10-Q 1 h89473e10-q.txt MITCHELL ENERGY & DEVELOPMENT CORP. - 06/30/2001 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 JUNE 30, 2001 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 July 31, 2001.............. 49,911,612 ================================================================================ 2 INDEX

Page Number ------ 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...................... 1112 Part II - Other Information Item 1. Legal Proceedings........................................... 1720 Item 4. Submission of Matters to Vote of Security Holders........... 20 Item 6. Exhibits and Reports on Form 8-K............................ 1720

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 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. 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 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 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- 4 MITCHELL ENERGY & DEVELOPMENT CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (dollar amounts in thousands)

~~MARCH~~JUNE 3130, December 31, 2001 2000 ----------- ----------- ASSETS CURRENT ASSETS Cash and cash equivalents .................................................~~.....~~ $ ~~121~~61,~~340~~495 $ 23,451 Trade receivables .........................................................~~.....~~ ~~182~~142,~~291~~817 221,946 Inventories ...............................................................~~.....~~ 1830,~~726~~132 17,636 ~~Other~~Federal income taxes receivable ........................................... 13,649 -- Other ..................................................................... 32,~~875~~761 5,198 ----------- ----------- Total current assets .................................................~~.....~~ ~~326~~250,~~232~~854 268,231 ----------- ----------- PROPERTY, PLANT AND EQUIPMENT, at cost less accumulated depreciation, depletion and amortization of $1,~~590~~634,~~195~~399 and $1,559,427 Exploration and production Oil and gas properties ..................................................~~.....~~ ~~850~~926,~~287~~187 795,682 Support equipment and facilities ........................................~~.....~~ 13,~~357~~712 12,874 Gas services (including investments in equity partnerships) (Note 2) Natural gas processing ..................................................~~.....~~ ~~136~~151,~~933~~222 117,975 Natural gas gathering and marketing .....................................~~.....~~ ~~217~~252,~~861~~984 190,569 Other ...................................................................~~.....~~ 8591,~~714~~264 86,077 Corporate .................................................................~~.....~~ 2,~~839~~978 2,828 ----------- ----------- 1,~~306~~438,~~991~~347 1,206,005 ----------- ----------- LONG-TERM INVESTMENTS AND OTHER ASSETS ....................................~~.....~~ 4142,~~551~~386 45,529 ----------- ----------- $ 1,~~674~~731,~~774~~587 $ 1,519,765 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current maturities of long-term debt (Note 3) .............................~~.....~~ $ 62,920 $ -- Oil and gas proceeds payable ..............................................~~.....~~ ~~165~~147,~~727~~492 166,221 Accounts payable ..........................................................~~.....~~ 8192,~~713~~836 79,248 ~~Federal income taxes payable ................................................... 39,712 --~~ Accrued liabilities .......................................................~~.....~~ 5261,~~814~~998 58,670 ----------- ----------- Total current liabilities ............................................~~.....~~ ~~402~~365,~~886~~246 304,139 ----------- ----------- LONG-TERM DEBT (Note 3) ...................................................~~.....~~ ~~218~~210,~~105~~855 300,342 ----------- ----------- DEFERRED CREDITS AND OTHER LIABILITIES Deferred income taxes .....................................................~~.....~~ ~~225~~253,~~661~~247 203,919 Retirement obligations ....................................................~~.....~~ 72,~~135~~727 71,733 Other .....................................................................~~.....~~ 17,~~975~~987 19,446 ----------- ----------- ~~315~~343,~~771~~961 295,098 ----------- ----------- COMMITMENTS AND CONTINGENCIES (Note 6) STOCKHOLDERS' EQUITY Preferred stock, $.10 par value (authorized 10,000,000 shares; none issued) Common stock, $.10 par value (authorized 200,000,000 shares) ..............~~.....~~ 5,386 5,386 Additional paid-in capital ................................................~~.....~~ ~~148~~149,~~575~~283 148,154 Retained earnings .........................................................~~.....~~ ~~681~~752,~~450~~868 565,132 Other comprehensive loss ..................................................~~.....~~ (8,896) (8,896) Treasury stock, at cost ...................................................~~.....~~ (8887,~~503~~116) (89,590) ----------- ----------- ~~738~~811,~~012~~525 620,186 ----------- ----------- $ 1,~~674~~731,~~774~~587 $ 1,519,765 =========== ===========

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 Six Months Ended ~~March~~June 3130 Ended June 30 ------------------------- ------------------------ 2001 2000 2001 2000 ---------- ---------- ---------- ---------- REVENUES Exploration and production ...........................................~~.............~~ $ ~~242~~180,~~641~~636 $ 86109,~~632~~027 $ 423,277 $ 195,659 Gas services (including a gain of $4,884 from an asset exchange in 2000)'s first quarter (Note 2) ................~~........................~~ ~~412~~305,~~486~~427 ~~227~~252,~~299~~313 717,913 479,612 ---------- ---------- ~~655~~---------- ---------- 486,~~127~~063 ~~313~~361,~~931~~340 1,141,190 675,271 ---------- ---------- ---------- ---------- OPERATING COSTS AND EXPENSES Exploration and production (net of a litigation provision reversal of $1,200 in 2000's first quarter) (Note 5) ....~~..............................~~ 7376,~~541~~020 5057,~~910~~494 149,561 108,404 Gas services .........................................................~~.............~~ ~~381~~284,~~159~~207 ~~186~~219,~~838~~233 665,366 406,071 ---------- ---------- ~~454~~---------- ---------- 360,~~700~~227 ~~237~~276,~~748~~727 814,927 514,475 ---------- ---------- ---------- ---------- SEGMENT OPERATING EARNINGS (Note 5) ..................................~~.............~~ ~~200~~125,~~427~~836 7684,~~183~~613 326,263 160,796 General and administrative expense ...................................~~.............~~ 67,~~806~~179 79,~~199~~236 13,985 16,435 ---------- ---------- ---------- ---------- TOTAL OPERATING EARNINGS .............................................~~.............~~ ~~193~~118,~~621~~657 6875,~~984~~377 312,278 144,361 ---------- ---------- ---------- ---------- OTHER EXPENSE Interest expense .....................................................~~.............~~ 5,~~666~~202 7,~~909~~143 10,868 15,052 Other (income) expense, net ..........................................~~.............~~ 1(3,~~200~~572) (3559) (2,~~688~~372) (4,247) ---------- ---------- ---------- ---------- 1,630 6,~~866~~584 48,~~221~~496 10,805 ---------- ---------- ---------- ---------- EARNINGS BEFORE INCOME TAXES .........................................~~.............~~ ~~186~~117,~~755~~027 6468,~~763~~793 303,782 133,556 INCOME TAXES (Note 4) ................................................~~.............~~ 6338,~~833~~997 2124,~~512~~623 102,830 46,135 ---------- ---------- ---------- ---------- NET EARNINGS .........................................................~~.............~~ $ ~~122~~78,~~922~~030 $ 4344,~~251~~170 $ 200,952 $ 87,421 ========== ========== ========== ========== NET EARNINGS PER SHARE (Note 8) Basic ................................................................ $ 1.56 $ .~~...........~~90 $ 24.4703 $ 1.8878 Diluted .............................................................. 1.53 .~~...........~~89 23.4195 1.8776 AVERAGE COMMON SHARES OUTSTANDING Basic ................................................................~~.............~~ 49,~~818~~876 49,~~121~~172 49,847 49,147 Diluted ..............................................................~~.............~~ 50,~~912~~918 49,~~450~~722 50,906 49,576

