<PAGE> 1
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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, 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 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. [X]
The aggregate market value of voting stock held by nonaffiliates of the
registrant at
February 28, 1997 was approximately $173,869,000.
Shares of common stock outstanding at February 28, 1997:
Class A - 23,055,659
Class B - 28,787,047
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, 1997 - Parts I and II.
Definitive Proxy Statement to be filed within 120 days after
January 31, 1997 - Part III.
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<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, 1997 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 . . . . . . . . . . . . . . . . . . . . 7 - 13
Energy Operations - Gas Services . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 - 20
Real Estate Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 - 28
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 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. 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.
The Company owns or has interests in natural gas processing plants
located in Texas and Oklahoma, and it ranked 16th in daily domestic NGL
production in calendar 1995. The Company has fractionating equipment at
several of its processing plants and also 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 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 16,500 barrels.
The Company owns or operates natural gas gathering systems located in
Texas with an overall length of 6,200 miles. These systems operate in highly
competitive local markets and intersect with numerous pipeline systems enabling
the Company to buy, sell, transport and exchange gas with other pipeline
operators.
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<PAGE> 3
The Company's real estate activities are concentrated in The Woodlands,
a 25,000-acre planned community with a population of more than 47,000. During
each of the last seven 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 second full year of
operation in fiscal 1997. The mall has served as a catalyst for additional
commercial land sales and has enhanced 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 increase its
residential unit sales volume from the level achieved in recent years.
The Company's operations have been and in the future may be affected 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 both by domestic and 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 NGLs 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 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, purchases 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.
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<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 . . . . . . . . . . . . . . . . . . . . 7 - 13
Energy Operations - Gas Services . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 - 20
Real Estate Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 - 28
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
---------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Combined natural gas, crude oil and condensate
production (thousand cubic feet per day)* . . . . . . . . . . 261,000 249,000 252,000
Average production cost per
equivalent thousand cubic feet . . . . . . . . . . . . . . . $ .69 $ .65 $ .70
</TABLE>
- ---------------------------------------------
*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 AT JANUARY 31, 1997 Earliest Material
Concentration Expiration (a)
----------------------------- -------------------
Gross Net % Net Calendar
Location Acres Acres County or Area (b) Acres Year
-------- ------- ------- --------------------- ---- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Texas . . . . . . . . . 159,600 104,600 North Texas 48 33,200 1997
South Dakota . . . . . . 84,100 24,100 Butte 100 7,600 1998
Ohio . . . . . . . . . . 41,400 41,300 Lawrence 85 14,600 1997
Utah . . . . . . . . . . 40,600 23,500 Uintah 100 11,900 1997
Michigan . . . . . . . . 36,800 36,700 Eaton 77 2,500 1997
New Mexico . . . . . . . 27,900 25,800 Lea 71 4,900 1997
Alabama . . . . . . . . 30,400 14,000 Butler, Conecuh 72 6,100 1999
Other (c) . . . . . . . 38,500 22,700
-------- --------
Total undeveloped acreage 459,300 292,700
Producing acreage . . . 765,200 573,000
--------- --------
Total acreage . . . . . 1,224,500 865,700
========= ========
</TABLE>
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(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, Louisiana, Mississippi, Montana, Oklahoma and
Wyoming.
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<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 - 1997
North Texas . . . . . . . . 73 11 1 8 1 48 4 12 49 12
East Texas . . . . . . . . . 23 - - 1 - 21 1 - 21 2
Gulf Coast . . . . . . . . . 14 - - 3 1 10 - 1 10 3
West Texas . . . . . . . . . 84 - - 2 82 - - 82 - 2
Other . . . . . . . . . . . 15 - - 4 5 5 1 5 5 5
---- -- -- -- --- -- -- ---- --- --
Total (b) . . . . . . . . 209 11 1 18 89 84 6 100 85 24
=== == == == == == == === == ==
Net Wells
1997 . . . . . . . . . . . . 119.1 6.1 1.0 12.1 22.0 74.2 3.7 28.1 75.2 15.8
===== === === ==== ==== ==== === ==== ==== ====
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
===== ==== === ==== ==== ==== === ==== ==== =====
</TABLE>
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(a) Excludes service wells.
(b) An additional 41 wells (24.8 net wells) were in the process
of being drilled or completed on January 31, 1997.
ITEM 3 - LEGAL PROCEEDINGS
See Note 7 of Notes to Consolidated Financial Statements included in the
Company's Annual Report to Stockholders.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of fiscal 1997, no matter was submitted to a
vote of security holders, either through solicitation of proxies or otherwise.
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<PAGE> 6
EXECUTIVE OFFICERS OF THE REGISTRANT
The following is a list of the executive officers of the Company as of
March 1, 1997.
<TABLE>
<CAPTION>
Held a
Position
Continu-
ously
Name Position Age Since
---- -------- --- ---------
<S> <C> <C> <C>
George P. Mitchell Chairman and Chief Executive Officer 77 1946
Bernard F. Clark Vice Chairman 75 1956
W. D. Stevens President and Chief Operating Officer 62 1994
Roger L. Galatas Senior Vice President, Real Estate 61 1979
Philip S. Smith Senior Vice President and Chief Financial Officer 60 1980
Allen J. Tarbutton, Jr. Senior Vice President, Gas Services 58 1974
Thomas P. Battle Senior Vice President, Legal and Governmental 54 1982
Affairs, General Counsel and Secretary
</TABLE>
All of the executive officers were elected at a Board of Directors meeting
held on June 26, 1996 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.
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<PAGE> 7
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.
<TABLE>
<CAPTION>
CROSS REFERENCE TO APPLICABLE SECTIONS
OF ANNUAL REPORT TO STOCKHOLDERS PAGE
-------------------------------------- --------
<S> <C>
Quarterly Stock Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Inside
Corporate Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Back Cover
</TABLE>
The numbers of holders of record of Class A Common Stock and of Class B Common
Stock at February 28, 1997 were 2,080 and 2,069, respectively. Including those
whose shares are carried in street names, the Registrant estimates that there
are approximately 7,000 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 methods, net earnings, earnings per share before extraordinary item
and cumulative effect of change in accounting method, net earnings per share,
cash dividends per share, ratio of earnings to fixed charges, total assets and
long-term debt for the fiscal years 1993 through 1997.
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 29 through 38 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.
<TABLE>
<CAPTION>
CROSS REFERENCE TO APPLICABLE SECTIONS
OF ANNUAL REPORT TO STOCKHOLDERS PAGE
-------------------------------------- --------
<S> <C>
Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . 40 - 43
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . 44 - 59
Report of Independent Public Accountants . . . . . . . . . . . . . . . . . . . . . . . 60
Supplemental Oil and Gas Information (unaudited) . . . . . . . . . . . . . . . . . . . 61 - 64
Quarterly Financial Data (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . 39
</TABLE>
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<PAGE> 8
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, 1997 and 1996 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, 1997
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, 1997, 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, 1997, under the caption "Voting
Securities and Principal Holders Thereof."
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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, 1997, under the caption "Certain
Transactions."
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<PAGE> 9
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) . . . . . . . . . . . . . . . . . . . . . . . . . 39
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Consolidated Statements of Earnings . . . . . . . . . . . . . . . . . . . . . . . . . 41
Consolidated Statements of Stockholders' Equity . . . . . . . . . . . . . . . . . . . 42
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . 43
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . 44 - 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, 1997 and 1996 and for the Years . . . . . . . . . . . . thru
Ended January 31, 1997, 1996 and 1995 . . . . . . . . . . . . . . . . . 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.
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<PAGE> 10
EXHIBITS
<TABLE>
<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. are incorporated as an exhibit to this report by
reference to exhibit 3(b) of the annual report on Form 10-K dated January 31, 1996.
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 Chase
Manhattan Bank, as administrative agent for the banks is incorporated as an exhibit to this report by
reference to exhibit 4(c) of the annual report on Form 10-K dated January 31, 1996. The first amendment
to this agreement dated as of January 31, 1997 is attached hereto as exhibit 4(c).
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.
</TABLE>
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.
<TABLE>
<S> <C>
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.
</TABLE>
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<PAGE> 11
<TABLE>
<S> <C>
10(c) 1995 Stock Option Plan is incorporated as an exhibit to this report by reference to File No. 333-06981.
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 incorporated as an exhibit to this report by
reference to exhibit 10(d) of the annual report on Form 10-K dated January 31, 1996.
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(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.
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.
</TABLE>
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<PAGE> 12
<TABLE>
<S> <C>
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 is incorporated as an exhibit to this report by
reference to exhibit 10(m) of the annual report on Form 10-K dated January 31, 1996.
12 Computation of Ratio of Earnings to Fixed Charges.
13 Annual Report to Stockholders for the fiscal year ended January 31, 1997.
21 List of Subsidiaries as of January 31, 1997.
23 Consent of Independent Public Accountants.
27 Financial Data Schedule.
99(a) Mitchell Energy & Development Corp. Thrift and Savings Plan - Annual
Report on Form 11-K for the fiscal year ended January 31, 1997.
99(b) MND Hospitality, Inc. Thrift and Savings Plan - Annual Report on Form 11-K
for the fiscal year ended January 31, 1997.
</TABLE>
REPORTS FILED ON FORM 8-K
No reports were filed on Form 8-K during the quarter ended January 31,
1997.
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<PAGE> 13
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 March 25, 1997
- --------------------------------------------------
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.
<TABLE>
<S> <C>
/s/ George P. Mitchell March 25, 1997
- ------------------------------------------------------------
George P. Mitchell, Chairman
and Chief Executive Officer
/s/ Bernard F. Clark March 25, 1997
- -------------------------------------------------------------
Bernard F. Clark, Vice Chairman
/s/ W. D. Stevens March 25, 1997
- ------------------------------------------------------------
W. D. Stevens, Director, President
and Chief Operating Officer
/s/ Philip S. Smith March 25, 1997
- --------------------------------------------------------------
Philip S. Smith, Senior Vice President -
Administration, Chief Financial Officer
and Principal Accounting Officer
/s/ Robert W. Baldwin March 25, 1997
- -----------------------------------------------------------
Robert W. Baldwin, Director
/s/ William D. Eberle March 25, 1997
- ------------------------------------------------------------
William D. Eberle, Director
</TABLE>
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<PAGE> 14
SIGNATURES (continued)
<TABLE>
<S> <C>
/s/ Shaker A. Khayatt March 25, 1997
- ------------------------------------------------------------
Shaker A. Khayatt, Director
/s/ Ben F. Love March 25, 1997
- -------------------------------------------------------------
Ben F. Love, Director
/s/ Walter A. Lubanko March 25, 1997
- -----------------------------------------------------------
Walter A. Lubanko, Director
/s/ J. Todd Mitchell March 25, 1997
- ------------------------------------------------------------
J. Todd Mitchell, Director
- ------------------------------------------------------------
M. Kent Mitchell, Director
/s/ Constantine S. Nicandros March 25, 1997
- -----------------------------------------------------------
Constantine S. Nicandros, Director
/s/ Raymond L. Watson March 25, 1997
- ---------------------------------------------------------
Raymond L. Watson, Director
/s/ J. McDonald Williams March 25, 1997
- ----------------------------------------------------------
J. McDonald Williams, Director
</TABLE>
-13-
<PAGE> 15
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To 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 March 14, 1997. 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 8 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
March 14, 1997
S-1
<PAGE> 16
Mitchell Energy & Development Corp. and Subsidiaries
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
================================================================================
Mitchell Energy & Development Corp.
CONDENSED BALANCE SHEETS
January 31, 1997 and 1996
(in thousands)
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 48,644 $ 85
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . 1,362 1,490
Investment in consolidated subsidiaries,
at cost plus equity in undistributed earnings . . . . . . . . . . . 545,068 477,118
Advances to subsidiaries . . . . . . . . . . . . . . . . . . . . . . . 672,448 715,472
Trust fund for nonqualified retirement benefits . . . . . . . . . . . . 11,251 -
Deferred financing costs . . . . . . . . . . . . . . . . . . . . . . . 2,881 3,635
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157 182
---------- ----------
$1,281,811 $1,197,982
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current maturities of long-term debt (repaid on February 18, 1997) . . $ 100,000 $ -
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . 22,543 12,287
Long-term debt (Note C) . . . . . . . . . . . . . . . . . . . . . . . . 600,000 700,000
Deferred credits and other liabilities . . . . . . . . . . . . . . . . 3,981 3,792
Commitments and contingencies (Note D)
Stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . 555,287 481,903
---------- ----------
$1,281,811 $1,197,982
========== ==========
</TABLE>
================================================================================
Mitchell Energy & Development Corp.
CONDENSED STATEMENTS OF EARNINGS
For the Years Ended January 31, 1997, 1996 and 1995
(in thousands, except per-share amounts)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
EQUITY IN NET EARNINGS OF SUBSIDIARIES . . . . . . . . . . . $102,400 $37,480 $45,785
------- ------ ------
OTHER (INCOME) EXPENSE
Interest expense - third parties . . . . . . . . . . . . . . 53,931 54,076 55,597
Interest income on subsidiary advances . . . . . . . . . . . (54,846) (54,782) (56,353)
General and administrative expense (Note E) . . . . . . . . . - - -
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . (674) 1,010 524
Income taxes (Note B) . . . . . . . . . . . . . . . . . . . . 763 47 203
-------- --------- --------
(826) 351 (29)
-------- -------- --------
NET EARNINGS . . . . . . . . . . . . . . . . . . . . . . . . $103,226 $37,129 $45,814
======= ====== ======
EARNINGS PER SHARE . . . . . . . . . . . . . . . . . . . . . $1.99 $.71 $.87
==== === ===
</TABLE>
____________________________________________________________
The accompanying notes are an integral part of these condensed financial
statements.
S-2
<PAGE> 17
Mitchell Energy & Development Corp. and Subsidiaries
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
================================================================================
Mitchell Energy & Development Corp.
CONDENSED STATEMENTS OF CASH FLOWS
For the Years Ended January 31, 1997, 1996 and 1995
(in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $103,226 $ 37,129 $45,814
Adjustments to reconcile net earnings
to cash provided by operating activities
Equity in net earnings of subsidiaries . . . . . . . . . . . . . . (102,400) (37,480) (45,785)
Dividends from consolidated subsidiaries . . . . . . . . . . . . . 35,000 30,000 30,000
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . 39 1,154 1,939
Changes in operating assets and liabilities . . . . . . . . . . . . 10,384 3,452 (5,758)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 972 1,295 457
-------- -------- --------
Cash provided by operating activities . . . . . . . . . . . . . . . 47,221 35,550 26,667
-------- -------- --------
INVESTING ACTIVITIES
Investments in subsidiaries . . . . . . . . . . . . . . . . . . . . . . (550) (600) (2,500)
Advances (to) from subsidiaries, net . . . . . . . . . . . . . . . . . 43,024 (4,880) 216,646
Funding of trust for nonqualified retirement benefits . . . . . . . . . (11,251) - -
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (25) (25) -
-------- -------- -------
Cash provided by (used for) investing activities . . . . . . . . . . 31,198 (5,505) 214,146
-------- ------- -------
FINANCING ACTIVITIES
Debt repayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - (200,000)
Cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . (26,342) (26,421) (26,738)
Treasury stock purchases . . . . . . . . . . . . . . . . . . . . . . . (3,917) (4,227) (7,635)
Other (including debt prepayment premium of $6,420 in 1995) . . . . . . 399 338 (6,376)
-------- -------- --------
Cash used for financing activities . . . . . . . . . . . . . . . . . (29,860) (30,310) (240,749)
-------- ------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . 48,559 (265) 64
CASH AND CASH EQUIVALENTS, beginning of year . . . . . . . . . . . . . 85 350 286
-------- -------- ---------
CASH AND CASH EQUIVALENTS, end of year . . . . . . . . . . . . . . . . $ 48,644 $ 85 $ 350
======== ======== =========
</TABLE>
___________________________
The accompanying notes are an integral part of these condensed financial
statements.
S-3
<PAGE> 18
Mitchell Energy & Development Corp. and Subsidiaries
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
================================================================================
Mitchell Energy & Development Corp.
NOTES TO CONDENSED FINANCIAL STATEMENTS
JANUARY 31, 1997, 1996 AND 1995
(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 1997, 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 Company's stock option and bonus
unit plans, see Note 11 of Notes to Consolidated Financial Statements included
in the Company's Annual Report to Stockholders.
(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.
(C) Long-term Debt. A summary of outstanding long-term debt at January 31,
1997 and 1996 follows (in thousands):
<TABLE>
<CAPTION>
UNSECURED SENIOR NOTES 1997 1996
-------- --------
<S> <C> <C>
5.10%, repaid on February 18, 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
Less - Current maturities . . . . . . . . . . . . . . . . . . . . . . . . 100,000 -
------- ---------
$600,000 $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 $251,664,000 at January 31, 1997.
(D) Debt Guarantees. At January 31, 1997, MEDC was contingently liable for
the repayment of $3,640,000 in outstanding debt of an equity investee of one of
its subsidiaries. Also, MEDC was contingently liable at that date as the
guarantor of approximately $10,400,000 in outstanding bonds of 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. During August 1996, letters of credit of
$184,300,000 were issued by banks supporting a $224,850,000 supersedeas bond
that was filed in connection with an appeal of a $204,000,000 judgement in that
litigation. See Note 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> 19
Mitchell Energy & Development Corp. and Subsidiaries
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
================================================================================
(E) General and Administrative Expense Allocation. General and administrative
expense in the Condensed Statements of Earnings is net of amounts charged to
subsidiaries of $38,664,000; $44,821,000 and $42,225,000 in fiscal 1997, 1996
and 1995. The fiscal 1996 expense includes personnel reduction program costs
of $5,665,000. The charges to the subsidiaries are based on their 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; $53,100,000 and $55,180,000 during the years ended January 31,
1997, 1996 and 1995. Income taxes paid during these same periods totaled
$9,988,000; $21,634,000 and $6,877,000. There were no significant non-cash
investing or financing activities during the three-year period ended January
31,1997.
(G) Financial Instruments. Based on quoted market prices, the aggregate fair
value of MEDC's senior notes was $711,000,000 at January 31, 1997 (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> 20
MITCHELL ENERGY & DEVELOPMENT CORP. AND SUBSIDIARIES
EXHIBITS TO FORM 10-K
For the Fiscal Year Ended January 31, 1997
<PAGE> 21
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 are incorporated as an exhibit to this report by
reference to exhibit 3(b) of the annual report on Form 10-K dated January 31, 1996.
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.
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 is incorporated as an exhibit to this report by
reference to exhibit 4(c) of the annual report on Form 10-K dated January 31, 1996. The first
amendment to this agreement dated as of January 31, 1997 is attached hereto as exhibit 4(c).
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>
<PAGE> 22
INDEX TO EXHIBITS (Continued)
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------------------
<S> <C>
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(c) 1995 Stock Option Plan is incorporated as an exhibit to this report by reference to File No. 333-
06981.
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 incorporated as an
exhibit to this report by reference to exhibit 10(d) of the annual report on Form 10-K dated January
31, 1996.
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(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 January 31, 1992
10(h) The Supplemental Benefit Agreement dated August 17, 1990 between the Registrant and George P.
Mitchell.
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.
</TABLE>
<PAGE> 23
INDEX TO EXHIBITS (Continued)
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------------------
<S> <C>
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 Registrant's 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 is incorporated as an exhibit to this
report by reference to exhibit 10(m) of the annual report on Form 10-K dated January 31, 1996.
12 Computation of Ratio of Earnings to Fixed Charges
13 Annual Report to Stockholders for the fiscal year ended
January 31, 1997
21 List of Subsidiaries as of January 31, 1997
23 Consent of Independent Public Accountants
27 Financial Data Schedule
99(a) Mitchell Energy & Development Corp. Thrift and Savings
Plan - Annual Report on Form 11-K for the fiscal year ended January 31, 1997
99(b) MND Hospitality, Inc. Thrift and Savings Plan - Annual Report
on Form 11-K for the fiscal year ended January 31, 1997
</TABLE>
<PAGE> 1
Exhibit 4(c)
FIRST AMENDMENT
FIRST AMENDMENT, dated as of January 31, 1997 (this "Amendment"), to
the Credit and Reimbursement Agreement, dated as of April 8, 1996 (the "Credit
Agreement"), among (a) MITCHELL ENERGY CORPORATION, a Delaware corporation (the
"Borrower"), (b) MND ENERGY CORPORATION, a Delaware corporation ("MND"), (c) the
several banks which are parties to this Amendment (collectively, the "Banks",
each a "Bank"), including the Issuing Banks (as defined herein), and (d) THE
CHASE MANHATTAN BANK (formerly known as 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, the Borrower has requested that certain amendments
be made to the Credit Agreement as provided herein; and
WHEREAS, the Administrative Agent and the Banks are willing to effect
such amendments, but only on the terms and conditions set forth herein.
NOW, THEREFORE, the parties hereto hereby agree as follows:
I. Defined Terms. Terms defined in the Credit Agreement
and used herein shall have the meanings given to them in the
Credit Agreement.
II. Amendments to Credit Agreement; Consent to First
Amendment to MND Revolving Credit Agreement.
1. Consolidated Net Current Assets. (a) Subsection 1.1 of
the Credit Agreement is hereby amended by deleting the
definitions of "Consolidated Current Assets", "Consolidated
Current Liabilities", "Current Assets" and "Current Liabilities"
in their entirety;
(b) Subsection 5.2(a)(ii) of the Credit Agreement is
hereby amended by deleting it in its entirety and inserting in
lieu thereof;
"'(ii) [Reserved]';"; and
(c) Subsection 6.5 of the Credit Agreement is hereby amended
by deleting it in its entirety and inserting in lieu thereof:
"'6.5 [Reserved]'."
<PAGE> 2
2
2. Fixed Charge Ratio. Subsection 6.8 of the Credit
Agreement is hereby amended by deleting the ratio "1.5 to 1"
contained therein and inserting in lieu thereof the ratio "2.5 to
1."
