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, 1996
|_| TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-8921
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 offices) (Zip Code)
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 12, 1996
Class A 9,977,254
Class B 143,773
Class C 664,063
Page 1 of 21
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HALLWOOD ENERGY PARTNERS, L. P.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands except Units)
September 30, December 31,
1996 1995
CURRENT ASSETS
Cash and cash equivalents $ 7,499 $ 4,977
Accounts receivable:
Oil and gas sales 6,913 6,767
Trade 4,103 2,860
Due from affiliates 1,833
Prepaid expenses and other current assets 1,153 1,091
Net working capital of affiliates 144
----------
Total 19,812 17,528
-------- -------
PROPERTY, PLANT AND EQUIPMENT, at cost Oil and gas properties (full cost
method):
Proved mineral interests 604,276 601,323
Unproved mineral interests 1,280 684
Furniture, fixtures and other 3,278 3,090
---------- ---------
Total 608,834 605,097
Less accumulated depreciation, depletion,
amortization and property impairment (520,920) (510,171)
------- -------
Total 87,914 94,926
-------- --------
OTHER ASSETS
Investment in common stock of HCRC 13,159 11,491
Deferred expenses and other assets 208 232
---------- ----------
Total 13,367 11,723
-------- --------
TOTAL ASSETS $121,093 $124,177
======= =======
<FN>
(Continued on the following page)
</FN>
-2-
HALLWOOD ENERGY PARTNERS, L. P.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands except Units)
September 30, December 31,
1996 1995
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 15,603 $ 16,369
Net working capital deficit of affiliates 5,061
Due to affiliates 861
Current portion of contract settlement 374
Current portion of long-term debt 3,873 87
--------- -----------
Total 20,337 21,891
-------- --------
NONCURRENT LIABILITIES
Long-term debt 31,398 37,557
Contract settlement 2,456 2,397
Deferred liability 1,530 1,718
--------- ---------
Total 35,384 41,672
-------- --------
Total Liabilities 55,721 63,563
-------- --------
MINORITY INTEREST IN SUBSIDIARIES 3,356 3,042
--------- ---------
PARTNERS' CAPITAL
Class A Units - 9,977,254 Units issued, 9,077,496 outstanding in 1996 and
9,193,159 outstanding
in 1995 64,650 59,614
Class B Subordinated Units - 143,773 Units
outstanding in 1996 and 1995 1,154 1,062
Class C Units - 664,063 outstanding in 1996 and
-0- outstanding in 1995
General Partner 3,194 2,981
Treasury Units - 899,758 Units in 1996 and
784,095 Units in 1995 (6,982) (6,085)
--------- ---------
Partners' Capital - Net 62,016 57,572
-------- ---------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $121,093 $124,177
======= =======
<FN>
The accompanying notes are an integral
part of the financial statements.
</FN>
-3-
HALLWOOD ENERGY PARTNERS, L. P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except per Unit data)
For the Three Months Ended
September 30,
1996 1995
REVENUES:
Oil revenue $ 4,478 $ 4,607
Gas revenue 6,593 6,188
Pipeline, facilities and other 607 388
Interest 125 71
---------- ----------
11,803 11,254
-------- -------
EXPENSES:
Production operating 2,687 3,119
Facilities operating 119 213
General and administrative 1,215 1,089
Depreciation, depletion and amortization 3,226 4,057
Interest 928 1,056
---------- --------
8,175 9,534
--------- -------
OTHER INCOME (EXPENSES):
Equity in income of HCRC 500 1,304
Minority interest in net income of subsidiaries (621) (349)
Litigation settlement (2) (363)
------------ ---------
(123) 592
---------- ---------
NET INCOME 3,505 2,312
--------- --------
CLASS C UNIT DISTRIBUTIONS ($.25 PER UNIT) 166
----------
NET INCOME FOR GENERAL PARTNER,
CLASS A AND CLASS B LIMITED PARTNERS $ 3,339 $ 2,312
========= ========
ALLOCATION OF NET INCOME:
General partner $ 590 $ 361
========== =========
Class A and Class B Limited partners $ 2,749 $ 1,951
========= ========
Per Class A Unit and Class B Unit $ .30 $ .20
=========== ==========
Weighted average Class A Units and
Class B Units outstanding 9,221 9,793
========= ========
<FN>
The accompanying notes are an integral
part of the financial statements.
