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, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-9579
HALLWOOD ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 84-1489099
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4610 South Ulster Street Parkway
Suite 200
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 [ ]
Number of shares outstanding as of November 8, 1999
Common Stock 9,999,754
Series A Cumulative Preferred Stock 2,334,165
Page 1 of 27
<PAGE>
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HALLWOOD ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
September 30, December 31,
1999 1998
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 7,119 $ 11,874
Accounts receivable:
Oil and gas revenues 12,473 5,911
Trade 6,605 4,040
Due from affiliates 622 119
Prepaid expenses and other current assets 1,196 1,338
Net working capital of affiliate 236
------------ ----------
Total 28,015 23,518
-------- --------
PROPERTY, PLANT AND EQUIPMENT, at cost Oil and gas properties (full cost
method):
Proved mineral interests 746,980 664,799
Unproved mineral interests 4,815 2,694
Furniture, fixtures and other 3,736 3,411
--------- ---------
Total 755,531 670,904
Less accumulated depreciation, depletion,
amortization and property impairment (581,299) (565,899)
------- -------
Total 174,232 105,005
------- -------
OTHER ASSETS
Deferred expenses and other assets 1,402 408
Investment in common stock of HCRC 10,160
------------- --------
Total 1,402 10,568
--------- --------
TOTAL ASSETS $203,649 $139,091
======= =======
<FN>
(Continued on the following page)
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HALLWOOD ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands except Shares)
September 30, December 31,
1999 1998
CURRENT LIABILITIES
<S> <C> <C>
Accounts payable and accrued liabilities $ 23,674 $ 22,921
Current portion of long-term debt 9,319
------------ ---------
Total 23,674 32,240
-------- --------
NONCURRENT LIABILITIES
Long-term debt 103,428 40,381
Deferred liability 939 1,050
--------- ---------
Total 104,367 41,431
------- --------
Total Liabilities 128,041 73,671
------- --------
MINORITY INTEREST IN AFFILIATES 506 2,788
--------- ---------
COMMITMENTS AND CONTINGENCIES (NOTE 7)
STOCKHOLDERS' EQUITY
Series A Cumulative Preferred Stock; 5,000,000 shares authorized; 2,334,165
shares issued and outstanding in 1999 and
1998 21,386 21,386
Common Stock par value $.01 per share; 25,000,000 shares
authorized; 9,999,754 shares issued and outstanding in 1999 and
5,599,754 shares issued and outstanding in 1998 100 56
Additional paid-in capital 68,376 58,052
Accumulated deficit (14,760) (16,862)
-------- --------
Stockholders' equity - net 75,102 62,632
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $203,649 $139,091
======= =======
<FN>
The accompanying notes are an integral part of the
financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HALLWOOD ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except per Share data)
For the Three Months Ended
September
30,
1999 1998
---- ----
REVENUES:
<S> <C> <C>
Gas revenue $ 10,580 $ 7,421
Oil revenue 5,063 2,626
Pipeline, facilities and other 1,208 1,067
Interest 92 241
---------- ---------
16,943 11,355
------- -------
EXPENSES:
Production operating 5,238 2,947
Facilities operating 148 136
General and administrative 1,738 1,104
Depreciation, depletion and amortization 6,423 4,617
Impairment of oil and gas properties 6,600
Interest 2,377 734
--------- ---------
15,924 16,138
------- -------
OTHER EXPENSES:
Equity in loss of HCRC 767
Minority interest in net income of affiliates 56 203
Litigation 375
------------ ---------
56 1,345
--------- --------
INCOME (LOSS) BEFORE INCOME TAXES 963 (6,128)
PROVISION FOR INCOME TAXES:
Current 156
Deferred 100
256
NET INCOME (LOSS) 707 (6,128)
PREFERRED DIVIDENDS 552 616
--------- ---------
NET INCOME (LOSS) ATTRIBUTABLE TO
COMMON SHAREHOLDERS $ 155 $ (6,744)
========= ========
NET INCOME (LOSS) PER SHARE - BASIC $ .02 $ (1.20)
========== =========
NET INCOME (LOSS) PER SHARE - DILUTED $ .02 $ (1.20)
========== =========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 10,000 5,600
======= ========
PRO FORMA INFORMATION ASSUMING PROVISION
FOR INCOME TAXES APPLIED RETROACTIVELY (NOTE 1)
Income (loss) before income taxes $ 963 $ (6,128)
Provision for income taxes
Net income (loss) $ 963 $ (6,128)
========= ========
Net income (loss) attributable to common shareholders $ 411 $ (6,744)
========= ========
Net income (loss) per share - basic $ .04 $ (1.20)
========== ==========
Net income (loss) per share - diluted $ .04 $ (1.20)
========== ==========
<FN>
The accompanying notes are an integral part of the
financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HALLWOOD ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except per Share data)
For the Nine Months Ended
September 30,
1999 1998
REVENUES:
<S> <C> <C>
Gas revenue $ 24,616 $ 21,159
Oil revenue 10,261 8,356
Pipeline, facilities and other 3,847 2,743
Interest 269 567
--------- ---------
38,993 32,825
------- -------
EXPENSES:
Production operating 11,728 9,008
Facilities operating 475 381
General and administrative 4,232 3,353
Depreciation, depletion and amortization 15,235 11,234
Impairment of oil and gas properties 9,200
Interest 4,468 1,927
-------- --------
36,138 35,103
------- -------
OTHER INCOME (EXPENSES):
Equity in loss of HCRC (419) (3,090)
Minority interest in net income of affiliates (252) (787)
Litigation 100 (930)
-------- --------
(571) (4,807)
-------- --------
INCOME (LOSS) BEFORE INCOME TAXES 2,284 (7,085)
PROVISION FOR INCOME TAXES:
Current 182
NET INCOME (LOSS) 2,102 (7,085)
PREFERRED DIVIDENDS 1,752 1,848
-------- --------
NET INCOME (LOSS) ATTRIBUTABLE TO
COMMON SHAREHOLDERS $ 350 $ (8,933)
========= ========
NET INCOME (LOSS) PER SHARE - BASIC $ .05 $ (1.60)
========== ========
NET INCOME (LOSS) PER SHARE - DILUTED $ .05 $ (1.60)
========== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 7,437 5,600
======== ========
PRO FORMA INFORMATION ASSUMING PROVISION
FOR INCOME TAXES APPLIED RETROACTIVELY (NOTE 1)
Income (loss) before income taxes $ 2,284 $ (7,085)
Provision for income taxes
Net income (loss) $ 2,284 $ (7,085)
======== ========
Net income (loss) attributable to common shareholders $ 532 $ (8,933)
========= ========
Net income (loss) per share - basic $ .07 $ (1.60)
========= =========
Net income (loss) per share - diluted $ .07 $ (1.60)
========= =========
<FN>
The accompanying notes are an integral part of the
financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HALLWOOD ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
For the Nine Months Ended
September 30,
1999 1998
OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $ 2,102 $ (7,085)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation, depletion and amortization 15,235 11,234
Impairment of oil and gas properties 9,200
Depreciation charged to affiliates 165 188
Equity in loss of HCRC 419 3,090
Minority interest in net income 252 787
Undistributed earnings of affiliates (1,176) (508)
Gain on asset disposals (188)
Amortization of deferred loan costs and debt discount 202 54
Noncash interest expense 15
Recoupment of take-or-pay liability (173) (99)
Changes in operating assets and liabilities provided (used) cash net of
noncash activity:
Oil and gas revenues receivable (2,673) 3,344
Trade receivables (2,216) (323)
Due from affiliates (3,863) (874)
Prepaid expenses and other current assets 371 (240)
Accounts payable and accrued liabilities (1,800) 1,548
-------- --------
Net cash provided by operating activities 6,845 20,143
-------- -------
INVESTING ACTIVITIES:
Additions to property, plant and equipment (3,498) (19,772)
Exploration and development costs incurred (7,037) (9,561)
Costs incurred in connection with the Consolidation (2,890)
Proceeds from sales of property, plant and equipment 143 189
Distributions received from affiliate 1,635 639
Other investing activities (21)
------------- ---------
Net cash used in investing activities (11,647) (28,526)
-------- --------
FINANCING ACTIVITIES:
Proceeds from long-term debt 6,000 24,500
Proceeds from equity offering net of syndication costs 16,517
Payments of long-term debt (2,000) (18,286)
Dividends paid (3,477) (7,072)
Payment of contract settlement (2,767)
Distributions paid by consolidated affiliates to minority interest (429) (1,200)
Exercise of options 199
Capital contribution 171
Syndication costs (47)
----------
Net cash provided by financing activities 47 12,062
---------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (4,755) 3,679
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD 11,874 6,622
------- --------
END OF PERIOD $ 7,119 $ 10,301
======== =======
<FN>
The accompanying notes are an integral part of the
financial statements.
</FN>
</TABLE>
<PAGE>
HALLWOOD ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - GENERAL
Hallwood Energy Corporation ("HEC" or the "Company") is a Delaware corporation
engaged in the development, exploration, acquisition and production of oil and
gas properties. HEC began operations June 8, 1999, in connection with the
consolidation ("Consolidation") of Hallwood Energy Partners, L.P. ("HEP") and
Hallwood Consolidated Resources Corporation ("HCRC") and the acquisition of the
direct energy interests of The Hallwood Group Incorporated ("Hallwood Group").
For accounting purposes, the Consolidation has been treated as a purchase by HEP
of the common stock of HCRC and the direct energy interests of Hallwood Group.
