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, 1999 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, 1999, 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, 1999
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Balance Sheets as of September 30, 1999 (Unaudited)
and December 31, 1998
Condensed Statements of Earnings for the Three and Nine
Months Ended September 30, 1999 and 1998 (Unaudited)
Statements of Comprehensive Income for the Three and Nine
Months Ended September 30, 1999 and 1998 (Unaudited)
Condensed Statements of Cash Flows for the Nine Months Ended
September 30, 1999 and 1998 (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
September 30, 1999 and December 31, 1998
(Dollars in Thousands)
Sept. 30, Dec. 31,
1999 1998
-------- --------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents ........................ $ 5,308 $ 4,167
Restricted cash .................................. 386 379
Investments - available for sale ................. 4,864 4,680
Accounts receivable, net ......................... 2,191 1,645
Prepaid expenses and other current assets ........ 169 152
------- -------
Total current assets ........................... 12,918 11,023
Property and equipment - at cost ..................... 29,108 28,836
Less depreciation, depletion and amortization .... (14,821) (13,415)
------- --------
Net property and equipment ..................... 14,287 15,421
------- --------
Total assets ......................................... $27,205 $26,444
======= =======
LIABILITIES AND PARTNERSHIP CAPITAL
Current liabilities:
Accounts payable and other current liabilities ... $ 472 $ 260
Production and property taxes payable or accrued . 716 647
Royalties and production payment payable ......... 748 839
Distributions payable to Unitholders ............. 1,956 1,957
------- -------
Total current liabilities ...................... 3,892 3,703
Long-term debt ....................................... 100 100
------- -------
Total liabilities .............................. 3,992 3,803
Commitments and contingencies (Note 2)
Partnership capital
General partners ................................. 131 128
Unitholders ...................................... 20,735 20,350
Accumulated other comprehensive income ........... 2,347 2,163
------- -------
Total partnership capital ...................... 23,213 22,641
------- -------
Total liabilities and partnership capital ............ $27,205 $26,444
======= =======
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, 1999 and 1998
(Dollars in Thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ----------------
1999 1998 1999 1998
-------- ------- ------- -------
Net operating revenues:
Natural gas sales ............. $ 4,509 $ 3,685 $11,289 $12,064
Other ......................... 51 44 143 148
Production payment (ORRI) ..... (223) (164) (523) (559)
------- ------- ------- -------
Total net operating revenues ....... 4,337 3,565 10,909 11,653
------- ------- ------- -------
Costs and expenses:
Operating, including prod. taxes 900 940 2,643 2,758
Depletion, depreciation & amort. 477 506 1,427 1,506
General and administrative ..... 139 116 408 390
Management fees ................ 128 120 362 369
Interest ....................... 10 10 28 30
Other income, net .............. (86) (77) (219) (175)
------- ------- ------- -------
Total costs and expenses ........... 1,568 1,615 4,649 4,878
------- ------- ------- -------
Net earnings ....................... $ 2,769 $ 1,950 $ 6,260 $ 6,775
======= ======= ======= =======
Net earnings per Unit (in dollars) . $ 0.26 $ 0.18 $ 0.58 $ 0.63
======= ======= ======= =======
STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
For the Three and Nine Months Ended September 30, 1999 and 1998
(Dollars In Thousands)
Net earnings ....................... $ 2,769 $ 1,950 $ 6,260 $ 6,775
Unrealized holding gain (loss) on
available for sale securities . (72) (48) 184 475
-------- ------- ------- -------
Comprehensive income ............... $ 2,697 $ 1,902 $ 6,444 $ 7,250
======== ======= ======= =======
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, 1999 and 1998
(Dollars in Thousands)
1999 1998
------- -------
Cash flows provided by operating activities ........... $ 7,287 $ 8,135
------- -------
Cash flows used in investing activities:
Purchases of prop. & equipment .................... (296) (917)
Purchase of securities - available for sale ....... -0- (741)
Cash received on sale of other property & equipment 12 30
------- -------
Cash flows used in investing activities ............... (284) (1,628)
------- -------
Cash flows used in financing activities:
Distributions paid to Unitholders ................. (5,862) (5,861)
Reductions of long-term debt ...................... -0- (22)
------- -------
Cash flows used in financing activities ............... (5,862) (5,883)
------- -------
Increase in cash and cash equivalents ................. 1,141 624
Cash and cash equivalents at January 1, ............... 4,167 3,344
------- -------
Cash and cash equivalents at September 30, ............ $ 5,308 $ 3,968
======= =======
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 and recurring adjustments) that 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 1998 the Partnership recorded $450,000 (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. On March 9, 1998 $151,757 was paid to PEPL. An additional
$366,633, which is still awaiting possible regulatory/judicial/legislative
action, was placed into an escrow account. On March 2, 1999, $2,840 was
released from escrow to PEPL. At September 30, 1999, the value of the
escrow is approximately $386,000. The escrowed funds include amounts that
could possibly be waived, recovered or recoverable from others, of which
$34,000 has been recorded as an allowance for bad debt on the Partnership's
books in the event it is not waived and deemed uncollectible.
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 8.25% on October 31, 1999. All amounts borrowed
under this facility will become due and payable on July 31, 2001. As of
October 31, 1999, 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 1999.
<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, 1999 were $2,988,000 and $7,287,000 compared to $2,751,000 and
$8,135,000 for the same periods of 1998. Higher quarterly cash flows from
operations primarily resulted from increased natural gas market prices. Nine-
month cash flows were less than 1998 period, mainly because of lower Kansas gas
sales volumes.
