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 June 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 July 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
June 30, 1998
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Balance Sheets as of June 30, 1998 and
December 31, 1997 (Unaudited)
Condensed Statements of Earnings for the Three and Six
Months Ended June 30, 1998 and 1997 (Unaudited)
Condensed Statements of Cash Flows for the Six Months Ended
June 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)
June 30, 1998 and December 31, 1997
(In Thousands of Dollars)
June 30, Dec. 31,
1998 1997
-------- --------
ASSETS
Current assets:
Cash and cash equivalents ....................... $ 3,583 $ 3,344
Restricted cash .................................. 370 -0-
Investments - available for sale ................. 4,568 3,304
Accounts receivable, net ......................... 1,488 2,086
Prepaid expenses and other current assets ........ 191 136
------- -------
Total current assets ........................... 10,200 8,870
Property and Equipment - at cost ..................... 28,299 27,875
Less depreciation, depletion and amortization .... (12,486) (11,530)
------- --------
Net property and equipment ..................... 15,813 16,345
------- --------
Total Assets ......................................... $26,013 $25,215
======= =======
LIABILITIES AND PARTNERSHIP CAPITAL
Current liabilities:
Accounts payable and other current liabilities ... $ 570 $ 411
Production and property taxes payable or accrued . 638 820
Royalties and production payment payable ......... 497 1,063
Distributions payable to Unitholders ............. 1,958 1,958
------- -------
Total current liabilities ...................... 3,663 4,252
Long-term debt ....................................... 100 122
------- -------
Total liabilities .............................. 3,763 4,374
Commitments and contingencies (Note 2)
Partnership capital
General partners ................................. 145 131
Unitholders ...................................... 22,105 20,710
------- -------
Total partnership capital ...................... 22,250 20,841
------- -------
Total liabilities and partnership capital ............ $26,013 $25,215
======= =======
The accompanying condensed notes are an
integral part of hese financial statements.
<PAGE>
DORCHESTER HUGOTON, LTD.
(A Texas Limited Partnership)
CONDENSED STATEMENTS OF EARNINGS
(Unaudited)
For the Three and Six Months Ended June 30, 1998 and 1997
(In Thousands of Dollars)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1998 1997 1998 1997
-------- ------- ------- -------
Net operating revenues:
Natural gas sales .............. $ 4,129 $ 3,840 $ 8,379 $ 9,863
Other .......................... 55 42 104 92
Production payment (ORRI) ...... (193) (187) (395) (531)
------- ------- -------- --------
Total net operating revenues ....... 3,991 3,695 8,088 9,424
------- ------- -------- --------
Costs and expenses
Operating, including prod. taxes 940 849 1,818 1,833
Depletion, depreciation & amort. 495 458 1,000 943
General and administrative ..... 131 134 274 282
Management fees ................ 124 97 249 213
Interest ....................... 10 20 20 78
Other income, net .............. (70) (46) (98) (67)
------- ------- -------- --------
Total costs and expenses ........... 1,630 1,512 3,263 3,282
------- ------- -------- -------
Net earnings ....................... $ 2,361 $ 2,183 $ 4,825 $ 6,142
======= ======= ======== =======
Net earnings per Unit (in dollars) . $ 0.22 $ 0.21 $ 0.45 $ 0.57
======= ======= ======== =======
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 Six Months Ended June 30, 1998 and 1997
(In Thousands of Dollars)
1998 1997
------- -------
Cash flows provided by operating activities .......... $ 5,384 $ 7,883
------- -------
Cash flows used in investing activities:
Purchases of prop. & equipment ................... (475) (746)
Purchase of securities - available for sale ...... (741) -0-
Cash received on sale of other prop. & equipment.. -0- 34
------- -------
Cash flows used in investing activities .............. (1,216) (712)
------- -------
Cash flows used in financing activities:
Distributions paid to Unitholders ................ (3,907) (3,799)
Additions to long-term debt ...................... -0- 5,200
Reductions of long-term debt ..................... (22) (8,222)
------- -------
Cash flows used in financing activities .............. (3,929) (6,821)
------- -------
Increase in cash and cash equivalents ................ 239 350
Cash and cash equivalents at January 1, .............. 3,344 115
------- -------
Cash and cash equivalents at June 30, ................ $ 3,583 $ 465
======= =======
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.