</FN>
-4-
HALLWOOD ENERGY PARTNERS, L. P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except per Unit data)
For the Nine Months Ended
September 30,
1996 1995
REVENUES:
Oil revenue $ 14,600 $ 12,796
Gas revenue 21,322 16,899
Pipeline, facilities and other 2,039 1,806
Interest 331 247
---------- ----------
38,292 31,748
-------- --------
EXPENSES:
Production operating 8,379 8,208
Facilities operating 551 591
General and administrative 3,133 3,736
Depreciation, depletion and amortization 10,554 12,081
Impairment of oil and gas properties 11,051
Interest 3,047 3,103
--------- ---------
25,664 38,770
-------- --------
OTHER INCOME (EXPENSES):
Equity in income (loss) of HCRC 1,227 (1,049)
Minority interest in net income of subsidiaries (2,092) (987)
Litigation settlement (230) (393)
---------- ----------
(1,095) (2,429)
--------- ---------
NET INCOME (LOSS) 11,533 (9,451)
CLASS C UNIT DISTRIBUTIONS ($.75 PER UNIT) 498
----------
NET INCOME (LOSS) FOR GENERAL PARTNER,
CLASS A AND CLASS B LIMITED PARTNERS $ 11,035 $ (9,451)
======== ========
ALLOCATION OF NET INCOME (LOSS):
General partner $ 1,923 $ 840
========= ==========
Class A and Class B Limited partners $ 9,112 $(10,291)
========= =======
Per Class A Unit and Class B Unit $ .99 $ (1.05)
=========== =========
Weighted average Class A Units and
Class B Units outstanding 9,246 9,800
======== =========
<FN>
The accompanying notes are an integral
part of the financial statements.
</FN>
-5-
HALLWOOD ENERGY PARTNERS, L. P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
For the Nine Months Ended
September 30,
1996 1995
OPERATING ACTIVITIES:
Net income (loss) $ 11,533 $ (9,451)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation, depletion, amortization and impairment 10,554 22,980
Depreciation charged to affiliates 195 200
Amortization of deferred loan costs and other assets 122 152
Noncash interest expense 163 227
Equity in (earnings) loss of HCRC (1,227) 1,049
Minority interest in net income of subsidiaries 2,092 987
Undistributed earnings of affiliates (553) (414)
Recoupment of take-or-pay liability (331) (422)
--------- --------
Cash provided by operations before
working capital changes 22,548 15,308
Changes in operating assets and liabilities provided (used) cash net of
noncash activity:
Oil and gas sales receivable (146) 116
Trade receivables (1,243) (1,029)
Due from affiliates 2,287 1,591
Prepaid expenses and other current assets (339) (48)
Accounts payable and accrued liabilities (1,220) (3,302)
Due to affiliates 861
---------
Net cash provided by operating activities 22,748 12,636
------- --------
INVESTING ACTIVITIES:
Additions to property, plant and equipment (2,667) (1,715)
Exploration and development costs incurred (6,838) (6,842)
Proceeds from sales of property, plant and equipment 5,287 248
Refinance of Spraberry investment (4,715)
Investment in affiliates (517) (15)
--------- ----------
Net cash used in investing activities (9,450) (8,324)
-------- --------
FINANCING ACTIVITIES:
Payments of long-term debt (8,373) (7,355)
Proceeds from long-term debt 6,000 15,000
Distributions paid (6,180) (7,515)
Distributions paid by consolidated subsidiaries to minority shareholders (1,778) (932)
Payments of contract settlement (305) (1,015)
Syndication costs and capital contributions (12) (53)
Other financing activities (128) (25)
--------- ----------
Net cash used in financing activities (10,776) (1,895)
------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,522 2,417
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD 4,977 2,409
-------- ---------
END OF PERIOD $ 7,499 $ 4,826
========= ========
<FN>
The accompanying notes are an
integral part of the financial
statements.
</FN>
-6-
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, 1995 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 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 Units
HEP owns approximately 46% and 40% of the outstanding common stock of HCRC, at
September 30, 1996 and December 31, 1995, respectively, while HCRC owns
approximately 19% of HEP's Units at September 30, 1996 and December 31, 1995.
Consequently, HEP has an interest in 899,758 and 784,095 of its own Units at
September 30, 1996 and December 31, 1995, respectively. These Units are treated
as treasury units in the accompanying financial statements.
