<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED APRIL 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-6959
MITCHELL ENERGY & DEVELOPMENT CORP.
(Exact name of registrant as specified in charter)
TEXAS 74-1032912
(State of incorporation) (I.R.S. Employer Identification No.)
2001 TIMBERLOCH PLACE 77380
THE WOODLANDS, TEXAS (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (713) 377-5500
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
--- ---
Shares of common stock outstanding at May 31, 1997:
Class A . . . . . . . . 23,055,658
Class B . . . . . . . . 28,798,779
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
Page
Part I - Financial Information Number
------
<S> <C>
Item 1. Financial Statements
Representation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Unaudited Consolidated Statements of Earnings . . . . . . . . . . . . . . . . . . . . . 3
Unaudited Consolidated Statement of Stockholders' Equity . . . . . . . . . . . . . . . . 4
Unaudited Condensed Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . 5
Notes to Unaudited Consolidated Financial Statements . . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of
Financial Position and Results of Operations . . . . . . . . . . . . . . . . . . . . . . 12
Part II - Other Information
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . 17
</TABLE>
DEFINITIONS. As used herein, "MMBtu" means million British thermal units,
"Mcf" means thousand cubic feet, "MMcf" means million cubic feet, "Bcf" means
billion cubic feet, "Bbl" means barrel, "MMBbls" means million barrels, "NGL"
or "NGLs" means natural gas liquids, "fiscal 1997" and "fiscal 1998" refer,
respectively, to the 12-month periods ended January 31, 1997 and 1998 and
"DD&A" means depreciation, depletion and amortization. Pipeline throughput
volumes are based on average energy content of 1,000 Btu per cubic foot. Where
applicable, NGL volume, price and reserve information includes equity
partnership interests.
<PAGE> 3
Part I - Financial Information
ITEM 1. FINANCIAL STATEMENTS
REPRESENTATION. The consolidated financial statements of Mitchell Energy &
Development Corp. and subsidiaries (the "Company") and related notes included
herein have been prepared by the Company, without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to those rules and regulations, although the Company believes
that the disclosures included herein are adequate to make the information
presented not misleading. In the opinion of the Company's management, all
adjustments - which include only normal and recurring adjustments - necessary
for a fair presentation of the financial position and results of operations for
the periods presented have been made. These financial statements should be
read in conjunction with the financial statements and the notes thereto
included in the Company's Fiscal 1997 Annual Report and with the Management's
Discussion and Analysis of Financial Position and Results of Operations
sections of that and this report.
-1-
<PAGE> 4
MITCHELL ENERGY & DEVELOPMENT CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollar amounts in thousands)
<TABLE>
<CAPTION>
APRIL 30, January 31,
1997 1997
------------ -----------
ASSETS (unaudited)
<S> <C>
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . $ 57,635 $ 79,681
Trade receivables, net of allowance for doubtful accounts of $856 and $807 88,207 155,551
Gas contract buyout proceeds receivable . . . . . . . . . . . . . . . . . - 91,000
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,576 11,354
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,235 11,180
---------- ----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . 165,653 348,766
---------- ----------
PROPERTY, PLANT AND EQUIPMENT, at cost less accumulated depreci-
ation, depletion and amortization of $1,350,082 and $1,337,041
Exploration and production
Oil and gas properties . . . . . . . . . . . . . . . . . . . . . . . . 546,477 537,992
Support equipment and facilities . . . . . . . . . . . . . . . . . . . 20,029 22,485
Gas services (including investments in equity partnerships) (Note 2)
Natural gas processing . . . . . . . . . . . . . . . . . . . . . . . . 70,792 69,658
Natural gas gathering . . . . . . . . . . . . . . . . . . . . . . . . . 97,911 94,499
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,944 42,634
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,714 8,661
---------- ----------
790,867 775,929
---------- ----------
REAL ESTATE
The Woodlands
Land development . . . . . . . . . . . . . . . . . . . . . . . . . . . 510,039 509,069
Commercial properties (100% owned) . . . . . . . . . . . . . . . . . . 83,465 80,515
Equity investments and property management . . . . . . . . . . . . . . 26,393 26,307
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 3,043
---------- ----------
619,913 618,934
Other properties (primarily held for disposal) . . . . . . . . . . . . . 30,644 30,887
---------- ----------
650,557 649,821
---------- ----------
OTHER ASSETS
Real estate notes and contracts receivable . . . . . . . . . . . . . . . 36,966 37,092
Long-term investments and other . . . . . . . . . . . . . . . . . . . . . 42,367 41,108
---------- ----------
79,333 78,200
---------- ----------
$1,686,410 $1,852,716
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt . . . . . . . . . . . . . . . . . $ - $ 100,000
Oil and gas proceeds payable . . . . . . . . . . . . . . . . . . . . . . 85,225 141,076
Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . 125,861 141,141
---------- ----------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . 211,086 382,217
---------- ----------
LONG-TERM DEBT (Note 3)
Energy operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 212,546 206,672
Real estate operations . . . . . . . . . . . . . . . . . . . . . . . . . 388,548 394,599
---------- ----------
601,094 601,271
---------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 234,547 227,875
Deferred income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,661 18,421
Retirement obligations and other . . . . . . . . . . . . . . . . . . . . 64,289 67,645
---------- ----------
315,497 313,941
---------- ----------
COMMITMENTS AND CONTINGENCIES (Notes 2, 5 and 6)
STOCKHOLDERS' EQUITY
Preferred stock, $.10 par value (authorized 10,000,000 shares; none issued)
Common stock, $.10 par value
(authorized 100,000,000 Class A and 100,000,000 Class B shares) . . . . 5,386 5,386
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . 143,372 143,343
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 438,479 435,165
Treasury stock, at cost . . . . . . . . . . . . . . . . . . . . . . . . . (28,504) (28,607)
---------- ----------
558,733 555,287
---------- ----------
$1,686,410 $1,852,716
========== ==========
</TABLE>
- -----------------------------------------
The accompanying notes are an integral part of these financial statements.
