<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 OCTOBER 31, 1999
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, 1999:
<TABLE>
<S> <C>
Class A......................... 22,321,635
Class B......................... 26,795,622
</TABLE>
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<PAGE> 2
INDEX
<TABLE>
<CAPTION>
Page
Part I - Financial Information Number
------
Item 1. Financial Statements
<S> <C>
Representation............................................................................... 1
Consolidated Balance Sheets.................................................................. 2
Unaudited Consolidated Statements of Earnings................................................ 3
Unaudited Consolidated Statement of Stockholders' Equity..................................... 4
Unaudited Condensed Consolidated Statements of Cash Flows.................................... 5
Notes to Unaudited Consolidated Financial Statements......................................... 6
Item 2. Management's Discussion and Analysis of
Financial Position and Results of Operations................................................. 12
Part II - Other Information
Item 1. Legal Proceedings...................................................................... 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 1999" and "fiscal 2000" refer, respectively,
to the 12-month periods ended January 31, 1999 and 2000 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 1999 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,
1999 1999
------------ ------------
ASSETS (unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents ...................................................... $ 20,575 $ 20,300
Trade receivables .............................................................. 36,554 34,078
Inventories .................................................................... 11,162 10,734
Income taxes receivable ........................................................ -- 5,944
Other .......................................................................... 7,796 8,576
------------ ------------
Total current assets ...................................................... 76,087 79,632
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, at cost less accumulated depreciation, depletion
and amortization of $1,476,706 and $1,450,685
Exploration and production
Oil and gas properties ....................................................... 684,685 683,946
Support equipment and facilities ............................................. 13,751 16,253
Gas services (including investments in equity partnerships) (Note 3)
Natural gas processing ....................................................... 104,166 102,761
Natural gas gathering ........................................................ 153,379 145,488
Other ........................................................................ 83,808 79,678
Corporate ...................................................................... 4,139 5,612
------------ ------------
1,043,928 1,033,738
------------ ------------
LONG-TERM INVESTMENTS AND OTHER ASSETS ......................................... 32,354 33,106
------------ ------------
$ 1,152,369 $ 1,146,476
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt (Note 4) .................................. $ -- $ 100,000
Oil and gas proceeds payable ................................................... 78,972 68,658
Accounts payable ............................................................... 31,952 32,868
Accrued liabilities ............................................................ 38,845 40,269
------------ ------------
Total current liabilities ................................................. 149,769 241,795
------------ ------------
LONG-TERM DEBT (Note 4) ........................................................ 394,267 362,467
------------ ------------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes .......................................................... 150,335 130,069
Retirement obligations and other ............................................... 89,962 87,371
------------ ------------
240,297 217,440
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY
Preferred stock, $.10 par value (authorized 10,000,000 shares; none issued)
Common stock, $.10 par value
(authorized 100,000,000 Class A and 100,000,000 Class B shares) .............. 5,386 5,386
Additional paid-in capital ..................................................... 143,636 143,636
Retained earnings .............................................................. 330,545 287,283
Other comprehensive loss ....................................................... (7,381) (7,381)
Treasury stock, at cost ........................................................ (104,150) (104,150)
------------ ------------
368,036 324,774
------------ ------------
$ 1,152,369 $ 1,146,476
============ ============
</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 Nine Months
Ended October 31 Ended October 31
--------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES
Exploration and production (including a gain of $11,527
from sale of Hell's Hole area properties in 1999's nine-month period) ... $ 74,943 $ 51,718 $195,799 $169,635
Gas services ............................................................... 190,692 123,616 457,723 358,806
-------- -------- -------- --------
265,635 175,334 653,522 528,441
-------- -------- -------- --------
OPERATING COSTS AND EXPENSES
Exploration and production (net of water well litigation
provision reversals of $5,000, none, $14,000 and $4,000) (Note 6) ....... 40,222 50,759 119,059 160,854
Gas services ............................................................... 163,046 114,980 395,803 332,661
-------- -------- -------- --------
203,268 165,739 514,862 493,515
-------- -------- -------- --------
SEGMENT OPERATING EARNINGS (Note 7) ........................................ 62,367 9,595 138,660 34,926
General and administrative expense ......................................... 7,707 7,493 20,438 23,311
-------- -------- -------- --------
TOTAL OPERATING EARNINGS ................................................... 54,660 2,102 118,222 11,615
-------- -------- -------- --------
OTHER EXPENSE
Interest expense ........................................................... 8,075 9,336 25,977 25,495
Interest income ............................................................ (72) (100) (180) (836)
Other, net ................................................................. 960 (834) (3,043) (3,495)
-------- -------- -------- --------
8,963 8,402 22,754 21,164
-------- -------- -------- --------
EARNINGS (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES .......................................... 45,697 (6,300) 95,468 (9,549)
INCOME TAXES (Note 5) ...................................................... 16,239 (2,584) 33,519 (3,880)
-------- -------- -------- --------
EARNINGS (LOSS) FROM CONTINUING OPERATIONS ................................. 29,458 (3,716) 61,949 (5,669)
DISCONTINUED REAL ESTATE OPERATIONS (Note 2)
Adjustment to loss on sale, net of income taxes of $1,750 .................. -- -- -- 3,250
-------- -------- -------- --------
NET EARNINGS (LOSS) ........................................................ $ 29,458 $ (3,716) $ 61,949 $ (2,419)
======== ======== ======== ========
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE (Note 9)
Class A - From continuing operations ....................................... $ .59 $ (.08) $ 1.24 $ (.14)
Net earnings ..................................................... .59 (.08) 1.24 (.07)
Class B - From continuing operations ....................................... .60 (.07) 1.28 (.10)
Net earnings ..................................................... .60 (.07) 1.28 (.03)
AVERAGE COMMON SHARES OUTSTANDING (Basic) - Class A ........................ 22,322 22,321 22,322 22,321
Class B ........................ 26,796 26,794 26,796 26,781
</TABLE>
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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, 1999
(dollar amounts in thousands)
<TABLE>
<CAPTION>
Other
Additional Compre-
Common Paid-in Retained hensive Treasury
DOLLAR AMOUNTS Total Stock Capital Earnings Loss Stock
- -------------- --------- --------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 31, 1999 ...................... $ 324,774 $ 5,386 $ 143,636 $ 287,283 $ (7,381) $(104,150)
Net earnings ................................... 61,949 -- -- 61,949 -- --
Cash dividends (36 cents per share on Class A
and 39.75 cents per share on Class B) ....... (18,687) -- -- (18,687) -- --