Reclassifications
Certain reclassifications have been made to the prior period amounts to conform
to the classifications used in the current period.
-7-
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 $48,000,000. HEP has amounts outstanding at September 30, 1996 of $26,700,000
under the Credit Agreement and $8,571,000 under the Note Purchase Agreement.
HEP's borrowing base is further reduced by an outstanding contract settlement
obligation of $2,456,000; therefore, its unused borrowing base totaled
$10,273,000 at November 12, 1996.
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 1997 through additional
borrowings under the Credit Agreement; thus, no portion of HEP's Note Purchase
Agreement is classified as current as of September 30, 1996.
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% (7.2% at September 30, 1996). Interest is payable monthly, and
quarterly principal payments of $1,937,000, as adjusted for the anticipated
borrowings to fund the Note Purchase Agreement payment due in April 1997,
commence May 31, 1997.
The borrowing base for the Credit Facilities is redetermined semiannually. 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.
HEP entered into contracts to hedge its interest rate payments on $10,000,000 of
its debt for 1996 and 1997 and $5,000,000 for 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 the next two years and 25% 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 7.55% and a
ceiling rate of 9.85%, and the other is an interest rate swap with a fixed rate
of 7.49%. 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, 1996 and 1995
was $2,761,000 and $2,495,000, respectively.
NOTE 4 - PROPERTY INTEREST ACQUISITION
On July 1, 1996, HEP and HCRC completed a transaction involving the acquisition
from Fuel Resources Development Co., a wholly owned subsidiary of Public Service
Company of Colorado, and other interest owners of their interests in 38 coal bed
methane wells located in La Plata County, Colorado and Rio Arriba County, New
Mexico. Thirty-four of the wells, estimated to have reserves of 53 BCF, were
assigned to 44 Canyon LLC ("44 Canyon"), a special purpose entity owned by a
large east coast financial institution. The wells qualify for tax credits under
Section 29 of the Internal Revenue Code. HPI will manage and operate the
properties on behalf of 44 Canyon. The $27.8 million purchase price was funded
by 44 Canyon through the sale of a volumetric production payment to an affiliate
of Enron Capital & Trade Resources Corp., a subsidiary of Enron Corp., the sale
of a subordinated production payment and certain other property interests for
$3.45 million to an affiliate of HEP and HCRC, and additional cash contributed
by the owners of 44
-8-
Canyon. The affiliate of HEP and HCRC which purchased the subordinated
production payment and other property interests is owned equally by HEP and
HCRC. The interests in the four wells in Rio Arriba County were acquired
directly by HEP and HCRC. As a result of the transaction, HEP expects to add 9.8
BCF of gas to its reserve base, which represents approximately 50% of its
estimated 1996 production.
NOTE 5 - LEGAL PROCEEDINGS
In June 1996, HEP and the other parties to the lawsuits styled Lamson Petroleum
Corporation v. Hallwood Petroleum, Inc. et al. settled the lawsuits. The
plaintiffs in the lawsuits claimed they had valid leases covering streets and
roads in the units of the A. L. Boudreaux #1 well, G. S. Boudreaux #1 well, Paul
Castille #1 well, Evangeline Shrine Club #1 well and Duhon #1 well, which
represented approximately .4% to 2.3% of HEP's interest in these properties, and
they were entitled to a portion of the production from the wells dating from
February 1990. In the settlement, HEP and the plaintiffs agreed to cross-convey
interests in certain leases to one another, and HEP agreed to pay the plaintiffs
$728,000. HEP has not recognized revenue attributable to the contested leases
since January 1993. These revenues plus accrued interest, totaling $506,000, had
been placed in escrow pending the resolution of the lawsuits. The excess of the
cash paid over the escrowed amounts, is reflected as litigation settlement
expense in the accompanying financial statements. The cross-conveyance of the
interests in the leases will result in a decrease in HEP's reserves of $374,000
in future net revenues, discounted at 10%.
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 $22,748,000 of cash flow from operating activities during the
first nine months of 1996.
The other primary cash inflow was:
o $5,287,000 in proceeds from the sale of property
o $6,000,000 in proceeds from long-term debt
Cash was used primarily for:
o Additions to property and development costs incurred of $9,505,000
o Payments of long-term debt of $8,373,000
o Refinance of Spraberry investment of $4,715,000
o Distributions to Unitholders of $6,180,000
o Payments of contract settlement of $305,000
When combined with miscellaneous other cash activity during the period, the
result was an increase of $2,522,000 in HEP's cash from $4,977,000 at December
31, 1995 to $7,499,000 at September 30, 1996.