-2-
<PAGE> 5
MITCHELL ENERGY & DEVELOPMENT CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands except per-share amounts)
<TABLE>
<CAPTION>
Three Months Ended
April 30
------------------------
1997 1996
--------- ---------
<S> <C> <C>
REVENUES
Exploration and production . . . . . . . . . . . . . . . . . . . . $ 60,311 $ 61,552
Gas services . . . . . . . . . . . . . . . . . . . . . . . . . . . 109,420 137,529
Real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,145 38,272
--------- ---------
206,876 237,353
--------- ---------
OPERATING COSTS AND EXPENSES
Exploration and production, including litigation
provision of $7,000 in 1997 (Note 5) . . . . . . . . . . . . . . 51,084 41,909
Gas services . . . . . . . . . . . . . . . . . . . . . . . . . . . 92,388 114,779
Real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,910 28,577
--------- ---------
169,382 185,265
--------- ---------
SEGMENT OPERATING EARNINGS (Note 7) . . . . . . . . . . . . . . . . 37,494 52,088
General and administrative expense . . . . . . . . . . . . . . . . 9,153 9,112
--------- ---------
TOTAL OPERATING EARNINGS . . . . . . . . . . . . . . . . . . . . . 28,341 42,976
--------- ---------
OTHER EXPENSE
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . 12,136 14,164
Capitalized interest . . . . . . . . . . . . . . . . . . . . . . . (6,690) (6,385)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,384) (423)
--------- ---------
3,062 7,356
--------- ---------
EARNINGS BEFORE INCOME TAXES . . . . . . . . . . . . . . . . . . 25,279 35,620
INCOME TAXES (Note 4) . . . . . . . . . . . . . . . . . . . . . . . 8,802 12,371
--------- ---------
NET EARNINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,477 $ 23,249
========= =========
EARNINGS PER SHARE . . . . . . . . . . . . . . . . . . . . . . . . $ .32 $ .45
========= =========
AVERAGE COMMON SHARES OUTSTANDING . . . . . . . . . . . . . . . . 51,845 52,045
========= =========
</TABLE>
- -----------------------------------------
The accompanying notes are an integral part of these financial statements.
-3-
<PAGE> 6
MITCHELL ENERGY & DEVELOPMENT CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF
STOCKHOLDERS' EQUITY
For the Three Months Ended April 30,1997
(dollar amounts in thousands)
<TABLE>
<CAPTION>
Additional
Common Paid-In Retained Treasury
DOLLAR AMOUNTS Stock Capital Earnings Stock Total
- -------------- ------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 31, 1997 . . . . . . . . . . . . . $5,386 $143,343 $435,165 $(28,607) $555,287
Net earnings . . . . . . . . . . . . . . . . . . . . - - 16,477 - 16,477
Cash dividends declared (24 cents per share on
Class A and 26 1/2 cents per share on Class B) . . - - (13,163) - (13,163)
Exercises of stock options . . . . . . . . . . . . . - 29 - 103 132
------ -------- -------- -------- --------
BALANCE, APRIL 30, 1997 . . . . . . . . . . . . . . $5,386 $143,372 $438,479 $(28,504) $558,733
====== ======== ======== ======== ========
</TABLE>
===========================================
<TABLE>
<CAPTION>
Common Stock Issued Treasury Stock
-------------------------- ----------------------
SHARE AMOUNTS Class A Class B Class A Class B
- ------------- ----------- ---------- --------- ---------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 31, 1997 . . . . . . . . . . . . . 23,978,088 29,878,088 922,429 1,092,958
Exercises of stock options . . . . . . . . . . . . . - - - (7,250)
Other . . . . . . . . . . . . . . . . . . . . . . . . (1) (1) - -
---------- ---------- --------- ---------
BALANCE, APRIL 30, 1997 . . . . . . . . . . . . . . 23,978,087 29,878,087 922,429 1,085,708
========== ========== ========= =========
</TABLE>
- --------------------------
The accompanying notes are an integral part of these financial statements.
-4-
<PAGE> 7
MITCHELL ENERGY & DEVELOPMENT CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
April 30
------------------------
1997 1996
--------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,477 $ 23,249
Adjustments to reconcile net earnings
to cash provided by operating activities
Depreciation, depletion and amortization . . . . . . . . . . 26,088 28,690
Exploration expenses, including dry-hole costs . . . . . . . 2,421 2,537
Deferred income taxes . . . . . . . . . . . . . . . . . . . . 6,672 9,128
Cost of land sold . . . . . . . . . . . . . . . . . . . . . . 9,780 9,060
Residential land development costs, net of reimbursements . . (1,870) (3,933)
Distributions in excess of earnings of equity investees . . . 653 3,460
Gains from sales of properties . . . . . . . . . . . . . . . (2,928) (973)
Litigation provision . . . . . . . . . . . . . . . . . . . . 7,000 -
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . (3,040) 1,296
---------- ---------
61,253 72,514
Changes in operating assets and liabilities . . . . . . . . . 79,874 78,830
---------- ---------
Cash provided by operating activities . . . . . . . . . . . . 141,127 151,344
---------- ---------
INVESTING ACTIVITIES
Capital and exploratory expenditures
Total on accrual basis . . . . . . . . . . . . . . . . . . . . . (55,989) (45,356)
Residential land development costs deducted above . . . . . . . 1,870 3,933
Adjustment to cash basis . . . . . . . . . . . . . . . . . . . . (9,435) (7,570)
---------- ---------
(63,554) (48,993)
Proceeds from sales of real estate properties . . . . . . . . . . . 2,104 9,125
Proceeds from sales of property, plant and equipment . . . . . . . 4,419 4,779
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 870 193
---------- ---------
Cash used for investing activities . . . . . . . . . . . . . (56,161) (34,896)
---------- ---------
FINANCING ACTIVITIES
Debt repayments . . . . . . . . . . . . . . . . . . . . . . . . . . (100,177) (80,185)
Cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . (6,581) (6,608)
Treasury stock purchases . . . . . . . . . . . . . . . . . . . . . - (3,094)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (254) (574)
---------- ---------
Cash used for financing activities . . . . . . . . . . . . . (107,012) (90,461)
---------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . . . . (22,046) 25,987
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD . . . . . . . . . . 79,681 21,336
---------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD . . . . . . . . . . . . . $ 57,635 $ 47,323
========== =========
</TABLE>
- --------------------------------------
The accompanying notes are an integral part of these financial statements.
-5-
<PAGE> 8
MITCHELL ENERGY & DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
April 30, 1997
(1) ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Mitchell Energy &
Development Corp. and its majority-owned subsidiaries (the "Company"). All
significant intercompany accounts and transactions are eliminated in
consolidation. The Company follows the equity method of accounting for
investments in 20%- to 50%-owned entities.
The Company's exploration and production activities are accounted for
using the "successful efforts" method. Impairment computations for proved oil
and gas properties are made on a field-by-field basis as conditions warrant.
Charges for such impairments, which are included in DD&A expense, totaled none
and $3,068,000 for the three-month periods ended April 30, 1997 and 1996.
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.
In accordance with industry accounting practice, real estate assets are
reported as long-term assets in the consolidated balance sheets.
In March 1997, Statement of Financial Accounting Standards (SFAS) Nos. 128
and 129 were issued which must be adopted by the Company during the fourth
quarter of fiscal 1998. SFAS No. 128, "Earnings Per Share," will require the
Company to disclose basic and diluted earnings per share information. Since
the dilutive impact of its only common stock equivalent - employee stock
options - historically has been less than 3%, the Company previously was not
required to make fully diluted earnings per share disclosures. SFAS No. 129,
"Disclosure of Information About Capital Structure," requires entities that
issue securities other than ordinary common stock to make specified
disclosures. Since the Company's issued stock consists solely of common stock,
this statement will have little, if any, impact on its financial statements.
