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 March 31, 2000
[ ] 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
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 May 9, 2000
Common Stock 9,621,604
Series A Cumulative Preferred Stock 2,290,349
Page 1 of 22
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<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HALLWOOD ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
March 31, December 31,
2000 1999
---------------- ------------
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 15,498 $ 10,480
Accounts receivable:
Oil and gas revenues 13,741 12,442
Trade 6,948 4,918
Due from affiliates 838 704
Prepaid expenses and other current assets 1,212 1,209
--------- ---------
Total 38,237 29,753
-------- --------
PROPERTY, PLANT AND EQUIPMENT, at cost Oil and gas properties (full cost
method):
Proved mineral interests 754,414 758,473
Unproved mineral interests 4,209 6,543
Furniture, fixtures and other 2,309 1,941
--------- ---------
Total 760,932 766,957
Less accumulated depreciation, depletion,
amortization and property impairment (591,820) (585,336)
------- -------
Total 169,112 181,621
------- -------
OTHER ASSETS
Deferred expenses and other assets 1,327 1,400
--------- ---------
TOTAL ASSETS $208,676 $212,774
======= =======
<FN>
(Continued on the following page)
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HALLWOOD ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands except shares)
March 31, December 31,
2000 1999
-------------- -----------
CURRENT LIABILITIES
<S> <C> <C>
Accounts payable and accrued liabilities $ 25,580 $ 26,382
-------- --------
NONCURRENT LIABILITIES
Long-term debt 102,412 109,357
Deferred revenue and other 1,059 1,066
--------- ---------
Total 103,471 110,423
------- -------
Total liabilities 129,051 136,805
------- -------
MINORITY INTEREST IN AFFILIATES 709 582
--------- ---------
COMMITMENTS AND CONTINGENCIES (NOTE 7)
STOCKHOLDERS' EQUITY
Series A Cumulative Preferred Stock; 5,000,000 shares authorized; 2,290,349
shares issued and outstanding in 2000
and 2,334,165 shares issued and outstanding in 1999 21,083 21,386
Common Stock par value $.01 per share; 25,000,000 shares
authorized; 9,999,754 shares issued and outstanding in
2000 and 1999 100 100
Additional paid-in capital 67,310 67,883
Accumulated deficit (9,577) (13,982)
--------- --------
Stockholders' equity - net 78,916 75,387
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $208,676 $212,774
======= =======
<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
March 31,
---------------------------
2000 1999
---- ----
REVENUES:
<S> <C> <C>
Gas revenue $ 13,845 $ 6,490
Oil revenue 6,145 2,167
Pipeline, facilities and other 1,666 1,209
Interest 153 116
--------- -------
21,809 9,982
------- ------
EXPENSES:
Production operating 5,250 3,058
Facilities operating 232 175
General and administrative 1,801 1,342
Depreciation, depletion and amortization 6,434 4,293
Interest 2,395 818
-------- -------
16,112 9,686
------- ------
OTHER EXPENSES:
Equity in loss of HCRC 482
Minority interest in net income of affiliates 127 132
Litigation 617
--------
744 614
-------- ---------
INCOME (LOSS) BEFORE INCOME TAXES 4,953 (318)
PROVISION FOR INCOME TAXES:
Current 548
--------
NET INCOME (LOSS) 4,405 (318)
PREFERRED DIVIDENDS 573 616
-------- --------
NET INCOME (LOSS) ATTRIBUTABLE TO
COMMON SHAREHOLDERS $ 3,832 $ (934)
========= ========
NET INCOME (LOSS) PER SHARE - BASIC $ .38 $ (.17)
=========== =========
NET INCOME (LOSS) PER SHARE - DILUTED $ .38 $ (.17)
=========== =========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 10,000 5,600
======= ======
PRO FORMA INFORMATION ASSUMING PROVISION
FOR INCOME TAXES APPLIED RETROACTIVELY (NOTE 1)
Loss before income taxes $ (318)
Provision for income taxes
Net loss $ (318)
=========
Net loss attributable to common shareholders $ (934)
=========
Net loss per share - basic $ (.17)
=========
Net loss per share - diluted $ (.17)
=========
<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 Three Months Ended
March 31,
--------------------------
2000 1999
---- ----
OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $ 4,405 $ (318)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation, depletion and amortization 6,434 4,293
Depreciation charged to affiliates 50 55
Minority interest in net income 127 132
Amortization of deferred loan costs and debt discount 110
Recoupment of take-or-pay liability (52) (31)
Equity in loss of HCRC 482
Undistributed earnings of affiliates (631)
Changes in operating assets and liabilities provided (used) cash net of
noncash activity:
Oil and gas revenues receivable (1,299) 924
Trade receivables (2,030) (3,267)
Due from affiliates (134) (579)
Prepaid expenses and other current assets 15 (1)
Deferred expenses and other (7)
Accounts payable and accrued liabilities (757) (4,035)
Due to affiliates 131
----------- ---------
Net cash provided by (used in) operating activities 6,869 (2,852)
------- -------
INVESTING ACTIVITIES:
Additions to property, plant and equipment (1,182) (964)
Exploration and development costs incurred (4,296) (1,875)
Proceeds from sales of property, plant and equipment 11,503 16
Distributions received from affiliate 1,019
----------- -------
Net cash provided by (used in) investing activities 6,025 (1,804)
------- -------
FINANCING ACTIVITIES:
Payments of long-term debt (7,000)
Proceeds from long-term debt 1,000
Dividends paid (573) (2,309)
Purchase and cancellation of preferred shares (303)
Distributions paid by consolidated affiliates to minority interest (186)
----------- --------
Net cash used in financing activities (7,876) (1,495)
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
5,018 (6,151)
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD 10,480 11,874
------- -------
END OF PERIOD $ 15,498 $ 5,723
======= =======
<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, 1999. Any additional provision or benefit for
income taxes is excluded because of the Company's net operating loss
carryforwards and related valuation allowance.