--------- --------- --------- --------- --------- ---------
BALANCE, OCTOBER 31, 1999 ...................... $ 368,036 $ 5,386 $ 143,636 $ 330,545 $ (7,381) $(104,150)
========= ========= ========= ========= ========= =========
</TABLE>
============================
<TABLE>
<CAPTION>
Common Stock Issued Treasury Stock Outstanding Shares
----------------------------- ---------------------------- -----------------------------
SHARE AMOUNTS Class A Class B Class A Class B Class A Class B
- ------------- ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 31, 1999 .... 23,978,077 29,878,077 1,656,437 3,082,450 22,321,640 26,795,627
Other ........................ (5) (5) -- -- (5) (5)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, OCTOBER 31, 1999 .... 23,978,072 29,878,072 1,656,437 3,082,450 22,321,635 26,795,622
============ ============ ============ ============ ============ ============
</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
---------------------------
1999 1998
---------- ----------
OPERATING ACTIVITIES
<S> <C> <C>
Earnings (loss) from continuing operations ....................................... $ 61,949 $ (5,669)
Adjustments to reconcile earnings from continuing
operations to cash provided by operating activities
Depreciation, depletion and amortization ................................... 81,524 88,718
Deferred income taxes ...................................................... 20,266 1,107
Distributions in excess of earnings of equity investees .................... 7,028 10,859
Exploration expenses (including exploratory well impairments) .............. 5,200 23,308
Gain from sale of Hell's Hole area properties .............................. (11,527) --
Water well litigation provision reversals .................................. (14,000) (4,000)
Other, net ................................................................. (5,268) (1,343)
---------- ----------
145,172 112,980
Changes in operating assets and liabilities ................................ 24,135 (8,311)
---------- ----------
Cash provided by operating activities ...................................... 169,307 104,669
---------- ----------
INVESTING ACTIVITIES
Capital and exploratory expenditures
Total on accrual basis (including asset acquisitions of $23,819 and $85,046) .. (125,061) (256,502)
Adjustment to cash basis ...................................................... (372) (9,100)
---------- ----------
(125,433) (265,602)
Property, plant and equipment sales proceeds ..................................... 37,991 2,326
Other, net ....................................................................... 5,614 2,508
---------- ----------
Cash used for investing activities ......................................... (81,828) (260,768)
---------- ----------
FINANCING ACTIVITIES
Proceeds from issuance of debt ................................................... 31,800 135,000
Debt repayments .................................................................. (100,000) (60,000)
Cash dividends ................................................................... (18,687) (18,681)
Treasury stock purchases ......................................................... -- (9,217)
Other ............................................................................ (317) 2,257
---------- ----------
Cash provided by (used for) financing activities ........................... (87,204) 49,359
---------- ----------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS FROM CONTINUING OPERATIONS ........................................ 275 (106,740)
CASH PROVIDED BY DISCONTINUED OPERATIONS ......................................... -- 12,927
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................................... 20,300 105,309
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD ......................................... $ 20,575 $ 11,496
========== ==========
</TABLE>
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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, 1999
(1) ACCOUNTING POLICIES
Mitchell Energy & Development Corp. together with its majority-owned
subsidiaries (the "Company") is a large independent energy company engaged in
the exploration for and development and production of natural gas, natural gas
liquids, and crude oil and condensate. The Company also operates natural gas
gathering systems in Texas and markets natural gas through purchase and resale
activities.
The consolidated financial statements include the accounts of the Company
after elimination of all significant intercompany accounts and transactions. The
equity method of accounting is used for investments in 20%-to-50%-owned
entities.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The Company's exploration and production activities are accounted for
using the "successful efforts" method. Long-lived assets held and used by the
Company are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. When it is
determined that an asset's estimated future net cash flows will not be
sufficient to recover its carrying amount, an impairment charge is recorded to
reduce the carrying amount for that asset to its estimated fair value.
Impairment assessments for proved oil and gas properties are made on a
field-by-field basis. There were no charges for proved-property impairments
during the nine-month periods ended October 31, 1999 and 1998.
The Financial Accounting Standards Board (FASB) adopted Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities" in June 1998. The statement, which the
Company must adopt for fiscal 2002, requires that all derivatives be recognized
at fair value as assets or liabilities and that changes in fair value be
recorded in earnings or other comprehensive income. While the Company's analysis
of the potential impact of this statement has not been completed, its infrequent
use of derivatives - particularly those which are not hedges - makes it unlikely
that the adoption of this statement will have a significant impact on the
Company's financial statements.
(2) DISCONTINUED REAL ESTATE OPERATIONS
The Company decided to withdraw from the real estate business during fiscal 1998
and commenced reporting real estate activities as discontinued operations in its
financial statements at that time. During the first quarter of fiscal 1999,
adjustments were recorded reducing by $3,250,000 ($5,000,000 pretax) the
$67,123,000 loss on disposition previously recorded in connection with the
discontinuance of those activities. The reduction occurred because actual
realizations were higher than originally estimated and certain contingent
obligations were settled for less than the amounts accrued.
-6-
<PAGE> 9
(3) PARTNERSHIP INVESTMENTS
A summary of the Company's net investments in partnerships at October 31, 1999
and January 31, 1999 and its equity in their pretax earnings for the nine-month
periods ended October 31, 1999 and 1998 follows (in thousands):
<TABLE>
<CAPTION>
Equity in
Net Investment Pretax Earnings
------------------------- ---------------------------
Percent October 31, January 31, October 31, October 31,
Owned 1999 1999 1999 1998
------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
NATURAL GAS PROCESSING
C&L Processors Partnership ......... 50 $ 24,731 $ 60,130 $ 3,863 $ (217)
U.P. Bryan Plant ................... 45 2,120 2,244 5,696 900
-------- -------- -------- --------
26,851 62,374 9,559 683
-------- -------- -------- --------
GAS GATHERING AND MARKETING
Austin Chalk Natural Gas
Marketing Services .............. 45 (85) 739 582 2,881
Ferguson-Burleson County
Gas Gathering System ............ 45 36,832 40,151 3,950 2,436
Louisiana Chalk Gathering System ... 50 16,615 17,346 (731) (551)
Others ............................. 443 353 87 3,628*
-------- -------- -------- --------
53,805 58,589 3,888 8,394
-------- -------- -------- --------
OTHER
Belvieu Environmental Fuels ........ 33.33 53,300 47,660 5,640 7,333
Gulf Coast Fractionators ........... 38.75 28,934 30,364 1,934 3,873
-------- -------- -------- --------
82,234 78,024 7,574 11,206
-------- -------- -------- --------
$162,890 $198,987 $ 21,021 $ 20,283
======== ======== ======== ========
</TABLE>
- ------------------------------------
* Includes $3,492 gain on a partnership's sale of the Brooks-Hidalgo
gathering system.
The Company's net investment in each of these entities is reported as property,
plant and equipment in the consolidated balance sheets and its equity in their
pretax earnings is reported as revenues in the consolidated statements of
earnings, each under the gas services caption.
