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 June 30, 1997
|_| TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-8921
HALLWOOD ENERGY PARTNERS, L. P.
(Exact name of registrant as specified in its charter)
Delaware 84-0987088
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4582 South Ulster Street Parkway
Suite 1700
Denver, Colorado 80237
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 850-7373
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
The registrant is a limited partnership and issues Units (representing ownership
of limited partner interests).
Number of Units outstanding as of August 14, 1997
Class A 9,977,254
Class B 143,773
Class C 664,063
Page 1 of 21
<PAGE>
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HALLWOOD ENERGY PARTNERS, L. P.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
June 30, December 31,
1997 1996
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 5,562 $ 5,540
Accounts receivable:
Oil and gas revenues 6,010 9,405
Trade 3,207 4,507
Prepaid expenses and other current assets 1,191 928
-------- ----------
Total 15,970 20,380
------- --------
PROPERTY, PLANT AND EQUIPMENT, at cost
Oil and gas properties (full cost method):
Proved mineral interests 614,683 607,875
Unproved mineral interests - domestic 1,750 1,244
Furniture, fixtures and other 3,421 3,366
--------- ---------
Total 619,854 612,485
Less accumulated depreciation, depletion,
amortization and property impairment (529,538) (523,936)
------- -------
Total 90,316 88,549
------- --------
OTHER ASSETS
Investment in common stock of HCRC 14,946 13,700
Deferred expenses and other assets 122 163
---------- ----------
Total 15,068 13,863
-------- --------
TOTAL ASSETS $121,354 $122,792
======= =======
<FN>
(Continued on the following page)
</FN>
-2-
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HALLWOOD ENERGY PARTNERS, L. P.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands except Units)
June 30, December 31,
1997 1996
CURRENT LIABILITIES
<S> <C> <C>
Accounts payable and accrued liabilities $ 15,669 $ 15,185
Net working capital deficit of affiliate 198 159
Due to affiliates 685 581
Current portion of contract settlement 2,628
Current portion of long-term debt 5,810
------------- ---------
Total 19,180 21,735
------- --------
NONCURRENT LIABILITIES
Long-term debt 29,986 29,461
Contract settlement 2,512
Deferred liability 1,237 1,533
--------- ---------
Total 31,223 33,506
-------- --------
Total liabilities 50,403 55,241
-------- --------
MINORITY INTEREST IN AFFILIATES 3,040 3,336
-------- ---------
PARTNERS' CAPITAL
Class A Units - 9,977,254 Units issued, 9,077,949
outstanding in 1997 and 1996 64,896 61,487
Class B Subordinated Units - 143,773 Units issued
and outstanding in 1997 and 1996 1,351 1,254
Class C Units - 664,063 Units issued and outstanding
in 1997 and 1996 5,146 5,146
General Partner 3,497 3,307
Treasury Units - 899,305 Units in 1997 and 1996 (6,979) (6,979)
--------- ---------
Partners' capital - net 67,911 64,215
-------- --------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $121,354 $122,792
======= =======
<FN>
The accompanying notes are an integral
part of the financial statements.
</FN>
</TABLE>
-3-
<PAGE>
<TABLE>
<CAPTION>
HALLWOOD ENERGY PARTNERS, L. P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except per Unit data)
For the Three Months Ended
June 30,
1997 1996
REVENUES:
<S> <C> <C>
Oil revenue $ 3,082 $ 5,037
Gas revenue 4,961 6,921
Pipeline, facilities and other 786 697
Interest 136 133
--------- ---------
8,965 12,788
-------- -------
EXPENSES:
Production operating 2,536 2,662
Facilities operating 192 157
General and administrative 1,030 750
Depreciation, depletion and amortization 2,540 3,466
Interest 748 997
--------- ---------
7,046 8,032
-------- --------
OTHER INCOME (EXPENSES):
Equity in earnings of HCRC 266 351
Minority interest in net income of affiliates (332) (604)
Litigation settlement 273 (228)
--------- ---------
207 (481)
--------- ---------
NET INCOME 2,126 4,275
CLASS C UNIT DISTRIBUTIONS ($.25 PER UNIT) 166 166
--------- ---------
NET INCOME ATTRIBUTABLE TO GENERAL PARTNER,
CLASS A AND CLASS B LIMITED PARTNERS $ 1,960 $ 4,109
======== ========
ALLOCATION OF NET INCOME:
General partner $ 249 $ 646
========= =========
Class A and Class B limited partners $ 1,711 $ 3,463
======== ========
Per Class A Unit and Class B Unit $ .18 $ .37
========== ==========
Weighted average Class A Units and Class B Units
and equivalent Units outstanding 9,335 9,246
======== ========
<FN>
The accompanying notes are an integral
part of the financial statements.
</FN>
-4-
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HALLWOOD ENERGY PARTNERS, L. P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except per Unit data)
For the Six Months Ended
June 30,
1997 1996
REVENUES:
<S> <C> <C>
Oil revenue $ 7,593 $ 10,122
Gas revenue 12,434 14,729
Pipeline, facilities and other 1,549 1,432
Interest 259 206
--------- ---------
21,835 26,489
------- -------
EXPENSES:
Production operating 5,325 5,692
Facilities operating 370 432
General and administrative 2,254 1,918
Depreciation, depletion and amortization 5,492 7,328
Interest 1,599 2,119
-------- --------
15,040 17,489
------- -------
OTHER INCOME (EXPENSES):
Equity in earnings of HCRC 1,246 727
Minority interest in net income of affiliates (892) (1,471)
Litigation settlement 273 (228)
--------- ---------
627 (972)
--------- ---------
NET INCOME 7,422 8,028
CLASS C UNIT DISTRIBUTIONS ($.50 PER UNIT) 332 332
--------- ---------
NET INCOME ATTRIBUTABLE TO GENERAL PARTNER,
CLASS A AND CLASS B LIMITED PARTNERS $ 7,090 $ 7,696
======== ========
ALLOCATION OF NET INCOME:
General partner $ 876 $ 1,333
========= ========
Class A and Class B limited partners $ 6,214 $ 6,363
======== ========
Per Class A Unit and Class B Unit $ .66 $ .69
========== ==========
Weighted average Class A Units and Class B Units
and equivalent Units outstanding 9,354 9,258
======== ========
<FN>
The accompanying notes are an integral
part of the financial statements.
</FN>
-5-
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HALLWOOD ENERGY PARTNERS, L. P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
For the Six Months Ended
June 30,
1997 1996
OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 7,422 $ 8,028
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization 5,492 7,328
Depreciation charged to affiliates 110 125
Amortization of deferred loan costs and other assets 41 78
Noncash interest expense 116 55
Equity in earnings of HCRC (1,246) (727)
Minority interest in net income of affiliates 892 1,471
Undistributed earnings of affiliates (73) (451)
Recoupment of take-or-pay liability (296) (216)
--------- ---------
Cash from operations before working capital changes 12,458 15,691
Changes in operating assets and liabilities provided (used) cash net of
noncash activity:
Oil and gas revenues receivable 3,395 (766)
Trade receivables 1,300 530
Due from affiliates 1,405
Prepaid expenses and other current assets (263) 29
Accounts payable and accrued liabilities 484 (2,150)
Due to affiliates (489) 1,849
--------- --------
Net cash provided by operating activities 16,885 16,588
------- -------
INVESTING ACTIVITIES:
Additions to property, plant and equipment (1,759) (616)
Exploration and development costs incurred (4,920) (4,142)
Proceeds from sales of property, plant and equipment 85 5,263
Refinance of Spraberry investment (4,715)
Investment in affiliates (70) (508)
---------- ---------
Net cash used in investing activities (6,664) (4,718)
-------- --------
FINANCING ACTIVITIES:
Payments of long-term debt (5,285) (4,373)
Proceeds from long-term debt 6,000
Distributions paid (3,612) (4,207)
Distributions paid by consolidated affiliates to minority interest (1,188) (1,335)
Payment of contract settlement (305)
Syndication costs and capital contributions (114) (12)
Other financing activities (118)
------------ ---------
Net cash used in financing activities (10,199) (4,350)
------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 22 7,520
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD 5,540 4,977
-------- --------
END OF PERIOD $ 5,562 $ 12,497
======== =======
<FN>
The accompanying notes are an
integral part of the financial
statements.
