled three
step-out gas wells in fiscal 1996 that established the potential for as many as
four more this year.

As of the end of the year, the Company had interests in 2,188 gas producers
and 859 oil producers -- a total of 3,047 -- of which 76 were productive in two
or more zones. Excluding interests held by partners, the Company held net
interests equivalent to 2,480 wells -- 1,879 gas and 601 oil -- of which 66
were productive in two or more zones.

PRINCIPAL PRODUCING AREAS
Year Ended January 31, 1996

<TABLE>
<CAPTION>
Average Daily Sales
---------------------------
Natural gas (net Mcf) 1996 1995
------- -------
<S> <C> <C>
North Texas . . . . . . . . . . . . . . . . 104,400 102,000
East Texas . . . . . . . . . . . . . . . . 48,800 46,200
Gulf Coast . . . . . . . . . . . . . . . . 36,000 30,600
Southeast New Mexico . . . . . . . . . . . 10,700 17,600
Rocky Mountain area . . . . . . . . . . . . 6,700 9,700
Other . . . . . . . . . . . . . . . . . . . 9,600 8,000
------- -------
Total . . . . . . . . . . . . . . . . . . . 216,200 214,100
======= =======

Crude oil and condensate (net Bbls)
North Texas . . . . . . . . . . . . . . . . 1,300 1,600
East Texas . . . . . . . . . . . . . . . . 1,100 1,000
Gulf Coast . . . . . . . . . . . . . . . . 1,400 1,600
Southeast New Mexico . . . . . . . . . . . 800 1,100
Other . . . . . . . . . . . . . . . . . . . 800 1,000
------- -------
5,400 6,300
======= =======
</TABLE>

[PHOTO]
1974
--------

***************************************************************************
* *
* A five-month embargo ends on oil produced in the Mideast and destined *
* for the United States, but energy supplies remain tight. Oil goes *
* from $4 to $12 per barrel. (Four years later, a disruption in Iranian *
* oil production moves world prices from $14 to more than $30 per *
* barrel; average price realized by MEDC in fiscal 1996: about $17.) *
* After unfavorable building weather and in the face of the embargo's *
* aftereffects, The Woodlands opens. A 10-year contract is signed with *
* the Houston Golf Association to host the PGA Houston Open; 10 years *
* later, the Company agrees to create a TPC golf course for the Houston *
* Open golf tournament. *
* *
***************************************************************************

13
<PAGE> 16
[PHOTO]
1975
--------

***************************************************************************
* *
* MEDC's energy business is strong, but soaring interest rates and the *
* energy shortage punish the Company's fledgling new community and *
* other real estate developments nationwide. The Interfaith idea is *
* implemented, providing a link among The Woodlands' religious *
* institutions. In 1996, the community is home to 28 congregations. *
* *
***************************************************************************

[PHOTO]
1976
--------

***************************************************************************
* *
* Jack Eckerd Drug Company purchases 26 acres in The Woodlands' new *
* Trade Center. Twenty years later, the Trade Center comprises 800 *
* acres and is home to distribution centers for 15 companies. *
* *
***************************************************************************

WELL COMPLETIONS (1)
Year Ended January 31, 1996

<TABLE>
<CAPTION>
Exploratory Development Total
-------------- ------------- -------------
Total Oil Gas Dry Oil Gas Dry Oil Gas Dry
----- --- --- --- --- ---- --- --- ---- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Texas
North Texas . . . 69 - 4 - - 65 - - 69 -
East Texas . . . . 22 - - 3 - 17 2 - 17 5
Gulf Coast . . . . 9 - 3 1 - 5 - - 8 1
West Texas . . . . 4 - - - 4 - - 4 - -
New Mexico . . . . . 6 1 - - 5 - - 6 - -
Colorado . . . . . . 5 - - 2 - 3 - - 3 2
Alabama . . . . . . . 1 - - 1 - - - - - 1
---- --- --- --- --- ---- --- --- ---- ---
Gross wells (2) . . . 116 1 7 7 9 90 2 10 97 9
==== === === === === ==== === === ==== ===

Net wells . . . . . . 94.7 0.3 5.1 3.8 2.2 81.6 1.7 2.5 86.7 5.5
==== === === === === ==== === === ==== ===
</TABLE>

(1) Excludes service wells.
(2) An additional 18 wells (13.1 net wells) were in the process of
drilling or completion on January 31, 1996.

LEASEHOLDINGS
At January 31, 1996

<TABLE>
<CAPTION>
Gross Net
Acres Acres
--------- --------
<S> <C> <C>
Alabama . . . . . . . . . . . . . . . . . . . 29,200 14,400
Michigan . . . . . . . . . . . . . . . . . . 28,800 28,600
New Mexico . . . . . . . . . . . . . . . . . 52,700 48,900
Ohio . . . . . . . . . . . . . . . . . . . . 47,400 47,200
South Dakota . . . . . . . . . . . . . . . . 84,100 24,100
Texas . . . . . . . . . . . . . . . . . . . . 170,500 125,000
Utah . . . . . . . . . . . . . . . . . . . . 63,200 36,200
Other* . . . . . . . . . . . . . . . . . . . 38,700 29,000
--------- --------
Total undeveloped acreage . . . . . . . . . . 514,600 353,400
Producing acreage . . . . . . . . . . . . . . 769,800 575,600
--------- --------

Total acreage . . . . . . . . . . . . . . . . 1,284,400 929,000
========= ========
</TABLE>

* Includes Arkansas, Colorado, Kansas, Louisiana, Mississippi, Montana,
Oklahoma, Pennsylvania and Wyoming.

[MAP]

14
<PAGE> 17
Gas Services Financial Highlights
Year Ended January 31 (in thousands)

<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Revenues
Natural gas processing . . . . . . . . . . . . . . $ 283,378 $ 252,159
Natural gas gathering and marketing . . . . . . . . 184,584 180,038
Other . . . . . . . . . . . . . . . . . . . . . . . 10,296 6,989
Unusual items -- gains from major asset sales . . . -- 48,821
---------- ----------
$ 478,258 $ 488,007
========== ==========

Segment operating earnings
Natural gas processing . . . . . . . . . . . . . . $ 30,994 $ 23,253
Natural gas gathering and marketing . . . . . . . . 14,063 12,335
Other . . . . . . . . . . . . . . . . . . . . . . . 9,059 (846)
---------- ----------
54,116 34,742
Unusual items
Gains from major asset sales . . . . . . . . . -- 48,821
Asset write-downs . . . . . . . . . . . . . . . (52,715) (23,888)
Personnel reduction program costs . . . . . . . (3,600) (7,364)
---------- ----------
$ (2,199) $ 52,311
========== ==========

Capital expenditures . . . . . . . . . . . . . . . $ 38,358 $ 35,111
========== ==========
</TABLE>

Excluding the impact of unusual items, operating earnings from gas services
were up substantially in fiscal 1996, to $54.1 million, from $34.7 million in
the prior year. This improvement resulted primarily from sharply lower fuel and
shrinkage costs in gas processing, better margins on fixed-price contracts in
gathering and marketing, and earnings from the MTBE gasoline additive plant.
The improvement was more than offset, however, by unusual charges for asset
write- downs and staff reductions totaling $56.3 million. As a result, gas
services reported an operating loss of $2.2 million, compared with earnings of
$52.3 million in the prior year.

The largest of the unusual items in fiscal 1996 was a $45.6 million
fourth-quarter write-down of certain processing plants and pipeline assets in
connection with the completion of an in-depth review of gas services assets and
a revaluation of certain facilities held for sale. In addition, the Company
recorded a $7.1 million third-quarter charge to reduce the carrying values of
three processing plants sold in December and a $3.6 million charge in the first
quarter in connection with a staff reduction program.

Out of total capital outlays in gas services of $38.4 million, expansion of
the Austin Chalk joint venture accounted for $19.6 million. The Company spent
an additional $6.5 million for various other gas gathering projects, $6.6
million for the MTBE plant and $5.5 million for gas processing plant
relocations and upgrades.

NATURAL GAS PROCESSING

Operating earnings from gas processing during fiscal 1996 increased by 33
percent, despite flat natural gas liquids prices and slightly lower average
daily production volumes. The biggest factor in the improvement was the lower
cost of gas purchased on

15
<PAGE> 18
[PHOTO]
1978
--------

***************************************************************************
* *
* With assistance from the U.S. Department of Energy, MEDC conducts a *
* record-breaking massive hydraulic fracture at a well in the North *
* Personville field in the Limestone County area. Nearly 1 million *
* gallons of fluid and 2.8 million pounds of sand are pumped down the *
* well bore and out into a "tight" formation. Under high pressure, the *
* fluid creates a fracture which, when propped open with sand, allows *
* gas to flow. Production from the well more than doubles. *
* *
***************************************************************************

Natural gas processing operations experienced
a big turnaround beginning in November 1995,
when a combination of cold weather, low [PHOTO]
inventories of NGLs and brisk demand from
petrochemical manufacturers boosted NGL prices.

the spot market to replace volumes consumed as fuel and shrinkage when gas
liquids are recovered. Contractual agreements with third-party producers who
supply about half the gas the Company processes require it to pay producers for
the volumes lost to fuel and shrinkage. Other factors contributing to the
improved profitability included operating cost reductions achieved through
shutdowns or sales of inefficient and underutilized plants and the April 1995
personnel reduction program.

The rationalization and consolidation of gas processing operations
continued in fiscal 1996 and is now largely complete. Without sacrificing
significant production volumes, the Company cut the number of operating plants
to 16 at the end of fiscal 1996 from 23 as of the end of fiscal 1995 through
sales, trades and shutdowns. Of these 16 remaining plants, eight are operated
by the Company. Natural gas liquids production during fiscal 1996 averaged
46,400 barrels a day, compared with 47,500 in the prior year.

During fiscal 1996, the Company sold six plants, including four that were
idle, and various other facilities and equipment for $16.6 million. Through its
C&L Processors partnership -- a joint venture with Conoco -- the Company's
interests in three processing plants in Oklahoma were traded for an additional
interest in C&L's Laverne plant in Oklahoma.

[BAR CHART]

16
<PAGE> 19
Liquids prices were sluggish during most of the year due to excess ethane
inventories and low crude prices. However, beginning in late November 1995,
extreme winter weather in many parts of the country and unusually large
consumption of ethane as a petrochemical feedstock began to drive prices
upward. In addition to the sharp increase in demand for propane for home
heating, a reduction in NGL supplies occurred when natural gas prices east of
the Sabine River in Louisiana jumped sharply, and gas processors in this area
temporarily stopped extracting the liquids in order to maximize their gas sales
volumes and revenues. Demand for natural gas liquids was holding up well early
in fiscal 1997. During the first two months of fiscal 1997, weighted average
NGL prices averaged $14.27 a barrel, versus $11.55 for all of fiscal 1996.

Additional NGL demand is expected to be created from new ethylene plants
under construction and from expansions of existing plants along the
Texas-Louisiana Gulf Coast. These plants will require an estimated 80,000
barrels a day of ethane or propane feedstocks.

This compressor station is part of the
North Texas gathering system, which [PHOTO]
Mitchell began operating in fiscal 1996.

Even with the elimination of reserves associated with plants that were sold
or shut down, the Company's natural gas plant liquids reserves increased almost
4 percent, to 125.8 MMBbls at year end, from 121.3 MMBbls at the end of fiscal
1995.

NATURAL GAS GATHERING AND MARKETING

Natural gas gathering and marketing operating earnings increased 14 percent in
fiscal 1996. Although throughput volumes were flat at 354 MMcf per day and
average spot sales margins were mostly unchanged, operating earnings benefited
from personnel cost reductions and improved margins from fixed-price sales
contracts.

In fiscal 1996, the Company completed an important expansion of a gas
gathering and treating system serving southern Washington and Grimes counties
in the Austin Chalk area of East Central Texas. The Company owns a 45 percent
interest in this system in partnership with Union Pacific Resources (UPR).
While the gas gathered by this system does not contain NGLs in commercially
recoverable amounts, the partnership collects fees for removing carbon dioxide
from the gas at its Anderson treating plant. It also profits from purchasing
gas gathered by the system and reselling it.

In late August, gas began flowing through the Austin Chalk expansion. In
February 1996, Mitchell's share of average throughput handled by the new system
had reached 51 MMcf per

[BAR CHART]

[PHOTO]
1980
--------

***************************************************************************
* *
* MEDC headquarters are moved from downtown Houston to a new *
* 150,000-square-foot office building in The Woodlands. *
* *
***************************************************************************

17
<PAGE> 20
[PHOTO]
1982
--------

***************************************************************************
* *
* The Woodlands Research Forest is established; in the same year, *
* George Mitchell creates the Houston Advanced Research Center. The *
* Research Forest, inspired by the Research Triangle of North Carolina, *
* with its concentration of technology- and research-oriented companies *
* and institutions, is conceived as a welcoming place for the Houston *
* area's burgeoning technology industry. By 1996, it includes 26 *
* companies which provide employment for 1,850, including 300 Ph.Ds. *
* *
***************************************************************************

[PHOTO]

Expansion of the Madison gas processing plant was part of a rationalization and
consolidation program under which small, stand-alone plants were shut down or
relocated to form larger, more profitable processing centers.

day. By the end of fiscal 1997, that share is expected to be nearly 100 MMcf
per day, as UPR and another operator add more wells to the system. Gas
production from these new wells -- which is purchased by the partnership and
resold -- is expected to offset volumes that will be lost due to natural field
declines.

Volumes for the original NGL-rich gas system in the Austin Chalk, serving
mainly Burleson and Brazos counties, were averaging approximately 254 MMcf per
day at year end, or about 114 MMcf a day net to Mitchell. Those volumes yielded
approximately 9,570 barrels of natural gas liquids per day net to the Company.

OTHER

The Company's one-third-owned MTBE plant at Mont Belvieu, Texas, became fully
operational and profitable in April 1995 after start-up problems were resolved.
In addition, modifications completed during the third quarter raised plant
capacity by 25 percent to 16,000 barrels a day. This allowed the partnership to
convert a construction loan to permanent financing that, except for the
guarantee of a $20 million ($6.7 million Company share) debt service reserve
fund, is nonrecourse to the partners. MTBE produced at the facility is a key
ingredient in reformulated gasoline. Gulf Coast Fractionators, a partnership in
which the Company holds a 38.75 percent interest, handled approximately 105,000
barrels a day of raw NGL mix. This facility, also located at Mont Belvieu,
separates natural gas liquids into pure products -- ethane, propane, butanes
and natural gasoline. This partnership's construction financing for a
40,000-barrel-a-day expansion also was converted during fiscal 1996 to a
permanent, nonrecourse loan.

18
<PAGE> 21
[PHOTO]

REAL
ESTATE

The Woodlands Mall and nearby
dining/entertainment district,
seen across The Woodlands Waterway.

19
<PAGE> 22
REAL ESTATE FINANCIAL HIGHLIGHTS
Year Ended January 31 (in thousands)

<TABLE>
<CAPTION>
1996 1995
--------- ----------
<S> <C> <C>
Revenues
The Woodlands
Land development . . . . . . . . . . . . . . . $ 50,569 $ 47,536
Commercial properties . . . . . . . . . . . . 52,125 51,390
Equity investments and property management . . 6,682 4,024
Other . . . . . . . . . . . . . . . . . . . . 6,716 9,791
Asset sales . . . . . . . . . . . . . . . . . 20,313 --
--------- ----------
136,405 112,741
Real estate outside The Woodlands . . . . . . . . 32,423 16,724
--------- ----------
$ 168,828 $ 129,465
========= ==========

Segment operating earnings
The Woodlands
Land development . . . . . . . . . . . . . . . $ 16,125 $ 16,182
Commercial properties . . . . . . . . . . . . 9,907 8,588
Equity investments and property management . . 4,281 2,293
Other . . . . . . . . . . . . . . . . . . . . (1,751) 574
Asset sales . . . . . . . . . . . . . . . . . 20,313 --
--------- ----------
48,875 27,637
Real estate outside The Woodlands . . . . . . . . (27) (1,844)
--------- ----------
48,848 25,793
Unusual items
Write-downs of properties . . . . . . . . . . (123,916) (5,661)
Personnel reduction program costs . . . . . . (3,000) --
--------- ----------
$ (78,068) $ 20,132
========= ==========

Capital expenditures . . . . . . . . . . . . . . $ 59,990 $ 65,123
========= ==========
</TABLE>

The Woodlands Corporation, a wholly owned subsidiary of Mitchell Energy &
Development Corp., conducts the Company's real estate operations. These
operations achieved another record year in terms of lot sales to builders,
asset sales and debt reduction. Excluding unusual items, real estate operating
earnings of $48.8 million for fiscal 1996 were $23 million greater than those
of the previous fiscal year, largely due to a $19.4 million gain from the sale
of the Company's interest in The Woodlands' cable television system.

Upon completion of the real estate portion of the Company's asset
management study in fiscal 1996, the decision was made to focus almost
exclusively on development of The Woodlands and to dispose of most other real
estate properties. Consequently, it was necessary to reduce the carrying
values of these other properties, which had been held for long- term investment
and development, to their fair market values. As a result, asset write-downs of
$123.9 million were recorded during the year, primarily in the second quarter.
After these write-downs and costs associated with the first quarter's personnel
reduction program, the segment reported an operating loss of $78.1 million.

20
<PAGE> 23
During fiscal 1996, real estate reduced its total debt by $63.2 million, to
$455.9 million, from $519.1 million a year earlier. This reduction was funded
using proceeds received from sales of real estate assets during fiscal 1996.
The assets sold included a 75 percent interest in 10 office buildings in The
Woodlands, the Company's remaining half interest in the cable television
system, the San Luis Resort on Galveston Island and 8,000 acres of timberlands
north and west of Houston. The sale of an additional 1,143 acres of timberlands
closed in the first quarter of fiscal 1997.

More than 90 percent of the fiscal 1996 hard dollar capital expenditures
were related to the continuing development of The Woodlands.

THE WOODLANDS

The population, employment and commercial growth of The Woodlands over the past
21 years has earned brand identity and consumer loyalty and thus established a
meaningful franchise that is unique among large-scale communities in the
region. The value of this franchise is protected by the Company's management
of residential and commercial land use and affirmed by voter approval of public
funding for infrastructure improvements. Market acknowledgment of this value
drives The Woodlands' residential growth and commercial development.

Builders sold 1,021 new homes in fiscal 1996, the most during any year in
the 21-year history of The Woodlands and the highest of any planned community
in the Houston region for the sixth consecutive year. Nationwide, The Woodlands
ranked eighth in new home sales for planned communities. During fiscal 1996,
the Company sold 980 residential lots for $40 million, a 3 percent unit gain
and a 13 percent revenue gain over fiscal 1995 sales.

At the current sales pace, the 15,000th
single-family home will be sold in The [PHOTO]
Woodlands in the fall of this year.

[GRAPHIC INSERT]
1987
--------

***************************************************************************
* *
* The first 13-mile stretch of the 22-mile Hardy Toll Road opens, *
* providing a new express link from The Woodlands to Intercontinental *
* Airport and downtown Houston. It is part of a $1.2 billion area road *
* improvement program which will ease transportation to, from and *
* around The Woodlands. *
* *
***************************************************************************

21
<PAGE> 24
[PHOTO]
1990
--------

***************************************************************************
* *
* The Cynthia Woods Mitchell Pavillion opens in The Woodlands. By the *
* end of the 1995 season, the outdoor entertainment center, its *
* capacity increased to 13,000, has become the summer home of the *
* Houston Symphony and has attracted 1.75 million visitors. *
* *
***************************************************************************

1991
--------

***************************************************************************
* *
* Hughes Christensen buys land to build a 245,000-square-foot *
* headquarters and manufacturing facility in The Woodlands. *
* *
***************************************************************************

While demand for traditional single-family homes continues to increase, new
housing products are attracting first- time buyers and empty-nesters who seek
alternatives to traditional single-family homes. These new offerings include
clustered "patio" homes with low exterior maintenance for the leisure market
and affordable townhouses. On another front, the market for apartments remained
strong, with an occupancy rate of 96 percent for the 1,891 Company-managed
units.

The Woodlands residential population increased to 44,700 from fiscal 1995's
41,900, and non-construction employment in the community increased by 1,000 to
more than 16,500 jobs.

Major corporations and medical institutions with facilities in The
Woodlands include Allstate Insurance, Andrews & Kurth, Arthur Andersen,
Cardinal Health, Chevron Pipeline, Dresser Industries Valves & Controls
Division, Exxon Marketing, Hughes Christensen, M.D. Anderson Cancer Research
Center, Memorial Health Care System, Pennzoil, Shell Oil and Tenneco Business
Services.

New public schools to open for classes
this fall include The Woodlands High
School (above), George P. Mitchell [PHOTO]
Intermediate School and Barbara Bush
Elementary School.

The million-square-foot Woodlands Mall had an excellent holiday season,
attracting more than 1.5 million shoppers between Thanksgiving and New Year's
Day. Sales for anchor tenants Dillard's, Foley's and Sears were up
substantially over sales for the corresponding period in the prior year. The
mall, which was 93 percent leased at year end, is a partnership equally owned
by The Woodlands Corporation and General Growth Properties, which purchased
Homart's half interest in December 1995. General Growth manages the property.

The Company receives earnings from The Woodlands Mall and other jointly
owned equity investments with Stanford University Endowment Trust for
neighborhood retail center development; Sumitomo Corporation of America and
American National Insurance for apartments; and Crescent Real Estate Equities
(REIT) for office and service/technology buildings. From these partnerships,
the Company also receives fees for on-site management and leasing.

The Company owns The Woodlands Executive Conference Center and Resort, as
well as a portfolio of nine other income properties that includes office,
service and retail buildings. In fiscal 1996, the Conference Center had its
best year to date, with an average occupancy rate of

[BAR CHART]

22
<PAGE> 25
Montgomery College at The Woodlands has a current
enrollment of 3,500 students. In the fall of 1997,
[PHOTO] the adjacent University Center at The Woodlands
will offer bachelors' and masters' degree programs
from nine universities.

70 percent and an 8 percent increase in revenues to $34 million. In fiscal
1997, the Conference Center will spend $12 million on capital improvements,
including the addition of 90 to 100 guest rooms, for a total of as many as 365
rooms.

The other nine buildings total 671,000 square feet and generated revenues
of $9.1 million last year. The Company plans to sell joint-venture interests in
most of its retail buildings, a plan comparable to the sale of 10 office
buildings to Crescent in fiscal 1996.

Commercial properties recently completed in The Woodlands include a
17-screen cinema, constructed for Cinemark under a long-term lease.
Redevelopment and enhancement of the Grogan's Mill Village Center in the
current year will include construction of an Albertson's supermarket and new
retail sites for a branchbank and a service station. Across Interstate 45 from
The Woodlands Mall, in the Wood Ridge Center, Office Depot opened, and
construction of a Pier One store is planned for the current year. Wood Ridge
was a distressed property that the Company purchased in 1992 from the
Resolution Trust Corporation for its profit potential and to enhance a primary
entrance to The Woodlands Mall. By year end, the newly remodeled and
redeveloped Wood Ridge Center was 74 percent occupied, up from 40 percent when
first acquired.