3. For purposes of subsection 1.4 of the Credit Agreement, each Bank
consents to the amendment of the MND Revolving Credit Agreement effected by the
First Amendment thereto, dated as of the date hereof.
III. Conditions to Effectiveness. This Amendment shall
become effective as of January 31, 1997 (the "Effective Date")
but shall not become effective until the following conditions
precedent have been satisfied or waived:
(a) The Borrower, MND, the Administrative Agent and the
Required Banks shall have executed and delivered to the Administrative
Agent this Amendment.
(b) The Administrative Agent shall have received a copy of the
resolutions, in form and substance satisfactory to the Administrative
Agent, of the Board of Directors of the Borrower and MND authorizing
the execution, delivery and performance of this Amendment and the
transactions contemplated hereby, certified by the Secretary or an
Assistant Secretary of such Credit Party as of the Effective Date,
which certificate shall state that the resolutions thereby certified
have not been amended, modified, revoked or rescinded as of the date of
such certificate.
IV. General.
1. Representations and Warranties. To induce the Administrative Agent
and the Banks parties hereto to enter into this Amendment, the Borrower and MND
each hereby represents and warrants to the Administrative Agent and all of the
Banks as of the Effective Date that the representations and warranties made by
such party in the Credit Documents to which it is a party are true and correct
in all material respects on and as of the Effective Date, after giving effect to
the effectiveness of this Amendment, as if made on and as of the Effective Date.
2. Payment of Expenses. The Borrower agrees to pay or reimburse the
Administrative Agent for all of its out-of-pocket costs and reasonable expenses
incurred in connection with this Amendment, any other documents prepared in
connection herewith and the transactions contemplated hereby, including, without
limitation, the reasonable fees and disbursements of counsel to the
Administrative Agent.
<PAGE> 3
3
3. No Other Amendments; Confirmation. Except as expressly
amended, modified and supplemented hereby, the provisions of the
Credit Agreement and the other Credit Documents are and shall
remain in full force and effect.
4. Affirmation of MEDC Guarantee. MEDC hereby consents to
the execution and delivery of this Amendment and reaffirms its
obligations under the MEDC Guarantee.
5. Governing Law; Counterparts. (a) THIS AMENDMENT AND
THE RIGHTS AND OBLIGATIONS OF THE PARTIES HERETO SHALL BE
GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH,
THE LAWS OF THE STATE OF NEW YORK.
(b) This Amendment may be executed by one or more of the parties to
this Amendment on any number of separate counterparts, and all of said
counterparts taken together shall be deemed to constitute one and the same
instrument. A set of the copies of this Amendment signed by all the parties
shall be lodged with the Administrative Agent. This Amendment may be delivered
by facsimile transmission of the relevant signature pages hereof.
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed and delivered by their respective proper and duly
authorized officers as of the day and year first above written.
MITCHELL ENERGY CORPORATION
By:_________________________________
Title:
MND ENERGY CORPORATION
By:_________________________________
Title:
THE CHASE MANHATTAN BANK (formerly known as
Chemical Bank), as Administrative Agent,
as an Issuing Bank and as a Bank
By:_________________________________
Title:
NATIONSBANK OF TEXAS, N.A., as an
Issuing Bank and as a Bank
By:_________________________________
Title:
THE BANK OF NOVA SCOTIA
By:_________________________________
Title:
PNC BANK, NATIONAL ASSOCIATION
By:_________________________________
Title:
<PAGE> 5
BANK ONE, TEXAS, N.A.
By:_________________________________
Title:
BANK OF AMERICA, NATIONAL TRUST &
SAVINGS ASSOCIATION
By:_________________________________
Title:
WELLS FARGO BANK (TEXAS), NATIONAL
ASSOCIATION
By:_________________________________
Title:
CHRISTIANIA BANK OG KREDITKASSE
By:_________________________________
Title:
By:_________________________________
Title:
MORGAN GUARANTY TRUST COMPANY
By:_________________________________
Title:
THE FIRST NATIONAL BANK OF CHICAGO
By:_________________________________
Title:
THE BANK OF TOKYO-MITSUBISHI, LTD.,
HOUSTON AGENCY
By:_________________________________
Title:
<PAGE> 6
ABN AMRO BANK N.V., HOUSTON AGENCY
by: ABN AMRO North America,
Inc., as agent
By:_________________________________
Title:
By:_________________________________
Title:
SOCIETE GENERALE, SOUTHWEST AGENCY
By:_________________________________
Title:
THE LONG TERM CREDIT BANK
OF JAPAN, LTD., NEW YORK BRANCH
By:_________________________________
Title:
UNION BANK OF SWITZERLAND, HOUSTON
AGENCY
By:__________________________________
Title:
<PAGE> 7
Consented and agreed to:
MITCHELL ENERGY & DEVELOPMENT CORP.
By:_________________________________
Title:
<PAGE> 1
EXHIBIT 10(h)
SUPPLEMENTAL BENEFIT AGREEMENT
THIS AGREEMENT, made and entered into as of the 17th day of August,
1990, by and between MITCHELL ENERGY & DEVELOPMENT CORP.
("Company") and GEORGE P. MITCHELL ("Mitchell"),
W I T N E S S E T H :
WHEREAS, Mitchell has been employed by the Company in a key
executive capacity for a long and valuable career of executive service to the
Company and is currently employed by the Company as President, Chief Executive
Officer, and Chairman of the Board of Directors of the Company ("Board"); and
WHEREAS, the services of Mitchell as an employee of the Company
have been, are currently and are expected to continue to be extremely valuable
to the operation and success of the Company; and
WHEREAS, the Company wishes to recognize and reward such valuable
services of Mitchell, to encourage his continued employment and involvement in
Company affairs and to retain his services as an employee of the Company; and
WHEREAS, the Company desires to promote Mitchell's devotion to his
duties on behalf of the Company by ameliorating any uncertainty or concern as to
the financial security of his surviving spouse in the event of his death while
employed or during a period in which he may be totally and permanently disabled;
NOW, THEREFORE, the Company and Mitchell hereby agree as follows:
1. Compensation Continuation Payments.
(a) In consideration of Mitchell's continued employment
with the Company and its affiliates, the Company agrees
that, if Mitchell dies while employed by the Company or
its affiliates, the Company shall pay to Mitchell's
surviving spouse, if any, a supplemental surviving
spouse benefit in an annual amount equal to the greater
of (i) Mitchell's annual rate of base salary from the
Company in effect at the time of his death or (ii)
$625,000. Such supplemental surviving spouse benefit
shall be payable monthly in an amount equal to 1/12th
of the annual amount, beginning with the first day of
the month following Mitchell's death and ending with
the earlier to occur of (i) the date as of which
thirty-six such monthly payments have been made to such
surviving spouse or (ii) the death of such surviving
spouse. If Mitchell leaves no surviving spouse, no
such compensation continuation payments shall be made
under this Agreement.
<PAGE> 2
(b) If Mitchell's employment with the Company and its
affiliates terminates by reason of his becoming totally
and permanently disabled while employed by the Company
or its affiliates and Mitchell subsequently dies while
he remains totally and permanently disabled, the
Company shall pay to Mitchell's surviving spouse, if
any, a supplemental surviving spouse benefit in an
annual amount equal to the greater of (i) Mitchell's
annual rate of base salary from the Company in effect
as of the date he became totally and permanently
disabled or (ii) $625,000. Such supplemental surviving
spouse benefit shall be payable monthly in an amount
equal to 1/12th of the annual amount, beginning with
the first day of the month following Mitchell's death
and ending with the earlier to occur of (i) the date as
of which thirty-six such monthly payments have been
made to such surviving spouse or (ii) the death of such
surviving spouse. If Mitchell leaves no surviving
spouse, no such compensation continuation payments
shall be made under this Agreement. For purposes of
this Paragraph 1(b), total and permanent disability
shall mean any physical or mental impairment or
condition that totally and presumably permanently
prevents Mitchell from performing his normal duties for
the Company, as determined by the Board, upon receipt
of and in reliance on the medical opinion of one or
more competent individuals (selected by the Board) who
are qualified to give medical opinions. In any event,
however, a disability that is sufficient to entitle
Mitchell to benefits under the Company's Long Term
Disability Plan shall be deemed to constitute total and
permanent disability for purposes of this Paragraph
1(b).
2. Other Employment Termination.
(a) If the employment of Mitchell by the Company is terminated
for any reason other than his death or total and permanent
disability, this Agreement shall thereupon terminate, and
the Company shall have no further obligation hereunder.
(b) Nothing contained herein shall be construed to be a
contract of employment, nor confer upon Mitchell the right
to continued employment by the Company or its affiliates,
nor affect in any manner the right of Mitchell or the
Company to terminate Mitchell's employment at any time for
any reason.
(c) Mitchell shall be considered to be in the employment of
the Company so long as he remains an employee of either
the Company or an affiliate of the Company. For
-2-
<PAGE> 3
purposes of this Agreement, the term "affiliates" shall
mean any entity controlling, controlled by or under common
control with the Company.
3. Nature of Agreement. Nothing contained in this
Agreement, and no action taken pursuant to its provisions by either
party hereto shall create, or be construed to create, a trust of
any kind.
The compensation continuation payments to Mitchell's surviving
spouse shall be made from assets which shall continue, for all purposes, to be a
part of the general assets of the Company, and no person, other than the
Company, shall have, by virtue of the provisions of this Agreement, any interest
in such assets. All assets which may, in the sole discretion of the Company, be
set aside by the Company to provide amounts payable pursuant to this Agreement
shall remain subject to the claims of the creditors of the Company, present and
future. This Agreement shall constitute an unfunded, unsecured obligation of the
Company to make payments in accordance with this Agreement.
4. Effect on Other Company Benefits and Perquisites. This Agreement
is intended to provide benefits in addition to, and not in lieu of, other
company-sponsored benefits and perquisites, including, but not limited to, the
Company's group life and long-term disability plans and any other benefits to
which Mitchell or his spouse may be entitled pursuant to other Company benefit
plans or agreements.
5. Modification. This Agreement may not be modified,
altered, or amended in any way except by a written instrument
signed by the parties hereto or their respective successors or
assigns, and may not be otherwise terminated except as provided
herein.
6. Successors and Assigns. This Agreement shall be binding upon any
successor to the Company. Neither Mitchell nor his spouse shall have the power
to anticipate, dispose of, assign or pledge any right, title, interest or
benefit hereunder in any manner until the same shall have been actually
distributed free and clear of the terms of this Agreement. No right, title,
interest or benefit hereunder shall be charged with any of the torts or
obligations of Mitchell or his spouse or be subject to seizure by any creditor
of Mitchell or his spouse.
7. Administration. The Compensation Committee of the
Board shall have full power and authority to interpret, construe
and administer this Agreement.
8. Governing Law. The provisions of this Agreement shall
be governed by and construed in accordance with the laws of the
State of Texas.
-3-
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement, effective as of the day and year first above written.
MITCHELL ENERGY & DEVELOPMENT CORP.
By /s/ Bernard F. Clark
---------------------------------
Vice Chairman
/s/ George P. Mitchell
-----------------------------------
GEORGE P. MITCHELL
-4-
<PAGE> 5
<PAGE> 1
Exhibit 12
Mitchell Energy & Development Corp. and Subsidiaries
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
FOR THE YEARS ENDED JANUARY 31, 1997, 1996, 1995, 1994 AND 1993
(dollar amounts in thousands)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
EARNINGS
Pretax earnings . . . . . . . . . . . . . . . . . . . . . $159,596 $ 58,331 $ 70,551 $ 47,376 $ 60,022
Add (Deduct)
Previously capitalized interest
charged against pretax earnings . . . . . . . . . . 45,735(d) 79,499(d) 22,158 11,552 9,545
Losses of less-than-50%-owned persons . . . . . . . . 1 9 1,104 32 99
Fixed charges (see below) . . . . . . . . . . . . . . 66,888 78,992 85,988 84,788 85,169
Reverse effect of inclusion of interest
capitalized in fixed charges above . . . . . . . . (25,788) (28,561) (33,011) (33,956) (34,161)
Undistributed earnings of
less-than-50%-owned persons . . . . . . . . . . . . (12,024) (4,321) (914) (3,594) (10,305)
-------- -------- -------- -------- --------
$234,408 $183,949 $145,876 $106,198 $110,369
======== ======== ======== ======== ========
FIXED CHARGES
Interest expense incurred
Consolidated (a) (b) . . . . . . . . . . . . . . . . $ 57,183 $ 65,802 $ 71,570 $ 75,252 $ 77,451
50%-owned persons . . . . . . . . . . . . . . . . . . 7,538 9,957 7,912 6,236 4,609
Less-than-50%-owned persons . . . . . . . . . . . . . - - 3,032(e) - -
-------- -------- --------- --------- ---------
64,721 75,759 82,514 81,488 82,060
Portion of rental expense representing interest (c) . . . 2,167 3,233 3,474 3,300 3,109
--------- -------- --------- --------- ---------
$ 66,888 $ 78,992 $ 85,988 $ 84,788 $ 85,169
======== ======== ========= ========= =========
RATIO OF EARNINGS TO FIXED CHARGES . . . . . . . . . . . 3.50 2.33 1.70 1.25 1.30
======== ======== ========= ======== =========
</TABLE>
_________________________________________
(a) Consists of interest expense as reported in consolidated statements of
earnings and interest expense related to finance operations included in
costs and expenses in the consolidated statements of earnings.
(b) At January 31, 1997, the Company had outstanding guaranties of the
indebtedness of third parties and less-than-50%- owned equity investees
totaling approximately $23,000,000 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 $1,100,000 for
fiscal 1997, have been excluded from the reported fixed charges.
(c) Represents one-third of rental expense under operating lease agreements.
(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.
<PAGE> 1
EXHIBIT 13
[PICTURE]
Residential Villages
Future Villages
<PAGE> 2
MITCHELL ENERGY & DEVELOPMENT CORP.
Fiscal 1997 Annual Report / Year Ended January 31, 1997
<PAGE> 3
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, 1997, the Company had approximately 1,950 full-time
employees.
Mitchell's principal energy operations include oil and gas exploration and
production, gas processing, and gas gathering and marketing. In its most recent
fiscal year, the Company produced 87.6 Bcf of natural gas and 18.8 million
barrels of liquid hydrocarbons, including natural gas liquids, oil and
condensate. At year end, it owned or had interests in 3,090 wells and 1.2
million acres of oil and gas leases. In addition, the Company owned or operated
6,200 miles of gathering pipelines that supply gas to 16 processing plants.
The Company's real estate operations are conducted through its subsidiary,
The Woodlands Corporation, and are concentrated in The Woodlands, a 25,000-acre
community located 27 miles north of downtown Houston. At year end, the
community had 47,300 residents and a non-construction employment base of 17,300
jobs.
FORWARD-LOOKING INFORMATION
This Annual Report includes forward-looking statements. 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.
CONTENTS
<TABLE>
<S> <C>
Letter to Shareholders ..................................................... 2
Energy Operations .......................................................... 5
Real Estate Operations ..................................................... 21
Management's Discussion and Analysis of
Financial Position and Results of Operations ............................. 29
Consolidated Financial Statements ........................................ 40
Notes to Consolidated Financial Statements ................................. 44
Report of Independent Public Accountants ................................... 60
Supplemental Oil and Gas Information ....................................... 61
Historical Summary ......................................................... 65
Board of Directors ......................................................... 67
Principal Officers ......................................................... 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 and
pipeline throughput includes equity partnership interests.
On the cover (from upper left): drilling and workover rigs at the Lake Creek
field, fractionation towers at the Bridgeport processing plant, and The
Woodlands Mall.
<PAGE> 4
FINANCIAL HIGHLIGHTS
MITCHELL ENERGY & DEVELOPMENT CORP. AND SUBSIDIARIES
Year Ended January 31 (in thousands, except per-share data)
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
NET EARNINGS ...................................... $ 103,226 $ 37,129
========== ==========
EARNINGS PER SHARE ................................ $ 1.99 $ .71
========== ==========
REVENUES .......................................... $1,104,844 $1,071,747*
========== ==========
SEGMENT OPERATING EARNINGS
ENERGY
Exploration and production ........................ $ 81,432 $ 35,775
Natural gas processing ............................ 69,110 30,994
Natural gas gathering and marketing ............... 27,589 14,063
Other gas services ................................ 11,397 9,059
Unusual items
Gain from natural gas contract buyout ........... -- 205,256
Gains from sales of producing
properties and drilling rigs ................. -- 5,338
Asset write-downs ............................... -- (52,715)
Litigation provision ............................ (10,000) (15,000)
Personnel reduction program costs ............... -- (11,535)
Severance tax refunds ........................... 5,935 --
Columbia Gas contract
settlement proceeds .......................... 3,444 --
---------- ----------
188,907 221,235
---------- ----------
REAL ESTATE
Operations ........................................ 40,224 48,848
Unusual items
Write-downs of properties ....................... -- (123,916)
Personnel reduction program costs ............... -- (3,000)
Gains from sales of certain
non-Woodlands assets ......................... 2,507 --
---------- ----------
42,731 (78,068)
---------- ----------
$ 231,638 $ 143,167
========== ==========
CAPITAL AND EXPLORATORY EXPENDITURES .............. $ 235,138 $ 246,083
========== ==========
LONG-TERM DEBT (including current maturities) ..... $ 701,271 $ 827,875
========== ==========
STOCKHOLDERS' EQUITY .............................. $ 555,287 $ 481,903
========== ==========
OPERATING STATISTICS (average daily amounts)
Natural gas sales (Mcf) ........................... 228,500 216,200
Crude oil and condensate sales (Bbls) ............. 5,500 5,400
Natural gas liquids production (Bbls) ............. 46,100 46,400
Pipeline throughput (Mcf) ......................... 410,000 354,000
</TABLE>
- --------------
* Includes gain from natural gas contract buyout of $205,256.
ESTIMATED PROVED RESERVES
NATURAL GAS
At January 31 (Bcf)
[GRAPH]
LIQUID HYDROCARBONS
At January 31 (MMBbls)
[GRAPH]
1
<PAGE> 5
LETTER TO SHAREHOLDERS
Fiscal 1997 earnings were the best we've had in 14 years and the second-highest
in the Company's history. While higher energy prices, particularly in the
fourth quarter, were the main driver, this outstanding performance also
reflects the accomplishments of the last three years in restructuring the
Company to improve profitability. During this period we sold almost $300
million of marginal and non-core assets, retired nearly $400 million of debt
and substantially reduced operating and overhead costs. With the restructuring
largely complete, the Company now has a solid platform for growth in each of
its core businesses.
In exploration and production, gas reserves produced were more than
replaced for the ninth consecutive year, and we again did it the old-fashioned
way -- with the drill bit. Drilling was stepped up in the second half of fiscal
1997 to take advantage of stronger prices, and this more aggressive pace is
being continued in the current year. We expect to grow oil and gas production
by 10 percent, and to accomplish this, we're planning a significant increase in
wells drilled and a 23 percent increase in capital spending to fund this higher
level of activity.
Much of the Company's recent success in exploratory and step-out
development drilling is due to increased use of three-dimensional (3-D) seismic
surveys to help delineate and better evaluate prospects before they are
drilled. Of approximately 60 wells drilled so far from 3-D surveys, two out of
three have been successful. Based on these successes, 3-D seismic spending is
being increased in the current year.
We will have another active year in the Barnett Shale in North Texas and
will continue efforts to extend the boundaries of this important play.
Elsewhere, redevelopment of the Lake Creek field in Southeast Texas, purchased
in September 1995, has exceeded the Company's expectations. Gas production from
this field has been increased five-fold, and we see considerable remaining
potential from previously untested zones.
2
<PAGE> 6
In gas services, the fundamentals for natural gas liquids are positive,
with relatively tight supplies and growing petrochemical demand. In fact, the
gas processing business may offer the best opportunity for price, volume and
earnings growth in the next few years. We picked up 30 MMcf per day of new
natural gas supplies for processing in fiscal 1997, which enabled the Company
to more than replace the NGL production capacity that was lost with the earlier
sale of three marginal processing plants. In fiscal 1998, we expect to maintain
or increase natural gas liquids production through our own drilling program and
by aggressively pursuing new third-party gas supplies as well as acquisition
opportunities.
We also see excellent growth opportunities in gathering and marketing. A
good example is the major gathering system under construction in the Austin
Chalk trend of Central Louisiana, which is widely considered the hottest inland
drilling play in the United States today. The new system, scheduled for
completion in late summer, will build on our success in the Austin Chalk in
East Central Texas. This system, which will be 50 percent owned and operated by
the Company, will gather gas produced by our partner's wells and by other
operators now active in this area. We plan to expand this gathering venture
into processing and marketing as the drilling play develops. With the 45
percent-owned Texas Chalk system running virtually full and new gas flowing in
Louisiana, the Company's total pipeline throughput should jump nearly 25
percent this year to more than 500 MMcf per day.
In real estate, the pace of residential and commercial activity continued
to accelerate in The Woodlands. The Company set a new record for sales of
residential lots to home builders in fiscal 1997. The Woodlands also ranked No.
1 in new home sales in the Houston area for the seventh consecutive year and is
now the sales leader among all planned communities in Texas. Prospect traffic
at the new Information Center has increased considerably, and with favorable
mortgages rates, continuing strength in the local economy and the wide range of
housing choices and prices available in The Woodlands, we expect another record
year for lot sales in fiscal 1998.
NATURAL GAS SALES
NET EARNINGS
Year Ended January 31 (In Millions)
[GRAPH]
STOCKHOLDERS' EQUITY
At January 31 (In Millions)
[GRAPH]
LONG-TERM DEBT
At January 31 (In Millions)
[GRAPH]
3
<PAGE> 7
The Company is financially
stronger than it has ever been,
providing more flexibility to pursue
a range of opportunities to grow.
