ITEM 1. BUSINESS.
General
PDC 1998-D Limited Partnership ("the Partnership") is a limited partnership formed on December 31, 1998 pursuant to the West Virginia Uniform Limited Partnership Act. Petroleum Development Corporation ("PDC") serves as Managing General Partner of the Partnership.
Since the commencement of operations on December 31, 1998, the Partnership has been engaged in onshore, domestic gas exploration exclusively in the northern Appalachian, Michigan and Colorado Basins. A total of 11 limited partners contributed initial capital of $330,000; a total of 1,045 additional general partners contributed initial capital of $20,195,261; and PDC (Managing General Partner) contributed $4,464,244 in capital as a participant in accordance with contribution provisions of the Limited Partnership Agreement (the Agreement).
Under the terms of the Agreement, the allocation of revenues is as follows:
Allocation of Revenues Additional General and Limited Partners 80%
Managing General Partner 20%
Operating and direct costs are allocated and charged to the additional general and limited partners and the Managing General Partner in the same percentages as revenues are allocated. Leasehold, drilling and completion costs, and equipment costs are borne 80% by the additional general and limited partners and 20% by the Managing General Partner.
Employees
The Partnership has no employees, however, PDC has approximately 81 employees which include a staff of geologists, petroleum engineers, landmen and accounting personnel who administer all of the partnership's operations.
Plan of Operations
The Partnership will participate in the drilling of approximately 100 gross wells in the first quarter of 1999. It is anticipated that all of the initial capital of the Partnership will be expended.
See Item 2
ITEM 2. PROPERTIES.
Drilling Activity and Productive Wells.
As of December 31, 1998, the Partnership had not drilled any wells. Therefore, there are no reserves as of that date. The Partnership commenced drilling in 1999 and drilled 75 wells (72 of which were productive) as of March 17, 1999. Drilling activity continues and it is estimated that the partnership will participate in 20 additional wells. All partnership wells to date are development wells and drilling activity will be substantially completed by March 31, 1999.
A "productive well" is a well producing, or capable of producing, oil and gas in commercial quantities.
Title to Properties
The Partnership's interests in producing acreage are in the form of assigned direct interests in leases. Such properties are subject to customary royalty interests generally contracted for in connection with the acquisition of properties and could be subject to liens incident to operating agreements, liens for current taxes and other burdens. The Partnership believes that none of these burdens materially interfere with the use of such properties in the operation of the Partnership's business.
As is customary in the oil and gas industry, little or no investigation of title is made at the time of acquisition of undeveloped properties (other than a preliminary review of local mineral records). Investigations are generally made, including in most cases receiving a title opinion of legal counsel, before commencement of drilling operations. A thorough examination of title has been made with respect to all of the Partnership's producing properties and the Partnership believes that it has generally satisfactory title to such properties.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
The Managing General Partner as driller/operator is not party to any legal action that would materially affect the Managing General Partner's or Partnership's operations or financial statements.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND SECURITY HOLDER MATTERS.
At December 31, 1998, PDC 1998-D Limited Partnership had one Managing General Partner, 11 Limited Partners who fully paid for 16.5 units at $20,000 per unit of limited partnership interests and a total of 1,045 Additional General Partners who fully paid for 1,009.76305 units at $20,000 per unit of additional general partnership interests. No established public trading market exists for the interests.
Limited and additional general partnership interests are transferable, however no assignee of an interest in the Partnership can become a substituted partner without the written consent of the transferor and the Managing General Partner.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data presented below has been derived from audited financial statements of the Partnership appearing elsewhere herein.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Liquidity and Capital Resources
The Partnership was funded with initial Limited and Additional General Partner contributions of $20,525,261 and the Managing General Partner contributed $4,464,244 in accordance with the Agreement. Syndication and management fee costs of $2,668,284 were incurred leaving available capital of $22,321,221 for Partnership activities.
The Partnership began exploration and development activities subsequent to the funding of the Partnership.
The Partnership had working capital at December 31, 1998 of $2,010.
Operations are expected to be conducted with available funds and revenues generated from oil and gas activities. No bank borrowings are anticipated.
Results of Operations
The Partnership's revenues from natural gas sales will be affected by changes in prices. Natural gas prices are subject to general market conditions which drive the pricing changes.
The principal effects of inflation upon the Partnership relate to the costs required to drill, complete and operate oil and gas wells. The Partnership expects these costs to remain somewhat stable over the next year.