Accordingly, the assets and liabilities of HEP, including its 46% share of
assets and liabilities of HCRC owned prior to the Consolidation, have been
recorded at historical cost, and the remaining assets and liabilities of HCRC
and the direct energy interests of Hallwood Group have been recorded at
estimated fair values as of the date of purchase. All information presented for
periods prior to June 8, 1999 represents the historical information of HEP
because HEP is considered to be the acquiring entity for accounting purposes.
The financial statements for periods prior to June 8, 1999 have been
retroactively restated to reflect the corporate structure of HEC, and all share
and per share information assumes that the shares of HEC issued to HEP in
connection with the Consolidation were outstanding for all periods prior to June
8, 1999. The Company's properties are primarily located in the Rocky Mountain,
Mid-Continent, Greater Permian and Gulf Coast regions of the United States.
The following pro forma information presents the financial information of HEP,
HCRC and the direct property interests of Hallwood Group as if the Consolidation
had taken place on January 1 of each year presented.
<TABLE>
<CAPTION>
For the Three Months Ended September 30,
1999 1998
------------------------------------------------------------------------------------
As Acquired As Acquired
Reported Interests Pro Forma Reported Interests Pro Forma
(In thousands except per Share data)
<S> <C> <C> <C> <C> <C>
Revenues $16,943 $16,943 $11,355 $ 6,956 $ 18,311
Net income (loss) 707 707 (6,128) (4,576) (10,704)
Net income (loss)
attributable to
common
shareholders 155 155 (6,744) (4,576) (11,320)
Net income (loss)
per share - basic $ .02 $ .02 $ (1.20) $ (1.13)
======== ======= ======= ========
Net income (loss)
per share - diluted $ .02 $ .02 $ (1.20) $ (1.13)
======== ======= ======= ========
Production:
Gas (mcf) 5,476 5,476 3,802 2,394 6,196
Oil (bbl) 278 278 201 147 348
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
1999 1998
------------------------------------------------------------------------------------
As Acquired As Acquired
Reported Interests Pro Forma Reported Interests Pro Forma
(In thousands except per Share data)
<S> <C> <C> <C> <C> <C> <C>
Revenues $38,993 $11,971 $50,964 $32,825 $ 18,528 $ 51,353
Net income (loss) 2,102 (1,065) 1,037 (7,085) (15,655) (22,740)
Net income (loss)
attributable to
common
shareholders 350 (1,065) (715) (8,933) (15,655) (24,588)
Net income (loss)
per share - basic $ .05 $ (.07) $ (1.60) $ (2.46)
======== ======== ======= ========
Net income (loss)
per share - diluted $ .05 $ (.07) $ (1.60) $ (2.46)
======== ======== ======= ========
Production:
Gas (mcf) 13,016 4,097 17,113 10,463 5,937 16,400
Oil (bbl) 661 252 913 594 449 1,043
</TABLE>
The pro forma information shown above excludes any additional provision or
benefit for income taxes because of the Company's net operating loss
carryforwards and related valuation allowance.
The interim financial data are unaudited; however, in the opinion of management,
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 notes included in HEP's 1998 Annual Report
on Form 10-K.
Accounting Policies
Consolidation
HEC fully consolidates entities in which it owns a greater than 50% equity
interest and reflects a minority interest in the consolidated financial
statements.
Pro Forma Information
The pro forma information included in the statements of operations has been
presented to reflect the provision for income taxes, using statutory rates, as
though the Company had been a taxable corporation for all periods presented.
Because of the Company's net operating loss carryforwards and its recent
operating losses, it is assumed that the Company would have had a full valuation
allowance. Accordingly, no provision or benefit for income taxes has been
recorded in any period.
Computation of Net Income (Loss) Per Share
Basic income (loss) per share is computed by dividing net income (loss) by the
weighted average number of common shares outstanding during the periods. Diluted
income per common share includes the potential dilution that could occur upon
exercise of options or warrants to acquire common stock, computed using the
treasury stock method which assumes that the increase in the number of shares is
reduced by the number of shares which could have been repurchased by the Company
with the proceeds from the exercise of the options or warrants (which were
assumed to have been made at the average market price of the common shares
during the reporting period). The warrants described in Note 2 and the stock
options described in Note 4 have been ignored in the computation of diluted net
income (loss) per share because their inclusion would be antidilutive.
<PAGE>
The following table reconciles the number of shares outstanding used in the
calculation of basic and diluted income (loss) per share.
<TABLE>
<CAPTION>
Income
(Loss) Shares Per Share
(In thousands except per Share data)
For the Three Months Ended September 30, 1999
<S> <C> <C> <C>
Net income per share - basic $ 155 10,000 $ .02
------- ------- =======
Net income per share - diluted $ 155 10,000 $ .02
======= ======= =======
For the Nine Months Ended September 30, 1999
Net income per share- basic $ 350 7,437 $ .05
------- -------- ======
Net income per share- diluted $ 350 7,437 $ .05
======= ======== ======
For the Three Months Ended September 30, 1998
Net loss per share- basic $ (6,744) 5,600 $(1.20)
------- -------- =====
Net loss per share - diluted $ (6,744) 5,600 $(1.20)
======= ======== =====
For the Nine Months Ended September 30, 1998
Net loss per share - basic $ (8,933) 5,600 $(1.60)
------- -------- =====
Net loss per share - diluted $ (8,933) 5,600 $(1.60)
======= ======== =====
</TABLE>
Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities. SFAS 133 requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as (a) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment, (b)
a hedge of the exposure to variable cash flows of a forecasted transaction, or
(c) a hedge of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. The accounting for changes
in the fair value of a derivative (gains and losses) depends on the intended use
of the derivative and the resulting designation. The Company is required to
adopt SFAS 133 on January 1, 2001. The Company has not completed the process of
evaluating the impact that will result from adopting SFAS 133.
Reclassifications
Certain reclassifications have been made to the prior period amounts to conform
to the classifications used in the current period.
NOTE 2 - DEBT
On June 8, 1999, HEC and its lenders entered into an Amended and Restated Credit
Agreement (as amended, the "Credit Agreement") to extend the term date of its
line of credit to May 31, 2002. The lenders are Morgan Guaranty Trust Company,
First Union National Bank and Bank of America. The terms of the Credit Agreement
were amended on October 15, 1999, to, among other matters, increase HEC's
borrowing base to $90,000,000. At September 30, 1999, HEC had amounts
outstanding of $80,200,000. On October 22, 1999, HEC borrowed an additional
$7,000,000 to acquire certain oil and gas properties located principally in the
Yoakum Gorge area of Lavaca County, Texas (see Note 8). Therefore, HEC's unused
borrowing base totaled $2,800,000 at November 8, 1999.
<PAGE>
Borrowings against the Credit Agreement bear interest at the lower of the
Certificate of Deposit rate plus from 1.375% to 2.125%, prime plus 1/2% or the
Euro-Dollar rate plus from 1.25% to 2.0%. The applicable interest rate was
7.375% at September 30, 1999. Interest is payable monthly, and quarterly
principal payments, including repayments of the borrowing made subsequent to
September 30, 1999, of $12,457,000 commence May 31, 2002.
The borrowing base for the Credit Agreement is typically redetermined
semiannually, although the lenders have the right to make a redetermination at
anytime. The Credit Agreement is secured by a first lien on approximately 80% in
value of HEC's oil and gas properties. Additionally, aggregate dividends paid by
HEC in any 12 month period are limited to 50% of cash flow from operations
before working capital changes and distributions received from affiliates, if
the principal amount of debt of HEC is 50% or more of the borrowing base.
Aggregate dividends paid by HEC are limited to 65% of cash flow from operations
before working capital changes and distributions received from affiliates, if
the principal amount of debt is less than 50% of the borrowing base.
At the time of the Consolidation, HCRC had $25,000,000 of 10.32% Senior
Subordinated Notes ("Subordinated Notes") due December 23, 2007 and warrants to
purchase common stock which were held by The Prudential Insurance Company of
America ("Prudential"). On June 8, 1999, the Amended and Restated Subordinated
Note and Warrant Purchase Agreement (the "Note Agreement") was amended to issue
warrants to Prudential to purchase 309,278 shares of HEC's Common Stock at an
exercise price of $7.00 per share. The terms of the Note Agreement were further
amended on October 15, 1999 to exclude certain hedging transactions of the
subsidiaries of HEC from the calculation of indebtedness. The Subordinated Notes
bear interest at the rate of 10.32% per annum on the unpaid balance, payable
quarterly. Annual principal payments of $5,000,000 are due December 23, 2003
through December 23, 2007.
HEC recorded the Subordinated Notes and the warrants based upon the relative
fair values of the Subordinated Notes without the warrants and of the warrants
themselves at the time of Consolidation. The allocated value of the warrants of
$1,828,000 was recorded as additional paid-in-capital. The discount on the
Subordinated Notes is being amortized over the term of the Subordinated Notes
using the interest method of amortization.
As part of its risk management strategy, HEC enters into financial contracts to
hedge the interest rate payments under its Credit Agreement. HEC does not use
the hedges for trading purposes, but rather to protect against the volatility of
the cash flows under its Credit Agreement, which has a floating interest rate.
The amounts received or paid upon settlement of these transactions are
recognized as interest expense at the time the interest payments are due.
All contracts are interest rate swaps with fixed rates. As of September 30,
1999, HEC was a party to eight contracts with three different counterparties.
The following table provides a summary of HEC's financial contracts.