With its concentration of retail businesses, health care facilities,
cultural activities and corporate office and industrial businesses, Town
Center, encompassing approximately 1,000 acres around The Woodlands Mall, is
becoming the "new downtown" of the North Houston region and its resident
population of 800,000. Retail additions to Town Center completed in fiscal 1996
included Linens 'N Things, Landry's Seafood House, Macaroni Grill and Grady's
American Grill. To accommodate increasing consumer demand for

[BAR CHART]

[PHOTO]
1992
--------

***************************************************************************
* *
* Mitchell Energy & Development Corp., on the American Stock Exchange *
* since 1972, moves to the New York Stock Exchange and adopts a *
* dual-class common stock structure to improve the Company's financial *
* flexibility. Construction begins on the one-third-owned Mont Belvieu *
* plant to produce MTBE, an additive for reformulated gasoline. By *
* 1996, capacity has been increased almost 25 percent. *
* *
***************************************************************************

[PHOTO]
1994
--------

***************************************************************************
* *
* Opening of The Woodlands Mall, a million-square-foot regional *
* shopping mall, is a dramatic breakout in the community's development. *
* *
***************************************************************************

23
<PAGE> 26
[GRAPHIC INSERT]
1995
--------

***************************************************************************
* *
* MEDC's natural gas reserves reach a new record, even though *
* production for the past year also has set a record over the past five *
* years. The Company has replaced 137 percent of the gas it produced *
* since its beginning. The Company has discovered nearly 600 new fields *
* and reservoirs and drilled nearly 8,500 wells, of which some 1,400 *
* were explortory wells. For the sixth consecutive year, more new homes *
* are sold in The Woodlands than any other Houstpon area real estate *
* development. A two-fold expansion of the Ferguson Burleson gas *
* gathering system -- 45 percent owned by MEDC -- gets under way in *
* East Central Texas. *
* *
***************************************************************************

health care services, The Woodlands Memorial Hospital purchased 10 additional
acres for use in a planned three-year, $20 million expansion of its primary
care facilities. Early in fiscal 1997, a 150-room Drury Inn was completed on
land purchased from the Company.

The nonprofit Cynthia Woods Mitchell Pavilion, near The Woodlands Mall, is
the Houston region's premier outdoor entertainment center. Early in fiscal
1996, the Pavilion increased its seating capacity from 10,000 to 13,000 and had
attendance totaling 394,000 for a variety of popular concerts, the Houston
Symphony and other classical performances -- an increase of 15 percent over the
prior year.

Town Center infrastructure improvements planned for the current year
include further excavation and shoreline construction of bulkheads and
sidewalks along the 1.5-mile Woodlands Waterway -- an entertainment, retail and
office development with a design similar to that of the Riverwalk in downtown
San Antonio. Upon completion, the Waterway will enhance the business
environment and development potential of Town Center.

In the Research Forest, up-and-coming companies that could become household
names in the near future include GeneMedicine, Energy Biosystems, Surgimedics,
Aronex Pharmaceuticals, LDDS WorldCom, Lexicon Genetics and Zonagen.

In February 1996, Shell opened its worldwide leadership Learning Center
within The Woodlands Executive Conference Center and Resort. Shell's activities
at the Conference Center will provide a dependable base of 20,000 guest days
for the resort's business this year. At The Woodlands Tournament Players
Course, Shell sponsors the annual Houston Open golf tournament, which raised
$1.6 million for charity last year.

Construction of Tenneco's 71,000-square-foot building, which initially will
house approximately 225 employees, is scheduled for completion in the spring of
1996. After a national search for its new business services location, Tenneco
selected The Woodlands, in part due to the community's superior post-secondary
education facilities for employee training.

The new Montgomery College at The Woodlands has a current enrollment of
3,500 students, and voters have approved a bond issue to construct a separate
upperlevel learning institution in the fall of 1997. The University Center at
The Woodlands will offer bachelors' and masters' degree programs from nine
universities in Texas, Oklahoma and Louisiana.

Construction progressed in fiscal 1996 for several publicly funded
infrastructure improvements with a combined cost of $42 million. These include
three new public schools, roadway projects, another post office and two more
fire stations.

24
<PAGE> 27
Commercial properties developed by
The Woodlands Corporation include this [PHOTO]
17-screen cinema constructed for Cinemark
under a long-term lease.

THE WOODLANDS
At January 31, 1996

<TABLE>
<S> <C>
Total acres . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,000
Remaining acres . . . . . . . . . . . . . . . . . . . . . . . . . 16,000
Estimated years of supply . . . . . . . . . . . . . . . . . . . . 20-30
Dwelling units . . . . . . . . . . . . . . . . . . . . . . . . . 16,100
Estimated dwelling units at completion . . . . . . . . . . . . . 52,000
</TABLE>

STATISTICAL HIGHLIGHTS
At January 31, except as noted

<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Population . . . . . . . . . . . . . . . . . . 44,726 41,930
Employment (non-construction) . . . . . . . . . 16,500 15,500
Properties managed
Occupancy rates (percentage)
Office/industrial . . . . . . . . . . . . 85 90
Retail . . . . . . . . . . . . . . . . . . 84 81
Apartments . . . . . . . . . . . . . . . . 96 97
Woodlands Executive Conference
Center and Resort (average for the year) 70 69
Office/industrial (square feet) . . . . . 1,858,000 1,858,000
Retail (square feet) . . . . . . . . . . . 654,000 633,000
Apartments (units) . . . . . . . . . . . . 1,891 1,675
</TABLE>

[GRAPHIC INSERT]
1996
--------

***************************************************************************
* *
* An asset management study is completed which, with earlier cost *
* reduction programs, leads to new strategic directions for MEDC, with *
* emphasis on growing and enhancing the value of core properties while *
* shedding underperforming and noncore assets. The steps are directed *
* at improving profitability and enhancing shareholder value as the *
* Company progresses through its second half-century. *
* *
***************************************************************************

25
<PAGE> 28
THE WOODLANDS

[MAP]

o The Woodlands is the center of business, entertainment and cultural
activity for 800,000 residents in the North Houston region.

o The Woodlands is convenient to Houston's central business district and
largest airport via I-45 and the Hardy Toll Road.

26
<PAGE> 29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF
OPERATIONS

Mitchell Energy & Development Corp. and Subsidiaries

FORWARD-LOOKING INFORMATION

This Annual Report includes forward-looking statements. These include, among
others, discussions of the funding of the Company's operations (on pages 29 and
30), its replacement of cash flows attributable to the Natural contract (on
page 29) and future reductions of long-term debt (on page 29). 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 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

Refocusing of the Company's Operations

Overview. Approximately two years ago, management began an extensive,
multi-step refocusing of the Company's business activities to (i) position the
Company to be more profitable in volatile, and sometimes depressed, energy
markets, and (ii) mitigate the loss of cash flows that would occur with the
scheduled expiration of its premium-priced North Texas natural gas sales
contract. Major strides subsequently have been made towards achieving these
objectives through efforts which have included the following steps:

o Performing a companywide asset management study which led to

o Concentrating management resources and capital spending on
core business activities;

o Selling or otherwise disposing of noncore assets and
eliminating the operating costs and capital spending
associated with such activities;

o Reducing operating and overhead costs through personnel reduction
programs;

o Terminating early the Company's premium-priced North Texas natural
gas sales contract (the Natural contract) thereby accelerating the
receipt of these proceeds and the timing of the Company's
transition to operating in a market-sensitive pricing environment;

o Replacing on a long-term basis the incremental cash flows
associated with the premium-priced North Texas natural gas sales
contract; and

o Reducing long-term debt using proceeds from sales of noncore
assets and the early termination of the Natural contract.

By implementing this program, the Company laid the groundwork for improved
profitability. And, with the program now well along the road to being
accomplished, management's attention increasingly will be directed toward
maximizing the value of the Company's core assets and other initiatives to
increase shareholder value. The paragraphs which follow discuss in more detail
actions taken by the Company in the last two years to accomplish a refocusing
of its operations.

Asset management study. This study of all the Company's assets began in fiscal
1995 and was completed recently. Its purpose was to determine the assets which
should be considered among the Company's core assets and to develop a plan for
more cost-effective operations or sale of underutilized assets or noncore
holdings having limited future growth potential or greater value to others.
Significant decisions resulted from this study impacting both the Company's
energy and real estate activities.

27
<PAGE> 30
With respect to the Company's energy activities, the study led to fiscal
1995 sales, at a $52.6 million cumulative gain, of $164 million in assets,
including the Winnie/Spindletop natural gas storage facility and related
assets, a natural gas compression service subsidiary and nine drilling rigs. In
fiscal 1996, transactions were completed selling another $25 million of assets,
primarily gas processing plants and producing oil and gas properties. Exclusive
of write- downs recorded in anticipation of the sale of three gas processing
plants, these fiscal 1996 sales were made at a cumulative gain of $5.3 million.
Also, the study resulted in charges to write down to estimated fair market
value certain gas services assets ($52.7 million in fiscal 1996 and $23.9
million in fiscal 1995).

As a result of the study, the Company's energy capital spending was
directed almost exclusively to core areas. While on an overall year-to-year
basis this trend was masked by major expenditures to increase North Texas
production, acquire the Lake Creek field and extend a 45%-owned partnership's
Austin Chalk gas gathering and treating facilities, capital expenditures on
noncore activities declined in fiscal 1996, as they had in fiscal 1995.
Further, largely because of the exploration program refocusing and downsizing,
the Company's finding cost per barrel of oil equivalent (BOE) averaged $4.92
over the last two years, down sharply from the level that existed previously.
Largely because of timing differences related to proved undeveloped reserve
additions and the incurrence of costs to develop those reserves, the Company's
finding cost per BOE was $7.05 in fiscal 1996 and $3.82 in fiscal 1995.

The real estate portion of the asset study concluded that even greater
emphasis should be placed on developing The Woodlands and that most of the
Company's other real estate holdings should be disposed of through sales or
accelerated development. Based on an extensive review of the estimated values
to be realized from these dispositions, the Company recorded pretax property
write-downs totaling $123.9 million in fiscal 1996. The Company believes that
both its profitability and financial flexibility will be enhanced by monetizing
these assets and redeploying the proceeds instead of holding the properties for
long-term investment or development. As a result of early decisions to sell a
few undeveloped tracts outside The Woodlands, property write-downs of $5.7
million were recorded in fiscal 1995's third quarter.

Consistent with the asset study conclusions, 8,130 acres of timberlands
northwest of The Woodlands were sold during fiscal 1996 at their carrying
value. Further, in July 1995, the Company's half interest in The Woodlands'
cable television system was sold for $17 million. Including previously deferred
income, a gain of $19.4 million was recognized on this sale. Also, in January
1996, The San Luis Resort in Galveston was sold.These assets were sold for
approximately $50 million. At January 31, 1996, certain assets that the study
concluded would be sold were still being offered for sale by the Company. These
assets (consisting principally of real estate properties), together with
certain commercial properties in The Woodlands that likely will be involved in
partnership transactions, have a total book value of approximately $85 million.

Cost reduction programs. As a result of hiring freezes, asset sales and
personnel reduction programs, the Company's full-time employment level was
reduced by approximately 300 in fiscal 1995 and 600 in fiscal 1996. At January
31, 1996 the Company had approximately 2,000 full-time employees, down 31% from
the 2,900 it had at the beginning of fiscal 1995. Since the costs of the
personnel reduction programs ($20.2 million in fiscal 1996 and $7.4 million in
fiscal 1995) had approximately one-year payout periods, the Company had
substantially recovered these amounts by the end of fiscal 1996. These
reductions will benefit future periods' earnings on an ongoing basis.

Early termination of the Natural contract. To ease the transition to a
market-sensitive natural gas price environment, the Company reached an
agreement with Natural Gas Pipeline Company of America (Natural) terminating
effective July 1, 1995 the Company's North Texas gas sales contract that was
scheduled to expire on December 31, 1997. Effective with the contract buyout,
the Company gained operational control of Natural's gathering system that
services most of the Company's North Texas wells and will obtain ownership of
that system on January 1, 1998 for no additional consideration. In addition,
for itself and other interest owners, the Company received a $55.5 million cash
payment on July 1, 1995 and receivables with a then present value of $174
million related to cash payments from Natural of $95 million and $91 million on
February 1, 1996 and 1997. A gain of $205.3 million was recorded in fiscal 1996
in connection with the contract buyout. The agreement accelerated the Company's
receipt of the contract's premium financial benefits, making these funds
available earlier for debt repayment or funding acquisitions or other
investments to replace a portion of the operating cash flows previously
provided by the Natural

28
<PAGE> 31
contract. Further, the buyout freed the Company from contract-related
production limitations, and the resulting gain accelerated its use of
approximately $25 million in Federal income tax credits due to expire over the
next three years.

Gaining control of the North Texas gathering system allowed the Company to
optimize field operations and to access new natural gas markets using new
pipeline interconnections that were completed in October 1995. These
improvements and the elimination of contract-related production constraints
allowed the Company to increase its North Texas natural gas production by
approximately 20%.

As a result of the contract termination, the Company began receiving
market-sensitive prices for the 80,000 Mcf per day of residue gas that Natural
had been buying for $4.00 per MMBtu. Because of this, the Company's natural gas
revenues were substantially reduced effective July 1, 1995. However, since none
of the $210.5 million of unamortized costs of the North Texas properties was
charged against the proceeds the Company received for agreeing to terminate the
contract, the Company's North Texas DD&A expense was not reduced
proportionately. Because of this, DD&A expense constitutes a higher percentage
of the Company's oil and gas revenues for periods subsequent to the contract's
termination than was the case earlier. From a liquidity standpoint, however,
the price-related decline in revenues ($1.57 per MMBtu over the last seven
months of fiscal 1996 versus the contract's $4.00) was mitigated by the early
termination proceeds.

Replacement of cash flows attributable to the Natural contract (forward-looking
information--see page 27). Based on the difference in (i) the average fiscal
1996 market-sensitive price for the North Texas area and (ii) the contract
price that, absent the early contract termination on July 1, 1995, would have
been in effect for that year, the Natural contract would have provided
incremental cash flows to the Company of approximately $67 million in fiscal
1996. As discussed in this refocusing section, the Company took a number of
actions to improve its cash flows to compensate for the loss of the contract's
premium prices. These included increasing, subsequent to the contract's
termination, its North Texas natural gas production volumes, lowering its
operating costs through personnel reduction and other programs and lowering its
net interest costs by receiving interest on or reducing debt with the proceeds
from the contract settlement. The cash flow improvements resulting from these
actions by the Company total approximately $50 million on an annualized basis.
These improvements, coupled with additional benefits projected to be obtained
in fiscal 1997 from higher market-sensitive natural gas prices (current futures
strip prices are approximately 50c. per MMBtu above fiscal 1996's average
market-sensitive prices) and further reductions in interest expense resulting
from projected debt paydowns (primarily due to additional noncore asset sales),
should result in the replacement in fiscal 1997 of the $67 million of
incremental cash flows attributed to the Natural contract's premium prices.

Reduction of long-term debt (forward-looking information--see page 27).
Substantial portions of the proceeds from sales of noncore assets and the early
termination of the Natural contract were used to pay down debt. At January 31,
1996, the Company's long-term debt totaled $831.7 million, down $156.6 million
from the $988.3 million balance at the beginning of fiscal 1995. With
collections of the remainder of the contract termination proceeds and
additional proceeds from sales of noncore properties, the Company anticipates
further reducing its outstanding indebtedness in fiscal 1997 and 1998.

Funding of the Company's Operations (forward-looking information--see page 27)

The Company generally has funded its investing activities using cash provided
from operating activities and sales of varying interests in mature real estate
assets, supplemented to the extent necessary with proceeds from long-term
borrowings. The primary sources of borrowed funds in recent years have been
bank credit agreements of the energy and real estate subsidiaries and senior
notes of the parent company. Needed funds initially have been borrowed under
the bank credit agreements, and the credit availability under these facilities
periodically has been restored by paying down outstanding borrowings using
proceeds from public offerings of parent company senior notes or Class B common
stock.

In concert with its long-standing strategy of using partnerships and
selling mature real estate properties to fund capital requirements, the Company
realized proceeds of approximately $39 million in connection with the July 1995
sale of a 75% interest in 10 office buildings in The Woodlands to Crescent Real
Estate Equities, Inc. This transaction established a relationship that is
expected to provide a potential source of funding for future office development
projects in The Woodlands.

The Company's fiscal 1997 budget and financial plan for fiscal 1998
(completed prior to the court judgment discussed below) indicated that
projected operating cash flows, combined with proceeds from continuing sales of
noncore properties and

29
<PAGE> 32
collections of the remainder of the Natural contract termination proceeds,
would result in further long-term debt reductions in fiscal 1997 and 1998.
These projections further indicated that the Company's cash flows, supplemented
as necessary with borrowings under its committed bank lines of credit, would be
sufficient to repay the $130 million in senior notes and term debt that matures
during the first half of fiscal 1998. Neither year's plan contemplated
accessing public debt or equity markets.

On March 1, 1996 (subsequent to the preparation of these financial plans),
a Texas district court, entered a judgment of $204 million for actual and
exemplary damages to eight plaintiffs groups who claimed the Company's natural
gas production operations affected their water wells. Additional information
concerning this judgment and 29 other pending cases alleging similar claims (17
of which have been combined and set for trial in June 1996) is included in Note
7 of Notes to Consolidated Financial Statements. The Company has assessed the
effect of this judgment and related pending litigation on its operations and
financial position and has taken several steps to deal with this, including (i)
revising its bank credit facilities to provide for future financial liquidity
and the credit support needed to obtain surety bonds required to appeal the
judgment, (ii) recording a $15 million financial statement provision in January
1996 to accrue the costs the Company believes it likely will incur in
connection with this litigation, and (iii) initiating actions to appeal the
judgment to the highest possible level, if required, and to contest the
remaining cases.

In order to appeal the $204 million judgment, the Company must post with
the court $225 million in surety bonds (covering the judgment amount,
post-judgment interest and certain other costs). The Company has made
arrangements for two insurance companies to post, when required, the $225
million of surety bonds, in connection with which the Company is to provide as
collateral $185 million in irrevocable bank letters of credit. Such letters of
credit are to be issued under an agreement that the Company entered into in
April 1996 with certain of the participants in its bank revolving credit
agreements to collateralize appeals bonds in connection with the water well
litigation discussed in the preceeding paragraph. In connection with entering
into this agreement, the Company's existing bank credit agreements were also
revised to provide aggregate committed revolving credit facilities of $200
million for its energy and real estate operations. These financing arrangements
are discussed further in Note 5 of Notes to Consolidated Financial Statements.

The Company recorded the above-mentioned $15 million litigation provision
to cover the cost of providing the surety bonds and letters of credit as well
as legal fees and other costs required to appeal the judgment and to contest
the other pending cases. Although the provision is composed primarily of
amounts required to appeal the litigation to the highest level required, it
also includes, based on the Company's current assessment, an amount for the
disposition of this litigation. If the Company is unable to dispose of the
judgment in a satisfactory manner at the district court where the judgment was
entered or by other means, it plans to appeal the judgment to the Texas Court
of Appeals sitting in Fort Worth (which could require up to one year) and, if
necessary, to the Texas Supreme Court (which could require an additional year).
The Company will not be required to pay any amounts under the judgment until
the appeals process has been completed, so long as the specified surety bonds
are provided and maintained in force.

The existence of the judgment, the other pending cases and the requirement
to provide surety bonds supported by letters of credit have reduced the
Company's financial flexibility from what it otherwise would have been. The
entering of the judgment resulted in a March 1996 downgrading by Moody's
Investors Service of its ratings on the Company's $700 million of senior notes
from Baa3 to Ba3. Prior to the judgment, Moody's, in December 1995, had
affirmed the Company's debt rating of Baa3 with a positive outlook. Standard &
Poors, however, subsequently reaffirmed its previous ratings of these
securities at BBB- with a negative outlook. Duff & Phelps has taken no action
on its rating of BBB-. Future events with respect to the judgment and the
pending cases could also affect these ratings. While the judgment and the
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. The Company
has no current plans to significantly alter its business plans for fiscal 1997
and 1998 because of the existing judgment and pending cases. Additionally, the
Company's bank credit facilities have been revised in a manner that facilitates
the issuance of surety bonds that might be needed in the litigation appeals
process and allows the Company to continue to use these

30
<PAGE> 33
facilities as the principal means of funding its short-term liquidity needs.
Consequently, the Company currently believes the litigation will not have a
significant adverse impact on its ability to meet its financial obligations or
to fund its ongoing operations during the appeals process.

However, the success or failure of the appeals and the results of the
pending cases could have a significant impact on the Company's liquidity and
funding needs. If, as the Company expects, the judgment ultimately is
overturned or significantly reduced, the litigation should not have a material
impact on the Company's financial position. Conversely, should the judgment
ultimately be affirmed, this would have a material adverse affect on both the
Company's liquidity and its financial statements.

Dividend Policy/Common Stock Repurchases

The Company has paid regular quarterly cash dividends on its common stock for
an uninterrupted period of 19 years. Beginning in fiscal 1994, annual
dividends totaling 48 cents and 53 cents per share, respectively, have been
paid on the Company's Class A and Class B common stock. In December 1994, the
Board of Directors authorized open market repurchases of up to one million
shares of the Company's common stock. Through January 31, 1996, 756,600 shares
have been so purchased at an aggregate cost of $11.9 million.

Capital and Exploratory Expenditures

The following table compares the Company's fiscal 1997 budget for capital and
exploratory expenditures with its actual expenditures during fiscal 1996 and
1995 (in millions):

<TABLE>
<CAPTION>
1997 Budget 1996 1995
----------------- ---------------- -----------------
Amount % Amount % Amount %
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Exploration and Production . . . . . . . . . $117.2 54.9 $141.7 57.6 $115.1 52.4
Gas Services . . . . . . . . . . . . . . . . 28.3 13.3 38.3 15.6 35.1 16.0
Real Estate . . . . . . . . . . . . . . . . . 60.5 28.3 60.0 24.3 65.1 29.6
Corporate . . . . . . . . . . . . . . . . . . 7.5 3.5 6.1 2.5 4.3 2.0
------ ----- ------ ----- ------ -----
$213.5 100.0 $246.1 100.0 $219.6 100.0
====== ===== ====== ===== ====== =====
</TABLE>

The consolidated budget for fiscal 1996 expenditures, initially set at $228.7
million, was later increased to $259 million to cover the $26 million Lake
Creek field producing oil and gas property acquisition. Fiscal 1996 spending
ultimately totaled $246.1 million, 5% below the revised budget.