Demand for apartments, office and retail space also continues to grow,
with current occupancies running 90 percent or better. An aggressive building
program in The Woodlands is planned this year to provide a ready inventory of
various commercial properties for prospective tenants.
As we previously reported, a judgment was entered on March 1, 1996,
awarding $4 million in actual and $200 million in exemplary damages to eight
plaintiff groups who claimed that the Company's natural gas operations had
affected their water wells. We believe scientific evidence indicates that our
operations were not the source of the alleged problems. The Company appealed
this judgment to the state Court of Appeals in Fort Worth, Texas. A hearing was
held on March 12, 1997, but a decision from the court is not expected for at
least three and possibly six months. The Company and its outside counsel
continue to believe that the judgment will be reversed or significantly reduced
upon completion of the appeals process. Similar lawsuits have been brought by
46 other plaintiff groups. A trial involving 17 of these cases that began March
17, 1997, is still ongoing.
We are pleased with the progress we made in fiscal 1997, which reflects
the hard work and dedication of employees at all levels of the organization.
The Company is financially stronger than it has ever been, providing more
flexibility to pursue a range of opportunities to grow. We are optimistic about
the future and our plans for continuing to enhance shareholder value.
/s/ GEORGE P. MITCHELL
George P. Mitchell
Chairman and
Chief Executive Officer
/s/ W. D. STEVENS
W. D. Stevens
President and
Chief Operating Officer
March 20, 1997
4
<PAGE> 8
Mitchell expects to increase oil and gas
production by 10 percent this year and
to expand gathering, processing and
marketing in core areas and the prolific
Austin Chalk trend in Central Louisiana.
ENERGY
One characteristic that sets Mitchell Energy & Development Corp. apart from
other large independents is its extensive acreage holdings in several key
inland areas that provide a significant backlog of prospects for continuing
development. Exploration and production operations are centered mainly in North
and East Texas and along the Gulf Coast. In recent years, Mitchell has
sharpened its focus on these areas, which have provided the best economic
returns and continue to offer new exploration and development opportunities.
Extensive use of 3-D seismic and advanced well stimulation techniques have
enabled the Company to add production and reserves in these areas year after
year.
Another dimension of its operations that makes Mitchell unique among
independents is its extensive gas gathering, processing and marketing
operations. It is the 16th-largest domestic producer of natural gas liquids,
which are used primarily as feedstocks for petrochemical manufacturing and for
rural home heating. The Company also operates 6,200 miles of pipeline through
which both third-party and Mitchell's own gas production is gathered, and then
processed and marketed. Third-party gas volumes supplied roughly 75 percent of
Mitchell's natural gas liquids and accounted for almost 73 percent of the 806
MMcf of gas Mitchell marketed daily in fiscal 1997.
5
<PAGE> 9
[PICTURE]
6
<PAGE> 10
EXPLORATION
& PRODUCTION
The Company more than
replaced the gas reserves
it produced for the ninth
consecutive year in fiscal 1997
while setting a new
gas sales record.
Sharply higher market prices for natural gas and oil, combined with increased
production, resulted in much stronger earnings from exploration and production
during fiscal 1997. Excluding the effect of unusual items, operating earnings
increased by 128 percent to $81.4 million.
Outlays for exploratory and development drilling were $16 million higher
in fiscal 1997, as the Company stepped up its drilling program. However, these
increases were offset by significantly lower producing property acquisition
expenditures. In the prior year, the Company spent a total of $32.2 million,
most of which went toward the purchase of the Lake Creek field in Montgomery
County, Texas, versus only $2.3 million spent in fiscal 1997.
The Company expects to increase oil and gas production by 10 percent in
fiscal 1998 and has budgeted a 23 percent increase in capital spending, mostly
to fund higher levels of development and exploratory drilling.
OIL AND GAS SALES
Natural gas sales averaged 228.5 MMcf a day in fiscal 1997, up 6 percent
from the prior year, due primarily to production increases in Lake Creek and
North Texas. The pace of the Company's development drilling program was stepped
up in the second half of fiscal 1997 to take advantage of strong prices. The
Company increased the number of rigs at work from five to a dozen. Another one
to two rigs will be added in fiscal 1998 as part of the most aggressive
drilling program Mitchell has undertaken since the
7
<PAGE> 11
[PICTURE]
A roughneck tightens pipe
sections on a new well in
Southeast Texas.
EXPLORATION & PRODUCTION FINANCIAL HIGHLIGHTS
Year Ended January 31 (in thousands)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
REVENUES
Operations ............................................. $266,418 $214,067
Unusual items
Gain from natural gas contract buyout ................ -- 205,256
Gains from sales of producing
properties and drilling rigs ....................... -- 5,338
Columbia Gas contract settlement proceeds ............ 3,444 --
-------- --------
$269,862 $424,661
======== ========
SEGMENT OPERATING EARNINGS
Operations ............................................. $ 81,432 $ 35,775
Unusual items
Gain from natural gas contract buyout ................ -- 205,256
Severance tax refunds ................................ 5,935 --
Columbia Gas contract settlement proceeds ............ 3,444 --
Gains from sales of producing
properties and drilling rigs ....................... -- 5,338
Litigation provision ................................. (10,000) (15,000)
Personnel reduction program costs .................... -- (7,935)
-------- --------
$ 80,811 $223,434
======== ========
CAPITAL AND EXPLORATORY EXPENDITURES ................... $134,275 $141,667
======== ========
</TABLE>
EXPLORATION &
PRODUCTION
OPERATING COSTS
Year Ended January 31 (per Mcfe)
[GRAPH]
GAS PRODUCTION REPLACED
Year Ended January 31
[GRAPH]
early 1980s; 307 gross wells are planned for fiscal 1998, compared with 209
drilled in fiscal 1997. The current year drilling program includes 123 enhanced
oil recovery wells, versus 87 drilled in fiscal 1997.
The Company realized an average gas sales price of $2.64 per Mcf for
fiscal 1997, compared with $2.16 in the prior year, when it benefited from a
sales contract that paid $4 per MMBtu for roughly 45 percent of its gas
production during the first five months of that year. The unusually strong gas
prices in fiscal 1997 were driven by the cold winter of 1995/96, which resulted
in lower-than-normal inventories of gas in storage at the end of the heating
season. Average monthly prices swung from a low of $2.07 per Mcf in February
1996 to a high of $4.18 in January 1997.
Oil production increased slightly during fiscal 1997 to an average of
5,500 barrels a day, mainly due to condensate produced with gas at Lake Creek
and development of enhanced oil recovery projects in West Texas. Oil production
is expected to rise further in fiscal 1998, as discoveries in Throckmorton
County in North Texas are brought on production and development continues at
Lake Creek and in West Texas. Average oil prices also increased sharply, to
$21.50 from $16.91 a barrel in the prior year.
8
<PAGE> 12
EXPLORATION AND PRODUCTION
The Company more than replaced its natural gas production for the ninth
consecutive year and replaced oil and condensate production for the first time
in four years. Gas reserves reached a record 701.2 Bcf, and the Company
replaced 105 percent of the 87.6 Bcf of gas it produced during the year -- all
from extensions and discoveries. Oil and condensate reserves increased slightly
to 13.3 million barrels. Finding costs declined to $6.73 per barrel of oil
equivalent from $7.05 in the prior year.
Operating costs increased to 81 cents per Mcf equivalent from 77 cents in
the prior year, primarily due to increased severance taxes resulting from
higher oil and gas sales prices.
Three-dimensional seismic technology, or 3-D, is playing an increasingly
important role in the Company's oil and gas operations -- both in exploration
and development. By using 3-D, geologists and geophysicists can better pinpoint
oil and gas objectives, as it provides a more complete image of the formations
below, rather than the limited cross-sectional view provided by 2-D. Recent
surveys identified nearly 100 potential drilling locations remaining -- roughly
half of which will be drilled in the current year.
AVERAGE DAILY SALES
Year Ended January 31 (Mmcf)
[GRAPH]
AVERAGE PRICE RECEIVED
Year Ended January 31 (per Mcf)
[GRAPH]
[PICTURE]
Mitchell geophysicist
Michael Ammerman studies a
3-D view of a structure in
Throckmorton County in North
Texas, where the Company
recently made 17 oil discoveries.
Three-dimensional seismic is
playing an increasingly
important role in both exploratory
and development drilling.
9
<PAGE> 13
[PICTURE]
A rig hand guides a new stand
of pipe into place in North Texas,
where another active year is
planned in the Barnett Shale.
OIL PRODUCTION REPLACED
Year Ended January 31
[GRAPH]
[PICTURE]
Production from Lake Creek
has increased five-fold since
Mitchell purchased the field
in September 1995.
During fiscal 1997, Mitchell shot or participated in seven 3-D surveys
totaling 300 square miles, and a similar program is planned in fiscal 1998. The
Company will spend $8.2 million on seismic projects this year -- nearly 90
percent on 3-D.
In North Texas, Mitchell's most active development area, 40 gas
development wells were drilled and completed in the Barnett Shale in Wise and
Denton counties during the year, and 65 are planned for fiscal 1998. The
Company continued its efforts to expand the northern and southern boundaries of
the Barnett's commercially productive area. A nine-square-mile 3-D survey was
completed along the southern edge of the reservoir in fiscal 1997, and two
development wells that were drilled in that survey are being evaluated. A
25-square-mile survey just west of that area is being considered for fiscal
1998.
Also in Wise County, the Company pursued higher-risk development and
exploratory prospects in shallower Caddo and Atoka sands. Of the 15 wells
drilled, nine were producers. Results from those wells should help the Company
fine tune its next 3-D project in the area, a 95-square-mile survey planned for
the spring of 1997. As many as 20 Caddo and Atoka wells are planned in fiscal
1998.
Three counties to the west in Throckmorton County, where Mitchell has
interests in leases and options totaling 121,500 acres, 17 oil discoveries were
made out of 20 wells drilled in fiscal 1997. Most of these wells are awaiting
the completion of a new pipeline to handle the associated rich gas, but eight
were producing in early fiscal 1998, adding about 450 barrels a day to
Mitchell's gross oil production. Mitchell is the operator and holds a 55
percent working interest in this play. At least 20 wells identified from
earlier 3-D surveys will be drilled in fiscal 1998, and as many as 20
additional locations also are being considered. Two new 3-D surveys totaling 90
square miles are planned for the spring of 1997.
In Limestone County in East Texas, Mitchell's second-largest producing
area, a second rig was added at mid year, stepping up drilling in the Cotton
Valley Limestone, where 14 completions were made during fiscal 1997. This
two-rig program will continue into fiscal 1998. Good
10
<PAGE> 14
results also were achieved from five other wells drilled in the shallower
Cotton Valley and Travis Peak Sandstone sections in Limestone County.
Lake Creek, purchased in September 1995 as an extension of the Company's
adjacent Pinehurst field, has performed well beyond expectations, and there is
considerable upside still to be developed. So far, the emphasis has been on the
Middle Wilcox, which produces from multiple sandstone intervals at depths of
10,000 to 12,000 feet, but the Company believes there is also good potential in
a number of shallower sands. A recent recompletion in the La Gloria interval,
for example, the Lake Creek No. 23, produced at initial daily rates of 5 MMcf
of gas and 200 barrels of oil.
Lake Creek gas production has grown from 4 MMcf a day when the field was
acquired to 20 MMcf as of year end, and condensate production has grown from
300 to 1,100 barrels a day. During fiscal 1997 the Company recompleted 10
existing wells and drilled five new wells in Lake Creek. Six development wells
and four recompletions are planned in fiscal 1998. In the Pinehurst field, four
new wells were drilled and two were recompleted in fiscal 1997. Two new wells
and two recompletions are scheduled for fiscal 1998.
Results of Shell-operated exploratory drilling in Matagorda Bay near
Palacios, Texas, have been disappointing to date. An initial gas discovery made
in fiscal 1996 in the lower Frio is producing at modest rates. Two additional
wells were abandoned, but further seismic review is pending. Mitchell holds a
one-eighth interest in these wells.
In Calcasieu Parish, Louisiana, the Company is preparing to drill its
first prospects that were identified from a 56-square-mile 3-D survey shot in
April 1996. Five shallow Hackberry wells and two deeper Yegua tests are planned
for the first half of fiscal 1998. Mitchell is the operator and holds a
one-third working interest. These exploratory wells are east of recent
discoveries in the same trends in nearby Orange County, Texas, in which the
Company participated.
In Mesquite Bay off Rockport, Texas, a deep Frio well drilled in the
summer of 1996 resulted in net reserve additions to the field of 6.1 Bcf of gas
and 480,000 barrels of condensate. This well, the Mesquite Bay
CRUDE OIL & CONDENSATE SALES
AVERAGE DAILY SALES
Year Ended January 31 (Bbls)
[GRAPH]
AVERAGE PRICE RECEIVED
Year Ended January 31 (per Bbl)
[GRAPH]
[PICTURE]
Previously untested Upper
Wilcox sands offer good
upside potential at both
Lake Creek and the
adjacent Pinehurst field.
11
<PAGE> 15
[PICTURE]
At year end, the Company
had interests in 3,090 wells
and 1.2 million acres of oil
and gas leases.
No. 13-4, tested at a daily rate of 2 MMcf of gas and 367 barrels of
condensate.
An enhanced oil recovery project in Ector County in West Texas was an
important contributor to growth in both oil production and reserves, and that
program continues in fiscal 1998. Seventy-two new infill wells were drilled on
20-acre spacing during fiscal 1997, and as many as 100 more are planned in the
current year. The Company holds a 17 percent working interest in the project,
which is operated by Anadarko. This project added nearly 300 net barrels a day
to Mitchell's oil production in fiscal 1997.
Companywide, Mitchell had interests in 2,167 gas producers and 923 oil
producers at year end -- a total of 3,090 -- of which 78 were productive in two
or more zones. Excluding interests held by partners, the Company held net
interests equal to 2,502 wells -- 1,889 gas and 613 oil -- of which 70 were
productive in two or more zones.
PRINCIPAL PRODUCING AREAS
Year Ended January 31
<TABLE>
<CAPTION>
Average Daily Sales
-------------------
1997 1996
-------- --------
<S> <C> <C>
NATURAL GAS (NET MCF)
North Texas .............................................. 112,600 104,400
East Texas ............................................... 49,100 48,800
Gulf Coast ............................................... 45,300 36,000
Other .................................................... 21,500 27,000
-------- --------
Total .................................................... 228,500 216,200
======== ========
CRUDE OIL AND CONDENSATE (NET BBLS)
North Texas .............................................. 1,200 1,300
East Texas ............................................... 1,000 1,100
Gulf Coast ............................................... 1,900 1,400
West Texas/Southeast New Mexico .......................... 1,000 1,100
Other .................................................... 400 500
-------- --------
Total .................................................... 5,500 5,400
======== ========
</TABLE>
12
<PAGE> 16
WELL COMPLETIONS (1)
Year Ended January 31, 1997
<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>
North Texas ........ 73 11 1 8 1 48 4 12 49 12
East Texas ......... 23 -- -- 1 -- 21 1 -- 21 2
Gulf Coast ......... 14 -- -- 3 1 10 -- 1 10 3
West Texas ......... 84 -- -- 2 82 -- -- 82 -- 2
Other (2) .......... 15 -- -- 4 5 5 1 5 5 5
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Gross wells (3) .... 209 11 1 18 89 84 6 100 85 24
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
Net wells .......... 119.1 6.1 1.0 12.1 22.0 74.2 3.7 28.1 75.2 15.8
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
(1) Excludes service wells.
(2) Includes Alabama, Michigan, Mississippi, Ohio and New Mexico.
(3) An additional 41 wells (24.8 net wells) were in the process of drilling or
completion at January 31, 1997.
LEASEHOLDINGS
At January 31, 1997
<TABLE>
<CAPTION>
Gross Net
Acres Acres
--------- ---------
<S> <C> <C>
Alabama ................................................ 30,400 14,000
Michigan ............................................... 36,800 36,700
New Mexico ............................................. 27,900 25,800
Ohio ................................................... 41,400 41,300
South Dakota ........................................... 84,100 24,100
Texas .................................................. 159,600 104,600
Utah ................................................... 40,600 23,500
Other * ................................................ 38,500 22,700
--------- ---------
Total undeveloped acreage .............................. 459,300 292,700
Producing acreage ...................................... 765,200 573,000
--------- ---------
Total acreage .......................................... 1,224,500 865,700
========= =========
</TABLE>
* Includes Arkansas, Colorado, Louisiana, Mississippi, Montana, Oklahoma and
Wyoming.
MAJOR AREAS OF OPERATION
[MAP]
Texas is home to most of
Mitchell's energy operations,
but the Company also has
interests in projects in
New Mexico, Oklahoma,
Louisiana and other
locations in the Lower 48.
13
<PAGE> 17
[PICTURE]
14
<PAGE> 18
Record Company gas
production in North Texas,
combined with increased
third-party supplies, should
boost NGL volumes from
the Bridgeport plant to an
all-time high in fiscal 1998.
GAS SERVICES
Near-record prices for natural gas liquids, higher pipeline throughput, better
profit margins from natural gas gathering and marketing and reduced expenses
produced gas services' best results since the early 1980s. Operating earnings
doubled during fiscal 1997 to $108.1 million.
NGL prices surged in the second half of the year due to low domestic
inventories, early cold weather and brisk demand for NGL feedstocks by
petrochemical manufacturers. Gathering and marketing margins benefited from
rising gas prices that resulted from low domestic storage levels of gas and
colder-than-normal fall weather.
Capital outlays for gas services totaled $34.2 million in fiscal 1997,
including $8.5 million to complete the expansion of Mitchell's 45 percent-owned
gas gathering/processing/treating operation in the Austin Chalk trend in East
Central Texas and $4.8 million for the Company's share of a new gas gathering
system under construction in the Austin Chalk trend in Central Louisiana.
NATURAL GAS PROCESSING
Natural gas liquids prices gained momentum as the year progressed,
increasing from a monthly average low of $13.38 a barrel in May 1996 to a high
of $21.23 in December 1996. For the full year, NGL prices averaged $16.13, 40
percent higher than the prior-year average. This, combined with lower expenses
resulting from last year's restructuring, pushed earnings from gas processing
to $69.1 million, a 123 percent increase.
15
<PAGE> 19
NATURAL GAS LIQUIDS SALES
AVERAGE DAILY PRODUCTION
Year Ended January 31 (Bbls)
[GRAPH]
AVERAGE PRICE RECEIVED
Year Ended January 31 (per Bbl)
[GRAPH]
GAS SERVICES FINANCIAL HIGHLIGHTS
Year Ended January 31 (in thousands)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
REVENUES
Natural gas processing ................................. $376,980 $283,378
Natural gas gathering and marketing .................... 247,214 184,584
Other .................................................. 12,621 10,296
-------- --------
$636,815 $478,258
======== ========
SEGMENT OPERATING EARNINGS
Natural gas processing ................................. $ 69,110 $ 30,994
Natural gas gathering and marketing .................... 27,589 14,063
Other .................................................. 11,397 9,059
-------- --------
108,096 54,116
Unusual items
Asset write-downs ...................................... -- (52,715)
Personnel reduction program costs ...................... -- (3,600)
-------- --------
$108,096 $ (2,199)
======== ========
CAPITAL EXPENDITURES ................................... $ 34,233 $ 38,358
======== ========
</TABLE>
Low inventories of NGLs at the beginning of the year grew even tighter in
the second half, as demand for NGLs increased with cold fall weather and strong
petrochemical demand. Although imports were higher in fiscal 1997, they were
not sufficient to meet the increased demand. U.S. customers were competing for
supplies with buyers in Europe, which experienced a harsh winter, and in
Mexico, where a large gas processing complex exploded during the summer.
Although lost processing capacity in Mexico will be partially restored by mid
year, the effect of the plant outage should continue to be felt in U.S. markets
throughout fiscal 1998.
While NGL prices fell from their fourth quarter peaks early in fiscal
1998, they remain healthy by historical standards. Longer term, the outlook for
domestic NGL markets is positive. Supplies remain relatively tight, and demand
for petrochemical feedstocks has remained strong. In addition, the scheduled
start-up in fiscal 1998 of new ethylene production capacity totaling 4.5
billion pounds a year along the Gulf Coast will create nearly 140,000 barrels a
day of new demand for ethane and propane.
The Company's NGL production remained flat in fiscal 1997, at 46,100
barrels a day. Liquids volumes were lower early in the year due to the sale of
three gas processing plants in December 1995, but they
16
<PAGE> 20
recovered by the fourth quarter to 46,900 barrels per day as a result of
several factors.
Additional gas was available for processing due to growing production
primarily on the Company's two North Texas gathering systems and on its Monco
system in Montgomery and Colorado counties in Southeast Texas. In North Texas,
12 MMcf a day of third-party gas was added to the Company's systems. These
supplies yielded an additional 1,100 barrels a day of natural gas liquids in
fiscal 1997 at Bridgeport and other smaller North Texas processing plants. NGL
volumes also increased due to plant modifications that boosted ethane recovery
at Bridgeport and to the restart of the Huckabay plant in Erath County. On the
Monco system, third-party well hookups and increased production from the
Company's Lake Creek field boosted liquids production another 1,300 barrels a
day at Katy, Texas, where Mitchell has a processing contract with Exxon.
The Company expects to maintain or grow its NGL production slightly in the
current year, even without acquisitions it hopes to make. In late fiscal 1997,
Mitchell leased and recommissioned the 76-mile Mesquite pipeline, which
provides additional gas for processing in North Texas. Further production
growth on the North Texas and Monco systems also should contribute new liquids
volumes. In addition, the recent restart of two idle units at Bridgeport should
raise operations at that plant to near full capacity later in fiscal 1998.
Further consolidations with other plant operators and acquisitions of plants in
core areas also could add to NGL volumes in the current year.