</FN>
-6-
</TABLE>
<PAGE>
HALLWOOD ENERGY PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - GENERAL
Hallwood Energy Partners, L. P. ("HEP") is a publicly traded Delaware limited
partnership engaged in the development, production, sale and transportation of
oil and gas and in the acquisition, exploration, development and operation of
oil and gas properties. HEP's objective is to provide its partners with a
balanced return through a combination of cash distributions and capital
appreciation. To achieve its objective, HEP utilizes operating cash flow, first,
to reinvest in operations to replace production; second, to maintain stable cash
distributions to Unitholders; and third, to increase HEP's reserve base over
time. HEP seeks to expand its reserve base by continually evaluating,
prioritizing and developing its existing inventory of development, exploitation
and exploration projects. In addition, HEP seeks to expand its inventory of
projects through internal project development and select acquisitions. The
general partner of HEP is HEPGP Ltd.
The activities of HEP are conducted through HEP Operating Partners, L.P.
("HEPO") and EDP Operating, Ltd. ("EDPO"). HEP is the sole limited partner and
HEPGP Ltd. is the sole general partner of HEPO and of EDPO. Solely for purposes
of simplicity herein, unless otherwise indicated, all references to HEP in
connection with the ownership, exploration, development or production of oil and
gas properties include HEPO and EDPO.
The interim financial data are unaudited; however, in the opinion of the general
partner, the interim data include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results for the
interim periods. These financial statements should be read in conjunction with
the financial statements and accompanying notes included in HEP's December 31,
1996 Annual Report on Form 10-K.
Accounting Policies
Consolidation
HEP fully consolidates majority owned entities and reflects a minority interest
in the consolidated financial statements. HEP accounts for its interest in 50%
or less owned affiliated oil and gas partnerships and limited liability
companies using the proportionate consolidation method of accounting. HEP's
investment in the common stock of its affiliate, Hallwood Consolidated Resources
Corporation ("HCRC"), is accounted for under the equity method.
The accompanying financial statements include the activities of HEP, its
subsidiaries Hallwood Petroleum, Inc. ("HPI") and Hallwood Oil and Gas, Inc.
("Hallwood Oil"), and majority owned affiliates, the May Limited Partnerships
1983-1, 1983-2, 1983-3, 1984-1, 1984-2, 1984-3 ("Mays").
Computation of Net Income Per Unit
Net income per Class A and Class B Unit is computed by dividing net income
attributable to the Class A and Class B limited partners' interest (net income
excluding income attributable to the general partner and Class C Units) by the
weighted average number of Class A Units, Class B Units and equivalent Class A
and Class B Units outstanding. The options to acquire Class A Units, which were
issued during 1995, are considered to be Unit equivalents since January 1, 1997
because the market price of the Class A Units has exceeded the exercise price of
the options since that date. The number of equivalent Units was computed using
the treasury stock method which assumes that the increase in the number of Units
is reduced by the number of Units which could have been repurchased by the
Partnership with the proceeds from the exercise of the options (which were
assumed to have been made at the average market price of the Class A Units
during the reporting period).
-7-
<PAGE>
HEP owns approximately 46% of the outstanding common stock of HCRC, while HCRC
owns approximately 19% of HEP's Units. Consequently, HEP has an interest in
899,305 of its own Units at June 30, 1997 and December 31, 1996. These Units are
treated as treasury units in the accompanying financial statements.
During February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings per Share ("SFAS 128"). SFAS
128 establishes standards for computing and presenting earnings per share (EPS),
and supersedes APB Opinion No. 15 and its related interpretations. It replaces
the presentation of primary EPS with a presentation of basic EPS, which excludes
dilution, and requires dual presentation of basic and diluted EPS for all
entities with complex capital structures. Diluted EPS is computed similarly to
fully diluted EPS pursuant to Opinion No. 15. SFAS 128 is effective for periods
ending after December 15, 1997, including interim periods, and will require
restatement of all prior period EPS data presented; earlier application is not
permitted.
A comparison of EPS shown in the accompany financial statements with the pro
forma amounts that would have been determined in accordance with SFAS 128 is as
follows:
<TABLE>
<CAPTION>
For the Quarter Ended June 30, For the Six Months Ended June 30,
1997 1996 1997 1996
Primary (Basic):
<S> <C> <C> <C> <C>
As reported $.18 $.37 $.66 $.69
Pro forma $.19 $.37 $.67 $.69
Fully Diluted (Diluted):
As reported $.18 $.37 $.66 $.69
Pro forma $.18 $.37 $.66 $.69
</TABLE>
Reclassifications
Certain reclassifications have been made to the prior period amounts to conform
to the classifications used in the current period.
NOTE 2 - DEBT
During the second quarter of 1997, HEP and its lenders amended and restated
HEP's Second Amended and Restated Credit Agreement (as amended, the "Credit
Agreement") to extend the term date of its line of credit to May 31, 1999. Under
the Credit Agreement and an Amended and Restated Note Purchase Agreement ("Note
Purchase Agreement") (collectively referred to as the "Credit Facilities") HEP's
borrowing base is $51,000,000. HEP has amounts outstanding at June 30, 1997 of
$25,700,000 under the Credit Agreement and $4,286,000 under the Note Purchase
Agreement. HEP's borrowing base is further reduced by an outstanding contract
settlement obligation of $2,628,000; therefore, its unused borrowing base
totaled $18,386,000 at August 14, 1997.
Borrowings under the Note Purchase Agreement bear interest at an annual rate of
11.85%, which is payable quarterly. Annual principal payments of $4,286,000
began April 30, 1992, and the debt is required to be paid in full on April 30,
1998. HEP intends to fund the payment due in April 1998 through additional
borrowings under the Credit Agreement; thus, no portion of HEP's Note Purchase
Agreement is classified as current as of June 30, 1997.
Borrowings against the Credit Agreement bear interest at the lower of the
Certificate of Deposit rate plus from 1.375% to 1.875%, prime plus 1/2% or the
Euro-Dollar rate plus from 1.25% to 1.75%. The applicable interest rate was 7.2%
at June 30, 1997. Interest is payable monthly, and quarterly principal payments
of $1,874,125, as adjusted for the anticipated borrowings to fund the Note
Purchase Agreement payment due in April 1998, commence May 31, 1999.
-8-
<PAGE>
The borrowing base for the Credit Facilities is redetermined semiannually. The
Credit Facilities are secured by a first lien on approximately 80% in value of
HEP's oil and gas properties. Additionally, aggregate distributions paid by HEP
in any 12 month period are limited to 50% of cash flow from operations before
working capital changes and distributions received from affiliates, if the
principal amount of debt of HEP is 50% or more of the borrowing base. Aggregate
distributions paid by HEP are limited to 65% of cash flow from operations if the
principal amount of debt is less than 50% of the borrowing base.