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 Six Months Ended June 30, 2001 (dollar amounts in thousands)

Other Additional Compre- Common Paid-in Retained hensive Treasury DOLLAR AMOUNTS Total Stock Capital Earnings Loss Stock ---------~~-----~~ --------- --------- -~~---------~~ --------- --------- --------- BALANCE, DECEMBER 31, 2000 ............... $ 620,186 $ 5,386 $ 148,154 $ 565,132 $ (8,896) $ (89,590) Net earnings ............................. ~~122~~200,~~922~~952 -- -- ~~122~~200,~~922~~952 -- -- Cash dividends (1326.255 cents per share) ... (613,~~604~~216) -- -- (613,~~604~~216) -- -- Exercises of stock options ............... 13,~~508~~603 -- ~~421~~1,129 -- -- 12,~~087~~474 --------- --------- --------- --------- --------- --------- BALANCE, ~~MARCH~~JUNE 3130, 2001 .................. $ ~~738~~811,~~012~~525 $ 5,386 $ ~~148~~149,~~575~~283 $ ~~681~~752,~~450~~868 $ (8,896) $ (8887,~~503~~116) ========= ========= ========= ========= ========= =========

----------

Common Stock Treasury Shares SHARE AMOUNTS Issued Stock Outstanding ----------~~---~~ ---------- ---------- -~~----------~~ BALANCE, DECEMBER 31, 2000 ...~~.....~~ 53,856,140 4,059,927 49,796,213 Exercises of stock options ...~~.....~~ -- (49112,~~239~~082) 49112,~~239~~082 ---------- ---------- ---------- BALANCE, ~~MARCH~~JUNE 3130, 2001 .......~~....~~ 53,856,140 43,~~010~~947,~~688~~845 49,~~845~~908,~~452~~295 ========== ========== ==========

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)

~~Three~~Six Months Ended ~~March~~June 3130 ----------------------- 2001 2000 --------- --------- OPERATING ACTIVITIES Net earnings ............................................................... $ ~~122~~200,~~922~~952 $ 4387,~~251~~421 Adjustments to reconcile net earnings to cash provided by operating activities Depreciation, depletion and amortization ............................. 4289,~~259~~944 3268,~~853~~235 Deferred income taxes ................................................ 2250,~~375~~724 1025,~~211~~299 Exploratory well impairments ......................................... 24,~~168~~619 --957 Distributions in excess of (less than) earnings of equity investees .... ~~594~~(4,883) 3(2,~~129~~904) Gain from disposition of property, plant and equipment ............... -- (4,884) Water well litigation provision reversal ............................. -- (1,200) Other, net ........................................................... 32,~~736~~308 (34,~~458~~069) --------- --------- ~~194~~343,~~054~~664 79168,~~902~~855 Changes in operating assets and liabilities .......................... 7641,~~668~~213 ~~6,513~~(923) --------- --------- Cash provided by operating activities ................................ ~~270~~384,~~722~~877 86167,~~415~~932 --------- --------- INVESTING ACTIVITIES Capital and exploratory expenditures ....................................... (~~150~~329,~~567~~079) (49116,~~738~~639) Adjustment to cash basis ................................................... 713,~~256~~992 114,~~278~~139 Exploration expenses also deducted from earnings ........................... 24,~~278~~078 13,~~879~~948 --------- --------- Cash basis capital and exploratory expenditures ......................... (~~141~~311,~~033~~009) (4698,~~581~~552) Proceeds from disposition of property, plant and equipment ................. -- 1215,~~930~~805 Other, net ................................................................. ~~(159)~~1,735 ~~637~~211 --------- --------- Cash used for investing activities ................................... (~~141~~309,~~192~~274) (3382,~~014~~536) --------- --------- FINANCING ACTIVITIES Debt repayments ............................................................ (1926,~~317~~567) (2565,000) Cash dividends ............................................................. (13,199) (612,~~229~~459) Other, net ................................................................. ~~875~~2,207 ~~260~~1,905 --------- --------- Cash used for financing activities ................................... (3137,~~641~~559) (3075,~~969~~554) --------- --------- INCREASE IN CASH AND CASH EQUIVALENTS ...................................... 9738,~~889~~044 229,~~432~~842 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ............................. 23,451 24,024 --------- --------- CASH AND CASH EQUIVALENTS, END OF PERIOD ................................... $ ~~121~~61,~~340~~495 $ 4633,~~456~~866 ========= =========

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 June 30, 2001 (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 processing plants and gathering systems in Texas and markets the natural gas liquids extracted by its plants and the natural gas throughput of its gathering systems. 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 June 30, 2001 and 2000. Supplemental cash flow information. Short-term investments with maturities of three months or less are considered to be cash equivalents. The reported amounts for proceeds from issuance of debt and debt repayments exclude the impact of borrowings with initial terms of three months or less. Excluding amounts capitalized of $3,455,000 and $990,000 respectively, interest paid totaled $11,518,000 and $15,316,000 during the six-month periods ended June 30, 2001 and 2000. Income taxes paid during the six-month periods ended June 30, 2001 and 2000 totaled $64,274,000 and $19,131,000. 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 June 30, 2001 and 2000. -6- 9 (2) GAS SERVICES PARTNERSHIP INVESTMENTS A summary of the Company's net investments in partnerships at June 30, 2001 and December 31, 2000 and its equity in their pretax earnings for the six-month periods ended June 30, 2001 and 2000 follows (in thousands):