-9-
Development Projects and Acquisitions
Through September 30, 1996, HEP incurred approximately $441,000 for the purchase
of shares of Hallwood Consolidated Resources Corporation ("HCRC") and $9,505,000
for exploration, development and acquisition costs toward the revised 1996
capital budget of $12,700,000. The expenditures were comprised of approximately
$6,838,000 for exploration and development expenditures and approximately
$2,667,000 for property acquisitions. A description of significant exploration
and development projects to date in 1996 follows.
During the second quarter of 1996, HEP purchased 12,965 shares of HCRC for $34
per share. The shares were originally purchased by HCRC in connection with an
odd lot repurchase offer and then were resold to HEP at the price paid by HCRC
for such shares.
HEP continues to devote capital resources to the West Texas Kermit area in 1996.
HEP drilled or participated in the drilling of fourteen wells, thirteen of which
were successful, and participated in four recompletions, three of which were
successful, in the first nine months of 1996, for a total cost of approximately
$1,100,000. The wells in this area are currently producing approximately 700
gross equivalent barrels of oil per day. HEP's interest in these wells averages
27%. HEP plans to drill or recomplete up to nine additional wells by year end.
HEP acquired 106 square miles of three dimensional (3-D) seismic data on the
Cowden Ranch in Crane County, Texas. The prospect is operated by a major oil
company, and HEP has a 12.5% working interest. HEP's share of costs to date is
$455,000. Seismic interpretation was recently completed, and two exploratory
wells are planned for the fourth quarter of 1996, with additional exploratory
activity to follow in 1997.
HEP acquired 3-D seismic data and related acreage in the Merkel Project Area
which covers 18 square miles in Jones, Taylor and Nolan Counties, Texas.
Expenditures in the first nine months of 1996 totaled $567,000. Thus far, HEP
has participated in drilling five wells on four exploration prospects for a
total cost of $135,000, including one well drilled in late 1995. Four of the
wells are each producing at average rates of 70 gross barrels of oil per day,
two of the wells encountered multiple pay zones but only one zone is currently
producing, and one well was unsuccessful. HEP's interest in the wells is 12.5%.
Two wells are planned for the fourth quarter of 1996, and an additional 10
prospects will be tested in 1997 and beyond. An additional 74 square miles of
3-D seismic data, which is presently being interpreted, was acquired in the same
area. HEP's working interest in this area averages 27.5%, and prospect
exploratory drilling will begin in the first quarter of 1997. Preliminary work
indicates as many as 25 wells may be drilled.
HEP participated in the drilling of two nonoperated wells in Williams County,
North Dakota in the latter part of 1995 and the first quarter of 1996, one of
which was dry and the other only marginally successful, for a total cost of
approximately $300,000. HEP also drilled an exploratory dry hole in Richland
County, Montana, at a cost of $150,000. HEP completed an Interlake Formation
development well, drilled in the second quarter, at a cost of approximately
$535,000. This well is currently producing at a rate of 130 gross barrels of oil
per day, and HEP's interest is 45%.
HEP incurred approximately $230,000 in the first quarter, net to HEP's interest,
for four recompletions and one drilled well in the Rocker "b" Ranch in Reagan
County, Texas. This activity has increased HEP's share of production by 44
equivalent barrels of oil per day. During the first quarter, HEP also acquired
interests in five additional producing leases on the Rocker "b" Ranch for a
total of $93,000. Effective April 1, 1996, HEP repaid its share of the debt of
Hallwood Spraberry Drilling Company, L.L.C. ("HSD") through additional
borrowings under its bank credit agreement and assumed direct ownership of its
share of HSD's properties. In the second and third quarters of 1996, HEP
recompleted five wells, four of which were successful, and drilled one
additional well for a total cost of $230,000. This activity increased HEP's
share of production by 57 equivalent barrels of oil per day. HEP plans to
recomplete at least five more wells before year end and will consider other
work, if the capital is available. Exploitation in this area is expected to slow
toward the end of 1997 as HEP's undeveloped acreage position declines.