HEP entered into contracts to hedge its interest rate payments on $15,000,000 of
its debt for each of 1997 and 1998 and $10,000,000 for each of 1999 and 2000.
HEP does not use the hedges for trading purposes, but rather for the purpose of
providing a measure of predictability for a portion of HEP's interest payments
under its debt agreement, which has a floating interest rate. In general, it is
HEP's goal to hedge 50% of the principal amount of its debt for the next two
years and 25% for each year of the remaining term of the debt. HEP has entered
into four hedges, one of which is an interest rate collar pursuant to which it
pays a floor rate of 7.55% and a ceiling rate of 9.85%, and the others are
interest rate swaps with fixed rates ranging from 5.75% to 6.57%. The amounts
received or paid upon settlement of these transactions are recognized as
interest expense at the time the interest payments are due.
NOTE 3 - STATEMENTS OF CASH FLOWS
Cash paid for interest during the six months ended June 30, 1997 and 1996 was
$1,443,000 and $1,913,000, respectively.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Capital Resources
Cash Flow
HEP generated $16,885,000 of cash flow from operating activities during the
first six months of 1997.
Cash was used primarily for:
o Additions to property and development costs incurred of $6,679,000,
o Payments of long-term debt of $5,285,000, and
o Distributions to Unitholders of $3,612,000.
When combined with miscellaneous other cash activity during the period, the
result was an increase of $22,000 in HEP's cash from $5,540,000 at December 31,
1996 to $5,562,000 at June 30, 1997.
Development Projects and Acquisitions
Through June 30, 1997, HEP incurred approximately $6,679,000 for exploration,
development and acquisition costs toward the 1997 capital budget of $15,500,000.
The expenditures were comprised of approximately $4,920,000 for exploration and
development and approximately $1,759,000 for property acquisitions.
HEP's 1997 capital budget is allocated to the following: Permian/Delaware
Basins, Gulf Coast Region, Rocky Mountain Region, and Mid-Continent Region. A
description of HEP's significant exploration, exploitation, and development
projects to date in 1997 follows.
-9-
<PAGE>
Permian/Delaware Basins
HEP has allocated 36% (approximately $5,500,000) of its 1997 capital budget to
the Permian/Delaware Basins located in Texas and Southeastern New Mexico. Thus
far in 1997, HEP spent approximately $1,900,000 drilling 22 exploitation and
development wells plus five exploration wells, and on the acquisition of
undeveloped acreage and geological and geophysical data. Of the wells that were
drilled, 22 (82%) are a success. During the remainder of 1997, HEP plans to
drill 36 additional exploitation and development wells and nine exploration
wells. In July, HEP acquired additional interests in 34 of its existing wells
with potential net volumes of approximately 127,500 equivalent barrels of oil. A
discussion of several of the larger projects within the Basins follows.
In 1996, HEP became active in the Garden City/Mills project in Glasscock County,
Texas. This project included the acquisition and processing of 66 square miles
of nonproprietary 3-D seismic data and the drilling of one successful
exploratory well prior to the end of 1996. In 1997, HEP drilled a second
successful 10,000 foot delineation well which is currently producing at a gross
rate of 230 equivalent barrels of oil per day. HEP's working interest in this
well is 25%. A third well in this area recently failed. HEP's 1997 costs
incurred in this area to date are approximately $220,000. HEP will attempt to
drill one additional exploitation well during the remainder of 1997.
The nonoperated Merkel Project consists of 10 square miles of proprietary 3-D
seismic data in Jones, Taylor and Nolan Counties, Texas. HEP began its
involvement in this area in 1995 with the successful completion of one well. In
1996, HEP participated in the drilling of eight additional wells, seven of which
were successful. In 1997, HEP continued its participation with the drilling of
two more successful wells, and four additional wells are currently underway.
HEP's 1997 costs for these wells to date total approximately $115,000. HEP owns
an average 10% working interest in this area.
Based on the success in the nonoperated Merkel area, HEP acquired 74 additional
miles of proprietary 3-D seismic data adjacent to the nonoperated area. HEP owns
an average 25% working interest in these wells, and HPI is the operator. HEP has
drilled three successful wells and two unsuccessful wells in the area. Ten
additional wells are scheduled to be drilled during the remainder of 1997. HEP's
1997 costs to date for drilling and acreage in the area are approximately
$300,000.
HEP purchased an interest in a 3-D seismic shoot covering 85 square miles of
acreage for the Griffin Project in Gaines County, Texas for $455,000. HEP has
developed a number of prospects incorporating different geologic ideas which it
plans to pursue in 1997 and future years. The first prospect, a 12,800 foot
Devonian/Silurian well was drilled and subsequently plugged at a cost of
approximately $165,000. HEP plans to drill 3 additional exploratory wells in the
area in 1997.
In 1996, HEP acquired 106 square miles of 3-D seismic data on the Cowden Ranch
in Crane County, Texas. In early 1997, an exploratory well was drilled at a
total cost of approximately $230,000. This well was dry, and HEP does not plan
to continue exploration in this area.
HEP drilled three successful development and exploitation wells in the Spraberry
area of Texas and plans to drill an additional 10 wells during 1997. In 1997,
HEP has spent approximately $225,000 in this area.
Rocky Mountain Region
At the current date, HEP has allocated approximately 11% (approximately
$1,700,000) of its 1997 capital budget to the Rocky Mountain Region located in
Colorado, Montana, North Dakota, Northwest New Mexico and Wyoming. To date, HEP
spent approximately $870,000 on drilling and recompletion of 12 development and
exploitation wells, one exploration well, and acquiring geological and
geophysical data. Seven of these wells are a success, and HEP plans to drill an
additional 16 wells in this region in 1997. A discussion of major projects
within the region follows.
-10-
<PAGE>
In the Lone Tree area of Montana, HEP drilled one exploitation well and
performed two recompletions; one well was a success. Work on a fourth well in
the area increased production on a gross basis by 50 barrels per day. Total 1997
costs for these Montana projects were approximately $320,000.
HEP also purchased a 12.5% interest in the Hudson Ranch project. This
multi-objective exploration project focuses on several formations. HEP's 1997
costs to date for the project are approximately $315,000. The first well in the
project is scheduled to be drilled in 1998.
Gulf Coast Region
HEP's 1997 capital budget allocation for the Gulf Coast Region in Louisiana and
South and East Texas is approximately 18% (approximately $2,800,000). In 1997,
HEP spent approximately $1,050,000 to drill and recomplete four exploitation
wells and two exploration wells. Four of the wells were successful. HEP plans to
drill four additional wells within the region during the remainder of 1997.
In 1997, HEP spent approximately $490,000 for tubing repairs, additional
perforations and miscellaneous maintenance costs. In addition, HEP spent
approximately $170,000 in 1997 for a 14,500 foot exploration well in the South
Scott Field of Louisiana, which was unsuccessful.
HEP participated in the drilling of two Jeffress Field wells in Hidalgo County,
Texas. Both wells are a success and have cost HEP approximately $475,000. One of
the wells reported a first 24 hour test of 15,338 mcf of gas per day and 480
barrels of condensate per day on a gross basis. These wells are nonoperated, and
HEP owns a 10% interest.
HEP has been active in the Mercy Field in San Jacinto County, Texas where it
drilled an 11,000 foot development well and deepened an existing well to a
different formation. Both wells were successful, and the estimated total costs
to HEP is approximately $380,000.
Other
HEP's 1997 capital budget allocation for all other areas is approximately 35%
(approximately $5,500,000). To date, HEP successfully recompleted four wells.