Year 2000 Issue
State of Readiness
The Year 2000 Issue is the risk that computer programs using two-digit data fields will fail to properly recognize the year 2000, with the result being business interruption due to computer system failures by PDC's software or hardware or that of government entities, service providers and vendors. PDC, who administers all aspects of the Partnership, has assessed the extent of the Year 2000 Issues affecting PDC and the Partnership. PDC believes that the new computer system including operating software installed during 1998 along with modifications made by PDC's computer technicians have addressed the dating system flaw inherent in most operating systems. PDC has completed a remediation plan and believes it is currently fully Year 2000 compliant.
PDC has initiated formal communications with its significant suppliers and service providers to determine the extent to which PDC may be vulnerable to their failure to correct their own Year 2000 issues. It is expected that full identification will be completed by April 30, 1999. To the extent that responses to Year 2000 readiness are unsatisfactory, PDC intends to take appropriate action, including identifying alternative suppliers and service providers who have demonstrated Year 2000 readiness.
Cost of Readiness
PDC does not currently expect to charge the Partnership for any portion of PDC's cost to become Year 2000 Compliant.
Risks of Year 2000 Issues
PDC presently believes the Year 2000 Issue will not present a materially adverse risk to PDC's or the Partnership's future results of operations, liquidity, and capital resources. However, if the level of the timely compliance by key suppliers or service providers is not sufficient, the Year 2000 Issue could have a material impact on PDC's or the Partnership's operations including, but not limited to, increased operating costs, loss of customers or suppliers, loss of accounting functions, including well revenue distributions, or other significant disruptions to PDC's or the Partnership's business.
Contingency Plan
PDC has a contingency plan, and will implement it on any system that remains non-compliant at December 31, 1999, if any.
New Accounting Standards
Statement of Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133), was issued by the Financial Accounting Standards Board in June, 1998. Statement 133 standardizes the accounting for derivative instruments, including certain derivative instruments embedded in other contracts. The Partnership must adopt SFAS No. 133 by January 1, 2000; however, early adoption is permitted. On adoption, the provisions of SFAS No. 133 must be applied prospectively. At the present time, the Partnership cannot determine the impact that SFAS No. 133 will have on its financial statements upon adoption, as such impact will be based on the extent of derivative instruments, such as natural gas futures and options contracts, outstanding at the date of adoption.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:
The response to this Item is set forth herein in a separate section of this Report, beginning on Page.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
NONE.
Part III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
The Partnership has no directors or executive officers. The Partnership is managed by Petroleum Development Corporation (the Managing General Partner). Petroleum Development Corporation's common stock is traded in the NASDAQ National Market and Form 10-K for 1998 has been filed with the Securities and Exchange Commission.
ITEM 11.
ITEM 11. MANAGEMENT REMUNERATIONS AND TRANSACTIONS.
NON-APPLICABLE.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
NON-APPLICABLE.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Pursuant to the authorization contained in the Limited Partnership Agreement, PDC receives fees for services rendered and reimbursement of certain expenses from the Partnership. The following table presents compensation or reimbursements by the Partnership to PDC or other related parties on December 31, 1998 (date of inception).
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) (1) Financial Statements
See Index to Financial Statements on
(2) Financial Statement Schedules
See Index to Financial Statements on page. All financial statement schedules are omitted because they are not required, inapplicable, or the information is included in the Financial Statements or Notes thereto.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
PDC 1998-D Limited Partnership By its Managing General Partner Petroleum Development Corporation
By /s/ James N. Ryan James N. Ryan, Chairman
March 24, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
Signature Title Date
/s/ James N. Ryan Chairman, Chief Executive James N. Ryan Officer and Director March 24, 1999
/s/ Steven R. Williams President and Director Steven R. Williams March 24, 1999
/s/ Dale G. Rettinger Executive Vice President, Dale G. Rettinger Treasurer and Director March 24, 1999 (principal financial and accounting officer)
/s/ Roger J. Morgan Secretary and Director Roger J. Morgan March 24, 1999
PDC 1998-D LIMITED PARTNERSHIP (A West Virginia Limited Partnership)
Financial Statements for Annual Report on Form 10-K to Securities and Exchange Commission
December 31, 1998 (Date of Inception)
(With Independent Auditors' Report Thereon)
PDC 1998-D LIMITED PARTNERSHIP (A West Virginia Limited Partnership)
Independent Auditors' Report Balance Sheet - December 31, 1998 Statement of Operations - December 31, 1998 (Date of Inception) Statement of Partners' Equity - December 31, 1998 (Date of Inception) Statement of Cash Flows - December 31, 1998 (Date of Inception) Notes to Financial Statements
All financial statement schedules have been omitted because they are not applicable or not required or for the reason that the required information is shown in the financial statements or notes thereto.
