<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED OCTOBER 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 charter)
TEXAS 74-1032912
(State of incorporation) (I.R.S. Employer Identification No.)
2001 TIMBERLOCH PLACE
THE WOODLANDS, TEXAS 77380
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 377-5500
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
--- ---
Shares of common stock outstanding at November 30, 1997:
Class A . . . . . . . . . . 22,316,654
Class B . . . . . . . . . . 26,933,779
================================================================================
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
Page
Part I - Financial Information Number
------
<S> <C>
Item 1. Financial Statements
Representation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Unaudited Consolidated Statements of Earnings . . . . . . . . . . . . . . . . . . . . . . . . . 3
Unaudited Consolidated Statement of Stockholders' Equity . . . . . . . . . . . . . . . . . . . . 4
Unaudited Condensed Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . 5
Notes to Unaudited Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of
Financial Position and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . 13
Part II - Other Information
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
</TABLE>
DEFINITIONS. As used herein, "MMBtu" means million British thermal units,
"Mcf" means thousand cubic feet, "MMcf" means million cubic feet, "Bcf" means
billion cubic feet, "Bbl" means barrel, "MMBbls" means million barrels, "NGL"
or "NGLs" means natural gas liquids, "fiscal 1997" and "fiscal 1998" refer,
respectively, to the 12-month periods ended January 31, 1997 and 1998 and
"DD&A" means depreciation, depletion and amortization. Pipeline throughput
volumes are based on average energy content of 1,000 Btu per cubic foot. Where
applicable, NGL volume, price and reserve information includes equity
partnership interests.
<PAGE> 3
Part I - Financial Information
ITEM 1. FINANCIAL STATEMENTS
REPRESENTATION. The consolidated financial statements of Mitchell Energy &
Development Corp. and subsidiaries (the "Company") and related notes included
herein have been prepared by the Company, without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to those rules and regulations, although the Company believes
that the disclosures included herein are adequate to make the information
presented not misleading. In the opinion of the Company's management, all
adjustments - which include only normal and recurring adjustments - necessary
for a fair presentation of the financial position and results of operations for
the periods presented have been made. These financial statements should be
read in conjunction with the financial statements and the notes thereto
included in the Company's Fiscal 1997 Annual Report and with the Management's
Discussion and Analysis of Financial Position and Results of Operations
sections of that and this report.
- 1 -
<PAGE> 4
MITCHELL ENERGY & DEVELOPMENT CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollar amounts in thousands)
<TABLE>
<CAPTION>
OCTOBER 31, January 31,
1997 1997
----------- -----------
ASSETS (unaudited) (Note 2)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents ................................................. $ 207,013 $ 75,825
Trade receivables ......................................................... 119,284 149,585
Gas contract buyout proceeds receivable ................................... -- 91,000
Inventories ............................................................... 19,852 10,072
Other ..................................................................... 9,008 8,864
----------- -----------
Total current assets .................................................. 355,157 335,346
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, at cost less accumulated depre-
ciation, depletion and amortization of $1,317,988 and $1,337,041
Exploration and production
Oil and gas properties .................................................. 585,642 537,992
Support equipment and facilities ........................................ 17,390 22,485
Gas services (including investments in equity partnerships) (Note 3)
Natural gas processing .................................................. 76,101 69,658
Natural gas gathering ................................................... 109,119 94,499
Other ................................................................... 54,178 42,634
Corporate ................................................................. 6,576 8,661
----------- -----------
849,006 775,929
----------- -----------
NET ASSETS OF DISCONTINUED REAL ESTATE OPERATIONS (Note 2) ................ 32,832 520,484
----------- -----------
LONG-TERM INVESTMENTS AND OTHER ASSETS .................................... 43,126 36,513
----------- -----------
$ 1,280,121 $ 1,668,272
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt ...................................... $ -- $ 100,000
Oil and gas proceeds payable .............................................. 104,555 141,076
Accounts payable and accrued liabilities .................................. 105,075 99,211
Federal income taxes payable .............................................. 10,991 8,700
----------- -----------
Total current liabilities ............................................. 220,621 348,987
----------- -----------
LONG-TERM DEBT (Note 4) ................................................... 414,267 600,000
----------- -----------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes ..................................................... 159,756 109,459
Retirement obligations and other .......................................... 59,584 54,539
----------- -----------
219,340 163,998
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 3, 6 and 7)
STOCKHOLDERS' EQUITY
Preferred stock, $.10 par value (authorized 10,000,000 shares; none issued)
Common stock, $.10 par value
(authorized 100,000,000 Class A and 100,000,000 Class B shares) ......... 5,386 5,386
Additional paid-in capital ................................................ 143,262 143,343
Retained earnings (Note 10) ............................................... 363,768 435,165
Treasury stock, at cost ................................................... (86,523) (28,607)
----------- -----------
425,893 555,287
----------- -----------
$ 1,280,121 $ 1,668,272
=========== ===========
</TABLE>
- ------------------------------------------------
The accompanying notes are an integral part of these financial statements.
- 2 -
<PAGE> 5
MITCHELL ENERGY & DEVELOPMENT CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands except per-share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
October 31 October 31
------------------------ ------------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(Note 2) (Note 2)
<S> <C> <C> <C> <C>
REVENUES
Exploration and production ....................................... $ 71,105 $ 57,505 $ 189,075 $ 178,399
Gas Services ..................................................... 153,020 141,505 380,383 416,619
--------- --------- --------- ---------
224,125 199,010 569,458 595,018
--------- --------- --------- ---------
OPERATING COSTS AND EXPENSES
Exploration and production, including water well
litigation provisions of $7,000 in the first quarter
of 1997 and $10,000 in the 1996 periods (Note 6) ................ 51,449 55,764 148,570 141,195
Gas services, including royalty litigation settlement pro-
vision of $26,000 in the second quarter of 1997 (Note 6) ....... 133,991 112,771 356,915 343,646
--------- --------- --------- ---------
185,440 168,535 505,485 484,841
--------- --------- --------- ---------
SEGMENT OPERATING EARNINGS (Note 8) .............................. 38,685 30,475 63,973 110,177
General and administrative expense ............................... 7,888 7,784 22,906 22,666
--------- --------- --------- ---------
TOTAL OPERATING EARNINGS ......................................... 30,797 22,691 41,067 87,511
--------- --------- --------- ---------
OTHER EXPENSE
Interest expense ................................................. 10,253 14,193 34,646 42,747
Interest expense attributable to discontinued operations ......... -- (8,533) (15,112) (25,899)
Interest income .................................................. (5,139) (143) (6,448) (412)
Other, net ....................................................... (1,832) (120) (3,627) (1,561)
--------- --------- --------- ---------
3,282 5,397 9,459 14,875
--------- --------- ---------- ---------
EARNINGS FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES ................................. 27,515 17,294 31,608 72,636
INCOME TAXES (Note 5) ............................................ 9,780 6,412 10,613 25,509
--------- --------- --------- ---------
EARNINGS FROM CONTINUING OPERATIONS .............................. 17,735 10,882 20,995 47,127
--------- --------- --------- ---------
DISCONTINUED REAL ESTATE OPERATIONS (Note 2)
Earnings from operations, net of income
taxes of $3,708, $4,071 and $8,221 ............................. -- 8,041 7,440 15,839
Loss on sale, net of income tax benefit of $25,878 ............... -- -- (67,123) --
--------- --------- --------- ---------
-- 8,041 (59,683) 15,839
--------- --------- --------- ---------
EARNINGS (LOSS) BEFORE EXTRAORDINARY ITEM ........................ 17,735 18,923 (38,688) 62,966
EXTRAORDINARY ITEM - EARLY RETIREMENT
OF DEBT, net of tax benefit of $7,135 (Note 4) ................. (13,250) -- (13,250) --
--------- --------- --------- ---------
NET EARNINGS (LOSS) .............................................. $ 4,485 $ 18,923 $ (51,938) $ 62,966
========= ========= ========= =========
EARNINGS (LOSS) PER SHARE
Earnings from continuing operations .............................. $ .36 $ .21 $ .41 $ .91