HEP plans to drill 15 wells in the remainder of 1997.
HEP is currently participating in the Stealth Exploration Prospect in Garter
County, Oklahoma. This structural test of two reservoirs will be 19,000 feet
deep and will take nearly nine months to drill. HEP has the right of first
refusal on five additional prospects developed by the same operator in the area.
In 1997, HEP's cost is approximately $80,000 for its 5% interest in the well.
Projects begun in the fourth quarter of 1996 have cost HEP approximately
$780,000 through the second quarter of 1997. These additional costs are
comprised primarily of approximately $200,000 for two unsuccessful exploratory
wells in the Gulf Coast Region and in the Permian/Delaware Basins.
Distributions
HEP declared distributions of $.13 per Class A Unit and $.25 per Class C Unit,
payable on August 15, 1997 to Unitholders of record on June 30, 1997.
Distributions on the Class B Units are suspended if the Class A Units receive a
distribution of less than $.20 per Class A Unit per calendar quarter. In any
quarter for which distributions of $.20 or more per unit are made on the Class A
Units, the Class B Units are entitled to be paid, in whole or in part, suspended
distributions.
-11-
<PAGE>
Financing
During the second quarter of 1997, HEP and its lenders amended and restated
HEP's Second Amended and Restated Credit Agreement (as amended, the "Credit
Agreement") to extend the term date of its line of credit to May 31, 1999. Under
the Credit Agreement and an Amended and Restated Note Purchase Agreement ("Note
Purchase Agreement") (collectively referred to as the "Credit Facilities") HEP's
borrowing base is $51,000,000. HEP has amounts outstanding at June 30, 1997 of
$25,700,000 under the Credit Agreement and $4,286,000 under the Note Purchase
Agreement. HEP's borrowing base is further reduced by an outstanding contract
settlement obligation of $2,628,000; therefore, its unused borrowing base
totaled $18,386,000 at August 14, 1997.
Borrowings under the Note Purchase Agreement bear interest at an annual rate of
11.85%, which is payable quarterly. Annual principal payments of $4,286,000
began April 30, 1992, and the debt is required to be paid in full on April 30,
1998. HEP intends to fund the payment due in April 1998 through additional
borrowings under the Credit Agreement; thus, no portion of HEP's Note Purchase
Agreement is classified as current as of June 30, 1997.
Borrowings against the Credit Agreement bear interest at the lower of the
Certificate of Deposit rate plus from 1.375% to 1.875%, prime plus 1/2% or the
Euro-Dollar rate plus from 1.25% to 1.75%. The applicable interest rate was 7.2%
at June 30, 1997. Interest is payable monthly, and quarterly principal payments
of $1,874,125, as adjusted for the anticipated borrowings to fund the Note
Purchase Agreement payment due in April 1998, commence May 31, 1999.
The borrowing base for the Credit Facilities is redetermined semiannually. The
Credit Facilities are secured by a first lien on approximately 80% in value of
HEP's oil and gas properties. Additionally, aggregate distributions paid by HEP
in any 12 month period are limited to 50% of cash flow from operations before
working capital changes and distributions received from affiliates, if the
principal amount of debt of HEP is 50% or more of the borrowing base. Aggregate
distributions paid by HEP are limited to 65% of cash flow from operations if the
principal amount of debt is less than 50% of the borrowing base.
HEP entered into contracts to hedge its interest rate payments on $15,000,000 of
its debt for each of 1997 and 1998 and $10,000,000 for each of 1999 and 2000.
HEP does not use the hedges for trading purposes, but rather for the purpose of
providing a measure of predictability for a portion of HEP's interest payments
under its debt agreement, which has a floating interest rate. In general, it is
HEP's goal to hedge 50% of the principal amount of its debt for the next two
years and 25% for each year of the remaining term of the debt. HEP has entered
into four hedges, one of which is an interest rate collar pursuant to which it
pays a floor rate of 7.55% and a ceiling rate of 9.85%, and the others are
interest rate swaps with fixed rates ranging from 5.75% to 6.57%. The amounts
received or paid upon settlement of these transactions are recognized as
interest expense at the time the interest payments are due.
Cautionary Statement Regarding Forward-Looking Statements
In the interest of providing the Partnership's Unitholders and potential
investors with certain information regarding the Partnership's future plans and
operations, certain statements set forth in this Form 10-Q relate to
management's future plans and objectives. Such statements are "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Although any forward-looking statements contained in this Form 10-Q or otherwise
expressed by or on behalf of the Partnership are, to the knowledge and in the
judgment of the officers and directors of the General Partner, expected to prove
true and to come to pass, management is not able to predict the future with
absolute certainty. Forward-looking statements involve known and unknown risks
and uncertainties which may cause the Partnership's actual performance and
financial results in future periods to differ materially from any projection,
estimate or forecasted result. These risks and uncertainties include, among
other things, volatility of oil and gas prices, competition, risks inherent in
the Partnership's oil and gas operations, the inexact nature of interpretation
of seismic and other geological and geophysical data, imprecision of reserve
estimates, the Partnership's ability to replace and expand oil and gas reserves,
and such other risks and uncertainties described from time to time in the
Partnership's periodic reports and filings with the Securities and Exchange
Commission. Accordingly, Unitholders and potential investors are cautioned that
certain events or circumstances could cause actual results to differ materially
from those projected.
-12-
<PAGE>
Inflation and Changing Prices
Prices
Prices obtained for oil and gas production depend upon numerous factors that are
beyond the control of HEP, including the extent of domestic and foreign
production, imports of foreign oil, market demand, domestic and worldwide
economic and political conditions, and government regulations and tax laws.
Prices for both oil and gas fluctuated significantly throughout 1996 and through
the second quarter of 1997. The following table presents the weighted average
prices received each quarter by HEP and the effects of the hedging transactions
discussed below.
<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>
First quarter - 1996 $18.05 $17.97 $2.41 $2.30
Second quarter - 1996 20.56 20.15 2.15 2.12
Third quarter - 1996 21.66 20.73 2.17 2.11
Fourth quarter - 1996 24.04 22.23 2.81 2.43
First quarter - 1997 22.10 21.08 2.89 2.52
Second quarter - 1997 17.71 17.71 2.02 1.98
</TABLE>
HEP has entered into numerous financial contracts to hedge the price of its oil
and natural gas. The purpose of the hedges is to provide protection against
price decreases and to provide a measure of stability in the volatile
environment of oil and natural gas spot pricing. The revenue associated with
these contracts is recognized as oil or gas revenue at the time the hedged
volumes are sold.
The following table provides a summary of HEP's outstanding financial contracts:
Oil
Percent of Production Contract
Period Hedged Floor Price
(per bbl)
Last six months of 1997 47% $17.78
1998 21% $16.41
1999 3% $15.88
-13-
<PAGE>
Between 12% and 100% of the oil volumes hedged in each year are subject to a
participating hedge whereby HEP will receive the contract price if the posted
futures price is lower than the contract price, and will receive the contract
price plus between 25% and 75% of the difference between the contract price and
the posted futures price if the posted futures price is greater than the
contract price. Between 32% and 100% of the volumes hedged in each year are
subject to a collar agreement whereby HEP will receive the contract price if the
spot price is lower than the contract price, the cap price if the spot price is
higher than the cap price, and the spot price if that price is between the
contract price and the cap price. The cap prices range from $17.50 to $19.35.