-10-
In the San Juan Basin area of Colorado, HEP, through an affiliate La Plata
Associates LLC ("LPA"), acquired interests in 34 coal bed methane wells located
in La Plata County, Colorado for $1,734,000. HEP's interest in the wells is
expected to add 9.8 bcf of gas to its reserve base, which represents
approximately 52% of its estimated 1996 production. The acquisition was
completed on July 1, 1996. Seven refracs/recompletions have been completed since
July 1 at a net cost to HEP of approximately $300,000. Numerous other
recompletion and facility projects are planned for the remainder of 1996 at an
estimated net cost to HEP of $490,000. Gross production has increased by 2,500
mcf of gas per day as a result of the work done thus far. Similar activity
levels in 1997 are anticipated on these newly acquired properties. In other
parts of the New Mexico portion of the San Juan Basin, HEP has recompleted three
wells, two of which were successful, drilled two wells and is converting another
well to be a disposal well. The total cost for this work was $497,000, and
production has increased by 2,000 mcf of gas per day. HEP's share of this
production is approximately 50%.
HEP participated in a 13 square mile 3-D seismic shoot at the Packsaddle Project
in the Big Horn Basin of Wyoming. The data is now being processed and additional
development and exploration is expected in the area following HEP's previous
discovery. HEP's ownership in the Big Horn Basin continues to increase through a
joint venture created to evaluate a 4,000 mile 2-D Seismic Data Base from which
HEP hopes to create additional drillable prospects.
In September, HEP spent $225,000 for a recompletion of the A. L. Boudreaux well
into a shallower interval of the Bol Mex 3 Formation after the previous
completion in the Bol Mex 3 Formation began to produce water and sand.
Production after the recompletion is currently 22 mmcf per day and 475 barrels
of condensate per day.
Numerous other projects, which are individually less significant have been
completed or are underway in Kansas, Louisiana, Texas and New Mexico, including
participation in five other 3-D seismic data acquisition programs not included
in the above activity.
Property Sales
During the first quarter of 1996, HEP received approximately $1,300,000 for the
sale of its interests in the Hoople Field in Crosby County, Texas. HEP also
received another $88,000 in early April for the sale of various nonstrategic
properties at auction. In June 1996, HEP completed the sale of its interests in
the Bethany Longstreet area of Louisiana (approximately 575,000 equivalent
barrels of oil, measured using December 31, 1995 pricing) for approximately
$3,800,000.
Distributions
HEP declared distributions of $.13 per Class A Unit and $.25 per Class C Unit,
payable on November 15, 1996 to Unitholders of record on September 30, 1996.
Distributions on the Class B Units are suspended if the Class A Units receive a
distribution of less than $.20 per Class A Unit per calendar quarter. In any
quarter for which distributions of $.20 or more per unit are made on the Class A
Units, the Class B Units are entitled to be paid, in whole or in part, suspended
distributions.
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 $48,000,000. HEP has amounts outstanding at September 30, 1996 of $26,700,000
under the Credit Agreement and $8,571,000 under the Note Purchase Agreement.
HEP's borrowing base is further reduced by an outstanding contract settlement
obligation of $2,456,000; therefore, its unused borrowing base totaled
$10,273,000 at November 12,1996.
-11-
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 1997 through additional
borrowings under the Credit Agreement; thus, no portion of HEP's Note Purchase
Agreement is classified as current as of September 30, 1996.
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% (7.2% at September 30, 1996). Interest is payable monthly, and
quarterly principal payments of $1,937,000, as adjusted for the anticipated
borrowings to fund the Note Purchase Agreement payment due in April 1997,
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.
HEP entered into contracts to hedge its interest rate payments on $10,000,000 of
its debt for 1996 and 1997 and $5,000,000 for 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 the next two years and 25% 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 7.55% and a
ceiling rate of 9.85%, and the other is an interest rate swap with a fixed rate
of 7.49%. The amounts received or paid upon settlement of these transactions are
recognized as interest expense at the time the interest payments are due.