<TABLE>
<CAPTION>
For the Three Months Ended March 31, 1999
As Acquired
Reported Interests Pro Forma
-------- --------- ---------
(In thousands except per share data)
<S> <C> <C> <C>
Revenues $ 9,982 $ 6,540 $16,522
Net loss (318) (1,016) (1,334)
Net loss
attributable to common
shareholders (934) (1,016) (1,950)
Net loss
per share - basic $ (.09) $ (.20)
========= =========
Net loss
per share - diluted $ (.09) $ (.20)
========= =========
</TABLE>
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 HEC's 1999 Annual Report
on Form 10-K.
<PAGE>
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. The accompanying financial statements include the majority owned
affiliates, the May Limited Partnerships 1984-1, 1984-2 and 1984-3 for all
periods and the May Limited Partnerships 1983-1, 1983-2 and 1983-3 through March
31, 1999 when they were liquidated.
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 during 1999. 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 1999.
Computation of Net Income (Loss) Per Share
Basic income (loss) per share is computed by dividing net income (loss)
attributable to the common shareholders 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 Company's outstanding stock options have
been ignored in the computation of diluted net income (loss) per share because
their inclusion would be antidilutive.
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 March 31, 2000
<S> <C> <C> <C>
Net income per share - basic $ 3,832 10,000 $ .38
------- ------ =======
Net income per share - diluted $ 3,832 10,000 $ .38
======= ====== =======
For the Three Months Ended March 31, 1999
Net income per share- basic $ (934) 5,600 $ (.17)
------- ------- =======
Net income per share- diluted $ (934) 5,600 $ (.17)
======= ======= =======
</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-
<PAGE>
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
HEC's long-term debt at March 31, 2000 and December 31, 1999 consisted of the
following:
March 31, 2000 December 31, 1999
-------------- -----------------
(in thousands)
Credit Agreement $ 79,200 $ 86,200
Note Agreement 25,000 25,000
Debt discount (1,788) (1,843)
-------- --------
Total long-term debt $102,412 $109,357
======= =======
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. At March 31, 2000, HEC's
borrowing base was $79,999,663 under which $79,200,000 was outstanding.
During the first quarter of 2000, HEC sold its interests in approximately 240
non-strategic oil and gas wells in order to enable HEC to better focus on its
core areas while at the same time reduce its level of outstanding debt.
Subsequent to March 31, 2000 and through May 9, 2000, approximately 260 more oil
and gas properties have been sold and HEC has repaid an additional $14,000,000
of its borrowings under the Credit Agreement. On April 27, and on May 9, 2000,
the Credit Agreement was further amended to, among other matters, reduce HEC's
borrowing base to $75,175,000 to reflect the most recent property sales and to
revise two of the covenants within the Credit Agreement. Therefore, HEC's unused
borrowing base totaled $9,975,000 at May 9, 2000.
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 7.94%
at March 31, 2000. Interest is payable monthly. Quarterly principal payments of
$9,314,000 are scheduled to 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, total expenditures for
dividends paid and stock repurchased 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. Total expenditures for dividends paid and
stock repurchased 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.
<PAGE>
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. In connection with
this amendment, the Company received a written waiver under the Credit Agreement
of the restriction on amendment to the Note Agreement. 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
$1,956,000 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 April 25, 2000,
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 nine months of 2000 $33,750,000 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
NOTE 3 - STATEMENTS OF CASH FLOWS
Cash paid for interest during the three months ended March 31, 2000 and 1999 was
$2,285,000 and $818,000, respectively.