Gas
Percent of Production Contract
Period Hedged Floor Price
(per mcf)
Last six months of 1997 54% $1.97
1998 48% $2.02
1999 24% $1.86
2000 18% $2.01
Between 0% and 43% of the gas volumes hedged in each year are subject to a
collar agreement whereby HEP will receive the contract price if the spot price
is lower than the contract price, the cap price if the spot price is higher than
the cap price, and the spot price if that price is between the contract price
and the cap price. The cap prices range from $2.78 to $2.93.
During the third quarter through July 24, 1997 the weighted average oil price
(for barrels not hedged) was approximately $18.50 per barrel. The weighted
average price of natural gas (for mcf not hedged) during that period was
approximately $2.10 per mcf.
Inflation
Inflation did not have a material impact on HEP in 1996 and is not anticipated
to have a material impact in 1997.
Results of Operations
The following tables are presented to contrast HEP's revenue, expense and
earnings for discussion purposes. Significant fluctuations are discussed in the
accompanying narrative. The "direct owned" column represents HEP's direct
royalty and working interests in oil and gas properties. The "Mays" column
represents the results of operations of six May Limited Partnerships which are
consolidated with HEP. In 1997, HEP owned interests which ranged from 57.5% to
68.2% of the Mays, and in 1996, HEP's ownership in the Mays ranged from 54.5% to
68.3%.
-14-
<PAGE>
<TABLE>
<CAPTION>
TABLE OF HEP EARNINGS FOR MANAGEMENT DISCUSSION
(In thousands except price)
For the Quarter Ended June 30, 1997 For the Quarter Ended June 30, 1996
----------------------------------- -----------------------------------
Direct Direct
Owned Mays Total Owned Mays Total
<S> <C> <C> <C> <C> <C> <C>
Oil production (bbl) 158 16 174 224 26 250
Gas production (mcf) 2,220 286 2,506 2,810 459 3,269
Average oil price (per bbl) $17.52 $19.63 $17.71 $ 20.05 $ 20.96 $ 20.15
Average gas price (per mcf) $ 1.93 $ 2.36 $ 1.98 $ 2.02 $ 2.69 $ 2.12
Oil revenue $ 2,768 $ 314 $ 3,082 $ 4,492 $ 545 $ 5,037
Gas revenue 4,285 676 4,961 5,687 1,234 6,921
Pipeline, facilities and other 786 786 697 697
Interest 113 23 136 115 18 133
------- -------- ------- -------- --------- --------
Total revenue 7,952 1,013 8,965 10,991 1,797 12,788
------ ------ ------ ------ ------- ------
Production operating 2,410 126 2,536 2,496 166 2,662
Facilities operating 192 192 157 157
General and administrative 941 89 1,030 631 119 750
Depreciation, depletion, and amortization 2,267 273 2,540 3,019 447 3,466
Interest 748 748 997 997
Litigation settlement (income) expense (243) (30) (273) 222 6 228
Equity in earnings of HCRC (266) (266) (351) (351)
Minority interest in net income of affiliates 332 332 604 604
---------- ------- ------- ----------- -------- --------
Total expense 6,049 790 6,839 7,171 1,342 8,513
------ ------- ------ ------- ------- -------
Net income $ 1,903 $ 223 $ 2,126 $ 3,820 $ 455 $ 4,275
====== ======= ====== ======= ======== =======
</TABLE>
-15-
<PAGE>
<TABLE>
<CAPTION>
TABLE OF HEP EARNINGS FOR MANAGEMENT DISCUSSION
(In thousands except price)
For the Six Months Ended June 30, 1997 For the Six Months Ended June 30, 1996
-------------------------------------- --------------------------------------
Direct Direct
Owned Mays Total Owned Mays Total
<S> <C> <C> <C> <C> <C> <C>
Oil production (bbl) 350 38 388 475 58 533
Gas production (mcf) 4,829 645 5,474 5,694 969 6,663
Average oil price (per bbl) $19.37 $21.39 $19.57 $ 18.87 $ 19.97 $ 18.99
Average gas price (per mcf) $ 2.19 $ 2.87 $ 2.27 $ 2.05 $ 3.14 $ 2.21
Oil revenue $ 6,780 $ 813 $ 7,593 $ 8,964 $ 1,158 $10,122
Gas revenue 10,580 1,854 12,434 11,689 3,040 14,729
Pipeline, facilities and other 1,549 1,549 1,432 1,432
Interest 219 40 259 174 32 206
------- -------- ------- -------- --------- --------
Total revenue 19,128 2,707 21,835 22,259 4,230 26,489
------ ------ ------ ------ ------- ------
Production operating 5,042 283 5,325 5,344 348 5,692
Facilities operating 370 370 432 432
General and administrative 2,056 198 2,254 1,686 232 1,918
Depreciation, depletion, and amortization 4,878 614 5,492 6,349 979 7,328
Interest 1,599 1,599 2,119 2,119
Litigation settlement (income) expense (243) (30) (273) 222 6 228
Equity in earnings of HCRC (1,246) (1,246) (727) (727)
Minority interest in net income of affiliates 892 892 1,471 1,471
---------- ------- ------- ----------- ------- -------
Total expense 12,456 1,957 14,413 15,425 3,036 18,461
------ ------ ------ ------ ------- ------
Net income $ 6,672 $ 750 $ 7,422 $ 6,834 $ 1,194 $ 8,028
====== ======= ====== ======= ======= =======
</TABLE>
-16-
<PAGE>
Second Quarter of 1997 Compared to Second Quarter of 1996
Oil Revenue
Oil revenue decreased $1,955,000 during the second quarter of 1997 as compared
with the second quarter of 1996. The decrease is the result of a decrease in
production from 250,000 barrels in 1996 to 174,000 barrels in 1997, combined
with a decrease in the average oil price from $20.15 per barrel in 1996 to
$17.71 per barrel in 1997. Approximately 13% of the decrease in oil production
is due to the temporary shut-in of two wells in the Louisiana area while
workover procedures are performed, and the remainder of the decrease in
production is due to steep production declines on wells located in the West
Texas area.
HEP's hedging transactions, as described under "Inflation and Changing Prices,"
during the second quarter of 1997, had an immaterial effect on HEP's average oil
price.
Gas Revenue
Gas revenue decreased $1,960,000 during the second quarter of 1997 as compared
with the second quarter of 1996. The decrease is the result of a decrease in
production from 3,269,000 mcf in 1996 to 2,506,000 mcf in 1997 combined with a
decrease in price from $2.12 per mcf in 1996 to $1.98 per mcf in 1997.
Approximately 64% of the decrease in production is due to the temporary shut-in
of two wells in the Louisiana area while workover procedures are performed, and
the remainder of the decrease in production is due to steep production declines
on wells located in the West Texas area.
The effect of HEP's hedging transactions during the second quarter of 1997, was
to decrease HEP's average gas price from $2.02 per mcf to $1.98 per mcf,
representing a $100,000 reduction in revenue from hedging transactions.
Pipeline, Facilities and Other
Pipeline, facilities and other revenue consists primarily of facilities income
from two gathering systems located in New Mexico, revenues derived from salt
water disposal and incentive payments related to certain wells in San Juan
County. Pipeline, facilities and other revenue increased $89,000 during the
second quarter of 1997 as compared with the second quarter of 1996 due to the
write-off of miscellaneous amounts no longer considered liabilities of HEP.
Production Operating Expense
Production operating expense decreased $126,000 during the second quarter of
1997 as compared with the second quarter of 1996, primarily due to decreased
production taxes resulting from the lower production described above.
Facilities Operating Expense
Facilities operating expense represents the costs of operating and maintaining
two gathering systems located in New Mexico. Costs increased $35,000 during the
second quarter of 1997 as compared with the second quarter of 1996 primarily due
to increased maintenance activity during 1997.