During the third quarter of fiscal 2000, C&L Processors partnership
distributed the Jameson gas processing plant and related facilities to its
partners, Conoco and a wholly-owned subsidiary of the Company. The Company
subsequently purchased Conoco's 50% interest in these facilities for
approximately $23,800,000. Effective October 1, 1999, the Jameson operations
became wholly owned and are no longer included in the reported amounts for the
partnership.
The table which follows provides summarized earnings information (on a
100% basis) for these entities for the three- and nine-month periods ended
October 31, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
Three Months Nine Months
---------------------- ----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues ................................................................... $166,892 $146,577 $435,077 $420,769
Operating earnings ......................................................... 24,173 19,379 56,453 48,512
Pretax earnings (before interest expense for those entities
whose activities are funded by capital contributions of the owners) .... 23,019 15,974 47,858 36,383
</TABLE>
-7-
<PAGE> 10
(4) LONG-TERM DEBT
At October 31, 1999, the Company's outstanding debt consisted of $314,267,000 of
unsecured parent company senior notes, the proceeds of which have been advanced
to the operating subsidiaries, and borrowings of $80,000,000 under a
$250,000,000 bank revolving credit facility. During July 1999, the Company
repaid $100,000,000 of maturing 8% senior notes using proceeds of borrowings
under its revolving credit agreement and available cash.
Any amounts then outstanding under the bank revolving credit facility are
payable in July 2003. Interest rates, which generally are based on spreads over
LIBOR, vary based on the highest of the ratings given the Company's senior notes
by two specified rating agencies. The Company pays commitment fees on the unused
portion of this facility.
The bank revolving credit agreement contains certain restrictions which,
among other things, limit the payment of dividends by requiring consolidated
tangible net worth, as defined, to equal at least $275,000,000 and require the
maintenance of a specified consolidated leverage ratio based on earnings before
interest, taxes and DD&A and excluding extraordinary, unusual non-recurring and
non-cash charges and credits. Retained earnings available for the payment of
cash dividends totaled $91,099,000 at October 31, 1999.
(5) INCOME TAXES
Income taxes applicable to earnings from continuing operations for the
nine-month periods ended October 31, 1999 and 1998 consist of the following (in
thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Current - Federal .............. $ 13,118 $ (4,974)
State ................ 135 (13)
-------- --------
13,253 (4,987)
-------- --------
Deferred - Federal ............. 18,071 1,997
State ............... 2,195 (890)
-------- --------
20,266 1,107
-------- --------
$ 33,519 $ (3,880)
======== ========
</TABLE>
Estimated annual tax rates of 35.1% and 40.6%, respectively, were used in
computing the income tax provisions for the nine-month periods ended October 31,
1999 and 1998. The differences between those 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.
(6) COMMITMENTS AND 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 Fort
Worth, Texas, and in November 1997 the court's 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 statutes of limitations. The
appeals court subsequently denied the plaintiffs' request for a reconsideration
of its decision. Plaintiffs' requests that the Texas Supreme Court review and
overturn this decision were subsequently denied, and this case is now over.
-8-
<PAGE> 11
In May 1997, in the Bailey case - which involved allegations similar to
those in the Bartlett case - 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 (and that most of their claims were
time-barred by statutes of limitations, in any event). The court entered the
judgment on July 15, 1997. After their motion for a new trial was denied, the
plaintiffs appealed this decision to the Second Court of Appeals, which affirmed
the trial court's decision on February 25, 1999. After their motion for a
rehearing was overruled by the Court of Appeals, the plaintiffs filed a petition
for review with the Texas Supreme Court which denied that request on August 26,
1999.
In three other cases involving allegations similar to those in the
Bartlett case, judges in the Wise County court issued summary judgments in favor
of the Company during January, April and July 1998. The plaintiffs appealed two
of these judgments to the Second Court of Appeals, which affirmed the trial
court's judgment in one of these cases on November 19, 1998 and in the other on
January 7, 1999. Subsequently, the Texas Supreme Court denied the plaintiffs'
petitions for review and motions for rehearing, and these cases are now over.
The Company has entered into agreements with its insurance carriers - one
in May 1997, two in April 1998, two in March 1999 and one in October 1999 -
reimbursing it for a total of $23,500,000 of the defense costs it incurred in
connection with this litigation. Negotiations continue with an additional
carrier.
The Company reviews the adequacy of its accrued liability for this
litigation quarterly, and provisions totaling $32,000,000 were expensed over the
years. Costs incurred - which consisted principally of attorneys' fees and other
defense costs for the Bartlett and Bailey trials and costs of bonds, etc.,
related to the appeal of the Bartlett judgment - were charged against the
reserve. After entering into the two reimbursement agreements in April 1998 and
after agreeing in August 1998 to settle the last 25 untried cases, the Company
recorded reversals of the previous provisions of $3,000,000 and $1,000,000,
respectively, in the first and second quarters of fiscal 1999. After entering
into two reimbursement agreements during March 1999 and another in October 1999,
accrual reversals of $9,000,000 and $5,000,000, respectively, were recorded in
the first and third quarters of fiscal 2000.
OTHER. The Company also is party to other claims and legal actions arising in
the ordinary course of its business and to recurring examinations performed by
the Internal Revenue Service and other regulatory agencies. While the outcome of
all 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 result in charges that are material to the Company's
financial position. It is possible, however, that charges could be required that
would be significant to the operating results of a particular period.
The Company holds a one-third interest in a partnership which owns a plant
that manufactures a gasoline additive known as MTBE. In March 1999 the governor
of California ordered that the use of MTBE be phased out in that state over a
four-year period. In July 1999, a national advisory panel formed by the EPA
recommended that the use of MTBE be reduced, and in August 1999 a group of seven
northeastern states took steps that would lead to the phase-out of MTBE usage
over a three-year period. Restrictions on the use of MTBE could significantly
impact future operations of the MTBE plant partially owned by the Company.
However, that facility, which was built in the mid 1990s for approximately
$225,000,000, was originally designed in a manner that allows it - with moderate
expenditures - to be converted to the production of other products. It is not
possible at this time to determine the ultimate impact, if any, of this matter
on the Company's financial position or future results of operations.
