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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1998 COMMISSION FILE NO. 0-20998
KELLEY PARTNERS 1992 DEVELOPMENT
DRILLING PROGRAM
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 76-0373428
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
601 JEFFERSON ST.
SUITE 1100
HOUSTON, TEXAS 77002
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 652-5200
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 _____
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KELLEY PARTNERS 1992 DEVELOPMENT DRILLING PROGRAM
INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I. FINANCIAL INFORMATION
Balance Sheets as of December 31, 1997 and September 30, 1998 (unaudited).......................... 2
Statements of Income for the three months and nine months ended
September 30, 1997 and 1998 (unaudited)......................................................... 3
Statements of Cash Flows for the nine months ended September 30, 1997 and 1998 (unaudited)......... 4
Notes to Financial Statements (unaudited).......................................................... 5
Management's Discussion and Analysis of Financial Condition and Results of Operations.............. 6
PART II. OTHER INFORMATION.............................................................................. 9
</TABLE>
1
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KELLEY PARTNERS 1992 DEVELOPMENT DRILLING PROGRAM
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Cash and cash equivalents ................................... $ -- $ --
Accounts receivable - trade ................................. 30 15
Accounts receivable - affiliates ............................ 342 258
-------- --------
Total current assets ........................................ 372 273
-------- --------
Oil and gas properties, successful efforts method:
Properties subject to amortization ........................ 44,302 44,311
Less: Accumulated depreciation, depletion and amortization (40,933) (41,250)
-------- --------
Total oil and gas properties ................................ 3,369 3,061
-------- --------
Total assets ................................................... $ 3,741 $ 3,334
======== ========
LIABILITIES:
Accounts payable and accrued expenses ....................... $ 84 $ 79
-------- --------
Total current liabilities ................................... 84 79
-------- --------
Long term note payable - affiliate .......................... 3,181 2,639
-------- --------
Total liabilities .............................................. 3,265 2,718
-------- --------
PARTNERS' EQUITY:
LP Unitholders' equity ...................................... 21 34
GP Unitholders' equity ...................................... 436 557
Managing and special general partners' equity ............... 19 25
-------- --------
Total partners' equity ......................................... 476 616
-------- --------
Total liabilities and partners'equity .......................... $ 3,741 $ 3,334
======== ========
</TABLE>
See Notes to Financial Statements.
2
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KELLEY PARTNERS 1992 DEVELOPMENT DRILLING PROGRAM
STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER UNIT DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPT. 30, SEPT. 30,
------------------ -----------------
1997 1998 1997 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES:
Oil and gas sales ........................ $ 540 $ 369 $ 2,045 $ 1,175
------- ------- ------- -------
Total revenues ........................... 540 369 2,045 1,175
------- ------- ------- -------
EXPENSES:
Lease operating expenses ................. 48 112 365 321
Severance taxes .......................... 25 21 88 65
General and administrative expenses ...... 119 45 357 111
Interest expenses ........................ 83 69 293 221
Depreciation, depletion and amortization . 111 107 440 317
------- ------- ------- -------
Total expenses ........................... 386 354 1,543 1,035
------- ------- ------- -------
Net income .................................. $ 154 $ 15 $ 502 $ 140
======= ======= ======= =======
Net income allocable to LP and GP unitholders $ 148 $ 14 $ 482 $ 134
======= ======= ======= =======
Net income allocable to managing and
special general partners ................. $ 6 $ 1 $ 20 $ 6
======= ======= ======= =======
Net income per LP and GP unit ............... $ .01 $ -- $ .03 $ .01
======= ======= ======= =======
Average LP and GP units outstanding ......... 16,033 16,033 16,033 16,033
======= ======= ======= =======
</TABLE>
See Notes to Financial Statements.