Discontinued real estate operations
Earnings from operations ....................................... -- .15 .15 .30
Loss on sale ................................................... -- -- (1.31) --
Extraordinary item - Early retirement of debt .................... (.27) -- (.26) --
--------- --------- --------- ---------
$ .09 $ .36 $ (1.01) $ 1.21
========= ========= ========= =========
AVERAGE COMMON SHARES OUTSTANDING ................................ 49,943 51,821 51,210 51,895
========= ========= ========= =========
</TABLE>
- ---------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
- 3 -
<PAGE> 6
MITCHELL ENERGY & DEVELOPMENT CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Nine Months Ended October 31, 1997
(dollar amounts in thousands)
<TABLE>
<CAPTION>
Additional
Common Paid-In Retained Treasury
DOLLAR AMOUNTS Stock Capital Earnings Stock Total
- -------------- --------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 31, 1997 ...................... $ 5,386 $ 143,343 $ 435,165 $ (28,607) $ 555,287
Net loss ....................................... -- -- (51,938) -- (51,938)
Cash dividends declared (36 cents per share on
Class A and 39 3/4 cents per share on
Class B) ..................................... -- -- (19,459) -- (19,459)
Treasury stock purchases ....................... -- -- -- (60,522) (60,522)
Exercises of stock options ..................... -- (81) -- 2,606 2,525
--------- --------- --------- --------- ---------
BALANCE, OCTOBER 31, 1997 ...................... $ 5,386 $ 143,262 $ 363,768 $ (86,523) $ 425,893
========= ========= ========= ========= =========
</TABLE>
============================
<TABLE>
<CAPTION>
Common Stock Issued Treasury Stock
--------------------------- --------------------------
SHARE AMOUNTS Class A Class B Class A Class B
------------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 31, 1997 ..... 23,978,088 29,878,088 922,429 1,092,958
Treasury stock purchases ...... -- -- 735,000 1,787,200
Exercises of stock options .... -- -- (6,000) (134,854)
Other ......................... (4) (4) -- --
---------- ---------- --------- ---------
BALANCE, OCTOBER 31, 1997 ..... 23,978,084 29,878,084 1,651,429 2,745,304
========== ========== ========= =========
</TABLE>
- ---------------------------------------
The accompanying notes are an integral part of these financial statements.
- 4 -
<PAGE> 7
MITCHELL ENERGY & DEVELOPMENT CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
October 31
------------------------
1997 1996
--------- ---------
(Note 2)
<S> <C> <C>
OPERATING ACTIVITIES
Earnings from continuing operations ............................................................ $ 20,995 $ 47,127
Adjustments to reconcile earnings from continuing
operations to cash provided by operating activities
Depreciation, depletion and amortization .................................................. 77,906 74,914
Exploration expenses, including dry-hole costs ............................................ 12,422 13,183
Deferred income taxes ..................................................................... 8,620 19,070
Distributions in excess of (less than) earnings of equity investees ....................... 38 (1,021)
Royalty litigation settlement provision ................................................... 26,000 --
Water well litigation provision ........................................................... 7,000 10,000
Gain from sale of drilling rigs ........................................................... (2,382) --
Other, net ................................................................................ (3,032) 3,834
--------- ---------
147,567 167,107
Changes in operating assets and liabilities ............................................... 46,941 67,473
--------- ---------
Cash provided by operating activities ..................................................... 194,508 234,580
--------- ---------
INVESTING ACTIVITIES
Capital and exploratory expenditures
Total on accrual basis ...................................................................... (172,234) (118,093)
Adjustment to cash basis .................................................................... 908 (2,512)
--------- ---------
(171,326) (120,605)
Net proceeds from sale of The Woodlands Corporation ............................................ 480,994 --
Proceeds from sales of property, plant and equipment ........................................... 6,689 8,632
Acquisition of leased equipment ................................................................ -- (6,995)
Other .......................................................................................... 3,361 2,130
--------- ---------
Cash provided by (used for) investing activities .......................................... 319,718 (116,838)
--------- ---------
FINANCING ACTIVITIES
Debt repayments ................................................................................ (285,733) (65,000)
Treasury stock purchases ....................................................................... (60,522) (3,917)
Debt reacquisition premium ..................................................................... (18,510) --
Cash dividends ................................................................................. (19,459) (19,763)
Other .......................................................................................... 556 (1,207)
--------- ---------
Cash used for financing activities ........................................................ (383,668) (89,887)
--------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS
FROM CONTINUING OPERATIONS ................................................................... 130,558 27,855
CASH PROVIDED BY DISCONTINUED OPERATIONS 630 11,875
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................................................. 75,825 17,867
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD ....................................................... $ 207,013 $ 57,597
========= =========
</TABLE>
- ----------------------------------------
The accompanying notes are an integral part of these financial statements.
-5-
<PAGE> 8
MITCHELL ENERGY & DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1997
(1) ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Mitchell Energy &
Development Corp. and its majority-owned subsidiaries (the "Company"). All
significant intercompany accounts and transactions are eliminated in
consolidation. The Company follows the equity method of accounting for
investments in 20%- to 50%-owned entities.
The Company's exploration and production activities are accounted for
using the "successful efforts" method. Impairment computations for proved oil
and gas properties are made on a field-by-field basis as conditions warrant.
Charges for such impairments, which are included in DD&A expense, totaled
$1,640,000 for the three- and nine-month periods ended October 31, 1997 and
none and $3,068,000 for the three- and nine-month periods ended October 31,
1996.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
In March 1997, Statement of Financial Accounting Standards (SFAS) Nos. 128
and 129 were issued which must be adopted by the Company during the fourth
quarter of fiscal 1998. SFAS No. 128, "Earnings Per Share," will require the
Company to disclose basic and diluted earnings per share information. Since
the dilutive impact of its only common stock equivalent - employee stock
options - historically has been less than 3%, the Company previously was not
required to make fully diluted earnings per share disclosures. SFAS No. 129,
"Disclosure of Information About Capital Structure," requires entities that
issue securities other than ordinary common stock to make specified
disclosures. Since the Company's issued stock consists solely of common stock,
this statement will have little, if any, impact on its financial statements.
(2) DISCONTINUED REAL ESTATE OPERATIONS
On June 12, 1997, the Company entered into an agreement to sell its real estate
subsidiary, The Woodlands Corporation (TWC), for $543,000,000 in cash to a
partnership of Crescent Real Estate Equities Company and Morgan Stanley Real
Estate Fund II, L.P. The transaction was subsequently closed on July 31, 1997.
After adjustment for certain net additional amounts received pursuant to the
contract and deductions for current income taxes and transaction costs, the
Company's net cash proceeds from the sale totaled $480,994,000. Excluded from
that transaction were real estate assets located outside The Woodlands that are
held for disposal with a book value at the time of the sale - including
deferred tax benefits - of approximately $35,000,000. The remaining book value
totaled $32,832,000 at October 31, 1997, and the Company plans to liquidate
most of these holdings over the next year.
The Company decided to withdraw from the real estate business upon
entering into the definitive agreement to sell TWC on June 12, 1997, and
commenced reporting real estate activities as discontinued operations in its
financial statements effective that date. The net assets of discontinued real
estate operations have been segregated in the accompanying consolidated balance
sheet and the results of discontinued operations have been separately reported
in the accompanying statements of earnings. Financial statements for
prior-year periods have been similarly restated. Interest expense attributable
to discontinued operations was determined in the same manner that historically
had been used for the Company's real estate operations. Revenues of the
discontinued real estate operations totaled approximately $73,094,000 through
July 31, 1997. For the three- and nine-month periods ended October 31, 1996,
such revenues were $46,396,000 and $128,847,000.
