<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, 2000
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, 2000............ 49,296,853
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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................................................. 11
Part II - Other Information
Item 1. Legal Proceedings...................................................................... 18
Item 2. Changes in Securities.................................................................. 18
Item 4. Submission of Matters to Vote of Security Holders...................................... 18
Item 5. Other Information...................................................................... 19
Item 6. Exhibits and Reports on Form 8-K....................................................... 19
</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, "Tcf" means trillion cubic feet, "Bbl" means barrel, "MMBbls" means
million barrels, "NGL" or "NGLs" means natural gas liquids, "fiscal 2000" and
"fiscal 2001" refer, respectively, to the 12-month periods ended January 31,
2000 and 2001 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 and
pipeline throughput include 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 dis closures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States
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 2000 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,
2000 2000
----------- -----------
ASSETS (unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents ...................................................... $ 15,491 $ 15,957
Trade receivables .............................................................. 97,723 46,103
Inventories .................................................................... 13,498 7,178
Other .......................................................................... 9,243 6,194
----------- -----------
Total current assets ...................................................... 135,955 75,432
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, at cost less accumulated depreciation,
depletion and amortization of $1,531,446 and $1,492,640
Exploration and production
Oil and gas properties ....................................................... 729,738 694,064
Support equipment and facilities ............................................. 12,645 13,025
Gas services (including investments in equity partnerships) (Note 2)
Natural gas processing ....................................................... 83,983 105,489
Natural gas gathering ........................................................ 171,979 153,834
Other ........................................................................ 90,777 85,243
Corporate ...................................................................... 3,132 3,784
----------- -----------
1,092,254 1,055,439
----------- -----------
LONG-TERM INVESTMENTS AND OTHER ASSETS ......................................... 38,110 37,197
----------- -----------
$ 1,266,319 $ 1,168,068
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Oil and gas proceeds payable ................................................... $ 120,201 $ 83,526
Accounts payable ............................................................... 41,114 36,411
Accrued liabilities ............................................................ 45,927 32,345
----------- -----------
Total current liabilities ................................................. 207,242 152,282
----------- -----------
LONG-TERM DEBT (Note 3) ........................................................ 314,267 369,267
----------- -----------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes .......................................................... 188,163 161,338
Retirement obligations ......................................................... 69,153 70,411
Deferred income and other ...................................................... 15,040 16,228
----------- -----------
272,356 247,977
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS' EQUITY
Preferred stock, $.10 par value (authorized 10,000,000 shares; none issued)
Common stock, $.10 par value (authorized 200,000,000 shares) ................... 5,386 5,386
Additional paid-in capital ..................................................... 143,337 143,636
Retained earnings .............................................................. 431,639 359,603
Other comprehensive loss ....................................................... (5,933) (5,933)
Treasury stock, at cost ........................................................ (101,975) (104,150)
----------- -----------
472,454 398,542
----------- -----------
$ 1,266,319 $ 1,168,068
=========== ===========
</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 Six Months
Ended July 31 Ended July 31
------------------------ ------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES
Exploration and production (including a gain of $11,527
from sale of Hell's Hole area properties in the 1999 periods) ..... $ 125,553 $ 74,107 $ 215,330 $ 120,856
Gas services (including a gain of $4,884 from an
asset sale in the first quarter of 2000) (Note 2) ................. 277,262 153,824 503,266 267,031
--------- --------- --------- ---------
402,815 227,931 718,596 387,887
--------- --------- --------- ---------
OPERATING COSTS AND EXPENSES
Exploration and production (net of a litigation
provision reversal of $9,000 in 1999's first quarter) (Note 6) .... 60,908 43,398 112,495 78,837
Gas services ......................................................... 239,417 131,045 426,393 232,757
--------- --------- --------- ---------
300,325 174,443 538,888 311,594
--------- --------- --------- ---------
SEGMENT OPERATING EARNINGS (Note 6) .................................. 102,490 53,488 179,708 76,293
General and administrative expense ................................... 8,947 6,462 15,954 12,731
--------- --------- --------- ---------
TOTAL OPERATING EARNINGS ............................................. 93,543 47,026 163,754 63,562
--------- --------- --------- ---------
OTHER EXPENSE
Interest expense ..................................................... 7,142 8,863 14,770 17,902
Other (income) expense, net .......................................... (533) (2,505) (2,465) (4,111)
--------- --------- --------- ---------
6,609 6,358 12,305 13,791
--------- --------- --------- ---------
EARNINGS BEFORE INCOME TAXES ......................................... 86,934 40,668 151,449 49,771
INCOME TAXES (Note 4) ................................................ 31,487 13,861 54,347 17,280
--------- --------- --------- ---------
NET EARNINGS ......................................................... $ 55,447 $ 26,807 $ 97,102 $ 32,491
========= ========= ========= =========
EARNINGS PER SHARE (Note 9)
Basic ................................................................ $ 1.13 $ .55 $ 1.97 $ .66
Diluted .............................................................. 1.11 .55 1.96 .66
AVERAGE COMMON SHARES OUTSTANDING (Basic) ............................ 49,209 49,118 49,167 49,118
</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, 2000
(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, 2000 ............................. $ 398,542 $ 5,386 $ 143,636 $ 359,603 $ (5,933) $(104,150)
Net earnings .......................................... 97,102 -- -- 97,102 -- --
Regular cash dividends (25.25 cents per share
on Class A and 26.5 cents per share on Class B) .... (12,755) -- -- (12,755) -- --
