UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------------
Form 10-Q
MARK ONE
X QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1995
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-8921
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HALLWOOD ENERGY PARTNERS, L. P.
(Exact name of registrant as specified in its charter)
------------------------
Delaware 84-0987088
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4582 South Ulster Street Parkway
Suite 1700
Denver, Colorado 80237
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (303) 850-7373
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
The registrant is a limited partnership and issues Units (representing
ownership of limited partner interests).
Number of Units outstanding as of November 10, 1995 9,977,254
Number of Class B Subordinated Units outstanding
as of November 10, 1995 143,773
HALLWOOD ENERGY PARTNERS, L. P.
CONSOLIDATED BALANCE SHEETS
(In thousands except Units)
September 30, December 31,
1995 1994
(Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 4,826 $ 2,409
Accounts receivable:
Oil and gas sales 5,727 6,220
Trade 4,071 3,042
Due from affiliates 56 1,647
Prepaid expenses and other current
assets 1,400 1,352
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Total 16,080 14,670
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PROPERTY, PLANT AND EQUIPMENT,
at cost
Oil and gas properties (full cost
method):
Proved mineral interests 598,757 588,758
Unproved mineral interests -
domestic 229 380
Unproved mineral interests -
foreign 2,399
Furniture, fixtures and other 3,093 2,980
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Total 602,079 594,517
Less accumulated depreciation,
depletion, amortization and
property impairment (506,378) (487,103)
------- -------
Net Property, Plant and
Equipment 95,701 107,414
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OTHER ASSETS
Investment in common stock of HCRC 12,715 13,764
Deferred expenses and other assets 281 433
------- --------
Total 12,996 14,197
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TOTAL ASSETS $124,777 $136,281
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HALLWOOD ENERGY PARTNERS, L. P.
CONSOLIDATED BALANCE SHEETS
(In thousands except Units)
(Continued)
September 30, December 31,
1995 1994
(Unaudited)
CURRENT LIABILITIES
Accounts payable and accrued
liabilities $ 15,105 $ 18,407
Net working capital deficit of
affiliates 4,498 103
Current portion of contract
settlement 850 1,425
Current portion of long-term debt 97 4,125
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Total 20,550 24,060
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NONCURRENT LIABILITIES
Long-term debt 37,571 25,898
Contract settlement 2,280 2,666
Deferred liability 1,759 1,931
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Total 41,610 30,495
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Total Liabilities 62,160 54,555
------- -------
MINORITY INTEREST IN SUBSIDIARIES 2,978 2,923
------- -------
PARTNERS' CAPITAL
Units - 9,977,254 Units issued,
9,193,159 outstanding in 1995 and
9,659,504 outstanding in 1994 61,638 77,342
Class B Subordinated Units - 143,773
Units outstanding 1,091 1,350
General Partner 2,995 4,051
Treasury Units - 784,095 Units in
1995 and 317,750 Units in 1994 (6,085) (3,940)
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Total Partners' Capital 59,639 78,803
------- -------
TOTAL LIABILITIES AND PARTNERS'
CAPITAL $124,777 $136,281
======= =======
HALLWOOD ENERGY PARTNERS, L. P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except Units)
For the Three Months
Ended September 30,
1995 1994
REVENUES:
Oil revenue $ 4,607 $ 4,184
Gas revenue 6,188 5,982
Pipeline, facilities and other 388 840
Interest 71 157
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11,254 11,163
------- -------
EXPENSES:
Production operating 3,119 2,697
Facilities operating 213 213
General and administrative 1,089 1,258
Depreciation, depletion and
amortization 4,057 4,630
Interest 1,056 919
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9,534 9,717
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OTHER INCOME (EXPENSES):
Equity in income of HCRC 1,304 63
Minority interest in net income of
subsidiaries (349) (374)
Litigation settlement (363)
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592 (311)
------- -------
NET INCOME $ 2,312 $ 1,135
======= =======
ALLOCATION OF NET INCOME:
General partner $ 361 $ 513
======= =======
Limited partners $ 1,951 $ 622
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Per Unit and Class B Unit $ .20 $ .06
======= =======
Weighted average Units and Class B
Units outstanding 9,793 9,808
======= =======
HALLWOOD ENERGY PARTNERS, L. P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except Units)
For the Nine Months
Ended September 30,
1995 1994
REVENUES:
Oil revenue $ 12,796 $ 11,551
Gas revenue 16,899 20,043
Pipeline, facilities and other 1,806 2,204
Interest 247 528
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31,748 34,326
------- -------
EXPENSES:
Production operating 8,208 8,991
Facilities operating 591 626
General and administrative 3,736 3,776
Depreciation, depletion and
amortization 12,081 13,912
Impairment of oil and gas properties 11,051
Interest 3,103 2,948
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38,770 30,253
------- -------
OTHER EXPENSES:
Equity in loss of HCRC 1,049 197
Minority interest in net income of
subsidiaries 987 1,453
Litigation settlement 393
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2,429 1,650
------- -------