(2) EQUITY INVESTMENTS
During fiscal 1998 and 1997, the Company's principal partnership interests
included the following:
<TABLE>
<CAPTION>
Ownership
Percentage Nature of Operations
---------- ---------------------------------------
<S> <C> <C>
GAS SERVICES
Austin Chalk Natural Gas Marketing Services 45 Natural gas marketing
Belvieu Environmental Fuels 33.33 Production of MTBE
C&L Processors Partnership 50 Natural gas processing
Ferguson-Burleson County Gas Gathering System 45 Natural gas gathering
Gulf Coast Fractionators 38.75 Fractionation of natural gas liquids
Louisiana Chalk Gathering System 50 Natural gas gathering
U. P. Bryan Plant 45 Natural gas processing
REAL ESTATE
Grogan's Mill Apartments 50 Apartments in The Woodlands
Mitchell Mortgage Company, LLC (after sale
by the Company of a 51% interest in December 1996) 49 Mortgage lending
The Woodlands Mall Associates 50 Regional mall in The Woodlands
Woodlands Office Equities - '95 Limited 25 Office buildings in The Woodlands
Woodlands Retail Equities - '96 Limited 25 Retail properties in The Woodlands
Lake Catamount Joint Venture (sold in October 1996) 50 Colorado land
</TABLE>
-6-
<PAGE> 9
The Company's net investment in each of these entities is included in the
applicable caption of property, plant and equipment or real estate. The
Company's equity in their pretax earnings is included in the applicable
revenues caption of the consolidated statements of earnings and its equity in
their pretax losses is included in the applicable operating costs and expenses
caption.
A summary of the Company's net investments in partnerships at April 30,
1997 and January 31, 1997 and its equity in their pretax earnings (losses) for
the three-month periods ended April 30, 1997 and 1996 follows (in thousands):
<TABLE>
<CAPTION>
Equity in Pretax
Net Investment Earnings (Losses)
-------------------------- -------------------------
April 30, January 31, April 30, April 30,
1997 1997 1997 1996
----------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
GAS SERVICES
Austin Chalk Natural Gas Marketing Services . . . . . . . $ 1,968 $ 2,014 $ (46) $ (884)
Belvieu Environmental Fuels . . . . . . . . . . . . . . . 34,118 31,174 2,944 2,646
C&L Processors Partnership . . . . . . . . . . . . . . . 22,059 21,433 626 796
Ferguson-Burleson County Gas Gathering System . . . . . . 49,847 53,164 1,183 2,639
Gulf Coast Fractionators . . . . . . . . . . . . . . . . 10,986 9,593 1,393 1,425
Louisiana Chalk Gathering System
(system currently under construction) . . . . . . . . 9,634 4,754 - -
U.P. Bryan Plant . . . . . . . . . . . . . . . . . . . . 7,280 6,973 1,335 2,244
Others . . . . . . . . . . . . . . . . . . . . . . . . . 139 162 - 28
-------- -------- ------ --------
$136,031 $129,267 $7,435 $ 8,894
======== ======== ====== ========
REAL ESTATE
Grogan's Mill Apartments . . . . . . . . . . . . . . . . $ 1,134 $ 1,160 $ (26) $ 51
Mitchell Mortgage Company, LLC
(formed in December 1996) . . . . . . . . . . . . . . 958 1,089 58 -
The Woodlands Mall Associates . . . . . . . . . . . . . . 3,364 4,218 (54) 124
Woodlands Office Equities - '95 Limited . . . . . . . . . 11,495 11,514 224 131
Woodlands Retail Equities - '96 Limited
(formed during fiscal 1997) . . . . . . . . . . . . . 5,281 5,252 146 -
Others (which own commercial properties in The
Woodlands) . . . . . . . . . . . . . . . . . . . . . . 1,190 1,183 276 215
Lake Catamount Joint Venture (sold in October 1996) . . . - - - (11)
-------- -------- ------ --------
$ 23,422 $ 24,416 $ 624 $ 510
======== ======== ====== ========
</TABLE>
Financial statement information is generally reported on a one-month lag
for entities accounted for on the equity method. Summarized earnings
information (on a 100% basis for these entities) for the three-month periods
ended April 30, 1997 and 1996 follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . $228,518 $185,872
Operating earnings . . . . . . . . . . . . . . . . . . . . 26,674 30,042
Pretax earnings (before interest expense for those
entities whose activities are funded by capital
contributions of the owners) . . . . . . . . . . . . . . 19,111 21,420
</TABLE>
-7-
<PAGE> 10
The construction of certain of these partnerships' properties was funded
using term loans secured by their assets and in some cases by contractual
commitments or guaranties of the partners. Information concerning the debt of
these entities to third parties at April 30, 1997 and January 31, 1997 and the
Company's proportionate share of such debt at April 30, 1997 is summarized as
follows (in thousands):
<TABLE>
<CAPTION>
Entity Total April 30, 1997 - Company's Share
------------------------- ----------------------------------
April 30, January 31, Non-
1997 1997 Recourse Recourse Total
---------- ----------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
GAS SERVICES ACTIVITIES
Belvieu Environmental Fuels . . . . . . . . . $127,111 $136,889 $ 6,667 $ 35,703 $ 42,370
C&L Processors Partnership . . . . . . . . . 66,709 71,209 18,012 15,343 33,355
Gulf Coast Fractionators . . . . . . . . . . 58,375 61,750 2,465 20,155 22,620
-------- -------- ------- -------- --------
252,195 269,848 27,144 71,201 98,345
-------- -------- ------- -------- --------
REAL ESTATE ACTIVITIES
Grogan's Mill Apartments . . . . . . . . . . 19,527 18,392 - 9,764 9,764
Mitchell Mortgage Company, LLC . . . . . . . 23,158 21,258 - 11,347 11,347
The Woodlands Mall Associates . . . . . . . . 65,000 65,000 - 32,500 32,500
Woodlands Office Equities B'95 Limited . . . 12,338 12,411 1,851 1,234 3,085
Others (which own commercial
properties in The Woodlands) . . . . . . . 37,293 37,410 2,220 15,238 17,458
-------- -------- ------- -------- --------
157,316 154,471 4,071 70,083 74,154
-------- -------- ------- -------- --------
$409,511 $424,319 $31,215 $141,284 $172,499
======== ======== ======= ======== ========
</TABLE>
See Note 4 of Notes to Consolidated Financial Statements on pages 48 and 49 of
the Company's Fiscal 1997 Annual Report for additional information concerning
the indebtedness of these partnerships.
