SECURITIES AND EXCHANGE COMMISSION
Washington, DC. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 1997 Commission file number 0-10697
DORCHESTER HUGOTON, LTD.
(Exact name of registrant as specified in its charter)
Texas 75-1829064
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
1919 S. Shiloh Road, Suite 600 - LB 48, Garland, Texas 75042-8234
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 864-8610
None
Former name, former address and former fiscal
year, if changed since last report
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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
As of October 30, 1997, 10,744,380 Depositary Receipts for Units of Limited
Partnership Interest were outstanding.
<PAGE>
DORCHESTER HUGOTON, LTD.
(A Texas Limited Partnership)
QUARTERLY REPORT ON FORM 10-Q
September 30, 1997
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Balance Sheets as of September 30, 1997 and
December 31, 1996 (Unaudited)
Condensed Statements of Earnings for the Three and Nine
Months Ended September 30, 1997 and 1996 (Unaudited)
Condensed Statements of Cash Flows for the Nine Months Ended
September 30, 1997 and 1996 (Unaudited)
Notes to Condensed Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
<PAGE>
DORCHESTER HUGOTON, LTD.
(A Texas Limited Partnership)
PART I
Item 1
CONDENSED BALANCE SHEETS
(Unaudited)
September 30, 1997 and December 31, 1996
(In Thousands of Dollars)
Sept. 30, Dec. 31,
1997 1996
-------- --------
ASSETS
Current assets:
Cash and temporary cash investments .............. $ 1,165 $ 115
Investments - available for sale ................. 3,460 2,646
Accounts receivable, net ......................... 1,909 3,054
Prepaid expenses and other current assets ........ 153 103
------- -------
Total current assets ........................... 6,687 5,918
Property and Equipment - at cost: 27,561 26,442
Less accum. depreciation, depletion and amort..... (11,015) (9,677)
------- --------
Net property and equipment ..................... 16,546 16,765
------- --------
Total Assets ......................................... $23,233 $22,683
======= =======
LIABILITIES AND PARTNERSHIP CAPITAL
Current liabilities:
Accounts payable and other current liabilities ... $ 631 $ 343
Production and property taxes payable or accrued . 791 755
Royalties and production payment payable ......... 722 1,199
Distributions payable to Unitholders ............. 1,959 1,853
------- -------
Total current liabilities ...................... 4,103 4,150
Long-term debt ....................................... 122 3,144
------- -------
Total liabilities .............................. 4,225 7,294
Commitments and contingencies (Note 2)
Partnership capital
General partners ................................. 113 77
Unitholders ...................................... 18,895 15,312
------- -------
Total partnership capital ...................... 19,008 15,389
------- -------
Total liabilities and partnership capital ............ $23,233 $22,683
======= =======
The accompanying condensed notes are an integral part of
these financial statements.
<PAGE>
DORCHESTER HUGOTON, LTD.
(A Texas Limited Partnership)
CONDENSED STATEMENTS OF EARNINGS
(Unaudited)
For the Three and Nine Months Ended September 30, 1997 and 1996
(In Thousands of Dollars)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ----------------
1997 1996 1997 1996
-------- ------- ------- -------
Net operating revenues:
Natural gas sales .............. $ 4,202 $ 4,066 $14,065 $13,369
Other .......................... 41 32 133 97
Production payment (ORRI) ...... (221) (506) (752) (506)
Litigation settlement adjustment -0- (1,204) -0- (1,204)
------- ------- -------- --------
Total net operating revenues ....... 4,022 2,388 13,446 11,756
------- ------- -------- --------
Costs and expenses
Operating, including prod. taxes 773 1,034 2,613 2,699
Depletion, depreciation & amort. 448 363 1,391 1,096
General and administrative ..... 137 131 412 376
Management fees ................ 99 86 312 298
Interest ....................... 18 62 96 105
Litigation settlement .......... -0- 3,036 -0- 3,036
Other income, net .............. (33) (14) (100) (72)
------- ------- -------- --------
Total costs and expenses ........... 1,442 4,698 4,724 7,538
------- ------- -------- -------
Net earnings ....................... $ 2,580 $(2,310) $ 8,722 $ 4,218
======= ======= ======== =======
Net earnings per Unit (in dollars) . $ 0.24 $ (0.21) $ 0.80 $ 0.39
======= ======= ======== =======
The accompanying condensed notes are an integral part of
these financial statements.