The Company's fiscal 1997 budget has been set at $213.5 million, 13.2%
below fiscal 1996's actual spending. Excluding the Lake Creek field purchase,
the fiscal 1996 budgeted outlays for exploration and production, real estate
and corporate activities are essentially unchanged from the amounts spent in
fiscal 1996. The decline in gas services spending relates primarily to the lack
of a budgeted project comparable in size to the expansion of an Austin Chalk
natural gas gathering system for which the Company's 45% share of expenditures
totaled $19.6 million in fiscal 1996.

The Company replaced 114% of the natural gas reserves it produced in fiscal
1996 and expects to more than replace the reserves it will produce in fiscal
1997. Real estate expenditures, which are earmarked almost exclusively for The
Woodlands, will consist principally of spending for residential lot
development, construction of commercial properties and interest and other
carrying costs incurred in the Company's land development activities.

Environmental Matters

Concern for the environment has been a fundamental part of the Company's
operating philosophy for many years. In the ordinary course of conducting its
business, the Company incurs costs--both expensed and capitalized--to preserve
and protect the environment. As public concern for the environment has grown in
recent years, new environmental laws have been enacted, more stringent
regulations have been implemented and enforcement of existing controls has been
strengthened. The Company considers the cost of environmental protection a
necessary and manageable part of its business. To date, the Company has not
been faced with major clean-up obligations and has been able to conform with
environmental regulations without materially altering its operating strategies.
Since scientific evidence indicates the Company's operations

31
<PAGE> 34
were not the cause of the problems, no discussion is included in this section
of the $204 million civil judgment (discussed elsewhere herein) against the
Company related to alleged water well problems in connection with its North
Texas oil and gas operations.

However, complying with environmental regulations sometimes imposes
constraints on the manner in which the Company conducts its operations. For
example, the real estate development at Laffite's Cove in Galveston was
significantly delayed while studies were performed to satisfy regulatory
requirements. Regulations also can impose costs beyond those an environmentally
conscious operator might otherwise incur. The Company estimates that it will
spend approximately $4 to $5 million annually over the next two or three years
on environmental testing and compliance for its energy and real estate
operations to comply with environmental regulations. For the most part, these
expenditures are related to new permitting and monitoring requirements of the
Federal Clean Air Act Amendments of 1990. The fiscal 1997 expenditures,
however, do include approximately $.6 million not required by environmental
regulations which the Company elected to spend for building more whooping crane
habitat in connection with its Mesquite Bay exploration and production
operations.

Nevertheless, while it is not possible to fully anticipate all of the
financial obligations or operating constraints that might ultimately result
from increasingly stringent environmental regulations and enforcement programs,
management believes the Company is well-positioned within the industries in
which it competes to deal with environmental protection requirements.
Furthermore, demand for clean-burning natural gas, the cornerstone of the
Company's energy operations, is likely to benefit from increasing environmental
awareness.

Real estate development activities also are affected by regulations,
policies and actions of various governmental agencies and other entities
relating to essential public services, including utilities, telephone service
and schools. To date, these public services have been obtained in a manner
that has enhanced the Company's development activities, and management expects
that this will continue to be the case for the foreseeable future.

OPERATING STATISTICS

Certain operating statistics (including, where applicable, proportional
interests in equity partnerships) for fiscal 1996, 1995 and 1994 follow:

<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Average daily volumes
Natural gas sales (Mcf) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 216,200 214,100 193,800
Crude oil and condensate sales (Bbls) . . . . . . . . . . . . . . . . . . . . . 5,400 6,300 6,000
Natural gas liquids produced (Bbls) . . . . . . . . . . . . . . . . . . . . . . 46,400 47,500 49,800
Pipeline throughput (Mcf)
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 354,000 415,000 549,000
Exclusive of Winnie Pipeline . . . . . . . . . . . . . . . . . . . . . . . . 354,000 353,000 386,000
Average sales prices
Natural gas (per Mcf) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2.16 $ 2.71 $ 2.86
Crude oil and condensate (per Bbl) . . . . . . . . . . . . . . . . . . . . . . 16.91 15.75 16.31
Natural gas liquids produced (per Bbl) . . . . . . . . . . . . . . . . . . . . 11.55 11.57 12.18
Residential lot sales--The Woodlands
Lots sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 980 951 844
Average price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $40,752 $37,287 $39,055
Average price per square foot . . . . . . . . . . . . . . . . . . . . . . . . . 3.89 3.70 3.38
</TABLE>

RESULTS OF OPERATIONS--FISCAL 1996 COMPARED WITH FISCAL 1995

The Company's results for fiscal 1996 and 1995--both before and after unusual
items--are summarized in the table on the following page. Fiscal 1996 net
earnings of $37.1 million were 19% below the $45.8 million of the prior year
(unusual items reduced net earnings by $6.2 million in fiscal 1996, but
increased fiscal 1995's net earnings by $8.7 million).

Excluding the unusual items, net earnings for fiscal 1996 were $6.2
million above those of the prior year. A major contributor to this increase was
sharply higher earnings from real estate operations, which included a $19.4
million gain ($12.6 million after tax) on the sale of the Company's remaining
50% interest in a partnership that operated the cable television system in

32
<PAGE> 35
The Woodlands. Also contributing to this improvement were earnings from the
Company's one-third interest in an MTBE plant partnership and
personnel-reduction-driven declines in costs and expenses. These improvements
were largely offset, however, by the negative impact on subsequent operations
of the July 1, 1995 buyout of the Natural contract and lower market-sensitive
natural gas prices during the first nine months of fiscal 1996. The following
table and discussion identify and explain the major increases (decreases) in
earnings (in millions):

Major increases (decreases)
Natural gas
Contract buyout . . . . . . . . . . . . . . . . . (32.4) - - 3.8 (28.6) (18.6)
Lower market-sensitive sales price . . . . . . . . (5.9) - - - (5.9) (3.8)
Lower salary and benefits expenses
due to personnel reductions . . . . . . . . . . . 5.9 2.7 .9 4.1 13.6 8.8
Increased proved-property impairments . . . . . . . . (6.8) - - - (6.8) (4.4)
Reduced amortization of deferred gas
contract restructuring proceeds . . . . . . . . . (8.1) - - - (8.1) (5.3)
Increased exploratory dry-hole costs . . . . . . . . (2.2) - - - (2.2) (1.4)
Lower NGL feedstock costs . . . . . . . . . . . . . . - 5.0 - - 5.0 3.3
UPR partnerships buy/resale gross profits . . . . . . - 2.3 - - 2.3 1.5
Equity in MTBE plant earnings . . . . . . . . . . . . - 9.0 - - 9.0 5.9
Real Estate--The Woodlands
Gain on sale of interest in cable television
partnership . . . . . . . . . . . . . . . . . . - - 19.4 - 19.4 12.6
Other . . . . . . . . . . . . . . . . . . . . . . - - 2.4 - 2.4 1.6
Interest expense incurred . . . . . . . . . . . . . . - - - 5.8 5.8 3.8
Other
SAR/Bonus unit expense accruals . . . . . . . . . (.8) (.4) (.5) (1.0) (2.7) (1.8)
Miscellaneous . . . . . . . . . . . . . . . . . . 1.9 .8 .8 .7 4.2 2.7
Lower effective income tax rate . . . . . . . . . - - - - - 1.3
------ ------- ------- ------ ------ ------
(48.4) 19.4 23.0 13.4 7.4 6.2
------ ------- ------- ------ ------ ------
Fiscal 1996 amounts before unusual items . . . . . . 35.7 54.1 48.8 (76.4) 62.2 43.3
------ ------- ------- ------ ------ ------

Fiscal 1996 unusual items (see Note 10 of
Notes to Consolidated Financial Statements)
Gain from Natural contract buyout . . . . . . . . . . 205.3 - - - 205.3 127.3
Write-downs of real estate properties . . . . . . . . - - (123.9) - (123.9) (80.6)
Gas services and Corporate asset write-downs . . . . - (52.7) - (2.7) (55.4) (34.4)
Personnel reduction program costs . . . . . . . . . . (7.9) (3.6) (3.0) (5.7) (20.2) (12.5)
Litigation provision . . . . . . . . . . . . . . . . (15.0) - - - (15.0) (9.3)
Gains from sales of energy assets . . . . . . . . . . 5.3 - - - 5.3 3.3
------ ------- ------- ------ ------ ------
187.7 (56.3) (126.9) (8.4) (3.9) (6.2)
------ ------- ------- ------ ------ ------
Fiscal 1996 amounts after unusual items . . . . . . . $223.4 $ (2.2) $ (78.1) $(84.8) $ 58.3 $ 37.1
====== ======= ======= ====== ====== ======
</TABLE>

- ------------
*Includes general and administrative expense and other expense.

Exploration and Production Overview

Largely because of the impact of the previously mentioned early termination of
the natural gas sales contract, Exploration and Production operating earnings
before unusual items declined $48.4 million during fiscal 1996 to $35.7
million.

33
<PAGE> 36
Natural gas - Contract buyout. Effective with the contract buyout on July 1,
1995, the Company began receiving market- sensitive prices for approximately
80,000 Mcf per day of North Texas residue gas previously sold at substantially
higher contract prices ($4.00 and $3.75 per MMBtu, respectively, in calendar
1995 and 1994). As a result, gas sales revenues were substantially less than
they had been previously. During the seven-month period subsequent to the
contract buyout, the Company's realizations for its North Texas residue gas
averaged $1.57 per MMBtu (ranging from $1.20 in August to $2.00 in January).
After price-related cost reductions, oil and gas operating earnings on a
period-to-period basis were lowered by $32.4 million. After interest income
accrued on the Company's share of the receivables from Natural and income
taxes, the net earnings impact was $18.6 million.

Natural gas - Lower market-sensitive sales price ($5.9 million decrease). For
production outside the North Texas area, the Company's average market-sensitive
natural gas sales price during fiscal 1996 of $1.72 per Mcf was 9.5% below the
$1.90 realized during the prior year, reducing operating earnings by $5.9
million.

Increased proved-property impairments ($6.8 million decrease). Such impairments
totaled $11.5 million during fiscal 1996, or $6.8 million more than fiscal
1995's $4.7 million. The fiscal 1996 impairments, which related to five fields,
occurred principally because of downward revisions in reserve estimates,
disappointing fiscal 1996 drilling results and a lowering of assumed product
sales prices for certain future periods.

Reduced amortization of deferred gas contract restructuring proceeds ($8.1
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 $12.5 million to
operating earnings in fiscal 1995. Exclusive of the $29.1 million separately
recognized in connection with the gas contract buyout, such amortization added
$4.4 million to fiscal 1996 operating earnings, or $8.1 million less than in
the prior year.

Increased exploratory dry-hole costs ($2.2 million decrease). Fiscal 1996
exploratory dry-hole costs totaled $3.3 million, or $2.2 million more than
during the prior year.

Gas Services Overview

Gas Services operating earnings before unusual items rose $19.4 million during
fiscal 1996 largely because of earnings from the Company's one-third-owned MTBE
plant that went into service effective April 1, 1995 and lower NGL feedstock
costs. NGL production volumes averaged 46,400 barrels per day, down from the
previous year's 47,500. The average price for NGLs produced during fiscal 1996
was $11.55 per barrel, essentially unchanged from fiscal 1995's $11.57.

Natural gas processing - Lower feedstock costs ($5.0 million increase).
Feedstock costs consist primarily of amounts paid to the natural gas producers.
Such amounts are based either on the value of natural gas consumed in
processing under keep-whole agreements or on a percentage of the value of NGLs
produced under percent-of-proceeds agreements. Accordingly, feedstock costs
under keep-whole agreements vary directly with market-sensitive natural gas
prices, while costs under percentage-of-proceeds agreements vary directly with
NGL prices. Largely because of lower market-sensitive gas prices, feedstock
costs declined during fiscal 1996, increasing gas processing operating earnings
by $5.0 million.

Natural gas buy/resale gross profits - UPR partnerships ($2.3 million
increase). The Company's equity in the buy/resale gross profits of this
45%-owned venture with Union Pacific Resources Company (UPR) was $2.3 million
higher during fiscal 1996. The increase was principally related to fixed-price
sales contracts and occurred largely because gas purchase costs declined as a
result of fiscal 1996's lower market-sensitive gas prices.

Equity in MTBE plant earnings ($9.0 million increase). The Company's earnings
from this one-third-owned venture rose substantially in fiscal 1996. This
occurred largely because the plant was under construction or involved in
start-up testing

34
<PAGE> 37
operations until April 1, 1995. After a six-week, third-quarter shutdown to
replace certain defective or improperly designed equipment (largely at the cost
of the respective suppliers), the plant's maximum daily capacity was
approximately 16,000 barrels, up approximately 25% from its 12,600-barrel
design capacity. For the period from its restart on September 29 until January
31, 1996, the plant's production averaged approximately 14,300 barrels per day.

Real Estate Overview

Exclusive of unusual items, operating earnings from real estate activities
totaled $48.8 million, or $23.0 million more than was earned during fiscal
1995. This improvement was almost exclusively attributable to the Company's
activities in The Woodlands. The number of residential lots sold increased by
3% to 980 in fiscal 1996, and the average sales price per square foot was 5%
higher. For the sixth consecutive year, The Woodlands ranked its No. 1 in
Houston-area new home sales.

The Woodlands - Gain on sale of interest in cable television partnership ($19.4
million increase). In accordance with its strategy of periodically monetizing
interests in mature real estate assets, during October 1995 the Company sold
its remaining 50% interest in a partnership that operated the cable television
system in The Woodlands. A gain of $19.4 million was recorded in connection
with this transaction, including the recognition of $2.5 million in deferred
profits from the earlier sale of an interest in this system.

The Woodlands - Other ($2.4 million increase). This variance was primarily
attributable to increased earnings for The Woodlands Executive Conference
Center and Resort, greater earnings from the Company's one-half interest in The
Woodlands Mall, which opened in October 1994, and higher property management
fees.

Other

Interest expense incurred. Interest expense incurred during fiscal 1996 (of
$64.2 million) declined by $5.8 million because of a $100 million lower average
outstanding debt balance. This occurred principally because of debt paydowns
using cash proceeds from asset sales and the Natural contract buyout. Interest
savings from this decline were partially offset, however, by the impact of
higher short-term (variable) interest rates in fiscal 1996.

Other - SAR/Bonus unit expense accruals ($2.7 million decrease). During fiscal
1996, $.8 million in SAR/Bonus unit expense accruals were recorded as the
average price of the Company's stock rose slightly. Conversely, in fiscal 1995,
SAR/Bonus expense accrual reversals of $1.9 million were recorded because of
declines in the stock price.

RESULTS OF OPERATIONS - FISCAL 1995 COMPARED WITH FISCAL 1994

The Company's results for fiscal 1995 and 1994--both before and after unusual
items--are summarized on the table on the following page. Largely because of
the impact of unusual items, fiscal 1995 net earnings exceeded those of the
previous year by approximately $21.2 million. Fiscal 1995 earnings included
$52.6 million in pretax gains from major energy asset sales but were reduced by
charges totaling $36.9 million associated with restructuring and asset
write-downs. The net effect was an increase of $15.7 million, or $8.6 million
after tax. Fiscal 1994's net earnings were reduced $12 million (after tax) by
an extraordinary charge for early debt retirement and a deferred tax provision
related to the August 1993 Federal corporate income tax rate increase.

Excluding the unusual items, fiscal 1995's earnings were almost
unchanged from those of the prior year. Favorable year-to-year earnings
variances included sharply lower fiscal 1995 exploratory dry-hole costs and
impairment charges--largely related to the Company's refocused exploration
emphasis--and improved earnings from higher natural gas production and real
estate operations. These gains were essentially offset, however, by the
negative impact of fiscal 1995's lower NGL prices, reduced gas gathering and
marketing margins and higher effective income tax rate and fiscal 1994's
one-time Exploration and Production earnings items.

35
<PAGE> 38
The following table and discussion identify and explain the major
increases (decreases) in earnings (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 1994 amounts . . . . . . . . . . . . . . . . . $ 68.2 $ 42.6 $ 21.1 $(84.5) $ 47.4 $ 24.6
Add back fiscal 1994 unusual items
Deferred tax charge caused by
increase in Federal income tax rate . . . . . . . - - - - - 6.6
Extraordinary item . . . . . . . . . . . . . . . . . - - - - - 5.4
------ ------- ------ ------ ------ ------
Fiscal 1994 amounts before unusual items . . . . . . 68.2 42.6 21.1 (84.5) 47.4 36.6
------ ------- ------ ------ ------ ------
Major increases (decreases)
Lower exploratory dry-hole costs . . . . . . . . . . 16.6 - - - 16.6 10.8
Reduced proved-property impairments . . . . . . . . . 8.9 - - - 8.9 5.8
Natural gas production
Market-sensitive sales price . . . . . . . . . . . (8.7) - - - (8.7) (5.7)
Market-sensitive sales volumes . . . . . . . . . . 3.8 - - - 3.8 2.5
Sales under fixed-price contracts . . . . . . . . 3.1 - - - 3.1 2.0
Natural gas processing
NGL price . . . . . . . . . . . . . . . . . . . . - (10.3) - - (10.3) (6.7)
Production volumes . . . . . . . . . . . . . . . . - (1.4) - - (1.4) (.9)
Reduced feedstock costs due to
Lower market-sensitive gas prices . . . . . . . - 8.5 - - 8.5 5.5
Lower NGL prices . . . . . . . . . . . . . . . . - 1.4 - - 1.4 .9
Natural gas gathering and marketing . . . . . . . . . - (6.4) - - (6.4) (4.2)
Real estate . . . . . . . . . . . . . . . . . . . . . - - 3.6 - 3.6 2.3
Interest expense incurred . . . . . . . . . . . . . . - - - 4.1 4.1 2.7
Capitalized interest . . . . . . . . . . . . . . . . - - - (5.1) (5.1) (3.3)
Other
Fiscal 1994 one-time earnings items . . . . . . . (6.9) - - - (6.9) (4.5)
SAR/Bonus unit expense accruals . . . . . . . . . 1.8 .8 1.1 2.1 5.8 3.8
Venture capital investments . . . . . . . . . . . - - - (4.8) (4.8) (3.1)
Fiscal 1994 excise tax refunds . . . . . . . . . . (1.0) - - (1.9) (2.9) (1.9)
Miscellaneous . . . . . . . . . . . . . . . . . . (1.7) (.5) - .3 (1.9) (1.3)
Higher effective income tax rate . . . . . . . . . . - - - - - (4.2)
------ ------- ------ ------ ------ ------
15.9 (7.9) 4.7 (5.3) 7.4 .5
------ ------- ------ ------ ------ ------
Fiscal 1995 amounts before unusual items . . . . . . 84.1 34.7 25.8 (89.8) 54.8 37.1
------ ------- ------ ------ ------ ------
Fiscal 1995 unusual items (see Note 10 of
Notes to Consolidated Financial Statements)
Gains from sales of major energy assets . . . . . . . 3.8 48.8 - - 52.6 32.7
Restructuring charges/asset write-downs . . . . . . . - (31.2) - - (31.2) (20.3)
Real estate asset write-downs . . . . . . . . . . . . - - (5.7) - (5.7) (3.7)
------ ------- ------ ------ ------ ------
3.8 17.6 (5.7) - 15.7 8.7
------ ------- ------ ------ ------ ------
Fiscal 1995 amounts after unusual items . . . . . . . $ 87.9 $ 52.3 $ 20.1 $(89.8) $ 70.5 $ 45.8
====== ======= ====== ====== ====== ======
</TABLE>

- ------------
*Includes general and administrative expense and other expense.

Fiscal 1994 Unusual Items

Deferred tax charge caused by increase in Federal income tax rate. Deferred
Federal income tax expense for the third quarter of fiscal 1994 included $6.6
million attributable to an increase enacted in August 1993 in the corporate
statutory Federal income tax rate from 34% to 35%. Because of the rate change,
it was necessary to increase the Company's deferred tax liability by an amount
equal to 1% of the aggregate cumulative difference between the book and tax
bases of its assets and liabilities.

Extraordinary item. In January 1994, the Company called for redemption its $200
million of 111/4 % Senior Notes Due 1999. The redemption price was 103.21% of
principal, and the premium and related unamortized debt issuance costs were
expensed, resulting in an extraordinary loss on the early retirement of this
debt of $5.4 million (after tax benefits of $2.9 million).

36
<PAGE> 39
Exploration and Production Overview

Exploration and Production operating earnings before unusual items increased by
$15.9 million during fiscal 1995, to $84.1 million. This improvement was the
result of lower expenses for exploratory dry holes and proved-property
impairments, the impact of which was partially offset by lower market-sensitive
natural gas prices in the last half of fiscal 1995 and the nonrecurrence of
one-time earnings items which added $6.9 million to fiscal 1994's operating
earnings. Average daily natural gas sales volumes rose to 214,100 Mcf from
193,800 in the prior year. This occurred primarily as a result of the Company's
increased fiscal 1994 drilling program and, to a lesser extent, the buyout of
MEC Development, Ltd., effective May 1, 1993.

Lower exploratory dry-hole costs ($16.6 million increase). Exploratory dry-hole
costs totaled $1 million in fiscal 1995, down from $17.6 million in fiscal
1994, improving operating earnings by $16.6 million. The reduced costs were the
result of a new exploration strategy initiated during fiscal 1995 under which
spending was reduced and focused more on core areas where the Company has a
good finding record. Also, the prior-year expense was adversely affected by the
Company's participation in an unsuccessful five-well offshore program operated
by a third party.

Reduced proved-property impairments ($8.9 million increase). Expenses for
property impairments declined to $4.7 million in fiscal 1995 from $13.6 million
in the prior year, increasing operating earnings by $8.9 million. Downward
revisions of reserve estimates for certain oil and gas properties caused the
fiscal 1994 impairments to be unusually large.

Natural gas - Market-sensitive sales price ($8.7 million decrease). The
Company's market-sensitive realizations averaged $1.90 per Mcf during fiscal
1995, down from $2.14 in the prior year, reducing operating earnings by $8.7
million. Market-sensitive natural gas prices were sharply lower during the
last half of fiscal 1995 as demand declined largely because of mild weather and
full storage caverns.

Natural gas - Market-sensitive sales volume ($3.8 million increase).
Market-sensitive sales volumes rose 18% to 108,800 Mcf per day from the prior
year's 92,000. After related operating costs and DD&A, this increased operating
earnings by $3.8 million. Production rose primarily due to wells drilled in
fiscal 1994; production from the Calhoun Unit, where the Company ceased
reinjecting gas and began selling it in August 1993; and the previously
mentioned MEC Development, Ltd. buyout, which added 1,500 Mcf per day to the
average volume. This increase would have been larger had the Company not
curtailed certain market-sensitive production late in the year because of low
prices.