3
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KELLEY PARTNERS 1992 DEVELOPMENT DRILLING PROGRAM
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPT. 30,
------------------------
1997 1998
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ............................................. $ 502 $ 140
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization ............. 440 317
Changes in operating assets and liabilities:
Decrease in accounts receivable ...................... 1,133 99
(Decrease) in accounts payable and accrued expenses... (21) (5)
------- -------
Net cash provided by operating activities .............. 2,054 551
------- -------
INVESTING ACTIVITIES:
Capital expenditures ...................................... (40) (9)
Proceeds from sale of assets .............................. 71 --
------- -------
Net cash provided by (used in) investing activities... 31 (9)
------- -------
FINANCING ACTIVITIES:
Principal payments on long-term borrowings ............. (2,107) (542)
------- -------
Net cash used in financing activities .................. (2,107) (542)
------- -------
Decrease in cash and cash equivalents ..................... (22) --
Cash and cash equivalents, beginning of period ............ 22 --
------- -------
Cash and cash equivalents, end of period .................. $ -- $ --
======= =======
</TABLE>
See Notes to Financial Statements.
4
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KELLEY PARTNERS 1992 DEVELOPMENT DRILLING PROGRAM
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
General. The accompanying unaudited interim financial statements of
Kelley Partners 1992 Development Drilling Program (the "Partnership") have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission in accordance with generally accepted accounting principles for
interim financial information. These financial statements reflect all
adjustments (consisting of normal recurring adjustments) necessary for a fair
presentation of the results for the interim periods presented. The results of
operations for the periods ended September 30, 1998 are not necessarily
indicative of results to be expected for the full year. The accounting policies
followed by the Partnership are set forth in Note 1 to the financial statements
included in its Annual Report on Form 10-K for the year ended December 31, 1997.
These unaudited interim financial statements should be read in conjunction with
the audited financial statements and notes thereto included in the Partnership's
1997 Annual Report on Form 10-K.
Comprehensive Income. In June 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130"). SFAS 130 is effective for periods beginning
after December 15, 1997. SFAS 130 establishes standards for reporting and
displaying comprehensive income and its components. The purpose of reporting
comprehensive income is to report a measure of all changes in equity of an
enterprise that results from recognized transactions and other economic events
of the period other than transactions with owners in their capacity as owners.
As of September 30, 1998, there are no adjustments ("Other comprehensive
income") to net income in deriving comprehensive income.
Derivative and Hedge Accounting. In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
SFAS 133 establishes accounting and reporting standards for derivative
instruments and hedging activities that require an entity to recognize all
derivatives as an asset or liability measured at its fair value. Depending on
the intended use of the derivative, changes in its fair value will be reported
in the period of change as either a component of earnings or a component of
other comprehensive income.
SFAS 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Earlier application of SFAS 133 is encouraged, but not
prior to the beginning of any fiscal quarter that begins after issuance of the
Statement. Retroactive application to periods prior to adoption is not allowed.
The Partnership has not quantified the impact of adoption on its financial
statements or the date it intends to adopt.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
In 1992, Kelley Partners 1992 Development Drilling Program (the
"Partnership") issued units of limited and general partner interests ("Units").
The Units represent 96.04% of the total interests in the Partnership. In
addition, the Partnership issued managing and special general partner interests
representing 3.96% of the total interests in the Partnership. Kelley Oil
Corporation, managing general partner of the Partnership ("Kelley Oil") and a
wholly owned subsidiary of Kelley Oil & Gas Corporation ("KOGC"), owns 83.72% of
the Units, together with its 3.94% managing general partnership interest. Since
inception, the Partnership participated in drilling 39 gross (15.23 net) wells,
of which 30 gross (11.07 net) wells were found productive and 9 gross (4.16 net)
wells were dry.
RECENT DEVELOPMENTS
Hedging Activities. KOGC periodically uses forward sales contracts,
natural gas price swap agreements, natural gas basis swap agreements and options
to reduce exposure to downward price fluctuations on its natural gas production.
KOGC's hedging activities also cover the gas production attributable to the
interest in such production of the public unitholders in its subsidiary
partnerships. The credit risk exposure from counterparty nonperformance on
natural gas forward sales contracts and derivative financial instruments is
generally the amount of unrealized gains under the contracts. KOGC has not
experienced counterparty nonperformance on these agreements and does not
anticipate any in future periods.