Cautionary Statement Regarding Forward-Looking Statements
In the interest of providing the Partnership's unitholders and potential
investors with certain information regarding the Partnership's future plans and
operations, certain statements setforth in this Form 10-Q relate to management's
future plans and objectives. Such statements are "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
in Section 21E of the Securities Exchange act of 1934, as amended. Although any
forward-looking statements contained in this Form 10-Q or otherwise expressed by
or on behalf of the Partnership are, to the knowledge and in the judgment of the
officers and directors of the General Partner, expected to prove true and to
come to pass, management is not able to predict the future with absolute
certainty. Forward-looking statements involve known and unknown risks and
uncertainties which may cause the Partnership's actual performance and financial
results in future periods to differ materially from any projection, estimate or
forecasted result. These risks and uncertainties include, among other things,
volatility of oil and gas prices, competition, risks inherent in the
Partnership's oil and gas operations, the inexact nature of interpretation of
seismic and other geological and geophysical data, imprecision of reserve
estimates, the Partneship's ability to replace and expand oil and gas reserves,
and such other risks and uncertainties described from time to time in the
Partnership's periodic reports and filings with the Securities and Exchange
Commission. Accordingly, unitholders and potential investors are cautioned that
certain events or circumstances could cause actual results to differ materially
from those projected.
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 1995 and 1996.
The following table presents the average prices received each quarter by HEP and
the effects of the hedging transactions discussed below.
-12-
Oil Oil Gas Gas
(excluding the (including the (excluding the (including the
effects of effects of effects of effects of
hedging hedging hedging hedging
transactions) transactions) transactions) transactions)
(bbl) (bbl) (mcf) (mcf)
First quarter - 1995 $16.79 $17.22 $1.51 $1.81
Second quarter - 1995 18.00 18.14 1.39 1.64
Third quarter - 1995 16.15 16.63 1.54 1.84
Fourth quarter - 1995 17.13 17.57 1.87 1.99
First quarter - 1996 18.05 17.97 2.41 2.30
Second quarter - 1996 20.56 20.15 2.15 2.12
Third quarter - 1996 21.66 20.73 2.17 2.11
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 decreases 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 1996 64% $18.91
1997 46% $17.78
1998 16% $15.33
1999 3% $15.88
Between 15% 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 26% 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 $17.00 to $19.35.
Gas
Percent of Production Contract
Period Hedged Floor Price
(per mcf)
Last three months of 1996 56% $1.96
1997 55% $1.97
1998 48% $2.02
1999 24% $1.86
2000 19% $2.01
-13-
Between 0% and 43% 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 $2.65 to $2.93.
During the fourth quarter through October 25, 1996 the oil price (for barrels
not hedged) averaged between $22.00 and $24.00 per barrel. The weighted average
price of natural gas (for mcf not hedged) during that period was between $1.50
and $2.10 per mcf.
Inflation
Inflation did not have a material impact on HEP in 1995 and is not anticipated
to have a material impact in 1996.
Results of Operations
The following tables are presented to contrast HEP's revenue, expense and
earnings for discussion purposes. Significant fluctuations are discussed in the
accompanying narrative. The "direct owned" column represents HEP's direct
royalty and working interests in oil and gas properties. The "Mays" column
represents the results of operations of six May Limited Partnerships which are
consolidated with HEP. In 1996, HEP owned interests which ranged from 54.5% to
68.3% of the Mays, and in 1995, HEP's ownership in the Mays ranged from 54.5% to
68.5%.
-14-
TABLE OF HEP EARNINGS FOR MANAGEMENT DISCUSSION
(In thousands except price)
For the Quarters Ended September 30, 1996 and 1995
For the Quarter Ended September 30, 1996 For the Quarter Ended September 30, 1995
---------------------------------------- ----------------------------------------
Direct Direct
Owned Mays Total Owned Mays Total
Oil production (bbl) 188 28 216 252 25 277
Gas production (mcf) 2,692 435 3,127 2,960 408 3,368
Average oil price $20.54 $22.03 $20.73 $16.59 $17.08 $16.63
Average gas price $ 2.02 $ 2.66 $ 2.11 $ 1.86 $ 1.70 $ 1.84