NOTE 4 - STOCK OPTION GRANT
On January 28, 2000, the Compensation Committee of HEC granted options to
purchase 238,500 shares of common stock at an exercise price of $4.625 per share
which was equal to the fair market value of the common stock on the date of
grant. The options expire on January 28, 2007, unless sooner terminated pursuant
to the provisions of the plan. One-third of the options vested on the grant date
and the remainder vest one-third on January 28, 2001 and one-third on January
28, 2002.
<PAGE>
NOTE 5 - STOCK REPURCHASES
On February 18, 2000, HEC repurchased and retired 43,816 shares of Series A
Preferred Stock from its affiliate, Hallwood Group for $303,426. The shares were
repurchased for $6.925 per share which represented the average of the closing
prices of the stock during the five days prior to February 18, 2000.
During March 2000, the Board of Directors of HEC approved the repurchase of up
to $5,000,000 worth of common and preferred stock of HEC through a combination
of an odd-lot program for certain common and preferred shareholders and the
repurchase of common shares in the open market.
Under the odd-lot program, the Company will offer to purchase holdings of 99 or
fewer common shares, or 20 or fewer Series A Preferred shares from its
shareholders of record as of April 10, 2000. The offer is for the period from
April 21, 2000 through May 22, 2000.
The Company is currently attempting to purchase shares of its common stock on
the open market. Subsequent to March 31, 2000 and through May 9, 2000, HEC has
purchased 18,150 shares of common stock at prices ranging from $4.10 to $4.81
per share.
On May 5, 2000, the Company repurchased 360,000 shares of common stock at $5.00
per share.
NOTE 6 - PROPERTY SALES
During the first quarter of 2000, HEC sold its interests in approximately 240
non-strategic oil and gas wells located in the Keystone, Merkle and Weesatche
areas of Texas, as well as various wells in Oklahoma, North Dakota and Montana.
The proceeds from all of the Company's property sales during the first quarter
of 2000 were $11,503,000 of which $7,000,000 was used to pay down borrowings
under the Credit Agreement.
Subsequent to March 31, 2000 and through May 9, 2000, HEC sold its interests in
approximately 260 additional oil and gas wells located in Kansas and Montana for
approximately $11,181,000 and repaid an additional $14,000,000 of its borrowings
under the Credit Agreement.
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 dismissed. During
February 2000, HEC paid approximately $673,000 in connection with these
lawsuits.
In connection with the 1995 closing of the Jakarta, Indonesia office of HEP and
HCRC, three former employees filed a lawsuit against those entities, primarily
based on allegations that their employment contracts had been breached. The case
was tried in 1997, and after appeals, a final judgment of $487,820 plus interest
was awarded to the plaintiffs. The amount due was accrued as of March 31, 2000
and will be paid to the plaintiffs in the second quarter of 2000.
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.
<PAGE>
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. Generally accepted accounting principles require the reporting of results
on a basis that makes it difficult to compare to prior periods. Therefore, this
Overview provides certain information on a pro forma basis to facilitate the
comparison with prior periods.
Pro Forma Results
The following pro forma information is prepared as if the Consolidation had been
completed on January 1, 1999.
For the Quarter Ended March 31,
2000 1999
---- ----
(in thousands except prices)
Prices
Gas (per mcf) $2.19 $1.79
Oil (per bbl) $24.19 $11.39
Production
Gas (mcf) 6,323 5,921
Oil (bbl) 254 342
Gas revenue $13,845 $10,623
Oil revenue 6,145 3,896
Production operating expense 5,250 5,523
Liquidity and Capital Resources
Cash Flow
HEC had $6,869,000 of cash flow from operating activities and proceeds from
property sales of $11,503,000 during the first three months of 2000.
Cash was used primarily for:
o Additions to property and development costs incurred of $5,478,000;
o Payments of long-term debt of $7,000,000; and
o Dividends to preferred shareholders of $573,000.
When combined with miscellaneous other cash activity during the period, the
result was an increase of $5,018,000 in HEC's cash from $10,480,000 at December
31, 1999 to $15,498,000 at March 31, 2000.
Exploration and Development Projects and Acquisitions
Through March 31, 2000, HEC incurred $5,478,000 in direct property additions,
development, exploitation, and exploration costs. The costs were comprised of
$1,182,000 for property acquisitions and approximately $4,296,000 for domestic
exploration and development. HEC's 2000 capital budget is set at $24,000,000.
The significant capital expenditures through March 31, 2000 are as follows:
<PAGE>
Gulf Coast Region
During the first quarter of 2000, HEC expended approximately $3,910,000 of its
capital budget in the Gulf Coast Region in Louisiana and South and East Texas.
The following are major projects within the region.