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 HEP.
These expenses increased $280,000 during the second quarter of 1997 as compared
with the second quarter of 1996 primarily due to the timing of the payment of
consulting fees.
-17-
<PAGE>
Depreciation, Depletion and Amortization Expense
Depreciation, depletion and amortization expense decreased $926,000 during the
second quarter of 1997 as compared with the second quarter of 1996. The decrease
is primarily the result of a lower depletion rate in 1997 due to the decline in
production previously discussed.
Interest Expense
Interest expense decreased $249,000 during the second quarter of 1997 as
compared with the second quarter of 1996, primarily as a result of lower
outstanding debt during 1997.
Equity in Earnings of HCRC
Equity in earnings of HCRC decreased $85,000 during the second quarter of 1997
as compared with the second quarter of 1996. The decrease is primarily due to
HCRC's lower gas revenue resulting from decreased production combined with
decreased oil and gas prices during the second quarter of 1997.
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 $272,000 is
due to a decrease in the net income of the May Partnerships resulting primarily
from decreased production on their properties.
Litigation Settlement
Litigation settlement income during the second quarter of 1997 is comprised of
insurance proceeds which reimbursed a portion of expense incurred in a prior
period to settle certain litigation. Litigation settlement expense during the
second quarter of 1996 consists primarily of expenses incurred to settle a
property related lawsuit.
First Six Months of 1997 Compared to First Six Months of 1996
The comparisons for the first six months of 1997 and the first six months of
1996 are consistent with those discussed in the second quarter of 1997 compared
to the second quarter 1996 except for the following:
Oil Revenue
Oil revenue decreased $2,529,000 during the first six months of 1997 as compared
with the first six months of 1996. The decrease is the result of a decrease in
production from 533,000 barrels in 1996 to 388,000 barrels in 1997, partially
offset by an increase in the average oil price from $18.99 per barrel in 1996 to
$19.57 per barrel in 1997. Approximately 11% of the decrease in oil production
is due to the temporary shut-in of two wells in the Louisiana area while
workover procedures are performed, and the remainder is due to steep production
declines on wells located in the West Texas area.
The effect of HEP's hedging transactions during the first six months of 1997 was
to decrease HEP's average oil price from $20.13 per barrel to $19.57 per barrel,
representing a reduction in revenue from hedging transactions of $217,000.
Gas Revenue
Gas revenue decreased $2,295,000 during the first six months of 1997 as compared
with the first six months of 1996. The decrease is the result of a decrease in
production from 6,663,000 mcf in 1996 to 5,474,000 mcf in 1997 partially offset
by an increase in price from $2.21 per mcf in 1996 to $2.27 per mcf in 1997.
Approximately 57% of the decrease in production is due to the temporary shut-in
of two wells in the Louisiana area while workover procedures are performed, and
the remainder is due to steep production declines on wells located in the West
Texas area.
-18-
<PAGE>
The effect of HEP's hedging transactions during the first quarter of 1997 was to
decrease HEP's average gas price from $2.49 per mcf to $2.27 per mcf,
representing a $1,204,000 reduction in revenue from hedging transactions.
Facilities Operating Expense
Facilities operating expense decreased $62,000 during the first six months of
1997 as compared with the first six months of 1996 primarily due to the sale of
a facility in Louisiana during the second quarter of 1996.
Equity in Earnings of HCRC
Equity in earnings of HCRC increased $519,000 during the first six months of
1997 as compared with the first six months of 1996. The increase is primarily
due to lower operating expenses combined with lower depletion expense during
1997.
-19-
<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, 1996.
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
Exhibit
10.15 Third Amended and Restated Credit Agreement dated as of
May 31, 1997.
-20-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Partnership has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HALLWOOD ENERGY PARTNERS, L.P.
BY: HEPGP LTD.
General Partner
BY: HALLWOOD G.P., INC.
General Partner
Date: August 14 , 1997 By: /s/Robert S. Pfeiffer
------------------------ ------------------------------
Robert S. Pfeiffer, Vice President
(Chief Financial Officer)
-21-
<PAGE>
CONFORMED COPY
THIRD AMENDED AND RESTATED CREDIT AGREEMENT
AMENDMENT NO. 10 TO NOTE PURCHASE AGREEMENT
THIRD AMENDED AND RESTATED CREDIT AGREEMENT dated as of May
31, 1997 among HALLWOOD ENERGY PARTNERS, L.P. ("HEP"), HEP OPERATING PARTNERS,
L.P., EDP OPERATING, LTD., EM NOMINEE PARTNERSHIP COMPANY, CONCISE OIL AND GAS
PARTNERSHIP, MAY ENERGY PARTNERS OPERATING PARTNERSHIP LTD. (collectively, with
HEP, the "Borrowers"), the BANKS listed on the signature pages hereof (the
"Banks"), First Union National Bank, as collateral agent (the "Collateral
Agent"), MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent (the "Agent") and
AMENDMENT dated as of May 31, 1997 between the Borrowers and THE PRUDENTIAL
INSURANCE COMPANY OF AMERICA ("Prudential").
W I T N E S S E T H :
WHEREAS, the Borrowers, the Banks, the Collateral Agent and
the Agent are party to a Second Amended and Restated Credit Agreement dated as
of March 31, 1995 (as amended prior to the Effective Date (as defined below),
the "Original Credit Agreement" and as amended and restated by this Amendment
and Restatement, the "Credit Agreement"); and
WHEREAS, pursuant to the Original Credit Agreement, the
Borrowers have issued to the order of each Bank promissory notes (the "Original
Notes") substantially in the form of Exhibit A to the Original Credit Agreement;
and
WHEREAS, the Borrowers, the Banks, the Collateral Agent and
the Agent desire to amend the Original Credit Agreement as set forth herein and
to restate the Original Credit Agreement in its entirety to read as set forth in
the Original Credit Agreement with the amendments specified below;
WHEREAS, the Borrowers and Prudential have entered into an
Amended and Restated Note Purchase Agreement dated as of May 7, 1990 (as amended
prior to the Effective Date, the "Original Note Purchase Agreement"); and
<PAGE>
WHEREAS, the Borrowers have asked Prudential, and Prudential
has agreed, on the terms and conditions set forth below, to amend certain
provisions of the Original Note Purchase Agreement;
NOW, THEREFORE, the parties hereto agree as follows:
SECTION 1. Definitions; References; Amendment and Restatement
of the Original Credit Agreement and Amendment of Note Purchase Agreement.
Unless otherwise specifically defined herein, each term used herein which is
defined in the Original Credit Agreement or the Original Note Purchase
Agreement, as the case may be (including any Schedule thereto), shall have the
meaning assigned to such term therein. 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 Original
Credit Agreement or the Original Note Purchase Agreement, as the case may be,
shall, from and after the Effective Date, refer to the Original Credit Agreement
as amended and restated hereby or the Original Note Purchase Agreement as
amended hereby. Effective on and as of the Effective Date, the Original Credit
Agreement shall be amended and restated in its entirety to read as set forth in
the Original Credit Agreement with the amendments specified below, and the
Original Note Purchase Agreement shall be amended by the amendments specified
below.
SECTION 2. Increase in Commitments. With effect from and
including the Effective Date, the Commitment of each Bank shall be the amount
set forth opposite the name of such Bank on the signature pages hereof, as such
amount may be reduced from time to time pursuant to Section 2.09 of the Credit
Agreement.