Special cash dividends (25 cents per share
on both Class A and Class B) ....................... (12,311) -- -- (12,311) -- --
Treasury stock purchases .............................. (2,239) -- -- -- -- (2,239)
Exercises of stock options ............................ 4,115 -- (299) -- -- 4,414
--------- --------- --------- --------- --------- ---------
BALANCE, JULY 31, 2000 ................................ $ 472,454 $ 5,386 $ 143,337 $ 431,639 $ (5,933) $(101,975)
========= ========= ========= ========= ========= =========
</TABLE>
---------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock Issued Treasury Stock Total
--------------------------- -------------------------- Shares
SHARE AMOUNTS Class A Class B Class A Class B Outstanding
------------- ---------- ----------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 31, 2000 ..... 23,978,072 29,878,072 1,656,437 3,082,450 49,117,257
Treasury stock purchases ...... -- -- 24,200 32,000 (56,200)
Exercises of stock options .... -- -- (3,000) (167,642) 170,642
Other ......................... (2) (2) -- -- (4)
Reclassification of common
stock (Note 8) ............. 29,878,070 (29,878,070) 2,946,808 (2,946,808) --
Treasury stock purchases ...... -- -- 26,600 -- (26,600)
Exercises of stock options .... -- -- (21,745) -- 21,745
---------- ----------- --------- ---------- ----------
BALANCE, JULY 31, 2000 ........ 53,856,140 -- 4,629,300 -- 49,226,840
========== =========== ========= ========== ==========
</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
------------------------
2000 1999
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings ................................................................. $ 97,102 $ 32,491
Adjustments to reconcile net earnings to
cash provided by operating activities
Depreciation, depletion and amortization ............................... 69,098 54,737
Deferred income taxes .................................................. 27,394 9,847
Exploration expenses (including exploratory well impairments) .......... 6,165 3,764
Distributions in excess of (less than) earnings of equity investees .... (1,560) 3,348
Gains from sales of assets (Notes 2 and 6) ............................. (4,884) (11,527)
Litigation provision reversal .......................................... -- (9,000)
Other, net ............................................................. (2,730) (6,901)
--------- ---------
190,585 76,759
Changes in operating assets and liabilities ............................ (11,466) 17,605
--------- ---------
Cash provided by operating activities .................................. 179,119 94,364
--------- ---------
INVESTING ACTIVITIES
Capital and exploratory expenditures
Total on accrual basis .................................................... (123,497) (54,705)
Adjustment to cash basis .................................................. 6,603 (3,484)
--------- ---------
(116,894) (58,189)
Proceeds from sales of assets ................................................ 15,534 34,681
Other, net ................................................................... 534 2,976
--------- ---------
Cash used for investing activities ..................................... (100,826) (20,532)
--------- ---------
FINANCING ACTIVITIES
Debt repayments .............................................................. (55,000) (100,000)
Proceeds from issuance of debt ............................................... -- 37,800
Cash dividends ............................................................... (25,066) (12,458)
Other ........................................................................ 1,307 (317)
--------- ---------
Cash used for financing activities ..................................... (78,759) (74,975)
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............................. (466) (1,143)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ............................... 15,957 20,300
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD ..................................... $ 15,491 $ 19,157
========= =========
</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
July 31, 2000
(1) ACCOUNTING POLICIES
Mitchell Energy & Development Corp. and its majority-owned subsidiaries (the
"Company") constitute 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 accounting
principles generally accepted in the United States 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 six-month periods ended July 31, 2000 and 1999.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" in June 1998. The statement, which the Company must adopt for fiscal
2002, generally requires that derivatives be recognized at fair value as assets
or liabilities and that changes in fair value be recorded in earnings or other
comprehensive income. The Company's infrequent use of derivatives makes it
unlikely that the adoption of this statement will have a significant impact on
its financial position or results of operations.
-6-
<PAGE> 9
(2) PARTNERSHIP INVESTMENTS
A summary of the Company's net investments in partnerships at July 31, 2000 and
January 31, 2000 and its equity in their pretax earnings for the six-month
periods ended July 31, 2000 and 1999 follows (in thousands):
<TABLE>
<CAPTION>
Equity in
Net Investment Pretax Earnings
------------------------- ------------------------
Percent July 31, January 31, July 31, July 31,
Owned 2000 2000 2000 1999
------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
NATURAL GAS PROCESSING
C&L Processors Partnership (C&L) ............ 50* $ -- $ 25,016 $ 1,038 $ 903
U.P. Bryan Plant ............................ 45* -- 2,091 3,115 2,939
--------- --------- --------- ---------
-- 27,107 4,153 3,842
--------- --------- --------- ---------
GAS GATHERING AND MARKETING
Austin Chalk Natural Gas
Marketing Services (Austin Chalk) ........ 45* -- 163 (253) 897
Ferguson-Burleson County Gas Gath-
ering System (Ferguson-Burleson) ......... 45* -- 35,744 34 2,707
Louisiana Chalk Gathering System ............ 50 15,389 15,904 (515) (477)
Others ...................................... 571 501 70 59
--------- --------- --------- ---------
15,960 52,312 (664) 3,186
--------- --------- --------- ---------
OTHER
Belvieu Environmental Fuels ................. 33.33 61,345 54,988 13,059 2,401
Gulf Coast Fractionators .................... 38.75 27,938 28,709 1,407 878
--------- --------- --------- ---------
89,283 83,697 14,466 3,279
--------- --------- --------- ---------
$ 105,243 $ 163,116 $ 17,955 $ 10,307
========= ========= ========= =========
</TABLE>
----------
* Prior to the asset exchange on March 31, 2000 discussed below.
For the applicable periods, the Company's net investment in 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 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 for approximately $23,900,000, and the Jameson facilities
became wholly owned and ceased being reported as part of C&L's operations
effective October 1, 1999.
On March 31, 2000, the Company exchanged its share of the gathering and
processing assets of C&L (non- operated Oklahoma facilities having a net book
value of $26,946,000) for Duke Energy Field Services, Inc.'s share of the
Company-operated gathering and processing assets of the U.P. Bryan Plant, Austin
Chalk and Ferguson-Burleson partnerships and $11,666,000 in cash. Each of the
four partnerships distributed all of their operating assets to their partners
prior to the exchange and ceased operations. A gain of $4,884,000 was recognized
in connection with the exchange.