NET INCOME (LOSS) $ (9,451) $ 2,423
======= =======
ALLOCATION OF NET INCOME (LOSS):
General partner $ 840 $ 1,508
======= =======
Limited partners $(10,291) $ 915
======= =======
Per Unit and Class B Unit $ (1.05) $ .09
======= =======
Weighted average Units and Class B
Units outstanding 9,800 9,808
======= =======
HALLWOOD ENERGY PARTNERS, L. P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
For the Nine Months
Ended September 30,
1995 1994
OPERATING ACTIVITIES:
Net income (loss) $ (9,451) $ 2,423
Adjustments to reconcile net income (loss)
to net cash flow provided by operating
activities:
Depreciation, depletion and impairment 22,980 13,717
Depreciation charged to affiliates 200 261
Amortization of deferred loan costs and other
assets 152 195
Noncash interest expense 227 305
Equity in loss of HCRC 1,049 197
Minority interest in net income 987 1,453
Undistributed (earnings) loss of affiliates (414) 159
Recoupment of take-or-pay liability (422) (261)
------- -------
Cash provided by operations before working
capital changes 15,308 18,449
Changes in operating assets and liabilities
provided (used) cash net of noncash activity:
Oil and gas sales receivable 116 3,65
Trade receivable (1,029) 2,642
Due from affiliates 1,591 (537)
Prepaid expenses and other current assets (48) 3,461
Accounts payable and accrued liabilities (3,302) (8,781)
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Net cash provided by operating activities 12,636 18,884
------- -------
INVESTING ACTIVITIES:
Additions to property, plant and equipment (1,715) (5,104)
Exploration and development costs incurred (6,842) (5,892)
Proceeds from sales of property, plant
and equipment 248 2,051
Other investing activities (15) (199)
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Net cash used in investing activities (8,324) (9,144)
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FINANCING ACTIVITIES:
Payments of long-term debt (7,355) (12,352)
Proceeds from long-term debt 15,000 4,300
Distributions paid (7,515) (7,184)
Distributions paid by consolidated
subsidiaries to minority shareholders (932) (1,964)
Payments of contract settlement (1,015) (975)
Syndication costs and capital contributions (53) (34)
Other financing activities (25) (25)
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Net cash used in financing activities (1,895) (18,234)
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NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 2,417 (8,494)
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD 2,409 13,139
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END OF PERIOD $ 4,826 $ 4,645
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<F1>
The accompanying notes are an integral part
of the financial statements.
HALLWOOD ENERGY PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - GENERAL
Hallwood Energy Partners, L. P. ("HEP") is a publicly traded Delaware limited
partnership engaged in the development, production, sale and transportation of
oil and gas and in the acquisition, exploration, development and operation of
oil and gas properties. The principal objectives of HEP are to maintain and
to expand its reserve base and to provide cash distributions to holders of its
units representing limited partner interests ("Units"). The general partner
of HEP is Hallwood Energy Corporation ("HEC") which has been engaged in oil
and gas exploration and development since its incorporation in 1968.
The activities of HEP are conducted through HEP Operating Partners, L. P.
("HEPO") and EDP Operating, Ltd. ("EDPO"). HEP is the sole limited partner
and HEC is the sole general partner of HEPO. Hallwood G. P., Inc. ("HGPI"), a
wholly-owned subsidiary of HEC, is the sole general partner, and HEP is the
sole limited partner of EDPO. Solely for purposes of simplicity herein,
unless otherwise indicated, all references to HEP in connection with the
ownership, exploration, development or production of oil and gas properties
include HEPO and EDPO.
The interim financial data are unaudited; however, in the opinion of the
general partner, the interim data include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the results
for the interim periods. These financial statements should be read in
conjunction with the financial statements and accompanying footnotes included
in HEP's December 31, 1994 Annual Report on Form 10-K.
Accounting Policies
Consolidation
HEP fully consolidates majority owned entities and reflects a minority
interest in the consolidated financial statements. HEP accounts for its
interest in 50% or less owned affiliated oil and gas partnerships and limited
liability companies using the proportionate consolidation method of
accounting. HEP's investment in approximately 40%, including Hallwood
Spraberry Drilling, L.L.C. ("HSD"), of the common stock of its affiliate,
Hallwood Consolidated Resources Corporation ("HCRC"), is accounted for under
the equity method.
The accompanying financial statements include the activities of HEP, its
subsidiaries Hallwood Petroleum, Inc. ("HPI") and Hallwood Oil and Gas, Inc.
("Hallwood Oil") and majority owned affiliates, the May Limited Partnerships
1983-1, 1983-2, 1983-3, 1984-1, 1984-2, 1984-3 ("Mays").
Treasury Stock
HEP owns approximately 40% of the outstanding common stock of HCRC, which
owned approximately 19% and 9% of HEP's Units at September 30, 1995 and
December 31, 1994, respectively; consequently, HEP had an interest in 784,095
and 317,750 of its own Units at September 30, 1995 and December 31, 1994,
respectively. These Units are treated as treasury units in the accompanying
financial statements.
