-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QLg3mEcws9UVDovFHa+5WhrveK9w7N6spSxpylDFJ+tw1AjFvD4tz0iayAsRF8T4 JQHgjfLceon+mxqdWBCFmQ== 0000950129-97-005233.txt : 19971216 0000950129-97-005233.hdr.sgml : 19971216 ACCESSION NUMBER: 0000950129-97-005233 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971031 FILED AS OF DATE: 19971212 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MITCHELL ENERGY & DEVELOPMENT CORP CENTRAL INDEX KEY: 0000311995 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 741032912 STATE OF INCORPORATION: TX FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-06959 FILM NUMBER: 97737606 BUSINESS ADDRESS: STREET 1: 2001 TIMBERLOCH PL CITY: THE WOODLANDS STATE: TX ZIP: 77380 BUSINESS PHONE: 7133775500 MAIL ADDRESS: STREET 1: P.O. BOX 4000 CITY: THE WOODLANDS STATE: TX ZIP: 77387-4000 10-Q 1 MITCHELL ENERGY & DEVELOPMENT CORP-DATED 10/31/97 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED OCTOBER 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 1-6959 MITCHELL ENERGY & DEVELOPMENT CORP. (Exact name of registrant as specified in charter) TEXAS 74-1032912 (State of incorporation) (I.R.S. Employer Identification No.) 2001 TIMBERLOCH PLACE THE WOODLANDS, TEXAS 77380 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (713) 377-5500 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes x No --- --- Shares of common stock outstanding at November 30, 1997: Class A . . . . . . . . . . 22,316,654 Class B . . . . . . . . . . 26,933,779 ================================================================================ 2 INDEX
Page Part I - Financial Information Number ------ Item 1. Financial Statements Representation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Unaudited Consolidated Statements of Earnings . . . . . . . . . . . . . . . . . . . . . . . . . 3 Unaudited Consolidated Statement of Stockholders' Equity . . . . . . . . . . . . . . . . . . . . 4 Unaudited Condensed Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . 5 Notes to Unaudited Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . 6 Item 2. Management's Discussion and Analysis of Financial Position and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . 13 Part II - Other Information Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
DEFINITIONS. As used herein, "MMBtu" means million British thermal units, "Mcf" means thousand cubic feet, "MMcf" means million cubic feet, "Bcf" means billion cubic feet, "Bbl" means barrel, "MMBbls" means million barrels, "NGL" or "NGLs" means natural gas liquids, "fiscal 1997" and "fiscal 1998" refer, respectively, to the 12-month periods ended January 31, 1997 and 1998 and "DD&A" means depreciation, depletion and amortization. Pipeline throughput volumes are based on average energy content of 1,000 Btu per cubic foot. Where applicable, NGL volume, price and reserve information includes equity partnership interests. 3 Part I - Financial Information ITEM 1. FINANCIAL STATEMENTS REPRESENTATION. The consolidated financial statements of Mitchell Energy & Development Corp. and subsidiaries (the "Company") and related notes included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures included herein are adequate to make the information presented not misleading. In the opinion of the Company's management, all adjustments - which include only normal and recurring adjustments - necessary for a fair presentation of the financial position and results of operations for the periods presented have been made. These financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company's Fiscal 1997 Annual Report and with the Management's Discussion and Analysis of Financial Position and Results of Operations sections of that and this report. - 1 - 4 MITCHELL ENERGY & DEVELOPMENT CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (dollar amounts in thousands)
OCTOBER 31, January 31, 1997 1997 ----------- ----------- ASSETS (unaudited) (Note 2) CURRENT ASSETS Cash and cash equivalents ................................................. $ 207,013 $ 75,825 Trade receivables ......................................................... 119,284 149,585 Gas contract buyout proceeds receivable ................................... -- 91,000 Inventories ............................................................... 19,852 10,072 Other ..................................................................... 9,008 8,864 ----------- ----------- Total current assets .................................................. 355,157 335,346 ----------- ----------- PROPERTY, PLANT AND EQUIPMENT, at cost less accumulated depre- ciation, depletion and amortization of $1,317,988 and $1,337,041 Exploration and production Oil and gas properties .................................................. 585,642 537,992 Support equipment and facilities ........................................ 17,390 22,485 Gas services (including investments in equity partnerships) (Note 3) Natural gas processing .................................................. 76,101 69,658 Natural gas gathering ................................................... 109,119 94,499 Other ................................................................... 54,178 42,634 Corporate ................................................................. 6,576 8,661 ----------- ----------- 849,006 775,929 ----------- ----------- NET ASSETS OF DISCONTINUED REAL ESTATE OPERATIONS (Note 2) ................ 32,832 520,484 ----------- ----------- LONG-TERM INVESTMENTS AND OTHER ASSETS .................................... 43,126 36,513 ----------- ----------- $ 1,280,121 $ 1,668,272 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current maturities of long-term debt ...................................... $ -- $ 100,000 Oil and gas proceeds payable .............................................. 104,555 141,076 Accounts payable and accrued liabilities .................................. 105,075 99,211 Federal income taxes payable .............................................. 10,991 8,700 ----------- ----------- Total current liabilities ............................................. 220,621 348,987 ----------- ----------- LONG-TERM DEBT (Note 4) ................................................... 414,267 600,000 ----------- ----------- DEFERRED CREDITS AND OTHER LIABILITIES Deferred income taxes ..................................................... 159,756 109,459 Retirement obligations and other .......................................... 59,584 54,539 ----------- ----------- 219,340 163,998 ----------- ----------- COMMITMENTS AND CONTINGENCIES (Notes 3, 6 and 7) STOCKHOLDERS' EQUITY Preferred stock, $.10 par value (authorized 10,000,000 shares; none issued) Common stock, $.10 par value (authorized 100,000,000 Class A and 100,000,000 Class B shares) ......... 5,386 5,386 Additional paid-in capital ................................................ 143,262 143,343 Retained earnings (Note 10) ............................................... 363,768 435,165 Treasury stock, at cost ................................................... (86,523) (28,607) ----------- ----------- 425,893 555,287 ----------- ----------- $ 1,280,121 $ 1,668,272 =========== ===========
- ------------------------------------------------ The accompanying notes are an integral part of these financial statements. - 2 - 5 MITCHELL ENERGY & DEVELOPMENT CORP. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS (in thousands except per-share amounts)
Three Months Ended Nine Months Ended October 31 October 31 ------------------------ ------------------------ 1997 1996 1997 1996 --------- --------- --------- --------- (Note 2) (Note 2) REVENUES Exploration and production ....................................... $ 71,105 $ 57,505 $ 189,075 $ 178,399 Gas Services ..................................................... 153,020 141,505 380,383 416,619 --------- --------- --------- --------- 224,125 199,010 569,458 595,018 --------- --------- --------- --------- OPERATING COSTS AND EXPENSES Exploration and production, including water well litigation provisions of $7,000 in the first quarter of 1997 and $10,000 in the 1996 periods (Note 6) ................ 51,449 55,764 148,570 141,195 Gas services, including royalty litigation settlement pro- vision of $26,000 in the second quarter of 1997 (Note 6) ....... 133,991 112,771 356,915 343,646 --------- --------- --------- --------- 185,440 168,535 505,485 484,841 --------- --------- --------- --------- SEGMENT OPERATING EARNINGS (Note 8) .............................. 38,685 30,475 63,973 110,177 General and administrative expense ............................... 7,888 7,784 22,906 22,666 --------- --------- --------- --------- TOTAL OPERATING EARNINGS ......................................... 