Summarized earnings information (on a 100% basis) for these entities for
the three- and six-month periods ended July 31, 2000 and 1999 follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Six Months
--------------------- ---------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues ..................... $ 96,684 $148,312 $225,558 $268,185
Operating earnings ........... 25,791 17,993 44,004 32,280
Pretax earnings .............. 26,001 16,693 44,152 24,839
</TABLE>
-7-
<PAGE> 10
(3) LONG-TERM DEBT
At July 31, 2000, 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. No amounts were outstanding under a $250,000,000
bank revolving credit facility. 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 $195,912,000 at July 31, 2000.
(4) INCOME TAXES
Income taxes for the six-month periods ended July 31, 2000 and 1999 consisted of
the following (in thousands):
<TABLE>
<CAPTION>
2000 1999
------- -------
<S> <C> <C>
Current - Federal ............ $26,780 $ 7,317
State .............. 173 116
------- -------
26,953 7,433
------- -------
Deferred - Federal ........... 23,388 8,787
State ............. 4,006 1,060
------- -------
27,394 9,847
------- -------
$54,347 $17,280
======= =======
</TABLE>
Estimated annual tax rates of 35.9% and 34.7%, respectively, were used in
computing the income tax provisions for the six-month periods ended July 31,
2000 and 1999. The differences between those rates and the 35% statutory Federal
income tax rate were principally the result of the interplay of Federal tax
credits and charges for state income taxes.
(5) COMMITMENTS AND CONTINGENCIES
The Company is party to 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.
-8-
<PAGE> 11
(6) 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>
SIX MONTHS ENDED JULY 31, 2000
Exploration and Production ....................... $ 215,330 $ -- $ 102,835 $ 98,366 $ 55,867 $ 102,144
--------- --------- --------- --------- --------- ---------
GAS SERVICES
Natural gas processing ........................... 308,478 92,069 42,649 41,134 3,170 6,224
Natural gas gathering and marketing .............. 175,428 246,149 15,237 13,552 9,190 14,739
Other ............................................ 14,476 -- 14,103 13,970 53 154
Gain from an asset sale (Note 2) ................. 4,884 -- 4,884 4,884 -- --
--------- --------- --------- --------- --------- ---------
503,266 338,218 76,873 73,540 12,413 21,117
--------- --------- --------- --------- --------- ---------
CORPORATE ........................................ -- -- -- (8,152)(b) 818 236
--------- --------- --------- --------- --------- ---------
$ 718,596 $ 338,218 $ 179,708 $ 163,754 $ 69,098 $ 123,497
========= ========= ========= ========= ========= =========
SIX MONTHS ENDED JULY 31, 1999
EXPLORATION AND PRODUCTION
Operations ....................................... $ 109,329 $ -- $ 21,492 $ 16,734 $ 46,705 $ 46,925
Gain on sale of Hell's Hole area properties ...... 11,527 -- 11,527 11,527 -- --
Water well litigation provision reversal ......... -- -- 9,000 9,000 -- --
--------- --------- --------- --------- --------- ---------
120,856 -- 42,019 37,261 46,705 46,925
--------- --------- --------- --------- --------- ---------
GAS SERVICES
Natural gas processing ........................... 145,933 38,038 16,283 14,897 1,832 2,687
Natural gas gathering and marketing .............. 117,968 98,110 15,244 13,668 4,949 4,737
Other ............................................ 3,130 -- 2,747 2,589 53 130
--------- --------- --------- --------- --------- ---------
267,031 136,148 34,274 31,154 6,834 7,554
--------- --------- --------- --------- --------- ---------
CORPORATE ........................................ -- -- -- (4,853)(b) 1,198 226
--------- --------- --------- --------- --------- ---------
$ 387,887 $ 136,148 $ 76,293 $ 63,562 $ 54,737 $ 54,705
========= ========= ========= ========= ========= =========
THREE MONTHS ENDED JULY 31, 2000
Exploration and Production ....................... $ 125,553 $ -- $ 64,645 $ 62,462 $ 28,755 $ 62,886
--------- --------- --------- --------- --------- ---------
GAS SERVICES
Natural gas processing ........................... 156,877 53,169 18,037 17,256 1,588 5,037
Natural gas gathering and marketing .............. 110,323 149,824 9,921 9,086 5,201 9,417
Other ............................................ 10,062 -- 9,887 9,815 26 112
--------- --------- --------- --------- --------- ---------
277,262 202,993 37,845 36,157 6,815 14,566
--------- --------- --------- --------- --------- ---------
CORPORATE ........................................ -- -- -- (5,076)(b) 394 182
--------- --------- --------- --------- --------- ---------
$ 402,815 $ 202,993 $ 102,490 $ 93,543 $ 35,964 $ 77,634
========= ========= ========= ========= ========= =========
THREE MONTHS ENDED JULY 31, 1999
EXPLORATION AND PRODUCTION
Operations ....................................... $ 62,580 $ -- $ 19,182 $ 16,991 $ 23,079 $ 25,773
Gain on sale of Hell's Hole area properties ...... 11,527 -- 11,527 11,527 -- --
--------- --------- --------- --------- --------- ---------
74,107 -- 30,709 28,518 23,079 25,773
--------- --------- --------- --------- --------- ---------
GAS SERVICES
Natural gas processing ........................... 84,764 21,657 12,387 11,691 907 629
Natural gas gathering and marketing .............. 67,334 55,772 8,852 8,060 2,387 1,802
Other ............................................ 1,726 -- 1,540 1,462 26 59
--------- --------- --------- --------- --------- ---------
153,824 77,429 22,779 21,213 3,320 2,490
--------- --------- --------- --------- --------- ---------
CORPORATE ........................................ -- -- -- (2,705)(b) 606 119
--------- --------- --------- --------- --------- ---------
$ 227,931 $ 77,429 $ 53,488 $ 47,026 $ 27,005 $ 28,382
========= ========= ========= ========= ========= =========
</TABLE>
----------
(a) On accrual basis, including exploratory expenses and acquisitions.
