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, 1998 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 31, 1998, 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, 1998
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Balance Sheets as of September 30, 1998 and
December 31, 1997 (Unaudited)
Condensed Statements of Earnings for the Three and Nine
Months Ended September 30, 1998 and 1997 (Unaudited)
Condensed Statements of Cash Flows for the Nine Months Ended
September 30, 1998 and 1997 (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, 1998 and December 31, 1997
(In Thousands of Dollars)
Sept. 30, Dec. 31,
1998 1997
-------- --------
ASSETS
Current assets:
Cash and cash equivalents ....................... $ 3,968 $ 3,344
Restricted cash .................................. 375 -0-
Investments - available for sale ................. 4,520 3,304
Accounts receivable, net ......................... 1,290 2,086
Prepaid expenses and other current assets ........ 154 136
------- -------
Total current assets ........................... 10,307 8,870
Property and Equipment - at cost ..................... 28,672 27,875
Less depreciation, depletion and amortization .... (12,940) (11,530)
------- --------
Net property and equipment ..................... 15,732 16,345
------- --------
Total Assets ......................................... $26,039 $25,215
======= =======
LIABILITIES AND PARTNERSHIP CAPITAL
Current liabilities:
Accounts payable and other current liabilities ... $ 460 $ 411
Production and property taxes payable or accrued . 708 820
Royalties and production payment payable ......... 614 1,063
Distributions payable to Unitholders ............. 1,958 1,958
------- -------
Total current liabilities ...................... 3,740 4,252
Long-term debt ....................................... 100 122
------- -------
Total liabilities .............................. 3,840 4,374
Commitments and contingencies (Note 2)
Partnership capital
General partners ................................. 145 131
Unitholders ...................................... 22,054 20,710
------- -------
Total partnership capital ...................... 22,199 20,841
------- -------
Total liabilities and partnership capital ............ $26,039 $25,215
======= =======
The accompanying notes are an integral
part of these condensed financial statements.
<PAGE>
DORCHESTER HUGOTON, LTD.
(A Texas Limited Partnership)
CONDENSED STATEMENTS OF EARNINGS
(Unaudited)
For the Three and Nine Months Ended September 30, 1998 and 1997
(In Thousands of Dollars)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1998 1997 1998 1997
-------- ------- ------- -------
Net operating revenues:
Natural gas sales .............. $ 3,685 $ 4,202 $12,064 $14,065
Other .......................... 44 41 148 133
Production payment (ORRI) ...... (164) (221) (559) (752)
------- ------- ------- -------
Total net operating revenues ....... 3,565 4,022 11,653 13,446
------- ------- ------- -------
Costs and expenses
Operating, including prod. taxes 940 773 2,758 2,613
Depletion, depreciation & amort. 506 448 1,506 1,391
General and administrative ..... 116 137 390 412
Management fees ................ 120 99 369 312
Interest ....................... 10 18 30 96
Other income, net .............. (77) (33) (175) (100)
------- ------- ------- -------
Total costs and expenses ........... 1,615 1,442 4,878 4,724
------- ------- ------- -------
Net earnings ....................... $ 1,950 $ 2,580 $ 6,775 $ 8,722
======= ======= ======= =======
Net earnings per Unit (in dollars) . $ 0.18 $ 0.24 $ 0.63 $ 0.80
======= ======= ======= =======
The accompanying notes are an integral
part of these condensed financial statements.
<PAGE>
DORCHESTER HUGOTON, LTD.
(A Texas Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months Ended September 30, 1998 and 1997
(In Thousands of Dollars)
1998 1997
------- -------
Cash flows provided by operating activities ............. $ 8,135 $10,997
------- -------
Cash flows used in investing activities:
Purchases of property & equipment ................... (917) (1,215)
Purchase of securities - available for sale ......... (741) -0-
Cash received on sale of other property & equipment.. 30 45
------- -------
Cash flows used in investing activities ................. (1,628) (1,170)
------- -------
Cash flows used in financing activities:
Distributions paid to Unitholders ................... (5,861) (5,755)
Additions to long-term debt ......................... -0- 7,200
Reductions of long-term debt ........................ (22) (10,222)
------- -------
Cash flows used in financing activities ................. (5,883) (8,777)
------- -------
Increase in cash and cash equivalents ................... 624 1,050
Cash and cash equivalents at January 1, ................. 3,344 115
------- -------
Cash and cash equivalents at September 30, .............. $ 3,968 $ 1,165
======= =======
The accompanying notes are an integral
part of these condensed 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.
2. Through December 31, 1997 the Partnership recorded $500,000 (which included
related interest) towards a request from Panhandle Eastern Pipe Line
Company ("PEPL") for refund of Kansas tax reimbursements received by the
Partnership during the years 1983 to 1987. These charges resulted 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. The Partnership and PEPL reached agreement on a portion of the
disputed amounts and on March 9, 1998 $151,756.92 was paid to PEPL. An
additional $366,633.13, which is still awaiting possible
regulatory/judicial/legislative action, was placed into an escrow account.