(3) LONG-TERM DEBT
In April 1996, the Company entered into an agreement with a group of banks for
a facility to provide letters of credit to collateralize appeals bonds in
connection with the North Texas water well litigation discussed in Note 5
(including the $204,000,000 judgment). In August 1996, letters of credit of
$184,300,000 were issued by the banks supporting a supersedeas bond of
$224,850,000 that was filed in connection with the appeal of the litigation
involving the $204,000,000 judgment. Additional letters of credit can be
issued under this facility, if required, during a period extending until April
1999, and any amounts drawn against the letters of credit are payable in April
2000.
The Company's bank revolving credit agreements consist of committed
facilities aggregating $200,000,000 for its Energy and Real Estate operations.
At April 30, 1997, nothing was borrowed under the revolving credit agreements,
and the Company had $200,000,000 in borrowing capacity available under these
agreements. See Note 5 of Notes to Consolidated Financial Statements on pages
49 and 50 of the Company's Fiscal 1997 Annual Report for additional information
concerning the Company's indebtedness.
(4) INCOME TAXES
Income taxes for the three-month periods ended April 30, 1997 and 1996 consist
of the following (in thousands):
<TABLE>
<CAPTION>
1997 1996
------- ----------
<S> <C> <C>
CURRENT
Federal . . . . . . . . . . . . . . . . . . . . . . . . $ 1,769 $ 2,747
State . . . . . . . . . . . . . . . . . . . . . . . . . 361 496
------- -------
2,130 3,243
------- -------
DEFERRED
Federal . . . . . . . . . . . . . . . . . . . . . . . . 6,265 8,789
State . . . . . . . . . . . . . . . . . . . . . . . . . 407 339
------- -------
6,672 9,128
------- -------
$ 8,802 $12,371
======= =======
</TABLE>
-8-
<PAGE> 11
The estimated annual tax rates of 34.8% and 34.7% used in computing the
income tax provisions for the three-month periods ended April 30, 1997 and 1996
approximated the 35% statutory Federal income tax rate as the benefit of
Federal tax credits somewhat more than offset the impact of state income taxes.
(5) LITIGATION CONTINGENCIES
NORTH TEXAS WATER WELL LITIGATION. On March 1, 1996, in a trial known as the
Bartlett case, a judgment was entered against a wholly owned subsidiary of the
Company by a Wise County, Texas court. The judgment awarded $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 awarded
were not large relative to the total judgment, and no significant medical
problems were alleged. The Company appealed this judgment to the Second Court
of Appeals in Fort Worth, Texas. A hearing was held on March 12, 1997, but the
court's decision is not expected for three to six months after that date. 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, either by the Second Court of Appeals or, if required,
after a subsequent appeal to the Texas Supreme Court.
On May 28, 1997, a jury in the same Wise County court found unanimously on
all counts that the Company was not responsible for damages claimed by 17 other
plaintiff groups in an 11-week trial known as the Bailey case. The claims made
by the Bailey plaintiffs were virtually identical to those made in the Bartlett
case. While a final judgment has not yet been entered in the Bailey case, the
trial court is expected to affirm the jury's verdict. In addition, similar
lawsuits (each claiming damages of more than $1,000,000) have been brought by 29
other plaintiff groups. Judges have not been appointed and essentially no
discovery has taken place for 28 of these cases, and trial dates have not been
set for any of the 29.
Aggregate charges of $32,000,000 (including $7,000,000 in April 1997) have
been recorded to provide for costs the Company considers probable that it will
incur in connection with the existing litigation related to this matter.
Consistent with the Company's belief that it is not responsible for the alleged
problems, the provisions consisted largely of expected costs for attorneys'
fees, bonds, etc., to appeal the March 1996 judgment to the necessary level and
to defend the Company in the other suits. The April 1997 provision of
$7,000,000 was recorded because of increases in estimated attorneys' fees and
other defense costs associated principally with the Bailey trial, which began
sooner and ran longer than had been anticipated. The setting of this case for
trial on March 17 rather than in the summer necessitated greatly expanding the
number of attorneys involved in trial preparation, making this more expensive
than it otherwise would have been.
Although the Company believes that the litigation and the claims for
damages ultimately will be resolved for significantly less than the amount of
the judgment and the claims for alleged damages, it is possible that the
Company's costs could exceed its aggregate accrual of $32,000,000. However, the
Company has no basis on which to estimate a range of such possible additional
losses, if any, because of errors it believes were made by the trial court in
the Bartlett case and since the Company believes, as supported by the verdict
in the Bailey case, that it was not responsible for the water well problems and
that its actions did not provide a basis for the awarding of exemplary damages.
The Company believes that recoveries of at least a portion of its defense
costs (and settlement/judgment costs, if any) should be available from the
companies that have participated in its longstanding insurance program.
Accordingly, the Company has notified the numerous insurance carriers whose
policies covered the Company's North Texas operations over the period that
might relate to the alleged problems. In May 1996, a lawsuit was filed by one
of the Company's insurers seeking a declaratory judgment that it does not have
a duty to indemnify the Company in these lawsuits. In June 1996, the Company
filed a declaratory
-9-
<PAGE> 12
action in another court seeking to have the court declare respective rights of
the parties, including duties of the insurance carriers to defend and indemnify
the Company under its insurance policies. In October 1996, a standstill
agreement was executed which delayed actions in these suits at least until
August 1997.
The Company believes that four of its insurance carriers have
responsibilities for participating in the costs of providing a defense in this
litigation and has been negotiating with these companies concerning their
participation. In May 1997, a reimbursement agreement covering a portion of
the Company's defense costs was entered into with one of these carriers and
discussions continue with the other three.
Because of uncertainties regarding the Company's ultimate liability and
when the alleged problems occurred and the large number of insurance carriers
that might be involved, the Company is presently unable to predict the outcome
of the insurance-related legal actions. The Company similarly is unable to
ascertain whether future agreements will be reached with its insurors or to
estimate the magnitude of any additional recoveries, and accordingly has
excluded such in determining its financial statement accruals for this
litigation.
ROYALTY OWNER LITIGATION. A suit styled Rowan Estate Trust, et al v.
Mitchell Energy & Development Corp., et al (the Rowan suit), originally brought
by 46 royalty owners and later certified as a class-action in July 1996, seeks
additional royalties on gas produced in certain North Texas counties and paid
during a period extending from July 1991 to the present. This suit, which is set
for trial in the 43rd District Court in Parker County, Texas in July 1997,
alleges that the Company breached its duties in marketing the gas and conspired
to tortiously interfere with the plaintiffs' royalty contracts. The plaintiffs
seek an accounting, actual and punitive damages, pre- and post-judgment interest
and attorneys' fees. The Company believes that its royalty payment practices
have been appropriate and will aggressively defend itself in this litigation.