30,797 22,691 41,067 87,511 --------- --------- --------- --------- OTHER EXPENSE Interest expense ................................................. 10,253 14,193 34,646 42,747 Interest expense attributable to discontinued operations ......... -- (8,533) (15,112) (25,899) Interest income .................................................. (5,139) (143) (6,448) (412) Other, net ....................................................... (1,832) (120) (3,627) (1,561) --------- --------- --------- --------- 3,282 5,397 9,459 14,875 --------- --------- ---------- --------- EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES ................................. 27,515 17,294 31,608 72,636 INCOME TAXES (Note 5) ............................................ 9,780 6,412 10,613 25,509 --------- --------- --------- --------- EARNINGS FROM CONTINUING OPERATIONS .............................. 17,735 10,882 20,995 47,127 --------- --------- --------- --------- DISCONTINUED REAL ESTATE OPERATIONS (Note 2) Earnings from operations, net of income taxes of $3,708, $4,071 and $8,221 ............................. -- 8,041 7,440 15,839 Loss on sale, net of income tax benefit of $25,878 ............... -- -- (67,123) -- --------- --------- --------- --------- -- 8,041 (59,683) 15,839 --------- --------- --------- --------- EARNINGS (LOSS) BEFORE EXTRAORDINARY ITEM ........................ 17,735 18,923 (38,688) 62,966 EXTRAORDINARY ITEM - EARLY RETIREMENT OF DEBT, net of tax benefit of $7,135 (Note 4) ................. (13,250) -- (13,250) -- --------- --------- --------- --------- NET EARNINGS (LOSS) .............................................. $ 4,485 $ 18,923 $ (51,938) $ 62,966 ========= ========= ========= ========= EARNINGS (LOSS) PER SHARE Earnings from continuing operations .............................. $ .36 $ .21 $ .41 $ .91 Discontinued real estate operations Earnings from operations ....................................... -- .15 .15 .30 Loss on sale ................................................... -- -- (1.31) -- Extraordinary item - Early retirement of debt .................... (.27) -- (.26) -- --------- --------- --------- --------- $ .09 $ .36 $ (1.01) $ 1.21 ========= ========= ========= ========= AVERAGE COMMON SHARES OUTSTANDING ................................ 49,943 51,821 51,210 51,895 ========= ========= ========= =========
- --------------------------------------------------------- The accompanying notes are an integral part of these financial statements. - 3 - 6 MITCHELL ENERGY & DEVELOPMENT CORP. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY For the Nine Months Ended October 31, 1997 (dollar amounts in thousands)
Additional Common Paid-In Retained Treasury DOLLAR AMOUNTS Stock Capital Earnings Stock Total - -------------- --------- --------- --------- ---------- --------- BALANCE, JANUARY 31, 1997 ...................... $ 5,386 $ 143,343 $ 435,165 $ (28,607) $ 555,287 Net loss ....................................... -- -- (51,938) -- (51,938) Cash dividends declared (36 cents per share on Class A and 39 3/4 cents per share on Class B) ..................................... -- -- (19,459) -- (19,459) Treasury stock purchases ....................... -- -- -- (60,522) (60,522) Exercises of stock options ..................... -- (81) -- 2,606 2,525 --------- --------- --------- --------- --------- BALANCE, OCTOBER 31, 1997 ...................... $ 5,386 $ 143,262 $ 363,768 $ (86,523) $ 425,893 ========= ========= ========= ========= =========
============================
Common Stock Issued Treasury Stock --------------------------- -------------------------- SHARE AMOUNTS Class A Class B Class A Class B ------------- ---------- ---------- ---------- --------- BALANCE, JANUARY 31, 1997 ..... 23,978,088 29,878,088 922,429 1,092,958 Treasury stock purchases ...... -- -- 735,000 1,787,200 Exercises of stock options .... -- -- (6,000) (134,854) Other ......................... (4) (4) -- -- ---------- ---------- --------- --------- BALANCE, OCTOBER 31, 1997 ..... 23,978,084 29,878,084 1,651,429 2,745,304 ========== ========== ========= =========
- --------------------------------------- The accompanying notes are an integral part of these financial statements. - 4 - 7 MITCHELL ENERGY & DEVELOPMENT CORP. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Nine Months Ended October 31 ------------------------ 1997 1996 --------- --------- (Note 2) OPERATING ACTIVITIES Earnings from continuing operations ............................................................ $ 20,995 $ 47,127 Adjustments to reconcile earnings from continuing operations to cash provided by operating activities Depreciation, depletion and amortization .................................................. 77,906 74,914 Exploration expenses, including dry-hole costs ............................................ 12,422 13,183 Deferred income taxes ..................................................................... 8,620 19,070 Distributions in excess of (less than) earnings of equity investees ....................... 38 (1,021) Royalty litigation settlement provision ................................................... 26,000 -- Water well litigation provision ........................................................... 7,000 10,000 Gain from sale of drilling rigs ........................................................... (2,382) -- Other, net ................................................................................ (3,032) 3,834 --------- --------- 147,567 167,107 Changes in operating assets and liabilities ............................................... 46,941 67,473 --------- --------- Cash provided by operating activities ..................................................... 194,508 234,580 --------- --------- INVESTING ACTIVITIES Capital and exploratory expenditures Total on accrual basis ...................................................................... (172,234) (118,093) Adjustment to cash basis .................................................................... 908 (2,512) --------- --------- (171,326) (120,605) Net proceeds from sale of The Woodlands Corporation ............................................ 480,994 -- Proceeds from sales of property, plant and equipment ........................................... 6,689 8,632 Acquisition of leased equipment ................................................................ -- (6,995) Other .......................................................................................... 3,361 2,130 --------- --------- Cash provided by (used for) investing activities .......................................... 319,718 (116,838) --------- --------- FINANCING ACTIVITIES Debt repayments ................................................................................ (285,733) (65,000) Treasury stock purchases ....................................................................... (60,522) (3,917) Debt reacquisition premium ..................................................................... (18,510) -- Cash dividends ................................................................................. (19,459) (19,763) Other .......................................................................................... 556 (1,207) --------- --------- Cash used for financing activities ........................................................ (383,668) (89,887) --------- --------- INCREASE IN CASH AND CASH EQUIVALENTS FROM CONTINUING OPERATIONS ................................................................... 130,558 27,855 CASH PROVIDED BY DISCONTINUED OPERATIONS 630 11,875 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................................................. 75,825 17,867 --------- --------- CASH AND CASH EQUIVALENTS, END OF PERIOD ....................................................... $ 207,013 $ 57,597 ========= =========