At September 30, the value of the escrow is approximately $375,000. The
escrowed funds include amounts possibly waived, recovered or recoverable
from others. A reduction to operating expense of $51,000 offset by an
allowance of $36,000 for the uncollectible portion not waived has been
booked during the first nine months of 1998.
The Partnership is involved in a few other legal and/or administrative
proceedings arising in the ordinary course of its gas business, none of
which have predictable outcomes and none of which are believed to have any
significant effect on financial position or operating results.
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, 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 September 30, 1998 and 8.0% on October 31,
1998. All amounts borrowed under this facility will become due and payable
on July 31, 2001. As of October 31, 1998, 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
remained $100,000 during the third quarter of 1998.
<PAGE>
DORCHESTER HUGOTON, LTD. (A Texas Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
4. Comprehensive income, as defined in Statement of Financial Accounting
Standards No. 130, includes holding gains on investments available for sale
and is calculated below (in thousands of dollars):
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30,
------------------ -----------------
1998 1997 1998 1997
------- ------- ------- -------
Net earnings..................... $ 1,950 $ 2,580 $ 6,775 $ 8,722
Unrealized holding gain (loss) on
available for sale securities.. (48) 472 475 1,133
------- ------- ------- -------
Comprehensive income............. $ 1,902 $ 3,052 $ 7,250 $ 9,855
======= ======= ======= =======
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, 1998 were $2,751,000 and $8,135,000 compared to $3,114,000 and
$10,997,000 for the same periods of 1997. Net cash flows from operations were
lower during the 1998 third quarter and the 1998 nine month period compared to
the same 1997 periods primarily as a result of decreased natural gas market
prices coupled with essentially unchanged overall sales volumes (see table
below). Also during March, 1998 the Partnership paid to Panhandle Eastern Pipe
Line Company or into an escrow account approximately $500,000 (See Note 2 to the
Financial Statements). On May 15, 1998 the Partnership paid approximately
$847,000 in Oklahoma production payments for the year ended February 28, 1998;
an additional $393,000 has been accrued through September 30, 1998. During July,
1998 the Partnership acquired in Kansas for $220,000 a royalty interest of
approximately 3% that included two wells operated by the Partnership and two
non-Hugoton wells operated by others.
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 October 31, 1998, 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
$100,000 during the first nine months of 1998. Cash and cash equivalents totaled
$3,968,000 at September 30, 1998 compared to $3,344,000 on December 31, 1997.
During the quarter ended June 30, 1998, the Partnership increased its common
stock holdings in Exxon Corp. by 10,000 shares to 64,000 shares.
<PAGE>
DORCHESTER HUGOTON, LTD.
(A Texas Limited Partnership)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
The Partnership's portion of gas sales volumes (not reduced for Oklahoma
production payments) and weighted average sales prices were:
Three Months Ended Nine Months Ended
---------------------------- -----------------
September 30, September 30,
---------------- June 30, -----------------
1998 1997 1998 1998 1997
Sales Volumes - MMCF: ----- ----- ----- ----- -----
Oklahoma ............... 1,432 1,374 1,410 4,281 4,251
Kansas ................. 413 448 435 1,314 1,440
----- ----- ----- ----- -----
Total MMCF ................ 1,845 1,822 1,845 5,595 5,691
===== ===== ===== ===== =====
Weighted Average Sales Prices - $/MCF:
Oklahoma ............... $1.97 $2.30 $2.22 $2.13 $2.47
Kansas ................. 2.10 2.34 2.30 2.24 2.48
Overall Weighted Avg - $/MCF $2.00 $2.31 $2.24 2.16 2.47
Oklahoma 1998 gas sales volumes were essentially unchanged compared to previous
and prior year periods. Kansas 1998 gas sales volumes during the third quarter
were slightly less than the second quarter of 1998. Kansas 1998 gas sales
volumes were lower than the comparable 1997 periods. Such decreases are
primarily a result of natural reservoir declines experienced by the Partnership
and other producers in the Kansas area.
As discussed in the 1997 Annual Report on Form 10-K, the Partnership's Matter 2A
Well, which now produces about 412 MCF per day, was inconclusive as to
Guymon-Hugoton Field Fort Riley zone productivity. The second Oklahoma Fort
Riley test (reported in both first and second Quarter Reports on Form 10-Q)
continues to produce approximately 86 MCF per day of new production solely from
the Fort Riley zone, while pumping 30 BBLS of water per day. During the next few
months, the Partnership expects to recomplete this second well into the
Winfield/Krider Zones and cease Fort Riley production. During August, 1998, the
Partnership drilled and completed a third Fort Riley test which recently
produced approximately 130 MCF per day of new production solely from the Fort
Riley zone. Because present state regulations do not allow gas production from
two Guymon-Hugoton field wells on the same 640 acres, the original well (last
producing 85 MCF per day) was plugged. The Partnership believes the current 130
MCF per day from the third Fort Riley well could likely change as a result of
current well stimulation work. The Partnership anticipates evaluating several
months results before considering another Fort Riley well. IT IS NOT KNOWN HOW
MANY WELLS SHOULD BE ATTEMPTED TO EVALUATE THE POTENTIAL OF THE FORT RILEY
FORMATION. THE OUTCOME OF SUCH EXPLORATION IS UNPREDICTABLE.