In January 1997 (after the district court's December 1996 ruling that the
Rowan suit did not cover pre-July 1991 payments), another lawsuit, Russell
Elvis Lawrence, et al v. Mitchell Energy & Development Corp., et al, was filed
in the 43rd District Court by the plaintiffs' attorneys with similar
allegations covering earlier periods. There has been no discovery, and a trial
date has not been set for this case.
OTHER LITIGATION OR POTENTIAL LITIGATION. Related to flooding in the North
Houston area in October 1994, legal actions have been brought in various Texas
state courts or threatened against the Company and third-party realtors and
engineers by 72 home owners in The Woodlands and against certain developers,
governmental entities and the Company by 17 property owners in surrounding
communities (after 50 such owners dismissed their claims in May 1997). 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,
development and maintenance.
SUMMARY. Management believes, after consultation with outside counsel, that
adequate financial statement accruals have been provided for all known
litigation contingencies where losses are deemed probable. Since the ultimate
costs will depend on the outcomes of the uncertainties discussed in this note,
it is possible, however, that additional future charges might be required that
would be significant to the operating results of a particular period. Based on
the status of the various cases and for other reasons discussed herein, the
Company is unable to determine a range of such possible additional losses, if
any, that might be incurred in connection with this litigation. However,
management and outside counsel believe it is not probable that the ultimate
resolution of these matters will have a material adverse effect on the Company's
financial position.
(6) OTHER CONTINGENCIES
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.
-10-
<PAGE> 13
(7) SEGMENT INFORMATION
Selected industry segment data for the three-month periods ended April 30, 1997
(fiscal 1998) and 1996 (fiscal 1997) are as follows (in thousands):
<TABLE>
<CAPTION>
Segment Total
Outside Operating Operating Capital
Revenues Earnings Earnings DD&A Expenditures(a)
------------------- ----------------- -------------------- ---------------- -----------------
1997 1996 1997 1996 1997 1996 1997 1996 1997 1996
-------- -------- ------- -------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EXPLORATION AND PRODUCTION
Operations . . . . . . . . $ 57,929 $ 58,108 $13,845 $12,320 $10,916 $ 9,266 $21,845 $24,189 $33,308 $24,140
Litigation provision
(see Note 5) - - (7,000) - (7,000) - - - - -
Gain from sale of contract
drilling assets . . . . . 2,382 - 2,382 - 2,382 - - - - -
Severance tax refunds . . . - - - 3,879 - 3,879 - - - -
Columbia Gas contract
settlement proceeds . . . - 3,444 - 3,444 - 3,444 - - - -
-------- -------- ------- ------- ------- ------- ------- ------- ------- -------
60,311 61,552 9,227 19,643 6,298 16,589 21,845 24,819 33,308 24,140
-------- -------- ------- ------- ------- ------- ------- ------- ------- -------
GAS SERVICES
Natural gas processing. . . 80,786 82,277 8,595 12,370 7,824 11,526 898 764 1,550 1,795
Natural gas gathering
and marketing . . . . . . 24,297 51,110 4,454 6,597 3,545 5,646 1,259 940 8,618 3,113
Other . . . . . . . . . . . 4,337 4,142 3,983 3,783 3,896 3,756 27 27 2 74
-------- -------- ------- ------- ------- ------- ------- ------- ------- -------
109,420 137,529 17,032 22,750 15,265 20,928 2,184 1,731 10,170 4,982
-------- -------- ------- ------- ------- ------- ------- ------- ------- -------
REAL ESTATE . . . . . . . 37,145 38,272 11,235 9,695 10,021 8,483 1,245 1,442 11,318 4,178
-------- -------- ------- ------- ------- ------- ------- ------- ------- -------
CORPORATE . . . . . . . . . - - - - (3,243)(b) (3,024)(b) 814 698 1,193 2,056
-------- -------- ------- ------- ------- ------- ------- ------- ------- -------
$206,876 $237,353 $37,494 $52,088 $28,341 $42,976 $26,088 $28,690 $55,989 $45,356
======== ======== ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
- ----------------------------------
(a) On accrual basis, including exploratory expenditures.
(b) General corporate expenses
Effective April 1, 1997, the Company sold its remaining contract drilling
assets for $3,500,000. A gain of $2,382,000 was recorded on this transaction.
During the first quarter of fiscal 1997, the Company recorded a severance
tax refund of $3,879,000 which was related to the retroactive designation of a
portion of the Boonsville field in North Texas as a "tight gas formation area"
by the Texas Railroad Commission.
During the first quarter of fiscal 1997, the Company received $3,444,000
as its share of proceeds in settlement of breach of contract claims brought
against Columbia Gas Transmission Company. In conjunction with its filing for
protection under the bankruptcy laws in July 1991, Columbia unilaterally
rejected its high-priced, long-term natural gas purchase contracts, including
one with the Company. During fiscal 1997's first quarter, the Company reached
an agreement with Columbia as to the amount of the contract termination
damages; after approval by the bankruptcy court, Columbia paid such damages to
the Company.
Because of their magnitude and unusual nature, and in accordance with
Accounting Principles Board Opinion No. 30, the items discussed in the
preceding paragraphs have been reported as separate components of segment
operating earnings.
(8) SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid - exclusive of amounts capitalized, but including amounts
reported as cost of sales for finance operations - totaled $4,707,000 and
$5,308,000 during the three-month periods ended April 30, 1997 and 1996.
Income taxes paid during these periods totaled $9,234,000 and $190,000. There
were no significant non-cash investing or financing activities during the
three-month periods ended April 30, 1997 and 1996.
-11-
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
POSITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING INFORMATION
This Form 10-Q includes forward-looking statements. These include, among
others, the discussions below concerning the Company's liquidity and capital
resources. Although the Company believes that its expectations are based on
reasonable assumptions, it can give no assurances that its goals will be
achieved. Important factors that could cause actual results to differ
materially from those in the forward-looking statements 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 impact of other pending
litigation, the attainment of forecasted operating levels and reserve
replacement, and general economic conditions such as the level of interest
rates and (in the case of real estate operations) disposable income of and the
availability and cost of mortgage financing to prospective property purchasers.
LIQUIDITY AND CAPITAL RESOURCES
With the restructuring efforts of the last three years substantially complete,
management's efforts are now directed primarily toward increasing the scope and
scale of the Company's core businesses and other initiatives to increase
shareholder value. To accomplish this, a number of strategies are being
pursued. In exploration and production, these include exploiting existing
fields on an accelerated timetable, increasing the scope of exploratory
activities and more aggressively pursuing core-area property acquisitions. The
overall goal is to increase gas and oil production 10% annually over the next
few years. In gas services, the Company is exploring expansions in its core
areas through acquisitions, asset trades and joint ventures. It is expanding
operations into the new, high-growth Austin Chalk play in Louisiana and expects
to complete construction this summer of the first phase of a 50%-owned
gathering system for production from this area. In The Woodlands, these
efforts involve increasing the sales pace for residential lots and commercial
land and accelerating the development of commercial properties.