The Company's 50 percent-owned C&L Processors partnership with Conoco
continued to consolidate its operations in fiscal 1997, with the diversion of
processable gas from the Hennessey plant in Kingfisher County, Oklahoma, to the
nearby Cashion plant, operated by Conoco. Mitchell also traded its own 50
percent interest in the Bee County, Texas, plant to The Williams Companies for
a 20 percent interest in Cashion and the nearby Mustang plant in Grady County,
Oklahoma.
Mitchell's natural gas plant liquids reserves at the end of fiscal 1997
were flat, at 126.4 million barrels.
[PICTURE]
Plant modifications completed
in fiscal 1997 have increased NGL
recovery rates at the Bridgeport
processing complex.
GAS PROCESSING
OPERATING COSTS
YEAR ENDED JANUARY 31 (PER BBL)
[GRAPH]
By integrating its two
North Texas gathering systems,
Mitchell has created new intrastate
marketing opportunities.
[PICTURE]
17
<PAGE> 21
PIPELINE THROUGHPUT*
Year Ended January 31 (MMcf per day)
[GRAPH]
[PICTURE]
The Tri-County plant
is part of a $37 million
expansion of the Company's
45 percent-owned gas
gathering system in the
Austin Chalk trend in
East Central Texas.
GAS GATHERING AND MARKETING
Gas gathering and marketing earnings benefited primarily from wider
margins on gas that is purchased and resold -- the result of rising spot market
prices. Other important contributors were restructuring-related expense
reductions and higher volumes of gas moving into the Company's gathering
systems. Operating earnings increased by 96 percent to $27.6 million for the
year.
Pipeline throughput increased by 16 percent to an average 410 MMcf per day
during fiscal 1997. The largest increase was in the Mitchell-operated lean gas
gathering and treating system serving the Austin Chalk area of East Central
Texas. Expansion of this system, in which Mitchell is a 45 percent partner with
Union Pacific Resources, was completed in the third quarter of fiscal 1996. The
Company's share of this system's throughput rose from an average 52 MMcf a day
at the beginning of fiscal 1997 to more than 120 MMcf a day by year end -- near
capacity. Although this system handles gas that does not contain enough natural
gas liquids to be processed economically, fees are collected for gathering and
treating this gas so that it meets pipeline quality specifications.
18
<PAGE> 22
The gathering and marketing business also benefited from the tie-in of new
third-party wells to Company-owned systems. Near Houston, the Company increased
daily third-party volumes on the Monco system in Colorado County to 20 MMcf at
year end from 9 MMcf at the end of fiscal 1996, and these volumes are expected
to increase further in the current year.
On the wholly owned Southwestern Gas Pipeline system in North Texas, the
combination of increased drilling in the area -- spurred by higher natural gas
prices -- and more aggressive pursuit of third-party producers resulted in a 10
MMcf increase during fiscal 1997 in daily volumes available for purchase and
resale. Although Mitchell currently controls only a small amount of third-party
gas for resale on the Natural Gas Pipeline Company of America system in Wise
County, it is aggressively pursuing the purchase of additional gas from other
producers.
Mitchell became operator of the Natural system in July 1995 as part of a
gas sales contract buyout agreement. By integrating the Natural and
Southwestern systems, the Company increased its flexibility to sell gas into
intrastate markets. Currently, Mitchell can supply as much as 90 MMcf a day to
local markets. The ultimate goal is to be able to deliver all the North Texas
gas to either the interstate or intrastate markets. Integration of these two
systems also has enabled Mitchell to move more gas from the Southwestern system
into the Bridgeport processing plant, where NGL recoveries are higher than at
other plants, and to reduce compression on both pipelines, thereby lowering
operating costs.
The Company plans to continue growing in the prolific Austin Chalk trend
via its newest joint venture, a $35 million gas gathering system that will
collect gas from wells that are just being drilled in the Austin Chalk trend in
Central Louisiana. Chesapeake Energy Corporation, which holds more than 1
million acres of leases and options in that area, is Mitchell's 50 percent
partner in the gathering venture. The current system is designed to carry as
much as 350 MMcf a day through 90 miles of gathering lines to a
third-party-owned processing plant at Eunice in South Central Louisiana.
[PICTURE]
The Anderson plant treats lean
gas gathered from the Austin
Chalk in East Central Texas.
GATHERING & MARKETING
OPERATING COSTS
Year Ended January 31 (per Mcf)
[GRAPH]
19
<PAGE> 23
[PICTURE]
A crane moves a section
of large-diameter pipe into
position for the new Louisiana
Chalk gathering system.
Chesapeake is actively drilling wells in Rapides, Evangeline, Allen,
Avoyelles and St. Landry's parishes that will be served by this system. The
first portion, consisting of 33 miles of 12-, 20- and 24-inch pipeline, is
scheduled to be completed in May 1997 and is expected to carry initial
throughput of 40 MMcf a day south to the Louisiana Intrastate Gas (LIG)
Junction. The remainder is scheduled for completion in the summer of 1997 and
by year end is expected to carry as much as 75 MMcf of gas a day from the LIG
Junction south to the plant at Eunice. The partners also expect to tie in gas
from a number of other producers active in the area, which will provide future
gathering, processing and marketing opportunities.
OTHER
Other gas services operations include a one-third interest in an MTBE
gasoline additive plant and a 38.75 percent interest in an NGL fractionator,
which separates raw natural gas liquids streams into pure products. These
facilities, both located at Mont Belvieu, Texas, contributed $11.4 million in
operating earnings during fiscal 1997, up 26 percent from the prior year.
[PICTURE]
A welder joins pipe in
Central Louisiana, where
Mitchell and Chesapeake
Energy are building a new
$35 million gathering system
that will collect gas from
prolific wells in the newly
developing Austin Chalk trend.
20
<PAGE> 24
The Company set a new record
in fiscal 1997 for residential lot sales in
The Woodlands, Houston's leading planned
community. The Woodlands expects to break that record again this year.
REAL
ESTATE
Of the Company's three main businesses, none was changed more dramatically by
the restructuring program than real estate, where virtually all properties
outside The Woodlands were identified for disposal. Over the past two years,
the Company has realized cash proceeds of $160 million ($85 million in fiscal
1997) from sales of real estate properties, reduced total real estate debt by
$132 million and increased recurring operating cash flow by 23 percent.
The Company's real estate operations are now focused on The Woodlands, a
25,000-acre planned community that is being developed by its subsidiary, The
Woodlands Corporation. Currently 47,300 people live in 18,600 homes. The
Woodlands is also home to a broad spectrum of businesses, with 17,300 people
employed by 740 employers in 10.7 million square feet of commercial and
institutional space.
The Woodlands is unique among planned communities in the region. In terms
of new home sales, it has ranked No. 1 in the Houston area for seven
consecutive years, is currently the leader in Texas and ranks seventh among
planned communities in the United States. The Woodlands offers excellent public
and private schools, a community college, The University Center, shopping,
entertainment and medical facilities, as well as a wide range of housing
choices and prices. The community also offers a diverse mix of social and
recreational resources that make The Woodlands a preferred place to live, work,
play and learn.
21
<PAGE> 25
[PICTURE]
22
<PAGE> 26
The Tenneco Business
Services building is among
the commercial properties
the Company sold to a
joint-venture partnership
with Crescent Real Estate
Equities.
THE
WOODLANDS
Fiscal 1997 was an outstanding operating year for The Woodlands, with record
residential lot sales, strong commercial land sales and record earnings from
The Woodlands Executive Conference Center and Resort. Operating earnings for
The Woodlands, exclusive of gains from commercial property sales, were $32
million, up 12 percent over the prior year.
The following statistical highlights from fiscal 1997 illustrate real
estate's growth potential:
o 1,105 residential lots were sold, up 13 percent.
o 86 acres of commercial and institutional land were sold, an increase
of 62 percent.
o The number of full-time jobs in The Woodlands increased by 800 to
17,300.
o Retail sales at The Woodlands Mall rose 13 percent.
o Revenues increased by 12 percent at The Woodlands Executive
Conference Center and Resort.
The restructuring of real estate operations that began in fiscal 1996 is
essentially complete. The Company is now focusing on accelerating residential
development and expanding commercial and industrial activity in The Woodlands
to fuel job growth within the community. Additional employment will increase
new home sales, retail volume and discretionary spending for entertainment and
leisure activities.
LAND DEVELOPMENT
With record sales of 1,105 lots to home builders in fiscal 1997, The
Woodlands led all other planned
23
<PAGE> 27
[PICTURE]
The Woodlands led the
Houston region in new home
sales for the seventh
consecutive year and is currently
the leader in Texas.
REAL ESTATE FINANCIAL HIGHLIGHTS
Year Ended January 31 (in thousands)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
REVENUES
The Woodlands
Land development ..................................... $ 62,341 $ 50,569
Commercial properties (100% owned) ................... 49,146 52,125
Equity investments and property management ........... 7,338 6,682
Other ................................................ 9,720 6,716
-------- --------
128,545 116,092
Gains from sales of commercial properties ............ 8,627 20,313
-------- --------
137,172 136,405
Other real estate, including revenues of $48,812
and $16,218 from sales of non-core properties ........ 60,995 32,423
-------- --------
$198,167 $168,828
======== ========
SEGMENT OPERATING EARNINGS
The Woodlands
Land development ..................................... $ 19,993 $ 16,125
Commercial properties (100% owned) ................... 10,011 9,907
Equity investments and property management ........... 4,169 4,281
Other ................................................ (2,140) (1,751)
-------- --------
32,033 28,562
Gains from sales of commercial properties ............ 8,627 20,313
-------- --------
40,660 48,875
Other real estate ...................................... (436) (27)
-------- --------
40,224 48,848
Unusual items
Write-downs of properties ............................ -- (123,916)
Personnel reduction program costs .................... -- (3,000)
Gains from sales of certain non-Woodlands assets ..... 2,507 --
-------- --------
$ 42,731 $(78,068)
======== ========
CAPITAL EXPENDITURES ................................... $ 59,312 $ 59,990
======== ========
</TABLE>
communities in the Houston region in home sales and starts for a record seventh
consecutive year. Lot prices were up 9 percent over the prior year (on a
per-square-foot basis), and last November the Company opened a new Information
Center to support its marketing efforts. By developing additional residential
product lines that meet specific buyer needs, the Company is creating the
potential to increase lot sales again this year, with the goal of increasing
the annual number of lots sold by 10 to 15 percent over the next few years.
Commercial land sales were also strong. Construction was started for two
hotels, a bank and a second post office. Medical organizations have announced
expansion plans for professional offices and HMO administrative space, as well
as a $43 million addition to Memorial Hospital System's patient care facilities
in The Woodlands.
24
<PAGE> 28
COMMERCIAL PROPERTIES, EQUITY INVESTMENTS AND PROPERTY MANAGEMENT
The demand for apartments and office and retail space continues to grow,
with occupancy rates running 90 percent or better in buildings owned or managed
by the Company. An aggressive property development program is planned in fiscal
1998 to provide an inventory of these products for prospective tenants.
Refurbishment of the Grogan's Mill Shopping Center that began in fiscal 1997
will be completed in September. The Company recently announced plans for a
150,000-square-foot office building, and negotiations are in progress with two
companies for freestanding build-to-suit office and technology space totaling
100,000 square feet. Construction will begin in the summer on a
140,000-square-foot neighborhood shopping center in the Village of Alden
Bridge, and an additional 80 units will be added to the Parkside Apartments
this year. Joint-venture partners are expected to participate in the Alden
Bridge and Parkside projects.
The Company continues to form strategic partnerships with financially
sound institutions. From these partnerships, the Company receives a return on
its equity investments and ongoing fees for leasing and managing the
properties. The joint-venture partners, in turn, receive an interest in
properties providing a current return on invested capital, as well as
opportunities for cash flow growth through future increases in rental rates. In
total, 18 commercial buildings originally built by the Company and later sold
to strategic partners are 93 percent leased.
In fiscal 1997, the Company sold a package of retail properties to a new
partnership with Crescent Real Estate Equities. These properties include
portions of Pinecroft Shopping Center, Wood Ridge Plaza Shopping Center, a
17-screen Tinseltown cinema and a Blockbuster Video location. In addition,
buildings occupied by Tenneco Business Services and GeneMedicine were sold to
an existing partnership with Crescent.
Consumer traffic continues to increase at the million-square-foot
Woodlands Mall and in the nearby restaurants, retail stores and entertainment
venues of Town Center. Only two years after opening, the mall reports the
fourth-highest sales per square foot among the
THE WOODLANDS RESIDENTIAL LOT SALES
Year Ended January 31
[GRAPH]
THE WOODLANDS PORTFOLIO OF MANAGED PROPERTIES
Year Ended January 31
(thousand square feet)
[GRAPH]
Residential products in The
Woodlands, from multifamily
to estate, are designed to
meet specific buyer needs.
[PICTURE]
25
<PAGE> 29
[PICTURE]
Construction of a 96-room
addition to The Woodlands
Executive Conference Center
and Resort will increase the
total number of rooms to 364.
19 major malls in the Houston region. Its fifth anchor, a 147,000-square-foot
JCPenney store, is under construction and will open in fiscal 1999.
Construction of a freestanding Best Buy store will be completed this spring,
and negotiations are under way for land sales and land leases to other
nationally recognized retailers and restaurants. A waterway, similar in concept
to the San Antonio Riverwalk, is planned to link The Woodlands Mall with
adjacent restaurants, office buildings and entertainment venues, including the
13,000-seat Cynthia Woods Mitchell Pavilion. The Pavilion, summer home of the
Houston Symphony, attracts 400,000 visitors annually.
In fiscal 1997, The Woodlands Executive Conference Center and Resort was
awarded Mobil's Four Star rating and the 1997 Paragon Award as one of the top
10 conference centers in the United States. Conference Center earnings of $6.6
million were up 12 percent. Capital expenditures of $10.3 million were
committed to begin construction of a 96-room addition to the Conference Center
(which will bring total rooms to 364 this spring), remodel resort facilities
and refurbish the Tournament Players Course(TM)", site of the annual Shell
Houston Open golf tournament. Shell Oil Company operates a worldwide leadership
[PICTURE]
The Tournament Players
Course(TM) is the site of the
annual Shell Houston Open
golf tournament.
26
<PAGE> 30
THE WOODLANDS
At January 31, 1997
<TABLE>
<CAPTION>
<S> <C>
Total acres ........................................................... 25,000
Remaining acres ....................................................... 15,400
Acres absorbed in fiscal 1997 ......................................... 600
Dwelling units ........................................................ 18,600
Estimated dwelling units at completion ................................ 52,000
</TABLE>
THE WOODLANDS STATISTICAL HIGHLIGHTS
At January 31, except as noted
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Population ........................................... 47,300 44,700
Employment (non-construction) ........................ 17,300 16,500
Properties managed
Occupancy rates (percentage)
Office/industrial ................................ 90 85
Retail ........................................... 92 84
Apartment ........................................ 96 96
The Woodlands Executive Conference
Center and Resort (average for the year) ....... 71 70
Office/industrial (square feet) .................... 1,943,000 1,858,000
Retail (square feet) ............................... 696,000 654,000
Apartment (units) .................................. 1,891 1,891
</TABLE>
and management learning center at the Conference Center and has increased its
lodging commitment by 28 percent in the current year.
The growth in population and commercial activity within The Woodlands has
been supported by major infrastructure improvements. During fiscal 1997, a new
public high school, a middle school and an elementary school opened.
Construction of The University Center on the campus of North Harris/Montgomery
Community College will be finished for the fall semester. Also completed were
$7.3 million in major roadway improvements, including The Woodlands Parkway
overpass. Thoroughfare improvements currently under way include completion of
the Lake Robbins Bridge in Town Center, widening of Research Forest Drive and a
major expansion of Interstate 45.
[PICTURE]
Construction of The
University Center next to
North Harris/Montgomery
Community College (below),
will be finished for the
fall semester.
27
<PAGE> 31
[THE WOODLANDS TOWN CENTER MAP]
[THE WOODLANDS MAP]
28
<PAGE> 32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL POSITION AND RESULTS OF OPERATIONS
MITCHELL ENERGY & DEVELOPMENT CORP. AND SUBSIDIARIES
FORWARD-LOOKING INFORMATION
The discussion which follows includes forward-looking statements. Reference is
made to the inside front cover of this report for information concerning these
statements, including factors that could cause actual results to differ
materially from those in the forward-looking statements.
LIQUIDITY AND CAPITAL RESOURCES
Over the past three years, the Company has successfully restructured its
operations by focusing on core business activities and disposing of non-core
assets and their attendant costs. During that period, property sales proceeds
have totaled more than $350 million, debt has been reduced by almost $400
million and the number of full-time employees has been reduced from
approximately 2,900 to 1,950. As a result of these efforts and favorable energy
and real estate market conditions, the Company's fiscal 1997 earnings and cash
flows were substantially above the levels achieved in the prior year. These
improvements were accomplished despite the fact that the prior-period's results
benefited from five months of sales under the premium-priced North Texas
natural gas sales contract with Natural Gas Pipeline Company of America
(Natural) that was terminated on July 1, 1995. The Company realized pretax cash
proceeds of approximately $94 million from property sales in fiscal 1997, a
substantial portion of which was part of its program to dispose of non-core
assets. Approximately $25 million in assets identified for sale under that
program remain to be sold.
With the restructuring efforts 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. Recently, it expanded
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 paid down its debt substantially over the last three
years, strengthening its financial position and increasing its flexibility to
pursue growth opportunities. At January 31, 1997, $701 million of total debt
was outstanding. With the February 18, 1997 repayment of $100 million of
maturing senior notes, debt was reduced further to approximately $601
million, or almost $400 million less than the $994 million balance (including
short-term debt) at the beginning of fiscal 1995. Also, after collecting the
final $91 million installment of the Natural contract buyout proceeds on
February 3 and retiring the senior notes on February 18, the Company still
retained approximately $38 million in excess cash balances. The Company's
debt-to-equity ratio was 1.08-to-1 after the February 1997 debt retirement,
down from 1.72 and 2.12, respectively, at January 31, 1996 and 1994.
Furthermore, the Company has almost no debt maturities prior to July 1999,
when $100 million in senior notes are payable.
29
<PAGE> 33
The Company's earnings and cash flows from energy operations and the
standardized measure of discounted future net cash flows from its total
proved reserves each rose sharply during fiscal 1997, chiefly because of
higher energy commodity prices. At January 31, 1997, the standardized measure
amounts, which are computed in accordance with Securities and Exchange
Commission guidelines, totaled $1,146 million ($940 million for natural gas
and oil and $206 million for plant NGLs). At January 31, 1996, this total was
$696 million ($531 million for natural gas and oil and $165 million for plant
NGLs). Energy prices have declined subsequent to January 31, 1997. If the
reserves were valued using prices existing on March 12, 1997, the
standardized measure amounts would total approximately $490 million less than
the amounts at January 31, 1997. Standardized measure amounts are not
indicative of asset fair values, but rather represent snapshots at points in
time which can be significantly impacted by short-term movements in energy
commodity prices. For example, the significant period-to-period differences
in the amounts reported above are largely the result of changes in natural
gas prices which were at a low level at the end of fiscal 1996, rose sharply
during fiscal 1997 (reaching a recent years' high point during the fourth
quarter) before falling back in March 1997 to a level somewhat below the
January 31, 1996 price. As evidenced by this recent experience, any of the
many factors that cause energy commodity prices to be extremely volatile
(including weather conditions, inventory levels and predicted changes in
those levels, major geopolitical events and a host of other factors) can
significantly impact the reported standardized measure amounts as well as the
Company's earnings and cash flows. As always where energy prices are
concerned, prior history is not necessarily indicative of future trends.
As discussed in Note 7 on page 51 of this Annual Report, 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. 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. The trial
for the second group of these cases, which began on March 17, is still in
progress.
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 since it currently 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.
The fiscal 1998 budget projects that operating cash flows, together with
the $38 million in excess cash balances available after the February 1997
debt paydown, will be sufficient to provide for the Company's spending needs,
including the expanded capital spending program discussed below. 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.
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. During April and May 1996, the
Company purchased in the open market 243,400 shares of its common stock at an
aggregate cost of $3.9 million. This completed purchases under the
1,000,000-share reacquisition authority approved by the Board of Directors in
December 1994.
30
<PAGE> 34
CAPITAL AND EXPLORATORY EXPENDITURES
The following table compares the Company's fiscal 1998 budget for capital and
exploratory expenditures with its actual expenditures during fiscal 1997 and
1996 (in millions):
<TABLE>
<CAPTION>
1998 Budget 1997 1996
--------------- --------------- ---------------
Amount % Amount % Amount %
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Exploration and production .... $165.0 58.2 $134.3 57.1 $141.7 57.6
Gas services .................. 36.8 13.0 34.2 14.6 38.3 15.6
Real estate ................... 75.3 26.6 59.3 25.2 60.0 24.3
Corporate ..................... 6.2 2.2 7.3 3.1 6.1 2.5
------ ------ ------ ------ ------ ------
$283.3 100.0 $235.1 100.0 $246.1 100.0
====== ====== ====== ====== ====== ======
</TABLE>
The consolidated budget for fiscal 1997 expenditures, initially set at
$213.5 million, was later increased to $246.2 million to cover an expanded
drilling program, initial spending on the 50%-owned Louisiana Chalk gathering
system and accelerated development of residential lots. Fiscal 1997 spending,
which ultimately totaled $235.1 million or 4.5% less than the revised budget,
was sufficient to allow the replacement of 105% of the natural gas reserves
produced.
The Company's fiscal 1998 budget has been 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 are budgeted at
$27.7 million in fiscal 1998, down slightly from the prior year's level.
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, 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 cleanup obligations and has been able to conform with
environmental regulations without materially altering its operating strategies.
Since scientific evidence indicates the Company's operations were not the cause
of the problems, no discussion is included in this section concerning water
well problems in the North Texas area that are alleged to be related to the
Company's oil and gas operations.