- 6 -
<PAGE> 9
The net loss incurred in connection with the sale of TWC is summarized as
follows (in thousands):
<TABLE>
<S> <C>
Proceeds .................................. $551,376
Less - Net book value of assets sold ..... 632,732
Transaction costs and expenses .... 11,645
--------
Pretax loss ............................... 93,001
Income tax benefit ........................ 25,878
--------
Net loss .................................. $ 67,123
========
</TABLE>
Net assets of discontinued real estate operations consisted of the
following at January 31, 1997 (in thousands):
<TABLE>
<S> <C>
Current assets ..................................... $ 13,420
Real estate ........................................ 649,821
Notes and contracts receivable and other assets .... 41,687
Current liabilities ................................ (33,230)
Long-term debt (excluding intercompany debt) ....... (1,271)
Deferred income tax liability ...................... (118,416)
Other deferred credits and long-term liabilities ... (31,527)
---------
$ 520,484
=========
</TABLE>
(3) EQUITY INVESTMENTS
At October 31, 1997, the Company's principal partnership interests included the
following:
<TABLE>
<CAPTION>
Ownership
Percentage Nature of Operations
---------- ----------------------
<S> <C> <C>
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
</TABLE>
The Company's net investment in each of these entities is reported as property,
plant and equipment in the consolidated balance sheets under the gas services
caption. The Company's equity in their pretax earnings is reported as revenues
in the consolidated statements of earnings under the gas services caption.
A summary of the Company's net investments in partnerships at October 31,
1997 and January 31, 1997 and its equity in their pretax earnings (losses) for
the nine-month periods ended October 31, 1997 and 1996 follows (in thousands):
<TABLE>
<CAPTION>
Equity in
Net Investment Pretax Earnings
---------------------- ------------------------
October 31, January 31, October 31, October 31,
1997 1997 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Austin Chalk Natural Gas Marketing Services . $ 1,042 $ 2,014 $ 2,359 $ 997
Belvieu Environmental Fuels ................. 38,917 31,174 7,743 6,348
C&L Processors Partnership .................. 23,585 21,433 2,152 4,068
Ferguson-Burleson County Gas Gathering System 45,109 53,164 2,708 7,048
Gulf Coast Fractionators .................... 13,474 9,593 3,881 3,475
Louisiana Chalk Gathering System ............ 16,394 4,754 (214) --
U.P. Bryan Plant ............................ 7,184 6,973 3,171 7,150
Others ...................................... 3 162 29 258
-------- -------- -------- --------
$145,708 $129,267 $ 21,829 $ 29,344
======== ======== ======== ========
</TABLE>
- 7 -
<PAGE> 10
Financial statement information is generally reported on a one-month lag
for entities accounted for on the equity method. Summarized earnings
information (on a 100% basis) for these entities for the three- and nine-month
periods ended October 31, 1997 and 1996 follows (in thousands):
<TABLE>
<CAPTION>
Three Months Nine Months
--------------------- ---------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues ..................................................... $181,205 $157,963 $576,572 $530,454
Operating earnings ........................................... 20,977 26,915 67,555 83,971
Pretax earnings (before interest expense for those entities
whose activities are funded by capital contributions of the
owners) .................................................... 16,756 21,554 53,776 66,767
</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 October 31, 1997 and January 31, 1997 and
the Company's proportionate share of such debt at October 31, 1997 is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
Entity Total October 31, 1997 - Company's Share
------------------------ ----------------------------------
October 31, January 31, Non-
1997 1997 Recourse Recourse Total
----------- ----------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Belvieu Environmental Fuels ....... $107,555 $136,889 $ 6,667 $ 29,185 $ 35,852
C&L Processors Partnership ........ 57,709 71,209 15,582 13,273 28,855
Gulf Coast Fractionators .......... 51,125 61,750 1,712 18,099 19,811
-------- -------- -------- -------- --------
$216,389 $269,848 $ 23,961 $ 60,557 $ 84,518
======== ======== ======== ======== ========
</TABLE>
See Note 4 of Notes to Consolidated Financial Statements on pages 48 and 49 of
the Company's Fiscal 1997 Annual Report for additional information concerning
the indebtedness of these partnerships.
(4) LONG-TERM DEBT
During the third quarter of fiscal 1998, the Company repurchased $185,733,000
face amount of its 9.25% senior notes maturing January 15, 2002. The purchase
price was $1,099.66 per $1,000 of principal plus accrued interest based on a
yield to maturity of 6.56% (30 basis points over the yield to maturity on the
6 1/8% U.S. Treasury Note due December 31, 2001 as of 2:00 p.m. Eastern Daylight
Time on September 11, 1997). In connection with this early retirement of debt,
an extraordinary charge was recorded. Before an income tax benefit of
$7,135,000, the costs associated with this debt retirement consisted of
$18,510,000 in reacquisition premiums, $784,000 of tender offer costs and
expenses and the write-off of $1,091,000 of deferred debt placement costs
applicable to the retired notes.
In April 1996, the Company entered into an agreement with a group of banks
for a $500,000,000 facility to provide letters of credit to collateralize
appeals bonds that might be needed in connection with the North Texas water
well litigation discussed in Note 6. In August 1996, letters of credit of
$184,300,000 were issued by the banks supporting a supersedeas bond of
$224,850,000 that was filed in connection with the Company's appeal of the
$204,000,000 judgment in the Bartlett case. 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. With the reversal of the Bartlett judgment (see Note 6), it is
expected that the Company will be able to cancel the appeal bond and the
related letters of credit before the end of fiscal 1998. After this is done,
the Company will likely substantially reduce the size of the letter of credit
facility or terminate it altogether.
The Company's bank revolving credit agreement consists of a committed
$150,000,000 facility, under which nothing was borrowed at October 31, 1997.
Accordingly, the Company had $150,000,000 in borrowing capacity available under
this agreement at that date. The previous $50,000,000 real estate facility was
cancelled effective with the TWC sale.
- 8 -
<PAGE> 11
(5) INCOME TAXES
Income taxes applicable to earnings from continuing operations for the
nine-month periods ended October 31, 1997 and 1996 consist of the following (in
thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
CURRENT
<S> <C> <C>
Federal .............. $ 1,496 $ 4,198
State ................ 497 2,241
------- -------
1,993 6,439
------- -------
DEFERRED
Federal .............. 7,700 18,146
State ................ 920 924
------- -------
8,620 19,070
------- -------
$10,613 $25,509
======= =======
</TABLE>
Estimated annual tax rates of 33.6% and 35.1%, respectively, were used in
computing the income tax provisions for the nine-month periods ended October
31, 1997 and 1996. The differences between these rates and the 35% statutory
Federal income tax rate were principally the result of the interplay of the
benefit of Federal tax credits and the impact of state income taxes.
Because of the large taxable gain on the sale of TWC, it is expected that
unused alternative minimum tax credits, which totaled $28,614,000 at January
31, 1997, will be substantially utilized during fiscal 1998.
(6) LITIGATION CONTINGENCIES
NORTH TEXAS WATER WELL LITIGATION. On March 1, 1996, in a trial known as the
Bartlett case, a judgment was entered against a wholly owned subsidiary of the
Company by a Wise County, Texas court. The judgment awarded $4,051,760 in
actual damages (consisting of $339,266 for economic damages and $3,712,494 for
pain, mental anguish, inconvenience, etc.) and $200,000,000 in exemplary
damages to eight plaintiff groups, who claimed that the natural gas operations
of the subsidiary had affected their water wells.