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 June 30, the value of the escrow is approximately $370,000. 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 six months of 1998.
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 July 31, 1998. All amounts borrowed under
this facility will become due and payable on July 31, 1999. As of July 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 second
quarter of 1998.
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:
Three Months Ended Six Months Ended
------------------ -----------------
June 30, June 30,
------------------ -----------------
1998 1997 1998 1997
------ ------ ------ ------
Net earnings.................... $2,361 $2,183 $4,825 $6,142
Unrealized holding gain on
available for sale securities. 175 398 523 661
------ ------ ------ ------
Comprehensive income............ $2,536 $2,581 $5,348 $6,803
====== ====== ====== ======
<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 six months ended
June 30, 1998 were $2,497,000 and $5,384,000 compared to $3,157,000 and
$7,883,000 for the same periods of 1997. Second quarter 1998 cash flows from
operating activities were impacted by modest increases in second quarter natural
gas market prices and by slightly lower natural gas sales volumes compared to
the second quarter of 1997. Second quarter 1997 cash flows were positively
impacted by the timing of receivable collections at month-end compared to 1998.
Since the second quarter of 1997, the Partnership has shortened the time between
sales of gas production and receipt of payment. Six month operating cash flows
have been negatively impacted during 1998 by lower natural gas market prices and
lower 1998 gas sales volumes compared to the same period of 1997. During March,
1998 the Partnership also paid to Panhandle Eastern Pipe Line Company or into an
escrow account approximately $500,000 (See Note 2 to the Financial Statements).
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 July 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 and second quarter of 1998. Cash and cash equivalents
totaled $3,583,000 at June 30, 1998 compared to $3,344,000 on December 31, 1997.
During the quarter ending June 30, 1998, the Partnership increased its common
stock holdings in Exxon Corp. by 10,000 shares to 64,000 shares.
In connection with the Oklahoma properties, on May 15, 1998 the Partnership paid
approximately $847,000 in production payments for the year ended February 28,
1998; an additional $241,000 has been accrued through June 30, 1998. During the
quarter ending June 30, 1998, the Partnership completed a transaction that
resulted in the sale of the Partnership's 50% working interest in one
non-operated Oklahoma well and the Partnership's acquisition of overriding
royalty interests in one Partnership owned and operated Oklahoma well. The net
cash outlay by the Partnership in the transaction was approximately $166,000.
During July, 1998 the Partnership acquired for $220,000 a royalty interest in
Kansas of approximately 3% that included two wells operated by the Partnership
and two non-Hugoton wells operated by others .
The Partnership's portion of gas sales volumes (not reduced for Oklahoma
production payment) and weighted average sales prices were:
Three Months Ended Six Months Ended
---------------------------- -----------------
June 30, June 30,
---------------- Mar. 31, -----------------
1998 1997 1998 1998 1997
Sales Volumes - MMCF: ----- ----- ----- ----- -----
Oklahoma ............... 1,410 1,387 1,439 2,849 2,878
Kansas ................. 435 491 466 901 991
----- ----- ----- ----- -----
Total MMCF ................ 1,845 1,878 1,905 3,750 3,869
===== ===== ===== ===== =====
Weighted Average Sales Prices - $/MCF:
Oklahoma ............... $2.22 $2.04 $2.21 $2.21 $2.55
Kansas ................. 2.30 2.06 2.30 2.30 2.55
Overall Weighted Avg - $/MCF $2.24 $2.04 $2.23 2.23 2.55
<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)
Oklahoma gas sales volumes were essentially unchanged during the 1998 second
quarter compared to the previous 1998 quarter and compared to the 1997 second
quarter as well as for the comparable six month periods of 1997 and 1998. Kansas
1998 gas sales volumes during the second quarter were slightly less than the
first quarter of 1998. Compared to 1997, Kansas 1998 gas sales volumes were
lower than the comparable 1997 second quarter and the 1997 same six month
period. Such decreases are primarily a result of natural reservoir declines
experienced by the Partnership and other producers in the Kansas area.