Reclassifications
Certain reclassifications have been made to the prior period's amounts to
conform to the classifications used in the current period.
NOTE 2 - DEBT
During the first quarter of 1995, HEP and its lenders amended and restated
HEP's Amended and Restated Credit Agreement ("Credit Agreement") to extend the
term date of its line of credit to May 31, 1997. Under the Credit Agreement
and an Amended and Restated Note Purchase Agreement ("Note Purchase
Agreement") (collectively referred to as the "Credit Facilities") HEP has a
borrowing base of $42,000,000. HEP has amounts outstanding at September 30,
1995 of $24,700,000 under the Credit Agreement and $12,857,000 under the Note
Purchase Agreement. HEP's borrowing base is further reduced by an outstanding
contract settlement obligation of $3,130,000 and capital lease obligations of
$111,000; therefore, its unused borrowing base totaled $1,202,000 at September
30, 1995.
Borrowings under the Note Purchase Agreement bear interest at an annual rate
of 11.85%, which is payable quarterly. Annual principal payments of
$4,286,000 began April 30, 1992, and the debt is required to be paid in full
on April 30, 1998. HEP intends to fund the payment due in April 1996 through
additional borrowings under the Credit Agreement; thus, no portion of HEP's
Note Purchase Agreement is classified as current as of September 30, 1995.
Borrowings against the Credit Agreement bear interest at the lower of the
Certificate of Deposit rate plus 1.875%, prime plus 1/2% or the Euro-Dollar
rate plus 1.75% (7.625% at September 30, 1995). Interest is payable monthly,
and quarterly principal payments of $1,812,000, as adjusted for the
anticipated borrowings during April 1996, commence May 31, 1997.
The borrowing base for the Credit Facilities is redetermined semiannually in
March and September of each year. The Credit Facilities are secured by a
first lien on approximately 80% in value of HEP's oil and gas properties.
Additionally, aggregate distributions paid by HEP in any 12 month period are
limited to 50% of cash flow from operations before working capital changes and
distributions received from affiliates.
The current portion of long-term debt represents a current capital lease
obligation of $97,000.
Included in net working capital deficit of affiliates is $3,537,000, net to
HEP's interest, which represents the current portion of the long-term debt of
Hallwood Spraberry Drilling Company, L.L.C. ("HSD"). HSD's line of credit of
$4,000,000, net to HEP's interest, which is provided by a third party lender,
is secured by certain leases held by HSD and is otherwise nonrecourse to HEP.
Borrowings under the line of credit bear interest at the prime rate plus 8%
(17.25% at September 30, 1995). Interest is payable monthly, and the entire
outstanding principal is due on August 31, 1996, at which time HSD intends to
refinance the debt so as to extend the repayment term.
HEP has entered into contracts to hedge its interest rate payments on
$5,000,000 of its debt through the end of 1995, $10,000,000 for 1996 and 1997
and $5,000,000 for the first three quarters of 1998. HEP does not use the
hedges for trading purposes, but rather for the purpose of providing a measure
of predictability for a portion of HEP's interest payments under its debt
agreement which has a floating interest rate. In general, it is HEP's goal to
hedge 50% of the principal amount of its debt for each year of the remaining
term of the debt. HEP has entered into two hedges, one of which is an
interest rate collar pursuant to which it pays a floor rate of 5.8% and a
ceiling rate of 8.1%, and the other is an interest rate swap with a fixed rate
of 5.75%. The amounts received or paid upon settlement of these transactions
are recognized as interest expense at the time the interest payments are due.
NOTE 3 - STATEMENT OF CASH FLOWS
Cash paid for interest during the nine months ended September 30, 1995 and
1994 was $2,495,000 and $2,448,000, respectively.
NOTE 4 - LITIGATION SETTLEMENT
In September 1995, the court order approving the settlement in the class
action lawsuit styled In re Hallwood Energy Partners, L.P. Securities
Litigation became final. As part of the settlement, on September 28, 1995,
HEP paid $2,870,000 in cash (which was recorded as an expense in the December
31, 1994 financial statements as the estimated cost associated with the
litigation) and issued 1,158,696 HEP Units with a market value of $5,330,000
to a nominee of the class. These Units were subsequently purchased from the
nominee by HCRC for $5,330,000 in cash. Other defendants contributed an
additional $900,000 in cash to the settlement. The net proceeds of the
settlement will be distributed to a class consisting of former owners of
limited partner interests in Energy Development Partners, Ltd. ("EDP") who
exchanged their units in that entity for Units of HEP pursuant to the merger
of EDP and HEP on May 9, 1990 (the "Transaction").
Upon issuance, these Units were treated, for financial statement purposes
only, as additional Units issued in connection with the Transaction, which was
accounted for as a reorganization of entities under common control, in a
manner similar to a pooling of interest, and have been reflected as
outstanding Units since May 9, 1990, the date of the Transaction. As a
result, the number of Units outstanding and the net income (loss) per Unit
have been retroactively restated for all periods subsequent to the
Transaction.