Natural gas - Sales under fixed-price contracts ($3.1 million increase).
Production under fixed-price contracts averaged 105,300 Mcf per day at a price
of $3.53 per Mcf; such amounts were 101,800 Mcf and $3.52, respectively, in
fiscal 1994. Almost 90% of these volumes were sales under the Natural
contract, which covered most of the Company's North Texas production. The
fiscal 1995 volume increase resulted largely from the partnership buyout, which
added approximately 2,800 Mcf per day to the period's volumes. The positive
impact of fiscal 1995's higher production volumes and a 25 cents-per-MMBtu
increase in the Natural contract's sales price was largely offset by lower
realizations for leasehold NGLs and the lack in fiscal 1995 of any amortization
of price-related deferred contract restructuring proceeds since this
amortization was completed during the prior year; such amortization added $.12
per Mcf to fiscal 1994's average price for sales under fixed-price contracts.
Certain volume-related deferred contract restructuring proceeds continued to be
amortized. Although not increasing cash flows, such amortization, after related
DD&A expense, added $12.1 million and $12.6 million to operating earnings in
fiscal 1995 and 1994.

Gas Services Overview

Gas Services operating earnings before unusual items declined $7.9 million
during fiscal 1995 largely because of lower NGL sales prices and reduced
earnings from gas gathering and marketing activities. The unfavorable impact of
lower NGL prices on natural gas processing earnings was largely offset,
however, by reduced feedstock costs, most of which was related to fiscal 1995's
lower market-sensitive natural gas prices. NGL production averaged 47,500 Bbls
per day--down from 49,800 during the prior year--as facilities were idled early
in the year in response to inadequate margins for most plants operating
principally under keep-whole processing arrangements. NGL margins improved
subsequently, and certain plants that were idle in the first quarter resumed
operations.

37
<PAGE> 40
Natural gas processing - NGL price ($10.3 million decrease). The average price
for NGLs produced of $11.57 per barrel was $.61 per barrel below the average
for fiscal 1994, reducing operating earnings by $10.3 million. The lower
prices, principally in the first half of the year, were largely the result of
lower prices for crude oil--which adversely affected NGL prices--and a soft
world economy, which reduced the demand for chemical feedstocks.

Natural gas processing - Production volumes ($1.4 million decrease). NGL
production volumes averaged 47,500 barrels per day, down 5% from the previous
year's 49,800. As a result of the relatively high market-sensitive feedstock
costs during fiscal 1995's first quarter, when NGL prices were severely
depressed, most plants operating under keep-whole processing agreements were
uneconomical to operate and were shut down during that period. Certain of these
plants resumed operations in the second quarter, and production volumes
averaged 48,800 barrels per day during the subsequent nine months, up from the
first quarter's 43,200.

Natural gas processing - Reduced feedstock costs ($9.9 million increase).
Feedstock costs consist primarily of amounts paid to the natural gas producers.
Such amounts are based either on the value of natural gas consumed in
processing under keep-whole agreements or on a percentage of the value of NGLs
produced under percent-of-proceeds agreements. Accordingly, feedstock costs
under keep-whole agreements vary directly with market-sensitive natural gas
prices, while costs under percentage-of-proceeds agreements vary directly with
NGL prices. Consequently, fiscal 1995's lower market- sensitive gas prices
caused feedstock costs to decline, increasing operating earnings by $8.5
million, while the lower NGL realizations also reduced feedstock costs,
increasing operating earnings by $1.4 million.

Natural gas gathering and marketing ($6.4 million decrease). Excluding the
impact of lower SAR/Bonus unit expense accruals, operating earnings (exclusive
of unusual items) from natural gas gathering and marketing activities were $6.4
million below those of the prior year. This decline was primarily the result of
lower volumes and margins for the wholly owned North Texas system and the
45%-owned venture with Union Pacific Resources Company (UPR). For the last
several years, throughput on the North Texas system has declined because
drilling activity in its service area has been too low to offset normal
production declines on existing wells. This system's margins were lower in
fiscal 1995 primarily as a result of the expiration late in fiscal 1994 of
certain favorable contracts. Fiscal 1995 volumes and margins for the UPR
venture were lower largely because of January 1994 revisions in natural gas
sales contracts with Texas Utilities Fuel Company (TUFCO). Purchases under
these contracts by TUFCO during fiscal 1995 averaged 50,000 MMBtu per day
(22,500 for the Company's 45% interest) at a price of $2.99, contrasted with
58,900 (26,500) at $3.42 during the prior year. System volumes not sold to
TUFCO were sold to other purchasers at substantially lower margins.

Real Estate and Other

Real Estate ($3.6 million increase). Excluding the impact of lower SAR/Bonus
unit expense accruals, Real Estate operating earnings before unusual items rose
$3.6 million during fiscal 1995. The improvement, which was concentrated in The
Woodlands, was largely due to increased profits from residential lot sales and
improved earnings from commercial activities.

Earnings from residential lot sales were $1 million above those of fiscal
1994 due to a 13% increase in the number of lots sold (951 vs. 844) and a 9%
increase in the average sales price for production lots. Fiscal 1996 production
lot sales increased 29% both because of the community's strong competitive
position in the Houston-area market and because lot sales early in fiscal 1994
had been adversely affected by inventory shortages related to delays in the
opening of the Village of Alden Bridge. Despite sharp rises in mortgage
interest rates, production lot sales were strong during the year as The
Woodlands became a more attractive community to new home buyers because of the
new retail centers and improved traffic access. However, the number of estate
and custom lots sold declined in fiscal 1995. This decline corresponded with a
national downward trend for larger home sales.

Earnings from commercial and institutional land sales were essentially
equal in fiscal 1995 and 1994, but the nature of the transactions changed
substantially. Fiscal 1995 sales included a sizable number of retail sites,
while much of fiscal 1994's earnings was related to the fourth-quarter sale of
a large tract for a funeral home and cemetery. Higher earnings

38
<PAGE> 41
from other commercial activities in The Woodlands accounted for $2.1 million of
the increase in real estate operating earnings. Several factors contributed to
this increase, including greater corporate conference activity at The Woodlands
Executive Conference Center and Resort and higher earnings from office and
research/technology buildings, most of which was related to increased
occupancy.

Interest expense incurred. Interest expense incurred during fiscal 1995 was
$4.1 million below that of the prior year partially due to a decline in the
Company's effective interest rate (to 7.4% from 7.7%). This was caused by a
decline of two percentage points (from 9.8% to 7.8%) in the average rate for
the Company's fixed-rate debt, which occurred because of the refunding in
February 1994 of $200 million of 111/4% Senior Notes with proceeds from January
1994 sales of $250 million of 63/4% Senior Notes and $100 million of 5.10%
Senior Notes. Excess proceeds were used to pay down outstanding borrowings
under the Company's bank credit agreements. The beneficial impact of the senior
note refunding was partially offset by a decline (from 37% to 19%) in the
percentage of lower-cost, floating-rate debt and a rise in short-term
(variable) interest rates. Also contributing to the decline in interest expense
was a reduction in the Company's average debt balance in fiscal 1995 resulting
principally from debt paydowns made using proceeds from major energy asset
sales.

Capitalized interest. The amount of interest capitalized fell by $5.1 million
in fiscal 1995 because of a decline in the average energy and real estate asset
balances subject to capitalization and, to a lesser extent, the Company's lower
effective interest rate during that period.

Other - Fiscal 1994 one-time earnings items ($6.9 million decrease). One-time
items added $6.9 million to fiscal 1994's Exploration and Production operating
earnings. These items included the recognition of $3.9 million in previously
deferred natural gas revenues, which had been deferred because of future
obligations for which the Company was no longer liable; a $1.1 million gain on
the sale of certain assets and the reversal of a $1.9 million contingent
liability related to contractual matters, which was determined to be no longer
needed.

Other - SAR/Bonus unit expense accruals ($5.8 million increase). During fiscal
1995, $1.9 million in SAR/Bonus unit expense accrual reversals were recorded as
the average market price of the Company's common stock declined $4.94 per
share. Conversely, in fiscal 1994, expense accruals of $3.9 million were
recorded as the average stock price rose by $5.00 per share. Also contributing
to this variance were fiscal 1994 exercises at higher mid-year prices of
SARs/Bonus units, many of which had January 1994 expiration dates. The impact
of stock price changes was less in fiscal 1995 because substantially fewer
units were outstanding.

Other - Fiscal 1994 excise tax refunds ($2.9 million decrease). During fiscal
1994, the Company recognized excise tax refunds applicable to prior years, of
which $1 million was for taxes previously charged to oil and gas operating
earnings and $1.9 million was for accrued interest on these tax overpayments.

Other - Venture capital investments ($4.8 million decrease). The Company has
investments in venture capital companies (many located in The Woodlands'
Research Forest), several of which have gone public in recent years. In
accordance with industry practice, these investments are carried at estimated
fair values. Because of sharp declines in the stock market prices for start-up
biotechnology companies, the estimated values of these investments declined
substantially in fiscal 1995. As a result, charges aggregating $3.8 million
were recorded during fiscal 1995. Conversely, unrealized appreciation of $1
million was recognized during fiscal 1994 because of increases in the estimated
values of these investments.

Higher effective income tax rate. The Company's effective income tax rate in
fiscal 1995 of 35.1% was up sharply from fiscal 1994's 22.7% (exclusive of the
impact of the August 1993 increase in the corporate statutory Federal income
tax rate). This occurred because of an increased provision for deferred state
income taxes in fiscal 1995 and a decline in available Federal tax credits for
natural gas produced from wells qualifying under Section 29 of the Internal
Revenue Code as production from those wells declined. Also, the fiscal 1994
provision was reduced by approximately $1 million because certain tax
carryforwards were estimated to be utilizable that previously had been expected
to expire.

39
<PAGE> 42
QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- --------- --------- ---------
(in thousands except per-share data)
<S> <C> <C> <C> <C>
Fiscal 1996
Revenues . . . . . . . . . . . . . . . . . . . . . . . . $ 214,975 $ 417,875(b) $ 193,219 $ 245,678
Segment operating earnings (loss) . . . . . . . . . . . . 21,800(a) 136,642(c) 31,601 (46,876)(d)
Net earnings (loss) . . . . . . . . . . . . . . . . . . . (3,181) 73,247 10,078 (43,015)
Earnings (loss) per share . . . . . . . . . . . . . . . . (.06) 1.41 .19 (.83)

Fiscal 1995
Revenues . . . . . . . . . . . . . . . . . . . . . . . . $ 225,168 $ 237,775 $ 207,654 $ 223,974
Segment operating earnings . . . . . . . . . . . . . . . 37,792 39,511(e) 45,157(f) 37,889
Net earnings . . . . . . . . . . . . . . . . . . . . . . 10,418 11,401 15,012 8,983
Earnings per share . . . . . . . . . . . . . . . . . . . .20 .22 .28 .17
</TABLE>
_______________

(a) Net of $14,535,000 in personnel reduction program charges. An additional
$5,665,000 was charged to general and administrative expense.
(b) Includes a gain of $205,256,000 from early termination of the Natural
contract.
(c) Includes the gain mentioned in (b), the effect of which was partially
offset by real estate property write-downs of $112,794,000.
(d) Net of charges of $59,407,000 for gas services asset and real estate
property write-downs and $15,000,000 for a litigation provision.
(e) Includes a gain of $29,196,000 from the sale of Winnie/Spindletop, the
effect of which was largely offset by charges aggregating $25,650,000 for
asset write-downs and restructuring costs.
(f) Includes a gain of $19,625,000 from the sale of compression operations,
which was partially offset by asset write- downs of $11,263,000.

QUARTERLY STOCK DATA

Mitchell Energy & Development Corp. and Subsidiaries

<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
(per-share amounts)
<S> <C> <C> <C> <C>
Fiscal 1996
Market Price Range
Class A --High . . . . . . . . . . . . . . . . . . . . . . . $ 19.00 $ 19.37 $ 18.75 $ 19.00
Low . . . . . . . . . . . . . . . . . . . . . . . 15.37 16.75 16.37 16.50
Class B --High . . . . . . . . . . . . . . . . . . . . . . . 18.12 19.12 18.75 18.87
Low . . . . . . . . . . . . . . . . . . . . . . . 15.00 16.62 16.00 16.00
Cash Dividends Paid
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . 12.00c 12.00c 12.00c 12.00c
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . 13.25 13.25 13.25 13.25

Fiscal 1995
Market Price Range
Class A --High . . . . . . . . . . . . . . . . . . . . . . . $ 22.87 $ 21.37 $ 19.62 $ 18.62
Low . . . . . . . . . . . . . . . . . . . . . . . 16.25 18.75 16.12 14.50
Class B --High . . . . . . . . . . . . . . . . . . . . . . . 23.25 21.25 19.50 18.75
Low . . . . . . . . . . . . . . . . . . . . . . . 17.25 18.50 16.50 14.50
Cash Dividends Paid
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . 12.00c 12.00c 12.00c 12.00c
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . 13.25 13.25 13.25 13.25
</TABLE>

40
<PAGE> 43
CONSOLIDATED BALANCE SHEETS

Mitchell Energy & Development Corp. and Subsidiaries
January 31, 1996 and 1995 (dollar amounts in thousands)
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 21,336 $ 11,967
Trade receivables, net of allowance for doubtful accounts of $2,116 and $2,304 . 105,238 133,995
Gas contract buyout receivable due February 1, 1996 . . . . . . . . . . . . . . . 95,000 -
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,137 13,068
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,602 24,808
---------- ----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 244,313 183,838

Property, Plant and Equipment, at cost less accumulated depreciation,
depletion and amortization of $1,321,004 and $1,301,498 (Note 2) . . . . . . . 719,535 734,099

Real Estate (Note 3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 762,834 917,890
Other Assets (including $85,467 present value of
gas contract buyout proceeds due February 1, 1997) . . . . . . . . . . . . . . 116,187 20,044
---------- ----------
$1,842,869 $1,855,871
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,732 $ 11,617
Oil and gas proceeds payable . . . . . . . . . . . . . . . . . . . . . . . . . . 81,696 51,211
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,769 67,452
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,746 39,962
---------- ----------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 221,943 170,242
---------- ----------
Long-term Debt (Note 5)
Energy operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 375,727 375,869
Real estate operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 455,937 519,093
---------- ----------
831,664 894,962
---------- ----------
Deferred Credits and Other Liabilities
Deferred income taxes (Note 6) . . . . . . . . . . . . . . . . . . . . . . . . . 193,908 200,722
Deferred income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,676 29,774
Natural gas contract restructuring proceeds (Note 10) . . . . . . . . . . . . . . - 35,017
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87,775 50,124
---------- ----------
307,359 315,637
---------- ----------
Commitments and Contingencies (Notes 4 and 7)

Stockholders' Equity (Notes 8 and 9)
Preferred stock, $.10 par value (authorized 10,000,000 shares; none issued)
Common stock, $.10 par value
(authorized 100,000,000 Class A and 100,000,000 Class B shares) . . . . . . . 5,386 5,386
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . 143,270 143,472
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 358,281 347,573
Treasury stock, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (25,034) (21,401)
---------- ----------
481,903 475,030
---------- ----------
$1,842,869 $1,855,871
========== ==========
</TABLE>

- ------------
The accompanying notes are an integral part of these financial statements.

41
<PAGE> 44
CONSOLIDATED STATEMENTS OF EARNINGS

Mitchell Energy & Development Corp. and Subsidiaries
For the Years Ended January 31, 1996, 1995 and 1994 (in thousands except
per-share amounts)

<TABLE>
<CAPTION>
1996 1995 1994
----------- --------- ---------
<S> <C> <C> <C>
Revenues
Exploration and production, including gain on natural
gas contract buyout of $205,256 in 1996 (Note 10) . . . . . . $ 424,661 $ 277,099 $ 266,166
Gas services, including gains from major
asset sales of $48,821 in 1995 (Note 10) . . . . . . . . . . . 478,258 488,007 560,537
Real estate, including gain from sale of cable
television operations of $19,449 in 1996 (Note 10) . . . . . . 168,828 129,465 126,106
----------- --------- ---------
1,071,747 894,571 952,809
----------- --------- ---------
Operating Costs and Expenses (including personnel
reduction program costs of $14,535 in 1996--Note 10)
Exploration and production, including litigation
provision of $15,000 in 1996 (Note 7) . . . . . . . . . . . . 201,227 189,193 197,980
Gas services, including asset write-downs/restructuring
charges of $52,715 in 1996 and $31,252 in 1995 (Note 10) . . . 480,457 435,696 517,878
Real estate, including property write-downs of
$123,916 in 1996 and $5,661 in 1995 (Note 10) . . . . . . . . 246,896 109,333 105,028
----------- --------- ---------
928,580 734,222 820,886
----------- --------- ---------
Segment Operating Earnings (Note 10) . . . . . . . . . . . . . . 143,167 160,349 131,923
General and administrative expense, including
personnel reduction program costs of $5,665 in 1996 . . . . . 44,821 42,225 43,222
----------- --------- ---------
Total Operating Earnings . . . . . . . . . . . . . . . . . . . . 98,346 118,124 88,701
----------- --------- ---------
Other Expense
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . 64,172 69,982 74,057
Capitalized interest . . . . . . . . . . . . . . . . . . . . . . (28,252) (28,816) (33,956)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,095 6,407 1,224
----------- --------- ---------
40,015 47,573 41,325
----------- --------- ---------
Earnings Before Income Taxes and Extraordinary Item . . . . . . . 58,331 70,551 47,376

Income Taxes (including $6,574 deferred tax impact
of increase in corporate tax rate in 1994--Note 6) . . . . . . 21,202 24,737 17,346
----------- --------- ---------

Earnings Before Extraordinary Item . . . . . . . . . . . . . . . 37,129 45,814 30,030

Extraordinary Item -- Loss From Early Retirement of Debt
(net of tax benefit of $2,921--Note 13) . . . . . . . . . . . - - (5,426)
----------- --------- ---------

Net Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . $ 37,129 $ 45,814 $ 24,604
=========== ========= =========

Earnings Per Share
Earnings before extraordinary item . . . . . . . . . . . . . . . $.71 $ .87 $ .58
---- ----- -----
Extraordinary item . . . . . . . . . . . . . . . . . . . . . . . - - (.10)
---- ----- -----
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . $.71 $ .87 $ .48
==== ===== =====

Average Common Shares Outstanding . . . . . . . . . . . . . . . . 52,044 52,696 51,004
====== ====== ======
</TABLE>

- ------------
The accompanying notes are an integral part of these financial statements.

42
<PAGE> 45
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Mitchell Energy & Development Corp. and Subsidiaries
For the Years Ended January 31, 1996, 1995 and 1994 (dollar amounts in
thousands)

<TABLE>
<CAPTION>
Additional
Common Paid-in Retained Treasury
Stock Capital Earnings Stock Total
--------- ---------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
Dollar Amounts
Balance, January 31, 1993 . . . . . . . . . . . . $ 4,796 $ 20,347 $ 329,835 $ (16,560) $338,418
Issuance of common stock (Note 8) . . . . . . . . 590 122,839 - - 123,429
Net earnings . . . . . . . . . . . . . . . . . . - - 24,604 - 24,604
Cash dividends (48 cents per share on
Class A and 53 cents per share on Class B) . . - - (25,942) - (25,942)
Exercises of stock options . . . . . . . . . . . - 254 - 2,474 2,728
--------- --------- --------- --------- --------
Balance, January 31, 1994 . . . . . . . . . . . . 5,386 143,440 328,497 (14,086) 463,237
Net earnings . . . . . . . . . . . . . . . . . . - - 45,814 - 45,814
Cash dividends (48 cents per share on
Class A and 53 cents per share on Class B) . . - - (26,738) - (26,738)
Treasury stock purchases . . . . . . . . . . . . - - - (7,635) (7,635)
Exercises of stock options . . . . . . . . . . . - 32 - 320 352
--------- --------- --------- --------- --------
Balance, January 31, 1995 . . . . . . . . . . . . 5,386 143,472 347,573 (21,401) 475,030
Net earnings . . . . . . . . . . . . . . . . . . - - 37,129 - 37,129
Cash dividends (48 cents per share on
Class A and 53 cents per share on Class B) . . - - (26,421) - (26,421)
Treasury stock purchases . . . . . . . . . . . . - - - (4,227) (4,227)
Exercises of stock options . . . . . . . . . . . - (202) - 594 392
--------- --------- --------- --------- --------
Balance, January 31, 1996 . . . . . . . . . . . . $ 5,386 $ 143,270 $ 358,281 $ (25,034) $481,903
========= ========= ========= ========= ========
</TABLE>

<TABLE>
<CAPTION>
Common Stock Issued Treasury Stock
------------------------- -----------------------
Class A Class B Class A Class B
---------- ---------- -------- ---------
<S> <C> <C> <C> <C>
Share Amounts
Balance, January 31, 1993 . . . . . . . . . . . . 23,978,146 23,978,146 518,968 787,368
Issuance of common stock . . . . . . . . . . . . - 5,900,000 - -
Exercises of stock options . . . . . . . . . . . - - (101,138) (94,887)
Other . . . . . . . . . . . . . . . . . . . . . . (29) (29) (353) (353)
---------- ---------- -------- ---------
Balance, January 31, 1994 . . . . . . . . . . . . 23,978,117 29,878,117 417,477 692,128
Treasury stock purchases . . . . . . . . . . . . - - 272,300 216,700
Exercises of stock options . . . . . . . . . . . - - (12,200) (12,350)
Other . . . . . . . . . . . . . . . . . . . . . . (13) (13) - -
---------- ---------- -------- ---------
Balance, January 31, 1995 . . . . . . . . . . . . 23,978,104 29,878,104 677,577 896,478
Treasury stock purchases . . . . . . . . . . . . - - 94,100 173,500
Exercises of stock options . . . . . . . . . . . - - (21,398) (23,921)
Other . . . . . . . . . . . . . . . . . . . . . . (9) (9) - -
---------- ---------- -------- ---------
Balance, January 31, 1996 . . . . . . . . . . . . 23,978,095 29,878,095 750,279 1,046,057
========== ========== ======== =========
</TABLE>

- ------------
The accompanying notes are an integral part of these financial statements.