(b) General corporate expenses.
-9-
<PAGE> 12
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
facilities owned by the Company and third parties. The gas gathering and
marketing segment operates Company-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 recorded on this sale.
After entering into a defense cost reimbursement agreement with an
insurance carrier during March 1999, a water well litigation provision reversal
of $9,000,000 was recorded during the first quarter of fiscal 2000.
(7) SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid totaled $14,608,000 and $17,741,000 during the six-month periods
ended July 31, 2000 and 1999. Income taxes paid during those periods totaled
$31,842,000 and none. Other than the asset exchange discussed in Note 2, there
were no significant non-cash investing or financing activities during the
six-month periods ended July 31, 2000 and 1999.
(8) COMMON STOCK
In June 2000, the Company's stockholders voted to combine its two classes of
common stock into a single class of voting common stock by reclassifying each
share of Class B common stock into one share of Class A common stock. Also, the
number of authorized shares of Class A common stock was increased from
100,000,000 to 200,000,000.
(9) EARNINGS PER SHARE
All earnings per share amounts are presented on a single class basis to give
effect to the June 2000 stock reclassification. The following table reconciles
the weighted average shares outstanding used in the basic and diluted earnings
per share computations for the three- and six-month periods ended July 31, 2000
and 1999 (in thousands):
<TABLE>
<CAPTION>
Three Months Six Months
----------------- -----------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Used in basic computations ............. 49,209 49,118 49,167 49,118
Dilutive effect of stock options ....... 683 112 471 63
------ ------ ------ ------
Used in diluted computations ........... 49,892 49,230 49,638 49,181
====== ====== ====== ======
</TABLE>
Excluded from these computations because their effect would have been
antidilutive were stock options covering 347,050 shares for the six-month period
ended July 31, 2000 and 1,722,633 shares for the three- and six-month periods
ended July 31, 1999.
(10) STOCK OPTIONS AND BONUS UNITS
On May 1, 2000, stock options covering 453,100 shares and 342,800 bonus units
were issued to employees at option/floor prices of $23.9375. Like previous
grants, these awards vest in three equal annual installments and have ten-year
lives.
-10-
<PAGE> 13
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; and unexpected changes in competitive and economic conditions,
government regulations, technology and other factors.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW. Net earnings were $55.4 million ($1.13 per basic share) for fiscal
2001's second quarter, the highest quarterly amounts in the Company's history,
exclusive of unusual items. For the last four quarters, the Company's net
earnings totaled $161.8 million ($3.29 per basic share), and its cash flows from
operating activities totaled $325.4 million. Contributing to these strong upward
trends were sharp rises in energy prices and the Company's natural gas and NGL
production volumes and its lower overall cost structure after a personnel
reduction program undertaken late in fiscal 1999 and other actions taken by the
Company.
While the Company's earnings and cash flows are affected by many things,
energy prices are clearly one of the most significant. The following table shows
the Company's quarterly average sales prices for the first two quarters of
fiscal 2001 and the prior two fiscal years:
<TABLE>
<CAPTION>
Crude Oil and
Natural Gas (per Mcf) Condensate (per Bbl) NGLs (per Bbl)
--------------------------- --------------------------- ---------------------------
2001 2000 1999 2001 2000 1999 2001 2000 1999
------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First quarter......... $3.02 $1.84 $2.29 $26.83 $12.56 $13.93 $20.51 $10.68 $11.44
Second quarter........ 4.11 2.40 2.25 28.92 16.44 12.33 20.69 13.33 10.22
Third quarter......... 2.94 1.90 20.67 12.22 17.52 9.79
Fourth quarter........ 2.78 1.99 24.32 10.25 17.96 9.27
Fiscal year........... 2.50 2.11 18.49 12.18 15.07 10.23
</TABLE>
Prices fell throughout fiscal 1999 and early in fiscal 2000 to low points not
seen for oil and NGLs since 1986 as worldwide oil production rose during a
period of relatively weak demand and inventories reached unusually high levels.
During fiscal 2000, worldwide oil production fell as OPEC and other countries
adopted lower production targets. Excess inventories were worked down and prices
for oil and NGLs rose steadily. After being at record lows early in fiscal 2000,
oil and NGL prices rose in fiscal 2001 to levels not seen in many years. Natural
gas prices - while not moving steadily upward - were relatively strong in fiscal
2000. As shown in the table above, gas prices continued to strengthen in the
current fiscal year due to reduced deliverability, low storage levels and strong
demand.
After taking actions late in fiscal 1999 to sharply reduce operating costs
and capital expenditures to position itself to operate in a low-energy-price
environment, the Company began taking steps in the first half of fiscal 2000 to
substantially increase its development drilling and well recompletion programs
in the Barnett Shale area of North Texas as the price outlook improved. The
Company's accelerated Barnett development program begun in the last half of
fiscal 2000 pushed natural gas sales to a record 294.2 MMcf per day in fiscal
2001's second quarter, 24% above the level during the prior-year's comparable
period. Six rigs are currently drilling in the Barnett, and the Company drilled
69 wells there in the first half of fiscal 2001 versus 77 for all of fiscal
2000. Plans call for increasing to an 8-rig drilling program in the Barnett
during the fourth quarter and for further expansion of the well
rework/refracturing program that is in progress there. Having already exceeded
in July the 300 MMcf per day production level needed to reach the previously
mentioned 15% growth goal for the current year and as a result of a further
step-up of capital spending in the last half of the year, it is now expected
that the current year's gas production growth rate will exceed 20%, with another
20% in the following year.
