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, 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 July 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
June 30, 1999
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Balance Sheets as of June 30, 1999 (Unaudited)
and December 31, 1998
Condensed Statements of Earnings for the Three and Six
Months Ended June 30, 1999 and 1998 (Unaudited)
Statements of Comprehensive Income for the Three and Six
Months Ended June 30, 1999 and 1998 (Unaudited)
Condensed Statements of Cash Flows for the Six Months Ended
June 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
June 30, 1999 and December 31, 1998
(Dollars in Thousands)
June 30, Dec. 31,
1999 1998
-------- --------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents ....................... $ 4,472 $ 4,167
Restricted cash .................................. 382 379
Investments - available for sale ................. 4,936 4,680
Accounts receivable, net ......................... 1,505 1,645
Prepaid expenses and other current assets ........ 189 152
------- -------
Total current assets ........................... 11,484 11,023
Property and Equipment - at cost ..................... 28,922 28,836
Less depreciation, depletion and amortization .... (14,365) (13,415)
------- --------
Net property and equipment ..................... 14,557 15,421
------- --------
Total assets ......................................... $26,041 $26,444
======= =======
LIABILITIES AND PARTNERSHIP CAPITAL
Current liabilities:
Accounts payable and other current liabilities ... $ 451 $ 260
Production and property taxes payable or accrued . 611 647
Royalties and production payment payable ......... 454 839
Distributions payable to Unitholders ............. 1,956 1,957
------- -------
Total current liabilities ...................... 3,472 3,703
Long-term debt ....................................... 100 100
------- -------
Total liabilities .............................. 3,572 3,803
Commitments and contingencies (Note 2)
Partnership capital
General partners ................................. 123 128
Unitholders ...................................... 19,927 20,350
Accumulated other comprehensive income ........... 2,419 2,163
------- -------
Total partnership capital ...................... 22,469 22,641
------- -------
Total liabilities and partnership capital ............ $26,041 $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 Six Months Ended June 30, 1999 and 1998
(Dollars in Thousands)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1999 1998 1999 1998
-------- ------- ------- -------
Net operating revenues:
Natural gas sales ............. $ 3,627 $ 4,129 $ 6,780 $ 8,379
Other ......................... 46 55 92 104
Production payment (ORRI) ..... (165) (193) (300) (395)
------- ------- ------- -------
Total net operating revenues ....... 3,508 3,991 6,572 8,088
------- ------- ------- -------
Costs and expenses:
Operating, including prod. taxes 955 940 1,743 1,818
Depletion, depreciation & amort. 463 495 950 1,000
General and administrative ..... 133 131 269 274
Management fees ................ 119 124 234 249
Interest ....................... 9 10 18 20
Other income, net .............. (60) (70) (133) (98)
------- ------- ------- -------
Total costs and expenses ........... 1,619 1,630 3,081 3,263
------- ------- ------- -------
Net earnings ....................... $ 1,889 $ 2,361 $ 3,491 $ 4,825
======= ======= ======= =======
Net earnings per Unit (in dollars) . $ 0.17 $ 0.22 $ 0.32 $ 0.45
======= ======= ======= =======
STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
For the Three and Six Months Ended June 30, 1999 and 1998
(Dollars In Thousands)
Net earnings ....................... $ 1,889 $ 2,361 $ 3,491 $ 4,825
Unrealized holding gain on
available for sale securities . 420 175 256 523
-------- ------- ------- -------
Comprehensive income ............... $ 2,309 $ 2,536 $ 3,747 $ 5,348
======== ======= ======= =======
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, 1999 and 1998
(Dollars in Thousands)
1999 1998
------- -------
Cash flows provided by operating activities .......... $ 4,299 $ 5,384
------- -------
Cash flows used in investing activities:
Purchases of prop. & equipment ................... (86) (475)
Purchase of securities - available for sale ...... -0- (741)
------- -------
Cash flows used in investing activities .............. (86) (1,216)
------- -------
Cash flows used in financing activities:
Distributions paid to Unitholders ................ (3,908) (3,907)
Reductions of long-term debt ..................... -0- (22)
------- -------
Cash flows used in financing activities .............. (3,908) (3,929)
------- -------
Increase in cash and cash equivalents ................ 305 239
Cash and cash equivalents at January 1, .............. 4,167 3,344
------- -------
Cash and cash equivalents at June 30, ................ $ 4,472 $ 3,583
======= =======
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 June 30, 1999, the value of the escrow is
approximately $382,000. 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% on July 31, 1999. All amounts borrowed under
this facility will become due and payable on July 31, 2001. As of July 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 half 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 six months ended
June 30, 1999 were $1,579,000 and $4,299,000 compared to $2,497,000 and
$5,384,000 for the same periods of 1998. The lower second quarter and first half
1999 cash flows from operating activities resulted from lower natural gas market
prices and lower natural gas sales volumes compared to 1998. Also, the table
below shows the improvement in gas prices since the first quarter of 1999.