- ---------------------------------------- The accompanying notes are an integral part of these financial statements. -5- 8 MITCHELL ENERGY & DEVELOPMENT CORP. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS October 31, 1997 (1) ACCOUNTING POLICIES The consolidated financial statements include the accounts of Mitchell Energy & Development Corp. and its majority-owned subsidiaries (the "Company"). All significant intercompany accounts and transactions are eliminated in consolidation. The Company follows the equity method of accounting for investments in 20%- to 50%-owned entities. The Company's exploration and production activities are accounted for using the "successful efforts" method. Impairment computations for proved oil and gas properties are made on a field-by-field basis as conditions warrant. Charges for such impairments, which are included in DD&A expense, totaled $1,640,000 for the three- and nine-month periods ended October 31, 1997 and none and $3,068,000 for the three- and nine-month periods ended October 31, 1996. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In March 1997, Statement of Financial Accounting Standards (SFAS) Nos. 128 and 129 were issued which must be adopted by the Company during the fourth quarter of fiscal 1998. SFAS No. 128, "Earnings Per Share," will require the Company to disclose basic and diluted earnings per share information. Since the dilutive impact of its only common stock equivalent - employee stock options - historically has been less than 3%, the Company previously was not required to make fully diluted earnings per share disclosures. SFAS No. 129, "Disclosure of Information About Capital Structure," requires entities that issue securities other than ordinary common stock to make specified disclosures. Since the Company's issued stock consists solely of common stock, this statement will have little, if any, impact on its financial statements. (2) DISCONTINUED REAL ESTATE OPERATIONS On June 12, 1997, the Company entered into an agreement to sell its real estate subsidiary, The Woodlands Corporation (TWC), for $543,000,000 in cash to a partnership of Crescent Real Estate Equities Company and Morgan Stanley Real Estate Fund II, L.P. The transaction was subsequently closed on July 31, 1997. After adjustment for certain net additional amounts received pursuant to the contract and deductions for current income taxes and transaction costs, the Company's net cash proceeds from the sale totaled $480,994,000. Excluded from that transaction were real estate assets located outside The Woodlands that are held for disposal with a book value at the time of the sale - including deferred tax benefits - of approximately $35,000,000. The remaining book value totaled $32,832,000 at October 31, 1997, and the Company plans to liquidate most of these holdings over the next year. The Company decided to withdraw from the real estate business upon entering into the definitive agreement to sell TWC on June 12, 1997, and commenced reporting real estate activities as discontinued operations in its financial statements effective that date. The net assets of discontinued real estate operations have been segregated in the accompanying consolidated balance sheet and the results of discontinued operations have been separately reported in the accompanying statements of earnings. Financial statements for prior-year periods have been similarly restated. Interest expense attributable to discontinued operations was determined in the same manner that historically had been used for the Company's real estate operations. Revenues of the discontinued real estate operations totaled approximately $73,094,000 through July 31, 1997. For the three- and nine-month periods ended October 31, 1996, such revenues were $46,396,000 and $128,847,000. - 6 - 9 The net loss incurred in connection with the sale of TWC is summarized as follows (in thousands): Proceeds .................................. $551,376 Less - Net book value of assets sold ..... 632,732 Transaction costs and expenses .... 11,645 -------- Pretax loss ............................... 93,001 Income tax benefit ........................ 25,878 -------- Net loss .................................. $ 67,123 ========
Net assets of discontinued real estate operations consisted of the following at January 31, 1997 (in thousands): Current assets ..................................... $ 13,420 Real estate ........................................ 649,821 Notes and contracts receivable and other assets .... 41,687 Current liabilities ................................ (33,230) Long-term debt (excluding intercompany debt) ....... (1,271) Deferred income tax liability ...................... (118,416) Other deferred credits and long-term liabilities ... (31,527) --------- $ 520,484 =========
(3) EQUITY INVESTMENTS At October 31, 1997, the Company's principal partnership interests included the following:
Ownership Percentage Nature of Operations ---------- ---------------------- Austin Chalk Natural Gas Marketing Services 45 Natural gas marketing Belvieu Environmental Fuels 33.33 Production of MTBE C&L Processors Partnership 50 Natural gas processing Ferguson-Burleson County Gas Gathering System 45 Natural gas gathering Gulf Coast Fractionators 38.75 Fractionation of natural gas liquids Louisiana Chalk Gathering System 50 Natural gas gathering U. P. Bryan Plant 45 Natural gas processing
The Company's net investment in each of these entities is reported as property, plant and equipment in the consolidated balance sheets under the gas services caption. The Company's equity in their pretax earnings is reported as revenues in the consolidated statements of earnings under the gas services caption. A summary of the Company's net investments in partnerships at October 31, 1997 and January 31, 1997 and its equity in their pretax earnings (losses) for the nine-month periods ended October 31, 1997 and 1996 follows (in thousands):
Equity in Net Investment Pretax Earnings ---------------------- ------------------------ October 31, January 31, October 31, October 31, 1997 1997 1997 1996 ---------- ---------- ---------- ---------- Austin Chalk Natural Gas Marketing Services . $ 1,042 $ 2,014 $ 2,359 $ 997 Belvieu Environmental Fuels ................. 38,917 31,174 7,743 6,348 C&L Processors Partnership .................. 23,585 21,433 2,152 4,068 Ferguson-Burleson County Gas Gathering System 45,109 53,164 2,708 7,048 Gulf Coast Fractionators .................... 13,474 9,593 3,881 3,475 Louisiana Chalk Gathering System ............ 16,394 4,754 (214) -- U.P. Bryan Plant ............................ 7,184 6,973 3,171 7,150 Others ...................................... 3 162 29 258 -------- -------- -------- -------- $145,708 $129,267 $ 21,829 $ 29,344 ======== ======== ======== ========
- 7 - 10 Financial statement information is generally reported on a one-month lag for entities accounted for on the equity method. Summarized earnings information (on a 100% basis) for these entities for the three- and nine-month periods ended October 31, 1997 and 1996 follows (in thousands):
Three Months Nine Months --------------------- --------------------- 1997 1996 1997 1996 -------- -------- -------- -------- Revenues ..................................................... $181,205 $157,963 $576,572 $530,454 Operating earnings ........................................... 20,977 26,915 67,555 83,971 Pretax earnings (before interest expense for those entities whose activities are funded by capital contributions of the owners) .................................................... 16,756 21,554 53,776 66,767
The construction of certain of these partnerships' properties was funded using term loans secured by their assets and in some cases by contractual commitments or guaranties of the partners. Information concerning the debt of these entities to third parties at October 31, 1997 and January 31, 1997 and the Company's proportionate share of such debt at October 31, 1997 is summarized as follows (in thousands):
Entity Total October 31, 1997 - Company's Share ------------------------ ---------------------------------- October 31, January 31, Non- 1997 1997 Recourse Recourse Total ----------- ----------- -------- -------- -------- Belvieu Environmental Fuels ....... $107,555 $136,889 $ 6,667 $ 29,185 $ 35,852 C&L Processors Partnership ........ 57,709 71,209 15,582 13,273 28,855 Gulf Coast Fractionators .......... 51,125 61,750 1,712 18,099 19,811 -------- -------- -------- -------- -------- $216,389 $269,848 $ 23,961 $ 60,557 $ 84,518 ======== ======== ======== ======== ========