-9-
<PAGE> 12
(7) SEGMENT INFORMATION
Selected industry segment data for the indicated periods follows (in thousands):
<TABLE>
<CAPTION>
Inter- Segment Total Capital
Outside segment Operating Operating Expendi-
Revenues Revenues Earnings Earnings DD&A tures(a)
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
NINE MONTHS ENDED OCTOBER 31, 1999
EXPLORATION AND PRODUCTION
Operations ......................................... $ 184,272 $ -- $ 51,213 $ 43,861 $ 69,330 $ 86,489
Gain from sale of Hell's Hole area properties ...... 11,527 -- 11,527 11,527 -- --
Water well litigation provision reversal (Note 6) .. -- -- 14,000 14,000 -- --
--------- --------- --------- --------- --------- ---------
195,799 -- 76,740 69,388 69,330 86,489
--------- --------- --------- --------- --------- ---------
GAS SERVICES
Natural gas processing ............................. 266,134 65,141 34,028 31,950 2,736 21,353
Natural gas gathering and marketing ................ 184,164 178,322 21,050 18,685 7,606 16,598
Other .............................................. 7,425 -- 6,842 6,605 80 172
--------- --------- --------- --------- --------- ---------
457,723 243,463 61,920 57,240 10,422 38,123
--------- --------- --------- --------- --------- ---------
CORPORATE .......................................... -- -- -- (8,406)(b) 1,772 449
--------- --------- --------- --------- --------- ---------
$ 653,522 $ 243,463 $ 138,660 $ 118,222 $ 81,524 $ 125,061
========= ========= ========= ========= ========= =========
NINE MONTHS ENDED OCTOBER 31, 1998
EXPLORATION AND PRODUCTION
Operations ......................................... $ 169,635 $ -- $ 4,781 $ (4,264) $ 75,287 $ 215,893
Water well litigation provision reversal (Note 6) .. -- -- 4,000 4,000 -- --
--------- --------- --------- --------- --------- ---------
169,635 -- 8,781 (264) 75,287 215,893
--------- --------- --------- --------- --------- ---------
GAS SERVICES
Natural gas processing ............................. 186,745 60,852 (2,108) (4,554) 2,977 19,060
Natural gas gathering and marketing ................ 160,855 170,275 17,916 15,013 8,231 18,374
Other .............................................. 11,206 -- 10,337 10,036 80 1,061
--------- --------- --------- --------- --------- ---------
358,806 231,127 26,145 20,495 11,288 38,495
--------- --------- --------- --------- --------- ---------
CORPORATE .......................................... -- -- -- (8,616)(b) 2,143 2,114
--------- --------- --------- --------- --------- ---------
$ 528,441 $ 231,127 $ 34,926 $ 11,615 $ 88,718 $ 256,502
========= ========= ========= ========= ========= =========
THREE MONTHS ENDED OCTOBER 31, 1999
EXPLORATION AND PRODUCTION
Operations ......................................... $ 74,943 $ -- $ 29,721 $ 27,127 $ 22,625 $ 39,564
Water well litigation provision reversal (Note 6) .. -- -- 5,000 5,000 -- --
--------- --------- --------- --------- --------- ---------
74,943 -- 34,721 32,127 22,625 39,564
--------- --------- --------- --------- --------- ---------
GAS SERVICES
Natural gas processing ............................. 120,201 27,103 17,745 17,053 904 18,666
Natural gas gathering and marketing ................ 66,196 80,212 5,806 5,017 2,657 11,861
Other .............................................. 4,295 -- 4,095 4,016 27 42
--------- --------- --------- --------- --------- ---------
190,692 107,315 27,646 26,086 3,588 30,569
--------- --------- --------- --------- --------- ---------
CORPORATE .......................................... -- -- -- (3,553)(b) 574 223
--------- --------- --------- --------- --------- ---------
$ 265,635 $ 107,315 $ 62,367 $ 54,660 $ 26,787 $ 70,356
========= ========= ========= ========= ========= =========
THREE MONTHS ENDED OCTOBER 31, 1998
EXPLORATION AND PRODUCTION
Operations ......................................... $ 51,718 $ -- $ 959 $ (2,112) $ 26,402 $ 39,067
--------- --------- --------- --------- --------- ---------
GAS SERVICES
Natural gas processing ............................. 58,639 18,851 (539) (1,367) 1,014 1,970
Natural gas gathering and marketing ................ 60,283 50,449 4,755 3,769 2,426 4,012
Other .............................................. 4,694 -- 4,420 4,321 27 461
--------- --------- --------- --------- --------- ---------
123,616 69,300 8,636 6,723 3,467 6,443
--------- --------- --------- --------- --------- ---------
CORPORATE .......................................... -- -- -- (2,509)(b) 714 810
--------- --------- --------- --------- --------- ---------
$ 175,334 $ 69,300 $ 9,595 $ 2,102 $ 30,583 $ 46,320
========= ========= ========= ========= ========= =========
</TABLE>
(a) On accrual basis, including exploratory expenses and acquisitions.
(b) General corporate expenses.
-10-
<PAGE> 13
The Company's reported business segments are based on the organizational
structure used by management to assess performance and make resource allocation
decisions. The Company's three principal business segments are: exploration and
production, natural gas processing, and gas gathering and marketing. Exploration
and production segment operations include the exploration for and development
and production of natural gas and oil. Natural gas processing segment operations
include the extraction of natural gas liquids from natural gas processed at
Company- and partnership-owned processing facilities. The gas gathering and
marketing segment operates Company- and partnership-owned natural gas gathering
systems and markets natural gas through purchase and resale transactions.
During June 1999, the Company sold for cash all its oil and gas properties
in the Hell's Hole and Park Mountain fields in Colorado and Utah, which
consisted of 24,000 net leasehold acres with 36 producing wells and associated
pipelines, gathering systems and production facilities. A pretax gain of
$11,527,000 ($7,190,000 after tax) was recognized on this sale.
(8) SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid totaled $26,191,000 and $24,804,000 during the nine-month periods
ended October 31, 1999 and 1998. Income taxes paid during those periods totaled
$5,631,000 and $3,972,000. There were no significant non-cash investing or
financing activities during the nine-month periods ended October 31, 1999 and
1998.
(9) EARNINGS PER SHARE
The Company is required to make separate per-share computations for its Class A
and Class B common stock since the shares are not convertible into each other
and different per share cash dividends are paid on the separate classes. In
those computations, differences between earnings from continuing operations and
total dividends paid are apportioned between the classes on a prorata per-share
basis and then added to the respective dividends paid to each of the classes.
Accordingly, the differences in the per-share earnings amounts for Class A and
Class B shares occur because of the dividend premium on the Class B shares. The
following table sets forth basic and diluted earnings per share information for
the three- and nine-month periods ended October 31, 1999 and 1998.
<TABLE>
<CAPTION>
Three Months Nine Months
------------------------------------- -------------------------------------
1999 1998 1999 1998
----------------- ----------------- ----------------- -----------------
Class A Class B Class A Class B Class A Class B Class A Class B
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
From continuing operations ............ $ .59 $ .60 $ (.08) $ (.07) $ 1.24 $ 1.28 $ (.14) $ (.10)
Discontinued real estate operations -
Adjustment to loss on sale ........ -- -- -- -- -- -- .07 .07
------- ------- ------- ------- ------- ------- ------- -------
Net earnings .......................... $ .59 $ .60 $ (.08) $ (.07) $ 1.24 $ 1.28 $ (.07) $ (.03)
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
There was no difference in the reported basic and diluted per-share
amounts because the earnings amounts were the same in the basic and diluted
computations, and -- as shown in the table below -- the dilutive effect of stock
options did not significantly increase the weighted average shares outstanding.