The Company estimates that expenditures totaling approximately $5.5
million annually will be made over the next two or three years by its energy
and real estate operations to comply with environmental regulations. These
costs consist principally of third party charges for services, equipment and
testing. Actual expenditures for new permitting and monitoring requirements of
the Federal Clean Air Act Amendments of 1990 may differ from the estimated
amounts when several long-anticipated regulations are issued in final form, but
the differences are not expected to be significant. The estimates include
increased wetlands avoidance and mitigation costs associated with expanding the
Company's energy operations in Louisiana.
31
<PAGE> 35
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.
OPERATING STATISTICS
Certain operating statistics (including, where applicable, proportional
interests in equity partnerships) for fiscal 1997, 1996 and 1995 follow:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
AVERAGE DAILY VOLUMES
Natural gas sales (Mcf) ............................................. 228,500 216,200 214,100
Crude oil and condensate sales (Bbls) ............................... 5,500 5,400 6,300
Natural gas liquids produced (Bbls) ................................. 46,100 46,400 47,500
Pipeline throughput (Mcf) (net of 62,000 in 1995
attributable to the Winnie Pipeline that was sold in July 1994) ... 410,000 354,000 353,000
AVERAGE SALES PRICES
Natural gas (per Mcf) ............................................... $ 2.64 $ 2.16 $ 2.71
Crude oil and condensate (per Bbl) .................................. 21.50 16.91 15.75
Natural gas liquids produced (per Bbl) .............................. 16.13 11.55 11.57
RESIDENTIAL LOT SALES--THE WOODLANDS
Number sold ......................................................... 1,105 980 951
Average price per lot ............................................... $ 43,851 $ 40,752 $ 37,287
Average price per square foot ....................................... 4.24 3.89 3.70
</TABLE>
RESULTS OF OPERATIONS -- FISCAL 1997 COMPARED WITH FISCAL 1996
The Company's results for fiscal 1997 and 1996 -- both before and after unusual
items -- are summarized in the table on the following page. Net earnings for
fiscal 1997 of $103.2 million were $66.1 million above those of the prior year.
Unusual items increased net earnings by $1.2 million in fiscal 1997, but
reduced fiscal 1996's net earnings by $6.2 million.
Excluding the effects of unusual items, fiscal 1997's earnings of $102.0
million were $58.7 million above the $43.3 million of the prior year, which
included five months of sales under the high-priced North Texas gas sales
contract. The substantial earnings improvement was the result of higher market
prices for all energy products, increased natural gas sales volumes, improved
margins in gas gathering and marketing, record residential lot sales and
refocusing-program-related reductions in operating and interest expenses.
Partially offsetting the favorable impact of these items was the $23.1 million
negative year-to-year operating earnings impact of the previously noted early
termination of the Natural contract and substantially smaller pretax gains from
real estate commercial property asset sales ($8.6 million versus $20.3 million
in fiscal 1996). The fiscal 1996 gains included $19.4 million from the sale of
the remaining 50% interest in a partnership that operated the cable television
system in The Woodlands.
32
<PAGE> 36
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 1996 AMOUNTS ....................................... $ 223.4 $ (2.2) $(78.1) $(84.8) $ 58.3 $ 37.1
ELIMINATE IMPACT OF FISCAL 1996 UNUSUAL ITEMS
(see bottom of table on page 36) ........................ (187.7) 56.3 126.9 8.4 3.9 6.2
---------- -------- ------ ------ -------- --------
FISCAL 1996 AMOUNTS BEFORE UNUSUAL ITEMS .................. 35.7 54.1 48.8 (76.4) 62.2 43.3
---------- -------- ------ ------ -------- --------
MAJOR INCREASES (DECREASES)
Natural gas
Contract buyout ......................................... (23.1) -- -- -- (23.1) (15.0)
Higher sales prices ..................................... 59.6 -- -- -- 59.6 38.7
Higher sales volumes .................................... 5.3 -- -- -- 5.3 3.4
Higher crude and condensate sales prices .................. 8.8 -- -- -- 8.8 5.7
Reduced proved-property impairments ....................... 8.4 -- -- -- 8.4 5.5
Amortization of deferred gas contract
restructuring proceeds (none versus $4.4) ............... (4.4) -- -- -- (4.4) (2.9)
Higher exploratory dry-hole costs ($7.6 versus $3.3) ...... (4.3) -- -- -- (4.3) (2.8)
Natural gas processing
Price-related increases in NGL margins .................. -- 27.9 -- -- 27.9 18.1
Other, net (principally expense reductions
caused by previous restructuring activities) ......... -- 10.2 -- -- 10.2 6.6
Gas gathering and marketing
Higher gross profits .................................... -- 10.7 -- -- 10.7 7.0
Other, net (principally expense reductions
caused by previous restructuring activities) ......... -- 2.8 -- -- 2.8 1.8
Equity in earnings of fractionation plant partnership ..... -- 1.8 -- -- 1.8 1.2
The Woodlands
Gains from commercial property asset sales .............. -- -- (11.7) -- (11.7) (7.6)
Other ................................................... -- -- 3.5 -- 3.5 2.3
Interest expense incurred ................................. -- -- -- 8.6 8.6 5.6
Capitalized interest ...................................... -- -- -- (2.5) (2.5) (1.6)
Other, net ................................................ (4.6) .6 (.4) (1.7) (6.1) (4.0)
Higher effective tax rate ................................. -- -- -- -- -- (3.3)
---------- -------- ------ ------ -------- --------
45.7 54.0 (8.6) 4.4 95.5 58.7
FISCAL 1997 AMOUNTS BEFORE UNUSUAL ITEMS .................. 81.4 108.1 40.2 (72.0) 157.7 102.0
---------- -------- ------ ------ -------- --------
FISCAL 1997 UNUSUAL ITEMS (see Notes 7
and 10 of Notes to Consolidated Financial Statements)
Litigation provision ...................................... (10.0) -- -- -- (10.0) (6.2)
Severance tax refunds ..................................... 5.9 -- -- -- 5.9 3.7
Columbia Gas contract settlement proceeds ................. 3.5 -- -- -- 3.5 2.1
Gains from sales of non-Woodlands properties .............. -- -- 2.5 -- 2.5 1.6
---------- -------- ------ ------ -------- --------
(.6) -- 2.5 -- 1.9 1.2
---------- -------- ------ ------ -------- --------
FISCAL 1997 AMOUNTS AFTER UNUSUAL ITEMS ................... $ 80.8 $ 108.1 $ 42.7 $(72.0) $ 159.6 $ 103.2
========== ======== ====== ====== ======== ========
</TABLE>
- --------------
*Includes general and administrative expense and other expense.
33
<PAGE> 37
EXPLORATION AND PRODUCTION OVERVIEW
Excluding unusual items, fiscal 1997 exploration and production segment
operating earnings of $81.4 million were $45.7 million above the $35.7 million
of the prior year. Higher commodity prices were the principal cause of the
improvement. Realizations from market-sensitive natural gas sales rose to such
an extent that they more than overcame the $23.1 million negative year-to-year
operating earnings impact of no longer having sales under the high-priced North
Texas gas sales contract.
Natural gas -- Contract buyout ($23.1 million decrease). Effective with the
contract buyout on July 1, 1995, the Company began receiving market-sensitive
prices for approximately 80 MMcf per day of North Texas residue gas previously
sold at a substantially higher contract price of $4.00 per MMBtu. As a result,
North Texas gas sales revenues for the first five months of fiscal 1997 were
substantially less than they had been in the prior-year period. The Company's
realizations for its North Texas gas previously sold to Natural averaged $2.01
per MMBtu during the first five months of fiscal 1997, and consequently
operating earnings on a period-to-period basis were lowered by $23.1 million.
Natural gas -- Higher sales prices ($59.6 million increase). The Company's
natural gas sales price averaged $2.64 per Mcf during fiscal 1997, 53% higher
than the $1.72 realized during the prior year on non-Natural-contract sales,
increasing operating earnings by $59.6 million. The higher prices were the
consequence of cold weather in the winter of 1995/96 and relatively low gas
storage inventories thereafter until nearly the end of the 1996/97 heating
season.
Natural gas -- Higher volumes ($5.3 million increase). Natural gas sales
volumes averaged 228.5 MMcf per day during fiscal 1997, up from 216.2 during
the prior year. The Company's drilling and recompletion activities in North
Texas and at the recently acquired Lake Creek field were the principal causes
of this increase.
Higher crude and condensate sales prices ($8.8 million increase). The average
sales price for crude and condensate during fiscal 1997 was $21.50 per barrel,
up 27% from the $16.91 of the prior year, improving operating earnings by $8.8
million.
Reduced proved-property impairments ($8.4 million increase). Impairment charges
totaled $3.1 million in fiscal 1997, down $8.4 million from fiscal 1996's $11.5
million. Fiscal 1996 impairments, which related to five fields, occurred
principally because of downward revisions in reserve and price estimates and
disappointing fiscal 1996 drilling results for certain of these fields.
GAS SERVICES OVERVIEW
Excluding unusual items, gas services segment operating earnings rose $54.0
million (to $108.1 million) in fiscal 1997 as gas processing earnings increased
by $38.1 million and gas gathering and marketing earnings were $13.5 million
higher. Gas processing margins were much higher primarily because NGL prices
rose at a faster rate than natural gas feedstock costs. Also contributing
substantially to the improved gas processing earnings were cost reductions
resulting from the Company's previous refocusing efforts. Price-related
increases in onsystem and offsystem margins and restructuring-related expense
reductions were the principal causes of the higher gas gathering and marketing
earnings. Increased earnings from the Company's interests in a fractionation
plant partnership also contributed to the gas services earnings improvement.
NGL production volumes averaged 46,100 barrels per day, down slightly from
46,400 in the prior year principally because of the December 1, 1995 sale of
three plants, which added 1,800 barrels per day to the fiscal 1996 average.
Natural gas processing -- Price-related increases in NGL margins ($27.9 million
increase). NGL margins rose substantially during fiscal 1997 as low
inventories, coupled with strong demand for chemical feedstocks, caused NGL
prices to rise significantly. The average price for NGLs produced during fiscal
1997 of $16.13 per barrel was $4.58 (40%) above the prior year's average,
increasing NGL revenues by $75.8 million. The earnings impact of this favorable
variance was partially offset by price-related increases in NGL feedstock
costs. Such costs, which consist primarily of amounts paid to the natural gas
producers, are based either on the value of natural gas consumed in processing
under keep-whole agreements or on a percent 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 percent-of-proceeds agreements vary directly with NGL prices. Largely
because of higher prices for market-sensitive gas and NGLs, fiscal 1997
feedstock costs were increased by $47.9 million, resulting in a net
price-related improvement in the Company's NGL margins of $27.9 million.
34
<PAGE> 38
Gas gathering and marketing -- Higher gross profits ($10.7 million increase).
Substantially improved markets for natural gas during fiscal 1997 resulted in
significant improvements in margins for the Company's gas gathering and
marketing activities. 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. Fiscal 1997's generally rising natural gas price trend and sharp
upward spikes in these prices during some months in the first and fourth
quarters caused the profit margins for these activities to increase.
Additionally, daily average pipeline throughput rose 16% in fiscal 1997 to
410,000 Mcf per day. Most of this increase was attributable to a 45%-owned
gathering system serving the Austin Chalk area of East Central Texas, where
throughput volumes rose because of an expansion of that system that was
completed late in fiscal 1996.
Equity in earnings of fractionation plant partnership ($1.8 million increase).
The Company's equity in the earnings of Gulf Coast Fractionators totaled $3.6
million during fiscal 1997, or $1.8 million more than during the prior year. A
volume-related increase in fractionation fees was the principal cause of the
plant's higher earnings.
REAL ESTATE OVERVIEW
Because of a $11.7 million reduction in gains from commercial property asset
sales, real estate segment operating earnings (excluding unusual items) in
fiscal 1997 of $40.2 million were $8.6 million less than fiscal 1996's.
Earnings from residential lot sales were up sharply in fiscal 1997, however,
primarily because of the sale of a record number of lots and a 9% increase in
the per-square-foot average sales price.
The Woodlands -- Gains from commercial property asset sales ($11.7 million
decrease). Gains totaling $8.6 million were recorded during fiscal 1997 from
sales of commercial property assets. The larger of these gains resulted from
the sale in October of retail properties to a partnership that is 75% owned by
Crescent Real Estate Equities and the sale in December of a 51% interest in
Mitchell Mortgage Company to Fort Bend Savings and Loan Association. The fiscal
1996 gains, which totaled $20.3 million, consisted almost exclusively of a
third quarter gain of $19.4 million in connection with the sale of the
Company's remaining 50% interest in a partnership that operated the cable
television system in The Woodlands.
The Woodlands -- Other ($3.5 million increase). The Company sold 1,105
residential lots to builders during fiscal 1997, 125 (13%) more than in the
prior year. During calendar 1996, builders sold more new homes than during any
calendar year in the community's history enabling The Woodlands to retain its
No. 1 ranking in Houston-area new home sales for the seventh consecutive year.
The community's outstanding reputation, a strong Houston housing market,
favorable interest rates for home buyers and the wide variety of lots available
in The Woodlands were the primary factors contributing to this strong
performance. Also contributing to fiscal 1997's higher earnings were increased
commercial land sales volumes, a 9% higher average per-square-foot sales price
for residential lots and an increase in earnings of The Woodlands Executive
Conference Center and Resort.
OTHER
Interest expense incurred ($8.6 million increase). Interest expense incurred
was $8.6 million lower during fiscal 1997 because of a $118 million decline in
the average balance of debt outstanding. This occurred primarily because of
paydowns using proceeds received from the Natural contract buyout (in July 1995
and February 1996) and proceeds realized from fiscal 1996 and 1997 property
sales.
Capitalized interest ($2.5 million decrease). Largely because of a decline in
the balance of real estate assets subject to interest capitalization, $2.5
million less interest was capitalized during fiscal 1997.
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).
35
<PAGE> 39
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 the
previously mentioned $19.4 million gain ($12.6 million after tax) on the sale
of an interest in a partnership that operated the cable television system in
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). For explanations of the fiscal
1995 and 1996 unusual items, see Notes 7 (for litigation provision) and 10 of
Notes to Consolidated Financial Statements.
<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 1995 AMOUNTS ............................................ $ 87.9 $ 52.3 $ 20.1 $(89.8) $ 70.5 $ 45.8
---------- -------- ------ ------ -------- --------
ELIMINATE IMPACT OF FISCAL 1995 UNUSUAL ITEMS
Gas Services restructuring charges and asset write-downs ....... -- 31.2 -- -- 31.2 20.3
Gains from sales of major energy assets ........................ (3.8) (48.8) -- -- (52.6) (32.7)
Write-downs of real estate properties .......................... -- -- 5.7 -- 5.7 3.7
---------- -------- ------ ------ -------- --------
(3.8) (17.6) 5.7 -- (15.7) (8.7)
---------- -------- ------ ------ -------- --------
FISCAL 1995 AMOUNTS BEFORE UNUSUAL ITEMS ....................... 84.1 34.7 25.8 (89.8) 54.8 37.1
---------- -------- ------ ------ -------- --------
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 resulting
from April 1995 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)
Exploratory dry-hole costs ($3.3 versus $1.1) .................. (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
The Woodlands
Gain from 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
SAR/Bonus unit expense accruals ................................ (.8) (.4) (.5) (1.0) (2.7) (1.8)
Miscellaneous others, net ...................................... 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
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
36
<PAGE> 40
EXPLORATION AND PRODUCTION OVERVIEW
Largely because of the impact of the early termination of the Natural contract,
exploration and production operating earnings before unusual items declined
$48.4 million during fiscal 1996 to $35.7 million.
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). For the reasons
previously discussed, proved-property impairments totaling $11.5 million were
recorded during fiscal 1996, or $6.8 million more than fiscal 1995's $4.7
million.
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 (see Note 10 of Notes to
Consolidated Financial Statements), such amortization added $4.4 million to
fiscal 1996 operating earnings, or $8.1 million less than in the prior year.
GAS SERVICES OVERVIEW
Gas services operating earnings before unusual items rose $19.4 million during
fiscal 1996 largely because of a $9 million increase in the Company's equity in
the earnings of a 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). As
discussed on page 34, feedstock costs under keep-whole agreements vary directly
with market-sensitive natural gas prices. Largely because of fiscal 1996's
lower market-sensitive gas prices, NGL feedstock costs declined, 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) rose $2.3 million
in 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 operations until April 1, 1995. After a six-week shutdown in
the third quarter to replace certain defective or improperly designed equipment
(largely at the expense 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.
37
<PAGE> 41
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 largely attributable to the gain mentioned in the
following paragraph. The number of residential lots sold to builders in The
Woodlands increased by 3% to 980 in fiscal 1996, and the average sales price
per square foot rose 5%. For the sixth consecutive year, The Woodlands ranked
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.
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
fee income.
OTHER
Interest expense incurred (5.8 million increase). 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.
SAR/Bonus unit expense accruals ($2.7 million decrease). During fiscal 1996,
SAR/Bonus unit expense accruals of $.8 million 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.
38
<PAGE> 42
QUARTERLY FINANCIAL DATA (UNAUDITED)
MITCHELL ENERGY & DEVELOPMENT CORP. AND SUBSIDIARIES
(in thousands except per-share amounts)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
FISCAL 1997
Revenues ............................. $ 237,353 $ 241,106 $ 245,406 $ 380,979
Segment operating earnings ........... 52,088 48,697 46,653(a) 84,200
Net earnings ......................... 23,249 20,794 18,923 40,260
Earnings per share ................... .45 .40 .36 .78
FISCAL 1996
Revenues ............................. $ 214,975 $ 417,875(c) $ 193,219 $ 245,678
Segment operating earnings (loss) .... 21,800(b) 136,642(d) 31,601 (46,876)(e)
Net earnings (loss) .................. (3,181) 73,247 10,078 (43,015)
Earnings (loss) per share ............ (.06) 1.41 .19 (.83)
</TABLE>
- --------------
(a) Net of litigation provision of $10,000.
(b) Net of $14,535 in personnel reduction program charges. An additional
$5,665 was charged to general and administrative expense.
(c) Includes a gain of $205,256 from early termination of the Natural
contract.
(d) Includes the gain mentioned in (c), the effect of which was partially
offset by real estate property write-downs of $112,794.
(e) Net of charges of $59,407 for write-downs of gas services assets and real
estate properties and $15,000 for a litigation provision.
QUARTERLY STOCK DATA
(per-share amounts)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
MARKET PRICE RANGE -- FISCAL 1997
Class A -- High ...................... $ 18.50 $ 20.38 $ 20.63 $ 23.63
Low ....................... 15.88 15.50 17.00 19.75
Class B -- High ...................... 18.50 20.25 21.25 23.50
Low ....................... 15.75 15.75 17.38 20.00
MARKET PRICE RANGE -- FISCAL 1996
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 -- FISCAL 1997 AND 1996
Class A ................................... 12.00c. 12.00c. 12.00c. 12.00c.
Class B ................................... 13.25 13.25 13.25 13.25
</TABLE>
39
<PAGE> 43
CONSOLIDATED BALANCE SHEETS
MITCHELL ENERGY & DEVELOPMENT CORP. AND SUBSIDIARIES
January 31, 1997 and 1996 (dollar amounts in thousands)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents ...................................................... $ 79,681 $ 21,336
Trade receivables, net of allowance for doubtful accounts of $807 and $2,116 ... 155,551 105,238
Gas contract buyout receivable (collected in February 1997) .................... 91,000 95,000
Inventories .................................................................... 11,354 12,137
Other .......................................................................... 11,180 10,602
----------- -----------
Total current assets ......................................................... 348,766 244,313
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, at cost less accumulated depreciation,
depletion and amortization of $1,337,041 and $1,321,004 (Note 2) ............. 775,929 719,535
----------- -----------
REAL ESTATE (Note 3) ........................................................... 649,821 720,434
----------- -----------
OTHER ASSETS
Real estate notes and contracts receivable ..................................... 37,092 35,045
Gas contract buyout receivable ................................................. -- 85,467
Long-term investments and other ................................................ 41,108 30,720
----------- -----------
78,200 151,232
----------- -----------
$ 1,852,716 $ 1,835,514
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt (repaid in February 1997) ................. $ 100,000 $ --
Short-term debt ................................................................ -- 13,732
Oil and gas proceeds payable ................................................... 141,076 96,705
Accounts payable ............................................................... 73,102 55,760
Accrued liabilities ............................................................ 68,039 55,746
----------- -----------
Total current liabilities .................................................... 382,217 221,943
----------- -----------
LONG-TERM DEBT (Note 5)
Energy operations .............................................................. 206,672 375,727
Real estate operations ......................................................... 394,599 452,148
----------- -----------
601,271 827,875
----------- -----------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes (Note 6) ................................................. 227,875 193,908
Deferred income ................................................................ 18,421 18,321
Retirement obligations and other ............................................... 67,645 91,564
----------- -----------
313,941 303,793
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 4, 7 and 8)
STOCKHOLDERS' EQUITY (Note 11)
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 ..................................................... 143,343 143,270
Retained earnings .............................................................. 435,165 358,281
Treasury stock, at cost ........................................................ (28,607) (25,034)
----------- -----------
555,287 481,903
----------- -----------
$ 1,852,716 $ 1,835,514
=========== ===========
</TABLE>
- --------------
The accompanying notes are an integral part of these financial statements.