Equity in Net Investment Pretax Earnings --------------------------- -------------------------- Percent ~~March~~June 3130, December 31, ~~March~~June 3130, ~~March~~June 3130, Owned 2001 2000 2001 2000 ------- ---------- ------------ ---------- ---------- NATURAL GAS PROCESSING C&L Processors Partnership (C&L) .........~~...................~~ 50* $ -- $ -- $ -- $ ~~1,100~~684 U.P. Bryan Plant .........................~~...................~~ 45* -- -- -- 4,640 ---------- ---------- ---------- ---------- -- -- -- 5,~~740~~324 ---------- ---------- ---------- ---------- GAS GATHERING AND MARKETING Austin Chalk Natural Gas Marketing Services (Austin Chalk) .....~~...................~~ 45* -- -- -- ~~(75)~~3 Ferguson-Burleson County Gas ~~Gath-~~Gathering ~~ering~~ System (Ferguson-Burleson) ............~~.............~~ 45* -- -- -- (76) Louisiana Chalk Gathering System .........~~...................~~ 50 4,~~132~~046 4,217 (85171) (~~254~~510) Others ...................................~~...................~~ 327 408 (81) 94145 ---------- ---------- ---------- ---------- 4,~~459~~373 4,625 (~~166~~252) (~~311~~438) ---------- ---------- ---------- ---------- OTHER Belvieu Environmental Fuels (BEF) ........~~...................~~ 33.33 5661,~~289~~709 56,254 355,455 110,~~554~~226 Gulf Coast Fractionators .................~~...................~~ 38.75 28,~~003~~160 28,375 ~~(372)~~947 ~~672~~1,428 ---------- ---------- ---------- ---------- 8489,~~292~~869 84,629 ~~(337)~~6,402 211,~~226~~654 ---------- ---------- ---------- ---------- $ 8894,~~751~~242 $ 89,254 $ ~~(503)~~6,150 $ 716,~~655~~540 ========== ========== ========== ==========

---------- * Prior to the asset exchange on March 31, 2000. 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. 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. The results of the U.P. Bryan Plant, Austin Chalk and Ferguson-Burleson partnerships began being reported in the Company's consolidated results effective April 1, 2000. For the applicable periods during which the Company held partnership interests in the above-listed entities, summarized earnings information (on a 100% basis) for these entities for the three- and six-month periods ended June 30, 2001 and 2000 follows (in thousands):

Three Months Six Months ----------------------------- ----------------------------- 2001 2000 2001 2000 ------------ ------------ ------------ ------------ Revenues ................~~......................................~~ 47$ 89,~~393~~211 ~~140~~$ 96,~~915~~965 $ 136,604 $ 237,880 Operating earnings ......~~......................................~~ (119,~~352)~~347 2125,~~174~~587 17,995 46,761 Pretax earnings .........~~......................................~~ (119,~~156)~~524 2125,~~123~~796 18,368 46,919

-7- 10 BEF owns a plant located at Mont Belvieu, Texas with the capacity to produce up to 17,000 barrels per day of MTBE, a gasoline additive that reduces emissions. BEF has entered into agreements which require each of the three partners to provide one-third of the plant's isobutane feedstock and one of the partners, Sun Company, Inc., to purchase all of its production for a period extending through September 2004. In March 1999, the governor of California ordered that the use of MTBE be phased out in that state over a four-year period, which ban was later the subject of a legal challenge. In July 1999, a national advisory panel formed by the United States Environmental Protection Agency (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 results of future operations. (3) LONG-TERM DEBT The Company's debt agreements include unsecured parent company senior notes, the proceeds of which have been advanced to the operating subsidiaries, and bank revolving credit and money market facilities. A summary of outstanding debt at June 30, 2001 and December 31, 2000 follows (in thousands):

~~March~~June 3130 December 31 ------------ ------------ Unsecured senior notes 9 1/4%, due January 15, 2002 ............................. $ 62,920 $ 64,267 6 3/4%, due February 15, 2004 ............................ ~~218~~210,~~105~~855 236,075 Committed bank revolving credit agreement, unsecured ....... -- -- ------------ ------------ ~~281~~273,~~025~~775 300,342 Less - current maturities .................................. 62,920 -- ------------ ------------ $~~218~~ 210,~~105~~855 $ 300,342 ============ ============

The senior notes have no sinking fund requirements and are not redeemable prior to their respective maturity dates. During March and May 2001, the Company purchased senior notes totaling $26,567,000 principal amount at a small premium in the open market. The Company has a five-year $250,000,000 committed bank revolving credit facility that terminates in July 2003, when any amounts then outstanding are payable. 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 $535,513,000 at June 30, 2001. -8- 11 (4) INCOME TAXES Income taxes for the six-month periods ended June 30, 2001 and 2000 consisted of the following (in thousands):

2001 2000 ------------ ------------ Current - Federal ......~~....................~~ $41 51,~~324~~964 $11 20,~~242~~683 State ........~~....................~~ ~~134~~142 59153 ------------ ------------ 4152,~~458~~106 1120,~~301~~836 ------------ ------------ Deferred - Federal ......~~....................~~ 2250,~~259~~451 922,~~201~~551 State ........~~....................~~ ~~116~~273 12,~~010~~748 ------------ ------------ 2250,~~375~~724 1025,~~211~~299 ------------ ------------ $63 102,~~833~~830 $21 46,~~512~~135 ============ ============

Estimated annual tax rates of 33.9% and 34.5%, respectively, were used in computing the income tax provisions for the six-month periods ended June 30, 2001 and 2000. 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. -9- 12 (5) SEGMENT INFORMATION Selected industry segment data for the indicated periods follows (in thousands):