NOTE 5 - LEGAL PROCEEDINGS
In October 1995, the parties agreed in principle to settle the lawsuit styled
Stutes v. Hallwood Petroleum, Inc. et al. The plaintiff in the lawsuit
alleged that as a result of exposure to benzene in the petroleum he was
hauling from various wells owned and operated by HEP and approximately 80
other named defendants, he contracted myelogenous leukemia. The majority of
HEP's share of the settlement liability is covered by HEP's liability
insurance carriers. HEP's share of the amounts not covered by insurance is
not material.
In June 1995, an additional lawsuit was filed against HEP in the 15th Judicial
District Court, Lafayette Parish, Louisiana, Docket No. 952601-3B, styled
Lamson Petroleum Corporation v. Hallwood Petroleum, Inc. et al. The
plaintiffs in the lawsuit claim that they have an additional valid leases
covering streets and roads in the units of the A. L. Boudreaux #1 well, G. S.
Boudreaux #1 well, Mary Guilbeau #1 well and Duhon #1 well and are entitled to
a portion of the production from the wells. HEP has not yet determined the
amount of its interest in the properties which is at issue. At this time, HEP
believes that the difference between the amount already in escrow as a result
of the litigation and the amount of any liability that may result upon
resolution of this matter will not be material.
NOTE 6 - SUBSEQUENT EVENT
In November 1995, the board of directors of the general partner approved the
creation of a new class of limited partner units, to be called Class C Units,
and the distribution of Class C Units to holders of HEP Units and Class B
Units. One Class C Unit will be received for every fifteen HEP Units and
Class B Units held. The Class C Units have a distribution preference of $.25
per quarter, and distributions on the new unit will commence for the first
quarter of 1996. The declaration date and the record date for the
distribution of Class C Units have not been set, but it is anticipated that
the declaration and record dates and the distribution of the Class C Unit
certificates will occur in December 1995. Class C Units will trade separately
from HEP Units. Class C Units have been created to give HEP greater
flexibility in structuring future acquisitions by allowing HEP to issue a
security with a set distribution rate. The Class C Units will vote separately
as a class on all matters that come up for a partnership vote. Currently
outstanding HEP Units will be redesignated as Class A Units but will continue
to be listed on the American Stock Exchange using the symbol "HEP."
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, LIQUIDITY AND
CAPITAL RESOURCES
Liquidity and Capital Resources
Cash Flow
HEP generated $12,636,000 of cash flow from operating activities during the
first nine months of 1995.
The other primary cash inflows were:
- $15,000,000 in proceeds from long-term debt
- $248,000 in proceeds from the sale of property
Cash was used primarily for:
- Payments of long-term debt of $7,355,000
- Additions to property and development costs incurred of $8,557,000
- Distributions to Unitholders of $7,515,000
- Payments of contract settlement of $1,015,000
When combined with miscellaneous other cash activity during the period, the
result was an increase of $2,417,000 in HEP's cash from $2,409,000 at December
31, 1994 to $4,826,000 at September 30, 1995.
Capital Projects
For 1995, HEP has a capital budget of $15,800,000 which includes $11,600,000
for direct expenditures and $4,200,000 for indirect expenditures through its
investment in HSD. Through September 30, 1995, HEP incurred approximately
$13,602,000 in capital expenditures which includes $8,557,000 directly and
$5,045,000 indirectly through HSD. A description of significant exploration
and development projects to date in 1995 follows.
HSD has incurred approximately $5,045,000, net to HEP's interest, through
September 30, 1995 for 31 drilled wells, 12 recompletions and acquisition of
drilling leases on the Rocker "b" Ranch in Reagan County, Texas. HSD has its
own line of credit of $4,000,000, net to HEP's interest, provided by a third
party lender. Based on the initial results of the drilling and recompletions,
HEP spent approximately $815,000 on additional acreage in the Rocker "b" Ranch
during the second and third quarters, HSD has expanded its project area to
include certain sections of this acreage, and HEP has pursued drilling on the
remaining acreage. The line of credit is secured only by certain leases on
the Rocker "b" Ranch and is otherwise nonrecourse to HEP. A request to
increase the size of the facility to $6,400,000, net to HEP's interest, is
pending. HSD has funded the drilling to date from the line of credit as well
as from cash flow generated from drilling activities. HSD has had up to three
drilling rigs under contract in this area in 1995, but plans to scale back to
one rig by the end of the year, in order to allow time to evaluate the results
of the drilling to date before moving forward. The 43 wells drilled or
recompleted since January 1, 1995, have increased HEP's share of production on
the Rocker "b" properties by 522 barrels of oil equivalent per day. HSD has
drilled five locations and recompleted three wells subsequent to September 30.
These wells, together with the 43 wells drilled through September 30, have
added a total of 1.1 million equivalent barrels of reserves, of which 640,000
were booked as proved undeveloped reserves at December 31, 1994. HSD has
plans to drill two additional locations and recomplete twelve wells prior to
year end.
