<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JULY 31, 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 August 31, 1997:
Class A . . . . . . . . 22,320,656
Class B . . . . . . . . 27,315,887
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<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 . . . . . . . . . . . . . 14
Part II - Other Information
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . 21
Item 4. Submission of Matters to Vote of Security Holders . . . . . . . 21
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . 21
</TABLE>
DEFINITIONS. As used herein, "MMBtu" means million British thermal units,
"Mcf" means thousand cubic feet, "MMcf" means million cubic feet, "Bcf" means
billion cubic feet, "Bbl" means barrel, "MMBbls" means million barrels, "NGL"
or "NGLs" means natural gas liquids, "fiscal 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>
July 31, January 31,
1997 1997
----------- -----------
ASSETS (unaudited) (Note 2)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents ................................................. $ 575,786 $ 75,825
Trade receivables ......................................................... 84,039 149,585
Gas contract buyout proceeds receivable ................................... -- 91,000
Inventories ............................................................... 12,825 10,072
Other ..................................................................... 5,843 8,864
----------- -----------
Total current assets .................................................. 678,493 335,346
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, at cost less accumulated depreciation,
depletion and amortization of $1,326,798 and $1,337,041
Exploration and production
Oil and gas properties .................................................. 563,730 537,992
Support equipment and facilities ........................................ 19,432 22,485
Gas services (including investments in equity partnerships) (Note 3)
Natural gas processing .................................................. 70,955 69,658
Natural gas gathering ................................................... 105,887 94,499
Other ................................................................... 50,402 42,634
Corporate ................................................................. 8,251 8,661
----------- -----------
818,657 775,929
----------- -----------
NET ASSETS OF DISCONTINUED REAL ESTATE OPERATIONS (Note 2) ................ 34,980 520,484
----------- -----------
LONG-TERM INVESTMENTS AND OTHER ASSETS .................................... 40,020 36,513
----------- -----------
$ 1,572,150 $ 1,668,272
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt ...................................... $ -- $ 100,000
Oil and gas proceeds payable .............................................. 81,555 141,076
Accounts payable and accrued liabilities .................................. 138,442 99,211
Federal income taxes payable............................................... 45,737 8,700
----------- -----------
Total current liabilities ............................................. 265,734 348,987
----------- -----------
LONG-TERM DEBT (Note 4) ................................................... 600,000 600,000
----------- -----------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes ..................................................... 158,730 109,459
Retirement obligations and other .......................................... 61,435 54,539
----------- -----------
220,165 163,998
----------- -----------
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 ................................................ 143,458 143,343
Retained earnings ......................................................... 365,579 435,165
Treasury stock, at cost ................................................... (28,172) (28,607)
----------- -----------
486,251 555,287
----------- -----------
$ 1,572,150 $ 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 Six Months Ended
July 31 July 31
---------------------- ----------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(Note 2) (Note 2)
<S> <C> <C> <C> <C>
REVENUES
Exploration and production .............................. $ 57,659 $ 59,342 $ 117,970 $ 120,894
Gas services ............................................ 117,943 137,585 227,363 275,114
--------- --------- --------- ---------
175,602 196,927 345,333 396,008
--------- --------- --------- ---------
OPERATING COSTS AND EXPENSES
Exploration and production, including first quarter water
well litigation provision of $7,000 in 1997 (Note 6) .. 46,037 43,522 97,121 85,431
Gas services, including royalty litigation settlement
provision of $26,000 in 1997 (Note 6) ................. 130,536 116,096 222,924 230,875
--------- --------- --------- ---------
176,573 159,618 320,045 316,306
--------- --------- --------- ---------
SEGMENT OPERATING EARNINGS (LOSS) (Note 8) .............. (971) 37,309 25,288 79,702
General and administrative expense ...................... 7,768 7,576 15,018 14,882
--------- --------- --------- ---------
TOTAL OPERATING EARNINGS (LOSS) ......................... (8,739) 29,733 10,270 64,820
--------- --------- --------- ---------
OTHER EXPENSE
Interest expense ........................................ 12,285 14,234 24,393 28,554
Interest expense attributable to discontinued operations (7,534) (8,791) (15,112) (17,366)
Interest income ......................................... (425) (58) (1,309) (269)
Other, net .............................................. (753) (644) (1,795) (1,441)
--------- --------- --------- ---------
3,573 4,741 6,177 9,478
--------- --------- --------- ---------
EARNINGS (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES ........................ (12,312) 24,992 4,093 55,342
INCOME TAXES (Note 5) ................................... (4,851) 8,578 833 19,097
--------- --------- --------- ---------
EARNINGS (LOSS) FROM CONTINUING OPERATIONS .............. (7,461) 16,414 3,260 36,245
--------- --------- --------- ---------
DISCONTINUED REAL ESTATE OPERATIONS (Note 2)
Earnings from operations, net of income
taxes of $953, $2,661, $4,071 and $4,513 .............. 1,684 4,380 7,440 7,798
Loss on sale, net of income tax benefit of $25,878 ...... (67,123) -- (67,123) --
--------- --------- --------- ---------
(65,439) 4,380 (59,683) 7,798
--------- --------- --------- ---------
NET EARNINGS (LOSS) ..................................... $ (72,900) $ 20,794 $ (56,423) $ 44,043
========= ========= ========= =========
EARNINGS (LOSS) PER SHARE
Earnings (loss) from continuing operations .............. $ (.15) $ .32 $ .06 $ .70
--------- --------- --------- ---------
Discontinued real estate operations
Earnings from operations .............................. .03 .08 .14 .15
Loss on sale .......................................... (1.29) -- (1.29) --
--------- --------- --------- ---------
(1.26) .08 (1.15) .15
--------- --------- --------- ---------
$ (1.41) $ .40 $ (1.09) $ .85
========= ========= ========= =========
AVERAGE COMMON SHARES OUTSTANDING ....................... 51,861 51,821 51,853 51,932
========= ========= ========= =========
</TABLE>
______________________________________________________
The accompanying notes are an integral part of these financial statements.