43
<PAGE> 46
CONSOLIDATED STATEMENTS OF CASH FLOWS

Mitchell Energy & Development Corp. and Subsidiaries
For the Years Ended January 31, 1996, 1995 and 1994 (in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Operating Activities
Earnings before extraordinary item . . . . . . . . . . . . . . . . . $ 37,129 $ 45,814 $ 30,030
Adjustments to reconcile earnings before extraordinary
item to cash provided by operating activities
Depreciation, depletion and amortization . . . . . . . . . . . . 158,596 140,724 121,860
Exploration expenses, including dry-hole costs . . . . . . . . . 14,752 13,307 29,969
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . (6,759) 17,691 5,353
Cost of land sold . . . . . . . . . . . . . . . . . . . . . . . 33,404 32,449 33,367
Residential land development costs, net of reimbursements . . . (14,642) (16,395) (14,303)
Distributions in excess of earnings of equity investees . . . . 6,795 19,233 13,849
Amortization of deferred natural gas
contract restructuring proceeds . . . . . . . . . . . . . . . (5,950) (16,510) (18,723)
Non-cash portion of natural gas contract buyout gain . . . . . . (162,689) - -
Write-downs of real estate properties . . . . . . . . . . . . . 123,916 5,661 -
Accrued personnel reduction program/restructuring costs . . . . 11,128 5,235 -
Gains from property sales . . . . . . . . . . . . . . . . . . . (25,439) (52,612) -
Litigation provision . . . . . . . . . . . . . . . . . . . . . . 15,000 - -
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,051 11,359 (5,159)
--------- --------- ---------
192,292 205,956 196,243
Changes in operating assets and liabilities
Receivables . . . . . . . . . . . . . . . . . . . . . . . . 29,879 (1,012) 4,071
Inventories . . . . . . . . . . . . . . . . . . . . . . . . 804 3,832 (1,728)
Payables . . . . . . . . . . . . . . . . . . . . . . . . . . 8,532 (32,687) (29,075)
Accrued liabilities and other . . . . . . . . . . . . . . . 2,687 (6,453) (1,469)
--------- --------- ---------
Cash provided by operating activities 234,194 169,636 168,042
--------- --------- ---------
Investing Activities
Capital and exploratory expenditures
Total on accrual basis (including $78,251 in 1994
related to the buyout of MEC Development, Ltd.) . . . . . . . (246,083) (219,575) (354,080)
Residential land development costs deducted above . . . . . . . 14,642 16,395 14,303
Adjustment to cash basis . . . . . . . . . . . . . . . . . . . . (4,012) (4,575) 21,125
--------- --------- ---------
(235,453) (207,755) (318,652)
Proceeds from sales of real estate properties . . . . . . . . . . . 62,176 - -
Proceeds from sales of major energy assets . . . . . . . . . . . . 32,569 152,000 -
Proceeds from other sales of property, plant and equipment . . . . 7,178 10,920 8,625
Acquisition of leased equipment . . . . . . . . . . . . . . . . . . (9,167) - -
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,900) (1,326) (286)
--------- --------- ---------
Cash used for investing activities . . . . . . . . . . . . . . (144,597) (46,161) (310,313)
--------- --------- ---------
Financing Activities
Proceeds from issuance of debt . . . . . . . . . . . . . . . . . . 50,000 117,734 351,728
Debt repayments . . . . . . . . . . . . . . . . . . . . . . . . . . (98,387) (209,428) (311,813)
Cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . (26,421) (26,738) (25,942)
Net proceeds from issuance of Class B common stock (Note 8) . . . . - - 123,429
Treasury stock purchases . . . . . . . . . . . . . . . . . . . . . (4,227) (7,635) -
Debt prepayment premium . . . . . . . . . . . . . . . . . . . . . . - (6,420) -
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,193) (853) (1,396)
--------- --------- ---------
Cash provided by (used for) financing activities . . . . . . . (80,228) (133,340) 136,006
--------- --------- ---------
Increase (Decrease) in Cash and Cash Equivalents . . . . . . . . . 9,369 (9,865) (6,265)
Cash and Cash Equivalents, beginning of year . . . . . . . . . . . 11,967 21,832 28,097
--------- --------- ---------
Cash and Cash Equivalents, end of year . . . . . . . . . . . . . . $ 21,336 $ 11,967 $ 21,832
========= ========= =========
</TABLE>

- ------------
The accompanying notes are an integral part of these financial statements.

44
<PAGE> 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Mitchell Energy & Development Corp. and Subsidiaries
January 31, 1996, 1995 and 1994

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of consolidation. 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.

Use of estimates. 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.

Adoption of Statement of Financial Accounting Standards (SFAS) Nos. 121 and
123. SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," requires that long-lived assets to be
held and used by an entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. When it is determined that an asset's estimated future net cash
flows will not be sufficient to recover its carrying amount, an impairment
charge must be recorded to reduce the carrying amount for that asset to its
estimated fair value. As is more fully discussed in Note 10, the Company
adopted SFAS No. 121 effective January 31, 1996.

The Company will adopt SFAS No. 123, "Accounting for Stock-based
Compensation," during fiscal 1997 using the proforma disclosure method
described in the pronouncement. Accordingly, adoption of the statement will not
affect the Company's financial statements but will add to its footnote
disclosures.

Property, plant and equipment. The Company's exploration and production
activities are accounted for using the "successful efforts" method. Under the
successful efforts method, lease acquisition costs are capitalized as are costs
to drill and equip development wells, including unsuccessful ones. Exploratory
drilling costs are initially capitalized; if proved reserves are not found,
such costs are subsequently expensed. Geological and geophysical costs and
other exploration costs are charged to expense as incurred.

The Company currently holds no unproved leases whose costs are individually
significant. The aggregate costs of individually insignificant unproved
leaseholds estimated to be non-productive are amortized on a straight-line
basis over estimated holding periods based on historical experience. As
unproved properties are determined to be productive, the related costs are
transferred to proved oil and gas properties.

Depreciation, depletion and amortization (DD&A) of proved oil and gas
properties is determined on a field-by-field basis using physical units of
production. Estimated future costs of dismantlement, restoration and
abandonment are considered in determining DD&A expense. Impairment computations
for proved oil and gas properties are performed on a field-by-field basis.
Charges for such impairments, which totaled $11,516,000, $4,718,000 and
$13,649,000 in fiscal 1996, 1995 and 1994, are included in DD&A expense.

Other property, plant and equipment additions are recorded at cost and
depreciated on the straight-line method over the estimated service lives of the
various assets, which range from 3 to 25 years. Maintenance and repair costs
are charged to expense; costs of renewals and betterments are capitalized.

Real estate operations. Costs associated with the acquisition and development
of real estate, including holding costs, are capitalized as incurred.
Capitalization of holding costs, principally interest and ad valorem taxes, is
limited to properties for which active development continues. Where practical,
capitalized costs are specifically assigned to individual assets; otherwise,
such costs are allocated based on estimated values of the affected assets.
Depreciable real estate assets are depreciated on the straight-line method over
estimated useful lives ranging from 3 to 50 years.

45
<PAGE> 48
Earnings from sales of real estate are recognized when a buyer has made an
adequate cash down payment and has attained the attributes of ownership. Notes
received in connection with land sales are discounted when the stated purchase
prices are significantly different from those which would have resulted from
similar cash transactions. The cost of land sold is generally determined as a
specific percentage of the sales revenues recognized for each land development
project. These percentages are based on total estimated development costs and
sales revenues for each project. The specific identification method is used to
determine the cost of land sold for certain land parcels located outside The
Woodlands.

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.

Environmental expenditures. Liabilities for these expenditures are recognized
when it is probable that obligations have been incurred in amounts that are
material and reasonably estimable.

Earnings per common share. Earnings per common share have been computed by
dividing net earnings by the weighted average number of common shares
outstanding during each period. After giving effect to the differing cash
dividends paid on Class A and Class B shares, net earnings per share were $.69
for Class A and $.74 for Class B (versus $.71 on a combined basis) in fiscal
1996 and $.84 for Class A and $.89 for Class B (versus $.87 on a combined
basis) in fiscal 1995. For fiscal 1994, earnings per share before extraordinary
item were $.56 for Class A and $.61 for Class B (versus $.58 on a combined
basis) while net earnings per share were $.46 for Class A and $.51 for Class B
(versus $.48 on a combined basis). The dilutive effect of outstanding stock
options, which was less than 3% for all years presented, has not been included
in the earnings-per-share computations.

Statements of Cash Flows. Short-term investments with maturities of three
months or less are considered to be cash equivalents. The reported amounts for
proceeds from issuance of debt and debt repayments exclude the impact of
borrowings with initial terms of three months or less. Interest paid--exclusive
of amounts capitalized, but including amounts reported as cost of sales for
finance operations--totaled $36,936,000, $40,058,000 and $38,052,000 during
fiscal 1996, 1995 and 1994. Income taxes paid during these periods, including
those resulting from the July 1995 natural gas contract settlement proceeds
(see Note 10), totaled $23,900,000, $9,760,000 and $12,840,000. Woodlands
Office Equities - '95 Limited, 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 three-year period ended January
31, 1996.

Reclassifications. Certain reclassifications of amounts previously reported
have been made to conform to the current year's presentation.

NOTE 2 PROPERTY, PLANT AND EQUIPMENT

The cost and net book value of property, plant and equipment consisted of the
following at January 31, 1996 and 1995 (in thousands):

<TABLE>
<CAPTION>
Cost Net Book Value
-------------------------- --------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Exploration and Production
Oil and gas properties . . . . . . . . . . . . . . . $ 1,564,852 $ 1,525,587 $ 515,383 $ 487,981
Support equipment and facilities . . . . . . . . . . 55,961 68,941 22,591 28,340
----------- ----------- ----------- -----------
1,620,813 1,594,528 537,974 516,321
----------- ----------- ----------- -----------
Gas Services (including investments
in equity partnerships) (Note 4)
Natural gas processing . . . . . . . . . . . . . . . 172,496 222,755 57,301 100,139
Natural gas gathering . . . . . . . . . . . . . . . . 201,962 184,728 86,356 92,725
Other . . . . . . . . . . . . . . . . . . . . . . . 30,061 18,544 29,206 17,794
----------- ----------- ----------- -----------
404,519 426,027 172,863 210,658
----------- ----------- ----------- -----------
Corporate . . . . . . . . . . . . . . . . . . . . . . 15,207 15,042 8,698 7,120
----------- ----------- ----------- -----------
$ 2,040,539 $ 2,035,597 $ 719,535 $ 734,099
=========== =========== =========== ===========
</TABLE>

See Note 10 for information concerning asset write-downs and asset sales.

46
<PAGE> 49
Note 3 REAL ESTATE

In accordance with industry accounting practice, real estate assets are
reported as long-term assets in the consolidated balance sheets. Such
assets--including, where applicable, the Company's net investments in equity
partnerships-- consisted of the following at January 31, 1996 and 1995 (in
thousands):
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
The Woodlands
Land development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 502,121 $ 489,863
Commercial properties, net of accumulated depreciation of $35,544 and $47,752 . . . . 93,029 127,622
Equity investments and property management . . . . . . . . . . . . . . . . . . . . . 29,406 23,396
Notes and contracts receivable and other . . . . . . . . . . . . . . . . . . . . . . 44,857 48,108
--------- ---------
669,413 688,989
Other properties, net of accumulated depreciation of $2,191 and $7,889 . . . . . . . 93,421 228,901
--------- ---------
$ 762,834 $ 917,890
========= =========
</TABLE>

The Company's real estate activities are concentrated in The Woodlands, a
planned community located north of Houston, which is being developed on
approximately 25,000 acres. Consequently, these operations and the associated
credit risks may be affected, either positively or negatively, by changes in
economic conditions in this geographical area. Activities associated with The
Woodlands include residential and commercial land sales; the construction and
operation of office and industrial buildings, apartments, retail shopping
centers, golf courses and a conference center; and the mortgage banking
operations of a wholly owned subsidiary, Mitchell Mortgage Company.

As discussed in Note 10, the Company adopted a revised business plan during
fiscal 1996 that called for the disposal of most of its real estate properties
located outside The Woodlands. The substantial year-to-year reduction in the
carrying values of "other properties" resulted from write-downs and sales of
these properties. At January 31, 1996, other real estate properties totaling
29,987 acres include certain resort properties in the Houston area and land
held for sale which is located in Houston, on Galveston Island and in Colorado.

NOTE 4 EQUITY INVESTMENTS

During the three-year period ended January 31, 1996, the Company's principal
partnership interests included the following:
<TABLE>
<CAPTION>
Ownership
Percentage Nature of Operations
---------- ----------------------------------
<S> <C> <C>
Energy Operations
Austin Chalk Natural Gas Marketing Services 45 Natural gas marketing
Belvieu Environmental Fuels (BEF) 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 natural gas liquids
U. P. Bryan 45 Natural gas processing
MEC Development, Ltd. (terminated after its
buyout by the Company effective May 1, 1993) 45 Oil and gas producing properties

Real Estate Operations
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 Hotel Limited (liquidated
after the hotel was sold in January 1996) 50 Resort hotel in Galveston, Texas
</TABLE>

The Company's net investment in each of these entities is included in the
applicable caption of property, plant and equipment (see Note 2) or real estate
(see Note 3). 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

47
<PAGE> 50
partnerships at January 31, 1996 and 1995 and its equity in their pretax
earnings (losses) for the years ended January 31, 1996, 1995 and 1994 follows
(in thousands):
<TABLE>
<CAPTION>
Net Investment Equity in Pretax Earnings (Losses)
----------------------- ------------------------------------
1996 1995 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
EXPLORATION AND PRODUCTION
MEC Development, Ltd. . . . . . . . . . . . . . $ - $ - $ - $ - $ 3,594
========= ========= ========= ========= =========
Gas Services
Austin Chalk Natural Gas Marketing Services . . $ 2,531 $ 1,558 $ 973 $ 1,517 $ 3,476
Belvieu Environmental Fuels . . . . . . . . . . 21,702 13,586 8,116 (1,080) -
C&L Processors Partnership . . . . . . . . . . 14,147 16,373 429 (346) 4,796
Ferguson-Burleson County Gas Gathering System . 58,331 45,890 7,913 4,297 8,208
Gulf Coast Fractionators . . . . . . . . . . . 5,530 2,112 1,810 (1,338) 1,932
U.P. Bryan . . . . . . . . . . . . . . . . . . 7,180 8,272 7,669 6,544 1,739
Others . . . . . . . . . . . . . . . . . . . . 152 1,599 (205) (3,604) 418
--------- --------- --------- --------- ---------
$ 109,573 $ 89,390 $ 26,705 $ 5,990 $ 20,569
========= ========= ========= ========= =========
REAL ESTATE
Grogan's Mill Apartments . . . . . . . . . . . $ 3,744 $ 3,849 $ 338 $ 174 $ 34
The Woodlands Mall Associates . . . . . . . . . 8,161 10,414 898 227 (99)
Woodlands Office Equities - '95 Limited . . . . 9,306 - 818 - -
Other partnerships (which own commercial
properties in The Woodlands) . . . . . . . . 7,237 7,621 593 526 373
Lake Catamount Joint Venture . . . . . . . . . 11,504 11,590 (639) (70) (108)
The Fort Crockett Hotel Limited
(liquidated in January 1996) . . . . . . . . - 9,181 (763) (1,057) (1,114)
--------- --------- --------- --------- ---------
$ 39,952 $ 42,655 $ 1,245 $ (200) $ (914)
========= ========= ========= ========= =========
</TABLE>

The following paragraphs present summarized financial statement information,
which is generally reported on a one-month lag, for all entities accounted for
on the equity method. Summarized balance sheet information for these entities
at January 31, 1996 and 1995 (on a 100% basis) follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
---------------------- ----------------------
<S> <C> <C> <C> <C>
Current assets . . . . . . . . . . . . . . . . . . . . . . . $ 134,325 $ 98,004
Net noncurrent assets
Energy . . . . . . . . . . . . . . . . . . . . . . . . . . 568,028 543,203
Real estate . . . . . . . . . . . . . . . . . . . . . . . 202,165 199,152
Current liabilities . . . . . . . . . . . . . . . . . . . . . 99,120 87,100
Debt payable to third parties
The Company's proportionate share
Recourse to the Company . . . . . . . . . . . . . . . . $ 66,688 $ 137,200
Nonrecourse to the Company . . . . . . . . . . . . . . . 123,676 72,217
Other parties' proportionate share ($31,417 of which
was guaranteed by the Company at January 31, 1996) . . . 274,563 464,927* 288,547 497,964*
---------- ---------
Notes payable to owners (including
$12,468 and $13,257 payable to the Company) . . . . . . . 13,763 14,359
Deferred credits and other . . . . . . . . . . . . . . . . . 1,153 541
Owners' equity . . . . . . . . . . . . . . . . . . . . . . . 325,555 240,395
</TABLE>

- -------------------
* Includes current maturities of $73,891 in 1996 and $44,425 in 1995 (increase
relates to BEF, whose debt was converted to a term loan in fiscal 1996).

Summarized earnings information for these entities for the years ended January
31, 1996, 1995 and 1994 follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 572,173 $ 416,129 $ 505,120
Operating earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . 92,224 20,194 71,223
Pretax earnings (before interest expense for those entities whose
activities are funded by capital contributions of the owners) . . . . 55,946 5,683 56,883
</TABLE>

48
<PAGE> 51
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 January 31, 1996 and 1995 and the Company's
proportionate share of such debt at January 31, 1996 is summarized as follows
(in thousands):
<TABLE>
<CAPTION>
1996 -- Company's Share
Entity Total --------------------------------
---------------------- Non-
1996 1995 Recourse recourse Total
---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
ENERGY ACTIVITIES
Belvieu Environmental Fuels . . . . . . . . . . . . $ 176,000 $ 176,000 $ 6,667 $ 52,000 $ 58,667
C&L Processors Partnership . . . . . . . . . . . . 86,209 101,209 23,276 19,829 43,105
Gulf Coast Fractionators . . . . . . . . . . . . . 74,250 79,550 3,028 25,744 28,772
---------- --------- --------- --------- ---------
336,459 356,759 32,971 97,573 130,544
---------- --------- --------- --------- ---------
REAL ESTATE ACTIVITIES
Grogan's Mill Apartments . . . . . . . . . . . . . 18,799 19,158 - 9,401 9,401
The Woodlands Mall Associates . . . . . . . . . . . 59,126 54,683 29,563 - 29,563
Woodlands Office Equities - O95 Limited . . . . . . 12,666 - 1,900 1,267 3,167
The Fort Crockett Hotel Limited . . . . . . . . . . - 11,592 - - -
Other partnerships (which own commercial
properties in The Woodlands) . . . . . . . . . . 37,877 55,772 2,254 15,435 17,689
---------- --------- --------- --------- ---------
128,468 141,205 33,717 26,103 59,820
---------- --------- --------- --------- ---------
$ 464,927 $497,964 $ 66,688 $ 123,676 $ 190,364
========== ======== ========= ========= =========
</TABLE>

Belvieu Environmental Fuels owns a plant with the capacity to produce up to
16,000 barrels per day of MTBE, a gasoline additive that reduces carbon
monoxide emissions. Construction of this $225,000,000 facility, located at Mont
Belvieu, Texas, was funded using proceeds of the partnership's loan agreement
and capital contributions of the partners. During the third quarter of fiscal
1996, the loan agreement was converted to a five-year term loan maturing May
31, 2000. BEF has entered into agreements which require each of the three
partners to provide one-third of the plant's isobutane feedstock and one of the
partners, Sun Company, Inc., to purchase all of its production for a period
extending through September 2004.

The Company and its partner, Conoco, Inc., have each agreed to make
aggregate future cash contributions to C&L Processors Partnership (C&L) of up
to 27% of the partnership's loan balance should the partnership's operating
cash flows not be sufficient to cover scheduled principal and interest
payments. The partners made net cash advances to C&L of $4,836,000 and
$9,000,000 in calendar 1995 and 1994 in the form of capital contributions and
subordinated loans. Projections indicate that additional advances from the
partners will be needed in future periods.

Gulf Coast Fractionators (GCF) executed an $85,000,000 bank term loan
agreement in June 1993. The primary uses of the loan proceeds were to fund a
$40,000,000 expansion of GCF's fractionator and $40,000,000 in cash
distributions to the partners, of which the Company's share was $15,500,000. In
connection with the 40,000-barrel-per-day expansion, Conoco, Inc. became a
22.5% owner of GCF and the Company's ownership was reduced from 50% to 38.75%.
Each partner also has executed long-term contracts with GCF for the
fractionation of production from certain of its gas processing plants.

The Woodlands Mall Associates is owned equally by the Company and General
Growth Properties, who operates the 345,000-square-foot gross leasable area
owned by the partnership which is part of a one million square foot regional
shopping mall that opened in October 1994. The partnership's $65,000,000 bank
loan, which matures in January 1999, is secured by the property and the joint
and several guaranties of the partners.

49
<PAGE> 52
NOTE 5 LONG-TERM DEBT

The Company's outstanding debt includes parent company borrowings, the proceeds
of which have been advanced to the operating subsidiaries, and the direct
borrowings of certain subsidiaries. Allocation of the parent company advances
among the subsidiaries changes in response to the specific financing needs of
the subsidiaries and the parent company. A summary of outstanding long-term
debt at January 31, 1996 and 1995 follows (in thousands):

<TABLE>
<CAPTION>
1996
------------------------------------
Energy Real Estate 1995
Operations Operations Total Total
---------- ----------- -------- ---------
<S> <C> <C> <C> <C>
Parent Company Senior Notes, Unsecured
5.10%, due February 15, 1997 . . . . . . . . . . . . . . . $100,000 $ 100,000
8%, due July 15, 1999 . . . . . . . . . . . . . . . . . . . 100,000 100,000
9 1/4%, due January 15, 2002 . . . . . . . . . . . . . . . 250,000 250,000
6 3/4%, due February 15, 2004 . . . . . . . . . . . . . . . 250,000 250,000
-------- ---------
$280,727* $419,273* 700,000 700,000
Subsidiary Borrowings
Bank revolving credit agreements, unsecured
Energy/Real Estate committed facilities . . . . . . . . 15,000 30,000 45,000 120,000
Mitchell Mortgage Company,
$18 million, at floating interest rates . . . . . . . - 15,000 15,000 14,500
Uncommitted money market facilities, at floating
interest rates . . . . . . . . . . . . . . . . . . . . . 50,000 - 50,000 -
Unsecured term loan, 7.98%, due in May 1997 . . . . . . . . 30,000 - 30,000 30,000
Commercial paper (repaid in 1996) . . . . . . . . . . . . . - - - 22,000
Mortgages, 9.6% average rate . . . . . . . . . . . . . . . - 5,396 5,396 20,079
--------- --------- -------- ---------
375,727 469,669 845,396 906,579
Less - Amounts reported as short-term debt . . . . . . . . - 13,732 13,732 11,617
--------- --------- -------- ---------
$ 375,727 $ 455,937 $831,664 $ 894,962
========= ========= ======== =========
</TABLE>

- ------------
* Intercompany loans from parent company.

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 7,
which facility will be used in the appeal of a $204 million judgment against
the Company. Additional letters of credit can be issued under this facility, if
required, during a three-year period ending in April 1999, and any amounts
drawn against the letters of credit are payable in April 2000.

In connection with entering into the letter of credit facility, the
Company's bank revolving credit agreements were also revised in April 1996 to
provide committed facilities aggregating $200 million for the Company's Energy
and Real Estate operations. The Company had $167,900,000 in additional
borrowing capacity available after the agreements were revised. Borrowings
under the bank revolving credit agreements are payable in April 2000. Interest
rates are based on spreads over the London Interbank Offered Rate and the
prevailing certificate of deposit rate or prime. Such rates vary based on the
highest of the ratings given the Company's senior notes by two specified rating
agencies. The Company compensates the banks for the unused portions of these
facilities by paying specified fees.

