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, 2000 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, 2000, 10,744,380 Depositary Receipts for Units of Limited
Partnership Interest were outstanding.
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DORCHESTER HUGOTON, LTD.
(A Texas Limited Partnership)
QUARTERLY REPORT ON FORM 10-Q
June 30, 2000
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Balance Sheets as of June 30, 2000 (Unaudited)
and December 31, 1999
Condensed Statements of Earnings for the Three and Six
Months Ended June 30, 2000 and 1999 (Unaudited)
Statements of Comprehensive Income for the Three and Six
Months Ended June 30, 2000 and 1999 (Unaudited)
Condensed Statements of Cash Flows for the Six Months Ended
June 30, 2000 and 1999 (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
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DORCHESTER HUGOTON, LTD.
(A Texas Limited Partnership)
PART I
Item 1
CONDENSED BALANCE SHEETS
(Dollars in Thousands)
June 30, Dec. 31,
2000 1999
-------- --------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents ....................... $ 8,014 $ 7,017
Restricted cash .................................. 398 390
Investments - available for sale ................. 5,024 5,156
Accounts receivable, net ......................... 3,041 1,555
Prepaid expenses and other current assets ........ 209 141
------- -------
Total current assets ........................... 16,686 14,259
------- -------
Property and equipment - at cost ..................... 29,307 29,203
Less depreciation, depletion and amortization .... (16,171) (15,297)
------- --------
Net property and equipment ..................... 13,136 13,906
------- --------
Total assets ......................................... $29,822 $28,165
======= =======
LIABILITIES AND PARTNERSHIP CAPITAL
Current liabilities:
Accounts payable and other current liabilities ... $ 974 $ 252
Production and property taxes payable or accrued . 705 630
Royalties and production payment payable ......... 843 889
Distributions payable to Unitholders ............. 1,956 1,956
------- -------
Total current liabilities ...................... 4,478 3,727
Long-term debt ....................................... 100 100
------- -------
Total liabilities .............................. 4,578 3,827
------- -------
Commitments and contingencies (Note 2)
Partnership capital:
General partners ................................. 150 140
Unitholders ...................................... 22,587 21,559
Accumulated other comprehensive income ........... 2,507 2,639
------- -------
Total partnership capital ...................... 25,244 24,338
------- -------
Total liabilities and partnership capital ............ $29,822 $28,165
======= =======
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
(Dollars in Thousands)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2000 1999 2000 1999
-------- ------- ------- -------
Net operating revenues:
Natural gas sales ............. $ 5,811 $ 3,627 $10,129 $ 6,780
Other ......................... 58 46 108 92
Production payment (ORRI) ..... (297) (165) (504) (300)
------- ------- ------- -------
Total net operating revenues ....... 5,572 3,508 9,733 6,572
------- ------- ------- -------
Costs and expenses:
Operating, including prod. taxes 1,035 955 1,951 1,743
Depletion, depreciation & amort. 442 463 891 950
General and administrative ..... 177 133 317 269
Management fees ................ 140 119 266 234
Interest ....................... 9 9 19 18
Other (income) expense, net .... 366 (60) 248 (133)
------- ------- ------- -------
Total costs and expenses ........... 2,169 1,619 3,692 3,081
------- ------- ------- -------
Net earnings ....................... $ 3,403 $ 1,889 $ 6,041 $ 3,491
======= ======= ======= =======
Net earnings per Unit (in dollars) . $ 0.32 $ 0.17 $ 0.56 $ 0.32
======= ======= ======= =======
STATEMENTS OF COMPREHENSIVE INCOME
(Dollars In Thousands)
(Unaudited)
Net earnings ....................... $ 3,403 $ 1,889 $ 6,041 $ 3,491
Unrealized holding gain (loss) on
available for sale securities . 44 420 (132) 256
-------- ------- ------- -------
Comprehensive income ............... $ 3,447 $ 2,309 $ 5,909 $ 3,747
======== ======= ======= =======
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 CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Six Months Ended
June 30,
--------------------
2000 1999
------- -------
Cash flows provided by operating activities .......... $ 6,107 $ 4,299
------- -------
Cash flows used in investing activities:
Purchases of prop. & equipment ................... (129) (86)
Cash received on sale of other property and equip. 11 -0-
------- -------
Cash flows used in investing activities .............. (118) (86)
------- -------
Cash flows used in financing activities:
Distributions paid to Unitholders ................ (4,992) (3,908)
------- -------
Cash flows used in financing activities .............. (4,992) (3,908)
------- -------
Increase in cash and cash equivalents ................ 997 305
Cash and cash equivalents at January 1, .............. 7,017 4,167
------- -------
Cash and cash equivalents at June 30, ................ $ 8,014 $ 4,472
======= =======
The accompanying condensed notes are an
integral part of these financial statements.
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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/
settlement action, was placed into an escrow account. On March 2, 1999,
$2,840 was released from escrow to PEPL. At June 30, 2000, the value of the
escrow is approximately $398,000. 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 received a notice and demand from the Internal Revenue
Service ("IRS") assessing a penalty payment of $100 per Partnership K-1, or
$446,100, excluding interest. The IRS penalty resulted from a clerical
error in requesting an automatic extension of time to file the
Partnership's federal income tax return. Although at this time no such
notices have been received from the various state taxing authorities with
which the Partnership is required to file income tax returns, it is
possible that some of those states may later assess a similar penalty due
to the Partnership's failure to secure an extension to file the federal
income tax return. An estimated expense of $500,000 was recorded on the
Partnership's books during June 2000. All federal and state tax returns
have been filed and all Unitholders timely received their K-1 from the
Partnership. The Partnership is contesting its liability for the IRS
penalty and will consider contesting any state penalties assessed.