Yoakum Gorge Project. During the first three months of 2000, HEC continued its
activity in the area and has incurred approximately $1,425,000 for costs
associated with six non-operated projects located in Lavaca County, Texas. One
exploration project currently drilling will test a 16,500-foot Upper Wilcox
well. HEC has a 20% interest in the well and costs incurred through March 31,
2000 were approximately $716,000. An exploitation well is currently drilling
which tests an extension zone to one of HEC's successful wells which currently
produces approximately 26,000 mcf per day. HEC has a 15.9% working interest in
the well currently drilling and has incurred approximately $362,000 in
associated drilling costs during the first quarter of 2000. One development well
was successfully recompleted from the Zoeller sand to the Dagg sand at
approximately 10,800 feet. Current gross production is approximately 14,000 mcf
per day. HEC owns a 28.81% working interest in the well and HEC's recompletion
costs through March 31, 2000 were approximately $65,000. Three other wells are
currently underway that will test various sands in the area. One of the wells
was logged in April 2000 and looks very encouraging. During the remainder of
2000, the Company plans to drill twelve additional wells in the area. HEC's
interests in the wells range from 7.5% to 12.5% and costs incurred during the
first quarter of 2000, were approximately $285,000. With the additional
opportunities provided from the 1999 Seisgen Exploration, Inc. acquisition, HEC
anticipates continued activity in the area.
Bell Prospect. In the first quarter of 2000, HEC incurred approximately $370,000
for completion costs associated with two wells drilled in 1999 which are in the
Bell prospect located in Houston County, Texas. One well tested the Georgetown
formation and was completed in the Buda formation and the other well is a dual
lateral Buda formation development well. The first well is currently producing
approximately 150 barrels of oil per day and 75 mcf per day with the expectation
of increasing rates, but has been constrained by salt water disposal and gas
gathering facilities. Previous disposal and gathering problems have been
remedied and withdrawals are being increased. The second well is currently being
completed. HEC owns 36% working interests in the two wells. The Company plans to
drill one additional well in this area during the current year.
Louisiana. HEC incurred approximately $1,106,000 for drilling costs associated
with an alternate unit well replacing the G.S. Boudreaux well, which was lost in
1999. HEC believes that this 13,600-foot Bol Mex 3 well will be successfully
completed during the second quarter of 2000 and will produce from a zone to
which reserves have not previously been booked. Initial test rates were as high
as 15,000 mcf per day and 450 barrels of oil per day at flowing tubing pressures
of 6,829 pounds per square inch. The Company anticipates stabilized production
rates will be higher than the initial test rates. The originally-targeted upper
zone will remain as behind pipe proved nonproducing reserves. HEC owns a 37.4%
working interest in the well. In February 2000, HEC plugged and abandoned a well
that attempted to recover remaining reserves in a fault block adjacent to the
A.L. Boudreaux well. HEC's costs through March 31, 2000 were approximately
$570,000. In 2000, HEC's plans include an exploration test of the deeper Klump
sands productive in nearby fields.
Rocky Mountain Region
During the first quarter of 2000, HEC expended approximately $465,000 of its
capital budget in the Rocky Mountain Region located in Colorado, Montana, North
Dakota, Northwest New Mexico, and Wyoming. Of this amount, HEC incurred
approximately $140,000 to frac two wells located on the Colorado Western Slope.
HEC believes these workovers will improve production and will additionally
increase the wells' ultimate recovery. In addition, during the first quarter of
2000, HEC participated in a Hudson Ranch exploration play that tested the Red
River and Nisku formations of North Dakota. The well found insufficient pay to
justify completion. HEC's costs incurred during first quarter 2000 were
approximately $255,000.
<PAGE>
San Juan Basin Project - Colorado and New Mexico. HEC, along with many other
industry partners, has made application to the Colorado Oil and Gas Commission
for fieldwide infill drilling of the Fruitland Coal formation. The application
is to reduce the present 320-acre spacing units to 160 acres, because the
existing spacing units cannot be adequately drained by a single well. Approval
is expected in 2000, and could result in as many as 18 possible locations on the
acreage in which the Company has an interest through its special purpose tax
credit vehicle. It is not yet known what the economic effect will be of any new
regulations related to drilling near residential developments and any
contractual requirements related to drilling on the tax credit vehicle acreage.
Assuming economic viability, HEC anticipates that infill drilling in Colorado
could begin as soon as 2001. In addition to the Colorado locations, HEC has the
potential for 14 similar locations in New Mexico if infill drilling is permitted
there. HEC has not added any volumes to its reserve projections in connection
with the Colorado or New Mexico infill drilling opportunities.