Average
Amount of Contract
Period Debt Hedged Floor Rate
Last three months of 1999 $45,000,000 5.65%
2000 45,000,000 5.65
2001 36,000,000 5.23
2002 37,500,000 5.23
2003 37,500,000 5.23
2004 6,000,000 5.23
<PAGE>
NOTE 3 - STATEMENTS OF CASH FLOWS
In connection with the Consolidation, the purchase of the common stock of HCRC
and the direct energy interests of Hallwood Group was recorded through the
issuance of approximately 2,600,000 shares of HEC common stock to HCRC and
1,800,000 shares of HEC common stock to Hallwood Group based on the estimated
fair value of the assets acquired and the liabilities assumed as of the date of
purchase. This noncash investing activity is summarized as follows:
Fair Value of
Acquired Interest
(In thousands)
Current assets $ 4,823
Oil and gas properties - net 81,348
Other assets 1,140
Current liabilities (2,587)
Long-term debt (49,672)
Other noncurrent liabilities (62)
At the time of the Consolidation, HEC recorded the allocated value of the
warrants, described in Note 2, as $1,828,000 in additional paid-in-capital which
represented a noncash financing transaction during the first nine months of
1999.
Cash paid for interest during the nine months ended September 30, 1999 and 1998
was $4,251,000 and $1,845,000, respectively.
NOTE 4 - STOCK OPTION GRANT
On June 9, 1999, HEC granted options to purchase 600,000 shares of common stock
at an exercise price of $7.00 per share which was equal to the fair market value
of the common stock on the date of grant. The options expire on June 9, 2006,
unless sooner terminated pursuant to the provisions of the plan. One-third of
the options are vested, and the remainder vest one-third on June 8, 2000 and
one-third on June 8, 2001.
NOTE 5 - CAPITAL STOCK
HEC's stock trades on the NASDAQ under the symbol "HECO" for Common Stock and
"HECOP" for Series A Cumulative Preferred Stock.
Common Stock
Under its charter, HEC is authorized to issue up to 25,000,000 shares of HEC
common stock with a par value of $.01 per share. The common shareholders are
entitled to one vote per share on all matters voted on by shareholders. After
giving effect to any preferential rights of any series of preferred stock
outstanding, the holders of HEC common stock are entitled to participate in
dividends, if any, as may be declared from time to time by the board of
directors of HEC. Upon liquidation, the common shareholders are entitled to
receive a pro rata share of all of the assets of HEC that are available for
distribution to such holders. The holders of HEC common stock have no preemptive
rights with respect to future issuances of HEC common stock.
Preferred Stock
HEC is authorized to issue up to 5,000,000 shares of preferred stock from time
to time, in one or more series, without shareholder approval and to fix the
designation, preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption of any series that may be established by the HEC board
of directors.
<PAGE>
In connection with the Consolidation, the board of directors of HEC has
authorized the issuance of 2,334,165 shares of Series A cumulative preferred
stock. Each share of preferred stock is entitled to one vote on all matters on
which shareholders may vote. The preferred shareholders vote together with the
common shareholders in the election of directors and vote as a separate class on
all other matters.
Preferred shareholders are entitled to receive cumulative cash dividends at the
rate of $1.00 per share per year, if declared by the HEC board of directors.
Dividends are paid quarterly in arrears commencing on June 30, 1999. The
dividends are fully cumulative and accumulate, whether or not earned or declared
and whether or not HEC has funds legally available to pay them, without interest
on a daily basis. HEC may not declare or pay dividends to common shareholders
unless full cumulative dividends have been paid on the preferred stock.
Upon liquidation or dissolution of HEC, all accrued dividends must be paid to
the preferred shareholders before any assets may be distributed to the common
shareholders. Once all accrued preferred dividends are paid, the preferred
shareholders are entitled to participate equally with the common shareholders in
the distribution of the remaining assets of HEC in a liquidation or dissolution.
The HEC preferred stock is redeemable at the option of HEC after December 31,
2003. After that date, HEC may redeem shares of preferred stock in whole or in
part at any time at a redemption price of $10.00 per share, plus accrued
dividends which are unpaid on the redemption date. Preferred stock may not be
redeemed in part if full cumulative dividends have not been paid or set aside
for payment with respect to all prior dividend periods.
Rights Plan
During the second quarter of 1999, the board of directors of HEC approved the
adoption of a rights plan designed to protect shareholders in the event of a
takeover action that would otherwise deny them the full value of their
investment.
Under the terms of the rights plan, one right was distributed for each common
share of HEC to holders of record at the close of business on June 8, 1999. The
rights trade with the common stock. The rights will become exercisable only in
the event, with certain exceptions, that an acquiring party accumulates 15% or
more of HEC's outstanding common stock. The rights will expire on June 7, 2009.
HEC will generally be entitled to redeem the rights at one cent per right at any
time until the tenth day following the acquisition of a 15% position in its
common shares.
NOTE 6 - ARBITRATION
In connection with the Demand for Arbitration filed by Arcadia Exploration and
Production Company ("Arcadia") with the American Arbitration Association against
Hallwood Energy Partners, L.P., Hallwood Consolidated Resources Corporation,
E.M. Nominee Partnership Company and Hallwood Consolidated Partners, L.P.
(collectively referred to as "Hallwood"), the arbitrators ruled that the
original agreement entered into in August 1997 to purchase oil and gas
properties for $16,400,000 should proceed, with a reduction to the total
purchase price of approximately $2,500,000 for title defects. The arbitrators
also ruled that Arcadia was not entitled to enforce its claim that Hallwood was
required to purchase an additional $8,000,000 worth of properties and denied
Arcadia's claim for attorneys' fees. The arbitrators granted Arcadia prejudgment
interest on the adjusted purchase price, in the amount of $904,000 of which HEP
paid $452,000. That amount was accrued in the December 31, 1998 financial
statements of the Company and was paid during the second quarter of 1999.
In October 1998, HEP and its affiliate, HCRC, closed the acquisition of oil and
gas properties from Arcadia, including interests in approximately 570 wells,
numerous proven and unproven drilling locations, exploration acreage, and 3-D
seismic data. HEP's share of the purchase price was $8,200,000.
<PAGE>
NOTE 7 - LEGAL SETTLEMENTS
In connection with the Consolidation, HEC assumed the liability for two lawsuits
filed against Hallwood Group and certain individuals and related to the direct
energy interests acquired from Hallwood Group. These lawsuits, both filed in
federal court in Denver, Colorado, have been settled, and payment of the
settlement amount and dismissal of the cases will occur thirty days after the
court has given final approval for the settlement. HEC is obligated to pay
approximately $650,000 in connection with these lawsuits, and that amount was
accrued as a liability on the Company's balance sheet in connection with the
Consolidation. It is anticipated that the court will give its final approval for
the settlement prior to the end of 1999.
Concise Oil and Gas Partnership ("Concise"), a wholly owned subsidiary of the
Company, was a defendant in a lawsuit styled Dr. Allen J. Ellender, Jr. et al.
vs. Goldking Production Company, et al., filed in the Thirty-Second Judicial
District Court, Terrebonne Parish, Louisiana on May 30, 1996. The portion of the
lawsuit against Concise was settled in consideration of the payment by Concise
of $600,000. This amount was recorded as litigation settlement expense in the
second quarter of 1998. Concise has been dismissed with prejudice from the
lawsuit.
In addition to the litigation noted above, the Company and its subsidiaries are
from time to time subject to routine litigation and claims incidental to their
business, which the Company believes will be resolved without material effect on
the Company's financial condition, cash flows or operations.
NOTE 8 - SUBSEQUENT EVENT
On October 20, 1999, HEC acquired oil and gas properties located principally in
the Yoakum Gorge area of Lavaca County, Texas for $7,300,000 and future
contingent consideration.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
HEC began operations on June 8, 1999, in connection with the Consolidation of
HEP and HCRC and the acquisition of the direct property interests of Hallwood
Group. For accounting purposes, the Consolidation has been treated as a purchase
by HEP of the common stock of HCRC and the direct energy interests of Hallwood
Group. Therefore, the quarter ended September 30, 1999, was the first full
quarter after the Consolidation and generally accepted accounting principles
require reporting of results on a basis that makes it difficult to compare to
prior years. Therefore, this Overview provides certain information on both GAAP
basis and on a pro forma basis as if the Consolidation had been completed on
January 1, 1998.
In October 1999, as a result of a sudden increase in water production, HEC
temporarily suspended production in the A.L. Boudreaux well located in the Scott
Field of Lafayette Parish, Louisiana in order to plug back several water
producing intervals and to attempt to open additional producing formation within
the Bol Mex 3 Zone. Stabilized production rates are expected in the range of 8
to 10 mmcfd and 160 to 200 bopd, which fall below pre-workover rates. Precise
results from the recompletion are not yet available, however, HEC expects to
quantify the extent of revisions by year-end. The G.S. Boudreaux well, also
located in the Scott Field, stopped producing in early October 1999, after
experiencing significant increased water production.
<PAGE>
Pro Forma Results
On a pro forma basis, revenues decreased approximately 7% and production
decreased approximately 14% for the third quarter of 1999 compared to the third
quarter of 1998 and revenues decreased approximately 1% for the first nine
months of 1999 compared to the first nine months of 1998.
The pro forma decrease in revenues and production during the third quarter of
1999 is primarily attributable to lower production from the A. L. Boudreaux and
G.S. Boudreaux wells in South Louisiana, as previously reported. Although the
decline in production from these wells occurred earlier than was projected, the
Company has been planning for the eventual depletion of these wells for several
years. The recently announced acquisition of additional Lower Wilcox interests
from Seisgen Exploration, Inc. ("Seisgen") brought HEC into a play that has
wells similar in productivity to its A. L. Boudreaux well. The 1998 repurchase
of a volumetric production payment in 34 coal bed methane wells located in La
Plata County, Colorado, has resulted in the San Juan Basin becoming HEC's most
significant producing area. In the third quarter of 1999, the San Juan Basin
comprised 41% of HEC's production, in contrast to South Louisiana, which, in
total, comprised only 17% of HEC's production. As a result of this activity, the
Company's fourth quarter production is expected to be substantially equivalent
to third quarter levels.