Oil revenue $ 3,861 $ 617 $ 4,478 $ 4,180 $ 427 $ 4,607
Gas revenue 5,434 1,159 6,593 5,495 693 6,188
Pipeline, facilities and other revenue 607 607 388 388
Interest income 110 15 125 56 15 71
------- -------- -------- --------- -------- ---------
Total revenue 10,012 1,791 11,803 10,119 1,135 11,254
------ ------ ------ ------ ------ ------
Production operating expense 2,511 176 2,687 2,941 178 3,119
Facilities operating expense 119 119 213 213
General and administrative expense 1,140 75 1,215 979 110 1,089
Depreciation, depletion, and amortization 2,787 439 3,226 3,607 450 4,057
Interest expense 928 928 1,056 1,056
Litigation settlement expense 1 1 2 363 363
Equity in income of HCRC (500) (500) (1,304) (1,304)
Minority interest 621 621 349 349
-------- ------- -------- ----------- ------- --------
Total expense 6,986 1,312 8,298 7,855 1,087 8,942
------ ------ ------- ------ ------ ------
Net income $ 3,026 $ 479 $ 3,505 $ 2,264 $ 48 $ 2,312
====== ======= ====== ====== ======== ======
-15-
TABLE OF HEP EARNINGS FOR MANAGEMENT DISCUSSION
(In thousands except price)
For the Nine Months Ended September 30, 1996 and 1995
For the Nine Months Ended September 30, 1996 For the Nine Months Ended September 30, 1995
-------------------------------------------- --------------------------------------------
Direct Direct
Owned Mays Total Owned Mays Total
Oil production (bbl) 663 86 749 671 69 740
Gas production (mcf) 8,386 1,404 9,790 8,479 1,108 9,587
Average oil price $19.34 $20.64 $19.49 $17.25 $17.72 $17.29
Average gas price $ 2.04 $ 2.99 $ 2.18 $ 1.76 $ 1.79 $ 1.76
Oil revenue $12,825 $ 1,775 $14,600 $11,573 $ 1,223 $12,796
Gas revenue 17,123 4,199 21,322 14,921 1,978 16,899
Pipeline, facilities and other revenue 2,039 2,039 1,806 1,806
Interest income 284 47 331 200 47 247
-------- --------- -------- -------- -------- --------
Total revenue 32,271 6,021 38,292 28,500 3,248 31,748
------ ------ ------ ------ ------ ------
Production operating expense 7,855 524 8,379 7,725 483 8,208
Facilities operating expense 551 551 591 591
General and administrative expense 2,826 307 3,133 3,399 337 3,736
Depreciation, depletion, and amortization 9,136 1,418 10,554 10,770 1,311 12,081
Impairment of oil and gas properties 11,051 11,051
Interest expense 3,047 3,047 3,103 3,103
Litigation settlement expense 223 7 230 393 393
Equity in (income) loss of HCRC (1,227) (1,227) 1,049 1,049
Minority interest 2,092 2,092 987 987
-------- ------ ------- ----------- ------- --------
Total expense 22,411 4,348 26,759 38,081 3,118 41,199
------ ------ ------ ------ ------ ------
Net income (loss) $ 9,860 $ 1,673 $11,533 $(9,581) $ 130 $(9,451)
====== ====== ====== ====== ======= ======
-16-
Third Quarter of 1996 Compared to Third Quarter of 1995
Oil Revenue
Oil revenue decreased by $129,000 during the third quarter of 1996 as compared
with the third quarter of 1995. The decrease is the result of a decrease in
production from 277,000 barrels in 1995 to 216,000 barrels in 1996, partially
offset by an increase in the average oil price from $16.63 per barrel in 1995 to
$20.73 per barrel in 1996. The decrease in oil production is due to property
sales and normal production declines.
The effect of HEP's hedging transactions, as described under "Inflation and
Changing Prices," was to decrease HEP's average oil price from $21.66 per barrel
to $20.73 per barrel, representing a reduction in revenue from hedging
transactions of $201,000.
Gas Revenue
Gas revenue increased by $405,000 during the third quarter of 1996 as compared
with the third quarter of 1995. The increase is the result of an increase in
price from $1.84 per mcf in 1995 to $2.11 per mcf in 1996 partially offset by a
decrease in production from 3,368,000 mcf in 1995 to 3,127,000 mcf in 1996. The
decrease in production is due to property sales and normal production declines.
The effect of HEP's hedging transactions was to decrease HEP's average gas price
from $2.17 per mcf to $2.11 per mcf, representing a $188,000 reduction in
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 and tax credit payments related to
certain coal bed methane wells. Pipeline, facilities and other income increased
by $219,000 during the third quarter of 1996 as compared with the third quarter
of 1995, primarily as a result of a pay-out adjustment on one of HEP's wells
during the third quarter of 1995.
Interest Income
The increase in interest income of $54,000 during the third quarter of 1996 as
compared with the third quarter of 1995 resulted from a higher average cash
balance during the third quarter of 1996 as compared with the same period during
1995.