Other
The remaining $1,103,000 of HEC's capital expenditures incurred in the first
quarter of 2000 relate to all other areas. One successful non-operated well was
drilled in Gaines County, Texas. The well was completed in the Leonard sand at
approximately 8,000 feet. HEC owns a 17.50% working interest in the well and has
incurred costs of approximately $112,000 during the first quarter of 2000. The
remaining costs are associated principally with technical general and
administrative expenditures and numerous other projects which are completed or
underway and which are individually less significant.
Property Divestments
During the first quarter of 2000, HEC sold its interests in approximately 240
non-strategic oil and gas wells located in the Keystone, Merkle, and Weesatche
areas of Texas, as well as various oil and gas wells in Oklahoma, North Dakota
and Montana. Subsequent to March 31, 2000 and through May 9, 2000, HEC sold its
interests in approximately 260 additional oil and gas wells located in Kansas
and Toole County, Montana. Total proceeds received during the first quarter of
2000 were approximately $11,503,000. The wells sold represent approximately 35%
of HEC's total well count, approximately 16% of HEC's reserve value, and
approximately 11% of its operating cash flow based on five year average reserve
pricing. The completion of HEC's 2000 sales effort has enabled HEC to reduce its
level of debt and will allow the Company to reduce its administrative overhead,
and to focus on its core areas of Colorado, Utah, New Mexico, Texas, and
Louisiana.
Dividends
On March 15, 2000, HEC declared a quarterly dividend of $.25 per Series A
Cumulative Preferred share, payable on May 15, 2000 to shareholders of record on
March 31, 2000. This amount was accrued as of March 31, 2000.
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.
Stock Repurchases
On February 18, 2000, HEC repurchased and retired 43,816 shares of Series A
Preferred Stock from its affiliate, Hallwood Group for $303,426. The shares were
repurchased for $6.925 per share which represented the average of the closing
prices of the stock during the five days prior to February 18, 2000.
During March 2000, the Board of Directors of HEC approved the repurchase of up
to $5,000,000 worth of common and preferred stock of HEC through a combination
of an odd-lot program for certain common and preferred shareholders and the
repurchase of common shares in the open market or in block purchases.
Under the odd-lot program, the Company will offer to purchase holdings of 99 or
fewer common shares, or 20 or fewer Series A Preferred shares from its
shareholders of record as of April 10, 2000. The offer is for the period from
April 21, 2000 through May 22, 2000.
<PAGE>
The Company is currently attempting to purchase shares of its common stock on
the open market. Subsequent to March 31, 2000 and through May 9, 2000, HEC has
purchased 18,150 shares of common stock at prices ranging from $4.10 to $4.81
per share.
On May 5, 2000, the Company repurchased 360,000 shares of common stock at $5.00
per share.
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. At March 31, 2000, HEC's
borrowing base was $79,999,663 under which $79,200,000 was outstanding.
During the first quarter of 2000, HEC sold its interests in approximately 240
non-strategic oil and gas wells in order to enable HEC to better focus on its
core areas while at the same time reduce its level of outstanding debt.
Subsequent to March 31, 2000 and through May 9, 2000, approximately 260 more oil
and gas properties have been sold and HEC has repaid an additional $14,000,000
of its borrowings under the Credit Agreement. On April 27, and on May 9, 2000,
the Credit Agreement was further amended to, among other matters, reduce HEC's
borrowing base to $75,175,000 to reflect the most recent property sales and to
revise two of the covenants within the Credit Agreement. Therefore, HEC's unused
borrowing base totaled $9,975,000 at May 9, 2000.
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 7.94%
at March 31, 2000. Interest is payable monthly. Quarterly principal payments of
$9,314,000 are scheduled to 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, total expenditures for
dividends paid and stock repurchased 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. Total expenditures for dividends paid and
stock repurchased 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. In connection with
this amendment, the Company received a written waiver under the Credit Agreement
of the restriction on amendment to the Note Agreement. 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
$1,956,000 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.
<PAGE>
All contracts are interest rate swaps with fixed rates. As of April 25, 2000,
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 nine months of 2000 $33,750,000 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
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 during 1999 and through the
first quarter of 2000. 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 - 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
Fourth quarter - 1999 22.50 19.01 2.26 1.93
First quarter - 2000 27.26 24.19 2.29 2.19
</TABLE>
<PAGE>
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.
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 expects
to 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 financial contracts used by HEC to hedge the price of its oil and natural
gas production are swaps and collars. 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 April 25, 2000, HEC was a party to 26
financial contracts with four different counterparties.
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 nine months of 2000 66% $18.55
2001 12 19.16
<PAGE>
Gas Contract
Percent of Production Delivered
Period Hedged Floor Price
(per mcf)
Last nine months of 2000 54% $ 2.14
2001 57 2.11
2002 34 1.95
Between 8% and 12% 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 $2.54 per mcf to
$2.65 per mcf.