Inter- Segment Total Capital Outside segment Operating Operating Expendi- Revenues Revenues Earnings Earnings DD&A tures(a) --------- --------- --------- --------- --------- --------- ~~THREE~~SIX MONTHS ENDED ~~MARCH~~JUNE 3130, 2001 EXPLORATION AND PRODUCTION .................~~........~~ $ ~~242~~423,~~641~~277 $ -- $ ~~169~~273,~~100~~716 $ ~~166~~268,~~404~~556 $ 3575,~~335~~001 $ 95215,~~236~~786 ---------- --------- --------- --------- --------- --------- GAS SERVICES Natural gas processing .....................~~........~~ ~~205~~357,~~424~~162 ~~109~~191,~~251~~078 1827,~~812~~681 1725,~~886~~942 14,~~855~~002 2238,~~395~~891 Natural gas gathering and marketing ........~~........~~ ~~207~~354,~~399~~349 ~~293~~510,~~087~~556 1318,~~032~~824 1216,~~050~~871 410,~~730~~251 3273,~~314~~099 Other ......................................~~........~~ ~~(337)~~6,402 -- ~~(517)~~6,042 ~~(587)~~5,894 2754 90105 ---------- --------- --------- --------- --------- --------- ~~412~~717,~~486~~913 ~~402~~701,~~338~~634 3152,~~327~~547 2948,~~349~~707 614,~~612~~307 54112,~~799~~095 ---------- --------- --------- --------- --------- --------- CORPORATE ..................................~~........~~ -- -- -- (24,~~132~~985)(b) ~~312~~636 ~~532~~1,198 ---------- --------- --------- --------- --------- --------- $ ~~655~~1,~~127~~141,190 $ ~~402~~701,~~338~~634 $ ~~200~~326,~~427~~263 $ ~~193~~312,~~621~~278 $ 4289,~~259~~944 $ ~~150~~329,~~567~~079 ========== ========= ========= ========= ========= ========= ~~THREE~~SIX MONTHS ENDED ~~MARCH~~JUNE 3130, 2000 EXPLORATION AND PRODUCTION Operations .................................~~........~~ $ 86195,~~632~~659 $ -- $ 3486,~~522~~055 $ 3281,~~212~~522 $ 2755,~~217~~301 $ 4296,~~495~~797 Water well litigation provision reversal ...~~........~~ -- -- 1,200 1,200 -- -- ---------- --------- --------- --------- --------- --------- 86195,~~632~~659 -- 3587,~~722~~255 3382,~~412~~722 2755,~~217~~301 4296,~~495~~797 ---------- --------- --------- --------- --------- --------- GAS SERVICES Natural gas processing .....................~~........~~ ~~163~~305,~~299~~022 3682,~~234~~807 2844,~~237~~447 2742,~~495~~910 13,~~644~~220 15,~~848~~301 Natural gas gathering and marketing ........ 158,042 217,472 12,918 11,209 8,797 14,139 Other ...................................... 5611,~~880~~664 88-- 11,~~895~~292 511,~~301~~156 53 169 Gain from asset exchange (Note 2) .......... 4,~~442~~884 3-- 4,~~505~~884 54,~~315~~884 ~~Other~~-- -- ---------- --------- --------- --------- --------- --------- 479,612 300,279 73,541 70,159 12,070 19,609 ---------- --------- --------- --------- --------- --------- CORPORATE .................................. -- -- -- (8,520)(b) 864 233 ---------- --------- --------- --------- --------- --------- $ 675,271 $ 300,279 $ 160,796 $ 144,361 $ 68,235 $ 116,639 ========== ========= ========= ========= ========= ========= THREE MONTHS ENDED JUNE 30, 2001 EXPLORATION AND PRODUCTION ................. 2$ 180,~~236~~636 $ -- 2$ 104,~~039~~616 1$ 102,~~977~~152 27$ 2439,666 ~~Gain~~$ ~~from~~120,550 ~~asset~~---------- ~~exchange~~--------- ~~(Note~~--------- 2)--------- --------- --------- GAS SERVICES Natural gas processing ..................... 151,738 81,827 8,869 8,056 2,147 16,496 Natural gas gathering and marketing ........ 146,950 217,469 5,792 4,~~884~~821 5,521 40,785 Other ...................................... 6,739 -- 46,~~884~~559 46,~~884~~481 27 15 ---------- --------- --------- --------- --------- --------- 305,427 299,296 21,220 19,358 7,695 57,296 ---------- --------- ~~227~~--------- --------- --------- --------- CORPORATE .................................. -- -- -- (2,853)(b) 324 666 ---------- --------- --------- --------- --------- --------- $ 486,063 $ 299,296 $ 125,~~129~~836 40$ 118,~~461~~657 38$ 47,~~798~~685 5$ 178,~~176~~512 7========== ========= ========= ========= ========= ========= THREE MONTHS ENDED JUNE 30,~~187~~ 2000 EXPLORATION AND PRODUCTION.................. $ 109,027 $ -- $ 51,533 $ 49,310 $ 28,084 $ 54,302 ---------- --------- --------- --------- --------- --------- ~~CORPORATE~~GAS SERVICES Natural gas processing ..................... 141,723 46,573 16,210 15,415 1,576 3,453 Natural gas gathering and marketing ........ 101,162 128,577 7,617 6,767 5,292 8,824 Other ...................................... 9,428 -- 9,253 9,179 26 145 ---------- --------- --------- --------- --------- --------- 252,313 175,150 33,080 31,361 6,894 12,422 ---------- --------- --------- --------- --------- --------- CORPORATE .................................. -- -- -- (35,~~226~~294)(b) ~~460~~404 56177 ---------- --------- --------- --------- --------- --------- $ ~~313~~361,~~931~~340 $ ~~125~~175,~~129~~150 $ 7684,~~183~~613 $ 6875,~~984~~377 $ 3235,~~853~~382 $ 4966,~~738~~901 ========== ========= ========= ========= ========= =========

---------- (a) On accrual basis, including exploratory expenditures. (b) General corporate expenses. -10- 13 The Company's reported business segments are based on the organizational structure used by management to assess performance and make resource allocation decisions. The Company's three principal business segments are: exploration and production, natural gas processing, and gas gathering and marketing. Exploration and production segment operations include the exploration for and development and production of natural gas and oil. Natural gas processing segment operations include the extraction of natural gas liquids from natural gas processed at facilities owned by the Company and third parties. The gas gathering and marketing segment operates Company-owned natural gas gathering systems and markets the natural gas throughput of these systems, including volumes purchased from third parties. After entering into a defense cost reimbursement agreement with an insurance carrier during January 2000, a water well litigation provision reversal of $1,200,000 was recorded during the first quarter of 2000. (6) 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 their ultimate resolution 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. (7) DERIVATIVE FINANCIAL INSTRUMENTS The Company does not hold or issue derivative financial instruments for trading purposes, and it had no open hedge positions at June 30, 2001 or December 31, 2000. As a result, the Company's adoption effective January 1, 2001 of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," had no significant impact on its financial statements. (8) EARNINGS PER SHARE 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 June 30, 2001 and 2000 (in thousands):