See Note 4 of Notes to Consolidated Financial Statements on pages 48 and 49 of the Company's Fiscal 1997 Annual Report for additional information concerning the indebtedness of these partnerships. (4) LONG-TERM DEBT During the third quarter of fiscal 1998, the Company repurchased $185,733,000 face amount of its 9.25% senior notes maturing January 15, 2002. The purchase price was $1,099.66 per $1,000 of principal plus accrued interest based on a yield to maturity of 6.56% (30 basis points over the yield to maturity on the 6 1/8% U.S. Treasury Note due December 31, 2001 as of 2:00 p.m. Eastern Daylight Time on September 11, 1997). In connection with this early retirement of debt, an extraordinary charge was recorded. Before an income tax benefit of $7,135,000, the costs associated with this debt retirement consisted of $18,510,000 in reacquisition premiums, $784,000 of tender offer costs and expenses and the write-off of $1,091,000 of deferred debt placement costs applicable to the retired notes. In April 1996, the Company entered into an agreement with a group of banks for a $500,000,000 facility to provide letters of credit to collateralize appeals bonds that might be needed in connection with the North Texas water well litigation discussed in Note 6. In August 1996, letters of credit of $184,300,000 were issued by the banks supporting a supersedeas bond of $224,850,000 that was filed in connection with the Company's appeal of the $204,000,000 judgment in the Bartlett case. Additional letters of credit can be issued under this facility, if required, during a period extending until April 1999, and any amounts drawn against the letters of credit are payable in April 2000. With the reversal of the Bartlett judgment (see Note 6), it is expected that the Company will be able to cancel the appeal bond and the related letters of credit before the end of fiscal 1998. After this is done, the Company will likely substantially reduce the size of the letter of credit facility or terminate it altogether. The Company's bank revolving credit agreement consists of a committed $150,000,000 facility, under which nothing was borrowed at October 31, 1997. Accordingly, the Company had $150,000,000 in borrowing capacity available under this agreement at that date. The previous $50,000,000 real estate facility was cancelled effective with the TWC sale. - 8 - 11 (5) INCOME TAXES Income taxes applicable to earnings from continuing operations for the nine-month periods ended October 31, 1997 and 1996 consist of the following (in thousands):
1997 1996 ------- ------- CURRENT Federal .............. $ 1,496 $ 4,198 State ................ 497 2,241 ------- ------- 1,993 6,439 ------- ------- DEFERRED Federal .............. 7,700 18,146 State ................ 920 924 ------- ------- 8,620 19,070 ------- ------- $10,613 $25,509 ======= =======
Estimated annual tax rates of 33.6% and 35.1%, respectively, were used in computing the income tax provisions for the nine-month periods ended October 31, 1997 and 1996. The differences between these rates and the 35% statutory Federal income tax rate were principally the result of the interplay of the benefit of Federal tax credits and the impact of state income taxes. Because of the large taxable gain on the sale of TWC, it is expected that unused alternative minimum tax credits, which totaled $28,614,000 at January 31, 1997, will be substantially utilized during fiscal 1998. (6) LITIGATION CONTINGENCIES NORTH TEXAS WATER WELL LITIGATION. On March 1, 1996, in a trial known as the Bartlett case, a judgment was entered against a wholly owned subsidiary of the Company by a Wise County, Texas court. The judgment awarded $4,051,760 in actual damages (consisting of $339,266 for economic damages and $3,712,494 for pain, mental anguish, inconvenience, etc.) and $200,000,000 in exemplary damages to eight plaintiff groups, who claimed that the natural gas operations of the subsidiary had affected their water wells. The Company appealed this judgment to the Second Court of Appeals in Forth Worth, Texas, which ruled on the Company's appeal on November 13, 1997. The three-judge panel unanimously reversed the previous decision finding that the plaintiffs failed to prove that the Company's actions were the cause of their alleged damages and that the claims of most plaintiffs were time-barred by statute of limitations. The plaintiffs subsequently requested a reconsideration of the court's decision, which is expected to be denied. It is not known whether the plaintiffs will seek a review of the appellate decision by the Texas Supreme Court. In May 1997, another jury in the Wise County court found unanimously on all counts that the Company was not responsible for damages claimed by 17 other plaintiff groups in an 11-week trial known as the Bailey case. The court entered the judgment on July 15, 1997. After the court subsequently denied their motion for a new trial, the plaintiffs filed a notice of appeal to the Second Court of Appeals. Similar lawsuits (each claiming damages of more than $1,000,000) have been brought by 29 other plaintiff groups. To date, there has been only minimal activity with respect to these cases although one of them involving one family (the Nelon case) is scheduled for trial on March 23, 1998 (after a recent postponement from January 20). Aggregate charges of $32,000,000 (including $7,000,000 in April 1997) have been recorded to provide for costs the Company considers probable that it will incur in connection with the existing litigation related to this matter. The provisions consisted largely of expected costs for attorneys' fees, bonds, etc., to appeal the March 1996 judgment to the necessary level and to defend the Company in the Bailey and other suits. The April 1997 provision of $7,000,000 was recorded because of increases in estimated attorneys' fees and other defense costs associated principally with the Bailey trial, which began sooner and ran longer than had been anticipated. - 9 - 12 The Company believes that recoveries of at least a portion of its defense costs (and settlement/judgment costs, if any) should be available from the companies that have participated in its longstanding insurance program. Accordingly, the Company has notified the numerous insurance carriers whose policies covered the Company's North Texas operations over the period that might relate to the alleged problems. In May 1996, a lawsuit was filed by one of the Company's insurers seeking a declaratory judgment that it does not have a duty to indemnify the Company in these lawsuits. In June 1996, the Company filed a declaratory action in another court seeking to have the court declare respective rights of the parties, including duties of the insurance carriers to defend and indemnify the Company under its insurance policies. The Company and its insurors subsequently agreed on a forum for the resolution of insurance coverage issues, and that court has entered an order staying proceedings until at least December 15, 1997. The Company believes that a number of its insurance carriers have responsibilities for participating in the costs of providing a defense in this litigation and has been negotiating with these companies concerning their participation. In May 1997, a reimbursement agreement covering a portion of the Company's defense costs was entered into with one of these carriers and discussions continue with others. Because of uncertainties regarding the Company's ultimate liability and when the alleged problems occurred and the large number of insurance carriers that might be involved, the Company is presently unable to predict the outcome of the insurance-related legal actions. The Company similarly is unable to ascertain whether future agreements will be reached with its insurors or to estimate the magnitude of any additional recoveries, and accordingly has excluded such in determining its financial statement accruals for this litigation. ROYALTY OWNER LITIGATION. In October 1997, the Company paid $21,000,000 to settle class-action litigation brought on behalf of its North Texas royalty owners in lawsuits styled Rowan Estate Trust, et al and Russell Elvis Lawrence, et al v. Mitchell Energy & Development Corp. The settlement resolved all claims that had been or could have been made by the plaintiffs regarding royalty payments in North Texas from inception of the affected agreements to date. Also, the plaintiffs agreed to ratify modified terms and procedures for the processing of gas and the payment of royalties in the affected North Texas counties which are to become effective January 1, 1998. Although the Company believes that it had properly calculated and paid all royalties applicable to the subject properties, it concluded a settlement was the appropriate course of action from an ongoing operational and relationship perspective. The Company is in the process of increasing its drilling in this area and, under the terms of the July 1995 gas contract termination agreement with Natural Gas Pipeline Company of America (Natural), it will assume ownership on January 1, 1998 of Natural's 1,100-mile gathering system that serves 1,500 of the Company's North Texas wells and a much smaller number of third-party wells. Having certainty with respect to the matters involved in the litigation facilitates the Company's increased North Texas drilling program and its planned efforts to significantly expand the gas volumes gathered and processed for third parties in the area while helping maintain its longstanding good relations with more than 11,000 royalty owners in the area. The settlement also eliminated (i) a complex litigation risk in an area where case law is not well defined, (ii) potentially significant defense costs, and (iii) the extensive involvement of the Company's personnel that would have been required to continue defending itself against these charges. In anticipation of this settlement, the Company recorded a July 1997 financial statement charge