During the second quarter through April 25, 2000, the weighted average oil price
(for barrels not hedged) was approximately $23.50 per barrel. The weighted
average price of natural gas (for mcf not hedged) during that period was
approximately $2.70 per mcf.
Inflation
Inflation did not have a material impact on HEC in 1999 and is not anticipated
to have a material impact in 2000.
<PAGE>
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.
First Quarter of 2000 Compared to the First Quarter of 1999
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.
2000 1999
---- ----
(In thousands except price)
Gas
Production (mcf) 6,323 3,580
Price (per mcf) $ 2.19 $ 1.81
Oil
Production (bbl) 254 190
Price (per bbl) $24.19 $11.41
Gas Revenue
Gas revenue increased $7,355,000 during the first quarter of 2000 compared with
the first quarter of 1999. The increase is the result of an increase in
production from 3,580,000 mcf in 1999 to 6,323,000 mcf in 2000. The average gas
price increased from $1.81 per mcf in 1999 to $2.19 per mcf in 2000. The
increase in production is primarily due to the Consolidation which caused an
increase in gas production of 2,464,000 mcf. The remaining increase in
production is primarily due to the acquisition of interests in 18 gas wells in
San Juan County, New Mexico during the second quarter of 1999 and the
acquisition of interest in 34 gas wells in Lavaca County, Texas during the
fourth quarter of 1999. The increased production from these acquisitions was
partially offset by a production decline on two significant wells in Louisiana
caused by increased rates of water production on the wells and property sales
during the first quarter of 2000.
The effect of HEC's hedging transactions as described under "Inflation and
Changing Prices," during the first quarter of 2000, was to decrease HEC's
average gas price from $2.29 per mcf to $2.19 per mcf, representing a $632,000
decrease in revenue from hedging transactions.
Oil Revenue
Oil revenue increased $3,978,000 during the first quarter of 2000 compared with
the first quarter of 1999. The increase is the result of an increase in the
average oil price from $11.41 per barrel in 1999 to $24.19 per barrel in 2000,
and an increase in production from 190,000 barrels in 1999 to 254,000 barrels in
2000. The production increase is primarily due to the Consolidation which caused
an increase in oil production of 113,000 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 property
sales during the first quarter of 2000.
The effect of HEC's hedging transactions during the first quarter of 2000 was to
decrease HEC's average oil price from $27.26 per barrel to $24.19 per barrel,
resulting in a $780,000 decrease in revenue from hedging transactions.
<PAGE>
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 $457,000 during the first quarter of 2000 compared with the
first quarter of 1999. The net increase is primarily comprised of additional
revenue from the Consolidation.
Interest Income
Interest income increased $37,000 during the first quarter of 2000 compared with
the first quarter of 1999 due primarily to a higher average cash balance during
2000.
Production Operating
Production operating expense increased $2,192,000 during the first quarter of
2000 compared with the first quarter of 1999. The majority of the increase is
the result of the Consolidation, partially offset by decreased operating costs
due to property sales during the first quarter of 2000.
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 $459,000 during the first quarter of 2000 primarily as
a result of the Consolidation.
Depreciation, Depletion and Amortization Expense
Depreciation, depletion and amortization expense increased $2,141,000 during the
first quarter of 2000 compared with the first quarter of 1999. The increase is
primarily the result of higher capitalized costs and a higher depletion rate in
2000 due to the increase in production primarily caused by the Consolidation.
Interest
Interest expense increased $1,577,000 during the first quarter of 2000 compared
with the first quarter of 1999 due to a higher average outstanding debt balance
during 2000 resulting from the Consolidation.
Equity in Loss of HCRC
Equity in loss of HCRC represents HEC's share of its equity investment in HCRC
prior to the Consolidation. This loss decreased to zero during the first quarter
of 2000, compared with the first quarter of 1999, as a result of the
Consolidation.
Litigation
Litigation expense during the first quarter of 2000 is comprised of the costs
related to the settlement of the employment litigation described in Note 7 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 first
quarter of 2000 is comprised of a provision for current federal taxes resulting
from alternative minimum taxes, and current state taxes.
<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 and collars. 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 and collars. 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. As of April 25, 2000, HEC has entered into
derivative commodity hedges covering an aggregate of 358,000 barrels of oil and
23,318,000 mcf of gas that extend through 2002. Under 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 March 31, 2000 would cause a
loss in income and cash flows of $4,890,000 during the remaining nine months of
2000, assuming that oil and gas production remain at projected levels. This loss
in income and cash flows would be offset by a $2,836,000 increase in income and
cash flows associated with the oil and natural gas derivative contracts that are
in effect for the remaining nine months of 2000.