-3-
<PAGE> 6
MITCHELL ENERGY & DEVELOPMENT CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Six Months Ended July 31,1997
(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 ........................................ -- -- (56,423) -- (56,423)
Cash dividends declared (24 cents per share on
Class A and 26 1/2 cents per share on Class B). -- -- (13,163) -- (13,163)
Exercises of stock options ...................... -- 115 -- 435 550
----------- ----------- ----------- ----------- -----------
BALANCE, JULY 31, 1997 .......................... $ 5,386 $ 143,458 $ 365,579 $ (28,172) $ 486,251
=========== =========== =========== =========== ===========
</TABLE>
_______________________________________________
_______________________________________________
<TABLE>
<CAPTION>
Common Stock Issued Treasury Stock
------------------------- --------------------
SHARE AMOUNTS Class A Class B Class A Class B
---------- ---------- ------- ---------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 31, 1997 ......................... 23,978,088 29,878,088 922,429 1,092,958
Exercises of stock options ........................ -- -- -- (30,736)
Other ............................................. (2) (2) -- --
---------- ---------- ------- ---------
BALANCE, JULY 31, 1997 ............................ 23,978,086 29,878,086 922,429 1,062,222
========== ========== ======= =========
</TABLE>
__________________________________________
The accompanying notes are an integral part of these financial statements.
-4-
<PAGE> 7
MITCHELL ENERGY & DEVELOPMENT CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
July 31
----------------------
1997 1996
--------- ---------
(Note 2)
<S> <C> <C>
OPERATING ACTIVITIES
Earnings from continuing operations ........................ $ 3,260 $ 36,245
Adjustments to reconcile earnings from continuing
operations to cash provided by operating activities
Depreciation, depletion and amortization .............. 50,305 51,289
Exploration expenses, including dry-hole costs ........ 6,639 7,873
Deferred income taxes ................................. 4,536 16,315
Distributions in excess of earnings of equity investees 451 1,246
Water well litigation provision ....................... 7,000 --
Royalty litigation settlement provision ............... 26,000 --
Gain from sale of drilling rigs ....................... (2,382) --
Other, net ............................................ (1,101) 478
--------- ---------
94,708 113,446
Changes in operating assets and liabilities ........... 138,656 81,149
--------- ---------
Cash provided by operating activities ................. 233,364 194,595
--------- ---------
INVESTING ACTIVITIES
Capital and exploratory expenditures
Total on accrual basis .................................. (104,574) (64,621)
Adjustment to cash basis ................................ (315) (3,300)
--------- ---------
(104,889) (67,921)
Net proceeds from sale of The Woodlands Corporation ........ 480,994 --
Proceeds from sales of property, plant and equipment ....... 5,078 6,227
Acquisition of leased equipment ............................ -- (6,995)
Other ...................................................... 2,888 2,737
--------- ---------
Cash provided by (used for) investing activities ...... 384,071 (65,952)
--------- ---------
FINANCING ACTIVITIES
Debt repayments ............................................ (100,000) (65,000)
Cash dividends ............................................. (13,163) (13,186)
Treasury stock purchases ................................... -- (3,917)
Other ...................................................... (487) (1,003)
--------- ---------
Cash used for financing activities .................... (113,650) (83,106)
--------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS
FROM CONTINUING OPERATIONS .............................. 503,785 45,537
CASH USED BY DISCONTINUED OPERATIONS (Note 2) .............. (3,824) (13,406)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ............. 75,825 17,867
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD ................... $ 575,786 $ 49,998
========= =========
</TABLE>
_________________________________________________________
The accompanying notes are an integral part of these financial statements.
-5-
<PAGE> 8
MITCHELL ENERGY & DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1997
(1) ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Mitchell Energy &
Development Corp. and its majority-owned subsidiaries (the "Company"). All
significant intercompany accounts and transactions are eliminated in
consolidation. The Company follows the equity method of accounting for
investments in 20%- to 50%-owned entities.
The Company's exploration and production activities are accounted for
using the "successful efforts" method. Impairment computations for proved oil
and gas properties are made on a field-by-field basis as conditions warrant.
Charges for such impairments, which are included in DD&A expense, totaled none
for the three- and six-month periods ended July 31, 1997 and none and
$3,068,000 for the three- and six-month periods ended July 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 approximately $481,000,000.
Excluded from that transaction were assets located outside The Woodlands that
are held for disposal with a book value - including deferred tax benefits - of
approximately $35,000,000, which the Company expects to realize as it
liquidates these holdings over the next six to twelve months.
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 $35,949,000 and $73,094,000 for
the three- and six-month periods ended July 31, 1997. For the three- and
six-month periods ended July 31, 1996, such revenues were $44,179,000
and $82,451,000.
-6-
<PAGE> 9
The net loss incurred in connection with the Company's 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
==========
The components of net assets of discontinued real estate operations at
July 31 and January 31, 1997 are summarized as follows (in thousands):
July 31, January 31,
1997 1997
-------- -----------
Current assets........................................... $ 2,910 $ 13,420
Real estate.............................................. 15,486 649,821
Notes and contracts receivable and other assets.......... 8,147 41,687
Current liabilities...................................... (558) (33,230)
Long-term debt (excluding intercompany debt)............. (156) (1,271)
Deferred income taxes.................................... 9,415 (118,416)
Other deferred credit and long-term liabilities.......... (264) (31,527)
------- -----------
$34,980 $ 520,484
======= ===========
</TABLE>
The principal components of cash used by discontinued operations for the
six-month periods ended July 31, 1997 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
July 31, July 31,
1997 1996
---------- ----------
<S> <C> <C>
Cash provided by operating activities ........... $ 14,222 $ 28,120
Capital expenditures ............................ (22,039) (23,510)
Proceeds from sales of properties ............... 2,299 16,175
Debt repayments ................................. (199) (32,378)
Other ........................................... 1,893 (1,813)
---------- ----------
$ (3,824) $ (13,406)
========== ==========
</TABLE>
(3) EQUITY INVESTMENTS
At July 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.