Independent Auditors' Report
To the Partners PDC 1998-D Limited Partnership:
We have audited the financial statements of PDC 1998-D Limited Partnership (a West Virginia limited partnership) as listed in the accompanying index. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of PDC 1998-D Limited Partnership as of December 31, 1998, and the results of its operations and its cash flows for December 31, 1998 (date of inception), in conformity with generally accepted accounting principles.
KPMG LLP
Pittsburgh, Pennsylvania March 23, 1999
PDC 1998-D LIMITED PARTNERSHIP (A West Virginia Limited Partnership)
Balance Sheet
December 31, 1998
See accompanying notes to financial statements.
PDC 1998-D LIMITED PARTNERSHIP (A West Virginia Limited Partnership)
Statement of Operations
December 31, 1998 (Date of Inception)
See accompanying notes to financial statements.
PDC 1998-D LIMITED PARTNERSHIP (A West Virginia Limited Partnership)
Statement of Partners' Equity
December 31, 1998 (Date of Inception)
See accompanying notes to financial statements.
PDC 1998-D LIMITED PARTNERSHIP (A West Virginia Limited Partnership)
Statement of Cash Flows
December 31, 1998 (Date of Inception)
See accompanying notes to financial statements.
PDC 1998-D LIMITED PARTNERSHIP (A West Virginia Limited Partnership)
Notes to Financial Statements
December 31, 1998
(1) Summary of Significant Accounting Policies
Partnership Financial Statement Presentation Basis
The financial statements include only those assets, liabilities and results of operations of the partners which relate to the business of PDC 1998-D Limited Partnership (the Partnership). The statements do not include any assets, liabilities, revenues or expenses attributable to any of the partners' other activities. At December 31, 1998, drilling of the wells of the Partnership had not commenced.
Oil and Gas Properties, Unevaluated
The Partnership follows the successful efforts method of accounting for the cost of exploring for and developing oil and gas reserves. Under this method, costs of development wells, including equipment and intangible drilling costs related to both producing wells and developmental dry holes, and successful exploratory wells are capitalized and amortized on an annual basis to operations by the units-of-production method using estimated proved developed reserves which will be determined at year end by an independent petroleum engineer. If a determination is made that an exploratory well has not discovered economically producible reserves, then its costs are expensed as dry hole costs.
The Partnership assesses impairment of capitalized costs of proved oil and gas properties by comparing net capitalized costs to undiscounted future net cash flows on a field-by-field basis using expected prices. Prices utilized in each years calculation for measurement purposes and expected costs are held constant. If net capitalized costs exceed undiscounted future net cash flow, the measurement of impairment is based on estimated fair value which would consider future discounted cash flows.
As of December 31, 1998, the Partnership signed a turnkey drilling agreement and paid drilling advances of $22,301,221 to Petroleum Development Corporation, Managing General Partner, for the drilling of the Partnership wells, leases and equipment. The wells were not drilled as of December 31, 1998. The Partnership commenced drilling in 1999 and drilled 75 wells (72 of which were productive) as of March 17, 1999. Drilling activity continues and it is estimated that the partnership will participate in 20 additional wells. Seventy-four development and one exploratory well in the Sand Wash Basin of Colorado have been drilled to date. All drilling activity is expected to be substantially completed by March 31, 1999.
Based on the Managing General Partner's experience, management believes site restoration, dismantlement and abandonment costs, net of salvage to be immaterial in relation to operating costs. These costs are being expensed when incurred.
Income Taxes
Since the taxable income or loss of the Partnership is reported in the separate tax returns of the partners, no provision has been made for income taxes on the Partnership's books.
(Continued)
PDC 1998-D LIMITED PARTNERSHIP (A West Virginia Limited Partnership)
Notes to Financial Statements, Continued
Under federal income tax laws, regulations and administrative rulings, certain types of transactions may be accorded varying interpretations. Accordingly, the Partnership's tax return and, consequently, individual tax returns of the partners may be changed to conform to the tax treatment resulting from a review by the Internal Revenue Service.
Use of Estimates
Management of the Partnership has made a number of estimates and assumptions relating to the reporting of assets and liabilities and revenues and expenses and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates.
(2) Organization
The Partnership was organized as a limited partnership on December 31, 1998 in accordance with the laws of the State of West Virginia for the purpose of engaging in the drilling, completion and operation of oil and gas development and exploratory wells in the Northern Appalachian, Michigan and Colorado Basins.