HEP expended approximately $520,000 in late August and September for the
drilling of five exploratory wells in Reagan County, Texas. Two of the five
wells are currently producing at an average rate of 46 barrels of oil per day,
one well was unsuccessful and is scheduled for recompletion and the remaining
two are presently being evaluated. Two additional wells are being drilled on
this acreage at the present time. The performance of these initial seven
wells will determine future development plans in this area.
HEP spent approximately $790,000 on six successful drilling wells and seven
successful recompletions in the West Texas Kermit area where HEP has working
interests ranging from 25% to 80%. Gross production on these properties is
currently averaging 596 barrels of oil per day and 870 mcf per day. Future
projects in the area include secondary recovery in the San Andres and Holt
Formations. It is anticipated that four more wells will be recompleted and
eight more wells will be drilled in the fourth quarter of 1995 and the first
quarter of 1996. Waterflood potential for this area is being considered for
1996.
A workover in the second quarter of 1995 on the G.S. Boudreaux in Lafayette
Parish, Louisiana, increased gross production rates from 17,500 mcf per day
and 370 barrels of condensate per day to current rates of 22,000 mcf per day
and 450 barrels of condensate per day. HEP has a 24% working interest in the
well. Gross production from the A.L. Boudreaux in the same area has increased
from 20,000 mcf per day to 26,000 mcf per day. HEP has a 26% interest in the
A.L. Boudreaux. HEP purchased an additional interest in the G. S. Boudreaux
for $225,000 in the third quarter of 1995.
In Richland County, Montana, the Lewis #1 was recompleted uphole to the
Interlake Formation in the first quarter of 1995, and the well continues to
flow 240 barrels of oil per day and 135 mcf per day. HEP has incurred
approximately $100,000 for the drilling of a Red River/Interlake development
well which was spud in early September and is presently being completed. HEP
also has plans to reenter a temporarily abandoned wellbore in this area in the
fourth quarter of 1995 and recomplete it to the Interlake formation. HEP has
a 22% working interest in the area.
In the first nine months of 1995, HEP spent approximately $335,000 on a
program started in late 1994 in New Mexico. This amount includes nine
successful and one unsuccessful non-operated development wells in Lea County,
New Mexico, and four successful operated recompletions in Eddy County, New
Mexico, having gross combined initial flowing potentials of 3,350 barrels of
oil per day and 4,200 mcf per day. HEP has a 5% working interest in the Lea
County field and 25% to 50% interests in the Eddy County wells.
In May 1995, HEP completed an exploratory well in Hot Springs County, Wyoming
for approximately $120,000. The well is flowing 620 barrels of oil per day.
A delineation well was drilled in August and completed in September at a cost
of $70,000 and is currently flowing 650 barrels of oil per day. A third well
on a separate but nearby structure was spud October 10th and is presently
being completed. It is anticipated that up to nine additional locations may
be available. HEP has a 15% working interest in this field.
In the first nine months of 1995, HEP completed two additional coal bed
methane development wells and acquired working interests in the San Juan Basin
of New Mexico, for a total of approximately $215,000. The two new wells have
increased gross production in this area by 700 mcf per day. HEP has working
interests in these new wells of 18% and 25%.
During the first nine months of 1995, HEP also acquired additional acreage in
Martin County, Texas for approximately $90,000 and has acquired interest in
two three-D seismic prospects in Taylor and Jones Counties, Texas and is
pursuing two other three-D projects in this area. HEP participated in the
drilling of a nonoperated exploratory well in one of the three-D prospects in
this area in the third quarter. This well is flowing 90 barrels of oil per
day and additional behind pipe reserves were recorded. Additional development
drilling on this discovery is anticipated in 1996. HEP has a 12% interest in
this area. HEP has also spent approximately $530,000 on two successful
development wells in Reagan County, Texas in which it has a 90% working
interest. Numerous other projects, which are individually less significant,
are also underway in Montana, Colorado, North Dakota, Texas and Utah.
Distributions
HEP paid a $.20 per Unit distribution on August 15, 1995 and declared a $.20
per Unit distribution payable on November 15, 1995. Oil and gas prices
continue to be low, and the resulting negative effect on cash flow from
operations will impact the amount of distributions which HEP will be able to
make. Future distributions will be determined after taking into account
reduced cash flow and the limitation in HEP's Credit Facilities on the amount
of distributions. Although HEP hopes to be able to declare a $.20
distribution for the fourth quarter of 1995, because of HEP's inability to
predict its cash flow from operations and the limitation on the amount of
distributions, it cannot currently be certain that it will distribute $.20 per
HEP Unit for the fourth quarter of 1995 or if a reduction of the distribution
will be required.
In November 1995, the board of directors of the general partner approved the
creation of a new class of limited partner units, to be called Class C Units,
and the distribution of Class C Units to holders of HEP Units and Class B
Units. One Class C Unit will be received for every fifteen HEP Units and
Class B Units held. The Class C Units have a distribution preference of $.25
per quarter, and distributions on the new unit will commence for the first
quarter of 1996. The declaration date and the record date for the
distribution of Class C Units have not been set, but it is anticipated that
the declaration and record dates and the distribution of the Class C Unit
certificates will occur in December 1995. Class C Units will trade separately
from HEP Units. Class C Units have been created to give HEP greater
flexibility in structuring future acquisitions by allowing HEP to issue a
security with a set distribution rate. Currently outstanding HEP Units will
be redesignated as Class A Units but will continue to be listed on the
American Stock Exchange using the symbol "HEP."