-7-
<PAGE> 10
A summary of the Company's net investments in partnerships at July 31,
1997 and January 31, 1997 and its equity in their pretax earnings (losses) for
the six-month periods ended July 31, 1997 and 1996 follows (in thousands):
<TABLE>
<CAPTION>
Equity in
Net Investment Pretax Earnings
-------------------------- --------------------------
July 31, January 31, July 31, July 31,
1997 1997 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Austin Chalk Natural Gas Marketing Services ...... $ 1,114 $ 2,014 $ 991 $ (33)
Belvieu Environmental Fuels ...................... 36,120 31,174 4,946 6,063
C&L Processors Partnership ....................... 22,816 21,433 1,383 1,809
Ferguson-Burleson County Gas Gathering System .... 47,169 53,164 2,023 4,357
Gulf Coast Fractionators ......................... 12,469 9,593 2,876 2,177
Louisiana Chalk Gathering System ................. 14,198 4,754 (32) --
U.P. Bryan Plant ................................. 7,255 6,973 2,236 3,331
Others ........................................... (25) 162 24 132
----------- ----------- ----------- -----------
$ 141,116 $ 129,267 $ 14,447 $ 17,836
=========== =========== =========== ===========
</TABLE>
Financial statement information is generally reported on a one-month lag
for entities accounted for on the equity method. Summarized earnings
information (on a 100% basis for these entities) for the three- and six-month
periods ended July 31, 1997 and 1996 follows (in thousands):
<TABLE>
<CAPTION>
Three Months Six Months
----------------------- -----------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues .............................................. $ 166,849 $ 196,246 $ 395,367 $ 372,491
Operating earnings .................................... 19,904 30,867 46,578 57,056
Pretax earnings (before interest expense for
those entities whose activities are funded
by capital contributions of the owners) ............ 17,909 24,805 37,020 45,213
</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 July 31, 1997 and January 31, 1997 and the
Company's proportionate share of such debt at July 31, 1997 is summarized as
follows (in thousands):
<TABLE>
<CAPTION>
Entity Total July 31, 1997 - Company's Share
----------------------- ------------------------------------
July 31, January 31, Non-
1997 1997 Recourse Recourse Total
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Belvieu Environmental Fuels . $ 117,333 $ 136,889 $ 6,667 $ 32,444 $ 39,111
C&L Processors Partnership .. 62,209 71,209 16,797 14,308 31,105
Gulf Coast Fractionators .... 55,000 61,750 2,123 19,190 21,313
---------- ---------- ---------- ---------- ----------
$ 234,542 $ 269,848 $ 25,587 $ 65,942 $ 91,529
========== ========== ========== ========== ==========
</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
In April 1996, the Company entered into an agreement with a group of banks for
a facility to provide letters of credit to collateralize appeals bonds in
connection with the North Texas water well litigation discussed in Note 5
(including the $204,000,000 judgment). In August 1996, letters of credit of
$184,300,000 were issued by the banks supporting a supersedeas bond of
$224,850,000 that was filed in connection with the appeal of the litigation
involving the $204,000,000 judgment. Additional letters of credit can be
issued under this facility, if required, during a period extending until April
1999, and any amounts drawn against the letters of credit are payable in April
2000.
-8-
<PAGE> 11
The Company's bank revolving credit agreement consists of a committed
$150,000,000 facility. Nothing was borrowed under this agreement at July 31,
1997, and the Company had $150,000,000 in borrowing capacity available under
this agreement. The previous $50,000,000 real estate facility was cancelled
effective with the TWC sale.
(5) INCOME TAXES
Income taxes applicable to earnings from continuing operations for the
six-month periods ended July 31, 1997 and 1996 consist of the following (in
thousands):
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
CURRENT
Federal ................................ $ (4,081) $ 1,989
State .................................. 378 793
---------- ----------
(3,703) 2,782
---------- ----------
DEFERRED
Federal ................................ 4,553 15,922
State .................................. (17) 393
---------- ----------
4,536 16,315
---------- ----------
$ 833 $ 19,097
========== ==========
</TABLE>
Estimated annual tax rates of 20.4% and 34.5%, respectively, were used in
computing the income tax provisions for the six-month periods ended July 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.
Unused alternative minimum tax credits, which totaled $28,614,000 at
January 31, 1997, were utilized in connection with the sale of TWC in
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 believes scientific evidence indicates that its operations
were not the source of the alleged problems. Further, the economic damages
awarded were not large relative to the total judgment, and no significant
medical problems were alleged. The Company appealed this judgment to the
Second Court of Appeals in Fort Worth, Texas. A hearing was held on March 12,
1997, but the court has not as yet rendered its decision. 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 subsequent appeal
to the Texas Supreme Court.
On May 28, 1997, a jury in the same Wise County court found unanimously on
all counts that the Company was not responsible for damages claimed by 17 other
plaintiff groups in an 11-week trial known as the Bailey case (the claims made
by the Bailey plaintiffs were virtually identical to those made in the Bartlett
case). The court entered the judgement on July 15, 1997. The plaintiffs
subsequently filed a motion for a new trial, which the court is expected to
deny.
-9-
<PAGE> 12
In addition, similar lawsuits (each claiming damages of more than
$1,000,000) have been brought by 29 other plaintiff groups. A trial date of
January 20, 1998 has been set for one of these cases. Judges have not been
appointed and essentially no discovery has taken place for any of the other 28.
Aggregate charges of $32,000,000 (including $7,000,000 in April 1997) have
been recorded to provide for costs the Company considers probable that it will
incur in connection with the existing litigation related to this matter.
Consistent with the Company's belief that it is not responsible for the alleged
problems, the provisions consisted largely of expected costs for attorneys'
fees, bonds, etc., to appeal the March 1996 judgment to the necessary level and
to defend the Company in the 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. The setting of this case
for trial on March 17 rather than in the summer necessitated greatly expanding
the number of attorneys involved in trial preparation, making this preparation
more expensive than it otherwise would have been.
Although the Company believes that the litigation and the claims for
damages ultimately will be resolved for significantly less than the amount of
the judgment and the claims for alleged damages, it is possible that the
Company's costs could exceed its aggregate accrual of $32,000,000. However,
the Company has no basis on which to estimate a range of such possible
additional losses, if any, because of errors it believes were made by the trial
court in the Bartlett case and since the Company believes, as supported by the
verdict in the Bailey case, that it was not responsible for the water well
problems and that its actions did not provide a basis for the awarding of
exemplary damages.
The Company believes that recoveries of at least a portion of its defense
costs (and settlement/judgment costs, if any) should be available from the
companies that have participated in its longstanding insurance program.