40
<PAGE> 44
CONSOLIDATED STATEMENTS OF EARNINGS
MITCHELL ENERGY & DEVELOPMENT CORP. AND SUBSIDIARIES
For the Years Ended January 31, 1997, 1996 and 1995 (in thousands except
per-share amounts)
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES
Exploration and production, including gain on natural
gas contract buyout of $205,256 in 1996 (Note 10) ............ $ 269,862 $ 424,661 $ 277,099
Gas services, including gains from major
asset sales of $48,821 in 1995 (Note 10) ..................... 636,815 478,258 488,007
Real estate (Notes 3 and 10) ................................... 198,167 168,828 129,465
------------ ------------ ------------
1,104,844 1,071,747 894,571
------------ ------------ ------------
OPERATING COSTS AND EXPENSES (including personnel
reduction program costs of $14,535 in 1996 -- Note 10)
Exploration and production, including litigation provisions
of $10,000 in 1997 and $15,000 in 1996 (Note 7) .............. 189,051 201,227 189,193
Gas services, including asset write-downs/restructuring
charges of $52,715 in 1996 and $31,252 in 1995 (Note 10) ..... 528,719 480,457 435,696
Real estate, including property write-downs of
$123,916 in 1996 and $5,661 in 1995 (Note 10) ................ 155,436 246,896 109,333
------------ ------------ ------------
873,206 928,580 734,222
------------ ------------ ------------
SEGMENT OPERATING EARNINGS (Note 10) ........................... 231,638 143,167 160,349
General and administrative expense, including
personnel reduction program costs of $5,665 in 1996 .......... 38,664 44,821 42,225
------------ ------------ ------------
TOTAL OPERATING EARNINGS ....................................... 192,974 98,346 118,124
------------ ------------ ------------
OTHER EXPENSE
Interest expense ............................................... 55,580 64,172 69,982
Capitalized interest ........................................... (25,788) (28,252) (28,816)
Other, net ..................................................... 3,586 4,095 6,407
------------ ------------ ------------
33,378 40,015 47,573
------------ ------------ ------------
EARNINGS BEFORE INCOME TAXES ................................... 159,596 58,331 70,551
INCOME TAXES (Note 6) .......................................... 56,370 21,202 24,737
------------ ------------ ------------
NET EARNINGS ................................................... $ 103,226 $ 37,129 $ 45,814
============ ============ ============
EARNINGS PER SHARE ............................................. $ 1.99 $ .71 $ .87
============ ============ ============
AVERAGE COMMON SHARES OUTSTANDING .............................. 51,878 52,044 52,696
============ ============ ============
</TABLE>
- --------------
The accompanying notes are an integral part of these financial statements.
41
<PAGE> 45
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
MITCHELL ENERGY & DEVELOPMENT CORP. AND SUBSIDIARIES
For the Years Ended January 31, 1997, 1996 and 1995 (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, 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
Net earnings ................................. -- -- 103,226 -- 103,226
Cash dividends (48 cents per share on
Class A and 53 cents per share on Class B) ... -- -- (26,342) -- (26,342)
Treasury stock purchases ..................... -- -- -- (3,917) (3,917)
Exercises of stock options ................... -- 73 -- 344 417
--------- --------- --------- --------- ---------
BALANCE, JANUARY 31, 1997 .................... $ 5,386 $ 143,343 $ 435,165 $ (28,607) $ 555,287
========= ========= ========= ========= =========
</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, 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
Treasury stock purchases ..... -- -- 179,000 64,400
Exercises of stock options ... -- -- (6,850) (17,499)
Other ........................ (7) (7) -- --
----------- ----------- ----------- -----------
BALANCE, JANUARY 31, 1997 .... 23,978,088 29,878,088 922,429 1,092,958
=========== =========== =========== ===========
</TABLE>
- -------------
The accompanying notes are an integral part of these financial statements.
42
<PAGE> 46
CONSOLIDATED STATEMENTS OF CASH FLOWS
MITCHELL ENERGY & DEVELOPMENT CORP. AND SUBSIDIARIES
For the Years Ended January 31, 1997, 1996 and 1995 (in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings ................................................................ $ 103,226 $ 37,129 $ 45,814
Adjustments to reconcile net earnings to
cash provided by operating activities
Depreciation, depletion and amortization ............................... 104,455 158,596 140,724
Exploration expenses, including dry-hole costs ......................... 18,051 14,752 13,307
Deferred income taxes .................................................. 33,985 (6,759) 17,691
Cost of land sold ...................................................... 40,399 33,404 32,449
Residential land development costs, net of reimbursements .............. (12,776) (14,642) (16,395)
Distributions in excess of earnings of equity investees ................ 787 6,795 19,233
Non-cash portion of natural gas contract buyout gain ................... -- (162,689) --
Write-downs of real estate properties .................................. -- 123,916 5,661
Gains from sales of properties ......................................... (11,134) (25,439) (52,612)
Litigation provision ................................................... 10,000 15,000 --
Accrued personnel reduction program/restructuring costs ................ -- 11,128 5,235
Amortization of deferred natural gas contract restructuring proceeds ... -- (5,950) (16,510)
Other, net ............................................................. 4,702 6,871 11,195
---------- ---------- ----------
291,695 192,112 205,792
Changes in operating assets and liabilities
Receivables .......................................................... 31,377 29,879 (1,012)
Inventories .......................................................... 783 804 3,832
Payables ............................................................. 22,883 8,532 (32,687)
Accrued liabilities and other ........................................ 1,017 2,687 (6,453)
---------- ---------- ----------
Cash provided by operating activities .................................. 347,755 234,014 169,472
---------- ---------- ----------
INVESTING ACTIVITIES
Capital and exploratory expenditures
Total on accrual basis .................................................... (235,138) (246,083) (219,575)
Residential land development costs deducted above ......................... 12,776 14,642 16,395
Adjustment to cash basis .................................................. 8,017 (4,012) (4,575)
---------- ---------- ----------
(214,345) (235,453) (207,755)
Proceeds from sales of real estate properties ............................... 85,301 62,176 --
Proceeds from sales of major energy assets .................................. -- 32,569 152,000
Proceeds from other sales of property, plant and equipment .................. 8,842 7,178 10,920
Acquisition of leased equipment ............................................. (6,995) (9,167) --
Other ....................................................................... (8,476) (1,900) (1,326)
---------- ---------- ----------
Cash used for investing activities ..................................... (135,673) (144,597) (46,161)
---------- ---------- ----------
FINANCING ACTIVITIES
Proceeds from issuance of debt .............................................. -- 50,000 117,734
Debt repayments ............................................................. (122,336) (98,207) (209,264)
Cash dividends .............................................................. (26,342) (26,421) (26,738)
Treasury stock purchases .................................................... (3,917) (4,227) (7,635)
Other(including debt prepayment premium of $6,420 in 1995) .................. (1,142) (1,193) (7,273)
---------- ---------- ----------
Cash used for financing activities ..................................... (153,737) (80,048) (133,176)
---------- ---------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............................ 58,345 9,369 (9,865)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ................................ 21,336 11,967 21,832
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR ...................................... $ 79,681 $ 21,336 $ 11,967
========== ========== ==========
</TABLE>
- --------------
The accompanying notes are an integral part of these financial statements.
43
<PAGE> 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MITCHELL ENERGY & DEVELOPMENT CORP. AND SUBSIDIARIES
January 31, 1997, 1996 and 1995
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 disclosures 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.
Impairment of long-lived assets. The Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," effective
January 31, 1996. That statement 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.
Property, plant and equipment. The Company's exploration and production
activities are accounted for using 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 made on a field-by-field
basis as conditions warrant. Charges for such impairments, which are included
in DD&A expense, totaled $3,068,000, $11,516,000 and $4,718,000 in fiscal
1997, 1996 and 1995.
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.
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
44
<PAGE> 48
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.
Prior to the disposition of the Company's finance operations during
fiscal 1997, interest income and expense of these operations were reported,
respectively, as revenues and as costs and expenses in the consolidated
statements of earnings because they represented the principal revenues and
costs of these activities.
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. During fiscal 1997, the Company adopted
the Accounting Standards Executive Committee's Statement of Position 96-1,
"Environmental Remediation Liabilities." The adoption of this statement had
no impact on the Company's financial statements.
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
$1.96 for Class A and $2.01 for Class B (versus $1.99 on a combined basis) in
fiscal 1997; $.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. The dilutive effect of outstanding stock
options, which was less than 3% in each of these years, 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 $32,619,000, $36,936,000 and
$40,058,000 during fiscal 1997, 1996 and 1995. Income taxes paid during these
periods, totaled $10,600,000, $23,900,000 and $9,760,000. The Company's
proceeds from the October 1996 sale of its interest in the Lake Catamount
Joint Venture included secured notes receivable totaling $8,805,000.
Woodlands Office Equities -- '95 Limited, a 25%-owned partnership, assumed a
mortgage obligation of $12,796,000 in connection with its July 1995 purchase
of ten office buildings from the Company. There were no other significant
non-cash investing or financing activities during the three-year period ended
January 31, 1997.
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, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
Cost Net Book Value
----------------------- -----------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
EXPLORATION AND PRODUCTION
Oil and gas properties ................ $1,625,903 $1,564,852 $ 537,992 $ 515,383
Support equipment and facilities ...... 58,483 55,961 22,485 22,591
---------- ---------- ---------- ----------
1,684,386 1,620,813 560,477 537,974
---------- ---------- ---------- ----------
GAS SERVICES (including investments
in equity partnerships) (Note 4)
Natural gas processing ................ 155,601 172,496 69,658 57,301
Natural gas gathering ................. 213,927 201,962 94,499 86,356
Other ................................. 43,595 30,061 42,634 29,206
---------- ---------- ---------- ----------
413,123 404,519 206,791 172,863
---------- ---------- ---------- ----------
CORPORATE ............................. 15,461 15,207 8,661 8,698
---------- ---------- ---------- ----------
$2,112,970 $2,040,539 $ 775,929 $ 719,535
========== ========== ========== ==========
</TABLE>
45
<PAGE> 49
NOTE 3 REAL ESTATE
In accordance with industry accounting practice, the Company's investments in
real estate properties are reported as long-term assets in the consolidated
balance sheets. The following table details these assets at January 31, 1997
and 1996 and the revenues from these properties for the last three fiscal
years (in thousands):
<TABLE>
<CAPTION>
Net Investment Revenues
---------------------- ------------------------------------
1997 1996 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
THE WOODLANDS
Land development ............................. $509,069 $502,121 $ 62,341 $ 50,569 $ 47,536
Commercial properties (100% owned) ........... 80,515(a) 93,029(a) 49,146 52,125 51,390
Equity investments and property management ... 26,307 22,051 7,338 6,682 4,024
Other ........................................ 3,043 13,940 18,347(b) 27,029(b) 9,791
-------- -------- -------- -------- --------
618,934 631,141 137,172 136,405 112,741
OTHER PROPERTIES, primarily
held for disposal (Note 10) ................ 30,887 89,293 60,995(c) 32,423(c) 16,724
-------- -------- -------- -------- --------
$649,821 $720,434 $198,167 $168,828 $129,465
======== ======== ======== ======== ========
</TABLE>
- --------------
(a) Net of accumulated depreciation of $33,370 in 1997 and $35,544 in 1996.
(b) Includes gains from commercial property sales of $8,627 in 1997 and
$20,313 in 1996.
(c) Includes proceeds from non-core property sales of $48,812 in 1997 and
$16,218 in 1996.
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 and the construction
and operation of office and industrial buildings, apartments, retail shopping
centers, golf courses and a conference center.
NOTE 4 EQUITY INVESTMENTS
During the three-year period ended January 31, 1997, the Company's principal
partnership interests included the following:
<TABLE>
<CAPTION>
Percent
Owned 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 49 Mortgage lending
by the Company of a 51% interest in December 1996)
The Woodlands Mall Associates 50 Regional mall in The Woodlands
Woodlands Office Equities -- '95 Limited 25 Office buildings in The Woodlands
Woodlands Retail Equities -- '96 Limited 25 Retail properties in The Woodlands
Lake Catamount Joint Venture (sold in October 1996) 50 Colorado land
The Fort Crockett Hotel Limited (liquidated 50 Resort hotel in Galveston, Texas
after the hotel was sold in January 1996)
</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 their pretax earnings is
included in the applicable revenues
46
<PAGE> 50
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 January
31, 1997 and 1996 and its equity in their pretax earnings (losses) for the
years ended January 31, 1997, 1996 and 1995 follows (in thousands):
<TABLE>
<CAPTION>
Net Investment Equity in Pretax Earnings (Losses)
------------------- ----------------------------------
1997 1996 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
GAS SERVICES
Austin Chalk Natural Gas Marketing Services ................. $ 2,014 $ 2,531 $ 2,633 $ 973 $ 1,517
Belvieu Environmental Fuels ................................. 31,174 21,702 8,472 8,116 (1,080)
C&L Processors Partnership .................................. 21,433 14,147 7,831 429 (346)
Ferguson-Burleson County Gas Gathering System ............... 53,164 58,331 9,953 7,913 4,297
Gulf Coast Fractionators .................................... 9,593 5,530 4,063 1,810 (1,338)
Louisiana Chalk Gathering System
(system currently under construction) ..................... 4,754 -- -- -- --
U.P. Bryan Plant ............................................ 6,973 7,180 8,976 7,669 6,544
Others ...................................................... 162 152 218 (205) (3,604)
-------- -------- -------- -------- --------
$129,267 $109,573 $ 42,146 $ 26,705 $ 5,990
======== ======== ======== ======== ========
REAL ESTATE
Grogan's Mill Apartments .................................... $ 1,160 $ 1,316 $ 271 $ 338 $ 174
Mitchell Mortgage Company LLC
(formed in December 1996) ................................. 1,089 -- -- -- --
The Woodlands Mall Associates ............................... 4,218 7,737 481 898 227
Woodlands Office Equities -- '95 Limited .................... 11,514 9,202 595 818 --
Woodlands Retail Equities -- '96 Limited
(formed during fiscal 1997) ............................... 5,252 -- 83 -- --
Others (which own commercial properties in The Woodlands) ... 1,183 3,349 855 593 526
Lake Catamount Joint Venture (sold in October 1996) ......... -- 11,504 (201) (639) (70)
The Fort Crockett Hotel Limited (liquidated
after the hotel was sold in January 1996) ................. -- -- -- (763) (1,057)
-------- -------- -------- -------- --------
$ 24,416 $ 33,108 $ 2,084 $ 1,245 $ (200)
======== ======== ======== ======== ========
</TABLE>
Financial statement information is generally reported on a one-month lag
for entities accounted for on the equity method. Summarized balance sheet
information (on a 100% basis) for these entities at January 31, 1997 and 1996
follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------------------- ---------------------
<S> <C> <C> <C> <C>
Current assets $ 188,262 $ 134,325
Net noncurrent assets
Energy 540,393 568,028
Real estate 243,550 202,165
Current liabilities 129,575 99,120
Debt payable to third parties
The Company's proportionate share
Recourse to the Company $ 32,450 $ 66,688
Nonrecourse to the Company 145,433 123,676
Other parties' proportionate share ($1,820 of which
was guaranteed by the Company at January 31, 1997) 246,436 424,319* 274,563 464,927*
-------- --------
Notes payable to owners (including $2,175
and $12,468 payable to the Company) 4,220 13,763
Deferred credits and other 1,013 1,153
Owners' equity 413,078 325,555
</TABLE>
- --------------
* Includes current maturities of $73,061 in 1997 and $73,891 in 1996.
47
<PAGE> 51
Summarized earnings information (on a 100% basis) for these entities for
the years ended January 31, 1997, 1996 and 1995 follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Revenues ............................................................ $855,419 $572,173 $416,129
Operating earnings .................................................. 133,664 92,224 20,194
Pretax earnings (before interest expense for those entities whose
activities are funded by capital contributions of the owners) ..... 99,740 55,946 5,683
</TABLE>
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 January 31, 1997 and 1996 and the
Company's proportionate share of such debt at January 31, 1997 is summarized
as follows (in thousands):
<TABLE>
<CAPTION>
1997 -- Company's Share
Entity Total ------------------------------
------------------- Non-
1997 1996 Recourse Recourse Total
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
GAS SERVICES
Belvieu Environmental Fuels ................................. $136,889 $176,000 $ 6,667 $ 38,963 $ 45,630
C&L Processors Partnership .................................. 71,209 86,209 19,226 16,378 35,604
Gulf Coast Fractionators .................................... 61,750 74,250 2,475 21,453 23,928
-------- -------- -------- -------- --------
269,848 336,459 28,368 76,794 105,162
-------- -------- -------- -------- --------
REAL ESTATE
Grogan's Mill Apartments .................................... 18,392 18,799 -- 9,197 9,197
Mitchell Mortgage Company LLC ............................... 21,258 -- -- 10,416 10,416
The Woodlands Mall Associates ............................... 65,000 59,126 -- 32,500 32,500
Woodlands Office Equities -- '95 Limited .................... 12,411 12,666 1,862 1,241 3,103
Others (which own commercial properties in The Woodlands) ... 37,410 37,877 2,220 15,285 17,505
-------- -------- -------- -------- --------
154,471 128,468 4,082 68,639 72,721
-------- -------- -------- -------- --------
$424,319 $464,927 $ 32,450 $145,433 $177,883
======== ======== ======== ======== ========
</TABLE>
Belvieu Environmental Fuels (BEF) owns a plant located at Mont Belvieu,
Texas with the capacity to produce up to 16,500 barrels per day of MTBE, a
gasoline additive that reduces carbon monoxide emissions. Its term loan,
which bears interest at floating rates based on spreads over LIBOR, is due in
quarterly installments of $9,778,000 plus interest through May 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.
C&L Processors Partnership (C&L) was formed in fiscal 1993 to acquire
the gas processing assets of Oryx Energy Company in a transaction that was
funded entirely by project financing proceeds. C&L's term loan, which bears
interest at floating rates based on spreads over LIBOR, is due in increasing
quarterly installments (ranging from $4,500,000 in 1997 to $5,000,000 in
2000) plus interest. The Company and its partner, Conoco, Inc., have each
agreed to make aggregate future cash contributions to C&L of up to 27% of the
outstanding balance of the partnership's loan 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 $1,500,000,
$4,836,000 and $9,000,000 in calendar 1996, 1995 and 1994 in the form of
capital contributions and subordinated loans. Additional advances likely will
be needed in future periods.
Gulf Coast Fractionators (GCF) owns an NGL fractionation plant at Mont
Belvieu, Texas, with the capacity to process up to 105,000 barrels per day of
natural gas liquids. GCF's bank term loan, which bears interest at floating
rates based on spreads
48
<PAGE> 52
over LIBOR, is due in increasing quarterly installments ranging from $3,375,000
to $5,625,000 plus interest. The Company and its partners (Conoco, Inc. and NGC
Corp.) have executed long-term contracts with GCF for the fractionation of
production from certain of their gas processing plants.
The Woodlands Mall Associates is owned equally by the Company and
GGP/Homart, Inc. which 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 7.9% fixed-rate
loan is due in monthly installments of interest only through December 1999
and thereafter amortizes on a 27-year basis, with a maturity date of December
1, 2006.
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, 1997 and 1996 follows (in thousands):
<TABLE>
<CAPTION>
1997
-------------------------------------
Energy Real Estate 1996
Operations Operations Total Total
---------- ----------- --------- ---------
<S> <C> <C> <C> <C>
PARENT COMPANY SENIOR NOTES, UNSECURED
5.10% (repaid on February 18, 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
--------- ---------
$ 306,672* $ 393,328* 700,000 700,000
SUBSIDIARY BORROWINGS
Bank revolving credit agreements, unsecured
Energy/Real estate committed facilities ........................ -- -- -- 45,000
Mitchell Mortgage Company (repaid in January 1997) ............. -- -- -- 15,000
Uncommitted money market facilities, at floating interest rates ... -- -- -- 50,000
7.98% unsecured term loan (repaid in January 1997) ................ -- -- -- 30,000
Other ............................................................. -- 1,271 1,271 1,607
--------- -------- --------- ---------
306,672 394,599 701,271 841,607
Less -- Current maturities ........................................ 100,000 -- 100,000 --
Amounts reported as short-term debt ....................... -- -- -- 13,732
--------- -------- --------- ---------
$ 206,672 $394,599 $ 601,271 $ 827,875
========= ======== ========= =========
</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. In August 1996, letters of credit of $184,300,000 were issued by the
banks supporting a $224,850,000 supersedeas bond that was filed in connection
with an appeal of a $204,000,000 judgment in this litigation. Additional
letters of credit can be issued under this facility, if required, during a
period extending until April 1999, and any amounts drawn against the letters
of credit are payable in April 2000.
In connection with entering into the letter of credit facility, the
Company's bank revolving credit agreements were also revised in April 1996 to
provide committed facilities aggregating $200,000,000 for the Company's
Energy and Real Estate operations. At January 31, 1997, there were no
borrowings outstanding under these agreements. Borrowings then outstanding
under the bank revolving credit agreements are payable in April 2000.
Interest rates are generally based on spreads over LIBOR. 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.
49
<PAGE> 53
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. Retained
earnings available for the payment of cash dividends totaled $251,664,000 at
January 31, 1997. The agreements also require the maintenance of specified
financial and oil and gas reserve and/or 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.
NOTE 6 INCOME TAXES
Income taxes for the years ended January 31, 1997, 1996 and 1995 consist of
the following (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
CURRENT
Federal ..................................... $ 19,322 $ 24,541 $ 3,407
State ....................................... 3,063 3,420 3,639
-------- -------- --------
22,385 27,961 7,046
-------- -------- --------
DEFERRED
Federal ..................................... 32,082 (9,494) 15,175
State ....................................... 1,903 2,735 2,516
-------- -------- --------
33,985 (6,759) 17,691
-------- -------- --------
$ 56,370 $ 21,202 $ 24,737
======== ======== ========
</TABLE>
Reconciliations from the 35% statutory Federal income tax rate to the
Company's effective income tax rate for the fiscal years 1997, 1996 and 1995
follow:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statutory Federal income tax rate .............................................. 35.0% 35.0% 35.0%
State income taxes, net of Federal income tax benefit .......................... 2.0 6.8 5.6
Federal tax credits (principally amounts available under Section 29
of the Internal Revenue Code for natural gas produced from certain wells) ... (1.8) (6.4) (5.4)
Other, net ..................................................................... .1 .9 (.1)
---- ---- ----
35.3% 36.3% 35.1%
==== ==== ====
</TABLE>
The principal components of the Company's deferred income tax liability
include the following at January 31, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Real estate holding costs ............................................ $ 125,841 $ 135,062
Oil and gas acquisition, exploration and development costs
deducted for tax purposes in excess of financial statement DD&A .... 109,173 86,896
Depreciation of other property, plant and equipment .................. 38,984 32,163
Business tax credit carryforwards .................................... -- (7,284)
Unused alternative minimum tax credits ............................... (28,614) (28,471)
Employee benefits expense not yet deductible for tax purposes ........ (21,382) (19,507)
Other, net ........................................................... 3,873 (4,951)
---------- ----------
$ 227,875 $ 193,908
========== ==========
</TABLE>
At January 31, 1997, the Company had $28,614,000 of unused alternative
minimum tax credits that can be carried forward indefinitely. These credits
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.