GAAP Results
On a GAAP basis, as described in greater detail in the remainder of this
discussion, revenues and production increased significantly from the third
quarter and first nine months of 1998 to the same periods in 1999, primarily
because the Consolidation is treated as a purchase by HEP of the assets of HCRC
and the energy interests of The Hallwood Group Incorporated.
Liquidity and Capital Resources
The following information presented for periods prior to June 8, 1999 represents
the historical information of HEP because HEP is considered to be the acquiring
entity for accounting purposes.
Cash Flow
HEC had $6,845,000 of cash flow from operating activities during the first nine
months of 1999.
The other primary cash inflows were:
o Proceeds from long-term debt of $6,000,000; and
o Distributions received from affiliate of $1,635,000;
Cash was used primarily for:
o Additions to property and development costs incurred of $10,535,000;
oCosts incurred in connection with the Consolidation of $2,890,000;
o Dividends to shareholders of $3,477,000.
o Payments of long-term debt of $2,000,000.
When combined with miscellaneous other cash activity during the period, the
result was a decrease of $4,755,000 in HEC's cash from $11,874,000 at December
31, 1998 to $7,119,000 at September 30, 1999.
<PAGE>
Exploration and Development Projects and Acquisitions
Since HEP is considered to be the acquiring entity for accounting purposes, the
expenditures discussed below represent the costs incurred by HEP prior to June
8, 1999 plus the costs incurred on a consolidated basis subsequent to June 8,
1999.
Through September 30, 1999, HEC incurred $10,535,000 in direct property
additions, development, exploitation, and exploration costs. The costs were
comprised of $3,498,000 for property acquisitions and approximately $7,037,000
for domestic exploration and development. HEC's 1999 capital budget was
initially set at $13,540,000 but was subsequently increased to $20,540,000
($24,000,000 including HCRC's capital expenditures prior to the Consolidation)
to allow for the purchase of certain of Seisgen's oil and gas interests
discussed below. The acquisition in October 1999 and the significant capital
expenditures through September 30, 1999 are as follows:
Rocky Mountain Region
During the first nine months of 1999, HEC expended approximately $3,553,000 of
its capital budget in the Rocky Mountain Region located in Colorado, Montana,
North Dakota, Northwest New Mexico and Wyoming. Of this amount, approximately
$676,500 was spent for the purchase of overriding royalty interests and working
interests in 18 coal bed methane properties already operated by HEC, located in
San Juan County, New Mexico. Most of the interests purchased qualify for tax
credits under Section 29 of the Internal Revenue Code. In order to monetize
these credits, the majority of the acquired interests were sold to 44 Canyon LLC
("44 Canyon"), a special purpose entity owned by a large East Coast financial
institution, by HEC in exchange for cash, a production payment, and promissory
notes. HEC's activity in the area began in 1990. The production payment from the
sale to 44 Canyon increased HEC's net current average daily production by 950
mcf per day.
In the third quarter of 1999, HEC expended approximately $1,372,000 drilling
three infill Dakota/Morrison gas wells, which are operated by HEC, in Garfield
County, Colorado. HEC anticipates all three wells will begin sales production in
November of 1999 at a combined rate of 2,300 mcf per day. HEC's current working
interest in the three wells is 100%.
In the second quarter of 1999, HEC installed an additional gas-gathering
pipeline in LaPlata County, Colorado. HEC anticipates that the additional line
will help lower system pressures and will increase production by 1,000 mcf per
day. HEC's costs incurred in 1999 for the additional pipeline are approximately
$266,000. Also, additional water disposal capacity is scheduled for completion
in the fourth quarter of 1999.
Gulf Coast Region
During 1999, HEC made a property acquisition for $7,300,000 and expended
approximately $4,848,000 of its capital budget in the Gulf Coast Region in
Louisiana and South and East Texas. The following are major projects within the
region.
In October 1999, HEC acquired from Seisgen, interests in 34 wells having current
net production of 4,500 mcf per day and 3.5 bcf of proven reserves. The proved
reserves have a present value, discounted at 10%, of $6,200,000 using
non-escalated prices of $2.50 mcf of gas and $18.50 per barrel of oil. HEC also
acquired significant non-producing reserves including drilling locations,
exploration acreage, and 3-D seismic data having an estimated value of
$2,200,000. The assets are located principally in the Yoakum Gorge area of
Lavaca County, Texas. These assets were acquired for $7,300,000 and future
contingent considerations. HEC believes that the acquisition has significant
potential upside value and will expand opportunities in an area where HEC has
been active since 1998.
Discussed below are HEC's current projects relating to Yoakum Gorge.
Yoakum Gorge Project. During the first nine months of 1999, HEC incurred
approximately $1,805,000 for costs associated with five non-operated directional
exploration wells testing the Wilcox Steven sands in Lavaca County, Texas. One
well drilled in 1998 and two additional wells drilled in 1999 are currently
producing, one well is currently drilling, and another well is waiting on
completion. The average rate of the producers to date is approximately 25,000
mcf per day. HEC has a working interest of 26.7% in the well. With the
additional opportunities provided by the acquisition from Seisgen, HEC
anticipates continued activity in the area.
<PAGE>
Bell Prospect. In 1998, HEC drilled one successful well within the Bell prospect
located in Houston County, Texas. HEC is currently sidetracking another well to
develop reserves in the Buda formation. In addition, HEC will be testing the
Georgetown formation in the same wellbore. Also, in the fourth quarter of 1999,
HEC plans to drill a proved undeveloped well in the area. HEC's costs incurred
in 1999 are approximately $413,000 for all costs associated with this prospect.
Mirasoles Project. In 1998, HEC began drilling a 17,000-foot Frio Formation
exploration well located in Kenedy County, Texas. Eight prospective horizons
were identified while drilling this large structural prospect defined by 63
miles of proprietary 3-D seismic data. Testing the deepest and highest potential
zone was not possible due to mechanical problems. HEC tested three shallower
zones, but found only subcommercial oil. In 1999, HEC incurred approximately
$1,400,000 related to this project and HEC operates the well and owns a 35%
working interest in the well. The well is temporarily abandoned and HEC is
currently investigating the possibility of another attempt to complete the
deepest zone. Evaluation is underway to determine the likelihood of the deep
zone being a gas-bearing zone.
Boca Chica Project. In 1999, HEC incurred approximately $410,000 for seismic and
all costs associated with its participation in an exploration well, which was
directionally drilled from the shore to a bottom hole location under the waters
of the Gulf of Mexico. This 10,000-foot exploration well in the Big Hum
formation tested wet, yet the exploration results were sufficiently encouraging
that working interest owners shot 3-D seismic over the area in the third quarter
of 1999. Subject to favorable 3-D seismic interpretation, HEC anticipates that
in the first quarter of 2000, it will make a second drilling attempt by either
reentering the existing wellbore or using a shallow-water drilling rig. HEC owns
a 25% working interest in the well.
Louisiana. HEC is planning to re-enter the G.S. Boudreaux wellbore and
directionally drill the well to an updip position to explore for Marg Tex Sand
production in an adjacent fault block. HEC also anticipates drilling the
alternate unit development well in the G.S. Boudreaux Unit approximately 1,000
feet updip to develop the Bol Mex 3 attic gas. This action should have the
effect of increasing recoverable reserves from the unit as well as accelerating
the associated cash flow.
Other
The remaining $2,134,000 of HEC's capital expenditures incurred in 1999 relate
principally to technical general and administrative expenditures and numerous
other projects which are completed or underway and which are individually less
significant.
Future Plans
HEC is planning to sell its interests in approximately 500 non-strategic oil and
gas wells over the next several months. These sales are being made in an effort
to better focus the Company on its core areas of Colorado, Utah, New Mexico,
Texas and Louisiana and at the same time, reduce its level of debt. These wells
represent approximately 34% of HEC's total well count, and approximately 11% of
HEC's reserve value. Proceeds from the sales will be used to reduce debt.
Although HEC does not anticipate depletion replacement for 1999, HEC anticipates
a capital budget for 2000 in the range of $24,000,000.
Dividends
On September 20, 1999, HEC declared a quarterly dividend of $.25 per Series A
Cumulative Preferred share, payable on November 15, 1999 to shareholders of
record on September 30, 1999.
The Series A Cumulative Preferred Stock has a dividend preference of $1.00 per
share per year. HEC may not declare or pay dividends to common shareholders
unless full cumulative dividends have been paid on the preferred stock.
<PAGE>
Financing
On June 8, 1999, HEC and its lenders entered into an Amended and Restated Credit
Agreement (as amended, the "Credit Agreement") to extend the term date of its
line of credit to May 31, 2002. The lenders are Morgan Guaranty Trust Company,
First Union National Bank and Bank of America. The terms of the Credit Agreement
were amended on October 15, 1999, to, among other matters, increase HEC's
borrowing base to $90,000,000. At September 30, 1999, HEC had amounts
outstanding of $80,200,000. On October 22, 1999, HEC borrowed an additional
$7,000,000 to acquire certain oil and gas properties from Seisgen as described
above. Therefore, HEC's unused borrowing base totaled $2,800,000 at November 8,
1999.
Borrowings against the Credit Agreement bear interest at the lower of the
Certificate of Deposit rate plus from 1.375% to 2.125%, prime plus 1/2% or the
Euro-Dollar rate plus from 1.25% to 2.0%. The applicable interest rate was
7.375% at September 30, 1999. Interest is payable monthly, and quarterly
principal payments, including repayments of the borrowing made subsequent to
September 30, 1999, of $12,457,000 commence May 31, 2002.