Production Operating Expense
Production operating expense decreased $432,000 during the third quarter of 1996
as compared with the third quarter of 1995, primarily due to decreased operating
costs resulting from cost savings measures implemented during 1995 as well as
the property sales and lower production described above.
Facilities Operating Expense
Facilities operating expense represents the costs of operating and maintaining
two gathering systems located in New Mexico. Costs decreased $94,000 during the
third quarter of 1996 as compared with the third quarter of 1995 primarily due
to the sale of a facility in Louisiana during the second quarter of 1996.
-17-
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 increased $126,000 during the third quarter of 1996 as compared
with the third quarter of 1995 primarily because certain bank fees were incurred
during the third quarter in 1996 and during the first quarter in 1995.
Depreciation, Depletion and Amortization Expense
Depreciation, depletion and amortization expense decreased $831,000 during the
third quarter of 1996 as compared with the third quarter of 1995. The decrease
is primarily the result of lower capitalized costs in 1996 as compared with
1995, due to the property impairments recorded during 1995, as well as the
property sales discussed above.
Interest Expense
Interest expense decreased $128,000 during the third quarter of 1996 as compared
with the third quarter of 1995, primarily as the result of lower outstanding
debt during 1996.
Equity in Income of HCRC
Equity in income of HCRC decreased $804,000 during the third quarter of 1996 as
compared with the third quarter of 1995. The decrease is primarily due to a tax
adjustment on HCRC during 1995.
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 increase of
$272,000 is due to an increase in the net income of the May Partnerships
resulting from increased production on their properties, as well as higher oil
and gas prices during 1996.
Litigation Settlement Expense
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 of 1996 Compared to the First Nine Months of 1995
The comparisons for the first nine months of 1996 and the first nine months of
1995 are consistent with those discussed in the third quarter of 1996 compared
to the third quarter of 1995 except for the following.
Oil Revenue
Oil revenue increased $1,804,000 during the first nine months of 1996 as
compared with the first nine months of 1995. The increase is comprised of an
increase in average oil prices from $17.29 per barrel in 1995 to $19.49 per
barrel in 1996 combined with an increase in production from 740,000 barrels in
1995 to 749,000 barrels in 1996. The production increase is due to increased
production from developmental and exploratory drilling projects in Montana,
Wyoming and West Texas partially offset by property sales and normal production
declines.
The effect of HEP's hedging transactions was to decrease HEP's average oil price
from $19.93 per barrel to $19.49 per barrel, representing a $330,000 decrease in
revenues.
-18-
Gas Revenue
Gas revenue increased $4,423,000 during the first nine months of 1996 as
compared with the first nine months of 1995. The increase is comprised of an
increase in price from $1.76 per mcf in 1995 to $2.18 per mcf in 1996 combined
with an increase in production from 9,587,000 mcf in 1995 to 9,790,000 mcf in
1996. The production increase is due to higher state allowable production limits
in Louisiana as well as increased production from exploratory and developmental
drilling projects in Montana, Wyoming and West Texas, which are partially offset
by property sales and normal production declines.
The effect of HEP's hedging transactions was to decrease HEP's average gas price
from $2.24 per mcf to $2.18 per mcf, representing a $587,000 reduction in
revenue from hedging transactions.
Production Operating Expense
Production operating expense increased $171,000 during the first nine months of
1996 as compared with the first nine months of 1995, primarily as a result of an
increase in production taxes and operating costs associated with the increase in
production as described above.
General and Administrative Expense
General and administrative expense decreased $603,000 during the first nine
months of 1996 as compared with the first nine months of 1995 primarily due to
lower administrative costs due to personnel reductions during 1995.
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 because capitalized costs at June 30, 1995 exceeded the
present value (discounted at 10%) of estimated future net revenues from proved
oil and gas reserves based on prices received at that date.
Equity in Income (Loss) of HCRC
Equity in income (loss) of HCRC increased $2,276,000 during the first nine
months of 1996 as compared with the first nine months of 1995. 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 property impairment
recorded by HCRC during the second quarter of 1995.
-19-
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Reference is made to Item 8 - Notes 13 and 14 of Form 10-K
for the year ended December 31, 1995, and Item 1 - Note 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.
-20-
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 12 , 1996 By: /s/Robert S. Pfeiffer
----------------------------------- -----------------------------
Robert S. Pfeiffer, Vice President
(Chief Financial Officer)
-21-