SECTION 3. Amendments to the Definitions Contained in the
Original Credit Agreement. (a) The definitions of "Drawdown Termination Date"
and "Term Date" contained in Section 1.01 of the Original Credit Agreement are
amended to read in their entirety as follows:
"Drawdown Termination Date" means the earlier to occur of May
31, 1999 or the date on which the Borrowers elect to commence the Term
Period.
"Term Date" means the earlier to occur of May 31, 1999 or the
last day of May, August, November or February which first occurs after
the date on which the Borrowers elect to commence the Term Period.
(b) Definitions of "Availability Limit", "CD Margin",
"Commitment Fee Rate", "Euro-Dollar Margin", "Level I Status", "Level II Status"
and "Level III Status" are added in alphabetical order in Section 1.01 of the
Original Credit Agreement, to read in their entirety as follows:
<PAGE>
"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) $51,000,000. 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.
"CD Margin" means, on any date, (i) 1.375%, if on such date
Level I Status exists, (ii) 1.625%, if on such date Level II Status
exists and (iii) 1.875%, if on such date Level III Status exists.
"Commitment Fee Rate" means, on any date, (i) .375%, if on
such date Level I Status or Level II Status exists and (ii) .50%, if on
such date Level III Status exists.
"Euro-Dollar Margin" means, on any date, (i) 1.25%, if on such
date Level I Status exists, (ii) 1.50%, if on such date Level II Status
exists and (iii) 1.75%, if on such date Level III Status exists.
"Level I Status" exists on any date if on such date the
aggregate outstanding principal amount of the Loans is less than 50% of
the Availability Limit.
"Level II Status" exists on any date if on such date (i) the
aggregate outstanding principal amount of the Loans is less than or
equal to 85% of the Availability Limit and (ii) Level I Status does not
exist on such date.
"Level III Status" exists on any date if on such date neither
Level I Status nor Level II Status exists.
SECTION 4. Change in the Interest Rate Applicable to the
Loans. (a) The first sentence of Section 2.04(a) of the Original Credit
Credit Agreement is amended to read in its entirety as follows:
Each Bank's CD Loans shall bear interest on the unpaid principal amount
thereof until payment in full thereof at a rate per annum equal to the
sum of (i) the Adjusted CD Rate for each Interest Period applicable
thereto plus (ii) the CD Margin, but in no event to exceed the Highest
Lawful Rate of such Bank; provided that if any CD Loan or any portion
thereof shall, as a result of clause (2) (b) (i) of the definition of
Interest Period, have an Interest Period of less than 30 days, such CD
Loan or portion thereof shall bear interest during such Interest Period
at the rate applicable to Base Rate Loans during such period.
<PAGE>
(b) The first sentence of Section 2.04(b) of the Original
Credit Agreement is amended to read in its entirety as follows:
Each Bank's Euro-Dollar Loans shall bear interest on the unpaid
principal amount thereof until payment in full thereof at a rate per
annum equal to the sum of (i) the Adjusted Euro-Dollar Rate for each
Interest Period applicable thereto plus (ii) the Euro-Dollar Margin,
but in no event to exceed the Highest Lawful Rate of such Bank.
(c) Section 2.04(f) of the Original Credit Agreement is
deleted in its entirety.
(d) Section 2.04(g) of the Original Credit Agreement is
renumbered as Section 2.04(f).
SECTION 5. Change in Calculation of Commitment Fee.
Section 2.20 of the Original Credit Agreement is amended to read in its entirety
as follows:
SECTION 2.20. Commitment Fees. During the Revolving Credit
Period, the Borrowers shall pay to the Agent for the account of
each Bank (which payment shall be distributed to each Bank
ratably in accordance with each Bank's Commitment) a commitment
fee at the Commitment Fee Rate calculated for each day on the
daily average amount by which the Availability Limit exceeds the
aggregate outstanding principal amount of the Loans. Subject to
Section 2.09(b) hereof, such commitment fees shall accrue from
and including the Effective Date to but excluding the last day of
the Revolving Credit Period and shall be payable quarterly on
each March 31, June 30, September 30 and December 31 during the
Revolving Credit Period and on the last day of the Revolving
Credit Period.
SECTION 6. Additional Condition to Borrowing. Section 6.03 of
the Original Credit Agreement is amended by adding the following new subsection
(f) immediately after subsection (e) thereof, to read in its entirety as
follows:
(f) the fact that, immediately after such Borrowing, the
aggregate outstanding principal amount of the Loans will not exceed the
Availability Limit.
SECTION 7. Change in Amendments Section. Section 8.05 of
the Original Credit Agreement is amended as follows:
(a) by deleting the "or" at the end of clause (iii) thereof
and replacing it with a comma;
<PAGE>
(b) by deleting the period at the end of clause (iv) thereof and
replacing it with an "or"; and
(c) by adding a new clause (v) immediately after clause (iv) thereof,
to read it its entirety as follows:
(v) increase the amount set forth in the definition of Availability
Limit or change the provisions of Section 6.03(f).
SECTION 8. Amendment to Exhibit A. Exhibit A to the Original
Credit Agreement is amended to read in its entirety as set forth on Exhibit A
hereto.
SECTION 9. Amendments to Schedule B. Section 20 of Schedule B
to the Original Credit Agreement and the Original Note Purchase Agreement is
amended to read in its entirety as follows:
<PAGE>
Section 20. Distributions, Etc. No Borrower will make, pay or
declare any dividend or distribution on any class of its stock or any
distribution of profits or purchase, redeem or otherwise acquire for
value any shares of any class of its stock or any of the partnership
interests in any Borrower now or hereafter outstanding, return any
capital to its Partners, or make any distribution of its assets to its
Partners as such ("Distributions") (a) if an Event of Default has
occurred and is continuing and the Majority Lenders have notified the
Borrowers in writing not to make such Distributions; (b) if the
aggregate Debt of the Borrowers exceeds, or would immediately after
such Distribution exceed, 100% of the Debt Limit; or (c) on any date (a
"Measuring Date") in any fiscal quarter of HEP if at such Measuring
Date, after giving effect to any such proposed Distribution to be made
on such Measuring Date, the aggregate amount of Distributions made in
the period of twelve consecutive calendar months ended on such
Measuring Date would exceed the Distribution Percentage of an amount
equal to (A) the sum of the amounts which are set forth opposite the
captions "Cash provided by operations before working capital changes"
and "Distributions received from affiliates" on consolidated statements
of cash flows of HEP for the period of four consecutive fiscal quarters
most recently ended on or prior to such Measuring Date and with respect
to which the Borrowers have delivered to the Lenders the financial
statements required to delivered by them pursuant to Section 1 (it
being understood that such financial statements are prepared in
accordance with generally accepted accounting principles consistent
with those utilized in preparing the consolidated statements of cash
flows of HEP as filed in HEP's annual report on Form 10-K for the
fiscal year ended December 31, 1994 with the Securities and Exchange
Commission pursuant to the Securities Exchange Act of 1934) minus (B)
the aggregate amount of payments made by HEP in such period to make
purchases permitted by Section 19(n); provided, however, that the
provisions of subparagraphs (b) and (c) of this Section 20 shall not
prevent the payment of any Distribution within 60 days of the
declaration thereof, if at said date of declaration such payment would
have complied with the provisions hereof; and provided, further, that
for purposes of this Section 20 no Distribution from any Borrower
directly or indirectly to another Borrower shall be deemed to be a
Distribution hereunder. In addition, for purposes of this Section 20:
"Distribution Percentage" means, at any date, (i) 65%, if on
such date Monthly Exposure is less than 50% of the Debt Limit on such
date and (ii) otherwise, 50%.