The borrowing base for the Credit Agreement is typically redetermined
semiannually, although the lenders have the right to make a redetermination at
anytime. The Credit Agreement is secured by a first lien on approximately 80% in
value of HEC's oil and gas properties. Additionally, aggregate dividends paid by
HEC in any 12 month period are limited to 50% of cash flow from operations
before working capital changes and distributions received from affiliates, if
the principal amount of debt of HEC is 50% or more of the borrowing base.
Aggregate dividends paid by HEC are limited to 65% of cash flow from operations
before working capital changes and distributions received from affiliates, if
the principal amount of debt is less than 50% of the borrowing base.
At the time of the Consolidation, HCRC had $25,000,000 of 10.32% Senior
Subordinated Notes ("Subordinated Notes") due December 23, 2007 and warrants to
purchase common stock which were held by The Prudential Insurance Company of
America ("Prudential"). On June 8, 1999, the Amended and Restated Subordinated
Note and Warrant Purchase Agreement (the "Note Agreement") was amended to issue
warrants to Prudential to purchase 309,278 shares of HEC's Common Stock at an
exercise price of $7.00 per share. The terms of the Note Agreement were further
amended on October 15, 1999 to exclude certain hedging transactions of the
subsidiaries of HEC from the calculation of indebtedness. The Subordinated Notes
bear interest at the rate of 10.32% per annum on the unpaid balance, payable
quarterly. Annual principal payments of $5,000,000 are due December 23, 2003
through December 23, 2007.
HEC recorded the Subordinated Notes and the warrants based upon the relative
fair values of the Subordinated Notes without the warrants and of the warrants
themselves at the time of Consolidation. The allocated value of the warrants of
$1,828,000 was recorded as additional paid-in-capital. The discount on the
Subordinated Notes is being amortized over the term of the Subordinated Notes
using the interest method of amortization.
For 1999, the Company had established an initial capital budget of $13,540,000
but as a result of the acquisition from Seisgen and other capital expenditures
added throughout the year, it is estimated that the total capital expenditures
for 1999 will be $20,540,000 ($24,000,000 including HCRC's capital expenditures
prior to the Consolidation). HEC's preliminary estimates indicate that its
capital budget for 2000 will be in the range of $24,000,000. These budgets are
subject to further revision to reflect future developments. They may be impacted
by oil and gas price levels, future redeterminations of the borrowing base under
the Credit Agreement, proceeds from asset sales and other factors.
As part of its risk management strategy, HEC enters into financial contracts to
hedge the interest rate payments under its Credit Agreement. HEC does not use
the hedges for trading purposes, but rather to protect against the volatility of
the cash flows under its Credit Agreement, which has a floating interest rate.
The amounts received or paid upon settlement of these transactions are
recognized as interest expense at the time the interest payments are due.
All contracts are interest rate swaps with fixed rates. As of September 30,
1999, HEC was a party to eight contracts with three different counterparties.
<PAGE>
The following table provides a summary of HEC's financial contracts.
Average
Amount of Contract
Period Debt Hedged Floor Rate
Last three months of 1999 $45,000,000 5.65%
2000 45,000,000 5.65
2001 36,000,000 5.23
2002 37,500,000 5.23
2003 37,500,000 5.23
2004 6,000,000 5.23
Issues Related to the Year 2000
General. The following Year 2000 statements constitute a Year 2000 Readiness
Disclosure within the meaning of the Year 2000 Information and Readiness
Disclosure Act of 1998. The Year 2000 problem has arisen because many existing
computer programs use only the last two digits to refer to a year. Therefore,
these computer programs do not properly recognize and process date-sensitive
information beyond 1999. In general, there are two areas where Year 2000
problems may exist for the Company: information technology such as computers,
programs and related systems ("IT") and non-information technology systems such
as embedded technology on a silicon chip ("Non IT").
The Plan. The Company's Year 2000 Plan (the "Plan") has four phases: (i)
assessment, (ii) inventory, (iii) remediation, testing and implementation and
(iv) contingency plans. Approximately twenty-one months ago, the Company began
its phase one assessment of its particular exposure to problems that might arise
as a result of the new millennium. The assessment and inventory phases have been
substantially completed and have identified the Company's IT systems that must
be updated or replaced in order to be Year 2000 compliant. Remediation, testing
and implementation was substantially completed on September 30, 1999, and the
contingency plans phase of the Plan is scheduled to be completed by November 30,
1999.
However, the effects of the Year 2000 problem on IT systems are exacerbated
because of the interdependence of computer systems in the United States. The
Company's assessment of the readiness of third parties whose IT systems might
have an impact on the Company's business has thus far not indicated any material
problems; responses have been received to approximately 70% of the inquiries
made.
With regard to the Company's Non IT systems, the Company believes that most of
these systems can be brought into compliance on schedule. Because Non IT systems
are embedded chips, it is difficult to determine with complete accuracy where
all such systems are located. However, to the best knowledge of management, the
Company's assessment of third party readiness is complete.
Estimated Costs. Although it is difficult to estimate the total costs of
implementing the Plan through January 1, 2000 and beyond, the Company's
preliminary estimate is that such costs will not be material. To date, the
Company has determined that its IT systems are either compliant or can be made
compliant for less than $40,000. However, although management believes that its
estimates are reasonable, there can be no assurance, for the reasons stated in
the next paragraph, that the actual cost of implementing the Plan will not
differ materially from the estimated costs.
Potential Risks. The failure to correct a material Year 2000 problem could
result in an interruption in, or a failure of, certain normal business
activities or operations. This risk exists both as to the Company's IT and Non
IT systems, as well as to the systems of third parties. Such failures could
materially and adversely affect the Company's results of operations, cash flow
and financial condition. Due to the general uncertainty inherent in the Year
2000 problem, resulting in large part from the uncertainty of the Year 2000
readiness of third party suppliers, vendors and transporters, the Company is
unable to determine at this time whether the consequences of Year 2000 failures
will have a material impact on the Company's results of operations, cash flow or
financial condition. Primarily because of its reliance on third party suppliers,
the Company is not currently able to determine the consequences of Year 2000
failures, however, its current assessment is that its area of greatest potential
risk in its third party relationships is in connection with the transporting and
marketing of the oil and gas produced by the Company. The Company has contacted
the various purchasers and pipelines with which it regularly does business to
determine their state of readiness for the Year 2000. Although in general the
purchasers and pipelines contacted will not guaranty their state of readiness,
to date, none have indicated that they expect to encounter any serious problems.
The Company believes that in a worst case scenario, the failure of its
purchasers and transporters to conduct business in a normal fashion could have a
material adverse effect on cash flow for a period of six to nine months.
Cautionary Statement Regarding Forward-Looking Statements. The dates for
completion of the phases of the Year 2000 Plan are based on the Company's best
estimates, which were derived using numerous assumptions of future events. Due
to the general uncertainty inherent in the Year 2000 problem, resulting in part
from the uncertainty of the Year 2000 readiness of third-parties and the
interconnection of computer systems, the Company cannot ensure its ability to
timely and cost-effectively resolve problems associated with the Year 2000 issue
that may affect its operations and business. Accordingly, shareholders and
potential investors are cautioned that certain events or circumstances could
cause actual results to differ materially from those projected, estimated or
predicted.
Cautionary Statement Regarding Forward-Looking Statements
In the interest of providing the shareholders with certain information regarding
the Company's future plans and operations, certain statements set forth in this
Form 10-Q relate to management's future plans and objectives. Such statements
are forward-looking statements within the meanings of Section 27A of the
Securities Act of 1933, as amended, and 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 Company are, to the
knowledge and in the judgment of the officers and directors of the Company,
expected to prove true and 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 Company's actual performance
and financial results in future periods to differ materially from any
projection, estimate or forecasted result. Please refer to the Company's
Registration Statement dated May 4, 1999, SEC file #333-77409 for additional
statements concerning important factors that could cause actual results to
differ materially from the Company's expectations. These risks and uncertainties
include, among other things, volatility of oil and gas prices, competition,
risks inherent in the Company's oil and gas operations, risk of mechanical
failure, the inexact nature of interpretation of seismic and other geological
and geophysical data, imprecision of reserve estimates, the availability of
capital, the Company's ability to replace and expand oil and gas reserves, and
such other risks and uncertainties described from time to time in the Company's
periodic reports and filings with the Securities and Exchange Commission.
Accordingly, shareholders and potential investors are cautioned that certain
events or circumstances could cause actual results to differ materially from
those projected, estimated or predicted.
Inflation and Changing Prices
Prices
Prices obtained for oil and gas production depend upon numerous factors that are
beyond the control of HEC, 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, with a distinct downward
trend in both oil and gas prices occurring in the calendar year 1998 and through
the first quarter of 1999. Prices began to rebound in April 1999. The following
table presents the weighted average prices received each quarter by HEC and the
effects of the hedging transactions discussed below.
<PAGE>
<TABLE>
<CAPTION>
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)
(per bbl) (per bbl) (per mcf) (per mcf)
<S> <C> <C> <C> <C> <C>
First quarter - 1998 $14.80 $15.30 $2.11 $2.07
Second quarter - 1998 13.03 13.82 2.08 2.06
Third quarter - 1998 12.19 13.06 1.85 1.95
Fourth quarter - 1998 11.12 12.29 1.96 2.02
First quarter - 1999 11.33 11.41 1.65 1.81
Second quarter - 1999 15.99 15.70 1.93 1.91
Third quarter - 1999 20.22 18.21 2.25 1.95
</TABLE>
As part of its risk management strategy, HEC enters into 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 amounts
received or paid upon settlement of hedge contracts are recognized as oil or gas
revenue at the time the hedged volumes are sold.