-11-
<PAGE> 14
With improved NGL economics, the acquisition in October 1999 of the other
50% interest in the Jameson plant and increased gathering throughput, NGL
production volumes increased during fiscal 2000 and rose further during fiscal
2001's first half. NGL production averaged 51,500 barrels per day during fiscal
2001's first six months, a level not reached since the early 1990s when three
times as many plants were being operated. An exchange of the Company's interests
in several Oklahoma systems for Duke Energy's 55% interest in jointly owned
processing and gathering assets in the Austin Chalk area of Central Texas was
closed on March 31, 2000. As a result, the Company's involvement in the
operations of four partnerships ceased, and it now has total ownership and
operating control of all its major gas processing and gathering facilities. This
lowered operating costs and gives the Company more flexibility in using these
facilities. NGL production should increase further after the expected completion
in December of a 50% expansion of the Bridgeport plant, and the Company's daily
NGL production could reach the 60,000-barrels-per-day level during next year's
first quarter.
By capturing a large portion of the new gas supplies being developed along
its systems both by the Company and third parties, the Company expects to
further grow its gathering and processing volumes in fiscal 2001 and beyond. For
fiscal 2001's second quarter pipeline throughput averaged 798 MMcf per day, up
54% from the comparable prior-year period. The increase was principally due to
increased Barnett Shale production, acquisition of Duke's 55% interest in the
Texas Chalk systems, addition of quantities for the Jameson system and added
production along the Vanderbilt and Monco systems.
CAPITAL AND EXPLORATORY EXPENDITURES. As previously reported, the Company's
fiscal 2001 capital budget was set at $221.5 million, 50% above the amount spent
in the prior year (excluding the $23.9 million Jameson acquisition). Because of
the favorable outlook for energy prices, a desire to further increase drilling
in the Barnett Shale and other areas and a need to further augment gas services'
infrastructure in North Texas, the fiscal 2001 budget was subsequently raised by
$82.1 million to $303.6 million. Exploration and production budget increases of
$34.9 million were primarily for drilling, recompletion work and acquisitions of
additional acreage in North Texas and for drilling and rework activities in the
Lake Creek and Personville areas. The gas services budget increases of $47.2
million provide for an expansion of the processing capacity of the Bridgeport
plant from 210 to 310 MMcf per day and improvements to the Bridgeport gathering
system to add capacity and reduce bottlenecking. Second quarter spending totaled
$77.6 million, up from the first quarter's $45.9 million. A summary of actual
capital and exploratory expenditures during the first half of fiscal 2001 and
the revised budget for the second half follows (in millions):
<TABLE>
<CAPTION>
Actual Revised Budget
---------------------------- -----------------
First Second First Second Full
Quarter Quarter Half Half Year
------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Exploration and production .................. $ 39.3 $ 62.9 $102.2 $115.8 $218.0
Gas services ................................ 6.5 14.6 21.1 62.3 83.4
Corporate ................................... .1 .1 .2 2.0 2.2
------ ------ ------ ------ ------
$ 45.9 $ 77.6 $123.5 $180.1 $303.6
====== ====== ====== ====== ======
</TABLE>
FINANCING MATTERS. Cash provided by operating activities totaled $179.1 million
in fiscal 2001's first six months. This, coupled with cash proceeds from the
asset exchange with Duke and sales of non-strategic assets, funded the capital
program and allowed long-term debt to be paid down by $55 million, to $314.3
million. Treasury stock purchases totaling $2.2 million were made during this
period under the stock buyback program that was announced in April. At
quarter-end, long-term debt comprised 40% of total capitalization, down from 48%
at the beginning of the year. The Company expects cash flows from operations to
be sufficient to cover its increased capital expenditures during the last half
of the fiscal year.
-12-
<PAGE> 15
The Company has a $250 million bank revolving credit facility and a $25
million bank money-market facility. At July 31, 2000, no borrowings were
outstanding under these facilities. While the Company has no immediate plans to
issue additional senior notes or to increase the size of its bank credit
facility, it has the borrowing capacity to do so should business opportunities
arise that require funding in excess of the amount available under the existing
bank credit facility ($250 million at July 31, 2000). Because of a receivable
sales agreement that lowers costs and eliminates the need to fund the Company's
receivables with bank borrowings, long-term debt and working capital balances
were each $50 million less at July 31, 2000 than they otherwise would have been.
In August 2000, the Company retired $13.9 million of 6 3/4% senior notes that it
repurchased at a small discount in the open market.
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 prices and domestic natural
gas prices. Such prices historically have been volatile (as shown by the table
on page 11), 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 $26 million and its after-tax annual net earnings by $17 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 (after the recent asset exchange, such purchases normally
should range from 40% to 45% of gas sales). Since it has this physical hedge,
the Company rarely 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 hedge positions at July 31, 2000, and its
hedging activities during the last three years were insignificant.
The Company's exposure to changing interest rates is limited since all its
long-term debt at July 31, 2000 consisted of senior notes with fixed interest
rates.
OPERATING STATISTICS
Certain operating statistics (including, where applicable, proportional
interests in equity partnerships) for the three- and six-month periods ended
July 31, 2000 and 1999 follow:
<TABLE>
<CAPTION>
Three Months Six Months
------------------- -------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
AVERAGE DAILY VOLUMES
Natural gas sales (Mcf) ..................... 294,200 236,900 286,800 240,300
Crude oil and condensate sales (Bbls) ....... 5,300 5,700 5,500 5,900
Natural gas liquids produced (Bbls) ......... 51,500 43,500 51,500 42,800
Pipeline throughput (Mcf) ................... 798,000 517,800 754,000 511,500
AVERAGE SALES PRICES
Natural gas (per Mcf) ....................... $ 4.11 $ 2.40 $ 3.58 $ 2.12
Crude oil and condensate (per Bbl) .......... 28.92 16.44 27.84 14.47
Natural gas liquids produced (per Bbl) ...... 20.69 13.33 20.60 12.05
</TABLE>
-13-
<PAGE> 16
RESULTS OF OPERATIONS - SIX MONTHS ENDED JULY 31, 2000
COMPARED WITH SIX MONTHS ENDED JULY 31, 1999
Net earnings for the six-month periods ended July 31, 2000 and 1999 - both
before and after unusual items - are summarized in the table on the following
page. For fiscal 2001's first half, net earnings totaled $97.1 million, versus
$32.5 million during the comparable prior-year period. Exclusive of unusual
items, after-tax earnings totaled $93.9 million, versus $19.7 million. Higher
energy prices and volumes were the principal causes of the period-to-period
earnings improvements.