50
<PAGE> 54
NOTE 7 LITIGATION 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 significant medical
problems were alleged. The Company appealed this judgment to the Second Court
of Appeals in Fort Worth, Texas. A hearing was held March 12, 1997, but the
court's decision is not expected for three to six months. 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.
In addition, similar lawsuits (each claiming damages of more than
$1,000,000) have been brought by 46 other plaintiff groups. A trial
commenced on March 17, 1997 for 17 of these cases and is still in progress.
Trial dates have not been set for the 29 remaining cases.
Aggregate charges of $25,000,000 ($15,000,000 in fiscal 1996 and
$10,000,000 in fiscal 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. The fiscal 1997 provision was recorded
because of increases in estimated attorneys' fees and other defense costs to
be incurred. Consistent with the Company's belief that it is not responsible
for the alleged problems, these provisions consisted primarily 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 fiscal
1996 accrual, however, also included an amount for disposition of this
litigation.
Although the Company believes that the litigation and the claims for
damages ultimately will be resolved for significantly less than the amount of
the judgment and the claims for damages, it is possible that the Company's
costs could exceed its aggregate accrual of $25,000,000. However, the Company
has no basis on which to estimate a range of such possible additional losses,
if any, because of errors it believes were made by the trial court and since
the Company believes that it was not responsible for the water well problems
and that its actions did not provide a basis for the awarding of exemplary
damages.
The Company believes that recoveries of at least a portion of its
defense costs (and settlement/judgment costs, if any) should be available
from the companies that have participated in its longstanding insurance
program. Accordingly, the Company has notified the numerous insurance
carriers whose policies covered the Company's North Texas operations over the
period that might relate to the alleged problems. In May 1996, a lawsuit was
filed by one of the Company's insurers seeking a declaratory judgment that it
does not have a duty to indemnify the Company in these lawsuits. In June
1996, the Company filed a declaratory action in another court seeking to have
the court declare respective rights of the parties, including duties of the
insurance carriers to defend and indemnify the Company under its insurance
policies. In October 1996, a standstill agreement was executed which delayed
actions in these suits at least until August 1997. Through January 31, 1997,
reimbursement agreements had not been entered into with any of the Company's
insurance carriers, and because of uncertainties regarding the Company's
ultimate liability, the period of time over which the alleged problems
occurred and the large number of insurance carriers that might be involved,
the Company is presently unable to predict the outcome of the
insurance-related legal actions or to estimate the magnitude or timing of any
such recoveries.
Royalty owner litigation. A suit styled Rowan Estate Trust, et al versus
Mitchell Energy & Development Corp., et al (the Rowan suit), originally
brought in a district court in Weatherford, Texas by 46 royalty owners and
certified as a class-action in July 1996, seeks additional royalties on gas
produced in certain North Texas counties for a period beginning in July 1991
and extending to the present. This suit, which is set for trial 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,
51
<PAGE> 55
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.
After the district court's ruling in December 1996 that the Rowan suit
did not cover periods prior to July 1991, the plaintiffs' attorneys filed
another lawsuit in January 1997 with similar allegations covering pre-July
1991 periods. There has been no discovery in this case, and a trial date has
not been set.
Other litigation or potential litigation. Legal actions have been brought 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 67 property owners in surrounding communities
related to flooding in the North Houston area in October 1994. These
claimants generally are seeking reimbursements for property damages, but some
are making claims for deceptive trade practices 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.
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, $3,000,000 in exemplary damages plus interest
and costs. In March 1997, this case was settled for a substantially reduced
amount which approximated the accrued liability that the Company had
previously established for this litigation.
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.
NOTE 8 OTHER COMMITMENTS AND CONTINGENCIES
Leases and contingent liabilities. The Company has various noncancellable
equipment and facility operating lease agreements which provide for aggregate
future payments of approximately $56,900,000. Minimum rentals for each of the
five years subsequent to fiscal 1997 total approximately $5,800,000,
$5,400,000, $4,700,000, $4,900,000 and $4,300,000. Rental expense for
operating leases was approximately $6,500,000, $9,700,000 and $10,400,000 in
fiscal 1997, 1996 and 1995. In addition to obligations described elsewhere in
these notes, the Company had contingent liabilities totaling approximately
$20,800,000 at January 31, 1997, consisting primarily of guarantees of
third-party debt.
Environmental regulations. The Company is now considered by the United States
Environmental Protection Agency to be a potentially responsible party with
respect to two Superfund waste disposal sites (after having been found during
fiscal 1997 to have no liability with respect to two other 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 non-toxic 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 $360,000 of cleanup costs. While additional exposure exists for
future cleanup and closure costs of this site, the Company's share of such
costs is not expected to be significant.
52
<PAGE> 56
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.
Other. 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.
NOTE 9 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. No contributions were made to the plan in fiscal 1997 or 1995
while $4,631,000 was contributed in fiscal 1996.
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 1997 and 1996 (5%
overall in fiscal 1995) and discount rates for the projected benefit
obligation of 7.25%, 7.25% and 8.5%, respectively, in fiscal 1997, 1996 and
1995. 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, 1997, 1996 and 1995 were (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Service cost (benefits accrued during the year) ...... $ 3,455 $ 3,579 $ 4,392
Interest accrued on projected benefit obligation ..... 8,984 8,526 7,528
Early retirement benefits accrued .................... -- 8,329 4,126
Return on plan assets ................................ (10,738) (8,634) (9,783)
Amortization of unrecognized gains ................... (1,206) (1,183) (1,400)
-------- -------- --------
Financial statement pension expense .................. $ 495 $ 10,617 $ 4,863
======== ======== ========
</TABLE>
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, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
---------- ----------
ACTUARIAL PRESENT VALUE OF PENSION BENEFIT OBLIGATION
<S> <C> <C>
Vested benefits ....................................... $ 103,928 $ 100,014
Nonvested benefits .................................... 5,568 8,988
---------- ----------
Accumulated benefit obligation ........................ 109,496 109,002
Provision for future salary increases ................. 17,311 18,697
---------- ----------
Projected benefit obligation .......................... $ 126,807 $ 127,699
========== ==========
AMOUNTS AVAILABLE TO SATISFY PENSION BENEFIT OBLIGATION
Plan assets, at market value .......................... $ 135,371 $ 123,087
Unrecognized actuarial gains .......................... (31,552) (17,881)
Balance sheet accrual for pension expense ............. 22,988 22,493
---------- ----------
$ 126,807 $ 127,699
========== ==========
</TABLE>
53
<PAGE> 57
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. During fiscal 1997, a trust fund was established from which
these benefits are to be paid. The balance of this trust fund, which is
included in other assets in the Company's balance sheet, was $11,251,000 at
January 31, 1997.
Amounts expensed related to these plans totaled $1,353,000, $1,381,000
and $1,330,000 in fiscal 1997, 1996 and 1995 (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, 1997, the aggregate balance sheet liability attributable to these
plans totaled $5,131,000.
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, 1997, 1996 and 1995 were (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Service cost (benefits accrued during the year) .... $ 1,028 $ 814 $ 814
Interest accrued on projected benefit obligation ... 2,165 1,823 1,281
Early retirement benefits accrued .................. -- 2,620 1,017
Amortization of unrecognized gains ................. 217 (5) (70)
-------- -------- --------
$ 3,410 $ 5,252 $ 3,042
======== ======== ========
</TABLE>
The plan is unfunded, and benefits are paid as costs are incurred. Such
benefits payments totaled approximately $1,585,000, $1,325,000 and $850,000
in fiscal 1997, 1996 and 1995. The plan's status at January 31, 1997 and 1996
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 following table (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
ACTUARIAL PRESENT VALUE OF POSTRETIREMENT BENEFIT OBLIGATION
Retirees ....................................................... $ 17,719 $ 18,137
Fully eligible, active plan participants ....................... 1,150 3,287
Other active plan participants ................................. 7,915 9,135
Unrecognized actuarial gains ................................... (1,627) (7,077)
-------- --------
The Company's accrued liability for postretirement benefits .... $ 25,157 $ 23,482
======== ========
</TABLE>
The Company's assumed future medical cost trend rate starts at 6% for
fiscal 1998, declines to 5.5% in 2002 and remains at that level thereafter.
Discount rates of 7.25%, 7.25% and 8.5% were used in determining the
postretirement benefit obligation at January 31, 1997, 1996 and 1995. 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, 1997 by
$3,659,000 and the aggregate service and interest components of the fiscal
1997 cost by a total of $487,000.
54
<PAGE> 58
NOTE 10 SEGMENT INFORMATION
Industry segment data for the fiscal years ended January 31, 1997, 1996 and
1995 are as follows (in thousands):
<TABLE>
<CAPTION>
Inter- Segment Total Capital
Outside segment Operating Operating Expendi- Identifiable
Revenues Revenues Earnings Earnings DD&A tures(a) Assets
---------- -------- --------- --------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
FISCAL 1997
EXPLORATION AND PRODUCTION
Operations ........................................... $ 266,418 $ -- $ 81,432 $ 69,314 $ 88,929 $ 134,275 $ 711,909
Litigation provision (see Note 7) .................... -- -- (10,000) (10,000) -- -- --
Severance tax refunds ................................ -- -- 5,935 5,935 -- -- --
Columbia Gas contract
settlement proceeds ................................ 3,444 -- 3,444 3,444 -- -- --
---------- -------- --------- --------- -------- ---------- ----------
269,862 -- 80,811 68,693 88,929 134,275 711,909
---------- -------- --------- --------- -------- ---------- ----------
GAS SERVICES
Natural gas processing ............................... 376,980 30,127 69,110 65,694 3,508 7,925 129,274
Natural gas gathering and marketing .................. 247,214 208,043 27,589 23,937 3,392 24,797 159,620
Other ................................................ 12,621 -- 11,397 10,995 107 1,511 42,931
---------- -------- --------- --------- -------- ---------- ----------
636,815 238,170 108,096 100,626 7,007 34,233 331,825
---------- -------- --------- --------- -------- ---------- ----------
REAL ESTATE
Operations (includes gains of $8,627
from commercial property asset sales) .............. 195,660 5,069 40,224 35,427 5,388 59,312 724,928
Gains from sales of certain
non-Woodlands assets ............................... 2,507 -- 2,507 2,507 -- -- --
---------- -------- --------- --------- -------- ---------- ----------
198,167 5,069 42,731 37,934 5,388 59,312 724,928
---------- -------- --------- --------- -------- ---------- ----------
CORPORATE ............................................ -- -- -- (14,279)(b) 3,131 7,318 84,054
---------- -------- --------- --------- -------- ---------- ----------
$1,104,844 $243,239 $ 231,638 $ 192,974 $104,455 $ 235,138 $1,852,716
========== ======== ========= ========= ======== ========== ==========
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 (includes gains of $20,313
from commercial property asset sales) .............. 168,828 6,413 48,848 43,779 7,223 59,990 785,835
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 59,990 785,835
---------- -------- --------- --------- -------- ---------- ----------
CORPORATE ............................................ -- -- -- (20,670)(b) 3,360 6,068 34,885
---------- -------- --------- --------- -------- ---------- ----------
$1,071,747 $130,276 $ 143,167 $ 98,346 $158,596 $ 246,083 $1,835,514
========== ======== ========= ========= ======== ========== ==========
FISCAL 1995
EXPLORATION AND PRODUCTION (includes a
gain of $3,791 from the sale of 16 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 65,123 941,968
Write-downs of properties ............................ -- -- (5,661) (5,661) -- -- --
---------- -------- --------- --------- -------- ---------- ----------
129,465 6,660 20,132 14,348 8,294 65,123 941,968
---------- -------- --------- --------- -------- ---------- ----------
CORPORATE ............................................ -- -- -- (15,623)(b) 3,468 4,268 26,495
---------- -------- --------- --------- -------- ---------- ----------
$ 894,571 $119,463 $ 160,349 $ 118,124 $140,724 $ 219,575 $1,848,620
========== ======== ========= ========= ======== ========== ==========
</TABLE>
- --------------
(a) On accrual basis, including exploratory expenditures.
(b) General corporate expenses, including personnel reduction program costs of
$5,665 in 1996.
55
<PAGE> 59
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. Sales to no single customer constituted
as much as 10% of consolidated revenues in fiscal 1997. Exploration and
production and natural gas gathering and marketing sales to Natural Gas
Pipeline Company of America constituted approximately 10% and 15% of
consolidated revenues, respectively, during fiscal 1996 and 1995.
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 companywide basis. In the reported total operating earnings
disclosures, 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.
Because of their magnitude and unusual nature, and in accordance with
Accounting Principles Board Opinion No. 30, the items discussed in the
following paragraphs have been reported as separate components of segment
operating earnings.
FISCAL 1997 EXPLANATIONS. During fiscal 1997, the Company recorded severance
tax refunds totaling $5,935,000. Of these amounts, $3,879,000 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 and
$2,056,000 was related to taxes paid on certain contract settlement proceeds,
which a Texas Controller's office regulation subsequently excluded from
severance taxes.
During 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.
During fiscal 1997, gains totaling $2,507,000 were recognized from sales
of the Company's interest in the Lake Catamount joint venture in Colorado and a
portfolio of installment notes receivable arising from resort property sales.
Proceeds from the Lake Catamount sale included cash proceeds of $4,700,000 and
secured notes receivable totaling $8,805,000 that are payable over a two-year
period.
FISCAL 1996 EXPLANATIONS. Effective July 1, 1995, the Company terminated its
North Texas gas sales contract with Natural Gas Pipeline Company of America
(Natural) which had been scheduled to expire on December 31, 1997. In exchange,
it received proceeds (for itself and other interest owners) consisting of
$55,500,000 in cash, receivables with discounted values of $91,608,000 and
$82,369,000, respectively, related to payments of $95,000,000 and $91,000,000
due from Natural on February 1, 1996 and 1997 and ownership (effective in
January 1998) of Natural's gathering system that serves 1,500 of the Company's
North Texas wells. The discounted value of the Company's share of these early
termination proceeds aggregated $176,189,000. After recognizing the remaining
$29,067,000 of previously deferred restructuring proceeds related to this
contract, the Company recognized a gain of $205,256,000 on the contract buyout
in the second quarter of fiscal 1996.
56
<PAGE> 60
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.
In April 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 recorded in October 1995 to
reduce to their net realizable values the carrying values of three gas
processing plants that were subsequently sold in December. Upon completion of a
gas services asset management study and concurrent with its adoption of SFAS
No. 121, write-downs totaling $45,604,000 were recorded in January 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
affected in recent periods by volume declines, contractual changes and other
factors which indicated that their capitalized costs would not be recovered.
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.
FISCAL 1995 EXPLANATIONS. Gas services segment revenues and operating earnings
for fiscal 1995 include $48,821,000 in gains from 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.
57
<PAGE> 61
NOTE 11 COMMON STOCK AND STOCK OPTIONS
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 Company's 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.
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 generally 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. Summarized stock option information follows:
<TABLE>
<CAPTION>
1995 Plan 1979 and 1989 Plans
----------------------------------------- -----------------------------------------
Options Exercisable Options Exercisable
Options Outstanding at Fiscal Year End Options Outstanding at Fiscal Year End
------------------- ------------------ ------------------- ------------------
Average Average Average Average
Number Price Number Price Number Price Number Price
------- ------- ------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AT JANUARY 31, 1994 -- -- -- -- 301,300 $ 15.296 142,100 $ 9.993
Exercised -- (28,650) 8.830
------- -------
AT JANUARY 31, 1995 -- -- -- -- 272,650 15.975 147,350 12.400
Granted on June 28, 1995 477,800 $17.625 --
Exercised -- (71,150) 8.800
Cancelled -- (10,050) 11.287
------- -------
AT JANUARY 31, 1996 477,800 17.625 -- -- 191,450 18.889 95,650 17.587
Granted on February 21, 1996 499,400 18.125 --
Exercised (15,499) 17.625 (12,950) 8.750
Cancelled (16,000) 17.859 --
------- -------
AT JANUARY 31, 1997 945,701 17.885 149,098 $ 17.633 178,500 19.624 118,500 19.213
======= =======
</TABLE>
Stock options are accounted for under the provisions of APB Opinion No.
25. As a result, the Company has recognized compensation expense in its
financial statements only for a relatively small number of grants under the
1979 and 1989 Plans that had associated stock appreciation rights (SARs).
The following disclosures are required for fiscal 1997 and later periods
by Statement of Financial Accounting Standards No. 123 (SFAS No. 123). Had
grants under the 1995 Plan been accounted for on the estimated fair-value basis
promulgated by SFAS No. 123, the Company would have recorded additional
compensation expense of $2,725,000 in fiscal 1997 and $774,000 in fiscal 1996.
On a proforma basis, net earnings would have been reduced by $1,771,000 ($.03
per share) and $503,000 ($.01 per share) to $101,455,000 ($1.96 per share) and
$36,626,000 ($.70 per share), respectively, for fiscal 1997 and 1996. The
estimated per share fair values of the options used in these computations
($5.32 and $5.39, respectively, for the February 21, 1996 and June 28, 1995
grants) were calculated as of the respective grant dates using the
Black-Scholes option-
58
<PAGE> 62
pricing model. For purposes of these computations, the options were estimated
to have expected lives of seven years and annual cash dividends on outstanding
Class B stock were assumed to remain constant at $.53 per share. Risk-free
interest rates of 5.56% and 5.85% and estimated stock price volatility rates of
27.6% and 26.3% were used in these computations. At January 31, 1997, options
outstanding under the 1995 Plan had exercise prices and remaining contractual
lives of $18.125 and 9 years for the fiscal 1997 grants and $17.625 and 8.5
years for the fiscal 1996 grants.
Prior to the implementation of annual grants under the 1995 Stock Option
Plan, the Company periodically had 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 vested in equal annual installments over a
five-year period. At January 31, 1997, grants covering 273,150 units with an
average floor price of $15.90 were outstanding, 269,750 of which were
exercisable. Compensation expense is recognized over the applicable vesting
terms of the SARs and bonus units in amounts equal to the appreciation in the
market price of the stock over the applicable floor prices. Reversals are
recognized to the extent of previously recorded appreciation in periods when
the market price of the stock declines. Such expense accruals (reversals)
aggregated $1,978,000, $747,000 and $(1,954,000) in fiscal 1997, 1996 and 1995.
NOTE 12 FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values of the Company's financial
instruments at January 31, 1997 and 1996 were as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
--------------------- ---------------------
Carrying Estimated Carrying Estimated
Amounts Fair Values Amounts Fair Values
-------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Real estate notes and contracts receivable ...... $ 37,092 $ 32,987 $ 35,045 $ 40,932
Long-term debt (including current maturities) ... 701,271 712,236 827,875 875,281
Short-term debt ................................. -- -- 13,732 13,732
</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, 1997 and 1996, open
transactions under such arrangements were not significant.
59
<PAGE> 63
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To 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, 1997 and 1996, and the related consolidated statements of earnings,
stockholders' equity and cash flows for each of the three years in the period
ended January 31, 1997. 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, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended January 31, 1997, 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
March 14, 1997
60
<PAGE> 64
SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED)
MITCHELL ENERGY & DEVELOPMENT CORP. AND SUBSIDIARIES
Reserve quantities. 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 following tables summarize changes in the Company's natural gas
(gas), crude oil and condensate (oil) and plant NGL reserve quantities during
the indicated fiscal years and the proved developed reserve quantities at the
dates indicated:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------ ------------------------- ------------------------
Gas Oil Gas Oil Gas Oil
MBOE * (Bcf) (MMBbls) MBOE * (Bcf) (MMBbls) MBOE * (Bcf) (MMBbls)
------ ----- -------- ------ ----- -------- ------ ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PROVED GAS AND OIL RESERVES
Beginning balance ................... 129.4 697.2 13.2 128.5 685.7 14.3 119.8 627.5 15.3
Extensions and discoveries .......... 17.4 91.5 2.2 13.4 75.4 .9 25.0 141.9 1.4
Production marketed ................. (15.9) (83.6) (2.0) (15.1) (78.9) (2.0) (15.3) (78.1) (2.3)
Production consumed in operations ... (.7) (4.0) -- (.6) (3.6) -- (.6) (3.7) --
Purchases in place .................. .9 4.8 .1 7.2 36.6 1.1 .2 1.5 --
Revisions of previous estimates ..... (.4) (1.0) (.2) (2.3) (9.1) (.8) -- -- --
Sales in place ...................... (.8) (3.7) (.2) (1.7) (8.9) (.3) (1.0) (3.4) (.5)
Improved recovery ................... .2 -- .2 -- -- -- .4 -- .4
----- ----- ---- ----- ----- ---- ----- ----- ----
Ending balance ...................... 130.1 701.2 13.3 129.4 697.2 13.2 128.5 685.7 14.3
===== ===== ==== ===== ===== ==== ===== ===== ====
</TABLE>
- -------------
* Million barrels of oil equivalent using 6-to-1 conversion factor for gas.