The following table reconciles the weighted average shares outstanding used in
the basic and diluted computations for the three- and nine-month periods ended
October 31, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
Three Months Nine Months
------------------------------------- -------------------------------------
1999 1998 1999 1998
----------------- ----------------- ----------------- -----------------
Class A Class B Class A Class B Class A Class B Class A Class B
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Used in basic computations ............ 22,322 26,796 22,321 26,794 22,322 26,796 22,321 26,781
Dilutive effect of stock options ...... 3 277 -- -- -- 101 -- --
------ ------ ------ ------ ------ ------ ------ ------
Used in diluted computations .......... 22,325 27,073 22,321 26,794 22,322 26,897 22,321 26,781
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
Excluded from these computations because their effect would have been
antidilutive were stock options covering 857,974 Class B shares for the
three-month period ended October 31, 1999 and 73,258 Class A and 1,649,375 Class
B shares for the nine-month period then ended. For the three- and nine-month
periods ended October 31, 1998, stock options were excluded from the diluted
computations because all would have been antidilutive.
-11-
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
POSITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING INFORMATION
All statements included in this Form 10-Q, other than statements of historical
fact, are forward-looking statements. These include, but are not limited to,
strategies, goals and expectations set forth herein concerning exploration and
production and gas services operations and 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 the timing and extent of changes in commodity prices for natural gas,
NGLs and crude oil; the attainment of forecasted operating levels and reserve
replacement; Year 2000 non-readiness of third parties of business importance to
the Company; unexpected changes in competitive and economic conditions,
government regulations, technology and other factors; and the Company's ongoing
evaluation of strategic alternatives.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW. After being adversely impacted by unusually low prices for its
products in fiscal 1999 and early this year, the Company's results for the
second and third quarters of fiscal 2000 improved dramatically as energy prices
rose. Also, contributing substantially to this improvement were reductions in
costs and expenses resulting from a personnel reduction program implemented by
the Company late last year and other cost-cutting strategies it employed.
While the Company's earnings and cash flows are affected by many things,
fluctuating energy prices are clearly one of the most significant. The following
table shows the Company's quarterly average sales prices during fiscal 2000's
first nine months and for the three prior fiscal years:
<TABLE>
<CAPTION>
Crude Oil and
Natural Gas (per Mcf) Condensate (per Bbl) NGLs (per Bbl)
------------------------------- ------------------------------- --------------------------------
2000 1999 1998 1997 2000 1999 1998 1997 2000 1999 1998 1997
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First quarter.... $1.84 $2.29 $2.23 $2.27 $12.56 $13.93 $19.99 $19.45 $10.68 $11.44 $13.46 $14.15
Second quarter... 2.40 2.25 2.24 2.40 16.44 12.33 18.48 20.28 13.33 10.22 12.76 13.62
Third quarter.... 2.94 1.90 2.66 2.21 20.67 12.22 18.89 22.62 17.52 9.79 14.33 16.55
Fourth quarter... 1.99 2.71 3.65 10.25 17.02 23.39 9.27 12.93 19.97
Fiscal year...... 2.11 2.47 2.64 12.18 18.50 21.50 10.23 13.38 16.13
</TABLE>
After being relatively strong in fiscal 1997 and 1998, prices fell throughout
fiscal 1999 to low points not seen for oil and NGLs since 1986. The depressed
NGL prices, coupled with the relatively higher natural gas prices, caused the
Company's normally very profitable gas processing activities to report segment
operating losses for the second, third and fourth quarters of fiscal 1999. The
depressed energy price environment led to fiscal 1999 fourth quarter impairments
of certain oil and gas proved properties - primarily oil fields - and gas
services assets. Subsequently, prices strengthened substantially in fiscal
2000's second and third quarters.
While the Company's operating plans are not generally modified in response
to normal volatility in energy prices, the downward price swings were so extreme
during fiscal 1999's last half that they could not be ignored. Accordingly,
after taking many actions early in fiscal 1999 to grow its energy businesses,
the Company found it necessary late in that year to curtail capital spending and
to take various steps, including a personnel reduction program, to sharply
reduce operating costs. Those actions were taken to enhance the Company's
profitability and to bring its cash outflows more in line with its
price-dampened revenues and thus mitigate the need for incremental borrowings
going forward.
-12-
<PAGE> 15
The Company went into fiscal 2000 well-positioned to operate in a
low-energy-price environment and conducted its activities on that basis
throughout the first half of the year. Capital spending was intentionally
deferred causing natural gas production levels to cease their growth and to fall
somewhat. The nature of the Company's properties and its large backlog of
undrilled well locations make it possible for development drilling activity and
capital spending levels to be quickly raised or lowered. As the outlook for
energy prices improved in the first half of fiscal 2000, the Company began
taking steps to substantially increase its development drilling and well
recompletion programs.
On October 6, 1999, the Company announced that its Board of Directors had
engaged the investment banking firms of Goldman, Sachs & Co. and Chase
Securities Inc. to advise the Company regarding strategic alternatives,
including possible transactions that might result in a sale or merger. At this
time, no decision has been made regarding whether such a transaction will be
entered into or whether the Company will continue to operate as an independent
corporation. Regardless of the ultimate outcome, the Company is aggressively
taking actions to grow its core energy businesses with the goal of adding to
stockholder value.
CAPITAL AND EXPLORATORY EXPENDITURES. A comparison of the Company's original and
revised budgets for fiscal 2000 capital and exploratory expenditures and its
actual spending for the indicated periods follows (in millions):
<TABLE>
<CAPTION>
Actual Expenditures
Through October 31, 1999
------------------------------------
Fiscal 2000 Budget
---------------------- First Third
Original Revised Half Quarter Total
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Exploration and production ...... $ 112.4 $ 137.8 $ 46.9 $ 39.6 $ 86.5
Gas services .................... 21.0 26.3 7.6 6.7 14.3
Corporate ....................... 2.8 2.8 .2 .2 .4
-------- -------- -------- -------- --------
136.2 166.9 54.7 46.5 101.2
Acquisition of 50% interest
in Jameson facilities ......... -- 23.8 -- 23.8 23.8
-------- -------- -------- -------- --------
$ 136.2 $ 190.7 $ 54.7 $ 70.3 $ 125.0
======== ======== ======== ======== ========
</TABLE>
The Company's fiscal 2000 budget originally was set at $136.2 million, 32%
below the $200.1 million spent in the prior year and roughly in line with the
reduced spending pace adopted for fiscal 1999's last half. During much of fiscal
2000's first half, capital spending was intentionally restrained to keep the
Company's cash outflows in line with its inflows. However, in response to
improving prices, steps began to be taken during the second quarter to increase
activity. The budget was adjusted upward in August, and after a subsequent
addition to cover an acquisition, the revised fiscal 2000 capital budget totals
$190.7 million as shown in the table above. Exploration and production
expenditures for development drilling and well recompletion programs in the
Barnett Shale play in North Texas increased dramatically in the third quarter.