The following table and discussion identify and explain the major
increases (decreases) in earnings for the six-month periods (in millions):
<TABLE>
<CAPTION>
Segment
Operating Earnings
---------------------
Exploration
and Gas Pretax Net
Production Services Other* Earnings Earnings
----------- -------- ------ -------- --------
<S> <C> <C> <C> <C> <C>
FISCAL 2000 AMOUNTS AFTER UNUSUAL ITEMS ......................... $ 42.0 $ 34.3 $(26.5) $ 49.8 $ 32.5
ELIMINATE IMPACT OF FISCAL 2000 UNUSUAL ITEMS
Gain from sale of Hell's Hole
area properties (see page 10) ................................ (11.5) -- -- (11.5) (7.2)
Water well litigation provision reversal (see page 10) .......... (9.0) -- -- (9.0) (5.6)
------ ------ ------ ------ ------
(20.5) -- -- (20.5) (12.8)
------ ------ ------ ------ ------
FISCAL 2000 AMOUNTS BEFORE UNUSUAL ITEMS ........................ 21.5 34.3 (26.5) 29.3 19.7
------ ------ ------ ------ ------
MAJOR INCREASES (DECREASES)
Higher natural gas sales price .................................. 73.0 -- -- 73.0 47.4
Higher natural gas sales volumes ................................ 7.9 -- -- 7.9 5.1
Higher oil and condensate sales price ........................... 12.7 -- -- 12.7 8.3
Higher NGL margins .............................................. -- 26.4 -- 26.4 17.2
Higher NGL volumes .............................................. -- 7.3 -- 7.3 4.8
Higher operating expenses (primarily repairs and maintenace) .... (4.1) (6.0) -- (10.1) (6.6)
Equity in earnings of MTBE partnership .......................... -- 10.7 -- 10.7 7.0
Higher bonus unit and incentive
compensation expense accruals ................................ (2.1) (1.2) (2.9) (6.2) (4.0)
Lower interest expense incurred ................................. -- -- 3.1 3.1 2.0
Prior-year fidelity insurance proceeds .......................... -- -- (1.8) (1.8) (1.2)
Higher effective income tax rate ................................ -- -- -- -- (2.0)
Other, net ...................................................... (6.1) .5 (.2) (5.8) (3.8)
------ ------ ------ ------ ------
81.3 37.7 (1.8) 117.2 74.2
------ ------ ------ ------ ------
FISCAL 2001 AMOUNTS BEFORE UNUSUAL ITEMS ........................ 102.8 72.0 (28.3) 146.5 93.9
Gain from an asset sale (see page 7) ............................ -- 4.9 -- 4.9 3.2
------ ------ ------ ------ ------
FISCAL 2001 AMOUNTS AFTER UNUSUAL ITEMS ......................... $102.8 $ 76.9 $(28.3) $151.4 $ 97.1
====== ====== ====== ====== ======
</TABLE>
----------------------
*Includes general and administrative expense and other expense.
EXPLORATION AND PRODUCTION OVERVIEW
Exploration and production segment operating earnings of $102.8 million during
fiscal 2001's first half were $81.3 million above those of the comparable
prior-year period. This improvement was principally due to higher prices for
natural gas and oil and increased natural gas sales volumes.
-14-
<PAGE> 17
HIGHER NATURAL GAS SALES PRICE ($73.0 MILLION INCREASE). During the first half
of fiscal 2001, the Company's natural gas sales price averaged $3.58 per Mcf,
$1.46 (69%) above the prior period's $2.12, increasing operating earnings by
$73.0 million.
HIGHER NATURAL GAS SALES VOLUMES ($7.9 MILLION INCREASE). Natural gas sales
averaged 286.8 MMcf per day during fiscal 2001's first six months, 19% above the
240.3 MMcf of the comparable prior-year period, improving operating earnings by
$7.9 million. As discussed elsewhere herein, the production increases were
largely due to the Company's activities in the Barnett Shale area of North
Texas.
HIGHER OIL AND CONDENSATE SALES PRICE ($12.7 MILLION INCREASE). The Company's
sales price for oil and condensate averaged $27.84 per barrel during the
six-month period ended July 31, 2000, almost double the prior period's $14.47,
increasing operating earnings by $12.7 million.
GAS SERVICES OVERVIEW
Exclusive of unusual items, gas services operating earnings rose $37.7 million
to $72.0 million during the first six months of fiscal 2001. The sharply higher
earnings were principally due to price-related improvements in gas processing
margins, higher NGL production volumes and higher earnings from an investment in
an MTBE partnership.
HIGHER NGL MARGINS ($26.4 MILLION INCREASE). The average price for NGLs produced
during fiscal 2001's first half of $20.60 per barrel was 71% above the
prior-year period's $12.05, improving NGL revenues by $66.8 million. Because of
the impact of the higher NGL and natural gas prices on producer settlement and
gas shrinkage costs, feedstock costs also increased, resulting in a net $26.4
million price-related increase in NGL margins.