The financial contracts used by HEC to hedge the price of its oil and natural
gas production are swaps, collars and participating hedges. Under the swap
contracts, HEC sells its oil and gas production at spot market prices and
receives or makes payments based on the differential between the contract price
and a floating price which is based on spot market indices. As of October 26,
1999, HEC was a party to 38 financial contracts with four different
counterparties.
HEC's philosophy is to use derivatives to provide a measure of stability in the
volatile price environment of oil and gas, and to furnish an element of
predictability in the cash flow of the Company. In general, the Company will
hedge up to 50%, on a total equivalent volume basis, of its oil and gas
production for the next two forward years, and 30% for each of the three years
thereafter. The Company does not ordinarily intend to hedge more than 65% of any
one commodity. In addition, HEC will, in most cases, enter into transactions
with minimum fixed prices for the production subject to the contracts. This
philosophy may be modified as circumstances require.
The following tables provide a summary of HEC's outstanding financial contracts:
Oil Contract
Percent of Production Delivered
Period Hedged Floor Price
(per bbl)
Last three months of 1999 48% $15.30
2000 26 17.00
Approximately 7% of the oil volumes hedged for the remainder of 1999 are subject
to a participating hedge under which HEC will receive the contract price if the
posted futures price is lower than the contract price, and will receive the
contract price plus 25% of the difference between the contract price and the
posted futures price if the posted futures price is greater than the contract
price. Additionally, 7% of the volumes hedged for the remainder of 1999 are
subject to a collar agreement whereby HEC 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 delivered cap price. The cap prices range from $16.50 to
$18.35.
<PAGE>
Gas Contract
Percent of Production Delivered
Period Hedged Floor Price
(per mcf)
Last three months of 1999 66% $2.00
2000 45 2.04
2001 43 2.06
2002 33 2.04
Between 7% and 13% of the gas volumes hedged in each year are subject to a
collar agreement under which HEC 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 $2.63 per mcf to
$2.80 per mcf.
During the fourth quarter through October 26, 1999, the weighted average oil
price (for barrels not hedged) was approximately $21.00 per barrel. The weighted
average price of natural gas (for mcf not hedged) during that period was
approximately $2.65 per mcf.
Inflation
Inflation did not have a material impact on HEC in 1998 and is not anticipated
to have a material impact in 1999.
Results of Operations
For accounting purposes, the Consolidation has been treated as a purchase by HEP
of the common stock of HCRC and the direct energy interests of Hallwood Group.
Accordingly, all information presented for periods prior to June 8, 1999
represents the historical information of HEP because HEP is considered to be the
acquiring entity for accounting purposes.
Third Quarter of 1999 Compared to Third Quarter of 1998
The following table is presented to contrast HEC's oil and gas price and
production for discussion purposes. Significant fluctuations are discussed in
the accompanying narrative.
1999 1998
---- ----
Gas
Production (mcf) 5,476,000 3,802,000
Price (per mcf) $ 1.95 $ 1.95
Oil
Production (bbl) 278,000 201,000
Price (per bbl) $18.21 $13.06
Gas Revenue
Gas revenue increased $3,159,000 during the third quarter of 1999 compared with
the third quarter of 1998. The increase is the result of an increase in
production from 3,802,000 mcf in 1998 to 5,476,000 mcf in 1999. The average gas
price remained constant at $1.95 per mcf in 1998 and in 1999. The increase in
production is primarily due to the Consolidation which caused an increase in gas
production of 2,245,000 mcf. This increase was partially offset by a decrease in
production primarily due to a production decline on two wells in Louisiana
caused by increased rates of water production and normal production declines.
<PAGE>
The effect of HEC's hedging transactions as described under "Inflation and
Changing Prices," during the third quarter of 1999, was to decrease HEC's
average gas price from $2.25 per mcf to $1.95 per mcf, representing a $1,642,800
decrease in revenue from hedging transactions.
Oil Revenue
Oil revenue increased $2,437,000 during the third quarter of 1999 compared with
the third quarter of 1998. The increase is the result of an increase in the
average oil price from $13.06 per barrel in 1998 to $18.21 in 1999, and an
increase in production from 201,000 barrels in 1998 to 278,000 barrels in 1999.
The increase in oil production is primarily due to the Consolidation which
caused an increase in oil production of 123,000 barrels. This increase was
partially offset by a decrease in production primarily due to a production
decline on two wells in Louisiana caused by increased rates of water production
and normal production declines.
The effect of HEC's hedging transactions during the third quarter of 1999 was to
decrease HEC's average oil price from $20.22 per barrel to $18.21 per barrel,
resulting in a $558,800 decrease 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 related to certain wells in San Juan
County, New Mexico and LaPlata County, Colorado. Pipeline, facilities and other
revenue increased $141,000 during the third quarter of 1999 compared with the
third quarter of 1998. The net increase is primarily comprised of additional
revenue from the Consolidation partially offset by a decrease in incentive
payment income due to a one-time adjustment relating to gas measurements made in
prior periods.
Interest Income
Interest income decreased $149,000 during the third quarter of 1999 compared
with the third quarter of 1998 due to a lower average cash balance during 1999.
Production Operating
Production operating expense increased $2,291,000 during the third quarter of
1999 compared with the third quarter of 1998. The majority of the increase is
the result of the Consolidation.
General and Administrative
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 HEC.
These expenses increased $634,000 during the third quarter of 1999 primarily as
a result of the Consolidation.
Depreciation, Depletion and Amortization Expense
Depreciation, depletion and amortization expense increased $1,806,000 during the
third quarter of 1999 compared with the third quarter of 1998. The increase is
primarily the result of higher capitalized costs and a higher depletion rate in
1999 due to the increase in production primarily caused by the Consolidation.
Impairment of Oil and Gas Properties
Impairment of oil and gas properties during the third quarter of 1998 represents
the impairment recorded because capitalized costs at September 30, 1998 exceeded
the present value (discounted at 10%) of estimated future net revenues from
proved oil and gas reserves, based on prices of $12.80 per barrel of oil and
$1.90 per mcf of gas.
<PAGE>
Interest
Interest expense increased $1,643,000 during the third quarter of 1999 compared
with the third quarter of 1998 due to a higher average outstanding debt balance
during 1999.
Equity in Loss of HCRC
Equity in loss of HCRC decreased to zero during the third quarter of 1999,
compared with the third quarter of 1998, as a result of the Consolidation.
Minority Interest in Net Income of Affiliates
Minority interest in net income of affiliates represents unaffiliated partners'
interest in the net income of the May Partnerships. The decrease of $147,000
during the third quarter of 1999 compared with the third quarter of 1998 is
primarily due to the liquidation of three of the six May Partnerships on March
31, 1999.
Litigation
Litigation expense during the third quarter of 1998 is comprised of the costs
related to the Arcadia arbitration described in Note 6 of the accompanying
financial statements.
Provision for Income Taxes
On June 8, 1999, in connection with the Consolidation, HEC began operations as a
taxable entity. Prior to the Consolidation, HEP was a partnership and was not
subject to federal income tax. The provision for income taxes during the third
quarter of 1999 is comprised of a provision for current and deferred taxes. The
current provision is primarily comprised of state income taxes. The deferred
provision is the result of providing a full valuation allowance against the
Company's deferred tax asset.
First Nine Months 1999 Compared to the First Nine Months 1998
The comparisons for the first nine months 1999 and the first nine months 1998
are consistent with those discussed in the third quarter 1999 compared to the
third quarter of 1998 except as discussed below. The following table is
presented to contrast HEC's oil and gas price and production for discussion
purposes. Significant fluctuations are discussed in the accompanying narrative.
1999 1998
---- ----
Gas
Production (mcf) 13,016,000 10,463,000
Price (per mcf) $1.89 $2.02
Oil
Production (bbl) 661,000 594,000
Price (per bbl) $15.52 $14.07
Gas Revenue
Gas revenue increased $3,457,000 during the first nine months of 1999 as
compared to the first nine months of 1998. The increase is the result of an
increase in production from 10,463,000 mcf in 1998 to 13,016,000 mcf in 1999
partially offset by a decrease in price from $2.02 per mcf in 1998 to $1.89 per
mcf in 1999. The Consolidation increased production by approximately 2,807,000
mcf which was partially offset by a decrease in production primarily due to a
production decline on two wells in Louisiana, as discussed above and normal
production declines.
The effect of HEC's hedging transactions during the first nine months of 1999
was to decrease HEC's average gas price from $1.98 to $1.89 per mcf,
representing a $1,171,000 decrease in revenue from hedging transactions.
<PAGE>
Oil Revenue
Oil revenue increased $1,905,000 during the first nine months of 1999 as
compared with the first nine months of 1998. The increase is the result of an
increase in the average oil price from $14.07 per barrel in 1998 to $15.52 per
barrel in 1999 and an increase in production from 594,000 barrels in 1998 to
661,000 barrels in 1999. The increase in oil production is primarily due to the
Consolidation, which caused an increase of 155,000 barrels that was partially
offset by decreased production on two wells in Louisiana, as discussed above and
normal production declines.
The effect of HEC's hedging transactions during the first nine months of 1999
was to decrease HEC's average oil price from $16.43 per barrel to $15.52 per
barrel, representing a decrease in revenue from hedging transactions of
$602,000.
Impairment of Oil and Gas Properties
Impairment of oil and gas properties during the first nine months of 1998
includes an impairment at June 30, 1998 based on prices of $13.00 per bbl of oil
and $2.00 per mcf of gas, as well as the third quarter property impairment
previously discussed.
Litigation
Litigation income during the first nine months of 1999 represents insurance
proceeds which reimbursed costs previously paid in connection with a property
related claim. Litigation expense during the first nine months of 1998 includes
the settlement of the Ellender lawsuit described in Note 7 of the accompanying
financial statements in addition to the costs of the Arcadia arbitration
described above.