of $26,000,000 for the estimated costs it expected to incur in this regard. In addition to the $21,000,000 payment mentioned above, the Company intends to make payments to royalty owners who chose not to participate in the class-action litigation, and expects that the aggregate costs incurred by it in connection with the royalty owner litigation will approximate the amount accrued in July 1997. SUMMARY. Management believes, after consultation with outside counsel, that adequate financial statement accruals have been provided for the litigation contingencies discussed in this footnote. - 10 - 13 (7) OTHER CONTINGENCIES The Company also is party to other claims and legal actions arising in the ordinary course of its business and to recurring examinations performed by the Internal Revenue Service and other regulatory agencies. The outcome of matters such as these and those discussed in Note 6 cannot be predicted with certainty, and it is possible that future charges might be required that would be significant to the operating results of a particular period. Management believes, however, it is not probable that the ultimate resolution of these matters will have a material adverse effect on the Company's financial position. (8) SEGMENT INFORMATION Selected industry segment data for the nine- and three-month periods ended October 31, 1997 and 1996 are as follows (in thousands):
Segment Total Outside Operating Operating Revenues Earnings Earnings ----------------------- ------------------------ --------------------------- Nine Months 1997 1996 1997 1996 1997 1996 - ----------- --------- --------- --------- --------- --------- --------- EXPLORATION AND PRODUCTION Operations ........................ $ 186,693 $ 174,955 $ 45,123 $ 37,825 $ 36,354 $ 29,016 Water well litigation provision (see Note 6) .......... -- -- (7,000) (10,000) (7,000) (10,000) Gain from sale of contract drilling assets ........ 2,382 -- 2,382 -- 2,382 -- Severance tax refunds ............. -- -- -- 5,935 -- 5,935 Columbia Gas contract settlement proceeds ............. -- 3,444 -- 3,444 -- 3,444 --------- --------- --------- --------- --------- --------- 189,075 178,399 40,505 37,204 31,736 28,395 --------- --------- --------- --------- --------- --------- GAS SERVICES Natural gas processing ............ 234,960 256,318 24,147 46,111 21,877 43,599 Royalty litigation settlement provision (Note 6) .............. -- -- (26,000) -- (26,000) -- Natural gas gathering and marketing ................... 134,299 150,392 15,223 17,884 12,432 15,153 Other ............................. 11,124 9,909 10,098 8,978 9,811 8,675 --------- --------- --------- --------- --------- --------- 380,383 416,619 23,468 72,973 18,120 67,427 --------- --------- --------- --------- --------- --------- CORPORATE ......................... -- -- -- -- (8,789)(b) (8,311)(b) --------- --------- --------- --------- --------- --------- $ 569,458 $ 595,018 $ 63,973 $ 110,177 $ 41,067 $ 87,511 ========= ========= ========= ========= ========= ========= Three Months - ------------ EXPLORATION AND PRODUCTION Operations ........................ $ 71,105 $ 57,505 $ 19,656 $ 11,741 $ 16,723 $ 8,874 Water well litigation provision (see Note 6) .......... -- -- -- (10,000) -- (10,000) --------- --------- --------- --------- --------- --------- 71,105 57,505 19,656 1,741 16,723 (1,126) --------- --------- --------- --------- --------- --------- GAS SERVICES Natural gas processing ............ 84,763 96,302 8,935 22,353 8,217 21,531 Natural gas gathering and marketing ................... 64,955 43,620 7,087 5,071 6,131 4,174 Other ............................. 3,302 1,583 3,007 1,310 2,906 1,215 --------- --------- --------- --------- --------- --------- 153,020 141,505 19,029 28,734 17,254 26,920 --------- --------- --------- --------- --------- --------- CORPORATE ......................... -- -- -- -- (3,180)(b) (3,103)(b) --------- --------- --------- --------- --------- --------- $ 224,125 $ 199,010 $ 38,685 $ 30,475 $ 30,797 $ 22,691 ========= ========= ========= ========= ========= =========
Capital DD&A Expenditures(a) ----------------------- ----------------------- Nine Months 1997 1996 1997 1996 - ----------- --------- --------- --------- --------- EXPLORATION AND PRODUCTION Operations ........................ $ 68,248 $ 66,874 $ 128,683 $ 92,920 Water well litigation provision (see Note 6) .......... -- -- -- -- Gain from sale of contract drilling assets ........ -- -- -- -- Severance tax refunds ............. -- -- -- -- Columbia Gas contract settlement proceeds ............. -- -- -- -- --------- --------- --------- --------- 68,248 66,874 128,683 92,920 --------- --------- --------- --------- GAS SERVICES Natural gas processing ............ 2,773 2,673 9,542 4,719 Royalty litigation settlement provision (Note 6) .............. -- -- -- -- Natural gas gathering and marketing ................... 4,515 2,913 30,587 14,116 Other ............................. 80 80 57 279 --------- --------- --------- --------- 7,368 5,666 40,186 19,114 --------- --------- --------- --------- CORPORATE ......................... 2,290 2,374 3,365 6,059 --------- --------- --------- --------- $ 77,906 $ 74,914 $ 172,234 $ 118,093 ========= ========= ========= ========= Three Months - ------------ EXPLORATION AND PRODUCTION Operations ........................ $ 24,241 $ 20,756 $ 51,566 $ 43,341 Water well litigation provision (see Note 6) .......... -- -- -- -- --------- --------- --------- --------- 24,241 20,756 51,566 43,341 --------- --------- --------- --------- GAS SERVICES Natural gas processing ............ 956 1,036 6,772 1,505 Natural gas gathering and marketing ................... 1,742 957 8,346 7,246 Other ............................. 27 27 20 205 --------- --------- --------- --------- 2,725 2,020 15,138 8,956 --------- --------- --------- --------- CORPORATE ......................... 635 849 956 1,175 --------- --------- --------- --------- $ 27,601 $ 23,625 $ 67,660 $ 53,472 ========= ========= ========= =========
- ---------------------------------- (a) On accrual basis, including exploratory expenditures. (b) General corporate expenses. Because of their magnitude and unusual nature, and in accordance with Accounting Principles Board Opinion No. 30, the items discussed in the following paragraphs have been reported as separate components of segment operating earnings. Effective April 1, 1997, the Company sold its remaining contract drilling assets for $3,500,000. A gain of $2,382,000 was recorded on this transaction. - 11 - 14 During the first and second quarters of fiscal 1997, the Company recorded severance tax refunds of $3,879,000 and $2,056,000, respectively. Acting on an application filed by the Company, the Texas Railroad Commission in February 1996 designated a portion of the Boonsville field in Wise County as a "tight gas formation area." This allowed the Company to apply for and receive severance tax exemptions covering production from this field for the period from September 1996 through August 2001; its share of these refunds totaled $3,879,000. In July 1996, in response to a Texas Comptroller's regulation providing that proceeds from contract terminations may not be subject to severance taxes, the Company requested refunds of severance taxes paid on settlement proceeds received in previous years in connection with two contract terminations. The Company's share of such refunds, which were collected in August 1996, totaled $2,056,000. During the first quarter of fiscal 1997, the Company received $3,444,000 as its share of proceeds in settlement of breach of contract claims brought against Columbia Gas Transmission Company. In conjunction with its filing for protection under the bankruptcy laws in July 1991, Columbia unilaterally rejected its high-priced, long-term natural gas purchase contracts, including one with the Company. During fiscal 1997's first quarter, the Company reached an agreement with Columbia as to the amount of the contract termination damages; after approval by the bankruptcy court, Columbia paid such damages to the Company. (9) COMMON STOCK REPURCHASE PROGRAM On August 18, 1997, the Company purchased 700,000 Class A shares and 1,400,000 Class B shares from a financial intermediary under an accelerated stock purchase transaction for a total consideration of approximately $49,700,000 (subject to a market price adjustment provision). Concurrently, the Company commenced a program to spend up to $50,000,000 to directly repurchase Class A and Class B shares in the open market. Through December 10, 1997, 45,000 Class A and 710,000 Class B shares had been so repurchased at an aggregate cost of approximately $19,800,000. (10) SUBSEQUENT EVENT On November 21, 1997, the Company declared special cash dividends of 24 and 26.5 cents per share, respectively, on its Class A and Class B common stock. The dividends are payable on December 30, 1997 to shareholders of record at the close of business on December 15, 1997. (11) SUPPLEMENTAL CASH FLOW INFORMATION Interest paid, including amounts applicable to discontinued operations, totaled $38,057,000 and $39,807,000 during the nine-month periods ended October 31, 1997 and 1996. Income taxes paid during these periods, including amounts applicable to discontinued operations, totaled $56,996,000 and $9,004,000. There were no significant non-cash investing or financing activities during the nine-month periods ended October 31, 1997 and 1996. - 12 - 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS FORWARD-LOOKING INFORMATION This Form 10-Q includes forward-looking statements. These include, among others, the discussions below concerning the Company's liquidity and capital resources. Although the Company believes that its expectations are based on reasonable assumptions, it can give no assurances that its goals will be achieved. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, among others, the timing and extent of changes in commodity prices for natural gas, NGLs and crude oil, the ability to enter into favorable arrangements to use the net proceeds from the sale of The Woodlands Corporation in the desired manner, the impact of pending North Texas water well litigation against the Company and related insurance recoveries, the attainment of forecasted operating levels and reserve replacement, and general economic conditions such as the level of interest rates. LIQUIDITY AND CAPITAL RESOURCES Over time the Company has periodically evaluated the separation of its energy and real estate businesses. Late last year management initiated a comprehensive re-examination of this matter to determine the course of action that would best serve the interests of the Company's shareholders. After an extensive evaluation of the available alternatives, the Company decided to discontinue its real estate activities and entered into an agreement on June 12, 1997 to sell its real estate subsidiary, The Woodlands Corporation (TWC), for $543,000,000 (certain properties located outside The Woodlands were not included in that transaction). It was concluded that selling TWC would create the greatest value because the transaction could be accomplished in the strongest real estate market in years and since the Company's core energy businesses were well-positioned for growth, which could be enhanced by directing greater resources - both management and financial - toward this objective. The Company realized $481 million of after-tax proceeds from the TWC sale, which closed on July 31, 1997. Excluded from that sale were real estate assets outside The Woodlands with a net book value (including tax benefits) of approximately $35 million. The Company is working to liquidate these holdings and expects that most will be sold during the next year. A balanced reinvestment plan was initiated to utilize the proceeds as quickly as practical, consistent with the Company's objective of growing its core energy businesses in a prudent manner. As part of this plan, $100 million was allocated to the buyback of common stock. On August 18, 1997, the Company purchased 700,000 of its Class A shares and 1,400,000 of its Class B shares in an accelerated stock purchase transaction with a financial intermediary, who borrowed the shares and will be repurchasing replacement shares on the open market. The total consideration was $49.7 million, subject to a market price adjustment provision payable either in the Company's common stock or cash. Concurrently, the Company commenced a program to spend up to an additional $50 million to directly repurchase Class A and Class B shares from time to time in the open market. Through December 10, 1997, 45,000 Class A and 710,000 Class B shares had been so repurchased at an aggregate cost of approximately $19.8 million. Also in connection with its reinvestment program, the Company repurchased $185.7 million face amount of its 9.25% senior notes during fiscal 1998's third quarter. Principally because of an acquisition premium paid in connection with this early retirement of debt, an extraordinary charge of $13.25 million was recorded. At October 31, 1997, $414 million of total debt remained outstanding, or $580 million less than the $994 million balance (including short-term debt) at January 31, 1994. The debt-to-equity ratio at October 31, 1997 was .97-to-1, down from 2.12 at the beginning of fiscal 1995. Furthermore, special cash dividends equal to one-half of the regular annual dividends on the Company's Class A and Class B common stock were declared in November to share some of the TWC sales proceeds with the stockholders. Such dividends, which will aggregate approximately $12.5 million, are payable on December 30, 1997 to stockholders of record on December 15, 1997. - 13 - 16 The remaining TWC sales proceeds are to be used to expand the scope and scale of the Company's core energy operations. Uses of the proceeds include an acceleration of the Company's capital program and possible acquisitions of oil and gas producing properties and gas gathering and processing facilities that complement its existing operations. In addition, the Company believes it could borrow additional funds and/or issue stock to make substantially larger acquisitions, if appropriate opportunities become available. Special teams have been formed to identify and complete acquisitions in each of the Company's core businesses. Although a number of acquisition candidates have been identified and currently are being evaluated, completing any such purchases will take time. Accordingly, it is not expected that any such acquisitions will significantly impact the Company's earnings or cash flows before fiscal 1999. Pending the use of the sales proceeds as described herein, the unused proceeds have been invested in short-term investments of the highest quality at an approximate 5.5% annual rate of return. For the reasons discussed in this paragraph, the Company believes that its future funding needs will not be increased to any significant extent by the North Texas water well litigation. On November 13, 1997, the Second Court of Appeals in Fort Worth, Texas ruled on the Company's appeal of the previously reported $204 million judgment against a subsidiary in the Bartlett case. The three-judge panel unanimously reversed the previous decision, finding that all plaintiffs failed to prove that the Company's actions were the cause of their alleged damages and that most plaintiffs' claims were time-barred by statute of limitations. The plaintiffs subsequently asked the court of appeals for a rehearing, which is expected to be denied. The appeals court decision was in line with the May 1997 unanimous jury verdict concerning the second group of these cases, known as the Bailey case. To date, there has been only minimal activity with respect to 29 other similar cases although one of them involving one family (the Nelon case) is scheduled for trial in January 1998. If, as expected, the court of appeals denies the plaintiffs' rehearing request in the Bartlett case, the Company will be able to cancel the appeal bond and the related letters of credit. After this is done, the Company likely will terminate the $500 million letter of credit facility or at least substantially reduce its size. The Company expects that its fiscal 1998 operating cash flows, together with its available excess cash balances, will be sufficient to cover its debt and stock repurchase and accelerated capital spending programs. CAPITAL AND EXPLORATORY EXPENDITURES The Company's fiscal 1998 budget was originally set at $283.3 million, including $75.3 million for real estate activities. The $208 million budgeted for energy activities, which was 18% higher than the prior year's actual spending level, included a $20 million increase (to $106 million) in exploration and development drilling spending. On an overall basis, gas services capital spending was slated to increase only slightly as expenditures incurred in fiscal 1998 to complete construction of the Louisiana Chalk gathering system essentially replaced amounts spent on the expansion of the 45%-owned "lean gas" gathering and treating system in the Texas Chalk that was completed early in fiscal 1997. In August 1997, the energy budget was increased by $30 million to $238 million to cover additional exploration and production expenditures for three-dimensional seismic work, exploratory acreage acquisitions and exploratory and development drilling and gas services expenditures for the Vanderbilt pipeline project, which includes the acquisition of that system and its connection to Exxon's Katy gas processing plant. The budget amounts are exclusive of acquisitions that could be made using the TWC sales proceeds. During the first nine months, energy capital additions totaled $172.2 million. - 14 - 17 OPERATING STATISTICS Certain operating statistics (including, where applicable, proportional interests in equity partnerships) for the three- and nine-month periods ended October 31, 1997 and 1996 follow:
Three Months Nine Months -------------------- -------------------- 1997 1996 1997 1996 -------- ------- ------- ------- AVERAGE DAILY VOLUMES Natural gas sales (Mcf) .......................................... 239,900 226,200 235,000 226,100 Crude oil and condensate sales (Bbls) ............................ 5,900 5,300 5,900 5,400 Natural gas liquids produced (Bbls) .............................. 45,900 47,200 45,700 45,800 Pipeline throughput (Mcf) ........................................ 410,300 415,800 420,400 397,300 AVERAGE SALES PRICES Natural gas (per Mcf) ............................................ $ 2.66 $ 2.21 $ 2.38 $ 2.29 Crude oil and condensate (per Bbl) ............................... 18.89 22.62 19.09 20.78 Natural gas liquids produced (per Bbl) ........................... 14.33 16.55 13.52 14.80
EARNINGS FROM CONTINUING OPERATIONS - NINE MONTHS ENDED OCTOBER 31, 1997 COMPARED WITH NINE MONTHS ENDED OCTOBER 31, 1996 Earnings from continuing operations for the nine-month periods ended October 31, 1997 - both before and after unusual items - are summarized in the table on the following page. Earnings from continuing operations for fiscal 1998's first nine months of $21.0 million were $26.1 million below those of the prior-year period largely because of the impact of unusual items, which reduced such earnings of the fiscal 1998 and 1997 periods by $19.7 million and $.4 million, respectively. Excluding the effects of the unusual items, such earnings totaled $40.7 million during fiscal 1998's first nine months, or $6.8 million below the prior-year period's $47.5 million. - 15 - 18 The following table and discussion identify and explain the major increases (decreases) in earnings for the nine-month periods (in millions):
Segment Earnings from Operating Earnings Continuing Operations -------------------- --------------------- Exploration Before and Gas Income After Production Services Other* Taxes Tax ----------- -------- ------ ------ ----- FISCAL 1997 AMOUNTS ........................................... $37.2 $73.0 $(37.6) $72.6 $47.1 ----- ----- ------ ----- ----- ELIMINATE IMPACT OF FISCAL 1997 UNUSUAL ITEMS Water well litigation provision (see page 9) .................. 10.0 -- -- 10.0 6.2 Severance tax refund (see page 12) ............................ (5.9) -- -- (5.9) (3.7) Columbia Gas contract settlement proceeds (see page 12) ...................................... (3.5) -- -- (3.5) (2.1) ----- ----- ------ ----- ----- .6 -- -- .6 .4 ----- ----- ------ ----- ----- FISCAL 1997 AMOUNTS BEFORE UNUSUAL ITEMS ...................... 37.8 73.0 (37.6) 73.2 47.5 ----- ----- ------ ----- ----- MAJOR INCREASES (DECREASES) Higher natural gas sales price ................................ 6.8 -- -- 6.8 4.4 Higher natural gas sales volumes .............................. 1.3 -- -- 1.3 .8 Higher operating expenses ..................................... (3.2) -- -- (3.2) (2.1) Proved property impairments ................................... 1.5 -- -- 1.5 1.0 Natural gas processing Price related decreases in NGL margins ...................... -- (13.9) -- (13.9) (9.0) Higher operating expenses, principally repairs and maintenance at the Bridgeport plant ................... -- (5.1) -- (5.1) (3.3) Lower NGL marketing earnings due to declining prices early in fiscal 1998 and rising prices late in fiscal 1997 ..................... -- (2.9) -- (2.9) (1.9) Gas gathering and marketing ................................. -- (2.7) -- (2.7) (1.8) Equity in earnings of MTBE plant partnership ................ -- 1.3 -- 1.3 .8 Interest expense ............................................ -- -- 8.1 8.1 5.3 Interest expense attributable to discontinued operations (only covers six months in fiscal 1998) ........ -- -- (10.7) (10.7) (7.0) Investment income on excess cash balances ................... -- -- 6.0 6.0 3.9 Other, net .................................................. .9 (.2) 1.8 2.5 2.1 ----- ----- ------ ----- ----- 7.3 (23.5) 5.2 (11.0) (6.8) ----- ----- ------ ----- ----- FISCAL 1998 AMOUNTS BEFORE UNUSUAL ITEMS ...................... 45.1 49.5 (32.4) 62.2 40.7 ----- ----- ------ ----- ----- FISCAL 1998 UNUSUAL ITEMS Royalty litigation settlement provision (see page 10) .................................... -- (26.0) -- (26.0) (16.9) Water well litigation provision (see page 9) .................. (7.0) -- -- (7.0) (4.3) Gain from sale of remaining contract drilling assets (see page 11) ...................... 2.4 -- -- 2.4 1.5 ----- ----- ------ ----- ----- (4.6) (26.0) -- (30.6) (19.7) ----- ----- ------ ----- ----- FISCAL 1998 AMOUNTS AFTER UNUSUAL ITEMS ....................... $40.5 $23.5 $(32.4) $31.6 $21.0 ===== ===== ====== ===== =====
- ----------------------------------- * Includes general and administrative expense and other expense EXPLORATION AND PRODUCTION OVERVIEW Exclusive of unusual items, exploration and production segment operating earnings of $45.1 million during fiscal 1998's first nine months were $7.3 million above the $37.8 million of the prior-year's comparable period largely as a result of the period's higher natural gas prices. After overcoming problems that held back production gains in the first and second quarters, the Company's natural gas production averaged almost 240 MMcf per day in the third quarter, 6% above the level for the comparable period last year. - 16 - 19 HIGHER NATURAL GAS SALES PRICE ($6.8 MILLION INCREASE). The Company's natural gas sales price during the first nine months of fiscal 1998 averaged $2.38 per Mcf, $.09 above the $2.29 of the comparable period of the prior year, increasing operating earnings by $6.8 million. HIGHER NATURAL GAS SALES VOLUMES ($1.3 MILLION INCREASE). Natural gas sales volumes averaged 235.0 MMcf per day during fiscal 1998's first nine months, up from 226.1 MMcf during the comparable prior-year period, increasing operating earnings by $1.3 million. HIGHER OPERATING EXPENSES ($3.2 MILLION DECREASE). This unfavorable variance resulted principally from increased spending for repairs and maintenance, property taxes and contract services. Also, the prior-year period benefitted from reimbursements by a third party under an indemnification agreement of expenses incurred several years ago. PROVED-PROPERTY IMPAIRMENTS ($1.5 MILLION INCREASE). An impairment charge of $1.6 million was recorded during the first nine months of fiscal 1998, or $1.5 million less than the $3.1 million recorded in the same period of the prior year. The fiscal 1998 charge involved a New Mexico field where certain wells were sold and reserve estimates were lowered for the remaining wells. The prior-year period's charge occurred because of disappointing drilling results for one well and downward revisions in reserve estimates for that field in the Gulf of Mexico. GAS SERVICES OVERVIEW Gas services operating earnings before unusual items declined $23.5 million (to $49.5 million) during the first nine months of fiscal 1998 largely because of price-related reductions in earnings from gas processing and gas gathering and marketing and increased gas processing operating expenses. NATURAL GAS PROCESSING - PRICE-RELATED DECREASES IN NGL MARGINS ($13.9 MILLION DECREASE). The average price for NGLs produced during fiscal 1998's first nine months of $13.52 per barrel was 9% below the prior period's $14.80, decreasing NGL revenues by $15.4 million. Feedstock costs declined by only $1.5 million, however, as the NGL-price-related reduction in producer payments was largely offset by fuel and shrinkage cost increases associated with the current period's higher natural gas prices. GAS GATHERING AND MARKETING ($2.7 MILLION DECREASE). A $2.2 million decline in gross margins on buy/resale activities was the principal cause of this decrease. Earnings increases from the Austin Chalk lean-gas system's increased throughput were unable to offset the downward impact on the rich-gas system's earnings of ongoing production declines for the wells it services. EQUITY IN EARNINGS OF MTBE PLANT PARTNERSHIP ($1.3 MILLION INCREASE). This variance was primarily due to a $.7 million increase in operating income because of approximately 39 days less downtime in the current year (12 versus 51) and a $.7 million decline in interest expense which resulted largely from ongoing quarterly paydowns of the partnership's debt. The plant experienced several shutdowns in the prior year including an unscheduled 7-day shutdown in