As previously announced in the Partnership's March 31, 1998 Quarterly Report on
Form 10-Q, the Partnership drilled and completed its second well to test the
Guymon-Hugoton field Fort Riley zone in Oklahoma. The second well's recent
production of 125 MCF per day while pumping 50 bbls of water per day is not as
favorable as the now plugged original well on the same acreage which produced
approximately 175 MCF per day with no water from the upper zones of the
Guymon-Hugoton field. Present state regulations do not allow gas production from
two Guymon-Hugoton field wells on the same 640 acres. However, the Fort Riley
production from the lower zone is all NEW production. The previously producing
upper zone reserves can later be produced from this same second well upon
ceasing production from the Fort Riley zone. As discussed in the 1997 Annual
Report on Form 10-K, the Partnership's 1997 Matter 2A well, which now produces
about 426 MCF per day, was inconclusive as to Fort Riley productivity. The
Partnership anticipates attempting another Fort Riley well during the next few
months. 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.
In 1997 and prior Annual Reports on Form 10-K, the Partnership's property
interests have been described as relatively shallow Guymon-Hugoton or
Kansas-Hugoton without specific details regarding depth. Because of newly
announced plans by others for deeper drilling underlying the Partnership's
acreage, the Partnership clarifies that it owns the Council Grove formation
under most of the Partnership's acreage in Oklahoma. The Partnership owns only a
minor overriding royalty interest in the Kansas Council Grove formation.
Production from the relatively shallow Oklahoma Council Grove (which is not part
of the Guymon-Hugoton field) is presently non-existent on the Partnership's
acreage; however, two wells on adjoining acreage have been completed. The
Partnership has begun looking into such offsetting activity. IT IS NOT KNOWN IF
SUCH CLOSER LOOK WILL RESULT IN ANY PLANS BY THE PARTNERSHIP TO ATTEMPT DRILLING
A COUNCIL GROVE WELL. All previous preliminary reviews yielded unfavorable
predictions.
<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)
As previously discussed in the Partnership's 1997 Annual Report on Form 10-K,
the routine workover of wells in Kansas and Oklahoma included 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, five well workovers
in Oklahoma are all producing increased volumes. Four of the five 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. HOWEVER, THE RESULTS OF SUCH FRACTURE TREATING CAN VARY WIDELY
FROM WELL TO WELL AND MAY NOT BE SUCCESSFUL. The Partnership anticipates
continuing additional fracture treating during 1998.
As previously discussed in the 1997 Annual Report on Form 10-K, on February 4,
1998 the Oklahoma Corporation Commission ("OCC"), which administers state oil
and gas conservation, adopted rules that will essentially remove limits on all
gas well production volume in the Guymon Hugoton field including most gas from
the Partnership's wells. The effective date and actual publication of the new
rules are still pending. 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.
The Partnership is in the process of reviewing and making necessary
modifications to its computer systems for year 2000 compliance. Costs incurred
to date to modify the Partnership's computer systems have not been material, and
future costs are not expected to be material. Timely completion of such
modifications is not considered to be a material risk to the Company. The
Partnership is in the process of initiating formal communications with its
significant suppliers and large customers to determine the extent to which the
Partnership's operations may be potentially vulnerable to those third parties'
failure to prepare for the year 2000 change.
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: Effective September 8, 1998, the transfer agent
for the Partnership's depositary units will change from American
Stock Transfer & Trust Company to BankBoston, N.A., %Boston
EquiServe Limited Partnership, 150 Royall Street, Canton, MA 02021.
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:July 31, 1998 /s/ Kathleen A. Rawlings
Kathleen A. Rawlings
Controller (Principal Accounting Officer)
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<PERIOD-END> JUN-30-1998
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