<PAGE>
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
HEC's primary market risks relate to changes in interest rates and in the prices
received from sales of oil and natural gas. HEC's primary risk management
strategy is to partially mitigate the risk of adverse changes in its cash flows
caused by increases in interest rates on its variable rate debt and decreases in
oil and natural gas prices, by entering into derivative financial and commodity
instruments, including swaps, collars and participating commodity hedges. By
hedging only a portion of its market risk exposures, HEC is able to participate
in the increased earnings and cash flows associated with decreases in interest
rates and increases in oil and natural gas prices; however, it is exposed to
risk on the unhedged portion of its variable rate debt and oil and natural gas
production.
Historically, HEC has attempted to hedge the exposure related to its variable
rate debt and its forecasted oil and natural gas production in amounts which it
believes are prudent based on the prices of available derivatives and the
Company's estimated debt levels and deliverable volumes. HEC attempts to manage
the exposure to adverse changes in the fair value of its fixed rate debt
agreements by issuing fixed rate debt only when business conditions and market
conditions are favorable.
HEC does not use or hold derivative instruments for trading purposes nor does it
use derivative instruments with leveraged features. HEC's derivative instruments
are designated and effective as hedges against its identified risks, and do not
of themselves expose HEC to market risk because any adverse change in the cash
flows associated with the derivative instrument is accompanied by an offsetting
change in the cash flows of the hedged transaction.
All derivative activity is carried out by personnel who have appropriate skills,
experience and supervision. The personnel involved in derivative activity must
follow prescribed trading limits and parameters that are regularly reviewed by
the Board of Directors and by senior management. HEC uses only well-known,
conventional derivative instruments and attempts to manage its credit risk by
entering into financial contracts with reputable financial institutions.
Following are disclosures regarding HEC's market risk sensitive instruments by
major category. Investors and other readers are cautioned to avoid simplistic
use of these disclosures. Readers should realize that the actual impact of
future interest rate and commodity price movements will likely differ from the
amounts disclosed below due to ongoing changes in risk exposure levels and
concurrent adjustments to hedging positions. It is not possible to accurately
predict future movements in interest rates and oil and natural gas prices.
Commodity Price Risk (non-trading) - HEC hedges a portion of the price risk
associated with the sale of its oil and natural gas production through the use
of derivative commodity instruments, which consist of swaps, collars and
participating hedges. These instruments reduce HEC's exposure to decreases in
oil and natural gas prices on the hedged portion of its production by enabling
it to effectively receive a fixed price on its oil and gas sales or a price that
only fluctuates between a predetermined floor and ceiling. HEC's participating
hedges also enable HEC to receive 25% of any increase in prices over the fixed
prices specified in the contracts. As of October 26, 1999, HEC has entered into
derivative commodity hedges covering an aggregate of 421,000 barrels of oil and
24,774,000 mcf of gas that extend through 2002. Under the these contracts, HEC
sells its oil and natural gas production at spot market prices and receives or
makes payments based on the differential between the contract price and a
floating price which is based on spot market indices. The amount received or
paid upon settlement of these contracts is recognized as oil or natural gas
revenues at the time the hedged volumes are sold. A hypothetical decrease in oil
and natural gas prices of 10% from the prices in effect as of September 30, 1999
would cause a loss in income and cash flows of $1,995,000 during the remaining
three months of 1999, assuming that oil and gas production, including production
from properties acquired in Consolidation, remain at current levels during the
last three months of 1999. This loss in income and cash flows would be offset by
a $1,099,000 increase in income and cash flows associated with the oil and
natural gas derivative contracts that are in effect for the remaining three
months of 1999.
<PAGE>
Interest Rate Risks (non-trading) - HEC uses both fixed and variable rate debt
to partially finance operations and capital expenditures. As of September 30,
1999 and currently, the majority of HEC's debt consists of borrowings under its
Credit Agreement which bear interest at a variable rate. HEC hedges a portion of
the risk associated with this variable rate debt through derivative instruments,
which consist of interest rate swaps and collars. Under the swap contracts, HEC
makes interest payments on its Credit Agreement as scheduled and receives or
makes payments based on the differential between the fixed rate of the swap and
a floating rate plus a defined differential. These instruments reduce HEC's
exposure to increases in interest rates on the hedged portion of its debt by
enabling it to effectively pay a fixed rate of interest or a rate which only
fluctuates within a predetermined ceiling and floor. A hypothetical increase in
interest rates of two percentage points would cause a loss in income and cash
flows of $436,000 during the remaining three months of 1999, assuming that
outstanding borrowings under the Credit Agreement remain at current levels. This
loss in income and cash flows would be offset by a $225,000 increase in income
and cash flows associated with the interest rate swap and collar agreements that
are in effect for the remaining three months of 1999.
<PAGE>
PART II -OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Reference is made to Item 8 - Notes 12 and 13 of Form 10-K for
Hallwood Energy Partners, L.P. for the year ended December 31,
1998 and Notes 6 and 7 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
a) Exhibits
10.12 Amendment No. 1 to Credit Agreement, dated as of October 15, 1999.
10.13 Letter Amendment No. 1 to Note Agreement, dated as of October 15, 1999.
27 Financial Data Schedule
b) Reports on Form 8-K
HEC filed a report on Form 8-K on August 10, 1999, reporting
the adoption of the Rights Plan.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
HALLWOOD ENERGY CORPORATION
Date: November 8, 1999 By: /s/Thomas J.Jung
Thomas J. Jung, Vice President
(Chief Financial Officer)
AMENDMENT NO. 1 TO CREDIT AGREEMENT
AMENDMENT dated as of October 15, 1999 to the Amended and Restated
Credit Agreement dated as of June 8, 1999 (the "Credit Agreement") among
HALLWOOD ENERGY CORPORATION, HALLWOOD ENERGY PARTNERS, L.P. and HALLWOOD
CONSOLIDATED RESOURCES CORPORATION (collectively, the "Borrowers"), the BANKS
party thereto (the "Banks"), FIRST UNION NATIONAL BANK, as Collateral Agent and
MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent (the "Agent").
W I T N E S S E T H :
WHEREAS, the parties hereto desire to amend the Credit Agreement as
set forth herein;
NOW, THEREFORE, the parties hereto agree as follows:
SECTION 1. Defined Terms; References. Unless otherwise specifically
defined herein, each term used herein which is defined in the Credit Agreement
has the meaning assigned to such term in the Credit Agreement. Each reference to
"hereof", "hereunder", "herein" and "hereby" and each other similar reference
and each reference to "this Agreement" and each other similar reference
contained in the Credit Agreement shall, after this Amendment becomes effective,
refer to the Credit Agreement as amended hereby.
SECTION 2. Resetting of the Availability Limit and the Debt Limit.
(a) The definition of "Availability Limit" set forth in Section 1.01 of the
Credit Agreement is amended by to read in its entirety as follows:
"Availability Limit" means, on any date, an amount equal to the lesser
of (i) the aggregate amount of the Commitments at such date and (ii)
$90,000,000. The Availability Limit may be increased only by an amendment in
accordance with Section 8.05, which the Banks may agree to or not agree to in
their sole discretion.
(b) Effective on and as of the date hereof, the "Debt Limit", as
determined in accordance with subsection (b) of Section 4.17 of the Credit
Agreement, shall be $90,000,000.
(NY) 27008/757/AMEND/amend99.1.wpd
<PAGE>
(c) (i) On or prior to November 19, 1999, the Borrowers shall provide
to the Banks such information as the Required Banks may reasonably request in
order to redetermine the Debt Limit.
(ii) Reasonably promptly after receipt of the information
delivered pursuant to clause (i) above, Banks having at least 70% of
the aggregate amount of the Commitments shall have the option to
redetermine the Debt Limit and the Agent shall notify the Borrowers of
any such redetermination, upon which notice such new Debt Limit (the
"New Debt Limit") shall become immediately effective and binding on all
parties to the Credit Agreement and shall be the Debt Limit thereunder,
until further determinations thereof in accordance with Section 4.17(c)
of the Credit Agreement. The redetermination of the Debt Limit pursuant
to this Section shall not affect the ability of the Borrowers to
request an additional such redetermination pursuant to Section
4.17(c)(iv) of the Credit Agreement in accordance with, and subject to
the terms of, such Section.
(iii) If upon the effectiveness of the New Debt Limit, the
aggregate unpaid principal amount of the Debt of the Borrowers exceeds
the New Debt Limit, then:
(A) the Borrowers shall take one of the actions contemplated
by clauses (i), (ii) and (iii) of Section 2.10 of the Credit
Agreement within three (3) months from the date the Borrowers
receive notice from the Agent of the New Debt Limit, and the
Banks hereby waive the requirement under such Section that the
Borrowers take one such action within thirty (30) days from
the earlier of the Agent's notification to the Borrowers of
such excess or the Borrowers otherwise becoming aware of such
excess and subject to clause (iv) any Default or Event of
Default arising under Section 5.01(a) of the Credit Agreement
solely as a result of the failure by any Borrower to so
comply; and
(B) from and including the date of effectiveness of
the New Debt Limit to but excluding the date on which the
Borrowers take one of the actions required by clause (A)
above, the Euro-Dollar Margin shall be equal to 2.50%, the
Base Rate Margin shall be equal to 1.50% and the CD Margin
shall be equal to 2.625%.
(iv) Failure by the Borrowers to comply with the provisions of
clause (iii) shall constitute an "Event of Default" under the Credit
Agreement and shall entitle the Agent, the Collateral Agent and the
Banks
(NY) 27008/757/AMEND/amend99.1.wpd
<PAGE>
to exercise all rights and remedies available under the Financing
Documents upon the occurrence of an Event of Default.