<TABLE>
<CAPTION>
1997 1996 1995
----------------------- ---------------------- -----------------------
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>
PROVED PLANT NGL RESERVES (MMBBLS)
Beginning balance 125.8 82.4 43.4 121.3 71.6 49.7 107.4 67.3 40.1
Additions 6.0 6.0 -- 10.7 10.1 .6 20.4 13.8 6.6
Production (16.8) (10.9) (5.9) (16.9) (10.6) (6.3) (17.3) (10.4) (6.9)
Exchange of plant interests 2.7 3.7 (1.0) -- -- -- -- -- --
Revisions of previous estimates 8.7 5.1 3.6 10.7 11.3 (.6) 10.8 .9 9.9
----- ---- ---- ----- ---- ---- ----- ---- ----
Ending balance 126.4 86.3 40.1 125.8 82.4 43.4 121.3 71.6 49.7
===== ==== ==== ===== ==== ==== ===== ==== ====
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995 1994
------ ------ ------ ------
<S> <C> <C> <C> <C>
PROVED DEVELOPED RESERVES AT FISCAL YEAR END
Gas (Bcf) ........................................ 611.0 587.6 577.1 558.5
====== ====== ====== ======
Oil (MMBbls) ..................................... 12.5 11.5 12.6 13.8
====== ====== ====== ======
Plant NGLs (MMBbls)
Consolidated ................................... 78.4 72.6 60.1 59.2
Equity partnerships ............................ 39.1 41.5 45.9 37.2
------ ------ ------ ------
117.5 114.1 106.0 96.4
====== ====== ====== ======
</TABLE>
61
<PAGE> 65
Future net cash flows from natural gas and oil reserves. The following tables
set forth estimates of the standardized measure of discounted future net cash
flows from proved gas and oil reserves at January 31, 1997, 1996 and 1995 and a
summary of the changes in those amounts for the fiscal years then ended (in
millions):
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
STANDARDIZED MEASURE
Future cash inflows ................................ $ 3,085 $ 1,752 $ 1,696
Future production and development costs ............ (864) (715) (644)
Future income taxes ................................ (685) (248) (227)
Discount -- 10% annually ........................... (596) (258) (224)
-------- -------- --------
$ 940 $ 531 $ 601
======== ======== ========
CHANGES IN STANDARDIZED MEASURE
Extensions and discoveries, net of related costs ... $ 176 $ 52 $ 103
Sales, net of production costs ..................... (198) (145) (183)
Net changes in prices and production costs ......... 699 (57) (101)
Accretion of discount .............................. 62 69 76
Production rate changes and other .................. (96) (43) 1
Development costs incurred ......................... 24 33 28
Purchases in place ................................. 9 50 2
Sales in place ..................................... (9) (11) (8)
Revisions of previous quantity estimates ........... (3) (16) --
Net change in future income taxes .................. (255) (2) 10
-------- -------- --------
$ 409 $ (70) $ (72)
======== ======== ========
</TABLE>
Future net cash flows from plant NGL reserves. The following tables set forth
estimates of the standardized measure of discounted future net cash flows from
proved NGL reserves at January 31, 1997, 1996 and 1995 and a summary of the
changes in those amounts for the fiscal years then ended (in millions):
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------- --------------------------- ---------------------------
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>
STANDARDIZED MEASURE
Future cash inflows ................. $ 2,100 $ 1,424 $ 676 $ 1,578 $ 1,036 $ 542 $ 1,368 $ 817 $ 551
Future production costs ............. (1,562) (1,058) (504) (1,175) (745) (430) (970) (553) (417)
Future income taxes ................. (177) (116) (61) (130) (87) (43) (122) (74) (48)
Discount -- 10% annually ............ (155) (103) (52) (108) (77) (31) (98) (65) (33)
------- ------- ------- ------- ------- ------- ------- ------- -------
$ 206 $ 147 $ 59 $ 165 $ 127 $ 38 $ 178 $ 125 $ 53
======= ======= ======= ======= ======= ======= ======= ======= =======
CHANGES IN STANDARDIZED MEASURE
Additions, net of related costs ..... $ 20 $ 20 $ -- $ 22 $ 21 $ 1 $ 44 $ 33 $ 11
Sales, net of production costs ...... (72) (48) (24) (26) (10) (16) (23) (8) (15)
Net changes in prices and costs ..... 67 36 31 (34) (19) (15) (8) (19) 11
Accretion of discount ............... 24 18 6 25 16 9 20 14 6
Exchange of plant interests ......... 14 15 (1) -- -- -- -- -- --
Revisions of previous
quantity estimates ................ 6 (3) 9 11 8 3 16 1 15
Other ............................... 4 (3) 7 (8) (7) (1) 3 4 (1)
Net change in future income taxes ... (22) (15) (7) (3) (7) 4 (20) (9) (11)
------- ------- ------- ------- ------- ------- ------- ------- -------
$ 41 $ 20 $ 21 $ (13) $ 2 $ (15) $ 32 $ 16 $ 16
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
62
<PAGE> 66
The natural gas reserve quantities reported as gas and oil reserves
represent wet gas volumes, including quantities that will be converted by
processing to NGLs. The gas and oil future net cash flows include only the
leasehold reimbursements for NGLs to be extracted during processing from the
Company's gas production; the other cash flows (amounts in excess of the
leasehold reimbursements) associated with NGLs to be extracted from the
Company's wet gas reserves are included in plant NGL amounts 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 all NGLs extracted from
gas streams committed to the plants, both those owned by the Company and 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, 1997, an
estimated 342.1 Bcf will be processed at Company plants, including 47.3 Bcf of
fiscal 1997's natural gas reserve additions from extensions and discoveries. It
is estimated that 66.6 Bcf of such reserves and 9.2 Bcf of such reserve
additions will be converted by processing into 32.5 MMBbls and 4.5 MMBbls of
plant NGLs, respectively.
Except where otherwise specified by contractual agreement, future cash
inflows are estimated using our year-end prices. Energy prices have declined
subsequent to January 31, 1997. If the reserves were valued using prices
existing on March 12, 1997, the standardized measure amounts would total
approximately $490,000,000 less than the amounts at January 31, 1997. 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 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.
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> 67
Oil and gas related costs and operating results. The following tables set forth
capitalized costs at January 31, 1997, 1996 and 1995 and costs incurred and
operating results for oil and gas producing activities for the years then ended
(in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
CAPITALIZED COSTS
Oil and gas properties ................................................ $ 1,625,903 $ 1,564,852 $ 1,525,587
Support equipment and facilities ...................................... 58,483 55,961 68,941
Accumulated depreciation, depletion and amortization .................. (1,123,909) (1,082,839) (1,078,207)
------------ ------------ ------------
Net capitalized costs ................................................. $ 560,477 $ 537,974 $ 516,321
============ ============ ============
COSTS INCURRED (including exploration expenses and
exploratory dry-hole costs of $18,051, $14,752 and $13,307)
Property acquisitions
Unproved ............................................................ $ 5,464 $ 5,267 $ 9,046
Proved .............................................................. 2,343 32,201 941
Exploration ........................................................... 18,796 19,908 19,221
Development ........................................................... 105,008 81,355 81,713
------------ ------------ ------------
Costs incurred ........................................................ 131,611 138,731 110,921
Support equipment and facilities ...................................... 2,664 2,936 4,152
------------ ------------ ------------
Capital and exploratory expenditures .................................. $ 134,275 $ 141,667 $ 115,073
============ ============ ============
OPERATING RESULTS (before charges for general
and administrative and interest expense)
Production revenues ................................................... $ 264,323 $ 203,906 $ 247,403
Amortization of deferred contract restructuring proceeds .............. -- 5,950 16,510
Other revenues ........................................................ 2,095 4,211 9,395
------------ ------------ ------------
266,418 214,067 273,308
Less - Production costs ............................................... 65,825 58,589 64,203
Depreciation, depletion and amortization (including
proved-property impairments of $3,068, $11,516 and $4,718) ... 88,929 93,206 96,369
Exploration expenses ........................................... 10,415 11,476 12,265
Exploratory dry-hole costs ..................................... 7,636 3,276 1,042
Other operating costs .......................................... 12,181 11,745 15,314
------------ ------------ ------------
Segment operating earnings ............................................ 81,432 35,775 84,115
Income taxes .......................................................... 28,121 10,281 26,665
------------ ------------ ------------
$ 53,311 $ 25,494 $ 57,450
============ ============ ============
</TABLE>
64
<PAGE> 68
HISTORICAL SUMMARY
MITCHELL ENERGY & DEVELOPMENT CORP. AND SUBSIDIARIES
Five Years Ended January 31, 1997 (in thousands except where otherwise
indicated)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
FINANCIAL POSITION AT YEAR END
Net property, plant and equipment ...................... $ 775,929 $ 719,535 $ 734,099 $ 858,705 $ 737,758
Real estate ............................................ 649,821 720,434 870,325 846,614 818,019
Total assets ........................................... 1,852,716 1,835,514 1,848,620 1,962,239 1,819,532
Capital employed
Long--term debt ...................................... $ 601,271(a) $ 827,875 $ 890,993 $ 984,185 $ 943,442
Deferred income taxes ................................ 227,875 193,908 200,722 181,989 178,375
Deferred credits and other liabilities ............... 86,066 109,885 111,633 115,712 139,236
Stockholders' equity ................................. 555,287 481,903 475,030 463,237 338,418
---------- ---------- ---------- ---------- ----------
$1,470,499 $1,613,571 $1,678,378 $1,745,123 $1,599,471
========== ========== ========== ========== ==========
CAPITAL AND EXPLORATORY EXPENDITURES (accrual basis)
Exploration and production ............................. $ 134,275 $ 141,667 $ 115,073 $ 158,203 $ 75,659
MEC Development, Ltd. buyout ......................... -- -- -- 78,251 --
Gas services ........................................... 34,233 38,358 35,111 48,628 70,473
Real estate ............................................ 59,312 59,990 65,123 65,132 84,954
Corporate .............................................. 7,318 6,068 4,268 3,866 4,538
---------- ---------- ---------- ---------- ----------
$ 235,138 $ 246,083 $ 219,575 $ 354,080 $ 235,624
========== ========== ========== ========== ==========
ENERGY OPERATING STATISTICS
Average daily volumes
Natural gas sales (Mcf) .............................. 228,500 216,200 214,100 193,800 149,000
Crude oil and condensate sales (Bbls) ................ 5,500 5,400 6,300 6,000 5,600
Natural gas liquids produced (Bbls) .................. 46,100 46,400 47,500 49,800 47,200
Pipeline throughput (Mcf) ............................ 410,000 354,000 353,000(b) 386,000(b) 398,000(b)
Average annual sales price (dollars)
Natural gas (per Mcf) ................................ $ 2.64 $ 2.16 $ 2.71 $ 2.86 $ 2.84
Crude oil and condensate (per Bbl) ................... 21.50 16.91 15.75 16.31 18.49
Natural gas liquids produced (per Bbl) ............... 16.13 11.55 11.57 12.18 13.41
Drilling program (gross wells)
Wells drilled ........................................ 209 116 132 154 152
Wells completed ...................................... 185 107 121 127 129
Well count at year end (gross wells) ................... 3,090 3,047 3,280 3,413 3,532
THE WOODLANDS OPERATING STATISTICS
Residential lots sold .................................. 1,105 980 951 844 911
Average price per lot (dollars) ...................... 43,851 40,752 37,287 39,055 38,196
Average price per square foot (dollars) .............. 4.24 3.89 3.70 3.38 3.14
Commercial/institutional acreage sold .................. 86 53 67 144 58
Office, industrial and retail space
managed (thousands of square feet) ................... 2,599 2,512 2,491 2,204 2,140
Apartment units managed ................................ 1,891 1,891 1,675 1,883 2,055
STOCKHOLDERS' EQUITY (per share at year end) ........... $ 10.71 $ 9.26 $ 9.09 $ 8.78 $ 7.25
RATIO OF EARNINGS TO FIXED CHARGES ..................... 3.50x 2.33x 1.70x 1.25x 1.30x
</TABLE>
- ---------------
(a) Excludes current maturities of $100,000.
(b) Excluding amounts attributable to the Winnie Pipeline system which was
sold in July 1994.
65
<PAGE> 69
HISTORICAL SUMMARY
MITCHELL ENERGY & DEVELOPMENT CORP. AND SUBSIDIARIES
Five Years Ended January 31, 1997 (in thousands except per-share data)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
REVENUES
Exploration and Production (including gain of
$205,256 from natural gas contract buyout in 1996) ... $ 269,862 $ 424,661 $ 277,099 $ 266,166 $ 214,681
Gas Services
Natural gas processing ............................... 376,980 283,378 252,159 253,605 306,967
Natural gas gathering and marketing .................. 247,214 184,584 180,038 296,373 248,605
Gains from major asset sales ......................... -- -- 48,821 -- --
Other ................................................ 12,621 10,296 6,989 10,559 11,128
Real Estate ............................................ 198,167 168,828 129,465 126,106 121,453
---------- ---------- ---------- ---------- ----------
Total revenues ....................................... $1,104,844 $1,071,747 $ 894,571 $ 952,809 $ 902,834
========== ========== ========== ========== ==========
SEGMENT OPERATING EARNINGS
Exploration and Production
Operations ........................................... $ 81,432 $ 35,775 $ 84,115 $ 68,186 $ 58,060
Gain from natural gas contract buyout ................ -- 205,256 -- -- --
Litigation provision ................................. (10,000) (15,000) -- -- --
Personnel reduction program costs .................... -- (7,935) -- -- --
Restructuring charges ................................ -- -- -- -- (20,726)
Severance tax refunds ................................ 5,935 -- -- -- --
Columbia Gas contract settlement proceeds ............ 3,444 -- -- -- --
Gains from asset sales ............................... -- 5,338 3,791 -- --
Gas Services
Natural gas processing ............................... 69,110 30,994 23,253 20,088 57,466
Natural gas gathering and marketing .................. 27,589 14,063 12,335 18,742 25,517
Other ................................................ 11,397 9,059 (846) 3,829 5,521
---------- ---------- ---------- ---------- ----------
Operations subtotal ............................... 108,096 54,116 34,742 42,659 88,504
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 ........................................... 40,224 48,848 25,793 21,078 22,801
Write-downs of properties ............................ -- (123,916) (5,661) -- --
Gains from sales of non-Woodlands assets ............. 2,507 -- -- -- --
Personnel reduction program costs .................... -- (3,000) -- -- --
---------- ---------- ---------- ---------- ----------
Total segment operating earnings .................. 231,638 143,167 160,349 131,923 148,639
General and administrative expense ..................... 38,664 44,821(a) 42,225 43,222 41,398
Interest expense ....................................... 55,580 64,172 69,982 74,057 75,284
Capitalized interest ................................... (25,788) (28,252) (28,816) (33,956) (34,161)
Other expense .......................................... 3,586 4,095 6,407 1,224 6,096
---------- ---------- ---------- ---------- ----------
EARNINGS BEFORE INCOME TAXES, EXTRAORDINARY
ITEM AND CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING METHODS ................................ 159,596 58,331 70,551 47,376 60,022
Income Taxes ........................................... 56,370 21,202 24,737 17,346(b) 14,967
---------- ---------- ---------- ---------- ----------
EARNINGS BEFORE EXTRAORDINARY ITEM AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING METHODS ............... 103,226 37,129 45,814 30,030 45,055
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 ........................................... $ 103,226 $ 37,129 $ 45,814 $ 24,604 $ 27,253
========== ========== ========== ========== ==========
EARNINGS PER SHARE
Earnings before extraordinary item and cumula-
tive effect of change in accounting methods .......... $ 1.99 $ .71 $ .87 $ .58 $ .96
Extraordinary item ..................................... -- -- -- (.10) (.15)
Cumulative effect of change in accounting methods ...... -- -- -- -- (.23)
---------- ---------- ---------- ---------- ----------
Net earnings ........................................... $ 1.99 $ .71 $ .87 $ .48 $ .58
========== ========== ========== ========== ==========
CASH DIVIDENDS (cents per share)
Prior to stock reclassification ........................ 20.00
Class A ................................................ 48.00 48.00 48.00 48.00 22.00
Class B ................................................ 53.00 53.00 53.00 53.00 23.75
AVERAGE COMMON SHARES OUTSTANDING ...................... 51,878 52,044 52,696 51,004 46,858
</TABLE>
- ---------------
(a) Includes $5,665 of personnel reduction program costs.
(b) Includes a $6,574 deferred provision related to an increase in the
corporate statutory Federal income tax rate from 34% to 35%.
66
<PAGE> 70
BOARD OF DIRECTORS
GEORGE P. MITCHELL
Chairman and Chief Executive Officer,
Mitchell Energy & Development Corp.
BERNARD F. CLARK
Vice Chairman,
Mitchell Energy & Development Corp.
W. D. STEVENS (3)
President and Chief Operating Officer,
President--Exploration and Production,
Mitchell Energy & Development Corp.
ROBERT W. BALDWIN (1)
Consultant (energy/management);
retired President, Gulf Refining
and Marketing Company
(a division of Gulf Oil Corp.),
Houston
WILLIAM D. EBERLE (1) (3)
Chairman,
Manchester Associates, Ltd.
(international business consulting),
Boston; Of Counsel on trade issues to
Kaye, Scholer, Fierman, Hays and
Handler (attorneys),
Washington, D.C.
SHAKER A. KHAYATT (1)
President and Chief Executive Officer,
Khayatt and Company, Inc.
(investment banking),
New York City
BEN F. LOVE (2) (3)
Consultant; Advisory Director,
Texas Commerce Bank, N.A., and
retired Chairman and
Chief Executive Officer,
Texas Commerce Bancshares,
Houston
WALTER A. LUBANKO (2)
Chairman and President,
W.A. Lubanko & Co., Inc.
(investment banking),
Brookville, New York
J. TODD MITCHELL (3)
President,
The Discovery Bay Company
(seismic software) and
Dolomite Resources, Inc.
(exploration and investments),
Houston
M. KENT MITCHELL (1) (3)
President and Chief Executive Officer,
Bald Head Island Management, Inc.
(real estate development),
Bald Head Island, North Carolina
CONSTANTINE S. NICANDROS (2)
Chairman,
CSN and Company
(investment and consulting);
retired Chairman, President and Chief
Executive Officer, Conoco and Vice
Chairman, DuPont,
Houston
RAYMOND L. WATSON (1)
Chairman,
Executive Committee
of the Board of Directors,
The Walt Disney Company
(entertainment),
Burbank, California;
Vice Chairman,
The Irvine Company
(real estate development),
Newport Beach, California
J. MCDONALD WILLIAMS (2)
Chairman,
Trammell Crow Company
(real estate services),
Dallas
(1) Compensation Committee
(2) Audit Committee
(3) Executive Committee
67
<PAGE> 71
PRINCIPAL OFFICERS
[PICTURE]
Left to right (seated): W. D. Stevens, George P. Mitchell,
Bernard F. Clark. Left to right (standing): Philip S. Smith,
Allen J. Tarbutton, Jr., Roger L. Galatas, Thomas P. Battle.
GEORGE P. MITCHELL PHILIP S. SMITH
Chairman and Chief Executive Officer Corporate Senior Vice President,
Chief Financial Officer, and
BERNARD F. CLARK President -- Administration and
Vice Chairman Financial Division
W. D. STEVENS ALLEN J. TARBUTTON, JR.
President and Chief Operating Officer, Corporate Senior Vice President,
President -- Exploration and President -- Gas Services Division
Production Division
THOMAS P. BATTLE
ROGER L. GALATAS Corporate Senior Vice President,
Corporate Senior Vice President, General Counsel and Secretary
President -- Real Estate Division
68
<PAGE> 72
CORPORATE INFORMATION
<TABLE>
<S> <C>
STOCK LISTINGS ANNUAL MEETING
New York Stock Exchange 10 a.m. CDT
The Pacific Stock Exchange Wednesday, June 25, 1997
Ticker Symbols: MND A and MND B The Woodlands Executive Conference
Options Trading: The Pacific Stock Exchange Center and Resort
2301 North Millbend
The Woodlands, Texas 77380
TRANSFER AGENT AND REGISTRAR Phone: (281) 367-1100
ChaseMellon Shareholder Services, L.L.C.
85 Challenger Road
Overpeck Centre FORM 10-K
Ridgefield Park, N.J. 07660-2104 Copies of the Company's Form 10-K
Phone: (800) 635-9270 are available upon written request to:
Public Affairs Department
Mitchell Energy & Development Corp.
P.O. Box 4000
The Woodlands, Texas 77387-4000
Phone: (713) 377-5650
Worldwide Web: http://www.mitchellenergy.com
Design: John Weaver Design/Houston, Texas
Photography: Ken Childress, Bryan Kuntz and
Ted Washington
</TABLE>
<PAGE> 73
---------------
Bulk Rate
[MITCHELL ENERGY LOGO] U.S. Postage
PAID
MITCHELL ENERGY & DEVELOPMENT CORP. Spring, Texas
Permit No. 67
P.O. Box 4000 ---------------
2001 Timberloch Place
The Woodlands, Texas 77387-4000
(713) 377-5500
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, 1997 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 Louisiana Gas Services, Inc. (MLGS)
Mitchell Marketing Company (Louisiana)
Madison Gas Marketing Services (80% owned)
The Woodlands Corporation (TWC)
Mitchell Catamount, Inc. (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)
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)
Louisiana Chalk Gathering System (50% owned by MLGS)
Mitchell Mortgage Company, LLC (49% owned by TWC)
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)
Woodlands Retail Equities - '96 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, 33-31446 and 333-06981 and into
previously filed Form S-3 Registration Statement Nos. 33-57332 and 33-61070.
ARTHUR ANDERSEN LLP
Houston, Texas
March 31, 1997
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<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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-6959
_______________________
MITCHELL ENERGY & DEVELOPMENT CORP.
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 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, 1997
OR
[ ] 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.