<PAGE>
Interest Rate Risks (non-trading) - HEC uses both fixed and variable rate debt
to partially finance operations and capital expenditures. As of March 31, 2000,
HEC's debt consisted of $79,200,000 in borrowings under its Credit Agreement
which bears interest at a variable rate, and $25,000,000 in borrowings under its
10.32% Senior Subordinated Notes which bear interest at a fixed 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 $1,188,000 during the remaining nine months of 2000, assuming
that outstanding borrowings under the Credit Agreement remain at March 31, 2000
levels. This loss in income and cash flows would be offset by a $506,000
increase in income and cash flows associated with the interest rate swap and
collar agreements that are in effect for the remaining nine months of 2000.
<PAGE>
PART II -OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Reference is made to Item 8 - Notes 12 and 13 of Form 10-K for the
year ended December 31, 1999 and Note 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
10.15 Amendment No. 3 to Credit Agreement, dated as of
April 27, 2000
10.16 Amendment No. 4 to Credit Agreement, dated as of
May 9, 2000
27 Financial Data Schedule
b) Reports on Form 8-K
None.
<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: May 9, 2000
By:
William J. Baumgartner, Vice President
(Chief Financial Officer)
[CONFORMED COPY]
AMENDMENT NO. 3 AND WAIVER TO CREDIT AGREEMENT
AMENDMENT AND WAIVER dated as of April 27, 2000 to the Amended and
Restated Credit Agreement dated as of June 8, 1999, as amended by Amendment No.
1 dated as of October 15, 1999 and Amendment No. 2 dated as of January 23, 2000
(as so amended, 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 and the Banks have agreed to grant a waiver of certain provisions
thereof 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, on and after the Effective Date (as
defined in Section 8 below), 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)
$75,175,000. 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.
(NY) 27008/757/AMEND/amend00.3conf
<PAGE>
(b) Effective on and as of the Effective Date, the "Debt Limit", as
determined in accordance with subsection (b) of Section 4.17 of the Credit
Agreement, shall be $75,175,000.
Section 3. Waiver of the Asset Sale Covenant. The Banks hereby waive
compliance by the Borrowers with the requirement in subsection (b) of Section
4.27 of the Credit Agreement that the net proceeds of all sales of Property by
HEC and its Subsidiaries not exceed $5,000,000 during any period of six
consecutive calendar months, such waiver being granted for the limited purpose
of permitting HEC and its Subsidiaries to sell all of the Properties of the
Borrowers located in Toole County, Montana for an aggregate purchase price of
approximately $1,650,000, respectively, in each case substantially on the terms
described by HEC to the Banks prior to the date hereof.
Section 4. No Other Waivers. Other than as specifically provided
herein, this Amendment and Waiver shall not operate as a waiver of any right,
remedy, power or privilege of the Agent, the Collateral Agent or the Banks under
the Credit Agreement or any other Financing Document or of any other term or
condition thereof.
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 and Waiver shall be
governed by and construed in accordance with the laws of the State of New York.
Section 7. Counterparts. This Amendment and Waiver 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 and Waiver shall become
effective on the date (the "Effective Date") on which the Agent shall have
received (i) 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 and (ii) evidence
reasonably satisfactory to it that the sale of all the Properties of the
Borrowers located in Toole County, Montana shall have been consummated
substantially on the terms described by HEC to the Banks prior to the date
hereof, for an unadjusted purchase price of not less than $1,650,000.
(NY) 27008/757/AMEND/amend00.3conf
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment and
Waiver to be duly executed as of the date first above written.
HALLWOOD ENERGY CORPORATION
By: /s/ William J. Baumgartner
Title: Vice President
HALLWOOD CONSOLIDATED
RESOURCES CORPORATION
By: /s/ William J. Baumgartner
Title: Vice President
HALLWOOD ENERGY PARTNERS, L.P.
By: HEC Acquisition Corp., its
General Partner
By: /s/ William J. Baumgartner
Title: Vice President
(NY) 27008/757/AMEND/amend00.3conf
<PAGE>
MORGAN GUARANTY TRUST
COMPANY OF NEW YORK
By: /s/ John Kowalczuk
Title: Vice President
FIRST UNION NATIONAL BANK
By: /s/ Robert R. Wetteroff
Title: Senior Vice President
BANK OF AMERICA, N.A., formerly
NATIONSBANK, N.A.
By: /s/ James R. Allred
Title: Managing Director
(NY) 27008/757/AMEND/amend00.3conf
<PAGE>
Acknowledged by:
HALLWOOD LA PLATA, LLC
LA PLATA ASSOCIATES, LLC
By: HALLWOOD PETROLEUM, INC.