Capital expenditures are expected to rise further in the fourth quarter with the
addition of a fifth rig in the Barnett Shale area of North Texas and a third rig
in the North Personville area of East Texas. The Company's natural gas
production reached 250,000 Mcf per day early in November 1999, ahead of the
previously established target to accomplish this.
In gas services, substantial improvements involving the Bridgeport gas
processing plant and the North Texas gathering system were completed in the
third quarter. And, in October, the Company acquired its partner's 50% interest
in the Jameson facilities. These actions, together with drilling-related
increases in gas throughput, had increased the Company's NGL production volumes
to almost 52,000 barrels per day by mid-November. Additional projects, involving
the North Texas, Vanderbilt and Monco systems and the Bridgeport plant, are
scheduled for completion during the fourth quarter that should further add to
the throughput and production volumes of the Company's pipelines and gas
processing plants.
-13-
<PAGE> 16
FINANCING MATTERS. The parent company has a $250 million bank revolving credit
facility and a $25 million bank money-market facility. At October 31, 1999,
borrowings of $80 million were outstanding under these facilities. The Company's
fiscal 2000 liquidity needs have been funded using cash inflows from operations
and proceeds from non-strategic asset sales; furthermore, at October 31, 1999
outstanding debt was $68.2 million lower than at the beginning of the year.
The Company retired $100 million of 8% senior notes that matured on July
15, 1999 using borrowings under its revolving credit facility and available
cash. While the Company has no immediate plans to issue additional senior notes
or to increase the size of its bank revolving credit facility, it has the
borrowing capacity to do so should business opportunities arise that require
funding in excess of the $170 million available under the existing bank credit
facility.
NORTH TEXAS WATER WELL LITIGATION. See Note 6 of Notes to Unaudited Consolidated
Financial Statements for information concerning this litigation and recoveries
of defense costs under agreements with the Company's insurance carriers.
Reimbursement agreements were reached with two carriers late in March 1999,
which led to the recording of a $9 million reversal of previous litigation
provisions in April 1999. In October 1999, an agreement was reached with another
carrier and an additional $5 million reversal was recorded. Negotiations
continue with one remaining carrier which should be completed during the fourth
quarter.
DISCLOSURES ABOUT MARKET RISK. The Company's major market risk exposure involves
prices for crude oil, natural gas and NGLs. Realized prices for these products
are driven primarily by prevailing world crude oil and domestic natural gas
markets. Such markets historically have been volatile (see the table on page 12,
for example), and this is expected to continue. In general, a $1.00 change in
the per-barrel price of oil, together with an equivalent change in the prices
for natural gas and NGLs based on Btu content (16.7 cents for gas and 67 cents
for NGLs), changes the Company's annual segment operating earnings and cash
flows by approximately $23 million and its after-tax annual net earnings by
almost $15 million.
The Company is partially hedged with respect to natural gas prices since
besides being a seller it also purchases gas in connection with its gas
processing operations (such purchases generally equal from 35% to 40% of gas
sales). Since it has this "natural" hedge, the Company only infrequently enters
into hedging transactions to manage its exposure to price fluctuations. It does
not hold or issue derivative instruments for trading purposes. The Company had
no open hedging positions at October 31, 1999, and its hedging activity during
the last three years was not significant.
The Company's exposure to changing interest rates is limited since
approximately 80% of its outstanding debt at October 31, 1999 consisted of
senior notes with fixed interest rates.
YEAR 2000 ISSUE. Like others, the Company is facing computer systems problems
caused by the approaching turn of the century, which has been dubbed the "Year
2000 problem." In addition to affecting mainframe and mid-range computer
systems, this problem potentially impacts computer chips integrated into
security, plant automation and pipeline control systems. Beginning in late 1996,
the Company conducted a study to determine the Year 2000 readiness of its
mainframe and mid-range financial and operating systems and established a
timetable for reprogramming, replacing and testing these systems to see that
they properly recognize dates subsequent to December 31, 1999. This work now has
been substantially completed. Since this work was accomplished principally by
reallocating internal resources, the Company did not incur incremental costs
that significantly impacted its results of operations or cash flows. Through
October 31, 1999, third party costs totaling $767,000 had been incurred in this
regard out of total estimated costs of less than $850,000.
During August 1998, the Company completed an inventory of embedded chips
integrated into its security, plant automation and pipeline control systems. As
part of this process, the Company ranked the facilities containing embedded
chips in order of importance and contacted equipment vendors to determine the
steps necessary to make the equipment in which they are installed capable of
operating properly after December 31, 1999. Testing and upgrade of the
facilities categorized as important have been completed. Third party costs
generally were not incurred in connection with these efforts.
-14-
<PAGE> 17
Through communications with industry partners and others, the Company is
also evaluating the risks presented by potential Year 2000 non-compliance of
third parties. Since such risks vary substantially, companies are being
contacted based on the estimated magnitude of the risk posed to the Company by
their potential Year 2000 non-readiness. The Company is currently not aware of
any situations where material disruptions of its business activities are likely
because of the Year 2000 non-readiness of third parties.
The Company believes that its computer systems and its security, plant
automation and pipeline control systems are Year 2000 ready, and it expects
"business as usual" in early January. There can be no guarantee that this is the
case, however, nor can there be any guarantee that the Year 2000 non-readiness
of third parties of business importance to the Company will not adversely affect
its operations in a future period. Although it is not currently aware of any
such situations, the Company is developing contingency plans to alter business
relationships in the event of such non-readiness.
OPERATING STATISTICS
Certain operating statistics (including proportional interests in equity
partnerships, where applicable) for the three- and nine-month periods ended
October 31, 1999 and 1998 follow:
<TABLE>
<CAPTION>
Three Months Nine Months
---------------------- ----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
AVERAGE DAILY VOLUMES
Natural gas sales (Mcf) .................... 237,500 250,200 239,400 247,300
Crude oil and condensate sales (Bbls) ...... 5,700 6,800 5,800 6,800
Natural gas liquids produced (Bbls) ........ 44,200 41,900 43,300 42,700
Pipeline throughput (Mcf) .................. 563,000 567,000 529,000 558,000
AVERAGE SALES PRICES
Natural gas (per Mcf) ...................... $ 2.94 $ 1.90 $ 2.39 $ 2.14
Crude oil and condensate (per Bbl) ......... 20.67 12.22 16.49 12.82
Natural gas liquids produced (per Bbl) ..... 17.52 9.79 13.93 10.50
</TABLE>
EARNINGS FROM CONTINUING OPERATIONS - NINE MONTHS ENDED OCTOBER 31, 1999
COMPARED WITH NINE MONTHS ENDED OCTOBER 31, 1998
Earnings from continuing operations for the nine-month periods ended October 31,
1999 and 1998 - both before and after unusual items - are summarized in the
table on the following page. Earnings from continuing operations for fiscal
2000's first nine months totaled $61.9 million, which compares with a loss of
$5.7 million during the comparable prior-year period. Exclusive of unusual
items, fiscal 2000 after-tax earnings totaled $46.0 million compared with the
prior-year period's loss of $8.2 million. Improved energy prices, lower
geological and geophysical expenses and reduced personnel and other operating
costs were the principal reasons for the year-to-year earnings turnaround.