Accordingly, the Company has notified the numerous insurance carriers whose
policies covered the Company's North Texas operations over the period that
might relate to the alleged problems. In May 1996, a lawsuit was filed by one
of the Company's insurers seeking a declaratory judgment that it does not have
a duty to indemnify the Company in these lawsuits. In June 1996, the Company
filed a declaratory 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. A suit styled Rowan Estate Trust, et al. v. Mitchell
Energy & Development Corp., et al. (the Rowan suit), originally brought in the
43rd District Court in Parker County, Texas by 46 royalty owners and later
certified as a class-action in July 1996, seeks additional royalties on gas
produced in certain North Texas counties and paid during a period extending
from July 1991 to the present. This suit, which as previously reported was set
for trial in July 1997, currently has no trial setting. It alleges that the
Company breached its duties to market the gas prudently and breached a duty of
good faith and fair dealing and that the defendants conspired to tortiously
interfere with the plaintiffs' royalty contracts. The plaintiffs seek an
accounting, actual and punitive damages, pre- and post- judgment interest and
attorneys' fees. In January 1997
-10-
<PAGE> 13
(after the district court's December 1996 ruling that the Rowan suit did not
cover pre-July 1991 payments), another lawsuit, Russell Elvis Lawrence, et al.
v. Mitchell Energy & Development Corp., et al., was filed in the 43rd District
Court by the plaintiffs' attorneys with similar allegations covering the period
January 1985 through June 1991. Substantial legal activity related to the Rowan
suit occurred between June 15 andAugust 31, 1997, including much discovery, the
filing of various motions with the court by attorneys for the Company and the
plaintiffs and a formal mediation. While the dispute was narrowed somewhat as a
result of these actions, the legal issues remained complex and largely
unresolved.
Following this period of intense activity, the Company and the plaintiffs'
attorneys involved in both lawsuits agreed in September 1997 on a basis for
settling this litigation, and the Company recorded a July 1997 financial
statement charge for the estimated $26,000,000 it expects to incur in this
regard. The proposed settlement would resolve 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. It also contemplates
that the plaintiffs will ratify modified terms and procedures for the
processing of gas and the payment of royalties in the affected North Texas
counties. The terms of the settlement are subject to approval by the court,
and it is expected that a hearing to consider this will be held during the week
of September 15.
Although the Company believes that it had properly calculated and paid all
royalties applicable to its Wise County area 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 will facilitate the Company's increased 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 the more than 11,000 royalty owners in the
area. The settlement also eliminates (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 be
required to continue defending itself against these charges.
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.
(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. 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.
-11-
<PAGE> 14
(8) SEGMENT INFORMATION
Selected industry segment data for the six- and three-month periods ended July
31, 1997 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
Segment Total
Outside Operating Operating
Revenues Earnings Earnings
--------------------- ---------------------- -------------------------
1997 1996 1997 1996 1997 1996
--------- --------- --------- --------- --------- ---------
Six Months
EXPLORATION AND PRODUCTION
Operations ................... $ 115,588 $ 117,450 $ 25,467 $ 26,084 $ 19,631 $ 20,142
Water well litigation
provision (see Note 6) ..... -- -- (7,000) -- (7,000) --
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
--------- --------- --------- --------- --------- ---------
117,970 120,894 20,849 35,463 15,013 29,521
--------- --------- --------- --------- --------- ---------
GAS SERVICES
Natural gas processing ....... 150,197 160,016 15,212 23,758 13,660 22,068
Royalty litigation
settlement provision ....... -- -- (26,000) -- (26,000) --
Natural gas gathering
and marketing .............. 69,344 106,772 8,136 12,813 6,301 10,979
Other ........................ 7,822 8,326 7,091 7,668 6,905 7,460
--------- --------- --------- --------- --------- ---------
227,363 275,114 4,439 44,239 866 40,507
--------- --------- --------- --------- --------- ---------
CORPORATE .................... -- -- -- -- (5,609)(b) (5,208)(b)
--------- --------- --------- --------- --------- ---------
$ 345,333 $ 396,008 $ 25,288 $ 79,702 $ 10,270 $ 64,820
========= ========= ========= ========= ========= =========
Three Months
EXPLORATION AND PRODUCTION
Operations ................... $ 57,659 $ 59,342 $ 11,622 $ 13,764 $ 8,715 $ 10,876
Severance tax refund ......... -- -- -- 2,056 -- 2,056
--------- --------- --------- --------- --------- ---------
57,659 59,342 11,622 15,820 8,715 12,932
--------- --------- --------- --------- --------- ---------
GAS SERVICES
Natural gas processing ....... 69,411 77,739 6,617 11,388 5,836 10,542
Royalty litigation
settlement provision ....... -- -- (26,000) -- (26,000) --
Natural gas gathering
and marketing .............. 45,047 55,662 3,682 6,216 2,756 5,333
Other ........................ 3,485 4,184 3,108 3,885 3,009 3,704
--------- --------- --------- --------- --------- ---------
117,943 137,585 (12,593) 21,489 (14,399) 19,579
--------- --------- --------- --------- --------- ---------
CORPORATE .................... -- -- -- -- (3,055)(b) (2,778)(b)
--------- --------- --------- --------- --------- ---------
$ 175,602 $ 196,927 $ (971) $ 37,309 $ (8,739) $ 29,733
========= ========= ========= ========= ========= =========
<CAPTION>
Capital
DD&A Expenditures(a)
--------------------- ---------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Six Months
EXPLORATION AND PRODUCTION
Operations ................... $ 44,007 $ 46,118 $ 77,117 $ 49,579
Water well litigation
provision (see Note 6) ..... -- -- -- --
Gain from sale of
contract drilling assets ... -- -- -- --
Severance tax refunds ........ -- -- -- --
Columbia Gas contract
settlement proceeds ........ -- -- -- --
--------- --------- --------- ---------
44,007 46,118 77,117 49,579
--------- --------- --------- ---------
GAS SERVICES
Natural gas processing ....... 1,817 1,637 2,770 3,214
Royalty litigation
settlement provision ....... -- -- -- --
Natural gas gathering
and marketing .............. 2,773 1,956 22,241 6,870
Other ........................ 53 53 37 74
--------- --------- --------- ---------
4,643 3,646 25,048 10,158
--------- --------- --------- ---------
CORPORATE .................... 1,655 1,525 2,409 4,884
--------- --------- --------- ---------
$ 50,305 $ 51,289 $ 104,574 $ 64,621
========= ========= ========= =========
Three Months
EXPLORATION AND PRODUCTION
Operations ................... $ 22,162 $ 21,299 $ 43,809 $ 25,439
Severance tax refund ......... -- -- -- --
--------- --------- --------- ---------
22,162 21,299 43,809 25,439
--------- --------- --------- ---------
GAS SERVICES
Natural gas processing ....... 919 873 1,220 1,419
Royalty litigation
settlement provision ....... -- -- -- --
Natural gas gathering
and marketing .............. 1,514 1,016 13,623 3,757
Other ........................ 26 26 35 --
--------- --------- --------- ---------
2,459 1,915 14,878 5,176
--------- --------- --------- ---------
CORPORATE .................... 841 827 1,216 2,828
--------- --------- --------- ---------
$ 25,462 $ 24,041 $ 59,903 $ 33,443
========= ========= ========= =========
</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.