HIGHER NGL VOLUMES ($7.3 MILLION INCREASE). NGL production volumes averaged
51,500 barrels per day, up 20% from the 42,800 of the corresponding prior year
period, adding $7.3 million to operating earnings. The increased volumes were
principally due to (i) the October 1, 1999 acquisition of a 50% interest in the
Jameson plant, (ii) increased throughput of the Company's Vanderbilt system that
is processed at the Exxon Katy plant and (iii) restarting of the Huckabay plant
to process a portion of the Company's increasing North Texas gas production.
EQUITY IN EARNINGS OF MTBE PLANT PARTNERSHIP ($10.7 MILLION INCREASE). The
Company's equity in the earnings of the Belvieu Environmental Fuels partnership
totaled $13.1 million during fiscal 2001's first half, $10.7 million above the
amount during the comparable prior-year period. This increase occurred both
because of fewer downtime days (8 versus 39 1/2) and much higher sales prices
for spot MTBE during the second-quarter peak gasoline production period. Late in
the quarter, spot MTBE prices declined to more normal levels, and it is expected
that the partnership's earnings will decline significantly in the third quarter.
OTHER
HIGHER BONUS UNIT AND INCENTIVE COMPENSATION EXPENSE ACCRUALS ($6.2 MILLION
DECREASE). Bonus unit and incentive compensation expense accruals during the
first half of fiscal 2001 totaled $3.5 million and $3.2 million, respectively
(compared with $.5 million and none during the comparable period of the prior
year), reducing pretax earnings by $6.2 million. The increase in bonus unit
expense accruals was due principally to a current-period rise in the price of
the Company's common stock to $31.75 per share at July 31, 2000 from $22.50 at
the beginning of the year. In the prior year, the prices at the same dates were
$17.50 and $12.63, respectively.
LOWER INTEREST EXPENSE INCURRED ($3.1 MILLION INCREASE). This favorable variance
was primarily due to a lower average debt balance during the first six months of
fiscal 2001 ($346.9 million versus $450.6 million), which lowered interest
expense by $3.8 million. Reducing the year-to-year savings somewhat were fiscal
2001's higher interest rates,which caused fees paid under the accounts
receivable securitization program to increase.
-15-
<PAGE> 18
RESULTS OF OPERATIONS - THREE MONTHS ENDED JULY 31, 2000
COMPARED WITH THREE MONTHS ENDED JULY 31, 1999
The following table and discussion identify and explain the major
increases (decreases) in earnings for the three-month periods (in millions):
<TABLE>
<CAPTION>
Segment
Operating Earnings
-----------------------
Exploration
and Gas Pretax Net
Production Services Other* Earnings Earnings
---------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
FISCAL 2000 AMOUNTS AFTER UNUSUAL ITEM .......................... $ 30.7 $ 22.8 $ (12.8) $ 40.7 $ 26.8
ELIMINATE IMPACT OF FISCAL 2000 UNUSUAL ITEM - Gain
from sale of Hell's Hole area properties (see page 10) ....... (11.5) -- -- (11.5) (7.2)
------ ------ ------- ------ ------
FISCAL 2000 AMOUNTS BEFORE UNUSUAL ITEM ......................... 19.2 22.8 (12.8) 29.2 19.6
------ ------ ------- ------ ------
MAJOR INCREASES (DECREASES)
Higher natural gas sales price .................................. 44.2 -- -- 44.2 28.7
Higher natural gas sales volumes ................................ 6.2 -- -- 6.2 4.0
Higher oil and condensate sales price ........................... 5.8 -- -- 5.8 3.8
Higher exploratory dry-hole costs ($2.2 versus $.1) ............. (2.1) -- -- (2.1) (1.4)
Higher NGL margins .............................................. -- 8.9 -- 8.9 5.8
Higher NGL volumes .............................................. -- 2.7 -- 2.7 1.8
Higher operating expenses (primarily repairs and maintenance) ... (2.8) (2.2) -- (5.0) (3.2)
Equity in earnings of MTBE partnership .......................... -- 7.8 -- 7.8 5.1
Higher bonus unit and incentive
compensation expense accruals ................................ (1.7) (.9) (2.4) (5.0) (3.2)
Lower interest expense incurred ................................. -- -- 1.7 1.7 1.1
Prior-year fidelity insurance proceeds .......................... -- -- (1.8) (1.8) (1.2)
Higher effective income tax rate ................................ -- -- -- -- (1.8)
Other, net ...................................................... (4.2) (1.3) (.2) (5.7) (3.7)
------ ------ ------- ------ ------
45.4 15.0 (2.7) 57.7 35.8
------ ------ ------- ------ ------
FISCAL 2001 AMOUNTS ............................................. $ 64.6 $ 37.8 $ (15.5) $ 86.9 $ 55.4
====== ====== ======= ====== ======
</TABLE>
--------------------------------------------------------------------------------
*Includes general and administrative expense and other expense.
EXPLORATION AND PRODUCTION OVERVIEW
Exploration and production segment operating earnings of $64.6 million during
fiscal 2001's second quarter were $45.4 million above those of the comparable
prior-year period principally due to higher prices for natural gas and oil and
increased natural gas sales volumes.
HIGHER NATURAL GAS SALES PRICE ($44.2 MILLION INCREASE). During the second
quarter of fiscal 2001, the Company's natural gas sales price averaged $4.11 per
Mcf, $1.71 (71%) above the prior period's $2.40, increasing operating earnings
by $44.2 million.
HIGHER NATURAL GAS SALES VOLUMES ($6.2 MILLION INCREASE). Second quarter natural
gas sales averaged 294.2 MMcf per day, 24% above the 236.9 MMcf of the
comparable prior-year period, increasing operating earnings by $6.2 million.
HIGHER OIL AND CONDENSATE SALES PRICE ($5.8 MILLION INCREASE). The Company's
sales price for oil and condensate averaged $28.92 per barrel during fiscal
2001's second quarter, up substantially from the prior period's $16.44,
increasing operating earnings by $5.8 million.