<PAGE>
DORCHESTER HUGOTON, LTD.
(A Texas Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months Ended September 30, 1997 and 1996
(In Thousands of Dollars)
1997 1996
------- -------
Cash flows provided by operating activities .......... $10,997 $ 7,442
------- -------
Cash flows used in investing activities:
Purchases of prop. & equipment, net of retirements (1,215) (4,063)
Cash received on sale of other prop. & equipment.. 45 16
------- -------
Cash flows used in investing activities .............. (1,170) (4,047)
------- -------
Cash flows used in financing activities:
Distributions paid to Unitholders ................ (5,755) (5,535)
Additions to long-term debt ...................... 7,200 10,566
Reductions of long-term debt ..................... (10,222) (8,547)
------- -------
Cash flows used in financing activities .............. (8,777) (3,516)
------- -------
Increase (decrease) in cash and
temporary cash investments ...................... 1,050 (121)
Cash and temporary cash investments at January 1, .... 115 183
------- -------
Cash and temporary cash investments at September 30, . $ 1,165 $ 62
======= =======
The accompanying condensed notes are an integral part of
these financial statements.
<PAGE>
DORCHESTER HUGOTON, LTD.
(A Texas Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. The condensed financial statements reflect all adjustments (consisting only
of normal, recurring adjustments and certain adjustments discussed in Note
2) which are, in the opinion of management, necessary for a fair
presentation of Dorchester Hugoton, Ltd.'s (the "Partnership's") financial
position and operating results for the interim period. Interim period
results are not necessarily indicative of the results for the calendar
year. Please refer to Management's Discussion and Analysis of Financial
Condition and Results of Operations for additional information. Per-Unit
information is calculated by dividing the 99% interest owned by Unitholders
by the 10,744,380 Units outstanding. Certain amounts in the 1996 financial
statements have been reclassified to conform to the 1997 presentation.
2. On August 14, 1996 the Partnership paid Parker & Parsley Petroleum Company
entities (successor to Damson Oil Corporation and Dorchester Master Limited
Partnership - collectively referred to as "P&P") $7.0 million in settlement
of all outstanding litigation. Some of the numerous issues resolved by this
settlement include the withdrawal by P&P of its claims of gas processing
rights to the Partnership's Oklahoma gas production, its rights to
participate in any Oklahoma gas wells, and its claims for unpaid production
payment amounts. The Partnership received confirmation of its ownership of
gas gathering pipelines connected to its Oklahoma wells and, prospectively
only, agreed to pay P&P any production payment (overriding royalty
interest) amount that may be due as set forth in a 1986 amended agreement.
The first production payment of $1,034,472.39, was paid on May 15, 1997 and
covered the year ended February 28, 1997. An additional amount of
approximately $423,000 has been accrued for the period from March 1, 1997
through September 30, 1997. The production payment calculation is based
upon the difference between market gas prices compared to a table of rising
prices and based upon a table of declining volumes.
During 1996 the Partnership booked $395,000 to operating expenses for
Kansas tax reimbursements (which included related interest through December
31, 1996) received by the Partnership during the years 1983 to 1987. This
charge results from a ruling by the United States Court of Appeals for the
District of Columbia which overruled a previous order by the Federal Energy
Regulatory Commission. On September 10, 1997 the Partnership, as well as
numerous other parties, was denied regulatory relief with respect to this
matter. Payment of the principal and interest is anticipated in March 1998.
Additional interest of $25,000 has been accrued through September, 1997.
Effective May 1, 1997, the Partnership's Kansas gas was committed for sale
and processing to PanEnergy Field Services, Inc. (now Duke Energy Field
Services, Inc.) for a period of 3 years. Duke Energy will pay based on an
index of the market price in the field plus a premium. Similarly, effective
July 1, 1997 the Partnership' Oklahoma gas was committed for sale to
Williams Energy Services Company for a one year period at a premium over
the market price index.
3. Since 1994 the Partnership has maintained an unsecured revolving credit
facility for $15,000,000 (the "Agreement") with Bank One, Texas, N.A. The
Agreement has a current borrowing base of $6,000,000, which will be
re-evaluated by Bank One at least semi-annually. If, on any such date, the
aggregate amount of outstanding loans and letters of credit exceed the
current borrowing base as most recently determined by Bank One, the
Partnership is required to repay the excess. This credit facility covers
both cash advances and any letters of credit that the Partnership may need,
with interest being charged at the base rate for Bank One, which was 8.5%
on November 10, 1997. All amounts borrowed under this facility will become
due and payable on July 31, 1999. As of November 10, 1997, letters of
credit totaling $25,000 were issued under the credit facility and the
amount borrowed was $100,000. The weighted average amount borrowed under
the credit facility was approximately $370,000 during the third quarter of
1997.