During the first and second quarters of fiscal 1997, the Company recorded
a 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.
-12-
<PAGE> 15
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.
As discussed in more detail in Note 6, the Company has been involved in
class-action litigation brought on behalf of its royalty owners in the Wise
County area of North Texas. In September 1997, the Company and the plaintiffs'
attorneys involved in the lawsuit agreed on a basis for settlement of this
litigation, and the Company recorded a July 1997 financial statement charge for
the estimated $26,000,000 it expects to incur in this regard. Because the
allegations principally involved issues related to the processing of North
Texas natural gas production at the Company's Bridgeport gas processing plant,
the provision was charged to operating costs and expenses of the gas processing
segment.
(9) SUBSEQUENT EVENTS
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
also commenced a program to spend up to $50,000,000 to directly repurchase
Class A and Class B shares in the open market. Through September 12, 1997,
35,000 Class A and 180,000 Class B shares had been so repurchased at an
aggregate cost of approximately $5,300,000.
On August 18, 1997, the Company made a tender offer to purchase up to
$180,000,000 face amount of its 9.25% senior notes maturing January 15, 2002.
The tender price is $1,099.66 per $1,000 of principal plus accrued interest. The
tender price was 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). Unless extended, the
tender offer will expire on September 16, and payment is scheduled to occur on
September 19. The reacquisition premium, which is estimated to total
approximately $18,000,000, will be expensed as an extraordinary charge when the
debt is retired.
(10) SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid totaled $26,555,000 and $28,818,000 during the six-month periods
ended July 31, 1997 and 1996. Income taxes paid during these periods,
including amounts applicable to discontinued operations, totaled $20,400,000
and $5,631,000. There were no significant non-cash investing or financing
activities during the six-month periods ended July 31, 1997 and 1996.
-13-
<PAGE> 16
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 (TWC) 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
In a three-year restructuring program that was substantially completed in
fiscal 1997, the Company's operations were streamlined to focus on its core
energy and real estate businesses. Subsequently, management's efforts have
been concentrated on growing these businesses and other initiatives to increase
shareholder value.
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. Further, the Company expects to realize the $35
million net book value (including tax benefits) of its remaining non-Woodlands
real estate assets during the next six to twelve months. A balanced
reinvestment plan has been 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 September 12, 1997, 35,000 Class A and 180,000 Class B shares had been
so repurchased at an aggregate cost of approximately $5.3 million.
In furtherance of its plan, the Company also announced a tender offer
to repurchase up to $180 million face amount of its 9.25% senior notes on August
18, 1997. The purchase price to be paid for the tendered notes is $1,099.66 per
$1,000 of principal plus accrued interest. The tender price was 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). The tender offer is to close on September 16, and
payment is scheduled to occur on September 19. The reacquisition premium, which
is estimated to total approximately $18 million, will be expensed when paid in
the third quarter (as an extraordinary charge).
-14-
<PAGE> 17
The balance of the sales proceeds will be used to expand the scope and
scale of the Company's core energy operations. Planned uses of the proceeds
include an acceleration of the Company's capital program and 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 numerous acquisition candidates have been identified and
currently are being evaluated, completing any such purchases will take time.
Accordingly, it is not expected that 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.
The Company has substantially paid down its debt in recent years,
strengthening its financial position and increasing its flexibility to pursue
growth opportunities. At July 31, 1997, $600 million of total debt was
outstanding, or almost $400 million less than the $994 million balance
(including short-term debt) at the beginning of fiscal 1995. The
debt-to-equity ratio at July 31, 1997 was 1.23-to-1, down from 2.12 at the
beginning of fiscal 1995. Adjusted solely for the planned retirement of $180
million in debt and repurchases of $100 million in stock, the Company's
outstanding debt would total $420 million and its debt-to-equity ratio would be
1.12-to-1.
The outlook for the North Texas water well litigation improved
considerably during the second quarter even though the Second Court of Appeals
in Fort Worth, Texas has not yet issued its decision on the Company's appeal of
the previously reported $204 million judgment against a subsidiary in the
Bartlett case. On May 28, 1997, in a trial for the second group of these cases,
known as the Bailey case, the jury unanimously concluded that the Company was
not responsible for any damages claimed by the 17 plaintiff groups. The
Company and its outside counsel continue to believe that the Bartlett judgment
will be reversed or significantly reduced, either by the appeals court or, if
required, after an appeal to the Texas Supreme Court. Also, after the Bailey
decision there has been only minimal activity with respect to the 29 other
cases. As a result of the Bailey decision, the pending settlement of the
royalty litigation (see Note 6 of Notes to Consolidated Financial Statements)
and the assumption by the purchaser of TWC of responsibility for litigation
related to flooding in The Woodlands in October 1994, uncertainties regarding
litigation involving the Company have been substantially reduced.
The water well litigation is not expected to have a significant adverse
impact on the Company's ability to meet its financial obligations both because
of the expected outcome (see the following paragraph) and the Company's current
financial position. While the cost of public debt or equity offerings likely
would be increased by the existence of the outstanding Bartlett judgment, such
offerings are believed to be possible should a need arise. However, the
Company presently does not foresee a need to access these markets until after
the time that the appeals court's decision is expected. Finally, the Company
has available committed credit facilities (both for liquidity and appeals
bonds) that can be used, if needed, while the appeal of the Bartlett judgment
is pending (or should adverse decisions occur in the remaining cases).
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 programs as well as its expanded capital budget and
acquisition programs. 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.
-15-
<PAGE> 18
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, including $18 million for three- dimensional seismic work, exploratory
acreage acquisitions and exploratory and development drilling and $12 million
for the Vanderbilt pipeline project which includes the acquisition of that
system and its connection to Exxon's Katy gas processing plant. During the
first six months, energy capital additions totaled $104.6 million. The
spending pace was slowed in the first quarter by weather-related delays
affecting certain oil and gas projects. For the full year, however, capital
additions are expected to approximate the $238 million budget. These capital
budget amounts are exclusive of acquisitions that could be made using the TWC
sales proceeds.