The Company has substantially paid down its debt in recent years,
strengthening its financial position and increasing its flexibility to pursue
growth opportunities. At April 30, 1997, $601 million of total debt was
outstanding, or almost $400 million less than the $994 million balance
(including short-term debt) at the beginning of fiscal 1995. Also, the Company
held approximately $38 million in excess cash balances at April 30, 1997, and
its debt- to-equity ratio (based on total debt) was 1.08-to-1, down from 1.26
at January 31, 1997. Furthermore, the Company has almost no debt maturities
prior to July 1999, when $100 million in senior notes are payable.
As discussed in Note 5 on page 9 of this Form 10-Q, a $204 million
judgment was entered against a subsidiary in a North Texas water well case on
March 1, 1996, and additional similar cases are pending. The Company appealed
this judgment to the Second Court of Appeals in Fort Worth, Texas. A hearing
was held on March 12, 1997, but the court's decision is not expected for three
to six months after the hearing. The Company and its outside counsel continue
to believe that the judgment will be reversed or significantly reduced, either
by that court or, if required, after an appeal to the Texas Supreme Court. On
May 28, 1997, in a trial for the second group of these cases, known as the
Bailey trial, the jury found unanimously on all counts that the Company was not
responsible for damages claimed by the 17 plaintiff groups. While a final
judgment has not yet been entered in the Bailey case, the trial court is
expected to affirm the jury's verdict.
While the judgment and pending cases remain outstanding, the Company
expects that its access to public debt and equity markets would be reduced and
its costs for any such transactions would be increased. However, the Company
presently does not foresee a need to access public debt or equity markets prior
to the time that more definitive decisions are expected to have been reached on
the North Texas water well litigation. Furthermore, under a $500 million letter
of credit facility put in place in April 1996, the Company has more than $300
million of credit available that can be used, if needed, should appeal bonds be
required in connection with decisions in the similar cases. For these reasons
and because of the favorable verdict in the Bailey Case (and since it has $200
million of additional credit available under other committed facilities), the
Company believes the litigation will not have a significant adverse impact on
its ability to meet its financial obligations or to fund its ongoing operations
as the process of dealing with this litigation continues.
-12-
<PAGE> 15
The Company expects that its fiscal 1998 operating cash flows, together
with its available excess cash balances, will be sufficient to provide for its
spending needs, including an expanded capital spending program. The Company's
long-term funding needs could be significantly affected, however, by a
resolution of the outstanding North Texas water well litigation. If, as the
Company expects, the judgment ultimately is overturned or significantly reduced
and substantial losses are not forthcoming in the other cases, resolution of
the litigation would not have a material impact on either the Company's
liquidity or its financial statements. Conversely, should the judgment
ultimately be affirmed and/or substantial awards be made and upheld in the
other cases, this would have a material adverse affect on both the Company's
liquidity and its financial statements.
CAPITAL AND EXPLORATORY EXPENDITURES
The Company's fiscal 1998 budget was set at $283.3 million, 20% above fiscal
1997's actual spending. In line with the Company's goal of replacing reserves
produced while increasing oil and gas production by 10% in fiscal 1998, the
budget calls for a $20 million increase (to $106 million) in exploration and
development drilling spending. On an overall basis, gas services capital
spending is slated to increase only slightly as expenditures incurred in fiscal
1998 to complete construction of the Louisiana Chalk gathering system will
essentially replace amounts spent on the expansion of a 45%-owned Texas Chalk
gathering and treating system that was completed early in fiscal 1997. The
increased real estate capital budget is intended to allow the Company to take
advantage of the continuing favorable business climate in the Houston region.
Accelerated land development spending to keep pace with the growth in
residential lot and commercial land sales and an aggressive commercial building
program to develop an inventory of available office and retail space in The
Woodlands for prospective tenants are the principal components of the budget
increase. Specific projects include a 150,000-square-foot office building,
expansion of a retail center near The Woodlands Mall, a new neighborhood retail
center and an 80-unit addition to some existing apartments. Also comprising a
significant portion of the real estate capital budget are interest and other
carrying costs incurred in the Company's land development activities; such
capitalized costs were budgeted at $27.7 million in fiscal 1998, down slightly
from the prior year's level. During the first quarter, capital additions
totaled $56 million. The spending pace was slowed by weather- related delays
affecting certain oil and gas and real estate projects. For the full year,
however, capital additions are expected to approximate the $283.3 million
budget.
OPERATING STATISTICS
Certain operating statistics (including, where applicable, proportional
interests in equity partnerships) for the three- month periods ended April 30,
1997 and 1996 follow:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
AVERAGE DAILY VOLUMES
Natural gas sales (Mcf) . . . . . . . . . . . . . 238,200 231,900
Crude oil and condensate sales (Bbls) . . . . . . 5,700 5,600
Natural gas liquids produced (Bbls) . . . . . . . 46,600 44,500
Pipeline throughput (Mcf) . . . . . . . . . . . 439,200 424,300
AVERAGE SALES PRICES
Natural gas (per Mcf) . . . . . . . . . . . . . . $ 2.23 $ 2.27
Crude oil and condensate (per Bbl) . . . . . . . 19.99 19.45
Natural gas liquids produced (per Bbl) . . . . . 13.46 14.15
RESIDENTIAL LOT SALES - THE WOODLANDS
Lots sold . . . . . . . . . . . . . . . . . . . . 309 370
Average price per lot . . . . . . . . . . . . . . $47,801 $39,622
Average price per square foot . . . . . . . . . . 4.48 4.06
</TABLE>
-13-
<PAGE> 16
RESULTS OF OPERATIONS - THREE MONTHS ENDED APRIL 30, 1997
COMPARED WITH THREE MONTHS ENDED APRIL 30, 1996
The Company's results for the three-month periods ended April 30, 1997 and 1996
- - both before and after unusual items - are summarized in the table on the
following page. Net earnings for fiscal 1998's first three months of $16.5
million were $6.7 million below those of the prior-year period. Unusual items
reduced net earnings of the fiscal 1998 period by $2.8 million, but added $4.5
million to those of the fiscal 1997 period. Excluding the effects of unusual
items, fiscal 1998's first quarter earnings of $19.3 million were $.6 million
above the $18.7 million of the prior-year period.