If there are no adverse changes in the factors which effect HEP cash flow,
including oil and gas prices, property and partnership expenses and other
relevant information, and there is no change in the limitation in HEP's Credit
Facilities on the amount of distributions permitted, HEP believes that it can
distribute $.13 per Class A Unit and $.25 per Class C Unit for the four
quarters of 1996. The combined effect of the issuance of the new Class C
Units and the decrease in distributions on the Class A Units would result in
the $.80 annual distribution that has been paid since 1992 being reduced to an
annual rate of $.58 on a Class A and associated Class C Unit.
Financing
During the first quarter of 1995, HEP and its lenders amended and restated
HEP's Amended and Restated Credit Agreement ("Credit Agreement") to extend the
term date of its line of credit to May 31, 1997. Under the Credit Agreement
and an Amended and Restated Note Purchase Agreement ("Note Purchase
Agreement") (collectively referred to as the "Credit Facilities") HEP has a
borrowing base of $42,000,000. HEP has amounts outstanding at September 30,
1995 of $24,700,000 under the Credit Agreement and $12,857,000 under the Note
Purchase Agreement. HEP's borrowing base is further reduced by an outstanding
contract settlement obligation of $3,130,000 and capital lease obligations of
$111,000; therefore, its unused borrowing base totaled $1,202,000 at September
30, 1995.
Borrowings under the Note Purchase Agreement bear interest at an annual rate
of 11.85%, which is payable quarterly. Annual principal payments of
$4,286,000 began April 30, 1992, and the debt is required to be paid in full
on April 30, 1998. HEP intends to fund the payment due in April 1996 through
additional borrowings under the Credit Agreement; thus, no portion of HEP's
Note Purchase Agreement is classified as current as of September 30, 1995.
Borrowings against the Credit Agreement bear interest at the lower of the
Certificate of Deposit rate plus 1.875%, prime plus 1/2% or the Euro-Dollar
rate plus 1.75% (7.625% at September 30, 1995). Interest is payable monthly,
and quarterly principal payments of $1,812,000, as adjusted for the
anticipated borrowings during April 1996, commence May 31, 1997.
The borrowing base for the Credit Facilities is redetermined semiannually in
March and September of each year. The Credit Facilities are secured by a
first lien on approximately 80% in value of HEP's oil and gas properties.
Additionally, aggregate distributions paid by HEP in any 12 month period are
limited to 50% of cash flow from operations before working capital changes and
distributions received from affiliates.
The current portion of long-term debt represents a current capital lease
obligation of $97,000.
Included in net working capital deficit of affiliates is $3,537,000, net to
HEP's interest, which represents the current portion of the long-term debt of
HSD. HSD's line of credit of $4,000,000, net to HEP's interest, which is
provided by a third party lender, is secured by certain leases held by HSD and
is otherwise nonrecourse to HEP. Borrowings under the line of credit bear
interest at the prime rate plus 8% (17.25% at September 30, 1995). Interest
is payable monthly, and the entire outstanding principal is due on August 31,
1996 at which time HSD intends to refinance the debt so as to extend the
repayment term.
HEP has entered into contracts to hedge its interest rate payments on
$5,000,000 of its debt through the end of 1995, $10,000,000 for 1996 and 1997
and $5,000,000 for the first three quarters of 1998. HEP does not use the
hedges for trading purposes, but rather for the purpose of providing a measure
of predictability for a portion of HEP's interest payments under its debt
agreement which has a floating interest rate. In general, it is HEP's goal to
hedge 50% of the principal amount of its debt for each year of the remaining
term of the debt. HEP has entered into two hedges, one of which is an
interest rate collar pursuant to which it pays a floor rate of 5.8% and a
ceiling rate of 8.1%, and the other is an interest rate swap with a fixed rate
of 5.75%. The amounts received or paid upon settlement of these transactions
are recognized as interest expense at the time the interest payments are due.
Inflation and Changing Prices
Prices
Prices obtained for oil and gas production depend upon numerous factors that
are beyond the control of HEP, including the extent of domestic and foreign
production, imports of foreign oil, market demand, domestic and worldwide
economic and political conditions, and government regulations and tax laws.
Prices for both oil and gas fluctuated significantly throughout 1994 and 1995.
The following table presents the average prices received each quarter by HEP
and the effects of the hedging transactions discussed below.