Three Months Six Months ----------------------- ----------------------- 2001 2000 2001 2000 --------- --------- --------- --------- Used in basic computations ............. 49,~~818~~876 49,~~121~~172 49,847 49,147 Dilutive effect of stock options ....... 1,~~094~~042 ~~329~~550 1,059 429 --------- --------- --------- --------- Used in diluted computations ........... 50,~~912~~918 49,~~450~~722 50,906 49,576 ========= ========= ========= =========

Excluded from these computations because their effect would have been antidilutive were stock options covering the following number of shares: 459,750 for the three- and six-month periods ended June 30, 2001 and none and 347,050 for the three- and six-month periods ended June 30, 2000. (9) STOCK OPTIONS AND BONUS UNITS On May 9, 2001, stock options covering 459,750 shares and 354,200 bonus units were issued to employees by the Company at option/floor prices of $54.00. Like previous grants, these awards vest in three equal annual installments and have ten-year lives. -11- 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS FORWARD-LOOKING INFORMATION All statements included in this Form 10-Q, other than statements of historical fact, are forward-looking statements. These include, but are not limited to, strategies, goals and expectations set forth herein concerning exploration and production and gas services operations and the discussions below concerning the Company's liquidity and capital resources. Although the Company believes that its expectations are based on reasonable assumptions, it can give no assurances that its goals will be achieved. Important factors that could cause actual results to differ materially from those in the forward-looking statements include the timing and extent of changes in commodity prices for natural gas, NGLs and crude oil; the attainment of forecasted operating levels and reserve replacement; and unexpected changes in competitive and economic conditions, government regulations, technology and other factors. These factors are discussed in greater detail in Item 7 of the Company's Annual Report on Form 10-K for the year ended December 31, 2000. LIQUIDITY AND CAPITAL RESOURCES For the seventh consecutive quarter, a new natural gas sales volume record was set by the Company. Buoyed by this strong production growth, the Company's second quarter earnings of $78.0 million ($1.53 per diluted share) were up sharply from the prior year's $44.2 million ($.89 per diluted share) and were the third best of any quarter in the Company's history. However, after rising steadily over the previous eight consecutive quarters, second quarter earnings were below the record level of 2001's first quarter as natural gas prices fell from their extremely high levels. While the Company's earnings and cash flows are affected by many factors, 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 2001 and the two prior years:

Crude Oil and Natural Gas (per Mcf)* Condensate (per Bbl) NGLs (per Bbl) ---------------------------~~---~~ ---------------------------~~---~~ ------------------------------ 2001 2000 1999 2001 2000 1999 2001 2000 1999 ------ ------ ------ ------ ------ ------ ------ ------ ------ First quarter ......... $ 6.87 $ 2.89 $ 1.79 $27.32 $26.93 $11.06 $24.76 $21.19 $ 9.55 Second quarter ........ 4.56 3.65 2.25 25.51 27.52 15.46 19.49 19.65 12.56 Third quarter ......... 4.50 2.79 30.29 19.67 22.20 16.36 Fourth quarter ........ 5.52 2.82 30.21 22.91 25.26 17.39 Calendar year ........ 4.23 2.42 28.70 17.17 21.97 14.20

* The Company's average natural gas prices are determined by dividing its reported natural gas revenues by wet gas volumes. Reported gas revenues include proceeds received from sales of gas plus leasehold reimbursements from processors (including the Company) for gas that is converted to NGLs. During 1998, oil and NGL prices were at low points not seen since 1986 because of rising worldwide oil production during a period of relatively weak demand and unusually high inventory levels. OPEC and other countries adopted lower oil production targets during 1999, and as a result excess inventories were worked down and prices for oil and NGLs rose steadily. This strengthening continued in 2000, and the Company's average prices in the fourth quarter exceeded $30.00 per barrel for oil and $25.00 per barrel for NGLs, before falling back in 2001's first quarter and further in the second. After beginning 1999 at extremely low levels, natural gas prices moved upward during the year. Due to reduced deliverability, low storage levels and strong demand, gas prices strengthened considerably in 2000, rising to the $10.00 per Mcf level late in December 2000. After averaging $9.42 per Mcf in January 2001, the Company's average natural gas sales price fell to $6.03 per Mcf in February and $5.13 in March resulting in an average first quarter price of $6.87 per Mcf. Prices continued to fall in the second quarter because of small increases in supply and decreases in demand resulting primarily from an economic slowdown in the United States -12- 15 and fuel switching to oil-based products due to the extremely high gas prices. These factors combined to rebuild natural gas inventories and push prices lower (the Company's average natural gas sales price in June of $3.74 per Mcf was well below the second quarter's $4.56 average). Early in the third quarter, prices had declined to the $3.00-per-Mcf level. Although down substantially from recent levels, natural gas prices remain strong by historical standards. The Company's efforts to grow production volumes continue since its development drilling in the Barnett is economic at current price levels. Based on current strip prices, it now appears that prices realized during 2001's second half will be well below those received in the second half of last year and the first half of this year. Accordingly, despite the sizeable ongoing production increases, the Company's net earnings for the third and fourth quarters of 2001 probably will not reach the record levels of 2000's comparable periods. The Company has major ongoing development drilling and well recompletion programs in the Barnett Shale area of North Texas. These programs, which benefit from the use of light sand fracture technology, have significantly expanded the economically developable area. As a result of this and other successful development drilling, the Company added 580 Bcfe to its gas and oil reserves in June 2001. At June 30, 2001, estimated proved reserves were 38% higher than at the beginning of the year. Primarily because of its success in the Barnett, the Company's natural gas sales have risen sharply in recent periods. Such sales averaged a record 403.3 MMcf per day in 2001's second quarter, 40.3% and 9.2%, respectively, above the levels achieved during last year's second quarter and this year's first quarter. The Company expects to drill approximately 300 wells in the Barnett in 2001, up from 142 in 2000 and 66 in 1999. Fifteen rigs were working in the Barnett in the second quarter and negotiations are proceeding with contractors to add five more later in the year to accelerate exploitation of the Company's large well backlog there. The Company's natural gas sales volumes are on pace to exceed the 25% annual growth target previously set for 2001. The table which follows shows the Company's quarterly natural gas sales volumes over the past eight quarters and the quarter-to-quarter percentage growth in such sales:

~~First~~Sales ~~Annual~~Percentage ~~Quarter~~(Mcf ~~Budget~~per ~~Spending~~day) Growth ------------- ---------- ~~Exploration~~1999 ~~and~~- ~~production~~Third..................................................... 231,800 (2.1) Fourth.................................................... ~~$345~~261,300 12.87 $2000 95- First.2.................................................... ~~Gas~~273,400 ~~services~~4.6 Second.................................................... ~~124~~287,500 5.2 54Third.8.................................................... ~~Corporate~~319,700 11.2 Fourth......................... 3.4.......................... 340,900 6.6 ~~------~~2001 -~~-----~~ ~~$473~~First.4.................................................... ~~$150~~369,300 8.63 ~~======~~Second.................................................... ~~======~~403,300 9.2

The Company's production growth is being achieved almost exclusively through low-risk development drilling and is not contingent upon realizing the high energy prices received in recent periods. With an estimated inventory at June 30, 2001 of almost 3,000 undrilled locations (80% of which are in the Barnett) and adoption of a 20-rig program in the Barnett, the Company expects to exceed its previously announced 20% compounded annual growth target for natural gas production during the three-year period ending in 2003. Pilot tests are underway in the Barnett to study reduced well spacing (27 acre versus the current 55). If successful, the result could be future reserve additions and increases in the backlog of undrilled well locations. 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 provided operating efficiencies and gave the Company more flexibility in using these facilities. -13- 16 The Company's NGL production averaged a record 57,600 barrels per day in 2001's second quarter, pushed by increased Barnett volumes processed at the Bridgeport plant. For the first six months, the average was substantially lower at 50,300 because of an economic decision not to process gas at the Exxon Katy plant in January and February when natural gas costs exceeded the value of NGLs at that plant. NGL production is expected to exceed 60,000 barrels by year-end, assuming at least break-even processing margins at that time. For the full year, the previously revised 10% growth target should be achieved. This increase will be driven by the processing of growing Barnett Shale gas volumes at the Bridgeport plant where capacity will have more than doubled upon completion of a second expansion in September 2001. At that time, the Bridgeport plant should be capable of processing 430 MMcf of natural gas per day and producing 37,000 barrels of NGLs per day. Throughput of the Company's gas gathering systems averaged 898 MMcf per day in 2001's first half, up 165 MMcf (22.5%) from the comparable prior-year period. This increase was principally due to the handling of increased Barnett Shale production and the acquisition of Duke's 55% interest in the Texas Chalk systems effective March 31, 2000. CAPITAL AND EXPLORATORY EXPENDITURES. The 2001 capital budget, which was originally set at $473.4 million, was increased in August to $685 million to provide for expanded activity levels and cost increases for the drilling and completing of wells. The revised budget includes 40 to 50 additional wells (including 20 in the Barnett) and further expansion of the North Texas gas services' infrastructure to handle the growing gas production volumes. This includes additional gas gathering capacity and initial costs for a third expansion of the Bridgeport plant that is to be completed by mid-2002. The following table compares budgeted capital and exploratory expenditures for 2001 with actual spending during the first quarter (in millions):

~~2001~~Actual ~~2000~~Revised Budget ---------------------------------- --------------------- ~~AVERAGE~~First ~~DAILY~~Second ~~VOLUMES~~First ~~Natural~~Second ~~gas~~Full ~~sales~~Quarter ~~(Mcf)~~Quarter ~~.....................~~Half ~~369,300~~Half ~~273,400~~Year ~~Crude~~-------- ~~oil~~-------- ~~and~~-------- ~~condensate~~-------- ~~sales~~-------- ~~(Bbls)~~Exploration and production ...~~....~~ ~~5,800~~$ ~~5,900~~95.2 ~~Natural~~$ ~~gas~~120.6 ~~liquids~~$ ~~produced~~215.8 ~~(Bbls)~~$ 271.~~........~~7 ~~42,900~~$ ~~50,600~~487.5 ~~Pipeline~~Gas ~~throughput~~services ~~(Mcf)~~ ................. 54.8 57.3 ~~859,000~~112.1 ~~680,000~~81.9 ~~AVERAGE~~194.0 ~~SALES~~Corporate ~~PRICES Natural gas (per Mcf)~~ .................... ...6 $ .6 1.872 $ 2.892 ~~Crude~~3.4 ~~oil~~-------- ~~and~~-------- ~~condensate~~-------- ~~(per~~-------- ~~Bbl)~~-------- $ 150.~~.........~~6 27$ 178.325 26$ 329.931 ~~Natural~~$ ~~gas~~355.8 ~~liquids~~$ ~~produced~~684.9 ~~(per~~======== ~~Bbl)~~======== ~~......~~======== ~~24.76~~======== ~~21.19~~========

FINANCING MATTERS. Cash provided by operating activities totaled $384.9 million during the first half of 2001. This (i) funded capital spending; (ii) allowed long-term debt to be paid down by $26.6 million, to $273.8 million; and (iii) increased cash and cash equivalents by $38 million to $61.5 million. Long-term debt (including current maturities) comprised 25.2% of total debt plus stockholders' equity at June 30, 2001, down from 32.6% at the beginning of the year. The Company expects to fund its increased capital spending over the remainder of 2001 primarily from operating cash flows and $50 million of mid-year cash balances. Based on current energy strip prices, debt at year-end is expected to approximate its level at the beginning of the year. The Company has a $250 million bank revolving credit facility and two bank money-market facilities totaling $45 million. At June 30, 2001, 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 amounts currently available. -14- 17 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 12), 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 $35 million and its after-tax annual net earnings by almost $23 million (based on average operating levels and production volumes projected for the last half of 2001). The Company is partially hedged with respect to natural gas prices since besides being a seller it also purchases gas in connection with its gas processing operations (such purchases recently have approximated 25% of gas sales). Since it has this "physical" hedge, the Company rarely enters into financial 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 June 30, 2001 or December 31, 2000. The Company's exposure to changing interest rates is limited since all of its outstanding debt at June 30, 2001 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 June 30, 2001 and 2000 follow:

~~Segment~~Three ~~Operating~~Months ~~Earnings~~Six Months ----------------------- ~~Exploration and Gas Pretax Net Production Services Other* Earnings Earnings~~ ----------- -------- ------ ~~--------~~2001 ~~--------~~ 2000 ~~AMOUNTS~~2001 ~~AFTER~~2000 ~~UNUSUAL ITEMS ........................... $ 35.7 $ 40.5 $(11.4) $ 64.8 $ 43.2~~ ------ ---~~---~~ ------ ---~~---~~ ------ ~~ELIMINATE IMPACT OF 2000 UNUSUAL ITEMS Gain from asset exchange ...................................~~ -- ~~(4.9)~~ -- ~~(4.9) (3.2) Water well litigation provision reversal ................... (1.2)~~ -- -- ~~(1.2) (.7)~~ ------ ~~------~~AVERAGE ~~------~~DAILY ~~------~~VOLUMES ~~------~~Natural ~~(1.2)~~gas ~~(4.9)~~sales -- (~~6.1~~Mcf) (3.~~9) ------ ------ ------ ------ ------ 2000 AMOUNTS BEFORE UNUSUAL ITEMS~~ ....................~~......~~ ~~34.5~~403,300 ~~35.6~~287,500 ~~(11.4)~~386,400 ~~58.7~~280,500 ~~39.3~~Crude ~~------~~oil ~~------~~and ~~------~~condensate ~~------~~sales ~~------ MAJOR INCREASES~~ (~~DECREASES~~Bbls) ~~Increased natural gas sales volumes~~ .......~~.................~~ ~~44.7~~5,600 --5,300 --5,700 ~~44.7~~5,600 ~~29.1~~Natural ~~Higher natural~~ gas ~~sales~~liquids ~~price~~produced (Bbls) .........~~....................~~ ~~95.9~~57,600 --51,600 --50,300 ~~95.9~~51,100 ~~62.3~~Pipeline ~~Increased~~throughput ~~exploratory well impairments~~ (~~$2.2 versus none~~Mcf) .. (2.~~2) -- -- (2~~.~~2) (1~~.~~4) Price-related decrease in NGL margins~~ ..............~~........~~ --937,000 ~~(12.2)~~785,000 --898,000 ~~(12.2)~~733,000 ~~(8.0)~~AVERAGE ~~Increased~~SALES ~~NGL~~PRICES ~~marketing~~Natural ~~earnings ........................... -- 3.5 -- 3.5 2.3 Higher~~ gas ~~gathering~~(per ~~and~~Mcf) ~~marketing margins~~ ................. ~~-- 11~~.~~8 -- 11~~.~~8 7~~.~~7 Increased operating expenses~~ ...~~............................~~ ~~(2.7)~~$ (74.5)56 --$ ~~(10~~3.2)65 ~~(6.6)~~$ ~~Reduction in interest expense incurred~~ 5.~~....................~~66 --$ ~~-- 2~~3.228 ~~2.2~~Crude ~~1.4~~oil ~~Stock market price related decreases in venture capital~~ and ~~Rabbi~~condensate ~~Trust earnings ................ -- --~~ (~~5.0)~~per ~~(5.0~~Bbl) (3.~~3) Other, net~~ .........~~........................................~~ (125.1)51 27.152 26.542 (27.5)21 .1Natural ~~------~~gas ~~------~~liquids ~~------~~produced ~~------ ------ 134.6~~ (~~4.3)~~per ~~(2.3~~Bbl) ~~128~~.~~0 83~~.~~6 ------ ------ ------ ------ ------ 2001 AMOUNTS~~ ....~~...........................................~~ ~~$169~~19.149 ~~$ 31~~19.365 ~~$(13~~21.7)72 ~~$186~~20.~~7 $122.9 ====== ====== ====== ====== ======~~41

-15- 18 RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2001 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2000 Net earnings for the six-month periods ended June 2001 and 2000 are summarized in the table which follows. The Company's net earnings for 2001's first half totaled $201.0 million, versus the $87.4 million ($83.5 million, excluding the effects of unusual items) of the comparable prior-year period. Higher natural gas volumes and prices were the principal reasons for the earnings increase. The following table and discussion identify and explain the major increases (decreases) in earnings (in millions):