-15-
<PAGE> 18
The following table and discussion identify and explain the major
increases (decreases) in earnings from continuing operations for the nine-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 1999 AMOUNTS AFTER UNUSUAL ITEMS ..................... $ 8.8 $ 26.2 $ (44.5) $ (9.5) $ (5.7)
ELIMINATE IMPACT OF FISCAL 1999 UNUSUAL ITEM -
Water well litigation provision reversals (see page 9) ... (4.0) -- -- (4.0) (2.5)
-------- -------- -------- -------- --------
FISCAL 1999 AMOUNTS BEFORE UNUSUAL ITEMS .................... 4.8 26.2 (44.5) (13.5) (8.2)
-------- -------- -------- -------- --------
MAJOR INCREASES (DECREASES)
Higher natural gas sales price .............................. 15.9 -- -- 15.9 10.3
Lower natural gas sales volume .............................. (2.4) -- -- (2.4) (1.6)
Higher oil and condensate sales price ....................... 5.7 -- -- 5.7 3.7
Lower oil and condensate sales volume ....................... (1.9) -- -- (1.9) (1.2)
Reduced geological and geophysical expenses ................. 15.3 -- -- 15.3 9.9
Decreased exploratory well impairments ($.8 versus $3.6) .... 2.8 -- -- 2.8 1.8
Higher NGL margins .......................................... -- 22.9 -- 22.9 14.9
Increased NGL marketing earnings ............................ -- 5.3 -- 5.3 3.4
Operating expenses
Salary and benefits savings from personnel reductions .... 4.5 4.1 2.7 11.3 7.3
Lower repairs and maintenance and other .................. 3.6 1.2 -- 4.8 2.5
Performance unit expense accruals ........................... .8 .4 .4 1.6 1.0
Interest expense incurred ................................... -- -- (.5) (.5) (.3)
Other, net .................................................. 2.1 1.8 (1.3) 2.6 2.5
-------- -------- -------- -------- --------
46.4 35.7 1.3 83.4 54.2
-------- -------- -------- -------- --------
FISCAL 2000 AMOUNTS BEFORE UNUSUAL ITEMS .................... 51.2 61.9 (43.2) 69.9 46.0
-------- -------- -------- -------- --------
Gain from sale of Hell's Hole
area properties (see page 11) ............................ 11.5 -- -- 11.5 7.2
Water well litigation provision reversals (see page 9) ...... 14.0 -- -- 14.0 8.7
-------- -------- -------- -------- --------
25.5 -- -- 25.5 15.9
-------- -------- -------- -------- --------
FISCAL 2000 AMOUNTS AFTER UNUSUAL ITEMS ..................... $ 76.7 $ 61.9 $ (43.2) $ 95.4 $ 61.9
======== ======== ======== ======== ========
</TABLE>
- -------------------------------------------------------------
*Includes general and administrative expense and other expense.
EXPLORATION AND PRODUCTION OVERVIEW
Exclusive of unusual items, exploration and production segment operating
earnings of $51.2 million during fiscal 2000's first nine months were $46.4
million higher than those of the comparable prior-year period. This improvement
was principally due to higher prices for natural gas and oil and reductions in
geological and geophysical and operating expenses. These period-to-period
earnings improvements were reduced somewhat by the impact of lower production
volumes for natural gas and oil which occurred because of price-related
curtailments of drilling activity during the last half of fiscal 1999 and the
first half of the current year.
HIGHER NATURAL GAS SALES PRICE ($15.9 MILLION INCREASE). During the first nine
months of fiscal 2000, the Company's natural gas sales price averaged $2.39 per
Mcf, $.25 (12%) above the prior period's $2.14, increasing operating earnings by
$15.9 million.
-16-
<PAGE> 19
LOWER NATURAL GAS SALES VOLUME ($2.4 MILLION DECREASE). Natural gas sales
averaged 239.4 MMcf per day during fiscal 2000's first nine months, 3% lower
than the 247.3 MMcf of the comparable prior-year period, reducing operating
earnings by $2.4 million.
HIGHER OIL AND CONDENSATE SALES PRICE ($5.7 MILLION INCREASE). The Company's
sales price for oil and condensate averaged $16.49 per barrel during fiscal
1999's first nine months, up $3.67 from the prior period's $12.82, increasing
operating earnings by $5.7 million.
LOWER OIL AND CONDENSATE SALES VOLUME ($1.9 MILLION DECREASE). Production of oil
and condensate during the first nine months of fiscal 2000 declined 1,000
barrels per day (15%) to 5,800, reducing operating earnings by $1.9 million.
LOWER GEOLOGICAL AND GEOPHYSICAL EXPENSES ($15.3 MILLION INCREASE). During the
first nine months of fiscal 2000, geological and geophysical expenses totaled
$4.3 million versus $19.6 million during the comparable prior-year period,
improving operating earnings by $15.3 million. During the prior year, the
Company undertook an aggressive 3-D seismic program which was not repeated in
fiscal 2000.
GAS SERVICES OVERVIEW
Gas services operating earnings rose $35.7 million to $61.9 million during the
first nine months of fiscal 2000 principally due to price-related improvements
in gas processing margins and to reductions in personnel costs and other
operating expenses.
IMPROVED NGL MARGINS ($22.9 MILLION INCREASE). The average price for NGLs
produced during fiscal 2000's first nine months of $13.93 per barrel was 33%
above the prior-year period's $10.50, improving NGL revenues by $38.9 million.
Because of the impact of higher NGL and natural gas prices on producer payments
and gas shrinkage costs, feedstock costs also increased, resulting in a net
margin improvement of $22.9 million.
INCREASED NGL MARKETING EARNINGS ($5.3 MILLION INCREASE). Because of the passage
of time between the production of NGLs and the sale of fractionated products,
NGL marketing operations generally benefit from rising product prices. NGL
prices rose almost steadily during the first nine months of the current year
(particularly in the third quarter) after declining during much of the
comparable prior-year period, causing a $5.3 million period-to-period increase
in NGL marketing earnings.