Oil Oil
(excluding the (including the
effects of effects of
hedging hedging
transactions) transactions)
(bbl) (bbl)
Third quarter - 1994 $17.08 $17.58
Fourth quarter - 1994 16.05 16.89
First quarter - 1995 16.79 17.22
Second quarter - 1995 18.00 18.14
Third quarter - 1995 16.15 16.63
Gas Gas
(excluding the (including the
effects of effects of
hedging hedging
transactions) transactions)
(mcf) (mcf)
Third quarter - 1994 $1.81 $1.95
Fourth quarter - 1994 1.65 1.84
First quarter - 1995 1.51 1.81
Second quarter - 1995 1.39 1.64
Third quarter - 1995 1.54 1.84
HEP has entered into numerous financial contracts to hedge the price of its
oil and natural gas. The purpose of the hedges is to provide protection
against price drops and to provide a measure of stability in the volatile
environment of oil and natural gas spot pricing. The revenue associated with
these contracts is recognized as oil or gas revenue at the time the hedged
volumes are sold.
The following table provides a summary of HEP's outstanding financial
contracts:
Oil
Percent of
Production Contract
Period Hedged Floor Price
(per bbl)
Last three months of 1995 43% $17.17
1996 22% $15.25
1997 18% $15.08
1998 14% $15.14
1999 3% $15.38
Between 20% and 100% of the oil volumes hedged in each year are subject to a
participating hedge whereby HEP will receive the contract price if the posted
futures price is lower than the contract price, and will receive the contract
price plus between 25% and 75% of the difference between the contract price
and the posted futures price if the posted futures price is greater than the
contract price. Between 27% and 100% of the volumes hedged in each year are
subject to a collar agreement whereby HEP will receive the contract price if
the spot price is lower than the contract price, the cap price if the spot
price is higher than the cap price, and the spot price if that price is
between the contract price and the cap price. The cap prices range from
$16.50 to $18.85.
Gas
Percent of
Production Contract
Period Hedged Floor Price
(per mcf)
Last three months of 1995 55% $2.04
1996 46% 1.95
1997 41% 1.97
1998 45% 2.01
1999 19% 1.92
Between 28% and 50% of the gas volumes hedged in each year are subject to a
collar agreement whereby HEP will receive the contract price if the spot price
is lower than the contract price, the cap price if the spot price is higher
than the cap price, and the spot price if that price is between the contract
price and the cap price. The cap prices range from $2.50 to $2.81.
During the fourth quarter through November 6, 1995, the oil price (for barrels
not hedged) averaged between $15.75 and $16.50 per barrel. The weighted
average price of natural gas (for mcf not hedged) was between $1.50 and $1.65
per mcf.
Inflation
Inflation did not have a material impact on HEP in 1994 and is not anticipated
to have a material impact in 1995.
Results of Operations
The following table is presented to contrast HEP's average oil and gas prices
and production. Significant fluctuations are discussed in the accompanying
narrative.
Oil and Gas Prices and Production
(In thousands except for price)
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
Oil Gas Oil Gas Oil Gas Oil Gas
(bbl) (mcf) (bbl) (mcf) (bbl) (mcf) (bbl) (mcf)
Average $16.63 $1.84 $17.58 $1.95 $17.29 $1.76 $16.34 $2.01
price
Production 277 3,368 238 3,069 740 9,587 707 9,965
Third Quarter 1995 Compared to Third Quarter 1994
Oil Revenue
Oil revenue increased by $423,000 during the third quarter of 1995 as
compared with the third quarter of 1994. The increase is the result of an
increase in oil production from 238,000 barrels in 1994 to 277,000 barrels in
1995 partially offset by a decrease in the average oil price from $17.58 per
barrel in 1994 to $16.63 per barrel in 1995. The increase in oil production
is due to increased production from developmental drilling projects in West
Texas which more than offset normal production declines.
The effect of HEP's hedging transactions, as described under "Inflation and
Changing Prices," was to increase HEP's average oil price from $16.15 per
barrel to $16.63 per barrel, representing $133,000 in additional revenue
from hedging transactions.
Gas Revenue
Gas revenue increased by $206,000 during the third quarter of 1995 as
compared with the third quarter of 1994. The increase is the result of an
increase in production from 3,069,000 mcf in 1994 to 3,368,000 mcf in 1995,
partially offset by a decrease in price from $1.95 per mcf in 1994 to $1.84 per
mcf in 1995. The increase in production is due to increased production from
the San Juan Basin which more than offset normal production declines.
The effect of HEP's hedging transactions was to increase HEP's average gas
price from $1.54 per mcf to $1.84 per mcf, representing $1,010,000 in
additional revenue from hedging transactions.
Pipeline, Facilities and Other
Pipeline, facilities and other revenue consists primarily of facilities
income from two gathering systems located in New Mexico, revenues derived
from salt water disposal, and incentive payments related to certain wells in
San Juan County. Pipeline, facilities and other income decreased by $452,000
during the third quarter of 1995 as compared with the third quarter of 1994,
primarily as a result of a pay-out adjustment on one of HEP's properties.
Interest Income
The decrease in interest income of $86,000 during the third quarter of 1995
as compared with the third quarter of 1994 resulted from a lower average
cash balance during the third quarter of 1995 as compared with the same period
during 1994.