The Company appealed this judgment to the Second Court of Appeals in Forth
Worth, Texas, which ruled on the Company's appeal on November 13, 1997. The
three-judge panel unanimously reversed the previous decision finding that the
plaintiffs failed to prove that the Company's actions were the cause of their
alleged damages and that the claims of most plaintiffs were time-barred by
statute of limitations. The plaintiffs subsequently requested a
reconsideration of the court's decision, which is expected to be denied. It is
not known whether the plaintiffs will seek a review of the appellate decision
by the Texas Supreme Court.
In May 1997, another jury in the Wise County court found unanimously on
all counts that the Company was not responsible for damages claimed by 17 other
plaintiff groups in an 11-week trial known as the Bailey case. The court
entered the judgment on July 15, 1997. After the court subsequently denied
their motion for a new trial, the plaintiffs filed a notice of appeal to the
Second Court of Appeals.
Similar lawsuits (each claiming damages of more than $1,000,000) have been
brought by 29 other plaintiff groups. To date, there has been only minimal
activity with respect to these cases although one of them involving one family
(the Nelon case) is scheduled for trial on March 23, 1998 (after a recent
postponement from January 20).
Aggregate charges of $32,000,000 (including $7,000,000 in April 1997) have
been recorded to provide for costs the Company considers probable that it will
incur in connection with the existing litigation related to this matter. The
provisions consisted largely of expected costs for attorneys' fees, bonds,
etc., to appeal the March 1996 judgment to the necessary level and to defend
the Company in the Bailey and other suits. The April 1997 provision of
$7,000,000 was recorded because of increases in estimated attorneys' fees and
other defense costs associated principally with the Bailey trial, which began
sooner and ran longer than had been anticipated.
- 9 -
<PAGE> 12
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. The Company and
its insurors subsequently agreed on a forum for the resolution of insurance
coverage issues, and that court has entered an order staying proceedings until
at least December 15, 1997.
The Company believes that a number of its insurance carriers have
responsibilities for participating in the costs of providing a defense in this
litigation and has been negotiating with these companies concerning their
participation. In May 1997, a reimbursement agreement covering a portion of
the Company's defense costs was entered into with one of these carriers and
discussions continue with others.
Because of uncertainties regarding the Company's ultimate liability and
when the alleged problems occurred and the large number of insurance carriers
that might be involved, the Company is presently unable to predict the outcome
of the insurance-related legal actions. The Company similarly is unable to
ascertain whether future agreements will be reached with its insurors or to
estimate the magnitude of any additional recoveries, and accordingly has
excluded such in determining its financial statement accruals for this
litigation.
ROYALTY OWNER LITIGATION. In October 1997, the Company paid $21,000,000 to
settle class-action litigation brought on behalf of its North Texas royalty
owners in lawsuits styled Rowan Estate Trust, et al and Russell Elvis Lawrence,
et al v. Mitchell Energy & Development Corp.
The settlement resolved all claims that had been or could have been made
by the plaintiffs regarding royalty payments in North Texas from inception of
the affected agreements to date. Also, the plaintiffs agreed to ratify
modified terms and procedures for the processing of gas and the payment of
royalties in the affected North Texas counties which are to become effective
January 1, 1998.
Although the Company believes that it had properly calculated and paid all
royalties applicable to the subject properties, it concluded a settlement was
the appropriate course of action from an ongoing operational and relationship
perspective. The Company is in the process of increasing its drilling in this
area and, under the terms of the July 1995 gas contract termination agreement
with Natural Gas Pipeline Company of America (Natural), it will assume
ownership on January 1, 1998 of Natural's 1,100-mile gathering system that
serves 1,500 of the Company's North Texas wells and a much smaller number of
third-party wells. Having certainty with respect to the matters involved in
the litigation facilitates the Company's increased North Texas drilling program
and its planned efforts to significantly expand the gas volumes gathered and
processed for third parties in the area while helping maintain its longstanding
good relations with more than 11,000 royalty owners in the area. The
settlement also eliminated (i) a complex litigation risk in an area where case
law is not well defined, (ii) potentially significant defense costs, and (iii)
the extensive involvement of the Company's personnel that would have been
required to continue defending itself against these charges.
In anticipation of this settlement, the Company recorded a July 1997
financial statement charge of $26,000,000 for the estimated costs it expected
to incur in this regard. In addition to the $21,000,000 payment mentioned
above, the Company intends to make payments to royalty owners who chose not to
participate in the class-action litigation, and expects that the aggregate
costs incurred by it in connection with the royalty owner litigation will
approximate the amount accrued in July 1997.
SUMMARY. Management believes, after consultation with outside counsel, that
adequate financial statement accruals have been provided for the litigation
contingencies discussed in this footnote.
- 10 -
<PAGE> 13
(7) OTHER CONTINGENCIES
The Company also is party to other claims and legal actions arising in the
ordinary course of its business and to recurring examinations performed by the
Internal Revenue Service and other regulatory agencies. The outcome of matters
such as these and those discussed in Note 6 cannot be predicted with certainty,
and it is possible that future charges might be required that would be
significant to the operating results of a particular period. Management
believes, however, it is not probable that the ultimate resolution of these
matters will have a material adverse effect on the Company's financial position.
(8) SEGMENT INFORMATION
Selected industry segment data for the nine- and three-month periods ended
October 31, 1997 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
Segment Total
Outside Operating Operating
Revenues Earnings Earnings
----------------------- ------------------------ ---------------------------
Nine Months 1997 1996 1997 1996 1997 1996
- ----------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
EXPLORATION AND PRODUCTION
Operations ........................ $ 186,693 $ 174,955 $ 45,123 $ 37,825 $ 36,354 $ 29,016
Water well litigation
provision (see Note 6) .......... -- -- (7,000) (10,000) (7,000) (10,000)
Gain from sale of
contract drilling assets ........ 2,382 -- 2,382 -- 2,382 --
Severance tax refunds ............. -- -- -- 5,935 -- 5,935
Columbia Gas contract
settlement proceeds ............. -- 3,444 -- 3,444 -- 3,444
--------- --------- --------- --------- --------- ---------
189,075 178,399 40,505 37,204 31,736 28,395
--------- --------- --------- --------- --------- ---------
GAS SERVICES
Natural gas processing ............ 234,960 256,318 24,147 46,111 21,877 43,599
Royalty litigation settlement
provision (Note 6) .............. -- -- (26,000) -- (26,000) --
Natural gas gathering
and marketing ................... 134,299 150,392 15,223 17,884 12,432 15,153
Other ............................. 11,124 9,909 10,098 8,978 9,811 8,675
--------- --------- --------- --------- --------- ---------
380,383 416,619 23,468 72,973 18,120 67,427
--------- --------- --------- --------- --------- ---------
CORPORATE ......................... -- -- -- -- (8,789)(b) (8,311)(b)
--------- --------- --------- --------- --------- ---------
$ 569,458 $ 595,018 $ 63,973 $ 110,177 $ 41,067 $ 87,511
========= ========= ========= ========= ========= =========
Three Months
- ------------
EXPLORATION AND PRODUCTION
Operations ........................ $ 71,105 $ 57,505 $ 19,656 $ 11,741 $ 16,723 $ 8,874
Water well litigation
provision (see Note 6) .......... -- -- -- (10,000) -- (10,000)
--------- --------- --------- --------- --------- ---------
71,105 57,505 19,656 1,741 16,723 (1,126)
--------- --------- --------- --------- --------- ---------
GAS SERVICES
Natural gas processing ............ 84,763 96,302 8,935 22,353 8,217 21,531
Natural gas gathering
and marketing ................... 64,955 43,620 7,087 5,071 6,131 4,174
Other ............................. 3,302 1,583 3,007 1,310 2,906 1,215
--------- --------- --------- --------- --------- ---------