Purchasers of partnership units subscribed to and fully paid for 16.5 units of limited partner interests and 1,009.76305 units of additional general partner interests at $20,000 per unit (Investor Partners). Petroleum Development Corporation has been designated the Managing General Partner of the Partnership. Although costs, revenues and cash distributions allocable to the limited and additional general partners are shared pro rata based upon the amount of their subscriptions, including the Managing General Partner to the extent of its capital contributions, there are significant differences in the federal income tax effects and liability associated with these different types of units in the Partnership.
Upon completion of the drilling phase of the Partnership's wells, all additional general partners units are converted into units of limited partner interests and thereafter become limited partners of the Partnership. Limited partners do not have any rights to convert their units into units of additional general partner interests in the Partnership.
In accordance with the terms of the Partnership Agreement (the Agreement), the Managing General Partner manages all activities of the Partnership and acts as the intermediary for substantially all Partnership transactions.
PDC 1998-D LIMITED PARTNERSHIP (A West Virginia Limited Partnership)
Notes to Financial Statements, Continued
(3) Transactions with Managing General Partner and Affiliates
The Partnership's transactions with the Managing General Partner include charges for the following:
(4) Allocation
The table below summarizes the participation of the Managing General Partner and the Investor Partners, taking account of the Managing General Partner's capital contribution equal to a minimum of 20% of the Initial Operating Capital, in the costs and revenues of the Partnership.
____________________ [FN] (1) Organization and Offering Costs, net of the Dealer Manager commissions, discounts, due diligence expenses, and wholesaling fees of the Partnership were paid by the Managing General Partner and not from Partnership funds. In addition, Organization and Offering Costs in excess of 10-1/2% of Subscriptions were paid by the Managing General Partner, without recourse to the Partnership.
(2) To the extent that Investor Partners receive preferred cash distributions, the allocations for Investor Partners will be increased accordingly and the allocation for the Managing General Partner will likewise be decreased.
PDC 1998-D LIMITED PARTNERSHIP (A West Virginia Limited Partnership)
Notes to Financial Statements, Continued
(3) As set forth in the following paragraph, the allocation of profits, losses and cash distributions of the Managing General Partner might be increased, and the allocation of profits, losses, and cash distributions of the Investor Partners might be decreased in the event that the Managing General Partner were to invest more than the Managing General Partner's minimum required Capital Contribution to cover tangible equipment and lease costs.
The Managing General Partner will pay for the Partnership's share of all Leases and tangible well equipment. The entire Capital Contribution of the Investor Partners, after payment of brokerage commissions, due diligence reimbursement, and the Management Fee, will be utilized to pay for intangible drilling costs. In the event that the Intangible Drilling Costs exceed the funds of the Investor Partners available for payment of Intangible Drilling Costs (herein "excess IDC"), a portion of the Capital Contribution of the Managing General Partner may be used to pay such excess IDC. If the cost of Leases and tangible well equipment were to exceed the Managing General Partner's Capital Contribution of 21-3/4 percent of the aggregate Capital Contribution of the Investor Partners, then the Managing General Partner will increase its Capital Contribution to fund such additional capital requirements and the Managing General Partner's allocation of profits, losses, and cash distributions will be increased to equal the percentage arrived at by dividing the Capital Contribution made by the Managing General Partner by the Capital Available for Investment; the allocation of the Investor Partners will be decreased accordingly.
(5) Costs Relating to Oil and Gas Activities
The Partnership is engaged solely in oil and gas activities, all of which are located in the continental United States. Information regarding aggregate capitalized costs and results of operations for these activities is located in the basic financial statements. Costs capitalized for these activities at December 31, 1998, are as follows:
Unevaluated oil and gas properties $22,301,221
The following costs were incurred for the Partnership's oil and gas activities: December 31, 1998 (date of inception)
Unevaluated oil and gas properties $22,301,221
Unevaluated oil and gas properties consist of payments to the managing general partner for drilling, completion, lease acquisition and gathering system costs on 75 wells drilled prior to March 17, 1999 and 20 additional wells to be drilled prior to March 31, 1999. Seventy-two of the 75 wells drilled are productive.
PDC 1998-D LIMITED PARTNERSHIP (A West Virginia Limited Partnership)
Notes to Financial Statements, Continued
(6) Income Taxes
As a result of the differences in the treatment of certain items for income tax purposes as opposed to financial reporting purposes, primarily depreciation, depletion and amortization of oil and gas properties and the recognition of intangible drilling costs as an expense or capital item, the income tax basis of oil and gas properties differs from the basis used for financial reporting purposes. At December 31, 1998, the income tax basis of the partnership's oil and gas properties was $4,396,086.
(7) Supplemental Reserve Information
As of December 31, 1998, the Partnership had not commenced drilling of wells. Therefore, no oil and gas reserve information is presented.