The Company's senior notes have no sinking fund requirements and are not
redeemable prior to their respective maturity dates. The bank credit agreements
contain certain restrictions which, among other things, require consolidated
stockholders' equity to equal at least $300,000,000. Consequently, retained
earnings available for the payment of cash dividends totaled $181,903,000 at
January 31, 1996. The credit agreements also require the maintenance of
specified financial and asset value-to-debt ratios. These agreements and/or the
senior notes indenture also limit the amounts of additional borrowings and
letters of credit, restrict the sale or lease of certain assets and limit the
right of the parent company and certain subsidiaries to merge with other
companies.

50
<PAGE> 53
Debt maturities for the five fiscal years subsequent to January 31, 1996,
excluding amounts reported as short-term debt, are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999 2000 2001
---------- --------- -------- --------- ----------
<S> <C> <C> <C> <C> <C>
Senior notes . . . . . . . . . . . . . . . . . . . $ - $ 100,000 $ - $ 100,000 $ -
Bank revolving credit agreements (includes borrowings
outstanding under money market facilities) . . . - - 1,268 - 95,000
Unsecured term loan . . . . . . . . . . . . . . . . - 30,000 - - -
Mortgages . . . . . . . . . . . . . . . . . . . . . 327 325 265 55 56
---------- --------- -------- --------- ----------
$ 327 $ 130,325 $ 1,533 $ 100,055 $ 95,056
========== ========= ======== ========= ==========
</TABLE>

Subsequent to January 31, 1996, borrowings outstanding under the Company's
money market facilities were refinanced under its bank revolving credit
agreements. Bank revolving credit agreement maturities are based on present
maturity dates, which may be extended. The fiscal 1997 debt maturities shown
above are included in noncurrent liabilities in the consolidated balance sheets
since they can be refunded by borrowing under credit agreements having no
fiscal 1997 maturities.

NOTE 6 INCOME TAXES

Exclusive of the tax benefit attributable to the extraordinary charge discussed
in Note 13, income taxes for the years ended January 31, 1996, 1995 and 1994
consist of the following (in thousands):

<TABLE>
<CAPTION>
1996 1995 1994
-------- ------- --------
<S> <C> <C> <C>
Current
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 24,541 $ 3,407 $ 8,805
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,420 3,639 3,188
-------- ------- --------
27,961 7,046 11,993
-------- ------- --------
Deferred
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9,494) 15,175 7,749
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,735 2,516 (2,396)
-------- ------- --------
(6,759) 17,691 5,353
-------- ------- --------
$ 21,202 $24,737 $ 17,346
======== ======= ========
</TABLE>

The Omnibus Budget Reconciliation Act of 1993, which was signed into law during
August 1993, increased the corporate statutory Federal income tax rate from 34%
to 35%. The principal financial statement impact of this rate change was a
fiscal 1994 charge of $6,574,000 to increase the liability for deferred Federal
income taxes by an amount equal to 1% of the aggregate cumulative difference
between the book and tax bases of the Company's assets and liabilities.

Reconciliations from the 35% statutory Federal income tax rate to the
Company's effective income tax rate (exclusive of the tax benefit attributable
to an extraordinary charge in 1994) for the fiscal years 1996, 1995 and 1994
follow:

<TABLE>
<CAPTION>
1996 1995 1994
---- ---- -----
<S> <C> <C> <C>
Statutory Federal income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . 35.0% 35.0% 35.0%
State income taxes, net of Federal income tax benefit . . . . . . . . . . . . . . . . . 6.8 5.6 1.1
Federal tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6.4) (5.4) (10.8)
Utilization of tax carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . - - (2.2)
Increase in corporate statutory Federal income tax rate . . . . . . . . . . . . . . . . - - 13.9
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9 (.1) (.4)
---- ---- -----
36.3% 35.1% 36.6%
==== ==== =====
</TABLE>

Federal tax credits consist principally of amounts available under Section 29
of the Internal Revenue Code for natural gas produced from certain wells. The
fiscal 1994 provision for deferred Federal income taxes was reduced by
$1,054,000 when certain tax carryforwards were estimated to be utilizable that
previously had been expected to expire.

51
<PAGE> 54
The principal components of the Company's deferred income tax liability
include the following at January 31, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Real estate holding costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 135,062 $ 183,103
Oil and gas acquisition, exploration and development costs
deducted for tax purposes in excess of financial statement DD&A . . . . . . . . . . 86,896 60,088
Depreciation of other property, plant and equipment . . . . . . . . . . . . . . . . . . 32,163 60,975
Business tax credit carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,284) (33,255)
Unused alternative minimum tax credits . . . . . . . . . . . . . . . . . . . . . . . . (28,471) (30,105)
Employee benefits expense not deductible for tax purposes . . . . . . . . . . . . . . . (19,507) (17,276)
Natural gas contract restructuring proceeds . . . . . . . . . . . . . . . . . . . . . . - (12,256)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,951) (10,552)
--------- ---------
$ 193,908 $ 200,722
========= =========
</TABLE>

At January 31, 1996, the Company had business tax credit carryforwards
(consisting principally of investment tax credits) of $7,284,000, substantially
all of which expire during the fiscal years 1997 through 2001, and $28,471,000
of unused alternative minimum tax credits that can be carried forward
indefinitely. These carryforwards have been recognized in the calculation of
financial statement tax provisions. Accordingly, their utilization reduces only
the amount of taxes currently payable, not the aggregate financial statement
provision for income taxes.

NOTE 7 COMMITMENTS AND CONTINGENCIES

North Texas water well litigation. On March 1, 1996, a judgment was entered
against a subsidiary of the Company by a Wise County, Texas court awarding
$4,051,760 in actual damages (consisting of $339,266 for economic damages and
$3,712,494 for pain, mental anguish, inconvenience, etc.) and $200,000,000 in
exemplary damages to eight plaintiff groups, who claimed that the natural gas
operations of the subsidiary had affected their water wells.

The Company believes scientific evidence indicates that its operations were
not the source of the alleged problems. Further, the economic damages were not
large relative to the total judgment, and no long-term medical problems were
even alleged. Arrangements have been made to provide the surety bonds required
to appeal this case, and the Company will take every possible step to overturn
this judgment. The Company and its outside counsel believe there are numerous
legal bases for a complete reversal on appeal by rendition of a judgment in the
Company's favor or a reversal and remand of the case for a new trial. In any
event, the Company and its outside counsel believe that the judgment will be
reversed or significantly reduced upon completion of the appeals process.

In addition, similar lawsuits each claiming damages of more than $1,000,000
have been brought by 29 other plaintiff groups. Of such suits, 17 have been
combined and set for trial in June 1996, another has been set for trial in
August 1996 and trial dates have not been set for the 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 and
other costs required to appeal the judgment to the highest possible level and
to defend the Company in the other suits. However, based on its current
assessment, an amount for disposition of this litigation was also included in
the accrual.

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,

52
<PAGE> 55
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. Because of uncertainties regarding the Company's ultimate
liability and when the alleged problems occurred and because of the large
number of insurance carriers that might be involved, the Company is presently
unable to estimate the magnitude of any such insurance proceeds or the timing
of any such recoveries.

Other litigation or potential litigation. Legal actions have been brought or
threatened against the Company by 59 home owners in The Woodlands and against
certain developers, governmental entities and the Company by 64 property owners
in surrounding communities related to flooding in the North Houston area in
October 1994. These claimants generally are seeking reimbursements for property
damages, but some are making claims for deceptive trade practices or mental
anguish or are claiming that the Company contributed to the flooding of their
homes. The Company contends that it was not responsible for these damages,
which it believes resulted from a record, near 500-year flood and were not
preventable with the exercise of ordinary care and generally accepted drainage
design. The Company and its outside counsel believe it is not probable that the
Company will incur losses in connection with these legal actions that will be
material to its financial statements.

On November 21, 1995, a jury in a District Court in Beaumont, Texas,
rendered a judgment against the Company finding that, by using the surface of a
tract of land for a gas storage project, it had unreasonably prevented the
plaintiff from developing its oil rights. The judgment included approximately
$1,600,000 in actual damages, interest and costs plus $3,000,000 in exemplary
damages. The Company and its outside legal counsel believe it is probable that
the judgment will be overturned or its amount significantly reduced upon
completion of the appeals process.

A group of plaintiffs' attorneys is attempting to convert to class-action
status a lawsuit that challenges the Company's royalty payment practices in
North Texas. The Company believes that its royalty payment practices have been
appropriate and will aggressively defend itself against any such litigation.
Because of the limited discovery and factual investigation that has taken place
to date, it is not possible to evaluate the range of possible exposure.
However, based on the information presently available, the Company and its
outside counsel believe it is not probable that the Company will incur losses
in connection with this litigation that will be material to its financial
statements.

The Company also is party to other claims and legal actions arising in the
ordinary course of its business and to recurring examinations performed by the
Internal Revenue Service and other regulatory agencies. While the outcome of
such matters cannot be predicted with certainty, management expects that
losses, if any, resulting from the ultimate resolution of the matters discussed
in this paragraph will not be material to the Company's financial statements.

Environmental regulations. The Company is considered by the United States
Environmental Protection Agency to be a potentially responsible party with
respect to four Superfund waste disposal sites. The only site involving more
than minimal potential exposure to the Company is the Operating Industries,
Inc. site located in Monterey Park, California, where small amounts of drilling
fluids from Company-operated oil and gas wells were deposited. Although the
Company believes that it should be exempt from liability with respect to this
site, to date it has paid and expensed approximately $335,000 of clean-up
costs. While additional exposure exists for future clean-up and closure costs
of this site, the Company's share of such costs is not expected to be
significant.

While the Company believes it is in substantial compliance with the many
Federal, state and local laws and regulations relating to the protection of the
environment and public health, changes in such laws and regulations are
continually monitored by the Company. Management presently knows of no such
changes that will have a material adverse effect upon the Company's financial
statements.

Mortgage activities. Mitchell Mortgage Company (MMC) administers approximately
$164,000,000 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.

53
<PAGE> 56
Leases and contingent liabilities. The Company has various noncancellable
equipment and facility operating lease agreements which provide for aggregate
future payments of approximately $68,600,000. Minimum rentals for each of the
five years subsequent to fiscal 1996 total approximately $7,400,000,
$7,200,000, $6,800,000, $6,200,000 and $4,800,000. Rental expense for
operating leases was approximately $9,700,000, $10,400,000 and $9,900,000 in
fiscal 1996, 1995 and 1994. Exclusive of obligations described elsewhere in
these notes, the Company had contingent liabilities at January 31, 1996
totaling approximately $17,600,000, which consist primarily of guarantees of
third-party debt.

NOTE 8 COMMON STOCK

The Company has two classes of common stock which are designated Class A and
Class B. Both the Class A and Class B common shares are freely transferable and
are listed on the New York Stock Exchange; neither is convertible into the
other class of common stock or any other security of the Company at the option
of the holder. The Class A shares have full voting rights, whereas the Class B
shares have no voting rights, except as provided by law. The amended Articles
of Incorporation allow cash dividends on Class B shares to be greater, but not
less, than those paid on Class A shares and also contain certain Class B
protection provisions.

In May 1993, the Company sold 5,900,000 shares of its nonvoting Class B
common stock at $21.875 per share. After deducting offering costs, the net
proceeds from the sale totaled approximately $123,400,000. Of the net proceeds,
$78,251,000 was used in connection with the buyout of MEC Development, Ltd. The
remaining proceeds initially were used to pay down borrowings under certain
Energy Division credit agreements. Such amounts subsequently were reborrowed to
fund drilling costs that otherwise would have been expenditures of the
partnership.

NOTE 9 STOCK OPTIONS AND BONUS UNITS

The Company's 1995 Stock Option Plan authorizes the granting of incentive and
nonqualified options to purchase up to a total of 2,500,000 shares of Class B
common stock at prices not less than the market value on the date of grant. The
options have maximum terms of 10 years and become exercisable ratably over a
three-year period. Previously, the Company had granted options under 1979 and
1989 Stock Option Plans, under which no further grants can be made. Almost all
of the earlier grants have been exercised that had associated stock
appreciation rights (SARs) entitling optionees to receive cash payments equal
to the difference between the market value and the option price at the time of
exercise. Summarized stock option information follows:
<TABLE>
<CAPTION>
Exercisable Options
------------------- Shares
Options Average Reserved for
Outstanding Number Price Future Grant
----------- ------- ------- ------------
<S> <C> <C> <C> <C>
At January 31, 1993 . . . . . . . . . . . . . . . . . . . . 404,075 344,375 $ 8.96 437,500
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . 120,000
Exercised (at average price of $8.82 per share) . . . . . . (218,375)
Cancelled . . . . . . . . . . . . . . . . . . . . . . . . . (4,400)
--------
At January 31, 1994 . . . . . . . . . . . . . . . . . . . . 301,300 142,100 $ 9.99 321,900
Exercised (at average price of $8.83 per share) . . . . . . (28,650)
--------
At January 31, 1995 . . . . . . . . . . . . . . . . . . . . 272,650 147,350 $12.40 321,900
Granted under 1995 plan (at $17.625 per share) . . . . . . 477,800
Exercised (at average price of $8.80 per share ) . . . . . (71,150)
Cancelled . . . . . . . . . . . . . . . . . . . . . . . . . (10,050)
--------
At January 31, 1996 . . . . . . . . . . . . . . . . . . . . 669,250 95,650 $17.59 2,022,200
========
</TABLE>

The 1995 Stock Option Plan is to be submitted for approval in connection with
the annual stockholder meeting scheduled for June 26, 1996. The grants under
the 1995 Stock Option Plan shown in the table above are contingent upon
obtaining the subsequent approval of the Company's stockholders. The same is
true for the 2,022,200 Class B shares reserved for future grant, 499,400 of
which were subsequently granted on February 21, 1996 at a price of $18.125 per
share.

In previous years, the Company issued phantom-stock awards, which it called
"bonus units," as a long-term incentive. Upon the redemption of such awards,
grantees receive gross compensation in amounts equal to the difference between
the market price of the Company's common stock and a floor price (the market
price of the stock when the units were awarded). The Company's 1991 Bonus Unit
Plan authorized the issuance of up to 700,000 units, substantially all of which
were granted. These units generally vest in equal annual installments over a
five-year period. At January 31, 1996, grants covering 431,750

54
<PAGE> 57
units with an average floor price of $15.85 were outstanding (329,050 of which
were exercisable). For SARs and bonus units, the Company recognizes
compensation expense over their applicable vesting terms (or reversals to the
extent of previously recorded appreciation in periods when the market price of
the stock declines). Such expense accruals (reversals) aggregated $747,000,
$(1,954,000) and $3,875,000 in fiscal 1996, 1995 and 1994.

NOTE 10 SEGMENT INFORMATION

Industry segment data for the fiscal years ended January 31, 1996, 1995 and
1994 are as follows (in thousands):

<TABLE>
<CAPTION>
Inter- Segment Total Capital Identi-
Outside segment Operating Operating Expendi- fiable
Revenues Revenues Earnings Earnings DD&A tures(a) Assets
---------- --------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
FISCAL 1996
EXPLORATION AND PRODUCTION
Operations . . . . . . . . . . . . . . . $ 214,067 $ - $ 35,775 $ 23,822 $ 93,206 $ 141,667 $ 761,743
Gain from gas contract buyout . . . . . . 205,256 - 205,256 205,256 - - -
Litigation provision (see Note 7) . . . . - - (15,000) (15,000) - - -
Gains from sales of producing
properties and drilling rigs . . . . . 5,338 - 5,338 5,338 - - -
Personnel reduction program costs . . . . - - (7,935) (7,935) - - -
---------- --------- ----------- ---------- ---------- ---------- ----------
424,661 - 223,434 211,481 93,206 141,667 761,743
---------- --------- ----------- ---------- ---------- ---------- ----------
GAS SERVICES
Natural gas processing . . . . . . . . . 283,378 20,808 30,994 27,690 6,725 5,660 92,767
Natural gas gathering and marketing . . . 184,584 103,055 14,063 10,340 6,645 26,119 130,741
Other . . . . . . . . . . . . . . . . . 10,296 - 9,059 8,957 107 6,579 29,543
Asset write-downs . . . . . . . . . . . . - - (52,715) (52,715) 41,330 - -
Personnel reduction program costs . . . . - - (3,600) (3,600) - - -
---------- --------- ----------- ---------- ---------- ---------- ----------
478,258 123,863 (2,199) (9,328) 54,807 38,358 253,051
---------- --------- ----------- ---------- ---------- ---------- ----------
REAL ESTATE
Operations (including a $19,449 gain
from the sale of a 50% partnership
interest in a cable television system) 168,828 6,413 48,848 43,779 7,223 59,990 793,190
Write-downs of properties . . . . . . . . - - (123,916) (123,916) - - -
Personnel reduction program costs . . . . - - (3,000) (3,000) - - -
---------- --------- ----------- ---------- ---------- ---------- ----------
168,828 6,413 (78,068) (83,137) 7,223 59,990 793,190
---------- --------- ----------- ---------- ---------- ---------- ----------
CORPORATE . . . . . . . . . . . . . . . . - - - (20,670)(b) 3,360 6,068 34,885
---------- --------- ----------- ---------- ---------- ---------- ----------
$1,071,747 $ 130,276 $ 143,167 $ 98,346 $ 158,596 $ 246,083 $1,842,869
========== ========= =========== ========== ========== ========== ==========
FISCAL 1995
EXPLORATION AND PRODUCTION (including
a $3,791 gain from sale of drilling
rigs) . . . . . . . . . . . . . . . . $ 277,099 $ - $ 87,906 $ 74,899 $ 96,369 $ 115,073 $ 560,818
---------- --------- ----------- ---------- ---------- ---------- ----------
GAS SERVICES
Natural gas processing . . . . . . . . . 252,159 21,419 23,253 19,723 7,865 14,227 165,647
Natural gas gathering and marketing . . . 180,038 82,875 12,335 8,420 7,898 15,279 134,955
Other . . . . . . . . . . . . . . . . . 6,989 8,509 (846) (1,212) 1,998 5,605 18,737
Gains from major asset sales . . . . . . 48,821 - 48,821 48,821 - - -
Asset write-downs/restructuring charges . - - (31,252) (31,252) 14,832 - -
---------- --------- ----------- ---------- ---------- ---------- ----------
488,007 112,803 52,311 44,500 32,593 35,111 319,339
---------- --------- ----------- ---------- ---------- ---------- ----------
REAL ESTATE
Operations . . . . . . . . . . . . . . . 129,465 6,660 25,793 20,009 8,294 65,123 949,219
Write-downs of properties . . . . . . . . - - (5,661) (5,661) - - -
---------- --------- ----------- ---------- ---------- ---------- ----------
129,465 6,660 20,132 14,348 8,294 65,123 949,219
---------- --------- ----------- ---------- ---------- ---------- ----------
CORPORATE . . . . . . . . . . . . . . . . - - - (15,623)(b) 3,468 4,268 26,495
---------- --------- ----------- ---------- ---------- ---------- ----------
$ 894,571 $ 119,463 $ 160,349 $ 118,124 $ 140,724 $ 219,575 $1,855,871
========== ========= =========== ========== ========== ========== ==========
FISCAL 1994
EXPLORATION AND PRODUCTION
Oil and gas . . . . . . . . . . . . . . . $ 265,798 $ - $ 68,551 $ 56,580 $ 89,793 $ 236,111 $ 568,836
Other . . . . . . . . . . . . . . . . . 368 5,779 (365) (553) 415 343 4,412
---------- --------- ----------- ---------- ---------- ---------- ----------
266,166 5,779 68,186 56,027 90,208 236,454 573,248
---------- --------- ----------- ---------- ---------- ---------- ----------
GAS SERVICES
Natural gas processing . . . . . . . . . 253,605 18,819 20,088 16,363 9,705 6,003 144,987
Natural gas gathering and marketing . . . 296,373 88,744 18,742 14,869 9,352 30,668 244,932
Other . . . . . . . . . . . . . . . . . 10,559 12,766 3,829 3,496 2,651 11,957 37,526
---------- --------- ----------- ---------- ---------- ---------- ----------
560,537 120,329 42,659 34,728 21,708 48,628 427,445
---------- --------- ----------- ---------- ---------- ---------- ----------
REAL ESTATE . . . . . . . . . . . . . . . 126,106 6,620 21,078 15,291 7,282 65,132 930,535
---------- --------- ----------- ---------- ---------- ---------- ----------
CORPORATE . . . . . . . . . . . . . . . . - - - (17,345)(b) 2,662 3,866 38,064
---------- --------- ----------- ---------- ---------- ---------- ----------
$ 952,809 $ 132,728 $ 131,923 $ 88,701 $ 121,860 $ 354,080 $1,969,292
========== ========= =========== ========== ========== ========== ==========
</TABLE>

(a) On accrual basis, including exploratory expenditures.
(b) General corporate expenses, including personnel reduction program costs of
$5,665 in 1996.

55
<PAGE> 58
Intersegment revenues are recorded at prevailing market prices and are
eliminated in consolidation. Substantially all of the Company's operations are
conducted in the United States. The Company's energy revenues are derived
principally from uncollateralized sales to customers in the electrical
generation, gas distribution, petrochemical and oil and gas industries. These
industry concentrations have the potential to impact the Company's exposure to
credit risk, either positively or negatively, because customers may be
similarly affected by changes in economic or other conditions. The
creditworthiness of this customer base is strong, and the Company has not
experienced significant credit losses. Exploration and production and natural
gas gathering and marketing sales to Natural Gas Pipeline Company of America
constituted approximately 10%, 15% and 13% of consolidated revenues,
respectively, during fiscal 1996, 1995 and 1994.

The reported segment operating earnings amounts represent the operating
earnings of the Company's various industry segments before charges for
administrative, accounting, legal, information systems and other costs that are
managed on a company-wide basis. The reported total operating earnings
information was added to the segment disclosure in the current year after an
extensive review of these costs and their relationship to the Company's various
industry segments. In this analysis, all general and administrative expenses
except for general corporate expenses incurred in connection with the overall
management of the Company and the operation of the parent company have been
allocated to the industry segments based on their estimated use of these
services.

Effective July 1, 1995, the Company terminated its North Texas gas sales
contract with Natural Gas Pipeline Company of America (Natural) which had been
scheduled to expire on December 31, 1997. In exchange, it received proceeds
(for itself and other interest owners) consisting of $55,500,000 in cash (which
was used to pay down long-term debt), receivables with discounted values of
$91,608,000 and $82,369,000, respectively, related to payments of $95,000,000
and $91,000,000 due from Natural on February 1, 1996 and 1997 and ownership
(effective in January 1998) of Natural's gathering system that serves 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.