153,020 141,505 19,029 28,734 17,254 26,920
--------- --------- --------- --------- --------- ---------
CORPORATE ......................... -- -- -- -- (3,180)(b) (3,103)(b)
--------- --------- --------- --------- --------- ---------
$ 224,125 $ 199,010 $ 38,685 $ 30,475 $ 30,797 $ 22,691
========= ========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Capital
DD&A Expenditures(a)
----------------------- -----------------------
Nine Months 1997 1996 1997 1996
- ----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
EXPLORATION AND PRODUCTION
Operations ........................ $ 68,248 $ 66,874 $ 128,683 $ 92,920
Water well litigation
provision (see Note 6) .......... -- -- -- --
Gain from sale of
contract drilling assets ........ -- -- -- --
Severance tax refunds ............. -- -- -- --
Columbia Gas contract
settlement proceeds ............. -- -- -- --
--------- --------- --------- ---------
68,248 66,874 128,683 92,920
--------- --------- --------- ---------
GAS SERVICES
Natural gas processing ............ 2,773 2,673 9,542 4,719
Royalty litigation settlement
provision (Note 6) .............. -- -- -- --
Natural gas gathering
and marketing ................... 4,515 2,913 30,587 14,116
Other ............................. 80 80 57 279
--------- --------- --------- ---------
7,368 5,666 40,186 19,114
--------- --------- --------- ---------
CORPORATE ......................... 2,290 2,374 3,365 6,059
--------- --------- --------- ---------
$ 77,906 $ 74,914 $ 172,234 $ 118,093
========= ========= ========= =========
Three Months
- ------------
EXPLORATION AND PRODUCTION
Operations ........................ $ 24,241 $ 20,756 $ 51,566 $ 43,341
Water well litigation
provision (see Note 6) .......... -- -- -- --
--------- --------- --------- ---------
24,241 20,756 51,566 43,341
--------- --------- --------- ---------
GAS SERVICES
Natural gas processing ............ 956 1,036 6,772 1,505
Natural gas gathering
and marketing ................... 1,742 957 8,346 7,246
Other ............................. 27 27 20 205
--------- --------- --------- ---------
2,725 2,020 15,138 8,956
--------- --------- --------- ---------
CORPORATE ......................... 635 849 956 1,175
--------- --------- --------- ---------
$ 27,601 $ 23,625 $ 67,660 $ 53,472
========= ========= ========= =========
</TABLE>
- ----------------------------------
(a) On accrual basis, including exploratory expenditures.
(b) General corporate expenses.
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.
Effective April 1, 1997, the Company sold its remaining contract drilling
assets for $3,500,000. A gain of $2,382,000 was recorded on this transaction.
- 11 -
<PAGE> 14
During the first and second quarters of fiscal 1997, the Company recorded
severance tax refunds of $3,879,000 and $2,056,000, respectively. Acting on an
application filed by the Company, the Texas Railroad Commission in February
1996 designated a portion of the Boonsville field in Wise County as a "tight
gas formation area." This allowed the Company to apply for and receive
severance tax exemptions covering production from this field for the period
from September 1996 through August 2001; its share of these refunds totaled
$3,879,000. In July 1996, in response to a Texas Comptroller's regulation
providing that proceeds from contract terminations may not be subject to
severance taxes, the Company requested refunds of severance taxes paid on
settlement proceeds received in previous years in connection with two contract
terminations. The Company's share of such refunds, which were collected in
August 1996, totaled $2,056,000.
During the first quarter of fiscal 1997, the Company received $3,444,000
as its share of proceeds in settlement of breach of contract claims brought
against Columbia Gas Transmission Company. In conjunction with its filing for
protection under the bankruptcy laws in July 1991, Columbia unilaterally
rejected its high-priced, long-term natural gas purchase contracts, including
one with the Company. During fiscal 1997's first quarter, the Company reached
an agreement with Columbia as to the amount of the contract termination
damages; after approval by the bankruptcy court, Columbia paid such damages to
the Company.
(9) COMMON STOCK REPURCHASE PROGRAM
On August 18, 1997, the Company purchased 700,000 Class A shares and 1,400,000
Class B shares from a financial intermediary under an accelerated stock
purchase transaction for a total consideration of approximately $49,700,000
(subject to a market price adjustment provision). Concurrently, the Company
commenced a program to spend up to $50,000,000 to directly repurchase Class A
and Class B shares in the open market. Through December 10, 1997, 45,000 Class
A and 710,000 Class B shares had been so repurchased at an aggregate cost of
approximately $19,800,000.
(10) SUBSEQUENT EVENT
On November 21, 1997, the Company declared special cash dividends of 24 and
26.5 cents per share, respectively, on its Class A and Class B common stock.
The dividends are payable on December 30, 1997 to shareholders of record at the
close of business on December 15, 1997.
(11) SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid, including amounts applicable to discontinued operations, totaled
$38,057,000 and $39,807,000 during the nine-month periods ended October 31,
1997 and 1996. Income taxes paid during these periods, including amounts
applicable to discontinued operations, totaled $56,996,000 and $9,004,000.
There were no significant non-cash investing or financing activities during the
nine-month periods ended October 31, 1997 and 1996.
- 12 -
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
POSITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING INFORMATION
This Form 10-Q includes forward-looking statements. These include, among
others, the discussions below concerning the Company's liquidity and capital
resources. Although the Company believes that its expectations are based on
reasonable assumptions, it can give no assurances that its goals will be
achieved. Important factors that could cause actual results to differ
materially from those in the forward-looking statements include, among others,
the timing and extent of changes in commodity prices for natural gas, NGLs and
crude oil, the ability to enter into favorable arrangements to use the net
proceeds from the sale of The Woodlands Corporation in the desired manner, the
impact of pending North Texas water well litigation against the Company and
related insurance recoveries, the attainment of forecasted operating levels and
reserve replacement, and general economic conditions such as the level of
interest rates.
LIQUIDITY AND CAPITAL RESOURCES
Over time the Company has periodically evaluated the separation of its energy
and real estate businesses. Late last year management initiated a
comprehensive re-examination of this matter to determine the course of action
that would best serve the interests of the Company's shareholders. After an
extensive evaluation of the available alternatives, the Company decided to
discontinue its real estate activities and entered into an agreement on June
12, 1997 to sell its real estate subsidiary, The Woodlands Corporation (TWC),
for $543,000,000 (certain properties located outside The Woodlands were not
included in that transaction). It was concluded that selling TWC would create
the greatest value because the transaction could be accomplished in the
strongest real estate market in years and since the Company's core energy
businesses were well-positioned for growth, which could be enhanced by
directing greater resources - both management and financial - toward this
objective.
The Company realized $481 million of after-tax proceeds from the TWC sale,
which closed on July 31, 1997. Excluded from that sale were real estate assets
outside The Woodlands with a net book value (including tax benefits) of
approximately $35 million. The Company is working to liquidate these holdings
and expects that most will be sold during the next year.
A balanced reinvestment plan was initiated to utilize the proceeds as
quickly as practical, consistent with the Company's objective of growing its
core energy businesses in a prudent manner. As part of this plan, $100 million
was allocated to the buyback of common stock. On August 18, 1997, the Company
purchased 700,000 of its Class A shares and 1,400,000 of its Class B shares in
an accelerated stock purchase transaction with a financial intermediary, who
borrowed the shares and will be repurchasing replacement shares on the open
market. The total consideration was $49.7 million, subject to a market price
adjustment provision payable either in the Company's common stock or cash.
Concurrently, the Company commenced a program to spend up to an additional $50
million to directly repurchase Class A and Class B shares from time to time in
the open market. Through December 10, 1997, 45,000 Class A and 710,000 Class B
shares had been so repurchased at an aggregate cost of approximately $19.8
million.