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
$4,472,000 at June 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 $187,000 has been accrued through June 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 Six Months Ended
---------------------------- -----------------
June 30, June 30,
---------------- Mar. 31, -----------------
1999 1998 1999 1999 1998
Sales Volumes - MMCF: ----- ----- ----- ----- -----
Oklahoma ............... 1,334 1,410 1,415 2,749 2,849
Kansas ................. 336 435 348 684 901
----- ----- ----- ----- -----
Total MMCF ................ 1,670 1,845 1,763 3,433 3,750
===== ===== ===== ===== =====
Weighted Average Sales Prices - $/MCF:
Oklahoma ............... $2.15 $2.22 $1.77 $1.96 $2.21
Kansas ................. 2.26 2.30 1.85 2.05 2.30
Overall Weighted Avg - $/MCF $2.17 $2.24 $1.79 $1.97 $2.23
Oklahoma gas sales volumes were lower during 1999 compared to similar periods in
1998 and compared to the prior 1999 quarter as a result of more wells being on
state tests than during comparable periods. Kansas 1999 gas sales volumes during
the second quarter were slightly less than the first quarter of 1999. Kansas
1999 gas sales volumes were lower than the comparable 1998 second quarter and
the 1998 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.
<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 second quarter, the Partnership fracture treated (creating
cracks in the formation to assist gas flow from the producing zones) four wells
in Oklahoma. Preliminary results show one well increased from 88 MCFD to over
440 MCFD while more than doubling in pressure. Increased pressure and volume
usually results in increased reserves. Another well increased from 146 MCFD to
175 MCFD with only a 16% increase in pressure. The remaining two wells showed no
increase in production volume while one increased pressure by 15% and the other
showed no change. Recent attempts to increase production from the Partnership's
Fort Riley formation well were unsuccessful. The Partnership recently installed
a temporary pumping unit to remove formation water and evaluate the well's
performance. Currently, the well is producing approximately 95 MCFD with minimal
amounts of water.
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, three of the Partnership's
wells are assisted by compression and thus far one well has increased production
from 210 MCFD to 435 MCFD and the other two have shown little change. The
Partnership will install one additional compressor to assist production from two
more wells. 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 13 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 53 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. On October 22, 1998, the Partnership filed suit in Texas County,
Oklahoma against Blue Star Resources, Inc. et al who was attempting, without
Partnership permission, to produce gas from the Council Grove formation
underlying three of the Partnership's gas well units. The dispute has been
settled and the litigation will be dismissed. As a result of the settlement, the
Partnership will receive a small overriding royalty. It is believed that any
Council Grove production volume by Blue Star will be quite small.
<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. Some remaining
operations, such as non-essential personal computers and non-financial software
products, have been upgraded or replaced at nominal costs and inconvenience.
Such 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 vendor that processes the Partnership's K-1's notified us that their
computer software will not be able to process Year 2000 tax returns. They have,
however assured us that 1999 tax year K-1's can be processed in early 2000 on
the current software. The Partnership is evaluating several options for the 2000
tax year K-1 processing in early 2001 including contracting with another vendor
to process the Partnership's 4,000 to 5,000 individualized K-1's annually. While
several options are available, the Partnership currently estimates that it will
spend a total of $150,000 to $200,000 during 1999 and 2000 on K-1 preparation
and/or conversion costs in addition to current K-1 processing costs in
implementing a Year 2000 solution. 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. While the Partnership has not repurchased and retired any of
its publicly traded Units to date, the previously announced authorization 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: None.
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: August 4, 1999 /s/ Kathleen A. Rawlings
Kathleen A. Rawlings
Controller (Principal Accounting Officer)
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<S> <C>
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<PERIOD-START> JAN-1-1999
<PERIOD-END> JUN-30-1999
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<SECURITIES> 4,936
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<PP&E> 28,922
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0
0
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