<PAGE>
DORCHESTER HUGOTON, LTD.
(A Texas Limited Partnership)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
As discussed in the 1998 Second Quarter Report on Form 10-Q, the Partnership is
continuing to monitor the activity on nearby acreage in the Council Grove
formation. At present seven wells have been drilled by others. The Partnership's
ownership includes the Council Grove formation underlying most of its Oklahoma
acreage. It is not known if such monitoring will result in any plans by the
Partnership to attempt a Council Grove well; previous preliminary reviews
yielded unfavorable forecasts. However, recent results by others have varied
from 108 MCF per day with water production to over 1,000 MCF per day initially
with significant volume declines in subsequent months.
As previously discussed in the Partnership's 1997 Annual Report on Form 10-K,
the routine workover of wells in Kansas and Oklahoma includes fracture treating
(the creation of cracks in the formation to assist gas flow toward the well bore
from the producing zones). While the results of one workover in Kansas was not
successful in improving production or increasing pressure, seven well workovers
in Oklahoma are producing increased volumes. Six of the seven wells have
increased in pressure, which combined with increased additional volume,
generally indicates increased reserves. Such fracture treatments cost from
$25,000 to $75,000 per well. THE RESULTS OF SUCH FRACTURE TREATING CAN VARY
WIDELY FROM WELL TO WELL AND MAY NOT BE SUCCESSFUL. However, at present,
Oklahoma per well volume increases have been outstanding ranging from 40% (175
to 250 MCF per day) to 300% (148 to 461 MCF per day). The Partnership
anticipates continuing additional fracture treating during 1998 and 1999.
As previously discussed in the 1997 Annual Report on Form 10-K, on July 1, 1998
the Oklahoma Corporation Commission ("OCC"), which administers state oil and gas
conservation, implemented (without announcement) previously adopted rules that
essentially remove limits on all gas well production volume in the Guymon
Hugoton field including most gas from the Partnership's wells. The OCC
specifically provided that the rule changes have no bearing on the question of
infill drilling which must be decided separately. Infill drilling, if adopted,
would likely allow one well for each 320 acres (as in the Partnership's Kansas
properties) versus the present one well for each 640 acres. Both infill drilling
and elimination of the field rules could require considerable capital
expenditures. THE OUTCOME AND COST OF SUCH ACTIVITIES IS UNPREDICTABLE. Thus
far, the Partnership has not noticed any activity resulting from elimination of
field rules that would require unusual or accelerated investment in more gas
compression or other facilities needed to stay competitive with offsetting
operators.
<PAGE>
DORCHESTER HUGOTON, LTD.
(A Texas Limited Partnership)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
The Partnership's field and administrative operations are being reviewed for
Year 2000 compliance. The Partnership's previous normal upgrades resulted in
most internal operations already being Year 2000 compliant. Some remaining
operations, such as non-essential personal computers and non-financial software
products, can be easily upgraded at nominal costs and inconvenience. The
Partnership has contacted its gas purchasers and third party software and
service vendors concerning Year 2000. Those third parties not already compliant
have indicated that they are working to be compliant. The Partnership is
preparing or has prepared contingency plans regarding those third parties that
do not currently meet Year 2000 compliance. Costs incurred to date, future
costs, implementation of contingency plans and completion of modifications or
replacements have not been and are not expected to be material or pose a
material risk.
As previously discussed in the 1997 Annual Report on Form 10-K, the Partnership
is reviewing its strategic alternatives in light of the various mergers and
other business transactions occurring in the natural gas and energy industry.
Although no decision to sell or combine the Partnership's business with others
has been made, the Partnership anticipates possible discussions with third
parties which could result in such a decision. The Partnership has no timetable
for any such discussions, and there is no assurance that any such discussions
will lead to a transaction. During the first quarter of 1998 the Partnership
adopted a severance policy which would provide up to approximately $2.8 million
of severance payments if such obligations occur. While the Partnership has not
repurchased and retired any of its publicly traded Units to date, the previously
announced 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) Effective September 8, 1998, the transfer agent for the
Partnership's depositary units changed from American Stock
Transfer & Trust Company to BankBoston, N.A., %Boston EquiServe
Limited Partnership, 150 Royall Street, Canton, MA 02021.
b) Mr. W. Randall Blank was re-appointed to the Partnership's
Advisory Committee for a two year term. Mr. Rawles Fulgham, also
on the Advisory Committee, will be eligible for re-appointment in
1999.
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 3, 1998 /s/ Kathleen A. Rawlings
Kathleen A. Rawlings
Controller (Principal Accounting Officer)
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