Also in connection with its reinvestment program, the Company repurchased
$185.7 million face amount of its 9.25% senior notes during fiscal 1998's third
quarter. Principally because of an acquisition premium paid in connection with
this early retirement of debt, an extraordinary charge of $13.25 million was
recorded. At October 31, 1997, $414 million of total debt remained
outstanding, or $580 million less than the $994 million balance (including
short-term debt) at January 31, 1994. The debt-to-equity ratio at October 31,
1997 was .97-to-1, down from 2.12 at the beginning of fiscal 1995.
Furthermore, special cash dividends equal to one-half of the regular
annual dividends on the Company's Class A and Class B common stock were
declared in November to share some of the TWC sales proceeds with the
stockholders. Such dividends, which will aggregate approximately $12.5
million, are payable on December 30, 1997 to stockholders of record on December
15, 1997.
- 13 -
<PAGE> 16
The remaining TWC sales proceeds are to be used to expand the scope and
scale of the Company's core energy operations. Uses of the proceeds include an
acceleration of the Company's capital program and possible acquisitions of oil
and gas producing properties and gas gathering and processing facilities that
complement its existing operations. In addition, the Company believes it could
borrow additional funds and/or issue stock to make substantially larger
acquisitions, if appropriate opportunities become available. Special teams
have been formed to identify and complete acquisitions in each of the Company's
core businesses. Although a number of acquisition candidates have been
identified and currently are being evaluated, completing any such purchases
will take time. Accordingly, it is not expected that any such acquisitions
will significantly impact the Company's earnings or cash flows before fiscal
1999.
Pending the use of the sales proceeds as described herein, the unused
proceeds have been invested in short-term investments of the highest quality at
an approximate 5.5% annual rate of return.
For the reasons discussed in this paragraph, the Company believes that its
future funding needs will not be increased to any significant extent by the
North Texas water well litigation. On November 13, 1997, the Second Court of
Appeals in Fort Worth, Texas ruled on the Company's appeal of the previously
reported $204 million judgment against a subsidiary in the Bartlett case. The
three-judge panel unanimously reversed the previous decision, finding that all
plaintiffs failed to prove that the Company's actions were the cause of their
alleged damages and that most plaintiffs' claims were time-barred by statute of
limitations. The plaintiffs subsequently asked the court of appeals for a
rehearing, which is expected to be denied. The appeals court decision was in
line with the May 1997 unanimous jury verdict concerning the second group of
these cases, known as the Bailey case. To date, there has been only minimal
activity with respect to 29 other similar cases although one of them involving
one family (the Nelon case) is scheduled for trial in January 1998.
If, as expected, the court of appeals denies the plaintiffs' rehearing
request in the Bartlett case, the Company will be able to cancel the appeal
bond and the related letters of credit. After this is done, the Company likely
will terminate the $500 million letter of credit facility or at least
substantially reduce its size.
The Company expects that its fiscal 1998 operating cash flows, together
with its available excess cash balances, will be sufficient to cover its debt
and stock repurchase and accelerated capital spending programs.
CAPITAL AND EXPLORATORY EXPENDITURES
The Company's fiscal 1998 budget was originally set at $283.3 million,
including $75.3 million for real estate activities. The $208 million budgeted
for energy activities, which was 18% higher than the prior year's actual
spending level, included a $20 million increase (to $106 million) in
exploration and development drilling spending. On an overall basis, gas
services capital spending was slated to increase only slightly as expenditures
incurred in fiscal 1998 to complete construction of the Louisiana Chalk
gathering system essentially replaced amounts spent on the expansion of the
45%-owned "lean gas" gathering and treating system in the Texas Chalk that was
completed early in fiscal 1997.
In August 1997, the energy budget was increased by $30 million to $238
million to cover additional exploration and production expenditures for
three-dimensional seismic work, exploratory acreage acquisitions and
exploratory and development drilling and gas services expenditures for the
Vanderbilt pipeline project, which includes the acquisition of that system and
its connection to Exxon's Katy gas processing plant. The budget amounts are
exclusive of acquisitions that could be made using the TWC sales proceeds.
During the first nine months, energy capital additions totaled $172.2 million.
- 14 -
<PAGE> 17
OPERATING STATISTICS
Certain operating statistics (including, where applicable, proportional
interests in equity partnerships) for the three- and nine-month periods ended
October 31, 1997 and 1996 follow:
<TABLE>
<CAPTION>
Three Months Nine Months
-------------------- --------------------
1997 1996 1997 1996
-------- ------- ------- -------
<S> <C> <C> <C> <C>
AVERAGE DAILY VOLUMES
Natural gas sales (Mcf) .......................................... 239,900 226,200 235,000 226,100
Crude oil and condensate sales (Bbls) ............................ 5,900 5,300 5,900 5,400
Natural gas liquids produced (Bbls) .............................. 45,900 47,200 45,700 45,800
Pipeline throughput (Mcf) ........................................ 410,300 415,800 420,400 397,300
AVERAGE SALES PRICES
Natural gas (per Mcf) ............................................ $ 2.66 $ 2.21 $ 2.38 $ 2.29
Crude oil and condensate (per Bbl) ............................... 18.89 22.62 19.09 20.78
Natural gas liquids produced (per Bbl) ........................... 14.33 16.55 13.52 14.80
</TABLE>
EARNINGS FROM CONTINUING OPERATIONS - NINE MONTHS ENDED OCTOBER 31, 1997
COMPARED WITH NINE MONTHS ENDED OCTOBER 31, 1996
Earnings from continuing operations for the nine-month periods ended October
31, 1997 - both before and after unusual items - are summarized in the table on
the following page. Earnings from continuing operations for fiscal 1998's
first nine months of $21.0 million were $26.1 million below those of the
prior-year period largely because of the impact of unusual items, which reduced
such earnings of the fiscal 1998 and 1997 periods by $19.7 million and $.4
million, respectively. Excluding the effects of the unusual items, such
earnings totaled $40.7 million during fiscal 1998's first nine months, or $6.8
million below the prior-year period's $47.5 million.