Drilling delays and a compressor station fire that reduced North Texas
production by approximately 10 MMcf per day between mid-June and mid-August make
it unlikely that the Company will achieve its fiscal 1998 goal of increasing
natural gas production by 10%. However, with an increased emphasis on growing
its core businesses and the availability of financial resources from the TWC
sale, the Company is well-positioned to accelerate its production growth for the
foreseeable future.
OPERATING STATISTICS
Certain operating statistics (including, where applicable, proportional
interests in equity partnerships) for the three- and six-month periods ended
July 31, 1997 and 1996 follow:
<TABLE>
<CAPTION>
Three Months Six Months
--------------------- ---------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
AVERAGE DAILY VOLUMES
Natural gas sales (Mcf) ................. 227,000 220,400 232,500 226,100
Crude oil and condensate sales (Bbls) ... 6,000 5,200 5,900 5,400
Natural gas liquids produced (Bbls) ..... 44,700 45,700 45,600 45,100
Pipeline throughput (Mcf) ............... 412,600 384,200 425,600 412,300
AVERAGE SALES PRICES
Natural gas (per Mcf) ................... $ 2.24 $ 2.40 $ 2.24 $ 2.34
Crude oil and condensate (per Bbl) ...... 18.48 20.28 19.20 19.86
Natural gas liquids produced (per Bbl) .. 12.76 13.62 13.11 13.88
</TABLE>
RESULTS OF CONTINUING OPERATIONS - SIX MONTHS ENDED JULY 31, 1997
COMPARED WITH SIX MONTHS ENDED JULY 31, 1996
Results of the Company's continuing operations for the six-month periods ended
July 31, 1997 and 1996 - both before and after unusual items - are summarized
in the table on the following page. Earnings from continuing operations for
fiscal 1998's first six months of $3.3 million were $32.9 million below those
of the prior-year period. Unusual items reduced net earnings from continuing
operations of the fiscal 1998 period by $19.7 million, but added $5.8 million
to those of the fiscal 1997 period. Excluding the effects of unusual items,
earnings from continuing operations for the first half of fiscal 1998 of $23
million were $7.4 million below the $30.4 million of the prior-year period.
-16-
<PAGE> 19
The following table and discussion identify and explain the major
increases (decreases) in earnings for the six- month periods (in millions):
<TABLE>
<CAPTION>
Segment Earnings from Con-
Operating Earnings tinuing Operations
------------------------ ------------------------
Exploration Before
and Gas Income After
Production Services Other* Taxes Tax
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
FISCAL 1997 AMOUNTS ................................... $ 35.5 $ 44.2 $ (24.3) $ 55.4 $ 36.2
---------- ---------- ---------- ---------- ----------
ELIMINATE IMPACT OF FISCAL 1997 UNUSUAL ITEMS
Severance tax refund (see page 12) .................... (5.9) -- -- (5.9) (3.7)
Columbia Gas contract settlement
proceeds (see page 13) .............................. (3.5) -- -- (3.5) (2.1)
---------- ---------- ---------- ---------- ----------
(9.4) -- -- (9.4) (5.8)
---------- ---------- ---------- ---------- ----------
FISCAL 1997 AMOUNTS BEFORE UNUSUAL ITEMS .............. 26.1 44.2 (24.3) 46.0 30.4
---------- ---------- ---------- ---------- ----------
MAJOR INCREASES (DECREASES)
Lower natural gas sales price ......................... (3.4) -- -- (3.4) (2.2)
Absence of proved-property impairments ................ 3.1 -- -- 3.1 2.0
Increased operating expenses .......................... (1.6) -- -- (1.6) (1.0)
Natural gas processing
Price-related decreases in NGL margins .............. -- (2.7) -- (2.7) (1.8)
Higher repairs and maintenance expense,
principally at the Bridgeport plant ............... -- (2.6) -- (2.6) (1.7)
Hedging losses recognized in fiscal
1998 on NGL fractionation spreads ................. -- (1.7) -- (1.7) (1.1)
Gas gathering and marketing ........................... -- (4.7) -- (4.7) (3.0)
Equity in earnings of MTBE plant partnership .......... -- (1.2) -- (1.2) (.8)
Interest expense incurred ............................. -- -- 1.9 1.9 1.2
Interest income on excess cash balances ............... -- -- 1.0 1.0 .7
Other, net ............................................ 1.3 (.9) .2 .6 .3
---------- ---------- ---------- ---------- ----------
(.6) (13.8) 3.1 (11.3) (7.4)
---------- ---------- ---------- ---------- ----------
FISCAL 1998 AMOUNTS BEFORE UNUSUAL ITEMS .............. 25.5 30.4 (21.2) 34.7 23.0
---------- ---------- ---------- ---------- ----------
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 12) .............. 2.4 -- -- 2.4 1.5
---------- ---------- ---------- ---------- ----------
(4.6) (26.0) -- (30.6) (19.7)
---------- ---------- ---------- ---------- ----------
FISCAL 1998 AMOUNTS AFTER UNUSUAL ITEMS ............... $ 20.9 $ 4.4 $ (21.2) $ 4.1 $ 3.3
========== ========== ========== ========== ==========
</TABLE>
______________________________________
*Includes general and administrative expense and other expense.
EXPLORATION AND PRODUCTION OVERVIEW
Exclusive of unusual items, exploration and production segment operating
earnings of $25.5 million during fiscal 1998's first six months were $.6
million below the $26.1 million of the prior-year's comparable period as
price-related reductions were largely offset by other factors.
LOWER NATURAL GAS SALES PRICE ($3.4 MILLION DECREASE). The Company's natural
gas sales price during the first six months of fiscal 1998 averaged $2.24 per
Mcf, $.10 below the $2.34 of the comparable period of the prior year, lowering
operating earnings $3.4 million.
-17-
<PAGE> 20
ABSENCE OF PROVED-PROPERTY IMPAIRMENTS ($3.1 MILLION INCREASE). There were no
proved-property impairment charges during fiscal 1998's first six months. A
$3.1 million impairment charge was recorded in the prior-year period because of
disappointing drilling results for one well and downward revisions in reserve
estimates for one field in the Gulf of Mexico.