Exploration and production segment operating earnings for fiscal 1996
include gains of $4,338,000 from the sale of certain West Texas producing oil
and gas properties and $1,000,000 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, gas services asset write-downs totaling $52,715,000
were recorded. Of this amount, $7,111,000 was a third-quarter charge that was
recorded to reduce to their net realizable values the carrying values of three
gas processing plants that the Company subsequently sold to a third party in
December. Upon completion of the gas services asset management study and
concurrent with the Company's adoption of SFAS No. 121 effective January 31,
1996, write-downs totaling $45,604,000 were recorded related to various gas
processing and natural gas gathering facilities. The write-downs included
downward adjustments in the estimated fair values of assets held for sale and
charges for certain operating properties whose cash flows had been adversely
impacted in recent periods by volume declines, contractual changes and other
factors which indicated that their capitalized costs would not be recovered.
Ultimately it is possible that a number of these assets will be sold, traded or
combined with assets of third parties in joint ventures. The write-downs of the
operating properties to fair value under the SFAS No. 121 methodology were
approximately $6,800,000 larger than they would have been using the
cost-recovery methodology that was applicable prior to SFAS No. 121.

56
<PAGE> 59
In August 1995, the Company completed a real estate asset management study
and adopted a revised business plan that called 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
these properties to their estimated fair market values, net of disposition
costs. As a result, property write-downs of $112,794,000 were recorded in
fiscal 1996's second quarter and were subsequently increased by $11,122,000 in
the fourth quarter to lower the estimated fair market values, net of
disposition costs, for certain of the properties.

During fiscal 1995, the Company reported a gain of $3,791,000 on the sale
of 16 land drilling rigs for $9,000,000.

Gas services segment revenues and operating earnings for fiscal 1995
include $48,821,000 in gains from the major asset sales. Specifically, the
Company sold its Spindletop gas storage facility, Winnie Pipeline system and a
50% interest in a related gas processing plant for $120,000,000 and its
compression operations, including 370 compressors and associated facilities and
parts inventory, for $35,000,000. Gains of $29,196,000 and $19,625,000 were
recorded on these transactions.

Gas services asset write-downs and restructuring charges totaling
$31,252,000 were recorded during fiscal 1995 in connection with a divisional
restructuring. This restructuring was undertaken because of the adverse
economic environment, particularly prices and margins, experienced during the
last half of fiscal 1994 and early in fiscal 1995. Write-downs of asset
carrying values and accruals of future lease rentals totaling $23,888,000 were
recorded. In addition, a voluntary incentive retirement program was undertaken
to bring the division's employment level in line with the expected future
needs. The costs associated with this program aggregated $7,364,000, most of
which will be paid over an extended period as additional retirement and retiree
medical benefits.

During fiscal 1995's third quarter, certain real estate properties which
had been held for long-term development were written down to net realizable
values. The write-downs, which totaled $5,661,000, were largely related to
undeveloped tracts outside The Woodlands that the Company decided to sell,
rather than develop.

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.

NOTE 11 RETIREMENT BENEFITS

Qualified retirement plan. Except for those engaged in leisure industry
activities, substantially all full-time employees of the Company who meet
specified age and service requirements are covered by a defined benefit
retirement plan which is maintained without cost to the employees. Pension
benefits are based on years of service and average earnings for the three
highest consecutive years during the 10 years immediately preceding retirement.
The Company's funding policy is to make contributions to the plan of at least
the minimum amounts required by applicable Federal laws and regulations; such
contributions were $4,631,000 in fiscal 1996 and none in fiscal 1995 and 1994.

The projected unit credit actuarial method is used in determining the
Company's required annual contributions to the retirement plan and its
financial statement pension expense. The assumptions used in the computations
include an expected long-term rate of return on plan assets of 9%, age-graded
annual salary increases ranging from 3.5% to 5.5% in fiscal 1996 (5% overall in
fiscal 1995 and 1994) and discount rates for the projected benefit obligation
of 7.25%, 8.5% and 7.25%, respectively, in fiscal 1996, 1995 and 1994. Plan
assets consist primarily of marketable equity securities and long-term U. S.
Treasury bonds. Components of financial statement pension expense for the years
ended January 31, 1996, 1995 and 1994 were (in thousands):

<TABLE>
<CAPTION>
1996 1995 1994
------- ------- --------
<S> <C> <C> <C>
Service cost (benefits accrued during the year) . . . . . . . . . . . . . . . $ 3,579 $ 4,392 $ 4,097
Interest accrued on projected benefit obligation . . . . . . . . . . . . . . 8,526 7,528 7,188
Early retirement benefits accrued . . . . . . . . . . . . . . . . . . . . . . 8,329 4,126 -
Return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,634) (9,783) (8,581)
Amortization of unrecognized gains . . . . . . . . . . . . . . . . . . . . . (1,183) (1,400) (1,853)
------- ------- --------
Financial statement pension expense . . . . . . . . . . . . . . . . . . . . . $10,617 $ 4,863 $ 851
======= ======= ========
</TABLE>

57
<PAGE> 60
The following table summarizes the plan's funded status for financial statement
purposes and the related amounts included in the Company's balance sheets at
January 31, 1996 and 1995 (in thousands):

<TABLE>
<CAPTION>
1996 1995
--------- ----------
<S> <C> <C>
Actuarial Present Value of Pension Benefit Obligation
Vested benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 100,014 $ 79,997
Nonvested benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,988 4,222
--------- ----------
Accumulated benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . 109,002 84,219
Provision for future salary increases . . . . . . . . . . . . . . . . . . . . . . . . 18,697 18,741
--------- ----------
Projected benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 127,699 $ 102,960
========= ==========

Amounts Available to Satisfy Pension Benefit Obligation
Plan assets, at market value . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 123,087 $ 98,584
Unrecognized actuarial gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . (17,881) (12,131)
Balance sheet accrual for pension expense . . . . . . . . . . . . . . . . . . . . . . 22,493 16,507
--------- ----------
$ 127,699 $ 102,960
========= ==========
</TABLE>

Nonqualified retirement plans. Internal Revenue Service regulations limit the
benefits that may be paid to certain employees under the Company's qualified
retirement plan. Nonqualified plans are maintained to make the basis on which
those individuals' retirement benefits are determined the same as is used for
other employees. The Company's liability to make these payments is a general
obligation for which a trust fund has not been established. Amounts expensed
related to these plans totaled $1,381,000, $1,330,000 and $819,000 in fiscal
1996, 1995 and 1994 (the fiscal 1996 and 1995 amounts include $179,000 and
$93,000, respectively, of incremental benefits accrued in connection with
voluntary incentive retirement programs). At January 31, 1996, the aggregate
balance sheet liability attributable to these plans totaled $4,732,000.

Postretirement medical benefits. Retirees who reach retirement age while
working for the Company and meet certain other eligibility requirements may
elect coverage under the Company's medical plan. The Company's medical plan
incorporates a scheduled-reimbursements methodology under which the Company and
providers agree to specified rates for individual services. The Company has the
right to amend or terminate medical benefits for active employees and retirees
or to change the required level of participant contributions. The cost of
providing these postretirement health care benefits is reduced by available
Medicare coverage and retiree contributions.

Components of financial statement expense for postretirement medical
benefits for the years ended January 31, 1996, 1995 and 1994 were (in
thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Service cost (benefits accrued during the year) . . . . . . . . . . . . . . . . $ 814 $ 814 $ 554
Interest accrued on projected benefit obligation . . . . . . . . . . . . . . . 1,823 1,281 1,046
Early retirement benefits accrued . . . . . . . . . . . . . . . . . . . . . . . 2,620 1,017 -
Amortization of unrecognized gains . . . . . . . . . . . . . . . . . . . . . . (5) (70) (291)
------- ------- -------
$ 5,252 $ 3,042 $ 1,309
======= ======= =======
</TABLE>

The plan is unfunded, and benefits are paid as costs are incurred. Such
benefits payments totaled approximately $1,325,000, $850,000 and $1,200,000 in
fiscal 1996, 1995 and 1994. The plan's status at January 31, 1996 and 1995 for
financial statement purposes, together with the accrued liability for these
benefits included in the consolidated balance sheets at those dates, are
summarized in the table on the following page (in thousands).

58
<PAGE> 61
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Actuarial Present Value of Postretirement Benefit Obligation
Retirees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 18,137 $ 12,087
Fully eligible, active plan participants . . . . . . . . . . . . . . . . . . . . . . . . 3,287 2,570
Other active plan participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,135 7,385
Unrecognized actuarial gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,077) (2,612)
-------- --------
The Company's accrued liability for postretirement benefits . . . . . . . . . . . . . . . $ 23,482 $ 19,430
======== ========
</TABLE>

The Company's assumed future medical cost trend rate starts at 6.5% for
fiscal 1997, declines gradually to 5.5% in 2002 and remains at that level
thereafter; such rates were 6.5% and 7%, respectively, for fiscal 1996 and
1995. Discount rates of 7.25%, 8.5% and 7.25% were used in determining the
postretirement benefit expense at January 31, 1996, 1995 and 1994.

The medical cost trend rate assumption has a significant effect on the
amount of the obligation and the periodic cost reported. An increase of 1% in
the assumed trend rate for each year would have increased the actuarial present
value of the postretirement benefit obligation at January 31, 1996 by
$3,014,000 and the aggregate service and interest components of the fiscal 1996
cost by a total of $361,000.

NOTE 12 FINANCIAL INSTRUMENTS

The carrying amounts and estimated fair values of the Company's financial
instruments at January 31, 1996 and 1995 were as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
----------------------- -----------------------
Carrying Estimated Carrying Estimated
Amounts Fair Values Amounts Fair Values
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Real estate notes and contracts receivable . . . . . . . . $ 35,045 $ 40,932 $ 40,314 $ 37,834
Long-term debt . . . . . . . . . . . . . . . . . . . . . . 831,664 879,398 894,962 869,093
Short-term debt . . . . . . . . . . . . . . . . . . . . . . 13,732 13,732 11,617 11,617
</TABLE>

Fair values of real estate notes and contracts receivable were estimated by
discounting future cash flows using interest rates at which similar loans
currently could be made for similar maturities to borrowers with comparable
credit ratings. Fair values of fixed-rate, long-term debt were based on quoted
market prices or, where such prices were not available, on current interest
rates offered to the Company for debt with similar remaining maturities. For
floating-rate debt, carrying amounts and fair values were assumed to be equal
because of the nature of these obligations. The carrying amounts of the
Company's other on-balance-sheet financial instruments approximate their fair
values. The aggregate cost to terminate the Company's off-balance-sheet
financial instruments is not material.

The Company has only limited involvement with derivative financial
instruments and does not use them for trading purposes. Such use generally
consists of using commodities futures contracts to hedge well-defined price
risks associated with its energy operations. At January 31, 1996 and 1995, open
transactions under such arrangements were not significant.

NOTE 13 EXTRAORDINARY ITEM

On February 25, 1994, the parent company redeemed its $200,000,000 of 111/4%
Senior Notes Due 1999 using a portion of the proceeds of January 1994 offerings
of $250,000,000 of 63/4% Senior Notes Due 2004 and $100,000,000 of 5.10% Senior
Notes Due 1997. The redemption was completed at a price of 103.21% of
principal, and the expensing of this premium and related unamortized debt
issuance costs resulted in an extraordinary charge of $5,426,000 (after tax
benefit of $2,921,000), which was recorded in January 1994 when the debt was
called.

59
<PAGE> 62
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

Mitchell Energy & Development Corp.:

We have audited the accompanying consolidated balance sheets of Mitchell
Energy & Development Corp. (a Texas corporation) and subsidiaries as of January
31, 1996 and 1995, and the related consolidated statements of earnings,
stockholders' equity and cash flows for each of the three years in the period
ended January 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Mitchell Energy &
Development Corp. and subsidiaries as of January 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended January 31, 1996, in conformity with generally accepted
accounting principles.

As discussed in Notes 1 and 10 of Notes to Consolidated Financial
Statements, the Company changed its method of accounting for the impairment of
long-lived assets effective January 31, 1996.

ARTHUR ANDERSEN LLP

Houston, Texas
April 23, 1996

60
<PAGE> 63
SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED)

Mitchell Energy & Development Corp. and Subsidiaries

Reserve quantities. The following tables summarize changes in total proved
reserve quantities for the fiscal years ended January 31, 1996, 1995 and 1994
and the proved developed reserve quantities at the dates indicated:
<TABLE>
<CAPTION>
Total Proved Reserves
------------------------------------------------------------------------------
1996 1995 1994
----------------------- ---------------------- -----------------------
Equity Equity Equity
Consoli- Partner- Consoli- Partner- Consoli- Partner-
Total dated ships Total dated ships Total dated ships
----- ------- ------- ----- ------- ------- ----- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Natural Gas (Bcf)
Beginning balance . . . . . . . . . 685.7 685.7 - 627.5 627.5 - 583.7 511.7 72.0
Extensions and discoveries . . . . 75.4 75.4 - 141.9 141.9 - 94.5 84.0 10.5
Production marketed . . . . . . . . (78.9) (78.9) - (78.1) (78.1) - (70.7) (69.0) (1.7)
Production consumed in operations . (3.6) (3.6) - (3.7) (3.7) - (3.7) (3.6) (.1)
Purchases in place . . . . . . . . 36.6 36.6 - 1.5 1.5 - 34.6 34.6 -
Transfers of undeveloped
reserves to partnerships . . . . - - - - - - (.3) (1.4) 1.1
Purchase of partnership interests . - - - - - - - 79.0 (79.0)
Revisions of previous estimates . . (9.1) (9.1) - - - - (9.4) (6.7) (2.7)
Sales in place . . . . . . . . . . (8.9) (8.9) - (3.4) (3.4) - (1.2) (1.1) (.1)
----- ----- ---- ----- ----- ---- ----- ----- -----
Ending balance . . . . . . . . . . 697.2 697.2 - 685.7 685.7 - 627.5 627.5 -
===== ===== ==== ===== ===== ==== ===== ===== =====
Oil and Condensate (MMBbls)
Beginning balance . . . . . . . . . 14.3 14.3 - 15.3 15.3 - 15.8 14.0 1.8
Extensions and discoveries . . . . .9 .9 - 1.4 1.4 - 1.7 1.6 .1
Production . . . . . . . . . . . . (2.0) (2.0) - (2.3) (2.3) - (2.2) (2.1) (.1)
Purchases in place . . . . . . . . 1.1 1.1 - - - - .8 .8 -
Sales in place . . . . . . . . . . (.3) (.3) - (.5) (.5) - (.5) (.4) (.1)
Revisions of previous estimates . . (.8) (.8) - - - - (.7) (.7) -
Improved recovery . . . . . . . . . - - - .4 .4 - .5 .5 -
Transfers and other . . . . . . . . - - - - - - (.1) 1.6 (1.7)
----- ----- ---- ----- ----- ---- ----- ----- -----
Ending balance . . . . . . . . . . 13.2 13.2 - 14.3 14.3 - 15.3 15.3 -
===== ===== ==== ===== ===== ==== ===== ===== =====
Plant NGLs (MMBbls)
Beginning balance . . . . . . . . . 121.3 71.6 49.7 107.4 67.3 40.1 127.4 79.1 48.3
Additions . . . . . . . . . . . . . 10.7 10.1 .6 20.4 13.8 6.6 10.7 7.1 3.6
Production . . . . . . . . . . . . (16.9) (10.6) (6.3) (17.3) (10.4) (6.9) (18.1) (11.3) (6.8)
Revisions of previous estimates . . 10.7 11.3 (.6) 10.8 .9 9.9 (12.6) (7.6) (5.0)
----- ----- ---- ----- ----- ---- ----- ----- -----
Ending balance . . . . . . . . . . 125.8 82.4 43.4 121.3 71.6 49.7 107.4 67.3 40.1
===== ===== ==== ===== ===== ==== ===== ===== =====
</TABLE>

<TABLE>
<CAPTION>
Proved Developed Reserves at January 31
----------------------------------------
1996 1995 1994 1993
----- ----- ----- -----
<S> <C> <C> <C> <C>
Natural Gas (Bcf), including 72.0 of partnership reserves in 1993 . . . 587.6 577.1 558.5 509.7
===== ===== ===== =====
Oil and Condensate (MMBbls), including
1.8 of partnership reserves in 1993 . . . . . . . . . . . . . . . . 11.5 12.6 13.8 14.1
===== ===== ===== =====
Plant NGLs (MMBbls)
Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72.6 60.1 59.2 70.8
Equity partnerships . . . . . . . . . . . . . . . . . . . . . . . . . . 41.5 45.9 37.2 43.1
----- ----- ----- -----
114.1 106.0 96.4 113.9
===== ===== ===== =====
</TABLE>

61
<PAGE> 64
Future net cash flows. The following table sets forth estimates of the
standardized measure of discounted future net cash flows from total proved
reserves at January 31, 1996, 1995 and 1994 (in millions):

<TABLE>
<CAPTION>
1996 1995 1994
--------------------------- --------------------------- ----------------------------
Equity Equity Equity
Consoli- Partner- Consoli- Partner- Consoli- Partner-
Total dated ships Total dated ships Total dated ships
------- -------- -------- ------- -------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Oil and Gas
Future cash inflows . . . $ 1,752 $ 1,752 $ - $ 1,696 $1,696 $ - $ 1,829 $ 1,829 $ -
Future production and
development costs . . (715) (715) - (644) (644) - (620) (620) -
Future income taxes . . . (248) (248) - (227) (227) - (264) (264) -
Discount--10% annually . (258) (258) - (224) (224) - (272) (272) -
------- ------- ------- ------- ------ ------ ------- ------- -------
$ 531 $ 531 $ - $ 601 $ 601 $ - $ 673 $ 673 $ -
======= ======= ======= ======= ====== ====== ======= ======= =======
Plant NGLs
Future cash inflows . . . $ 1,578 $ 1,036 $ 542 $ 1,368 $ 817 $ 551 $ 1,188 $ 762 $ 426
Future production costs . (1,175) (745) (430) (970) (553) (417) (859) (533) (326)
Future income taxes . . . (130) (87) (43) (122) (74) (48) (97) (62) (35)
Discount--10% annually . (108) (77) (31) (98) (65) (33) (86) (58) (28)
------- ------- ------- ------- ------ ------ ------- ------- -------
$ 165 $ 127 $ 38 $ 178 $ 125 $ 53 $ 146 $ 109 $ 37
======= ======= ======= ======= ====== ====== ======= ======= =======
</TABLE>

Proved reserves are the estimated quantities which geological and engineering
data demonstrate with reasonable certainty to be recoverable in future years
from known reservoirs under economic and operating conditions at each year end.
Proved developed reserves are expected to be recovered from existing wells
using existing equipment and operating methods. Consolidated reserves
represent the Company's net interest in oil and gas properties or in reserves
committed to Company-owned gas processing plants. Equity partnership reserves
represent the Company's proportional interest in the reserves of partnerships
that are accounted for using the equity method. The partnerships engaged in oil
and gas activities were liquidated during fiscal 1994.

The natural gas reserve quantities reported as oil and gas reserves
represent wet gas volumes and include gas quantities that will be converted by
processing to NGLs (both leasehold and plant ownership). The oil and gas future
net cash flows, however, include only the Company's leasehold reimbursement for
natural gas liquids extracted during processing. As discussed below, the
remainder of the cash flows associated with the Company's ownership of NGL
reserves extracted from its wet gas volumes is included in plant NGL future net
cash flows since those cash flows accrue to the Company because of its
ownership of gas processing plants.

The quantities reported herein for plant NGLs include all liquids that will
be extracted from gas streams contractually committed to Company-owned gas
processing plants since the Company, as plant owner, generally has beneficial
ownership of all the NGLs so produced. Accordingly, the plant NGL reserves and
future net cash flows include amounts attributable to Company-owned NGL
reserves and to NGLs extracted from gas streams owned by third parties. The
Company reimburses the owners of the natural gas streams based either on a
percentage of the value of the liquids produced or on the value of the natural
gas consumed in processing under keep-whole agreements. Such reimbursements,
including amounts attributable to the Company's oil and gas leasehold interests
(included in oil and gas future net cash flows), are deducted as production
costs in determining future net cash flows from plant NGLs.

Of the total remaining natural gas reserves at January 31, 1996, an
estimated 325.3 Bcf will be processed at Company plants, including 44.9 Bcf of
fiscal 1996's natural gas reserve additions from extensions and discoveries. It
is estimated that 72.8 Bcf of such reserves and 10.0 Bcf of such reserve
additions will be converted by processing into 36 MMBbls and 4.9 MMBbls of
plant NGLs, respectively.

62
<PAGE> 65
Except where otherwise specified by contractual agreement, future cash
inflows are estimated using year-end prices. Future production and development
cost estimates are based on economic conditions at the respective year ends.
Future income taxes are computed by applying applicable statutory tax rates to
the difference between the present value of estimated future net revenues and
the tax basis of proved oil and gas properties after considering tax credit
carryforwards, estimated future percentage depletion deductions and energy tax
credits.

The following table sets forth the changes in the standardized measure of
discounted future net cash flows for the years ended January 31, 1996, 1995 and
1994 (in millions):

<TABLE>
<CAPTION>
1996 1995 1994
----------------------- ---------------------- -----------------------
Equity Equity Equity
Consoli- Partner- Consoli- Partner- Consoli- Partner-
Total dated ships Total dated ships Total dated ships
----- ------- ------ ----- -------- ------- ----- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Oil and Gas
Extensions and discoveries,
net of related costs . . . . . . $ 52 $ 52 $ - $ 103 $ 103 $ - $ 108 $ 92 $ 16
Sales, net of production costs . . (145) (145) - (183) (183) - (176) (171) (5)
Net changes in prices
and production costs . . . . . . (57) (57) - (101) (101) - (31) (28) (3)
Accretion of discount . . . . . . . 69 69 - 76 76 - 68 64 4
Purchase of partnership interests . - - - - - - - 110 (110)
Production rate changes and other . (43) (43) - 1 1 - (28) (21) (7)
Development costs incurred . . . . 33 33 - 28 28 - 13 13 -
Purchases in place . . . . . . . . 50 50 - 2 2 - 47 47 -
Sales in place . . . . . . . . . . (11) (11) - (8) (8) - (4) (4) -
Revisions of previous
quantity estimates . . . . . . . (16) (16) - - - - (17) (14) (3)
Net change in future income taxes . (2) (2) - 10 10 - 53 23 30
----- ----- ----- ----- ------ ----- ----- ----- -----
$ (70) $ (70) $ - $ (72) $ (72) $ - $ 33 $ 111 $ (78)
===== ===== ===== ===== ====== ===== ===== ===== =====
Plant NGLs
Additions, net of related costs . . $ 22 $ 21 $ 1 $ 44 $ 33 $ 11 $ 17 $ 15 $ 2
Sales, net of production costs . . (26) (10) (16) (23) (8) (15) (30) (16) (14)
Net changes in prices and costs . . (34) (19) (15) (8) (19) 11 (144) (97) (47)
Accretion of discount . . . . . . . 25 16 9 20 14 6 34 23 11
Revisions of previous
quantity estimates . . . . . . . 11 8 3 16 1 15 (17) (8) (9)
Other . . . . . . . . . . . . . . . (8) (6) (2) 3 4 (1) (4) (5) 1
Net change in future income taxes . (3) (7) 4 (20) (9) (11) 44 29 15
----- ----- ----- ----- ------ ----- ----- ----- -----
$ (13) $ 3 $ (16) $ 32 $ 16 $ 16 $(100) $ (59) $ (41)
===== ===== ===== ===== ====== ===== ===== ===== =====
</TABLE>

Reserve estimates are subject to numerous uncertainties inherent in estimating
quantities of proved reserves and in the projection of future rates of
production and the timing of development expenditures. The accuracy of such
estimates is a function of the quality of available data and of engineering and
geological interpretation and judgment. Results of subsequent drilling, testing
and production may cause either upward or downward revisions of previous
estimates. Further, the volumes considered to be commercially recoverable
fluctuate with changes in prices and operating costs. Because of the
aforementioned factors, reserve estimates are generally less precise than other
financial statement disclosures.