- 15 -
<PAGE> 18
The following table and discussion identify and explain the major increases
(decreases) in earnings for the nine-month periods (in millions):
<TABLE>
<CAPTION>
Segment Earnings from
Operating Earnings Continuing Operations
-------------------- ---------------------
Exploration Before
and Gas Income After
Production Services Other* Taxes Tax
----------- -------- ------ ------ -----
<S> <C> <C> <C> <C> <C>
FISCAL 1997 AMOUNTS ........................................... $37.2 $73.0 $(37.6) $72.6 $47.1
----- ----- ------ ----- -----
ELIMINATE IMPACT OF FISCAL 1997 UNUSUAL ITEMS
Water well litigation provision (see page 9) .................. 10.0 -- -- 10.0 6.2
Severance tax refund (see page 12) ............................ (5.9) -- -- (5.9) (3.7)
Columbia Gas contract settlement
proceeds (see page 12) ...................................... (3.5) -- -- (3.5) (2.1)
----- ----- ------ ----- -----
.6 -- -- .6 .4
----- ----- ------ ----- -----
FISCAL 1997 AMOUNTS BEFORE UNUSUAL ITEMS ...................... 37.8 73.0 (37.6) 73.2 47.5
----- ----- ------ ----- -----
MAJOR INCREASES (DECREASES)
Higher natural gas sales price ................................ 6.8 -- -- 6.8 4.4
Higher natural gas sales volumes .............................. 1.3 -- -- 1.3 .8
Higher operating expenses ..................................... (3.2) -- -- (3.2) (2.1)
Proved property impairments ................................... 1.5 -- -- 1.5 1.0
Natural gas processing
Price related decreases in NGL margins ...................... -- (13.9) -- (13.9) (9.0)
Higher operating expenses, principally repairs
and maintenance at the Bridgeport plant ................... -- (5.1) -- (5.1) (3.3)
Lower NGL marketing earnings due to
declining prices early in fiscal 1998
and rising prices late in fiscal 1997 ..................... -- (2.9) -- (2.9) (1.9)
Gas gathering and marketing ................................. -- (2.7) -- (2.7) (1.8)
Equity in earnings of MTBE plant partnership ................ -- 1.3 -- 1.3 .8
Interest expense ............................................ -- -- 8.1 8.1 5.3
Interest expense attributable to discontinued
operations (only covers six months in fiscal 1998) ........ -- -- (10.7) (10.7) (7.0)
Investment income on excess cash balances ................... -- -- 6.0 6.0 3.9
Other, net .................................................. .9 (.2) 1.8 2.5 2.1
----- ----- ------ ----- -----
7.3 (23.5) 5.2 (11.0) (6.8)
----- ----- ------ ----- -----
FISCAL 1998 AMOUNTS BEFORE UNUSUAL ITEMS ...................... 45.1 49.5 (32.4) 62.2 40.7
----- ----- ------ ----- -----
FISCAL 1998 UNUSUAL ITEMS
Royalty litigation settlement
provision (see page 10) .................................... -- (26.0) -- (26.0) (16.9)
Water well litigation provision (see page 9) .................. (7.0) -- -- (7.0) (4.3)
Gain from sale of remaining
contract drilling assets (see page 11) ...................... 2.4 -- -- 2.4 1.5
----- ----- ------ ----- -----
(4.6) (26.0) -- (30.6) (19.7)
----- ----- ------ ----- -----
FISCAL 1998 AMOUNTS AFTER UNUSUAL ITEMS ....................... $40.5 $23.5 $(32.4) $31.6 $21.0
===== ===== ====== ===== =====
</TABLE>
- -----------------------------------
* Includes general and administrative expense and other expense
EXPLORATION AND PRODUCTION OVERVIEW
Exclusive of unusual items, exploration and production segment operating
earnings of $45.1 million during fiscal 1998's first nine months were $7.3
million above the $37.8 million of the prior-year's comparable period largely
as a result of the period's higher natural gas prices. After overcoming
problems that held back production gains in the first and second quarters, the
Company's natural gas production averaged almost 240 MMcf per day in the third
quarter, 6% above the level for the comparable period last year.
- 16 -
<PAGE> 19
HIGHER NATURAL GAS SALES PRICE ($6.8 MILLION INCREASE). The Company's natural
gas sales price during the first nine months of fiscal 1998 averaged $2.38 per
Mcf, $.09 above the $2.29 of the comparable period of the prior year,
increasing operating earnings by $6.8 million.
HIGHER NATURAL GAS SALES VOLUMES ($1.3 MILLION INCREASE). Natural gas sales
volumes averaged 235.0 MMcf per day during fiscal 1998's first nine months, up
from 226.1 MMcf during the comparable prior-year period, increasing operating
earnings by $1.3 million.
HIGHER OPERATING EXPENSES ($3.2 MILLION DECREASE). This unfavorable variance
resulted principally from increased spending for repairs and maintenance,
property taxes and contract services. Also, the prior-year period benefitted
from reimbursements by a third party under an indemnification agreement of
expenses incurred several years ago.
PROVED-PROPERTY IMPAIRMENTS ($1.5 MILLION INCREASE). An impairment charge of
$1.6 million was recorded during the first nine months of fiscal 1998, or $1.5
million less than the $3.1 million recorded in the same period of the prior
year. The fiscal 1998 charge involved a New Mexico field where certain wells
were sold and reserve estimates were lowered for the remaining wells. The
prior-year period's charge occurred because of disappointing drilling results
for one well and downward revisions in reserve estimates for that field in the
Gulf of Mexico.
GAS SERVICES OVERVIEW
Gas services operating earnings before unusual items declined $23.5 million (to
$49.5 million) during the first nine months of fiscal 1998 largely because of
price-related reductions in earnings from gas processing and gas gathering and
marketing and increased gas processing operating expenses.
NATURAL GAS PROCESSING - PRICE-RELATED DECREASES IN NGL MARGINS ($13.9 MILLION
DECREASE). The average price for NGLs produced during fiscal 1998's first nine
months of $13.52 per barrel was 9% below the prior period's $14.80, decreasing
NGL revenues by $15.4 million. Feedstock costs declined by only $1.5 million,
however, as the NGL-price-related reduction in producer payments was largely
offset by fuel and shrinkage cost increases associated with the current
period's higher natural gas prices.
GAS GATHERING AND MARKETING ($2.7 MILLION DECREASE). A $2.2 million decline in
gross margins on buy/resale activities was the principal cause of this
decrease. Earnings increases from the Austin Chalk lean-gas system's increased
throughput were unable to offset the downward impact on the rich-gas system's
earnings of ongoing production declines for the wells it services.
EQUITY IN EARNINGS OF MTBE PLANT PARTNERSHIP ($1.3 MILLION INCREASE). This
variance was primarily due to a $.7 million increase in operating income
because of approximately 39 days less downtime in the current year (12 versus
51) and a $.7 million decline in interest expense which resulted largely from
ongoing quarterly paydowns of the partnership's debt. The plant experienced
several shutdowns in the prior year including an unscheduled 7-day shutdown in
February 1996 to repair a turbine, a longer-than-expected 25-day maintenance
turnaround in August 1996 and an unscheduled 19-day shutdown in September to
correct a catalyst backflow problem. In contrast, the plant was down only 12
days in the current-year period for its scheduled annual maintenance
turnaround.
OTHER
INTEREST EXPENSE ($8.1 MILLION INCREASE). Interest expense was $8.1 million
lower during fiscal 1998's first nine months because of a $163.3 million
decline in the average balance of outstanding debt, which resulted primarily
from the repayment of a $30 million term loan on January 28, 1997, $100 million
of senior notes on February 18, 1997 and $185.7 million of senior notes in the
third quarter.
- 17 -
<PAGE> 20
EARNINGS FROM CONTINUING OPERATIONS - THREE MONTHS ENDED OCTOBER 31, 1997
COMPARED WITH THREE MONTHS ENDED OCTOBER 31, 1996
Earnings from continuing operations for the three-month periods ended
October 31, 1997 and 1996 are summarized in the table which follows. Net
earnings for the third quarter of fiscal 1998 were $17.7 million, compared with
$10.9 million in the prior-year period, when a $10 million water well
litigation provision reduced net earnings by $6.2 million. Excluding the
effects of unusual items, fiscal 1998's third quarter earnings of $17.7 million
were $.6 million above the $17.1 million of the prior-year period.
