10-Q 1 h87063e10-q.txt KELLEY PARTNERS 1992 DEVELOPMENT DRILLING PROGRAM 1 ================================================================================ 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 MARCH 31, 2001 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 ================================================================================ 2 KELLEY PARTNERS 1992 DEVELOPMENT DRILLING PROGRAM INDEX

1 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS KELLEY PARTNERS 1992 DEVELOPMENT DRILLING PROGRAM BALANCE SHEETS (IN THOUSANDS)

See Notes to Financial Statements (unaudited). 2 4 KELLEY PARTNERS 1992 DEVELOPMENT DRILLING PROGRAM STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER UNIT DATA) (UNAUDITED)

See Notes to Financial Statements (unaudited). 3 5 KELLEY PARTNERS 1992 DEVELOPMENT DRILLING PROGRAM STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)

See Notes to Financial Statements (unaudited). 4 6 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 accounting principles generally accepted in the United States of America for interim financial information. These financial statements reflect all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the results for the interim periods presented. The results of operations for the period ended March 31, 2001 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, 2000. These unaudited interim financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Partnership's 2000 Annual Report on Form 10-K. Derivative and Hedge Accounting. Historically, Contour Energy Co. has entered into hedge agreements on behalf of the Partnership to protect against commodity price declines, including production volumes for the first quarter 2000. Beginning in 2001, due to small production volumes, the Partnership production will no longer be hedged. Through natural gas price swap agreements, approximately 49% of the Partnership's natural gas production for the three months ended March 31, 2000 was affected by hedging transactions at an average NYMEX quoted price of $2.48 per Mmbtu before transaction and transportation costs. Through crude oil price swap agreements, the Partnership hedged approximately 67% of its crude oil production for the three months ended March 31, 2000, at an average NYMEX quoted price of $25.09 per bbl, before transaction and transportation costs. No natural gas or crude oil was hedged in the three months ended March 31, 2001. Hedging activities decreased Partnership revenues by less than $1,000 in the three months ended March 31, 2000, as compared to estimated revenues had no hedging activities been conducted. The Partnership adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") effective January 1, 2001. The statement, as amended, requires that all derivatives be recognized as either assets or liabilities and measured at fair value, and changes in the fair value of derivatives be reported in current earnings, unless the derivative is designated and effective as a hedge. If the intended use of the derivative is to hedge the exposure to changes in the fair value of an asset, a liability or firm commitment, then the changes in the fair value of the derivative instrument will generally be offset in the income statement by the change in the item's fair value. However, if the intended use of the derivative is to hedge the exposure to variability in expected future cash flows then the changes in fair value of the derivative instrument will generally be reported in Other Comprehensive Income (OCI). The gains and losses on the derivative instrument reported in OCI will be reclassified to earnings in the period in which earnings are impacted by the hedged item. At of January 1, 2001, the Partnership was not party to any derivative instruments and as such there is no impact on its financial statements as a result of the adoption of SFAS 133. NOTE 2 - NEW ACCOUNTING PRONOUNCEMENTS In the fourth quarter of 2000, the Partnership adopted Emerging Issues Task Force Issue No. 00-10 ("EITF No. 00-10") accounting for Shipping and Handling Fees and Costs. EITF No. 00-10 addresses how shipping and handling fees should be classified in the income statement. As a result of EITF No. 00-10, the Partnership has reclassified its transportation and compression expenses from oil and gas revenues to lease operating expenses. As a result, $2,000 of expenses was reclassified from oil and gas revenues to lease operating expenses for the three months ended March 31, 2000. 5 7 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. At March 31, 2001, Kelley Oil Corporation, managing general partner of the Partnership ("Kelley Oil") and a wholly owned subsidiary of Contour Energy Co. ("Contour") owns 91.82% of the Units and a 3.94% managing general partnership interest. RECENT DEVELOPMENTS Drilling Operations. 