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 March 31, 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, TX 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 April 30, 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
March 31, 1999
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Balance Sheets as of March 31, 1999 (Unaudited) and
December 31, 1998
Condensed Statements of Earnings for the Three Months Ended
March 31, 1999 and 1998 (Unaudited)
Condensed Statements of Cash Flows for the Three Months Ended
March 31, 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
March 31, 1999 and December 31, 1998
(Dollars in Thousands)
March 31, Dec. 31,
1999 1998
-------- --------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents ........................ $ 4,893 $ 4,167
Restricted cash .................................. 380 379
Investments - available for sale ................. 4,516 4,680
Accounts receivable, net ......................... 1,216 1,645
Prepaid expenses and other current assets ........ 127 152
------- -------
Total current assets ........................... 11,132 11,023
------- --------
Property and equipment - at cost: 28,877 28,836
Less depreciation, depletion, and amortization ... (13,902) (13,415)
------- --------
Net property and equipment ..................... 14,975 15,421
------- --------
Total assets ......................................... $26,107 $26,444
======= =======
LIABILITIES AND PARTNERSHIP CAPITAL
Current liabilities:
Accounts payable and other current liabilities ... $ 363 $ 260
Production and property taxes payable or accrued . 660 647
Royalties and production payment payable ......... 902 839
Distributions payable to Unitholders ............. 1,957 1,957
------- -------
Total current liabilities ...................... 3,882 3,703
Long-term debt ....................................... 100 100
------- -------
Total liabilities .............................. 3,982 3,803
------- --------
Commitments and contingencies (Note 2)
Partnership capital:
General partners ................................. 124 128
Unitholders ...................................... 20,002 20,350
Accumulated other comprehensive income ........... 1,999 2,163
------- -------
Total partnership capital ...................... 22,125 22,641
------- -------
Total liabilities and partnership capital ............ $26,107 $26,444
======= =======
The accompanying condensed notes are an integral part of
these financial statements.
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DORCHESTER HUGOTON, LTD.
(A Texas Limited Partnership)
CONDENSED STATEMENTS OF EARNINGS
(Unaudited)
For the Three Months Ended March 31, 1999 and 1998
(Dollars In Thousands)
Three Months Ended
March 31,
---------------------
1999 1998
-------- --------
Net operating revenues:
Natural gas sales ............................. $ 3,153 $ 4,250
Other ......................................... 46 49
Production payment (ORRI) ..................... (135) (202)
-------- -------
Total net operating revenues ....................... 3,064 4,097
-------- -------
Costs and expenses:
Operating, including production taxes .......... 788 878
Depletion, depreciation & amortization ......... 487 505
General and administrative ..................... 136 143
Management fees ................................ 115 125
Interest ...................................... 9 10
Other income, net .............................. (73) (28)
-------- -------
Total costs and expenses ........................... 1,462 1,633
-------- -------
Net earnings ....................................... $ 1,602 $ 2,464
======== =======
Net earnings per Unit (in dollars) ................. $ 0.15 $ 0.23
======== =======
STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
For the Three Months Ended March 31, 1999 and 1998
(Dollars In Thousands)
Net earnings ....................................... $ 1,602 $ 2,464
Unrealized holding gain (loss) on
available for sale securities ................. (164) 348
-------- -------
Comprehensive income ............................... $ 1,438 $ 2,812
======== =======
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 Three Months Ended March 31, 1999 and 1998
(Dollars in Thousands)
1999 1998
------- -------
Cash flows provided by operating activities .......... $ 2,720 $ 2,887
------- -------
Cash flows used in investing activities:
Purchases of property & equipment ................ (40) (79)
------- -------
Cash flows used in investing activities .............. (40) (79)
------- -------
Cash flows used in financing activities:
Distributions paid to Unitholders ................ (1,954) (1,954)
Reductions of long-term debt ..................... -0- (22)
------- -------
Cash flows used in financing activities .............. (1,954) (1,976)
------- -------
Increase in cash and cash equivalents ................ 726 832
Cash and cash equivalents at January 1, .............. 4,167 3,344
------- -------
Cash and cash equivalents at March 31, ............... $ 4,893 $ 4,176
======= =======
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) 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 the 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 March 31, 1999, the value of the escrow is
approximately $378,000. 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 7.75% on April 30, 1999. All amounts borrowed under
this facility will become due and payable on July 31, 2001. As of April 30,
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 approximately $100,000 during the
first quarter 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 months ended March 31,
1999 were $2,720,000 compared to $2,887,000 for the same period of 1998. First
quarter net earnings were $0.15 per Unit compared to $0.23 per Unit in 1998.