The following table and discussion identify and explain the major
increases (decreases) in earnings for the three- month periods (in millions):
<TABLE>
<CAPTION>
Segment Operating Earnings
-------------------------------
Exploration
and Gas Real Pretax Net
Production Services Estate Other* Earnings Earnings
---------- -------- ------ ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
FISCAL 1997 AMOUNTS . . . . . . . . . . . . . . $19.6 $22.8 $ 9.7 $ (16.5) $35.6 $23.2
----- ----- ------ ------- ----- -----
ELIMINATE IMPACT OF FISCAL 1997
UNUSUAL ITEMS - (see page 11)
Severance tax refund . . . . . . . . . . . . . 3.9 - - - 3.9 2.4
Columbia Gas contract settlement proceeds . . . 3.4 - - - 3.4 2.1
----- ----- ------ ------ ----- -----
7.3 - - - 7.3 4.5
----- ----- ------ ------ ----- -----
FISCAL 1997 AMOUNTS BEFORE UNUSUAL ITEMS . . . 12.3 22.8 9.7 (16.5) 28.3 18.7
----- ----- ------ ------ ----- -----
MAJOR INCREASES (DECREASES)
Absence of proved-property impairments . . . . 3.1 - - - 3.1 2.0
Increased operating expenses . . . . . . . . . (1.2) - - - (1.2) (.8)
Natural gas processing
Price-related decreases in NGL margins . . . - (2.0) - - (2.0) (1.3)
Higher production volumes . . . . . . . . . - .8 - - .8 .5
Hedging losses recognized in fiscal
1998 on NGL fractionation spreads . . . . . - (1.7) - - (1.7) (1.1)
Gas gathering and marketing . . . . . . . . . . - (2.1) - - (2.1) (1.4)
Real Estate
The Woodlands . . . . . . . . . . . . . . . - - .4 - .4 .3
Other properties . . . . . . . . . . . . . . - - 1.1 - 1.1 .7
Interest expense incurred . . . . . . . . . . . - - - 2.0 2.0 1.3
Earnings from excess cash and
venture capital investments . . . . . . . . - - - 1.9 1.9 1.2
Other, net . . . . . . . . . . . . . . . . . . (.3) (.8) - .4 (.7) (.4)
Higher effective tax rate . . . . . . . . . . . - - - - - (.4)
----- ----- ------ ------ ----- -----
1.6 (5.8) 1.5 4.3 1.6 .6
----- ----- ------ ------ ----- -----
FISCAL 1998 AMOUNTS BEFORE UNUSUAL ITEMS . . . 13.9 17.0 11.2 (12.2) 29.9 19.3
----- ----- ------ ------ ----- -----
FISCAL 1998 UNUSUAL ITEMS
Litigation provision (see page 9) . . . . . . . (7.0) - - - (7.0) (4.3)
Gain from sale of remaining
contract drilling assets (see page 11) . . . 2.4 - - - 2.4 1.5
----- ----- ------ ----- ----- -----
(4.6) - - - (4.6) (2.8)
----- ----- ------ ------ ----- ------
FISCAL 1998 AMOUNTS AFTER UNUSUAL ITEMS . . . $ 9.3 $17.0 $ 11.2 $(12.2) $25.3 $ 16.5
===== ===== ====== ====== ===== ======
</TABLE>
- -------------------------------
*Includes general and administrative expense and other expense.
-14-
<PAGE> 17
EXPLORATION AND PRODUCTION OVERVIEW
Exclusive of unusual items, exploration and production segment operating
earnings of $13.9 million during fiscal 1998's first quarter were $1.6 million
above the $12.3 million of the prior-year's comparable period. Although the
Company's average natural gas sales price during fiscal 1998's first quarter of
$2.23 per Mcf was only slightly different from the $2.27 average of the prior
year's first quarter, the averages were achieved in vastly different manners.
The Company's average sales price for natural gas fell from $4.18 per Mcf in
January 1997 to $2.88 in February before stabilizing just above $1.90 in March
and April (and rebounding to almost $2.20 in May). Conversely, natural gas
prices rose steadily during the prior year's first quarter.
ABSENCE OF PROVED-PROPERTY IMPAIRMENTS ($3.1 MILLION INCREASE). There were no
proved-property impairment charges during fiscal 1998's first quarter. A $3.1
million impairment charge was recorded in the prior-year period because of
disappointing drilling results for one well and downward revisions in reserve
estimates for one field in the Gulf of Mexico.
HIGHER OPERATING EXPENSES ($1.2 MILLION DECREASE). This unfavorable variance
resulted principally from increased expenses for surface and subsurface repairs
and maintenance. Also, the prior-year period benefitted from reimbursements by
a third party under an indemnification agreement of expenses incurred several
years ago.
GAS SERVICES OVERVIEW
Gas services operating earnings before unusual items declined $5.8 million (to
$17.0 million) during the first quarter of fiscal 1998 as price-related
reductions in margins caused gas processing and gas gathering and marketing
earnings to decline by $3.8 million and $2.1 million, respectively.
NATURAL GAS PROCESSING - PRICE-RELATED DECREASES IN NGL MARGINS ($2.0 MILLION
DECREASE). NGL margins were lower in fiscal 1998's first quarter as NGL prices
retreated sharply from the extremely high level experienced in the prior year's
fourth quarter. The average price for NGLs produced of $13.46 per barrel was
5% below the prior period's $14.15, decreasing NGL revenues by $2.8 million.
Partially offsetting this was a $.8 million decrease in feedstock costs under
percent-of-proceeds agreements that resulted from the lower NGL prices.
NATURAL GAS PROCESSING - HIGHER NGL VOLUMES ($.8 MILLION INCREASE). NGL
production volumes averaged 46,600 barrels per day, up from 44,500 in the
prior-year period, increasing operating earnings by $.8 million. Higher
production at the Bridgeport plant was the primary cause of this variance. Gas
volumes processed at that plant rose because of increases in the Company's
North Texas gas production and third-party volumes added during fiscal 1997.
Also, early in fiscal 1997, NGL recovery rates had been reduced as ethane was
rejected because of insufficient CO2 treating capacity before additional
equipment was installed in July 1996.
NATURAL GAS PROCESSING - HEDGING LOSSES RECOGNIZED IN FISCAL 1998 ON NGL
FRACTIONATION SPREADS ($1.7 MILLION DECREASE). After market prices had risen
sharply during the fourth quarter of fiscal 1997, the Company executed futures
contracts to lock-in profit margins on certain of its NGL products. Since the
market prices continued to increase after the hedge was entered into, the
closing of the futures contracts resulted in the recording of hedging losses
equal to the difference between the margins achieved via the hedges and actual
margins realized when the hedged product was produced and sold in fiscal 1998.
GAS GATHERING AND MARKETING ($2.1 MILLION DECREASE). Price-related declines in
gross profits were the principal cause of this unfavorable variance. A
substantial portion of the natural gas supply costs of these activities is
based on beginning-of-the-month market index prices or fixed prices. Sharp
downward movement in natural gas prices adversely impacted profit margins
during fiscal 1998's first quarter; whereas in the prior-year period, sharp
upward movement in gas prices inflated these margins.