Production Operating Expense
Production operating expense increased $422,000, or 16% during the third
quarter of 1995 as compared with the third quarter of 1994, primarily as a
result of increased production taxes due to the 6% increase in oil and gas
revenue and increased lease operating expenses caused by the 12% increase
in oil and gas production.
General and Administrative Expense
General and administrative expense includes costs incurred for direct
administrative services such as legal, audit and reserve reports, as well as
allocated internal overhead incurred by the operating company on behalf of
HEP. These expenses decreased $169,000 during the third quarter of 1995 as
compared with the third quarter of 1994 primarily due to reductions in personnel
during the first quarter of 1995.
Depreciation, Depletion and Amortization Expense
Depreciation, depletion and amortization expense decreased $573,000 during the
third quarter of 1995 as compared with the third quarter of 1994. The decrease
is primarily the result of lower capitalized costs in 1995 as compared with
1994, due to the property impairment recorded during second quarter of 1995
and the fourth quarter of 1994.
Interest Expense
Interest expense increased by $137,000 during the third quarter of 1995 as
compared with the third quarter of 1994, primarily as the result of a higher
interest rates.
Equity in Income of HCRC
Equity in income of affiliate represents HEP's share of its equity
investment in HCRC. HEP's equity in income of HCRC increased $1,241,000
during the third quarter of 1995 as compared with the third quarter of 1994.
The increase is the result of an increase in HCRC's oil and gas revenue.
Litigation Settlement
Litigation settlement expense during the third quarter of 1995 consists
primarily of expenses incurred to settle various individually insignificant
claims against HEP.
First Nine Months 1995 Compared to the First Nine Months 1994
The comparisons for the first nine months of 1995 and the first nine months of
1994 are consistent with those discussed in the third quarter 1995 compared
to the third quarter 1994 except for the following:
Oil Revenue
Oil revenue increased $1,245,000 during the first nine months of 1995 as
compared with the same period during 1994. The increase is comprised of an
increase in average oil prices from $16.34 per barrel in 1994 to $17.29 per
barrel in 1995 combined with an increase in production from 707,000 barrels
in 1994 to 740,000 barrels in 1995. The production increase is due to increased
production from developmental drilling projects in West Texas.
The effect of HEP's hedging transactions was to increase HEP's average oil
price from $16.93 per barrel to $17.29 per barrel, representing a $266,000
increase in revenues.
Gas Revenue
Gas revenue decreased $3,144,000 during the first nine months of 1995 as
compared with the first nine months of 1994. The decrease is comprised
of a decrease in price from $2.01 per mcf in 1994 to $1.76 per mcf in 1995
combined with a decrease in production from 9,965,000 mcf in 1994 to 9,587,000
mcf in 1995. The production decrease is due to allowable production limits and
normal production declines.
The effect of HEP's hedging transactions was to increase HEP's average gas
price from $1.48 per mcf to $1.76 per mcf, representing $2,684,000 in
additional revenue from hedging transactions.
Production Operating Expense
Production operating expense decreased $783,000 during the first nine months
of 1995 as compared with the same period during 1994. The decrease is due to
lower production taxes resulting from the decrease in oil and gas revenue
during 1995 and general cost reductions in West Texas.
Facilities Operating Expense
Facilities operating expense represents the costs of operating and maintaining
two gathering systems located in New Mexico. Costs decreased by $35,000
during 1995 as compared with 1994 due to decreased maintenance activity.
Impairment of Oil and Gas Properties
Impairment of oil and gas properties during the first nine months of 1995
includes the write-off of HEP's Indonesian operations as well as a property
impairment recorded at June 30, 1995 because capitalized costs on that date
exceeded the present value (discounted at 10%) of estimated future net
revenues from proved oil and gas reserves based on prices received at June 30,
1995 of $16.50 per barrel of oil and $1.50 per mcf of gas.
Equity in Loss of HCRC
Equity in loss of HCRC increased $852,000 during the first nine months of 1995
as compared with the first nine months of 1994. The increase is primarily
due to HCRC's impairment expense resulting from the write-off of its
Indonesian operations during the first quarter of 1995 and a second
quarter property impairment recorded by HCRC.
Minority Interest in Net Income of Subsidiaries
Minority interest in net income of subsidiaries represents unaffiliated
partners' interest in the net income of the May Partnerships. The decrease
is due to a decline in the net income of the May Partnerships resulting from
decreased production on their properties.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Reference is made to Item 8 - Note 14 of Form 10-K for the year
ended December 31, 1994, Item 1 - Note 4 of Form 10-Q for the
quarter ended March 31, 1995 and Item 1 - Note 4 of Form 10-Q
for the quarter ended June 30, 1995 and Item 1 - Notes 4 and 5 of
this Form 10-Q.
ITEM 2 - CHANGES IN SECURITIES
None.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5 - OTHER INFORMATION
None.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
None.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Partnership has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HALLWOOD ENERGY PARTNERS, L. P.
By: HALLWOOD ENERGY CORPORATION
General Partner
Date: November 13, 1995 By:/s/Robert S. Pfeiffer
Robert S. Pfeiffer,
Vice President
(Chief Financial Officer)