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. Hedging and Derivative Activities. Historically, Contour has entered into hedge agreements on behalf of the Partnership to protect against commodity price declines, including production volumes for the first quarter 2000. Beginning 2001, due to small production volumes, the Partnership production will no longer be hedged. Through natural gas price swap agreements, approximately 49% of the Partnership's natural gas production for the three months ended March 31, 2000 was affected by hedging transactions at an average NYMEX quoted price of $2.48 per Mmbtu before transaction and transportation costs. Through crude oil price swap agreements, the Partnership hedged approximately 67% of its crude oil production for the three months ended March 31, 2000, at an average NYMEX quoted price of $25.09 per bbl, before transaction and transportation costs. No natural gas or crude oil was hedged in the three months ended March 31, 2001. Hedging activities decreased Partnership revenues by less than $1,000 in the three months ended March 31, 2000, as compared to estimated revenues had no hedging activities been conducted. RESULTS OF OPERATIONS Three Months Ended March 31, 2001 and 2000. Oil and gas revenues increased by 78% to $308,000 for the first quarter of 2001 compared to $173,000 in the corresponding quarter of 2000, primarily the result of higher natural gas prices, partially offset by lower natural gas and crude oil production. Production of natural gas decreased 5% from 34,047 Mcf in the first quarter of 2000 to 32,361 Mcf in the current quarter due to natural depletion. The average price of natural gas increased 180% from $2.77 per Mcf in the first quarter of 2000 to $7.76 per Mcf in the current quarter. Production of crude oil in the current quarter totaled 2,171 barrels, with an average sales price of $26.75 per barrel compared to 2,904 barrels at $26.55 per barrel in the same quarter last year. Lease operating expenses and severance taxes were $43,000 in the current quarter versus $60,000 in the first quarter of 2000, a decrease of 28%. This decrease was primarily due to lower lifting costs, lower severance taxes and lower transportation and compression costs. On a unit of production basis, these expenses decreased to $0.95 per Mcfe in the first quarter of 2001 from $1.17 per Mcfe in the same quarter of 2000, partially due to the decline in production volumes. General and administrative expenses of $10,000 in the current quarter decreased 45% from $18,000 in the first quarter of 2000. On a unit of production basis, these expenses decreased by 37% to $0.22 per Mcfe compared to $0.35 per Mcfe in the first quarter of 2000. In the first quarter of 2000, the Partnership incurred interest expense of $5,000 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 final loan payment was made during 2000. Depreciation, depletion and amortization ("DD&A") expense decreased 33% from $33,000 in the first quarter of 2000 to $22,000 in the current quarter due to lower production levels and lower depletion rates. On a unit-of- production basis, DD&A expense decreased to $0.48 per Mcfe in the first quarter of 2001 from $0.64 per Mcfe in the same quarter last year. 6 8 The Partnership recognized net income of $233,000 or $0.01 per Unit for the first quarter of 2001. For the first quarter of 2000, the Partnership recognized net income of $57,000 or $0.00 per Unit. The reasons for the variance between the first quarter of 2001 and the first quarter of 2000 are described in the foregoing discussion. LIQUIDITY AND CAPITAL RESOURCES Liquidity. Net cash provided by the Partnership's operating activities during the first three months of 2001, as reflected on its statement of cash flows, totaled $19,000. During the period, funds used in investing activities were comprised of capital expenditures of $19,000. As a result of these activities, the Partnership's cash and cash equivalents remained unchanged from December 31, 2000. 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 to the Unitholders on a quarterly basis which is not required for the conduct of Partnership business. In February 2001, the fourth quarter 2000 earnings distribution was paid to the managing and special general partners and the Unitholders in the amounts of $13,000 and $304,000, or $0.02 per Unit, respectively. However, future distributions to the unitholders and the managing and special general partners are contingent on future operating results. 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. Accounting Pronouncements. In the fourth quarter of 2000, the Partnership adopted Emerging Issues Task Force Issue No. 00-10 ("EITF No. 00-10") accounting for Shipping and Handling Fees and Costs. EITF No. 00-10 addresses how shipping and handling fees should be classified in the income statement. As a result of EITF No. 00-10, the Partnership has reclassified its transportation and compression expenses from oil and gas revenues to lease operating expenses. As a result, $2,000 of expenses was reclassified from oil and gas revenues to lease operating expenses for the three months ended March 31, 2000. 7 9 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK See discussion in Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Hedging and Derivative Activities. 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 statement" 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, oil and natural gas prices, uncertainty of reserve estimates, rates and timing of future production of oil and natural 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 9 and 10 of the Partnership's Annual Report on Form 10-K for the fiscal year ended December 31, 2000. Words such as "anticipated," "expect," "estimate," "project" 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. 8 10 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: EXHIBIT NUMBER: EXHIBIT ------- ------- None (b) Reports on Form 8-K: No reports on Form 8-K were filed by the Registrant during the first quarter of 2001. 9 11 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: May 11, 2001 By: /s/ Rick G. Lester ------------------------------------ Rick G. Lester Executive Vice President and Chief Financial Officer (Duly Authorized Officer) (Principal Financial Officer) 10

KELLEY PARTNERS 1992 DEVELOPMENT DRILLING PROGRAM 10-Q