<PAGE>
DORCHESTER HUGOTON, LTD.
(A Texas Limited Partnership)
PART I
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net cash flows from operating activities during the three and nine months ended
September 30, 1997 were $3,114,000 and $10,997,000 compared to ($1,222,000) and
$7,442,000 for the same periods of 1996. Second quarter 1997 net cash flows were
$3,157,000. For the three and nine month periods ended September 30, 1996 net
cash flows from operating activities were lower as a result of non-recurring
charges and other costs from the settlement of litigation during 1996. Three and
nine month operating cash flows have been positively impacted during 1997 by
natural gas market prices which were higher compared to the same periods last
year. Lower 1997 gas sales volumes compared to the same period of 1996 tended to
offset the improved gas pricing.
Other comparisons of 1997 results to 1996 are also influenced by 1996
non-recurring items. Third quarter 1996 net operating revenues and operating
expenses were offset by litigation amounts of approximately $1,710,000 and
$121,000, respectively. Also, 1996 third quarter operating expense includes a
$387,000 charge for refund of Kansas ad valorem tax reimbursement. Through
September 30, 1997 an additional $33,000 in interest on the refund has been
accrued. Please see Note 2 to the Partnership's Condensed Financial Statements
for additional information related to the litigation settlement and the tax
refund. In connection with the settlement, the Partnership will pay a production
payment on May 15, 1998; approximately $423,000 has been accrued for the period
from March 1, 1997 through September 30, 1997.
The Partnership has available a $15,000,000 unsecured revolving credit facility
with a current borrowing base of $6,000,000. Please see Note 3 to the financial
statements for additional information. As of November 10, 1997, letters of
credit totaling $25,000 were issued under the credit facility and the amount
borrowed was $100,000. The weighted average amount borrowed under the credit
facility was approximately $370,000 during the third quarter of 1997 compared to
approximately $400,000 for the second quarter of 1997.
The Partnership's portion of gas sales volumes (not reduced for Oklahoma
production payment) and weighted average sales prices were:
Three Months Ended Nine Months Ended
---------------------------- -----------------
September 30, September 30,
---------------- June 30, -----------------
1997 1996 1997 1997 1996
Sales Volumes - MMCF: ----- ----- ----- ----- -----
Oklahoma ............... 1,374 1,416 1,387 4,251 4,719
Kansas ................. 448 527 491 1,440 1,699
----- ----- ----- ----- -----
Total MMCF ................ 1,822 1,943 1,878 5,691 6,418
===== ===== ===== ===== =====
Weighted Average Sales Prices - $/MCF:
Oklahoma ............... $2.30 $2.10 $2.04 $2.47 $2.10
Kansas ................. 2.34 2.08 2.06 2.48 2.04
Overall Weighted Avg - $/MCF $2.31 $2.09 $2.04 2.47 2.08
Oklahoma gas sales volumes during the 1997 third quarter were essentially
unchanged from sales volumes during the previous 1997 quarter. Natural reservoir
changes resulted in most of the lower sales volume for the nine months ended
September 30, 1997 compared to the same period in 1996. Compared to the previous
1997 quarter and the 1996 third quarter and the 1996 same nine month period,
Kansas 1997 sales volumes have decreased. Such decreases are primarily a result
of declining Kansas reservoir pressures experienced by the Partnership and other
producers in the area. The Partnership began operation on November 5, 1997 of
additional gas gathering pipelines and seven rental gas compressor units which
are scattered over a ten mile area. Initial results show a 30% increase in gas
sales which is expected to decline gradually. The Partnership expects Kansas
operating costs to increase by approximately $300,000 per year as a result of
such field gas compression operations.
<PAGE>
DORCHESTER HUGOTON, LTD.