February 1996 to repair a turbine, a longer-than-expected 25-day maintenance turnaround in August 1996 and an unscheduled 19-day shutdown in September to correct a catalyst backflow problem. In contrast, the plant was down only 12 days in the current-year period for its scheduled annual maintenance turnaround. OTHER INTEREST EXPENSE ($8.1 MILLION INCREASE). Interest expense was $8.1 million lower during fiscal 1998's first nine months because of a $163.3 million decline in the average balance of outstanding debt, which resulted primarily from the repayment of a $30 million term loan on January 28, 1997, $100 million of senior notes on February 18, 1997 and $185.7 million of senior notes in the third quarter. - 17 - 20 EARNINGS FROM CONTINUING OPERATIONS - THREE MONTHS ENDED OCTOBER 31, 1997 COMPARED WITH THREE MONTHS ENDED OCTOBER 31, 1996 Earnings from continuing operations for the three-month periods ended October 31, 1997 and 1996 are summarized in the table which follows. Net earnings for the third quarter of fiscal 1998 were $17.7 million, compared with $10.9 million in the prior-year period, when a $10 million water well litigation provision reduced net earnings by $6.2 million. Excluding the effects of unusual items, fiscal 1998's third quarter earnings of $17.7 million were $.6 million above the $17.1 million of the prior-year period. The following table and discussion identify and explain the major increases (decreases) in earnings for the three-month periods (in millions):
Segment Earnings from Operating Earnings Continuing Operations -------------------- --------------------- Exploration Before and Gas Income After Production Services Other* Taxes Tax ----------- -------- ------ ------ ----- FISCAL 1997 AMOUNTS ........................................... $ 1.7 $28.7 $(13.1) $17.3 $10.9 ELIMINATE IMPACT OF FISCAL 1997 UNUSUAL ITEM Water well litigation provision (see page 9) .................. 10.0 -- -- 10.0 6.2 ----- ----- ------ ----- ----- FISCAL 1997 AMOUNTS BEFORE UNUSUAL ITEM ....................... 11.7 28.7 (13.1) 27.3 17.1 ----- ----- ------ ----- ----- MAJOR INCREASES (DECREASES) Higher natural gas sales price ................................ 10.3 -- -- 10.3 6.7 Higher natural gas sales volumes .............................. .9 -- -- .9 .6 Crude and condensate sales .................................... (1.0) -- -- (1.0) (.7) Proved property impairments ($1.6 versus none -- see page 17) ........................... (1.6) -- -- (1.6) (1.0) Natural gas processing Price related decreases in NGL margins ...................... -- (10.6) -- (10.6) (6.9) Lower NGL sales volumes (45.9 MBbls/d versus 47.2) ................................ -- (1.0) -- (1.0) (.7) Higher repairs and maintenance expense, principally at the Bridgeport plant ....................... -- (2.6) -- (2.6) (1.7) Gas gathering and marketing ................................... -- 2.0 -- 2.0 1.3 Equity in earnings of MTBE plant partnership .................. -- 2.5 -- 2.5 1.6 Interest expense .............................................. -- -- 3.9 3.9 2.5 Interest expense attributable to discontinued operations (none versus $8.5) ............................... -- -- (8.5) (8.5) (5.5) Investment income on excess cash balances ..................... -- -- 5.0 5.0 3.3 Other, net .................................................... (.7) -- 1.6 .9 1.1 ----- ----- ------ ----- ----- 7.9 (9.7) 2.0 .2 .6 ----- ----- ------ ----- ----- FISCAL 1998 AMOUNTS ........................................... $19.6 $19.0 $(11.1) $27.5 $17.7 ===== ===== ====== ===== =====
- ------------------------------------ * Includes general and administrative expense and other expense EXPLORATION AND PRODUCTION OVERVIEW Exploration and production segment operating earnings of $19.6 million during the third quarter of fiscal 1998 were $7.9 million above the $11.7 million of fiscal 1997's third quarter (before unusual item) principally because of higher natural gas prices. The Company's natural gas sales price averaged $2.66 per Mcf during the third quarter of fiscal 1998, or 20% higher than the $2.21 of the prior-year period. - 18 - 21 HIGHER NATURAL GAS SALES VOLUME ($.9 MILLION INCREASE). Natural gas sales volumes averaged 239.9 MMcf per day during the current quarter, up from 226.2 during the third quarter of the prior year. The volume increases were primarily the result of activities in North Texas and the Lake Creek and Personville fields. CRUDE AND CONDENSATE SALES ($1.0 MILLION DECREASE). The average sales price for crude and condensate during fiscal 1998's third quarter was $18.89 per barrel, down from the $22.62 of the prior-year period, reducing operating earnings by $2.0 million. Partially offsetting the impact of this was a 600-barrel-per-day increase in production, which added $1.0 million to operating earnings. GAS SERVICES OVERVIEW Gas services operating earnings declined by $9.7 million to $19.0 million during the third quarter of fiscal 1998 due principally to lower NGL margins and higher repairs and maintenance costs at the Bridgeport plant, the impact of which was partially offset by other items. NATURAL GAS PROCESSING - PRICE-RELATED DECREASES IN NGL MARGINS ($10.6 MILLION DECREASE). The Company's NGL price averaged $14.33 per barrel during the current quarter, down 13% from the $16.55 of the prior-year's comparable period, reducing NGL revenues by $9.0 million. Furthermore, feedstock costs were $1.6 million higher as the period's higher natural gas prices caused fuel and shrinkage costs to increase by a greater amount than producer payments were reduced by the lower NGL prices. GAS GATHERING AND MARKETING ($2.0 MILLION INCREASE). Price-related improvements in gross margins for onsystem buy/resale and offsystem marketing activities were the principal causes of this earnings increase. EQUITY IN EARNINGS OF MTBE PLANT PARTNERSHIP ($2.5 MILLION INCREASE). This earnings improvement occurred primarily because the plant was shut-down for maintenance for substantially fewer days in the current quarter (see page 17 for additional information). OTHER INTEREST EXPENSE ($3.9 MILLION INCREASE). Interest expense during fiscal 1998's third quarter totaled $10.3 million, or $3.9 million less than during the fiscal 1997 quarter. This decline occurred principally because of a decline in the Company's average debt balance (for the reasons discussed on page 17). - 19 - 22 Part II - Other Information ITEM 1. LEGAL PROCEEDINGS See Note 6 of Notes to Unaudited Consolidated Financial Statements. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits No exhibits are filed with this report. (b) On August 15, 1997, the Company filed a Form 8-K reporting the sale of The Woodlands Corporation to a partnership of Crescent Real Estate Equities Company and Morgan Stanley Real Estate Fund II, L.P. in a transaction that closed on July 31, 1997 and its decision to withdraw from the real estate business. The following unaudited financial statements of the Company were filed with this report: Pro Forma Condensed Consolidated Balance Sheet at April 30, 1997 Pro Forma Condensed Consolidated Statements of Earnings for the following periods: Three-Month Period Ended April 30, 1997 Year Ended January 31, 1997 Condensed Consolidated Statements of Earnings for the following periods: Year Ended January 31, 1996 Year Ended January 31, 1995 On August 19, 1997, the Company filed Form 8-K/A Amendment No. 1 to amend and update the Form 8-K in certain respects. - 20 - 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MITCHELL ENERGY & DEVELOPMENT CORP. ----------------------------------- (Registrant) Dated: December 12, 1997 By: /s/ Philip S. Smith ----------------------------------- Philip S. Smith Senior Vice President - Administration and Chief Financial Officer - 21 - EX-27 2 FINANCIAL DATA SCHEDULE
5 9-MOS 3-MOS YEAR YEAR JAN-31-1998 JAN-31-1997 JAN-31-1996 JAN-31-1995 OCT-31-1997 APR-30-1996 JAN-31-1996 JAN-31-1995 207,013 43,467 17,867 9,346 0 0 0 0 119,284 90,370 88,494 119,863 0 439 439 1,536 19,852 8,918 10,956 11,739 355,157 235,482 219,163 159,176 2,166,994 2,040,905 2,040,539 2,116,076 1,317,988 1,327,056 1,321,004 1,381,977 1,280,121 1,561,084 1,599,183 1,514,277 220,621 281,678 182,752 134,525 414,267 642,000 795,000 789,680 0 0 0 0 0 0 0 0 5,386 5,386 5,386 5,386 420,507 490,064 476,517 469,644 1,280,121 1,561,084 1,599,183 1,514,277 569,458 195,637 902,919 765,106 569,458 199,081 902,919 765,106 0 0 0 0 505,485 156,688 681,684 624,889 12,831 6,298 37,762 37,049 0 0 0 0 19,534 5,745 27,341 32,958 31,608 30,350 156,132 70,210 10,613 10,519 55,420 24,627 20,995 19,831 100,712 45,583 (59,683) 3,418 (63,583) 231 (13,250) 0 0 0 0 0 0 0 (51,938) 23,249 37,129 45,814 (1.01) .45 .71 .87 (1.01) .45 .71 .87
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