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 9 1/2% on July 31, 2000. All amounts borrowed under
this facility will become due and payable on July 31, 2001. As of July 31,
2000, 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 second quarter
of 2000; $100,000 is the minimum borrowing level necessary to maintain the
credit facility.
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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, 2000 were $2,973,000 and $6,107,000 compared to $1,579,000 and
$4,299,000 for the same periods of 1999. Second quarter net earnings were $0.32
per Unit compared to $0.17 per Unit in 1999. Operating cash flows and net
earnings were higher during 2000 primarily as a result of significantly higher
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 $8,014,000 on June 30, 2000 compared to $7,017,000 on December 31, 1999.
On March 15, 2000 a special distribution of $0.10 per Unit was paid to
Unitholders of record on February 29, 2000. On April 14, 2000 and July 14, 2000
the Partnership paid distributions of $0.18 per Unit for each calendar quarter
of 2000. The total of the three distributions was approximately $4,992,000.
In connection with the Oklahoma properties, in May 1999 the Partnership paid
approximately $730,000 in production payments for the year ended February 29,
2000; an additional $338,000 has been accrued through June, 2000. As stated in
Note 2 to the Financial Statements, an accrual of approximately $500,000 has
been recorded to miscellaneous expense during June 2000 as a possible penalty
payment for a clerical error regarding tax return extensions.
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, -----------------
2000 1999 2000 2000 1999
Sales Volumes - MMCF: ----- ----- ----- ----- -----
Oklahoma ............... 1,374 1,334 1,392 2,766 2,749
Kansas ................. 282 336 291 573 684
----- ----- ----- ----- -----
Total MMCF ................ 1,656 1,670 1,683 3,339 3,433
===== ===== ===== ===== =====
Weighted Average Sales Prices - $/MCF:
Oklahoma ............... $3.50 $2.15 $2.53 $3.01 $1.96
Kansas ................. 3.58 2.26 2.72 3.14 2.05
Overall Weighted Avg - $/MCF $3.51 $2.17 $2.57 $3.03 $1.97
Oklahoma gas sales volumes were essentially unchanged during the second quarter
2000 compared to the second quarter of 1999 and the previous quarter. Kansas
natural gas sales volumes were lower during the second quarter compared to the
same quarter of 1999 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)
Since the first quarter of 2000, the Partnership has fracture treated (creating
cracks in the formation to assist gas flow from the producing zones into the
well bore) six wells in Oklahoma. Of the six wells the highest increase in
volume was from 100 MCF per day to 318 MCF per day and the lowest volume
increase was from 120 MCF per day to 170 MCF per day while the highest shut-in
pressure increase was from 39 psig to 118.3 psig and the least shut-in pressure
increase was from 31.3 psig to 37.5 psig. Increased pressure and volume usually
results in increased reserves. The Partnership has fracture treated seven wells
during 2000 and plans to continue fracture treatments during the year. The
Partnership's Fort Riley well production continues to vary around 60-65 MCF per
day with about 10 bbls of water per week.
As discussed in the 1999 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. No additional compression has been installed by operators on
adjoining acreage resulting from the relaxed production rules. Such
installations by others could require Partnership expenditures to stay
competitive with adjoining operators. The Partnership, together with other
producers, is currently seeking Kansas's regulatory permission to employ field
compressors to operate the wells at a vacuum. Some producers oppose the proposal
and neither the outcome nor the possible effect upon allowable production volume
is predictable.
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
including one well that has been recompleted in another formation resulting in
14 wells in the Council Grove. 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. Recent
results by others have varied from 28 MCF per day to 514 MCF per day. Production
volumes in subsequent months have varied with most wells showing decreases.
Current total production from the three Council Grove wells owned by others but
located on the Partnership's acreage is approximately 45 MCFD, 19 MCFD and 11
MCFD. The Partnership has a minor overriding royalty interest in the three
wells.
As previously reported, 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 2000, would not be able to process Year 2000 tax returns in early 2001.
Subsequently, the Partnership was notified during the third quarter of 1999 that
the accounting firm had begun developing new software and acquired another firm
that had a Year 2000 compliant product. However, conversion of the data to the
new software will still be necessary. Consequently, the Partnership 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
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DORCHESTER HUGOTON, LTD.
(A Texas Limited Partnership)
PART I
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
current K-1 processing costs. Except as stated above, thus far, the Partnership
has been essentially unaffected by the change from calendar year 1999 to 2000.
As previously discussed in the 1997, 1998, and 1999 Annual Reports, 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.
<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. 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
2001. The Advisory Committee functions as the Audit Committee for
the Partnership.
b) Although appearing to not be required to do so by current rules,
the Partnership, with Advisory Committee approval, adopted an
Audit Committee charter including annual review that complies
with the Nasdaq's Marketplace Rules.
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 3, 2000 /s/ Kathleen A. Rawlings
Kathleen A. Rawlings
Controller (Principal Accounting Officer)