SECTION 3. Change in Pricing. The definition of "Level III Status" set
forth in Section 1.01 of the Credit Agreement is amended by to read in its
entirety as follows:
"Level III Status" exists on any date if on such date (i) the aggregate
outstanding principal amount of the Loans is less than 90% of the Debt Limit and
(ii) neither Level I Status nor Level II Status exists on such date.
SECTION 4. Change in Amortization Schedule. The first sentence of
Section 2.02 of the Credit Agreement is amended to read in its entirety as
follows:
Pursuant to Section 2.11, the Borrowers will repay the principal amount
outstanding on each Note in seven (7) equal quarterly installments, commencing
on the Term Date and thereafter on the last day of each consecutive 3 month
period.
SECTION 5. Representations of Borrowers. The Borrowers represent and
warrant that (i) the representations and warranties of the Borrowers set forth
in Article 3 of the Credit Agreement are true on and as of the date hereof and
(ii) no Default has occurred and is continuing.
SECTION 6. Governing Law. This Amendment shall be governed by and
construed in accordance with the laws of the State of New York.
SECTION 7. Counterparts. This Amendment may be signed in any number of
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
SECTION 8. Effectiveness. This Amendment shall become effective as of
the date hereof on the date on which the Agent shall have received from the
Borrowers and the Banks a counterpart hereof signed by such party or facsimile
or other written confirmation (in form satisfactory to the Agent) that such
party has signed a counterpart hereof.
(NY) 27008/757/AMEND/amend99.1.wpd
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed as of the date first above written.
HALLWOOD ENERGY CORPORATION
By:
Name:
Title:
HALLWOOD CONSOLIDATED
RESOURCES CORPORATION
By:
Name:
Title:
HALLWOOD ENERGY PARTNERS, L.P.
By: HEC Acquisition Corp., its
General Partner
By___________________________
Name:
Title:
(NY) 27008/757/AMEND/amend99.1.wpd
<PAGE>
MORGAN GUARANTY TRUST
COMPANY OF NEW YORK
By:
Name:
Title:
FIRST UNION NATIONAL BANK
By:
Name:
Title:
BANK OF AMERICA, N.A., formerly
NATIONSBANK, N.A.
By:
Name:
Title:
(NY) 27008/757/AMEND/amend99.1.wpd
<PAGE>
Acknowledged by:
HALLWOOD LA PLATA, LLC
LA PLATA ASSOCIATES, LLC
By: HALLWOOD PETROLEUM, INC.
By:______________________________________
Name:
Title:
The Manager of Hallwood La Plata LLC and La
Plata Associates LLC
CONCISE OIL AND GAS PARTNERSHIP
EM NOMINEE PARTNERSHIP COMPANY
MAY ENERGY PARTNERS OPERATING
PARTNERSHIP LTD.
By: HEC ACQUISITION CORP.
By:______________________________________
Name:
Title:
The General Partner of Concise Oil and Gas
Partnership, EM Nominee Partnership Company,
May Energy Partners Operating Partnership
LTD.
HALLWOOD CONSOLIDATED PARTNERS,
L.P.
By: HALLWOOD CONSOLIDATED
RESOURCES CORPORATION
By:______________________________________
Name:
Title:
The General Partner of Hallwood Consolidated
Partners, L.P.
(NY) 27008/757/AMEND/amend99.1.wpd
<PAGE>
LETTER AMENDMENT NO. 1
October 15, 1999
The Prudential Insurance Company
of America
c/o Prudential Capital Group
2200 Ross Avenue, Suite 4200E
Dallas, Texas 75201
Ladies and Gentlemen:
We refer to the Amended and Restated Subordinated Note and
Warrant Purchase Agreement dated as of June 8, 1999 (the "Agreement") among the
undersigned, Hallwood Energy Corporation, Hallwood Consolidated Resources
Corporation and you. Unless otherwise defined herein, the terms defined in the
Agreement shall be used herein as therein defined.
Paragraph 6B(6) of the Agreement requires that Indebtedness of
Subsidiaries of the Parent not exceed the greater of $1,000,000 or 2% of
Consolidated Net Worth of the Parent. As of June 30, 1999, Indebtedness of
Subsidiaries of the Parent, other than the Company, computed after marking to
market Hedging Transactions was $2,991,000. We request that you amend paragraph
6B(6) of the Agreement to allow for the exclusion of $10,000,000 of hedging
exposure for the period beginning June 30, 1999 and ending June 30, 2000. You
have indicated your willingness to so agree. Accordingly, it is hereby agreed by
you and us as follows:
The Agreement is, effective the date first above written,
hereby amended as follows:
(a) Paragraph 6B(6). Paragraph 6B(6) of the Agreement is
amended in full to read as follows:
"6B(6). Priority Debt. Permit Indebtedness of
Subsidiaries of the Parent, other than the Company and other
than Indebtedness that constitutes Senior Debt, plus (without
duplication) Indebtedness secured by Liens permitted by clause
(v) of paragraph 6B(2) to exceed, at any time, the greater of
$1,000,000 or 2% of Consolidated Net Worth of the Parent. For
the purposes of this paragraph 6B(6), from the period of June
30, 1999 to June 30, 2000, "Indebtedness" of Subsidiaries will
not include up to $10,000,000 of Hedging Transactions of
Subsidiaries."
<PAGE>
On and after the effective date of this Letter Amendment, each
reference in the Agreement to "this Agreement", "hereunder", "hereof", or words
of like import referring to the Agreement, and each reference in the Notes to
"the Agreement", "thereunder", "thereof", or words of like import referring to
the Agreement, shall mean the Agreement as amended by this Letter Amendment. The
Agreement, as amended by this Letter Amendment, is and shall continue to be in
full force and effect and is hereby in all respects ratified and confirmed. The
execution, delivery and effectiveness of this Letter Amendment shall not, except
as expressly provided herein, operate as a waiver of any right, power or remedy
under the Agreement nor constitute a waiver of any provision of the Agreement.
This Letter Amendment may be executed in any number of
counterparts and by any combination of the parties hereto in separate
counterparts, each of which counterparts shall be an original and all of which
taken together shall constitute one and the same Letter Amendment. The
effectiveness of this Letter Amendment is conditioned upon the accuracy of the
factual matters described above and the execution of the Consent attached
hereto.
If you agree to the terms and provisions hereof, please
evidence your agreement by executing and returning at least a counterpart of
this Letter Amendment to Hallwood Energy Corporation, 4610 S. Ulster Street,
Suite 200, Denver, CO 80237, Attention: Legal Department. This Letter Amendment
shall become effective as of the date first above written when and if
counterparts of this Letter Amendment shall have been executed by us and you.
Very truly yours,
HALLWOOD ENERGY CORPORATION
By:______________________________
Title:
HALLWOOD CONSOLIDATED RESOURCES CORPORATION
By:______________________________
Title:
Agreed as of the date first above written:
THE PRUDENTIAL INSURANCE COMPANY
OF AMERICA
By:______________________________
Vice President
<PAGE>
-2-
Q:\TPD\DEALS\HALLWOOD CRC 99M\LETTER AMENDMENT NO 1.DOC
CONSENT
Hallwood Consolidated Partners, L.P., is a Guarantor under the
Senior Subordinated Guaranty Agreement dated as of December 23, 1997 and each of
the other undersigned entities are Guarantors under the Senior Subordinated
Guaranty Agreement dated as of June 8, 1999 (each being a "Guaranty") in favor
of The Prudential Insurance Company of America ("Prudential") with respect to
the obligations of Hallwood Consolidated Resources Corporation (the "Company")
under that certain Amended and Restated Subordinated Note and Warrant Purchase
Agreement dated as of June 8, 1999 (the "Agreement"). Prudential and the Company
are entering into Letter Amendment No. 1 to the Agreement (the "Amendment").
Each of the undersigned hereby consents to the Amendment and each hereby
confirms and agrees that its Guaranty is, and shall continue to be, in full
force and effect and is hereby confirmed and ratified in all respects except
that, upon the effectiveness of, and on and after the date of this consent, all
references in the Guaranty of the undersigned to the "Agreement," "thereunder,"
"thereof," or words of like import referring to the Agreement shall mean the
Agreement as amended by the Amendment, as the same may be further amended or
modified from time to time.
Dated as of October 15, 1999
HALLWOOD CONSOLIDATED MAY ENERGY PARTNERS OPERATING
PARTNERS, L.P. PARTNERSHIP, LTD.
By: Hallwood Consolidated Resources By: HEC Acquisition Corp.
Corporation
Its: General Partner Its: General Partner
By:__________________________________ By:______________________________
Title: Title:
HALLWOOD ENERGY PARTNERS, L.P. CONCISE OIL & GAS PARTNERSHIP
By: HEC Acquisition Corp. By: HEC Acquisition Corp
Its: General Partner
By:__________________________________ By:______________________________
Title: Title:
LA PLATA ASSOCIATES, LLC EM NOMINEE PARTNERSHIP COMPANY
By: Hallwood Petroleum, Inc. By: HEC Acquisition Corp.
Its: Manager Its: General Partner
By:__________________________________ By:______________________________
Title: Title:
HALLWOOD LA PLATA, LLC
By: Hallwood Petroleum, Inc.
Its: Manager
By:__________________________________
Title:
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Form 10-Q
for the quarter ended September 30, 1999 for Hallwood Energy Corporation and is
qualified in its entirety by reference to such Form 10-Q.
</LEGEND>
<CIK> 0000319019
<NAME> Hallwood Energy Corporation
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
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21,386
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