Through natural gas price swap agreements, approximately 62% and 44%
of the Partnership's natural gas production for the third quarter of 1998 and
first nine months of 1998, respectively, was affected by hedging transactions at
an average NYMEX quoted price of $2.34 per Mmbtu and $2.30 per Mmbtu,
respectively, before transaction and transportation costs. Hedging activities
increased Partnership revenues by approximately $28,000 and $40,000 in the third
quarter of 1998 and first nine months of 1998, respectively, as compared to
estimated revenues had no hedging activities been conducted. As of September 30,
1998, approximately 48% of the Partnership's anticipated natural gas production
for the remainder of 1998 had been hedged by natural gas price swap agreements
at an average NYMEX quoted price of $2.28 per Mmbtu before transaction and
transportation costs. The partnership has also hedged approximately 46% of its
anticipated natural gas production for the first four months of 1999 by natural
gas swap agreements at an average NYMEX quoted price of $2.36 per Mmbtu before
transaction and transportation costs. At September 30, 1998, the unrealized loss
of the Partnership's existing hedging instruments for future production months
in 1998 approximated $51,000.
RESULTS OF OPERATIONS
Three Months Ended, September 30, 1998 and 1997. Oil and gas revenues
of $369,000 for the third quarter of 1998 decreased 32% compared to $540,000 in
the corresponding quarter of 1997 as a result of lower gas production partially
offset by higher oil production and lower oil and gas prices. Production of
natural gas decreased 24% from 221,000 Mcf in the third quarter of 1997 to
168,000 Mcf in the current quarter, while the average price of natural gas
decreased 8% from $2.27 per Mcf in the third quarter of 1997 to $2.09 per Mcf in
the current quarter. Production of crude oil in the current quarter totaled
3,273 barrels, with an average sales price of $13.38 per barrel compared to
2,110 barrels at $18.34 per barrel in the same quarter last year, representing a
volume increase of 55% and a price decrease of 27%. Gas production decreased due
to natural depletion.
Lease operating expenses and severance taxes were $133,000 in the
current quarter versus $73,000 in the third quarter of 1997, an increase of 82%.
The third quarter of 1997 included an accrual adjustment for lease operating
expense of $57,000. On a unit of production basis, these expenses increased to
$0.71 per Mcfe in the third quarter of 1998 from $0.32 per Mcfe in the same
quarter of 1997.
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General and administrative ("G&A") expenses of $45,000 in the current
quarter decreased 62% from $119,000 in the third quarter of 1997. Lower third
quarter 1998 Partnership production activity caused the decline in G&A expenses
charged by Kelley Oil to the Partnership. On a unit of production basis, these
expenses decreased from $0.51 per Mcfe in the third quarter of 1997 to $0.24 per
Mcfe in the current quarter.
In the third quarter of 1998 and 1997, the Partnership incurred
interest expenses of $69,000 and $83,000, respectively, on a loan advanced to it
by Kelley Oil in August 1994 ("Initial Loan") to fund part of its drilling
expenditures in excess of contributed capital. The reduction reflects the lower
average note payable balance outstanding in the third quarter of 1998. See
"Liquidity and Capital Resources" below.
Depreciation, depletion and amortization ("DD&A") expenses decreased 4%
from $111,000 in the third quarter of 1997 to $107,000 in the current quarter
due to lower current quarter production levels partially offset by higher
current quarter depletion rates. On a unit of production basis, DD&A expenses
increased to $0.57 per Mcfe in the third quarter of 1998 from $0.47 per Mcfe in
the same quarter last year.
The Partnership recognized net income of $15,000 or $0.00 per Unit for
the third quarter of 1998. For the third quarter of 1997, the Partnership
recognized net income of $154,000 or $0.01 per Unit. The reasons for the
variance between the third quarter of 1998 and the third quarter of 1997 are
described in the foregoing discussion.