By:/s/ William J. Baumgartner
Title: Vice President
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:/s/ William J. Baumgartner
Title: Vice President
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:/s/ William J. Baumgartner
Title: Vice President
The General Partner of Hallwood Consolidated
Partners, L.P.
(NY) 27008/757/AMEND/amend00.3conf
<PAGE>
SCHEDULE A
[to be provided by Hallwood]
(NY) 27008/757/AMEND/amend00.3conf
<PAGE>
AMENDMENT NO. 4 TO CREDIT AGREEMENT
AMENDMENT dated as of May 9, 2000 to the Amended and Restated Credit
Agreement dated as of June 8, 1999, as amended by Amendment No. 1 dated as of
October 15, 1999, Amendment No. 2 dated as of January 23, 2000 and Amendment No.
3 dated as of April 27, 2000 (as so amended, 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, on and after the Effective Date (as
defined in Section 9 below), refer to the Credit Agreement as amended hereby.
Section 2. Resetting of the Availability Limit. The definition of
"Availability Limit" set forth in Section 1.01 of the Credit Agreement is
amended 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)
$75,175,000; provided that on any date on which the Debt Limit is reset to a new
amount in accordance with Section 4.17(c)(ii) or Section 4.17(c)(iii) (and, in
the case of any reset pursuant to Section 4.17(c)(iii) that constitutes an
increase in the Debt Limit, all the Banks have agreed to such new amount, in
their sole discretion), the amount set forth in this clause (ii) shall be deemed
to have been amended
(NY) 27008/757/AMEND/amend00.4.wpd
<PAGE>
(effective on and as of the date such reset is effective) to be such new amount,
without any further action on the part of any Borrower or any Bank. Except as
set forth in the proviso to clause (ii) of the immediately preceding sentence,
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.
Section 3. Notification of Automatic Reset of Debt Limit. The following
sentence is added at the end of Section 4.17(c)(ii): "The Borrowers shall give
the Agent prompt notice of any such sale and the Agent shall give the Borrowers
prompt notice of any redetermination of the Debt Limit pursuant to this clause
(ii) as a result of any such sale with respect to which the Agent shall have
received notice; provided that any failure or delay by the Agent in giving
notice of any such redetermination shall not affect or limit the obligations of
the Borrowers to comply with such redetermined Debt Limit.".
Section 4. Amendment of the Annual Coverage Ratio Covenant. The first
sentence of Section 4.28 of the Credit Agreement is amended by adding the
following proviso at the end thereof: "; provided that for purposes of
determining the amount of scheduled principal payments on the Loans in the
calendar year 2002, only 45% of the amount of scheduled payments of principal on
the Loans in such calendar year shall be included."
Section 5. Amendment of the Interest Coverage Ratio Covenant. The
penultimate sentence of Section 4.34 of the Credit Agreement is amended to read
in its entirety as follows:
For purposes of this Section 4.34, "Historical CFADS" means, for any
period, gross cash operating revenues properly allocable to Petroleum Property
for such period less the following cash items: royalties, operating costs,
severance, windfall profits and other wellhead taxes, general and administrative
expenses and current income and other taxes properly allocable to such period
and cash capital expenditures made during such period and properly allocable to
a Petroleum Property owned as of the date of the most recent Reserve Report
(other than cash capital expenditures (i) constituting the purchase price of any
such Petroleum Property permitted to be purchased hereunder or (ii) exploration
costs associated with any Petroleum Property owned as of the date of the most
recent Reserve Report).
Section 6. 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.
(NY) 27008/757/AMEND/amend00.4.wpd
<PAGE>
Section 7. Governing Law. This Amendment shall be governed by and
construed in accordance with the laws of the State of New York.
Section 8. 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 9. Effectiveness. This Amendment shall become effective on the
date (the "Effective Date") on which the Agent shall have received from the
Borrowers and the Required 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/amend00.4.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/amend00.4.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/amend00.4.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/amend00.4.wpd
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Form 10-Q
for the quarter ended March 31, 2000 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 15,498
<SECURITIES> 0
<RECEIVABLES> 21,527
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 38,237
<PP&E> 760,932
<DEPRECIATION> 591,820
<TOTAL-ASSETS> 208,676
<CURRENT-LIABILITIES> 25,580
<BONDS> 0
0
21,083
<COMMON> 100
<OTHER-SE> 57,733
<TOTAL-LIABILITY-AND-EQUITY> 208,676
<SALES> 21,656
<TOTAL-REVENUES> 21,809
<CGS> 0
<TOTAL-COSTS> 5,482
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,395
<INCOME-PRETAX> 4,953
<INCOME-TAX> 548
<INCOME-CONTINUING> 4,405
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,405
<EPS-BASIC> .38
<EPS-DILUTED> .38
</TABLE>