"Monthly Exposure" means, on any date, the daily average
outstanding principal amount of Debt of the Borrowers and their Subsidiaries
(including without limitation the loans under the Credit Agreement) during the
30-day period ending on the date immediately preceding such date.
SECTION 10. Amendments to Schedule D. Schedule D to the
Original Credit Agreement and the Original Note Purchase Agreement is amended to
read in its entirety as set forth on Schedule D hereto.
SECTION 11 . Transitional Provisions. On the Effective Date
but subject to the conditions set forth in Section 14 hereof, the Euro-Dollar
Loans and Domestic Loans outstanding to each Bank under the Original Credit
Agreement shall be deemed to be the initial Euro-Dollar Loans or Domestic Loans,
as the case may be, made by such Bank under the Credit Agreement, it being the
intention of the parties hereto that (i) all indebtedness evidenced by the
Original Notes shall, on and after the Effective Date, be solely evidenced by
the Notes (as defined in the Credit Agreement), (ii) the Loans outstanding under
the Original Agreement on the Effective Date shall continue to be outstanding on
such date as Domestic Loans or Euro-Dollar Loans, as appropriate, having
Interest Periods determined in accordance with the Original Credit Agreement and
bearing interest as provided with respect to Loans in Article II of the Credit
Agreement and (iii) the liens created by the Collateral Documents on the
properties and assets described therein shall be carried forward and continue in
full force and effect for the purpose of securing the Notes. Upon receipt of its
Note, each Bank will mark its Original Note AReplaced@ and send in due course to
HEP evidence that such Original Note has been so marked.
SECTION 12. Governing Law. This Amendment and Restatement
shall be governed by and construed in accordance with the laws of the State of
New York.
SECTION 13. Counterparts. This Amendment and Restatement 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.
<PAGE>
SECTION 14. Effectiveness. This Amendment and Restatement
shall become effective on the date (the "Effective Date") when each of the
following conditions shall have been satisfied:
(a) this Amendment and Restatement shall have been duly
executed and delivered by the Borrowers, the Banks, the Collateral
Agent, the Agent and Prudential (or, in the case of any party as to
which an executed counterpart shall not have been received, the Agent
shall have received telegraphic, telex or other written confirmation
from such party of execution of a counterpart hereof by such party);
(b) the Agent shall have received for the account of each Bank
an executed Note substantially in the form of Exhibit A, duly and
validly issued and in the amount of such Bank's Commitment as set forth
on the signature pages hereof, dated on or prior to the Effective Date;
(c) the Agent shall have received a signed copy of a
certificate of the Secretary or an Assistant Secretary or other
appropriate officer of each of the Borrowers (or if such Borrower is a
partnership, a General Partner of such Borrower) certifying (i) the
names and true signatures of the Authorized Persons authorized to sign
the Notes, and the Collateral Documents to which the Borrowers or the
General Partners are or will be a party (including without limitation
any Collateral Documents Amendments referred to in subsection (f)) and
the other documents or certificates to be delivered pursuant thereto,
(ii) the resolutions of the Board of Directors (or equivalent body) of
the Borrowers and of each General Partner authorizing the transactions
contemplated hereby to which the Borrowers or such General Partner
are/is or will be a party, together with all documents evidencing other
necessary partnership or corporate action with respect to any thereof,
(iii) no amendments to the true copies of the Partnership Agreements
delivered to the Agent prior to the Effective Date, and (iv) no
amendments to the true copy of the Articles of Incorporation and
By-Laws of Hallwood G.P. delivered to the Agent prior to the Effective
Date;
(d) the Agent shall have received from King & Spalding,
counsel for the Borrowers, an opinion substantially to the effect of
Exhibit B hereto and covering such additional matters as the Majority
Lenders may reasonably request;
(e) the Agent shall have received from Davis Polk & Wardwell,
special counsel for the Agent, an opinion in substantially the form of
Exhibit C hereto;
<PAGE>
(f) the Collateral Agent shall have received duly executed
counterparts of the documents numbered (C)(1)(f), (C)(2)(e), C(3)(d),
(D)(4)(h), (D)(5)(d), (D)(5)(d), (D)(6)(d), (D)(7)(c), (E)(2)(e),
(E)(5)(e) listed on Schedule D hereto (the "Collateral Documents
Amendments"); and
(g) the Collateral Agent shall have received from counsel
satisfactory to it in each jurisdiction in which any Collateral
Documents Amendments are to be recorded or filed a favorable written
opinion as to the validity and binding effect of the Collateral
Documents and the perfection of the Liens created thereunder under the
law of such jurisdiction and as to such other matters incident to the
transactions herein contemplated as the Majority Lenders may reasonably
request.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment and Amendment and Restatement to be duly executed as of the date first
above written.
BORROWERS:
HALLWOOD ENERGY PARTNERS, L.P.
HEP OPERATING PARTNERS, L.P.
EDP OPERATING, LTD.
By: HEPGP LTD., its general partner
By: HALLWOOD G.P., INC.,
its general partner
By: /s/ Robert S. Pfeiffer
Title: Vice President
MAY ENERGY PARTNERS OPERATING PARTNERSHIP LTD.
EM NOMINEE PARTNERSHIP COMPANY
CONCISE OIL AND GAS PARTNERSHIP
By: HALLWOOD G.P., INC.,
formerly known as QUINOCO ENERGY, INC.
By: /s/ Robert S. Pfeiffer
Title: Vice President
The General Partner of May Energy
Partners Operating Partnership Ltd.,
EM Nominee Partnership Company and
Concise Oil and Gas Partnership
<PAGE>
BANKS:
Commitment
$25,000,000 MORGAN GUARANTY TRUST COMPANY
OF NEW YORK
By: /s/ John Kowalczuk
Title: Vice President
$25,000,000 FIRST UNION NATIONAL BANK
By: /s/ Michael J. Kolosowsky
Title: Vice President
$25,000,000 NATIONSBANK OF TEXAS, N.A.
By: /s/ Richard P. Stults
Title: Vice President
================
Total Commitment:
$75,000,000
================
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK, as Agent
By: /s/ John Kowalczuk
Title: Vice President
<PAGE>
FIRST UNION NATIONAL BANK,
as Collateral Agent
By: /s/ Michael J. Kolosowsky
Title: Vice President
PRUDENTIAL:
THE PRUDENTIAL INSURANCE
COMPANY OF AMERICA
By: /s/ Randall M. Kob
Title: Vice President
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Form 10-Q
for the quarter ended June 30, 1997 for Hallwood Energy Partners, L.P. and is
qualified in its entirety by reference to such Form 10-Q.
</LEGEND>
<CIK> 0000768172
<NAME> Hallwood Energy Partners, L.P.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-END> Jun-30-1997
<CASH> 5,562
<SECURITIES> 0
<RECEIVABLES> 9,217
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 15,970
<PP&E> 619,854
<DEPRECIATION> 529,538
<TOTAL-ASSETS> 121,354
<CURRENT-LIABILITIES> 19,180
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 67,911
<TOTAL-LIABILITY-AND-EQUITY> 121,354
<SALES> 21,576
<TOTAL-REVENUES> 21,835
<CGS> 0
<TOTAL-COSTS> 13,441
<OTHER-EXPENSES> (627)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,599
<INCOME-PRETAX> 7,422
<INCOME-TAX> 0
<INCOME-CONTINUING> 7,422
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,422
<EPS-PRIMARY> .66
<EPS-DILUTED> .66
</TABLE>