Nine Months Ended September 30, 1998 and 1997. Oil and gas revenues of
$1,175,000 for the first nine months of 1998 decreased 43% compared to
$2,045,000 in the corresponding period of 1997 as a result of lower production
and oil prices. Production of natural gas decreased 40% from 848,000 Mcf in the
first nine months of 1997 to 511,000 Mcf in the current period, while the
average price of natural gas decreased 4% from $2.17 to $2.09 Mcf. Production of
crude oil in the current period totaled 7,608 barrels, with an average sales
price of $14.13 per barrel compared to 9,353 barrels at $20.26 per barrel in the
same period last year, representing a volume decrease of 19% and a price
decrease of 30%. Gas production decreased due to natural depletion.
Lease operating expenses and severance taxes were $386,000 in the
current period versus $453,000 in the first nine months of 1997, a decrease of
15%. The decrease was due primarily to lower lifting costs in the first nine
months of 1998 resulting from lower production. On a unit of production basis,
these expenses increased to $0.70 per Mcfe in the first nine months of 1998 from
$0.50 per Mcfe in the year-earlier period.
G&A expenses of $111,000 in the current period decreased 69% from
$357,000 in the first nine months of 1997. Lower current period Partnership
production activity caused the decline in G&A expenses charged by Kelley Oil to
the Partnership. On a unit of production basis, these expenses decreased from
$0.39 per Mcfe in the first nine months of 1997 to $0.20 per Mcfe in the current
period.
In the first nine months of 1998 and 1997, the Partnership incurred
interest expenses of $221,000 and $293,000, respectively, on a loan advanced to
it by Kelley Oil in August 1994 ("Initial Loan") to fund part of its drilling
expenditures in excess of contributed capital. The reduction reflects the lower
average note payable balance outstanding in the first nine months of 1998. See
"Liquidity and Capital Resources" below.
DD&A expenses decreased 28% from $440,000 in the first nine months of
1997 to $317,000 in the current period due to lower current period production
levels partially offset by higher current period depletion rates. On a unit of
production basis, DD&A expenses increased to $0.57 per Mcfe in the first nine
months of 1998 from $0.49 per Mcfe in the same period last year.
The Partnership recognized net income of $140,000 or $0.01 per Unit for
the first nine months of 1998. For the first nine months of 1997, the
Partnership recognized net income of $502,000 or $0.03 per Unit. The reasons for
the variance between the first nine months of 1998 and the first nine months of
1997 are described in the foregoing discussion.
7
<PAGE> 9
The results of operations for the quarter and nine months ended
September 30, 1998 are not necessarily indicative of the Partnership's operating
results to be expected for the full year.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity. Net cash provided by the Partnership's operating activities
during the first nine months of 1998, as reflected on its statement of cash
flows, totaled $551,000. During the period, funds used in investing activities
were comprised of capital expenditures of $9,000, and funds used in financing
activities including a reduction in the Initial Loan principal of $542,000. As a
result of these activities, the Partnership's cash and cash equivalents remained
unchanged from December 31, 1997.
Capital Resources. The Partnership has completed its development stage.
Accordingly, cash flow from operations should be adequate to meet its expected
capital and general working capital needs.
Distribution Policy. The Partnership maintains a policy of distributing
cash which is not required for the conduct of Partnership business to
Unitholders on a quarterly basis. To meet its financial obligations for drilling
overexpenditures, the Partnership suspended distributions commencing in October
1994 and reinstated a quarterly distribution for only one quarter in 1995. The
Partnership's operating cash flows are currently being applied to pay interest
and principal on the Initial Loan. At September 30, 1998, $2,639,000 of the
$6,000,000 Initial Loan remained outstanding. By continuing to service its debt
from operating cash flow, the Partnership expects to further reduce the
outstanding balance of the Initial Loan.
Year 2000. KOGC, on behalf of the Partnership, has instigated reviews
and evaluations in response to Year 2000 issues. These issues involve the
potential disruption to systems, processes, and business practices that may
occur if system hardware and software utilized by KOGC, its vendors, and
customers are unable to process year 2000 data. The planning phase is nearing
completion and KOGC is well into implementing internal corrective measures.