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. Cash and cash equivalents totaled
$5,308,000 at September 30, 1999 compared to $4,167,000 on December 31, 1998.
In connection with the Oklahoma properties, in May 1999 the Partnership paid
approximately $646,000 in production payments for the year ended February 28,
1999; an additional $394,000 has been accrued through September 30, 1999.
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, June 30, September 30,
---------------- --------- -----------------
1999 1998 1999 1999 1998
Sales Volumes - MMCF: ----- ----- ----- ----- -----
Oklahoma ............... 1,397 1,432 1,334 4,146 4,281
Kansas ................. 327 413 336 1,011 1,314
----- ----- ----- ----- -----
Total MMCF ................ 1,724 1,845 1,670 5,157 5,595
===== ===== ===== ===== =====
Weighted Average Sales Prices - $/MCF:
Oklahoma ............... $2.60 $1.97 $2.15 $2.17 $2.13
Kansas ................. 2.68 2.10 2.26 2.25 2.24
Overall Weighted Avg - $/MCF $2.62 $2.00 $2.17 $2.19 $2.16
Oklahoma gas sales volumes decreased slightly during 1999 compared to similar
periods during 1998. Kansas 1999 gas sales volumes during the third quarter were
slightly less than the second quarter of 1999. Kansas 1999 gas sales volumes
were lower than the comparable 1998 third quarter and the 1998 same nine-month
period. Such decreases are primarily a result of natural reservoir declines
experienced by the Partnership and other producers in the Kansas area.
<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)
During the 1999 third quarter, the Partnership fracture treated (creating cracks
in the formation to assist gas flow from the producing zones) two wells in
Oklahoma. Preliminary results show one well increased from 120 MCFD to 350 MCFD
while almost doubling in shut-in pressure. The other well increased from 136
MCFD to 275 MCFD and doubled in shut-in pressure. Increased pressure and volume
usually results in increased reserves. Three additional wells are currently
scheduled for fracture treatment. During the third quarter, the Partnership's
Fort Riley formation well decreased from approximately 95 MCFD to 60 MCFD before
removal of water from the well restored the volume to 95 MCFD. Since then, the
volume has again decreased to approximately 60 MCFD.
As discussed in the 1998 Annual Report on Form 10-K, the Partnership is active
in supporting its views regarding possible Oklahoma regulatory/legislative
action on infill drilling and in monitoring activities resulting from removal of
production quantity restrictions during 1998 in the Guymon-Hugoton field. Both
infill drilling and removal of production limits could require considerable
capital expenditures. The outcome and the cost of such activities is
unpredictable. Recently enacted Oklahoma legislation clarified who must receive
notices of any application for infill drilling. Any such applications are
expected to be controversial and require lengthy regulatory proceedings. Thus
far only one company on adjoining acreage has installed gas compression since
Oklahoma removed production limits. The Partnership elected to install similar
rental compression to stay competitive. At present, five of the Partnership's
wells are assisted by such field compression. Three of the wells have increased
production from an average of 214 MCFD to 393 MCFD. The other two wells have
increased from an average of 51 MCFD to 94 MCFD, which includes the results of
water removal. Operating costs are expected to increase by $65,000 to $70,000
per year as a result of compression for the five wells. The increase in
production should more than offset costs of compression.
The Partnership is continuing to monitor the activity on nearby acreage in the
Council Grove formation. At present 15 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 43 MCF per day with water production to over 1,000 MCF per day.
Production volumes in subsequent months have varied with some wells showing
increases. Following the litigation settlement discussed in the 1999 Second
Quarter Report on Form 10-Q, Blue Star Resources Inc.'s current total production
from the three Council Grove wells on the Partnership's acreage is approximately
165 MCFD, 41 MCFD, and 15 MCFD, of which the Partnership has a minor overriding
royalty interest.
<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)
In connection with the Partnership's Year 2000 Readiness Disclosures, its field
and administrative operations have been reviewed for Year 2000 compliance. These
reviews have disclosed to date that previous normal upgrades resulted in most
internal operations already being Year 2000 compliant. All upgrades are
essentially complete except for minor issues that are non-essential. The
Partnership previously contacted its gas purchasers and critical software and
service vendors concerning Year 2000. Most of those contacted, that are not
already compliant, have indicated they are working to be compliant. The
Partnership is preparing or has prepared contingency plans regarding those
contacted that do not currently meet Year 2000 compliance.
The accounting firm that has, for years, processed the Partnership's 4,000 to
5,000 individualized K-1's previously notified us that their current computer
software, while fully able to process 1999 tax returns in early year 2000, would
not be able to process Year 2000 tax returns in early 2001. However, the
Partnership was notified during the third quarter of 1999 that the accounting
firm had begun developing new software and had acquired another firm that had a
Year 2000 compliant product. However, conversion of data to a new software
product will still be necessary. Consequently, the Partnership still believes it
could incur estimated total expenditures of $150,000 to $200,000 during calendar
year 2000 and 2001 on K-1 preparation and/or conversion costs in addition to
current K-1 processing costs. Including the above mentioned estimate, 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 1998 Annual Report, 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.
The Partnership has terminated its previously announced authorization to
repurchase and retire publicly traded Units from time to time. No Units were
repurchased pursuant to such authorizations.
<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) 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 in 2000.
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 1, 1999 /s/ Kathleen A. Rawlings
Kathleen A. Rawlings
Controller (Principal Accounting Officer)
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0
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