Discounted future cash flow estimates such as those shown herein are not
intended to represent estimates of the fair market value of oil and gas
properties. Estimates of fair market value also should consider probable
reserves, anticipated future oil and gas prices and interest rates, changes in
development and production costs and risks associated with future production.
Because of these and other considerations, any estimate of fair market value is
necessarily subjective and imprecise.

63
<PAGE> 66
Oil and gas related costs and operating results. The following tables set forth
capitalized costs at January 31, 1996, 1995 and 1994 and costs incurred and
operating results for oil and gas producing activities for the years then ended
(in thousands):

<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Capitalized Costs
Oil and gas properties . . . . . . . . . . . . . . . . . . . . . . $ 1,564,852 $ 1,525,587 $ 1,514,525
Support equipment and facilities . . . . . . . . . . . . . . . . . 55,961 68,941 70,893
Accumulated depreciation, depletion and amortization . . . . . . . (1,082,839) (1,078,207) (1,068,514)
----------- ----------- -----------
Net capitalized costs . . . . . . . . . . . . . . . . . . . . . . . $ 537,974 $ 516,321 $ 516,904
=========== =========== ===========
Costs Incurred (including exploration expenses
and dry-hole costs of $14,752, $13,307 and $29,969)
Property acquisition
Unproved . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,267 $ 9,046 $ 8,799
MEC Development, Ltd. buyout . . . . . . . . . . . . . . . . . . - - 78,251
Other proved properties . . . . . . . . . . . . . . . . . . . . 32,201 941 11,721
Exploration . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,908 19,221 34,850
Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81,355 81,713 98,326
----------- ----------- -----------
Costs incurred . . . . . . . . . . . . . . . . . . . . . . . . . . 138,731 110,921 231,947
Equity partnership investments . . . . . . . . . . . . . . . . . . - - 314
Support equipment and facilities . . . . . . . . . . . . . . . . . 2,936 4,152 3,850
----------- ----------- -----------
Capital and exploratory expenditures . . . . . . . . . . . . . . . $ 141,667 $ 115,073 $ 236,111
=========== =========== ===========
Proportional interest in costs incurred by equity partnerships . . $ - $ - $ 5,470
=========== =========== ===========
Operating Results (before charges for general
and administrative and interest expense)
Production revenues . . . . . . . . . . . . . . . . . . . . . . . . $ 203,906 $ 247,403 $ 231,707
Amortization of deferred contract restructuring proceeds . . . . . 5,950 16,510 18,723
Other revenues . . . . . . . . . . . . . . . . . . . . . . . . . . 4,211 9,395 11,733
----------- ----------- -----------
214,067 273,308 262,163
Less--Production costs . . . . . . . . . . . . . . . . . . . . . . 58,589 64,203 61,082
Depreciation, depletion and amortization (including proved-
property impairments of $11,516, $4,718 and $13,649) . . . 93,206 96,369 89,793
Exploration expenses . . . . . . . . . . . . . . . . . . . . 11,476 12,265 12,356
Exploratory dry-hole costs . . . . . . . . . . . . . . . . . 3,276 1,042 17,613
Other operating costs . . . . . . . . . . . . . . . . . . . 11,745 15,314 16,362
----------- ----------- -----------
35,775 84,115 64,957
Equity in earnings of partnerships . . . . . . . . . . . . . . . . - - 3,594
----------- ----------- -----------
Segment operating earnings . . . . . . . . . . . . . . . . . . . . 35,775 84,115 68,551
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,281 26,665 19,251
----------- ----------- -----------
$ 25,494 $ 57,450 $ 49,300
=========== =========== ===========
</TABLE>

64
<PAGE> 67
HISTORICAL SUMMARY

Mitchell Energy & Development Corp. and Subsidiaries
Five Years Ended January 31, 1996 (dollar amounts in thousands)

<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Financial Position at Year End
Net property, plant and equipment . . . . . . . $ 719,535 $ 734,099 $ 858,705 $ 737,758 $ 688,924
Real estate . . . . . . . . . . . . . . . . . . 762,834 917,890 896,652 864,351 873,326
Total assets . . . . . . . . . . . . . . . . . 1,842,869 1,855,871 1,969,292 1,825,777 1,793,604
Capital employed
Long-term debt . . . . . . . . . . . . . . . $ 831,664 $ 894,962 $ 988,318 $ 947,723 $ 954,327
Deferred income taxes . . . . . . . . . . . 193,908 200,722 181,989 178,375 173,206
Deferred credits and other liabilities . . . 113,451 114,915 118,632 141,200 133,488
Stockholders' equity . . . . . . . . . . . . 481,903 475,030 463,237 338,418 334,969
---------- ---------- ---------- ---------- ----------
$1,620,926 $1,685,629 $1,752,176 $1,605,716 $1,595,990
========== ========== ========== ========== ==========
Capital and Exploratory Expenditures
(accrual basis)
Exploration and Production . . . . . . . . . . $ 141,667 $ 115,073 $ 158,203 $ 75,659 $ 82,162
MEC Development, Ltd. buyout . . . . . . . . - - 78,251 - -
Gas Services . . . . . . . . . . . . . . . . . 38,358 35,111 48,628 70,473 50,749
Real Estate . . . . . . . . . . . . . . . . . . 59,990 65,123 65,132 84,954 82,881
Corporate . . . . . . . . . . . . . . . . . . . 6,068 4,268 3,866 4,538 5,854
---------- ---------- ---------- ---------- ----------
$ 246,083 $ 219,575 $ 354,080 $ 235,624 $ 221,646
========== ========== ========== ========== ==========
Energy Operating Statistics
Average daily volumes
Natural gas sales (Mcf) . . . . . . . . . . 216,200 214,100 193,800 149,000 157,800
Crude oil and condensate sales (Bbls) . . . 5,400 6,300 6,000 5,600 5,400
Natural gas liquids produced (Bbls) . . . . 46,400 47,500 49,800 47,200 44,000
Pipeline throughput (Mcf) . . . . . . . . . 354,000 415,000 549,000 566,000 581,000
Average annual sales price (dollars)
Natural gas (per Mcf) . . . . . . . . . . . $ 2.16 $ 2.71 $ 2.86 $ 2.84 $ 2.74
Crude oil and condensate (per Bbl) . . . . . 16.91 15.75 16.31 18.49 18.95
Natural gas liquids produced (per Bbl) . . . 11.55 11.57 12.18 13.41 13.41
Drilling program (gross wells)
Wells drilled . . . . . . . . . . . . . . . 116 132 154 152 163
Wells completed . . . . . . . . . . . . . . 107 121 127 129 134
Well count at year end (gross wells) . . . . . 3,047 3,280 3,413 3,532 3,666
Real Estate Operating Statistics
The Woodlands
Residential lots sold . . . . . . . . . . . 980 951 844 911 910
Average price per lot (dollars) . . . . . 40,752 37,287 39,055 38,196 36,400
Average price per square foot (dollars) . 3.89 3.70 3.38 3.14 2.95
Commercial/institutional acreage sold . . . 53 67 144 58 171
Office, industrial and retail space
managed (thousands of square feet) . . . . 2,548 2,491 2,204 2,140 1,798
Apartment units managed . . . . . . . . . . 1,891 1,675 1,883 2,055 2,055
Bulk acreage sold . . . . . . . . . . . . . . . 8,367 74 250 - 565
Stockholders' Equity (per share at year end) . $ 9.26 $ 9.09 $ 8.78 $ 7.25 $ 7.14
Ratio of Earnings to Fixed Charges . . . . . . 2.33x 1.70x 1.25x 1.30x 1.45x
</TABLE>

65
<PAGE> 68
HISTORICAL SUMMARY

Mitchell Energy & Development Corp. and Subsidiaries
Five Years Ended January 31, 1996 (in thousands except per share data)

<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Revenues
Exploration and Production (including gain of
$205,256 from natural gas contract
buyout in 1996) . . . . . . . . . . . . . . $ 424,661 $ 277,099 $ 266,166 $ 214,681 $ 231,073
Gas Services
Natural gas processing . . . . . . . . . . . 283,378 252,159 253,605 306,967 268,643
Natural gas gathering and marketing . . . . 184,584 180,038 296,373 248,605 231,068
Gains from major asset sales . . . . . . . . - 48,821 - - -
Other . . . . . . . . . . . . . . . . . . . 10,296 6,989 10,559 11,128 12,268
Real Estate . . . . . . . . . . . . . . . . . . 168,828 129,465 126,106 121,453 131,318
---------- ---------- ---------- ---------- ----------
Total revenues . . . . . . . . . . . . . . $1,071,747 $ 894,571 $ 952,809 $ 902,834 $ 874,370
========== ========== ========== ========== ==========
Segment Operating Earnings
Exploration and Production
Operations . . . . . . . . . . . . . . . . . $ 35,775 $ 84,115 $ 68,186 $ 58,060 $ 48,118
Gain from natural gas contract buyout . . . 205,256 - - - -
Litigation contingency . . . . . . . . . . . (15,000) - - - -
Personnel reduction program costs . . . . . (7,935) - - - -
Restructuring charges . . . . . . . . . . . - - - (20,726) -
Gains from asset sales . . . . . . . . . . . 5,338 3,791 - - -
Gas Services
Natural gas processing . . . . . . . . . . . 30,994 23,253 20,088 57,466 62,076
Natural gas gathering and marketing . . . . 14,063 12,335 18,742 25,517 23,212
Other . . . . . . . . . . . . . . . . . . . 9,059 (846) 3,829 5,521 4,569
---------- ---------- ---------- ---------- ----------
Operations subtotal . . . . . . . . . . . . 54,116 34,742 42,659 88,504 89,857
Asset write-downs . . . . . . . . . . . . . (52,715) (23,888) - - -
Gains from major asset sales . . . . . . . . - 48,821 - - -
Personnel reduction program costs . . . . . (3,600) (7,364) - - -
Real Estate
Operations . . . . . . . . . . . . . . . . . 48,848 25,793 21,078 22,801 22,724
Write-downs of properties . . . . . . . . . (123,916) (5,661) - - -
Personnel reduction program costs . . . . . (3,000) - - - -
---------- ---------- ---------- ---------- ----------
Total segment operating earnings . . . . . 143,167 160,349 131,923 148,639 160,699
General and administrative expense . . . . . . 44,821 42,225 43,222 41,398 38,184
Interest expense . . . . . . . . . . . . . . . 64,172 69,982 74,057 75,284 81,169
Capitalized interest . . . . . . . . . . . . . (28,252) (28,816) (33,956) (34,161) (37,460)
Other expense . . . . . . . . . . . . . . . . . 4,095 6,407 1,224 6,096 5,618
---------- ---------- ---------- ---------- ----------
Earnings Before Income Taxes, Extraordinary
Item and Cumulative Effect of Change
in Accounting Methods . . . . . . . . . . . 58,331 70,551 47,376 60,022 73,188
Income Taxes . . . . . . . . . . . . . . . . . 21,202 24,737 17,346* 14,967 25,261
---------- ---------- ---------- ---------- ----------
Earnings Before Extraordinary Item and Cumulative
Effect of Change in Accounting Methods . . . 37,129 45,814 30,030 45,055 47,927
Extraordinary item (early retirement of debt) . - - (5,426) (7,251) -
Cumulative effect of change in accounting
method for postretirement medical benefits . - - - (10,551) -
---------- ---------- ---------- ---------- ----------
Net Earnings . . . . . . . . . . . . . . . . . $ 37,129 $ 45,814 $ 24,604 $ 27,253 $ 47,927
========== ========== ========== ========== ==========
Earnings Per Share
Earnings before extraordinary item and
cumulative effect of change in accounting
methods . . . . . . . . . . . . . . . . . . $.71 $.87 $.58 $.96 $1.02
Extraordinary item . . . . . . . . . . . . . . - - (.10) (.15) -
Cumulative effect of change in accounting
methods . . . . . . . . . . . . . . . . . . - - - (.23) -
---- ---- ---- ---- -----
Net earnings . . . . . . . . . . . . . . . . . $.71 $.87 $.48 $.58 $1.02
==== ==== ==== ==== =====
Cash Dividends (cents per share)
Prior to stock reclassification . . . . . . . . 20.00 40.00
Class A . . . . . . . . . . . . . . . . . . . . 48.00 48.00 48.00 22.00
Class B . . . . . . . . . . . . . . . . . . . . 53.00 53.00 53.00 23.75
Average Common Shares Outstanding . . . . . . . 52,044 52,696 51,004 46,858 46,849
</TABLE>

- ------------
* Includes a $6,574 deferred provision related to an increase in the
corporate statutory Federal income tax rate from 34% to 35%.

66
<PAGE> 69
PRINCIPAL OFFICERS

[PHOTO]

Left to right: Roger L. Galatas, Thomas P. Battle,
Allen J. Tarbutton, Jr., and Philip S. Smith.

<TABLE>
<S> <C> <C>
George P. Mitchell Roger L. Galatas Allen J. Tarbutton, Jr.
Chairman and Chief Executive Officer Corporate Senior Vice President, Corporate Senior Vice President,
President -- Real Estate Division President -- Gas Services Division
Bernard F. Clark
Vice Chairman Philip S. Smith Thomas P. Battle
Corporate Senior Vice President, Corporate Senior Vice President,
W.D. Stevens Chief Financial Officer, and General Counsel and Secretary
President and Chief Operating Officer, President -- Administration and
President -- Exploration and Financial Division
Production Division
</TABLE>

67
<PAGE> 70
BOARD OF DIRECTORS

[PHOTO]

Left to right (bottom): Robert W. Baldwin, Bernard F. Clark, George P.
Mitchell, W.D. Stevens and Shaker A. Khayatt. Left to right (top):
M. Kent Mitchell, Raymond L. Watson, William D. Eberle,
Ben F. Love, J. McDonald Williams, Walter A. Lubanko
and J. Todd Mitchell.

<TABLE>
<S> <C> <C>
George P. Mitchell Shaker A. Khayatt (1) J. Todd Mitchell (3) President
Chairman and Chief Executive Officer, President and Chief Executive Officer, The Discovery Bay Company
Mitchell Energy & Development Corp. Khayatt and Company, Inc. (seismic software)
(investment banking), and Dolomite Resources, Inc.
Bernard F. Clark New York City (exploration and investments),
Vice Chairman, Houston
Mitchell Energy & Development Corp. Ben F. Love (2) (3) Consultant;
retired Chairman and Raymond L. Watson (2) Chairman,
W.D. Stevens (3) Chief Executive Officer, Executive Committee of the
President and Chief Operating Officer, Texas Commerce Bancshares, Board of Directors,
President -- Exploration and Houston The Walt Disney Company,
Production Division, Burbank, California;
Mitchell Energy & Development Corp. Walter A. Lubanko (2) Vice Chairman, The Irvine Company,
Chairman and President, Newport Beach, California
Robert W. Baldwin (1) W.A. Lubanko & Co., Inc.
Consultant (energy/management); (investment banking), J. McDonald Williams (2) Chairman,
retired President, Gulf Refining Brookville, New York Trammell Crow Company, Dallas
and Marketing Company
(a division of Gulf Oil Corp.), M. Kent Mitchell (1) (3)
Houston President and Chief Executive Officer, (1) Compensation Committee
Bald Head Island Management, Inc. (2) Audit Committee
William D. Eberle (1) (3) Chairman, (real estate development), (3) Executive Committee
Manchester Associates, Bald Head Island, North Carolina
(venture capital and international
business consulting); of counsel,
Kaye, Scholer, Fierman, Hayes & Handler,
Boston and Washington, D.C.
</TABLE>

68
<PAGE> 71
CORPORATE INFORMATION

<TABLE>
<S> <C>
Stock Listings Annual Meeting
New York Stock Exchange 10 a.m. CDT
The Pacific Stock Exchange Wednesday, June 26, 1996
Ticker Symbols: MND A and MND B The Woodlands Executive Conference
Options Trading: The Pacific Stock Exchange Center and Resort
2301 North Millbend
Transfer Agent and Registrar The Woodlands, Texas 77380
Chemical Mellon Shareholder Services, L.L.C. Phone: (713) 367-1100
85 Challenger Road
Overpeck Centre Form 10-K
Ridgefield Park, N.J. 07660-2104 Copies of the Company's Form 10-K are available
Phone: (800) 635-9270 upon written request to:
Public Affairs Department
Mitchell Energy & Development Corp.
P.O. Box 4000
The Woodlands, Texas 77387-4000
Phone: (713) 377-5650

Design: Gluth, Weaver Design, Houston
Photography: Michael Hart, Rob Muir, Ted Washington
</TABLE>

69
<PAGE> 72
[LOGO]

MITCHELL ENERGY & DEVELOPMENT CORP. -------------
Bulk Rate
P.O. Box 4000 U.S. Postage
2001 Timberloch Place PAID
The Woodlands, Texas 77387-4000 Spring, Texas
(713) 377-5500 Permit No. 67
-------------
An Equal Opportunity Employer

<PAGE> 1
Exhibit 21

MITCHELL ENERGY & DEVELOPMENT CORP.
SUBSIDIARIES

Listings of the Company's major subsidiaries and partnership interests
at January 31, 1996 follow. These entities, along with others which in the
aggregate are not significant, are included in the financial statements
appearing in the Company's Annual Report to Stockholders. Parent/subsidiary
relationships are indicated by indentions. Except where otherwise indicated,
each subsidiary is incorporated in Delaware and is 100% owned by its parent.

CONSOLIDATED SUBSIDIARIES
MND Energy Corporation
Mitchell Energy Corporation
Mitchell Gas Services, Inc. (MGS)*
Liquid Energy Fuels Corporation (LEFC)
Mitchell Marketing Company (Louisiana)
Madison Gas Marketing Services (80% owned)

The Woodlands Corporation (TWC)
Mitchell Catamount, Inc. (Texas)
Mitchell Mortgage Company (Texas)
MND Hospitality, Inc.
The Woodlands Investment Group, Inc.
The Woodlands Office Equities, Inc. (TWOE)

MND Service, Inc.
The Woodlands Venture Capital Company

PARTNERSHIP INTERESTS (accounted for on equity basis)
Austin Chalk Natural Gas Marketing Services (45% owned by Mitchell
Marketing Company)
Bee County Joint Venture (50% owned by MGS)
Belvieu Environmental Fuels (33.33% owned by LEFC)
C&L Processors Partnership (50% owned by MGS)
Cochran's Crossing - 94 Limited (50% owned by TWC)
Ferguson-Burleson County Gas Gathering System (45% owned by MGS)
Gulf Coast Fractionators (38.75% owned by MGS)
Lake Catamount Joint Venture (50% owned by Mitchell Catamount, Inc.)
PC Retail-93 Limited Partnership (50% owned by TWC)
Southwood Limited I (50% owned by TWC)
The Woodlands Mall Associates (50% owned by TWC)
UP Bryan Plant (45% owned by MGS)
Woodlands Equity Partnership-89 (50% owned by TWC)
Woodlands Office Equities - '95 Limited (25% owned by TWOE)

____________________________________
*Does business as Liquid Energy Corporation and Southwestern Gas Pipeline, Inc.

<PAGE> 1
Exhibit 23

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the
incorporation of our reports included or incorporated by reference in this Form
10-K into the Company's previously filed Form S-8 Registration Statement Nos.
2-74458, 2-86550, 2-93380, 33-2716, 33-26276 and 33-31446 and into previously
filed Form S-3 Registration Statement Nos. 33-57332 and 33-61070.

ARTHUR ANDERSEN LLP

Houston, Texas
April 29, 1996

<ARTICLE> 5
<MULTIPLIER>1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-1996
<PERIOD-END> JAN-31-1996
<CASH> 21,336
<SECURITIES> 0
<RECEIVABLES> 107,354
<ALLOWANCES> 2,116
<INVENTORY> 12,137
<CURRENT-ASSETS> 244,313
<PP&E> 2,040,539
<DEPRECIATION> 1,321,004
<TOTAL-ASSETS> 1,842,869
<CURRENT-LIABILITIES> 221,943
<BONDS> 831,664
<COMMON> 5,386
0
0
<OTHER-SE> 476,517
<TOTAL-LIABILITY-AND-EQUITY> 1,842,869
<SALES> 817,670
<TOTAL-REVENUES> 1,071,747
<CGS> 0
<TOTAL-COSTS> 722,414
<OTHER-EXPENSES> 255,082
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 35,920
<INCOME-PRETAX> 58,331
<INCOME-TAX> 21,202
<INCOME-CONTINUING> 37,129
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 37,129
<EPS-PRIMARY> .71
<EPS-DILUTED> .71

</TABLE>

<PAGE> 1
Exhibit 99(a)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 11-K

[X] ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED JANUARY 31, 1996

[ ] TRANSITION REPORT PURSUANT TO SECTION 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-6959

_______________________

MITCHELL ENERGY & DEVELOPMENT CORP.
TRIFT AND SAVINGS PLAN
_______________________

MITCHELL ENERGY & DEVELOPMENT CORP.
(Name of issuer of securities held pursuant to the Plan)

P. O. Box 4000, The Woodlands, Texas 77387-4000
(Address of Plan and principal executive office of issuer)

The financial statements and schedules of the Mitchell Energy & Development
Corp. Thrift and Savings Plan required to be filed on Form 11-K by Section
15(d) of the Securities Exchange Act of 1934 will be filed as an amendment to
this Form 10-K.

<PAGE> 1
Exhibit 99(b)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 11-K

[X] ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED JANUARY 31, 1996

[ ] TRANSITION REPORT PURSUANT TO SECTION 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-6959

_______________________

MND HOSPITALITY, INC.
THRIFT AND SAVINGS PLAN
_______________________

MITCHELL ENERGY & DEVELOPMENT CORP.
(Name of issuer of securities held pursuant to the Plan)

P. O. Box 4000, The Woodlands, Texas 77387-4000
(Address of Plan and principal executive office of issuer)

The financial statements and schedules of the MND Hospitality, Inc., Thrift and
Savings Plan required to be filed on Form 11-K by Section 15(d) of the
Securities Exchange Act of 1934 will be filed as an amendment to this Form
10-K.