-15-
<PAGE> 18
REAL ESTATE OVERVIEW
Operating earnings from real estate activities during the first three months of
fiscal 1998 totaled $11.2 million, $1.5 million more than in the corresponding
period of the prior year. Operating earnings attributable to the Company's
activities in The Woodlands totaled $10.8 million, up $.4 million from the
strong performance of the fiscal 1997's first quarter. Earnings from
activities outside The Woodlands totaled $.4 million, or $1.1 million more than
the prior period's $.7 million loss. This improvement was largely attributable
to gains from asset sales as the process of liquidating the majority of these
holdings continues.
REAL ESTATE - THE WOODLANDS ($.4 MILLION INCREASE). Operating earnings for
activities in The Woodlands matched the strong performance of the fiscal 1997
period when 370 residential lots sold equalled the highest level ever for a
single quarter. Although the record volume was not duplicated, the sale of 309
lots puts the Company on pace to achieve its fiscal 1998 sales target of 1,250.
Contributing to the period-to-period operating earnings increase was a 10%
increase in the average per square foot sales price for residential lots and
the recognition of $1.4 million in previously deferred profits on residential
lot sales.
OTHER
INTEREST EXPENSE INCURRED ($2.0 MILLION INCREASE). Interest expense incurred
was $2.0 million lower during fiscal 1998's first quarter because of a $124.9
million decline in the average balance of outstanding debt. This resulted from
the repayment of a $30 million term loan on January 28, 1997 and $100 million
of senior notes on February 18, 1997.
-16-
<PAGE> 19
Part II - Other Information
ITEM 1. LEGAL PROCEEDINGS
See Note 5 of Notes to Unaudited Consolidated Financial Statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
12 Computation of ratio of earnings to fixed charges
(b) No reports were filed on Form 8-K during the three-month period
ended April 30, 1997.
-17-
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MITCHELL ENERGY & DEVELOPMENT CORP.
-----------------------------------
(Registrant)
Dated: June 2, 1997 By: /s/ Philip S. Smith
---------------------------------------
Philip S. Smith
Senior Vice President - Administration
and Chief Financial Officer
-18-
<PAGE> 21
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
12 Computation of ratio of earnings to fixed charges
27 Financial Data Schedule
</TABLE>
<PAGE> 1
Exhibit 12
Mitchell Energy & Development Corp.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(dollar amounts in thousands)
<TABLE>
<CAPTION>
Three
Months
Fiscal Year Ended January 31 Ended
------------------------------------------------------ April 30,
1993 1994 1995 1996 1997 1997
--------- --------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
EARNINGS
Pretax earnings . . . . . . . . . . . . . . . . $ 60,022 $ 47,376 $ 70,551 $ 58,331 $ 159,596 $25,279
Add (Deduct):
Previously capitalized interest
charged against pretax earnings . . . . . 9,545 11,552 22,158 79,499(d) 45,735(d) 3,613
Losses of less-than-50%-owned persons . . . 99 32 1,104 9 1 47
Fixed charges (see below) . . . . . . . . . 85,169 84,788 85,988 78,992 66,888 14,399
Reverse effect of inclusion of interest
capitalized in fixed charges above . . . . (34,161) (33,956) (33,011) (28,561) (25,788) (6,690)
Undistributed earnings of
less-than-50%-owned persons . . . . . . . (10,305) (3,594) (914) (4,321) (12,024) (4,648)
-------- -------- -------- -------- -------- -------
$110,369 $106,198 $145,876 $183,949 $234,408 $32,000
======== ======== ======== ======== ======== =======
FIXED CHARGES
Interest expense incurred
Consolidated (a) (b) . . . . . . . . . . . . $ 77,451 $ 75,252 $ 71,570 $ 65,802 $ 57,183 $12,136
50%-owned persons . . . . . . . . . . . . . 4,609 6,236 7,912 9,957 7,538 1,780
Less-than-50%-owned persons . . . . . . . . - - 3,032(e) - - -
-------- --------- --------- --------- -------- -------
82,060 81,488 82,514 75,759 64,721 13,916
Portion of rental expense
representing interest (c) . . . . . . . . . 3,109 3,300 3,474 3,233 2,167 483
-------- --------- --------- --------- -------- -------
$ 85,169 $ 84,788 $ 85,988 $ 78,992 $ 66,888 $14,399
======== ========= ========= ========= ======== =======
RATIO OF EARNINGS TO FIXED CHARGES . . . . . . 1.30 1.25 1.70 2.33 3.50 2.22
======== ========= ========= ========= ======== =======
</TABLE>
- ------------------------------------
(a) Consists of interest expense as reported in consolidated statements of
earnings and, where applicable, interest expense related to finance
operations included in costs and expenses in the consolidated
statements of earnings.
(b) At April 30, 1997, the Company had outstanding guaranties of the
indebtedness of third parties and less-than-50%-owned equity investees
totaling approximately $31,000,000 under which it has not been, nor is
it expected that it will be, required to perform. Fixed charges
related to these outstanding borrowings, estimated at approximately
$400,000 for the three months ended April 30, 1997, have been excluded
from the reported fixed charges.
(c) Represents one-third of rental expense under operating lease
(d) Includes charges totaling $31,168,000 in fiscal 1997 associated with
sales of timberlands and $66,073,000 in fiscal 1996 associated with
real estate property write-downs and sales of timberlands.
(e) At January 31, 1995, the Company had an outstanding guaranty covering
$58,667,000 of indebtedness of Belvieu Environmental Fuels (BEF), a
one-third-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 Company's reported fixed charges. This guaranty was subsequently
eliminated when BEF's debt was converted to a term loan during fiscal
1997.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-END> APR-30-1997
<CASH> 57,635
<SECURITIES> 0
<RECEIVABLES> 89,063
<ALLOWANCES> 856
<INVENTORY> 10,576
<CURRENT-ASSETS> 165,653
<PP&E> 2,140,949
<DEPRECIATION> 1,350,082
<TOTAL-ASSETS> 1,686,410
<CURRENT-LIABILITIES> 211,086
<BONDS> 601,094
0
0
<COMMON> 5,386
<OTHER-SE> 553,347
<TOTAL-LIABILITY-AND-EQUITY> 1,686,410
<SALES> 206,876
<TOTAL-REVENUES> 206,876
<CGS> 0
<TOTAL-COSTS> 169,382
<OTHER-EXPENSES> 6,769
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,446
<INCOME-PRETAX> 25,279
<INCOME-TAX> 8,802
<INCOME-CONTINUING> 16,477
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,477
<EPS-PRIMARY> .32
<EPS-DILUTED> .32
</TABLE>