---------- * Includes general and administrative expense and other expense. EXPLORATION AND PRODUCTION OVERVIEW Exploration and production segment operating earnings of $273.7 million were $187.6 million above those of the comparable prior-year period, principally due to higher natural gas sales volumes and prices. INCREASED NATURAL GAS SALES VOLUMES ($79.6 MILLION INCREASE). Natural gas sales averaged 386.4 MMcf per day during the first six months, 37.8% above the 280.5 MMcf per day of the prior-year period, increasing segment operating earnings by $79.6 million. The volume increases were principally attributable to the ongoing drilling and rework programs in the Barnett Shale in North Texas and exploratory success and follow-up drilling in the Lake Creek, North Needville and Personville fields. HIGHER NATURAL GAS SALES PRICE ($117.7 MILLION INCREASE). The Company's natural gas sales price averaged $5.66 per Mcf during the first half of 2001, $2.38 (72.6%) above the prior-year period's $3.28, increasing segment operating earnings by $117.7 million. -16- 19 INCREASED OPERATING EXPENSES ($6.2 MILLION DECREASE). Exploration and Production operating expenses were $6.2 million higher during the first half of 2001 primarily because of the larger number of wells being operated and increased property taxes. GAS SERVICES OVERVIEW Exclusive of unusual items in the prior period, gas services segment operating earnings declined $16.0 million to $52.6 million in 2001's first half. While higher volumes and margins pushed natural gas gathering and marketing earnings $13.4 million higher, these were more than offset by price-related earnings reductions for gas processing operations ($17.5 million) and increased operating expenses ($12.6 million). PRICE-RELATED DECREASE IN NGL MARGINS ($17.5 MILLION DECREASE). The average price for NGLs produced during the first six months of 2001 of $21.72 per barrel was 6% above the prior-year period's $20.41, improving NGL revenues by $8.8 million. However, because of the impact of higher natural gas and, to a lesser extent, NGL prices on producer settlements and gas shrinkage costs, feedstock costs rose by $26.3 million during the current period, resulting in a net $17.5 million price-related decrease in NGL margins. HIGHER GAS GATHERING AND MARKETING MARGINS ($13.4 MILLION INCREASE). These activities generally benefit from increases in natural gas prices. Accordingly, margins were much higher in 2001's first half (even with the expiration of a favorably priced contract in March 2000), particularly during the first quarter when gas prices were very high. Margins also benefited from throughput growth, which occurred primarily because of the acquisition of a 55% interest in certain Texas Chalk systems on March 31, 2000 and growth in North Texas volumes resulting from ongoing increases in the Company's Barnett Shale natural gas production. INCREASED OPERATING EXPENSES ($12.6 MILLION DECREASE). Gas Services operating expenses rose principally because of volume-related increases in North Texas and the above-mentioned acquisition of a 55% interest in the Texas Chalk systems on March 31, 2000. Also contributing to this were maintenance expenses incurred at the Bridgeport plant early in 2001 when an expansion train was tied-in. OTHER BONUS UNIT EXPENSE ACCRUALS/REVERSALS ($7.9 MILLION INCREASE). Bonus unit expense accrual reversals during the first six months of 2001 totaled $4.1 million compared with expense accruals of $3.8 million during the comparable period of the prior year, improving pretax earnings by $7.9 million. The accrual reversals resulted from a decline in the price of the Company's common stock to $46.60 at June 30, 2001 from $61.25 at December 31, 2000. Last year's prices at the comparable dates were $32.13 and $21.56, respectively. REDUCTION IN INTEREST EXPENSE INCURRED ($4.2 MILLION INCREASE). This favorable variance was primarily due to a lower average debt balance during the first six months of 2001 ($296.5 million versus $355.9 million) and the termination in December 2000 of an accounts receivable sales program. -17- 20 RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 2001 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2000 Net earnings for the three-month periods ended June 2001 and 2000 are summarized in the table which follows. The Company's net earnings for 2001's second quarter were $78.0 million, versus the $44.2 million of the comparable prior-year period. Higher natural gas volumes and prices were the principal causes of the quarter-to-quarter earnings increase. The following table and discussion identify and explain the major increases (decreases) in earnings (in millions):

---------- * Includes general and administrative expense and other expense. EXPLORATION AND PRODUCTION OVERVIEW Exploration and production segment operating earnings for the second quarter of 2001 of $104.6 million were $53.1 million above those of the prior year's comparable period principally due to higher natural gas sales volumes and prices. HIGHER NATURAL GAS SALES VOLUMES ($33.9 MILLION INCREASE). Natural gas sales averaged 403.3 MMcf per day during 2001's second quarter, 40.3% above the 287.5 MMcf of the comparable prior-year period, increasing operating earnings by $33.9 million. HIGHER NATURAL GAS SALES PRICE ($23.2 MILLION INCREASE). During the second quarter of 2001, the Company's natural gas sales price averaged $4.56 per Mcf, $.91 (24.9%) above the prior period's $3.65, increasing operating earnings by $23.2 million. -18- 21 GAS SERVICES OVERVIEW Gas services segment operating earnings during 2001's second quarter of $21.2 million were $11.9 million below the $33.1 million earned in the prior-year period. Price-related decreases in NGL margins, volume-related increases in operating expenses and lower earnings from the Company's equity interest in an MTBE partnership were the primary causes of this decline. These unfavorable variances were offset somewhat by higher NGL production volumes. PRICE-RELATED DECREASE IN NGL MARGINS ($6.8 MILLION DECREASE). The average price for NGLs produced during the current quarter of $19.49 per barrel was slightly below the $19.65 of the comparable prior-year quarter, reducing NGL revenues by $0.9 million. The impact of higher natural gas prices during the current period on producer settlement and gas shrinkage costs increased feedstock costs by $5.9 million, resulting in a $6.8 million price-related decrease in NGL margins. HIGHER NGL PRODUCTION VOLUMES ($3.6 MILLION INCREASE). NGL production volumes averaged 57,600 barrels per day during 2001's second quarter, up 11.6% above the corresponding prior-year period, increasing operating earnings by $3.6 million. The volume growth, which occurred primarily at the Company's Bridgeport plant, was principally the result of continuing increases in Barnett Shale natural gas production. EQUITY IN EARNINGS OF MTBE PARTNERSHIP ($3.3 MILLION DECREASE). This variance occurred because of substantially lower margins in 2001 that resulted primarily from sharply lower average sales prices for MTBE. OTHER BONUS UNIT EXPENSE ACCRUALS/REVERSALS ($5.3 MILLION INCREASE). Bonus unit expense accrual reversals during the second quarter of 2001 totaled $1.8 million compared with $3.5 million of expense accruals during the comparable prior year period, increasing pretax earnings by $5.3 million. The accrual reversals resulted from a decline in the price of the Company's common stock to $46.60 per share at June 30, 2001 from $52.50 at March 31, 2001. The stock price rose from $22.00 to $32.13 during the prior-year quarter. REDUCTION IN INTEREST EXPENSE INCURRED ($1.9 MILLION INCREASE). The $1.9 million decrease in interest expense was primarily due to a lower average debt balance during the second quarter ($282.3 million versus $334.2) and the December 2000 termination of an accounts receivable sales program. -19- 22 Part II - Other Information ITEM 1. LEGAL PROCEEDINGS No material legal proceedings were pending at June 30, 2001. ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS The annual meeting of stockholders of Mitchell Energy & Development Corp. was held on May 9, 2001 for the purpose of electing a Board of nine directors and to consider and act upon a proposal 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 solicitation. Each of the following nominees for the Board of Directors was elected by the stockholders for a term commencing May 9, 2001 and continuing until the Company's next annual meeting of stockholders. The vote was as follows:

Stockholders also approved the appointment of Arthur Andersen LLP, independent public accountants, to examine the accounts of the Company for the year ending December 31, 2001. The vote was as follows:

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits No exhibits are filed with this report. (b) No reports were filed on Form 8-K by Mitchell Energy & Development Corp. during the three-month period ended June 30, 2001. -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: August 8, 2001 By /s/ Philip S. Smith ----------------------------------------- Philip S. Smith Senior Vice President - Administration and Chief Financial Officer -21-

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