HIGHER OPERATING EXPENSES ($1.6 MILLION DECREASE). This unfavorable variance
resulted principally from increased expenses for surface and subsurface repairs
and maintenance. Also, the prior-year period benefitted from reimbursements by
a third party under an indemnification agreement of expenses incurred several
years ago.
GAS SERVICES OVERVIEW
Gas services operating earnings before unusual items declined $13.8 million (to
$30.4 million) during the first half of fiscal 1998 as price-related reductions
in margins caused gas processing and gas gathering and marketing earnings to
decline by $8.5 million and $4.7 million, respectively.
NATURAL GAS PROCESSING - PRICE-RELATED DECREASES IN NGL MARGINS ($2.7 MILLION
DECREASE). The average price for NGLs produced during fiscal 1998's first half
of $13.11 per barrel was 6% below the prior period's $13.88, decreasing NGL
revenues by $5.9 million. Partially offsetting the impact of this on NGL
margins was a $3.2 million reduction in feedstock costs resulting from the
period's lower NGL and natural gas prices.
NATURAL GAS PROCESSING - HEDGING LOSSES RECOGNIZED IN FISCAL 1998 ON NGL
FRACTIONATION SPREADS ($1.7 MILLION DECREASE). After market prices had risen
sharply during the fourth quarter of fiscal 1997, the Company executed futures
contracts to lock-in profit margins on certain of its NGL products. Since the
market prices continued to increase after the hedge was entered into, the
closing of the futures contracts resulted in the recording of hedging losses
equal to the difference between the margins achieved via the hedges and actual
margins realized when the hedged product was produced and sold in fiscal 1998.
GAS GATHERING AND MARKETING ($4.7 MILLION DECREASE). Price-related declines in
gross profits were the principal cause of this unfavorable variance. A
substantial portion of the natural gas supply costs of these activities is
based on beginning-of-the-month market index prices or fixed prices. Sharp
downward natural gas price movements during fiscal 1998's first quarter
adversely impacted gross profits during fiscal 1998's first half; conversely,
sharp upward gas price movements inflated the gross profits of the prior year's
second quarter.
EQUITY IN EARNINGS OF MTBE PLANT PARTNERSHIP ($1.2 MILLION DECREASE). This
unfavorable variance was due to production lost because of a scheduled 12-day
plant shutdown for maintenance in July 1997 (in the prior year, this turnaround
did not occur until August). Prior to the July 1997 turnaround, the plant's
earnings were slightly ahead of those of last year's comparable period.
OTHER
INTEREST EXPENSE INCURRED ($1.9 MILLION INCREASE). Interest expense incurred
was $4.2 million lower during fiscal 1998's first six months because of a $136.4
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 and
$100 million of senior notes on February 18, 1997. Because $2.3 million of the
$4.2 million interest expense reduction was attributable to discontinued
operations, interest expense attibutable to continuing operations was only $1.9
million below that of the prior-year period.
-18-
<PAGE> 21
RESULTS OF CONTINUING OPERATIONS - THREE MONTHS ENDED JULY 31, 1997
COMPARED WITH THREE MONTHS ENDED JULY 31, 1996
Results from the Company's continuing operations for the three-month
periods ended July 31, 1997 and 1996 are summarized in the table which follows.
Reduced by the $16.9 million after-tax impact of a $26 million royalty
litigation settlement provision, the Company reported a loss from continuing
operations of $7.5 million for the second quarter of fiscal 1998, which
compared with earnings from continuing operations of $16.4 million in the
prior-year period, when a severance tax refund added $1.3 million. Excluding
the effects of unusual items, fiscal 1998's second quarter earnings of $9.4
million were $5.7 million below the $15.1 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 Con-
Operating Earnings tinuing Operations
------------------------ ---------------------
Exploration Before
and Gas Income After
Production Services Other* Taxes Tax
---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
FISCAL 1997 AMOUNTS .............................. $ 15.8 $ 21.5 $ (12.4) $ 24.9 $ 16.4
ELIMINATE IMPACT OF FISCAL 1997 UNUSUAL ITEM
Severance tax refund (see page 12) ............... (2.0) -- -- (2.0) (1.3)
--------- --------- --------- --------- ---------
FISCAL 1997 AMOUNTS BEFORE UNUSUAL ITEM .......... 13.8 21.5 (12.4) 22.9 15.1
--------- --------- --------- --------- ---------
MAJOR INCREASES (DECREASES)
Lower natural gas sales price
($2.24 versus $2.40) ........................... (3.0) -- -- (3.0) (2.0)
Lower exploratory dry-hole costs ................. 1.9 -- -- 1.9 1.2
Increased operating expenses (see page 18) ....... (1.1) -- -- (1.1) (.7)
Natural gas processing
Price-related decreases in NGL margins ......... -- (1.4) -- (1.4) (.9)
Higher repairs and maintenance expense,
principally at the Bridgeport plant .......... -- (2.0) -- (2.0) (1.3)
Gas gathering and marketing ...................... -- (2.5) -- (2.5) (1.6)
Equity in earnings of MTBE
plant partnership (see page 18) ................ -- (1.5) -- (1.5) (1.0)
Interest expense incurred ........................ -- -- .7 .7 .5
Other, net ....................................... -- (.7) .4 (.3) (.2)
Lower effective tax rate ......................... -- -- -- -- .3
--------- --------- --------- --------- ---------
(2.2) (8.1) 1.1 (9.2) (5.7)
--------- --------- --------- --------- ---------
FISCAL 1998 AMOUNTS BEFORE UNUSUAL ITEM .......... 11.6 13.4 (11.3) 13.7 9.4
FISCAL 1998 UNUSUAL ITEM - Royalty litigation
settlement provision (see page 10) ............. -- (26.0) -- (26.0) (16.9)
--------- --------- --------- --------- ---------
FISCAL 1998 AMOUNTS AFTER UNUSUAL ITEM ........... $ 11.6 $ (12.6) $ (11.3) $ (12.3) $ (7.5)
========= ========= ========= ========= =========
</TABLE>
___________________________________
*Includes general and administrative expense and other expense.