The following table and discussion identify and explain the major increases
(decreases) in earnings for the three-month periods (in millions):
<TABLE>
<CAPTION>
Segment Earnings from
Operating Earnings Continuing Operations
-------------------- ---------------------
Exploration Before
and Gas Income After
Production Services Other* Taxes Tax
----------- -------- ------ ------ -----
<S> <C> <C> <C> <C> <C>
FISCAL 1997 AMOUNTS ........................................... $ 1.7 $28.7 $(13.1) $17.3 $10.9
ELIMINATE IMPACT OF FISCAL 1997 UNUSUAL ITEM
Water well litigation provision (see page 9) .................. 10.0 -- -- 10.0 6.2
----- ----- ------ ----- -----
FISCAL 1997 AMOUNTS BEFORE UNUSUAL ITEM ....................... 11.7 28.7 (13.1) 27.3 17.1
----- ----- ------ ----- -----
MAJOR INCREASES (DECREASES)
Higher natural gas sales price ................................ 10.3 -- -- 10.3 6.7
Higher natural gas sales volumes .............................. .9 -- -- .9 .6
Crude and condensate sales .................................... (1.0) -- -- (1.0) (.7)
Proved property impairments
($1.6 versus none -- see page 17) ........................... (1.6) -- -- (1.6) (1.0)
Natural gas processing
Price related decreases in NGL margins ...................... -- (10.6) -- (10.6) (6.9)
Lower NGL sales volumes
(45.9 MBbls/d versus 47.2) ................................ -- (1.0) -- (1.0) (.7)
Higher repairs and maintenance expense,
principally at the Bridgeport plant ....................... -- (2.6) -- (2.6) (1.7)
Gas gathering and marketing ................................... -- 2.0 -- 2.0 1.3
Equity in earnings of MTBE plant partnership .................. -- 2.5 -- 2.5 1.6
Interest expense .............................................. -- -- 3.9 3.9 2.5
Interest expense attributable to discontinued
operations (none versus $8.5) ............................... -- -- (8.5) (8.5) (5.5)
Investment income on excess cash balances ..................... -- -- 5.0 5.0 3.3
Other, net .................................................... (.7) -- 1.6 .9 1.1
----- ----- ------ ----- -----
7.9 (9.7) 2.0 .2 .6
----- ----- ------ ----- -----
FISCAL 1998 AMOUNTS ........................................... $19.6 $19.0 $(11.1) $27.5 $17.7
===== ===== ====== ===== =====
</TABLE>
- ------------------------------------
* Includes general and administrative expense and other expense
EXPLORATION AND PRODUCTION OVERVIEW
Exploration and production segment operating earnings of $19.6 million
during the third quarter of fiscal 1998 were $7.9 million above the $11.7
million of fiscal 1997's third quarter (before unusual item) principally
because of higher natural gas prices. The Company's natural gas sales price
averaged $2.66 per Mcf during the third quarter of fiscal 1998, or 20% higher
than the $2.21 of the prior-year period.
- 18 -
<PAGE> 21
HIGHER NATURAL GAS SALES VOLUME ($.9 MILLION INCREASE). Natural gas sales
volumes averaged 239.9 MMcf per day during the current quarter, up from 226.2
during the third quarter of the prior year. The volume increases were
primarily the result of activities in North Texas and the Lake Creek and
Personville fields.
CRUDE AND CONDENSATE SALES ($1.0 MILLION DECREASE). The average sales price
for crude and condensate during fiscal 1998's third quarter was $18.89 per
barrel, down from the $22.62 of the prior-year period, reducing operating
earnings by $2.0 million. Partially offsetting the impact of this was a
600-barrel-per-day increase in production, which added $1.0 million to
operating earnings.
GAS SERVICES OVERVIEW
Gas services operating earnings declined by $9.7 million to $19.0 million
during the third quarter of fiscal 1998 due principally to lower NGL margins
and higher repairs and maintenance costs at the Bridgeport plant, the impact of
which was partially offset by other items.
NATURAL GAS PROCESSING - PRICE-RELATED DECREASES IN NGL MARGINS ($10.6 MILLION
DECREASE). The Company's NGL price averaged $14.33 per barrel during the
current quarter, down 13% from the $16.55 of the prior-year's comparable
period, reducing NGL revenues by $9.0 million. Furthermore, feedstock costs
were $1.6 million higher as the period's higher natural gas prices caused fuel
and shrinkage costs to increase by a greater amount than producer payments were
reduced by the lower NGL prices.
GAS GATHERING AND MARKETING ($2.0 MILLION INCREASE). Price-related
improvements in gross margins for onsystem buy/resale and offsystem marketing
activities were the principal causes of this earnings increase.
EQUITY IN EARNINGS OF MTBE PLANT PARTNERSHIP ($2.5 MILLION INCREASE). This
earnings improvement occurred primarily because the plant was shut-down for
maintenance for substantially fewer days in the current quarter (see page 17
for additional information).
OTHER
INTEREST EXPENSE ($3.9 MILLION INCREASE). Interest expense during fiscal
1998's third quarter totaled $10.3 million, or $3.9 million less than during
the fiscal 1997 quarter. This decline occurred principally because of a
decline in the Company's average debt balance (for the reasons discussed on
page 17).
- 19 -
<PAGE> 22
Part II - Other Information
ITEM 1. LEGAL PROCEEDINGS
See Note 6 of Notes to Unaudited Consolidated Financial Statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
No exhibits are filed with this report.
(b) On August 15, 1997, the Company filed a Form 8-K reporting the sale of The
Woodlands Corporation to a partnership of Crescent Real Estate Equities
Company and Morgan Stanley Real Estate Fund II, L.P. in a transaction that
closed on July 31, 1997 and its decision to withdraw from the real estate
business. The following unaudited financial statements of the Company were
filed with this report:
Pro Forma Condensed Consolidated Balance Sheet at April 30, 1997
Pro Forma Condensed Consolidated Statements of Earnings for the
following periods:
Three-Month Period Ended April 30, 1997
Year Ended January 31, 1997
Condensed Consolidated Statements of Earnings for the following
periods:
Year Ended January 31, 1996
Year Ended January 31, 1995
On August 19, 1997, the Company filed Form 8-K/A Amendment No. 1 to amend
and update the Form 8-K in certain respects.
- 20 -
<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MITCHELL ENERGY & DEVELOPMENT CORP.
-----------------------------------
(Registrant)
Dated: December 12, 1997 By: /s/ Philip S. Smith
-----------------------------------
Philip S. Smith
Senior Vice President - Administration
and Chief Financial Officer
- 21 -
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 9-MOS 3-MOS YEAR YEAR
<FISCAL-YEAR-END> JAN-31-1998 JAN-31-1997 JAN-31-1996 JAN-31-1995
<PERIOD-END> OCT-31-1997 APR-30-1996 JAN-31-1996 JAN-31-1995
<CASH> 207,013 43,467 17,867 9,346
<SECURITIES> 0 0 0 0
<RECEIVABLES> 119,284 90,370 88,494 119,863
<ALLOWANCES> 0 439 439 1,536
<INVENTORY> 19,852 8,918 10,956 11,739
<CURRENT-ASSETS> 355,157 235,482 219,163 159,176
<PP&E> 2,166,994 2,040,905 2,040,539 2,116,076
<DEPRECIATION> 1,317,988 1,327,056 1,321,004 1,381,977
<TOTAL-ASSETS> 1,280,121 1,561,084 1,599,183 1,514,277
<CURRENT-LIABILITIES> 220,621 281,678 182,752 134,525
<BONDS> 414,267 642,000 795,000 789,680
0 0 0 0
0 0 0 0
<COMMON> 5,386 5,386 5,386 5,386
<OTHER-SE> 420,507 490,064 476,517 469,644
<TOTAL-LIABILITY-AND-EQUITY> 1,280,121 1,561,084 1,599,183 1,514,277
<SALES> 569,458 195,637 902,919 765,106
<TOTAL-REVENUES> 569,458 199,081 902,919 765,106
<CGS> 0 0 0 0
<TOTAL-COSTS> 505,485 156,688 681,684 624,889
<OTHER-EXPENSES> 12,831 6,298 37,762 37,049
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 19,534 5,745 27,341 32,958
<INCOME-PRETAX> 31,608 30,350 156,132 70,210
<INCOME-TAX> 10,613 10,519 55,420 24,627
<INCOME-CONTINUING> 20,995 19,831 100,712 45,583
<DISCONTINUED> (59,683) 3,418 (63,583) 231
<EXTRAORDINARY> (13,250) 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (51,938) 23,249 37,129 45,814
<EPS-PRIMARY> (1.01) .45 .71 .87
<EPS-DILUTED> (1.01) .45 .71 .87
</TABLE>