(A Texas Limited Partnership)
PART I
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
The Matter No. 2A Oklahoma Guymon-Hugoton Field gas well discussed in press
releases dated July 28, 1997 and September 5, 1997 continues to perform
favorably. Current Matter No. 2A production is 587 MCFD at 91 psig flowing
pressure from the Winfield/Krider zones of the Guymon-Hugoton formation. The
Matter No. 2A replaced the now plugged Matter No. 2 well which previously flowed
105 MCFD at 24 psig from the same two zones. Because the Matter No. 2A had
larger than normal volumes at higher than normal pressures from the
Winfield/Krider zones, the slightly deeper Fort Riley zone of the Guymon-Hugoton
formation has remained isolated and not producing from the Matter No. 2A to
allow time for evaluation of the Winfield/Krider zone. Such evaluation is still
underway. The Partnership anticipates reentering the Matter No. 2A during
November, 1997 and establishing flow from the Fort Riley zone which initially
tested greater than 500 MCFD with no water and higher pressure than the
Winfield/Krider zones. Upon successfully opening the Fort Riley zone, the Matter
No. 2A is expected to be simultaneously producing from all three zones of the
Guymon-Hugoton Field. The Matter No. 2A Fort Riley zone is expected to require
continuous operation without excessive pressure loss or water production for
several months to determine the probability of attempting additional wells in
the Fort Riley.
The Partnership's routine workover of wells in both Kansas and Oklahoma recently
included fracture treating (the creation of cracks in the formation to assist
gas flow toward the well bore from the producing zones). Following fracture
treating, the Oklahoma Long No. 1 well recently produced 369 MCFD at 53 psig
flowing pressure. Prior to workover, the Long No. 1 was capable of efficiently
producing 265 MCFD at 28 psig flowing pressure. The Partnership is particularly
pleased with the Long No. 1 increase in pressure and believes that many of its
Oklahoma wells are prospects for similar fracturing. Such fracture treatments
cost from $25,000 to $75,000 per well. However, the results of such fracture
treating will vary widely from well to well and may not be as successful as the
Long No. 1.
Subsequent to discussions in the Partnership's 1996 Annual Report on Form 10-K
in late February, 1997, Oklahoma did not pass legislation that would have
allowed "infill drilling" similar to the Kansas Hugoton Field where regulations
permit two gas wells per each 640 acres versus one well in the Oklahoma
Guymon-Hugoton Field. Such Oklahoma legislation, if passed, also would have
eliminated the Guymon-Hugoton field rules that regulate the amount of gas
production by all producers in the field. The Partnership believes the existing
field rules are proven conservation measures and necessary to protect
correlative rights among mineral owners and producers and to prevent waste.
On October 28, 1997 the Oklahoma Corporation Commission , which administers oil
and gas conservation in Oklahoma, conducted a hearing on a proposal to set an
allowable amount of production per well that essentially removes any production
quantity restriction from 98% of the wells in the Guymon-Hugoton field. The
hearing included contradictory viewpoints that the proposal encouraged infill
drilling vs. that the proposal had no effect on the infill drilling issue. It is
not known when the Oklahoma Corporation Commission will issue a decision or
whether any decision will face legal challenges.
The Partnership continues to be active in supporting its views regarding
possible Guymon-Hugoton regulatory action on rules regulating gas production
quantities and on infill drilling. Both infill drilling and removal of
restrictions on production amounts could result in considerable capital
expenditures. The cost and outcome of such activities is unpredictable. On May
7, 1996 the Partnership announced a Unit repurchase program. While the
Partnership has not repurchased and retired any Units to date, that program is
still in place.
<PAGE>
DORCHESTER HUGOTON, LTD.
(A Texas Limited Partnership)
OTHER INFORMATION
PART II
Item 1. Legal Proceedings: See Notes to Condensed Financial Statements.
Item 5. Other Information:
a) On July 2, 1997, the Partnership amended its Partnership agreement
to change its address to 1919 S. Shiloh Road, Suite 600 - LB48,
Garland, TX 75042-8234.
b) Mr. Rawles Fulgham was re-appointed to the Partnership's Advisory
Committee for a two year term. Mr. W. Randall Blank, also on
the Advisory Committee, will be eligible for re-appointment to the
Advisory Committee in 1998.
Item 6. Exhibits and Reports on Form 8-K:
a) Exhibit 27 - Financial Data Schedule
b) Reports on Form 8-K - None.
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.
DORCHESTER HUGOTON, LTD.
Registrant
Date: November 10, 1997 /s/ Kathleen A. Rawlings
Kathleen A. Rawlings
Controller (Principal Accounting Officer)
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