KOGC is working closely with its information systems and technology
vendors to install updated software, where appropriate, that will be Year 2000
compliant. Currently, more than 90% of the critical Year 2000 internal systems
issues have been corrected. The remainder are expected to be installed and
tested by mid-year 1999.
KOGC has identified those vendors and others that it believes provide
material services or are vital to its business. Discussions with these companies
to determine their Year 2000 readiness are expected to be completed in the first
quarter 1999. By mid-year 1999 KOGC plans to have completed its Year 2000 review
and implemented necessary corrective measures.
The cost of reviewing and implementing corrective measures for Year
2000 issues to date has not been material to KOGC or the Partnership and has
been limited to use of KOGC and vendor personnel for review and implementation
of corrective measures. KOGC expects the remainder of the Year 2000 review and
corrective measures to not involve significant costs.
Based on assessments to date and compliance plans in progress,
management is of the opinion that Year 2000 issues, including the cost of
implementing corrective measures, will not have a material impact on the
business or operations of KOGC or the Partnership . Nevertheless, as indicated
above, achieving Year 2000 readiness is subject to risk and uncertainties,
especially regarding third parties, and there can be no assurance that KOGC or
the Partnership will not be adversely affected by Year 2000 issues.
The foregoing statements are intended to be and are hereby designated
"Year 2000 Readiness Disclosures" within the meaning of the Year 2000
Information and Readiness Act.
Inflation and Changing Prices. Oil and natural gas prices, as with most
commodities, are highly volatile, have fluctuated during recent years and
generally have not followed the same pattern as inflation.
8
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FORWARD-LOOKING STATEMENTS
Statements contained in this Report and other materials filed or to be
filed by the Partnership with the Securities and Exchange Commission (as well as
information included in oral or other written statements made or to be made by
the Partnership or its representatives) that are forward-looking in nature are
intended to be "forward-looking statements" within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, relating to matters such as anticipated
operating and financial performance, business prospects, developments and
results of the Partnership. Actual performance, prospects, developments and
results may differ materially from any or all anticipated results due to
economic conditions and other risks, uncertainties and circumstances partly or
totally outside the control of the Partnership, including rates of inflation,
natural gas prices, uncertainty of reserve estimates, rates and timing of future
production of oil and gas, exploratory and development activities, acquisition
risks, changes in the level and timing of future costs and expenses related to
drilling and operating activities and those risk factors described on pages 8
and 9 of the Partnership's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997.
Words such as "anticipates," "expects," "believes," "estimates,"
"projects" and similar expressions are intended to identify forward-looking
statements. Forward-looking statements include the risk factors described in the
Partnership's Form 10-K mentioned above.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT
NUMBER: EXHIBIT
------- -------
27 Financial Data Schedule (included only in the
electronic filing of this document).
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Registrant during the
third quarter of 1998.
9
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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.
KELLEY PARTNERS 1992
DEVELOPMENT DRILLING PROGRAM
By: KELLEY OIL CORPORATION
Managing General Partner
Date: November 16, 1998 By: /s/ RICK LESTER
----------------------------------
Rick Lester
Chief Financial Officer
(Duly Authorized Officer)
(Principal Accounting Officer)
<PAGE> 12
INDEX TO EXHIBITS
EXHIBIT
NUMBER: EXHIBIT
------- -------
27 Financial Data Schedule (included only in the
electronic filing of this document).
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 273
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 273
<PP&E> 44,311
<DEPRECIATION> 41,250
<TOTAL-ASSETS> 3,334
<CURRENT-LIABILITIES> 79
<BONDS> 2,639
0
0
<COMMON> 0
<OTHER-SE> 616
<TOTAL-LIABILITY-AND-EQUITY> 3,334
<SALES> 1,175
<TOTAL-REVENUES> 1,175
<CGS> 0
<TOTAL-COSTS> 386
<OTHER-EXPENSES> 428
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 221
<INCOME-PRETAX> 140
<INCOME-TAX> 0
<INCOME-CONTINUING> 140
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 140
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