OTHER
PERSONNEL-REDUCTION-RELATED SALARY AND BENEFIT SAVINGS ($11.3 MILLION INCREASE).
These savings occurred because of the personnel reduction program implemented
during fiscal 1999's fourth quarter.
PERFORMANCE UNIT EXPENSE ACCRUALS ($1.6 MILLION INCREASE). In December 1997, the
Company awarded performance units to mid-level managerial and professional
employees. Holders of these units on March 31, 1999 received cash compensation
equal to the closing price of the Company's Class B common stock on that date
times the number of units awarded them. Compensation expense accruals - which
totaled $.4 million during fiscal 2000 - were $1.6 million less than the
accruals during the first nine months of the prior year.
INTEREST EXPENSE INCURRED ($.5 MILLION DECREASE). Interest expense incurred,
which includes fees attributable to an accounts receivable securitization
program begun in fiscal 1999's fourth quarter, rose $.5 million during the first
nine months of fiscal 2000. The fees under the securitization program
essentially offset interest savings attributable to the fiscal 2000's lower
average long-term debt balances.
-17-
<PAGE> 20
EARNINGS FROM CONTINUING OPERATIONS - THREE MONTHS ENDED OCTOBER 31, 1999
COMPARED WITH THREE MONTHS ENDED OCTOBER 31, 1998
Earnings from continuing operations for the three-month periods ended October
31, 1999 and 1998 - both before and after unusual items - are summarized in the
table which follows. Net earnings for fiscal 2000's third quarter totaled $29.5
million, which compares with a loss of $3.7 million in the comparable prior-year
period. Excluding the effects of an unusual item, the current quarter's earnings
totaled $26.4 million. The quarter-to-quarter earnings improvement was
principally the result of an increase in the average natural gas sales price and
price-related improvements in NGL margins.
The following table and discussion identify and explain the major
increases (decreases) in earnings from continuing operations 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 1999 AMOUNTS (before and after unusual items) ........ $ 1.0 $ 8.6 $ (15.9) $ (6.3) $ (3.7)
----------- ------- -------- -------- --------
MAJOR INCREASES (DECREASES)
Higher natural gas sales price .............................. 21.8 -- -- 21.8 14.2
Higher oil and condensate sales price ....................... 4.2 -- -- 4.2 2.7
Improved NGL margins ........................................ -- 15.4 -- 15.4 10.0
Increased NGL marketing earnings (see page 17) .............. -- 1.7 -- 1.7 1.1
Salary and benefits savings from personnel reductions ....... 1.8 1.3 1.1 4.2 2.7
Interest expense incurred ................................... -- -- 1.3 1.3 .8
Other (income) expense, net ................................. -- -- (1.8) (1.8) (1.2)
Other, net .................................................. .9 .7 (1.4) .2 (.2)
----------- -------- -------- -------- --------
28.7 19.1 (.8) 47.0 30.1
----------- -------- -------- -------- --------
FISCAL 2000 AMOUNTS BEFORE UNUSUAL ITEMS .................... 29.7 27.7 (16.7) 40.7 26.4
Water well litigation provision reversal (see page 9) ....... 5.0 -- -- 5.0 3.1
----------- -------- -------- -------- --------
FISCAL 2000 AMOUNTS AFTER UNUSUAL ITEMS ..................... $ 34.7 $ 27.7 $ (16.7) $ 45.7 $ 29.5
=========== ======== ======== ======== ========
</TABLE>
- -------------------------------------------------------------
*Includes general and administrative expense and other expense.
EXPLORATION AND PRODUCTION OVERVIEW
Exclusive of unusual items, exploration and production segment operating
earnings of $29.7 million during fiscal 2000's third quarter were $28.7 million
above those of the comparable prior-year period principally because of increased
average sales prices for natural gas and oil and condensate.
HIGHER NATURAL GAS SALES PRICE ($21.8 MILLION INCREASE). During fiscal 2000's
third quarter, the Company's natural gas sales price averaged $2.94 per Mcf,
$1.04 (55%) above the prior-year period's $1.90, increasing operating earnings
by $21.8 million.
HIGHER OIL AND CONDENSATE SALES PRICE ($4.2 MILLION INCREASE). The Company's
sales price for oil and condensate averaged $20.67 per barrel during fiscal
2000's third quarter, up from the prior period's $12.22, increasing operating
earnings by $4.2 million.
-18-
<PAGE> 21
GAS SERVICES OVERVIEW
Gas services operating earnings rose $19.1 million to $27.7 million during the
third quarter of fiscal 2000. This occurred principally because of price-related
increases in gas processing margins and NGL marketing earnings.
IMPROVED NGL MARGINS ($15.4 MILLION INCREASE). The average price for NGLs
produced during fiscal 2000's third quarter of $17.52 per barrel was 79% above
the prior-year period's $9.79, increasing NGL revenues by $29.5 million. Because
of the impact of the period's higher NGL and natural gas prices on producer
payments and gas shrinkage costs, feedstock costs were also higher, resulting in
a net margin improvement of $15.4 million.
OTHER (INCOME) EXPENSE, NET ($1.8 MILLION DECREASE). This unfavorable
quarter-to-quarter variance was principally due to lower earnings from venture
capital investments ($.8 million) and reduced earnings from Rabbi trust
investments ($.5 million).
-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) No reports were filed on Form 8-K during the nine-month period
ended October 31, 1999.
-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 6, 1999 By /s/ Philip S. Smith
---------------------------------------
Philip S. Smith
Senior Vice President - Administration
and Chief Financial Officer
-21-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-END> OCT-31-1999
<CASH> 20,575
<SECURITIES> 0
<RECEIVABLES> 36,857
<ALLOWANCES> 303
<INVENTORY> 11,162
<CURRENT-ASSETS> 76,087
<PP&E> 2,520,634
<DEPRECIATION> 1,476,706
<TOTAL-ASSETS> 1,152,369
<CURRENT-LIABILITIES> 149,769
<BONDS> 394,267
0
0
<COMMON> 5,386
<OTHER-SE> 362,650
<TOTAL-LIABILITY-AND-EQUITY> 1,152,369
<SALES> 653,522
<TOTAL-REVENUES> 653,522
<CGS> 0
<TOTAL-COSTS> 514,862
<OTHER-EXPENSES> 17,215
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25,977
<INCOME-PRETAX> 95,468
<INCOME-TAX> 33,519
<INCOME-CONTINUING> 61,949
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 61,949
<EPS-BASIC> 1.24
<EPS-DILUTED> 1.24
<FN>
<F1>CLASS A BASIC 1.24
CLASS B BASIC 1.28
<F2>CLASS A DILUTED 1.24
CLASS B DILUTED 1.28
</FN>
</TABLE>