-16-
<PAGE> 19
GAS SERVICES OVERVIEW
Exclusive of unusual items, gas services operating earnings rose $15.0 million
to $37.8 million during the first six months of fiscal 2001 due principally to
price-related increases in gas processing margins and earnings from the
Company's MTBE plant partnership investment.
HIGHER NGL MARGINS ($8.9 MILLION INCREASE). The average price for NGLs produced
during fiscal 2001's first quarter of $20.69 per barrel was 55% above the
prior-year period's $13.33, improving NGL revenues by $27.2 million. Because of
the quarter's impact of higher NGL and natural gas prices on producer settlement
and gas shrinkage costs, feedstock costs also increased, resulting in a net $8.9
million price-related increase in NGL margins.
HIGHER NGL VOLUMES ($2.7 MILLION INCREASE). NGL production volumes averaged
51,500 barrels per day, up 18% from the 43,500 of the corresponding prior-year
period, adding $2.7 million to operating earnings. The volume increase occurred
principally for the reasons mentioned on page 15.
EQUITY IN EARNINGS OF MTBE PLANT PARTNERSHIP ($7.8 MILLION INCREASE). This
variance occurred both because of fewer downtime days in fiscal 2001's second
quarter (none versus 17 1/2) and that period's higher MTBE sales prices (see
page 15).
OTHER
HIGHER BONUS UNIT AND INCENTIVE COMPENSATION EXPENSE ACCRUALS ($5.0 MILLION
DECREASE). Bonus unit and incentive compensation expense accruals during the
second quarter of fiscal 2001 totaled $3.1 million and $2.3 million,
respectively (compared with $.4 million and none during the comparable period of
the prior year), reducing pretax earnings by $5.0 million. The increase in bonus
unit expense accruals was due principally to a rise in the price of the
Company's common stock to $31.75 per share at July 31, 2000 from $23.94 at April
30, 2000. In the prior year, prices at the same dates were $17.50 and $15.38,
respectively.
LOWER INTEREST EXPENSE INCURRED ($1.7 MILLION INCREASE). The $1.7 million
decrease in interest expense was primarily due to a lower average debt balance
during the second quarter of fiscal 2001 ($329.0 million versus $437.1 million).
Reducing the period-to-period savings somewhat were fiscal 2001's higher
interest rates,which caused fees paid under the accounts receivable
securitization program to increase.
-17-
<PAGE> 20
Part II - Other Information
ITEM 1. LEGAL PROCEEDINGS
There were no material legal proceedings pending at July 31, 2000.
ITEM 2. CHANGES IN SECURITIES
At the Company's annual meeting on June 28, 2000, the stockholders voted
to combine the Company's two classes of common stock into a single class of
voting common stock by reclassifying each share of Class B common stock into one
share of Class A common stock. Also, the number of authorized shares of Class A
common stock was increased from 100,000,000 to 200,000,000.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
The annual meeting of stockholders of Mitchell Energy & Development Corp.
was held on June 28, 2000 for the purpose of electing a Board of nine directors
and to consider and act upon proposals (1) to amend Article Four of the
Company's Restated Articles of Incorporation, as amended, by (i) combining the
Company's two classes of stock into a single class of voting common stock by
reclassifying each issued share of the Company's Class B Common Stock, $.10 par
value, into one share of Class A Common Stock, $.10 par value, (ii) increasing
the number of authorized shares of Class A Common Stock from 100,000,000 to
200,000,000, and (iii) establishing the preferences, limitations and relative
rights of the Class A Common Stock and (2) to appoint 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 20,600,595 of the 21,258,573 votes cast.
Stockholders approved the proposal to amend Article Four of the Company's
Restated Articles of Incorporation. The vote was as follows:
<TABLE>
<CAPTION>
Class A Class B
Common Stockholders Common Stockholders
---------------------------- ----------------------------
Per- Per-
Number cent Number cent
---------- ----- ---------- -----
<S> <C> <C> <C> <C>
Shares voted "for" ..................... 19,689,036 92.62 22,731,903 99.71
Shares voted "against" ................. 438,441 2.06 23,667 .10
Shares abstaining ...................... 1,131,096 5.32 42,702 .19
---------- ----- ---------- -----
21,258,573 100.0 22,798,272 100.0
========== ===== ========== =====
</TABLE>
Class A Common 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, 2001. The vote was as follows:
<TABLE>
<CAPTION>
Per-
Number cent
---------- ------
<S> <C> <C>
Shares voted "for" ..................... 21,250,462 99.96
Shares voted "against" ................. 5,973 .03
Shares abstaining ...................... 2,138 .01
---------- -----
21,258,573 100.0
========== =====
</TABLE>
-18-
<PAGE> 21
ITEM 5. OTHER INFORMATION
On September 1, 2000, the Company decided to change its year end to
December 31; the fiscal year end previously was January 31. The change was made
to conform the timing of the Company's financial reporting with that of
virtually all its peer group of independent energy companies and thus eliminate
confusion caused by a one month reporting difference and facilitate the timely
comparison by the investment community of the Company's results with those of
its competitors.
The Company plans to file a transition Form 10-K during October 2000 that
will include historical audited financial statements for the calendar years
ended December 31, 1999, 1998 and 1997. In addition, "Selected Financial Data"
will be shown for an eleven-month "transition period" ended December 31, 1996
and for the fiscal year ended January 31, 1996. Beginning with the period ended
September 30, 2000, quarterly financial results will be reported on a calendar
quarter basis, and the earnings release for that period will include results for
the first two quarters of the year on a calendar basis.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27. Financial Data Schedule.
(b) No reports were filed on Form 8-K by Mitchell Energy & Development
Corp. during the three-month period ended July 31, 2000.
-19-
<PAGE> 22
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 11, 2000 By /s/ Philip S. Smith
----------------------------------------
Philip S. Smith
Senior Vice President - Administration
and Chief Financial Officer
-20-
<PAGE> 23
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