Operating cash flows and net earnings were lower during 1999 primarily as a
result of significantly lower natural gas market prices compared to the same
period last year as shown in the table below.
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 temporary cash investments
totaled $4,893,000 on March 31, 1999 compared to $4,167,000 on December 31,
1998.
In connection with the Oklahoma properties, on May 15, 1999 the Partnership will
pay approximately $646,000 in production payments for the year ended February
28, 1999. An additional $34,000 has been accrued for March, 1999.
The Partnership's portion of gas sales volumes (not reduced for Oklahoma
production payments) and weighted average sales prices were:
Three Months Ended
----------------------------
March 31, Dec. 31,
1999 1998 1998
Sales Volumes - MMCF: ----- ----- -----
Oklahoma .......................... 1,415 1,439 1,458
Kansas ............................ 348 466 382
----- ----- -----
Total MMCF ........................... 1,763 1,905 1,840
===== ===== =====
Weighted Average Sales Prices - $/MCF:
Oklahoma .......................... $1.77 $2.21 $2.07
Kansas ............................ 1.85 2.30 2.15
Overall Weighted Average - $/MCF...... $1.79 $2.23 $2.08
Oklahoma natural gas sales volumes were essentially the same during the first
quarter compared to the first quarter of 1998 and slightly lower than the
previous quarter as a result of routine state well tests during the current
quarter. Kansas natural gas sales volumes were lower during the first quarter
compared to the same quarter of 1998 and the previous quarter as a result of
natural reservoir decline typical of all producers in that 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 first quarter, the Partnership removed a restriction and
repaired one casing leak in Kansas. After installing a temporary pumping unit to
remove formation water, the Kansas well thus far appears to have increased from
80 MCFD to over 200 MCFD. Also, during the first quarter, the Partnership
repaired one casing leak in Oklahoma and then fracture treated the well
(creating cracks in the formation to assist gas flow from the producing zones).
Preliminary results show the Oklahoma well increased from 112 MCFD to over 200
MCFD accompanied by an increased pressure which usually results in increased
reserves. During April 1999 the Partnership resumed the testing and
reinstallation of anodes (corrosion protection devices) on the Partnership's
Oklahoma gas pipeline gathering system. Additional tests are underway regarding
the Partnership's Fort Riley formation well which is currently producing about
70 MCFD with water standing in the well bore.
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, although there has been no noticeable activity resulting from the
relaxed production rules that would require unusual or accelerated investment in
more gas compression or other facilities needed to stay competitive with
adjoining operators.
The Partnership is continuing to monitor the activity on nearby acreage in the
Council Grove formation. At present 11 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 80 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. At present, no schedule
has been established by the Court and no Council Grove production has begun. 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, will simply be upgraded or replaced at nominal costs and
inconvenience. These upgrades should be completed by the end of the third
quarter. The Partnership previously contacted its gas purchasers and 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. For example, the
vendor that processes the Partnership's K-1's notified us that their system is
not currently Year 2000 compliant. The Partnership is evaluating several
options, 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 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: None
Item 6. Exhibits and Reports on Form 8-K:
a) Exhibit 27 - Financial Data Schedule.
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: May 3, 1999 /s/ Kathleen A. Rawlings
Kathleen A. Rawlings
Controller (Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> MAR-31-1999
<CASH> 4,893
<SECURITIES> 4,516
<RECEIVABLES> 1,216
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 11,132
<PP&E> 28,877
<DEPRECIATION> 13,902
<TOTAL-ASSETS> 26,107
<CURRENT-LIABILITIES> 3,882
<BONDS> 100
0
0
<COMMON> 0
<OTHER-SE> 22,125
<TOTAL-LIABILITY-AND-EQUITY>26,107
<SALES> 3,064
<TOTAL-REVENUES> 3,064
<CGS> 1,462
<TOTAL-COSTS> 1,462
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9
<INCOME-PRETAX> 1,602
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,602
<EPS-PRIMARY> 0.15
<EPS-DILUTED> 0.15
</TABLE>