EXPLORATION AND PRODUCTION OVERVIEW
Exploration and production segment operating earnings of $11.6 million during
the second quarter of fiscal 1998 were $2.2 million below the $13.8 million of
fiscal 1997's second quarter (before unusual item). The Company's natural gas
sales price averaged $2.24 per Mcf during the second quarter of fiscal 1998,
down from $2.40 in the second quarter of the prior year. Natural gas
production averaged 227,000 Mcf per day during fiscal 1997's second quarter, 3%
above the 220,400 of the comparable prior-year period.
-19-
<PAGE> 22
LOWER EXPLORATORY DRY-HOLE COSTS ($1.9 MILLION INCREASE). Exploratory dry-hole
costs totaled $.6 million during the second quarter of fiscal 1998, down from
$2.5 million in the comparable prior-year period when exploratory wells were
drilled in North Texas to determine field limits and evaluate 3-D seismic
expenditures.
GAS SERVICES OVERVIEW
Exclusive of unusual items, gas services operating earnings declined to $13.4
million from $21.5 million during the second quarter of the prior year
principally because of lower buy/resale margins for gas gathering and marketing
operations, higher repairs and maintenance costs for gas processing, lower NGL
margins and lost production and sales due to scheduled maintenance at the
Company's MTBE plant.
NATURAL GAS PROCESSING - PRICE-RELATED DECREASES IN NGL MARGINS ($1.4 MILLION
DECREASE). The Company's NGL prices averaged $12.76 per barrel during the
current quarter, down 6% from the $13.62 of the prior-year's comparable
period, reducing NGL revenues by $3.2 million. Partially offsetting the impact
of this on NGL margins was a $1.8 million reduction in feedstock costs
resulting from lower NGL and natural gas prices.
GAS GATHERING AND MARKETING ($2.5 MILLION DECREASE). As explained on page 18,
price-related declines in gross profits were the principal cause of this
unfavorable earnings variance.
OTHER
INTEREST EXPENSE INCURRED ($.7 MILLION INCREASE). For the reasons discussed on
page 18, interest expense incurred during fiscal 1998's second quarter declined
by $2.0 million. Because of a $1.3 million decline in interest attributable to
discontinued operations, the period's interest expense attibutable to continuing
operations was only $.7 million below that of the prior year's second quarter.
-20-
<PAGE> 23
Part II - Other Information
ITEM 1. LEGAL PROCEEDINGS
See Note 6 of Notes to Unaudited Consolidated Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of Mitchell Energy & Development Corp.
was held on June 25, 1997 for the purpose of electing a Board of 13 directors
and considering the appointment of independent public accountants. Proxies for
the meeting were solicited pursuant to Section 14A of the Securities Exchange
Act of 1934, and there was no solicitation in opposition to the Company's
solicitations. Each of the nominees for the Board of Directors was elected by
the Class A common stockholders with no nominee receiving fewer than 22,026,360
votes.
Stockholders also approved the appointment of Arthur Andersen LLP,
independent public accountants, to examine the accounts of the Company for the
fiscal year ending January 31, 1998. The vote was as follows:
<TABLE>
<CAPTION>
Per-
Number cent
---------- ----------
<S> <C> <C>
Shares voted "for" ........ 22,031,564 99.88
Shares voted "against" .... 6,863 .03
Shares abstaining ......... 20,505 .09
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
No exhibits are filed with this report.
(b) No reports were filed on Form 8-K during the three-month period
ended July 31, 1997.
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.
-21-
<PAGE> 24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MITCHELL ENERGY & DEVELOPMENT CORP.
(Registrant)
Dated: September 12, 1997 By: /s/ Philip S. Smith
----------------------------------------
Philip S. Smith
Senior Vice President - Administration
and Chief Financial Officer
-22-
<PAGE> 25
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C> <C> <C> <C>
<PERIOD-TYPE> 6-MOS 3-MOS YEAR 9-MOS 6-MOS
<FISCAL-YEAR-END> JAN-31-1997 JAN-31-1997 JAN-31-1997 JAN-31-1997 JAN-31-1997
<PERIOD-END> JUL-31-1997 APR-30-1997 JAN-31-1997 OCT-31-1996 JUL-31-1996
<CASH> 575,786 47,012 75,825 57,597 49,998
<SECURITIES> 0 0 0 0 0
<RECEIVABLES> 84,039 79,713 149,918 87,638 84,170
<ALLOWANCES> 0 333 333 333 318
<INVENTORY> 12,825 9,016 10,072 10,480 10,497
<CURRENT-ASSETS> 678,493 142,262 335,346 256,051 237,244
<PP&E> 2,145,455 2,140,949 2,112,970 2,080,732 2,060,441
<DEPRECIATION> 1,326,798 1,350,082 1,337,041 1,334,408 1,337,684
<TOTAL-ASSETS> 1,572,150 1,512,451 1,668,272 1,581,782 1,556,749
<CURRENT-LIABILITIES> 265,734 184,604 348,987 316,697 303,461
<BONDS> 600,000 600,000 600,000 600,000 600,000
0 0 0 0 0
0 0 0 0 0
<COMMON> 5,386 5,386 5,386 5,386 5,386
<OTHER-SE> 480,865 553,347 549,901 515,887 503,495
<TOTAL-LIABILITY-AND-EQUITY> 1,572,150 1,512,451 1,668,272 1,581,782 1,556,749
<SALES> 345,333 169,731 903,233 591,574 392,564
<TOTAL-REVENUES> 345,333 169,731 906,677 595,018 396,008
<CGS> 0 0 0 0 0
<TOTAL-COSTS> 320,045 143,472 717,770 484,841 316,306
<OTHER-EXPENSES> 11,914 5,324 32,375 20,693 11,188
<LOSS-PROVISION> 0 0 0 0 0
<INTEREST-EXPENSE> 9,281 4,530 22,775 16,848 13,172
<INCOME-PRETAX> 4,093 16,405 133,757 72,636 55,342
<INCOME-TAX> 833 5,684 47,456 25,509 19,097
<INCOME-CONTINUING> 3,260 10,721 86,301 47,127 36,245
<DISCONTINUED> (59,683) 5,756 16,925 15,839 7,798
<EXTRAORDINARY> 0 0 0 0 0
<CHANGES> 0 0 0 0 0
<NET-INCOME> (56,423) 16,477 103,226 62,966 44,043
<EPS-PRIMARY> (1.09) .32 1.99 1.21 .85
<EPS-DILUTED> (1.09) .32 1.99 1.21 .85
</TABLE>
