UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
MARK ONE
|X| ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the Fiscal Year Ended December 31, 1996
|_| TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-8921
HALLWOOD ENERGY PARTNERS, L. P.
(Exact name of registrant as specified in its charter)
Delaware 84-0987088
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4582 South Ulster Street Parkway
Suite 1700
Denver, Colorado 80237
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 850-7373
Securities Registered Pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Class A Units of Limited Partnership Interests American Stock Exchange
Class C Units of Limited Partnership Interests American Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act:
None
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 |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
The aggregate market value of the Class A and Class C Units held by
nonaffiliates of the registrant as of March 20, 1997 was approximately
$67,601,500.
Number of Units outstanding as of March 20, 1997
Class A 9,977,254
Class B 143,773
Class C 664,063
Page 1 of 69 (Exhibits Begin on Page 53)
<PAGE>
PART I
ITEM 1 - BUSINESS
Hallwood Energy Partners, L.P. ("HEP" or the "Partnership"), is a publicly
traded Delaware limited partnership engaged in the production and sale of oil
and gas and in the acquisition, exploration, development and operation of oil
and gas properties. The principal objectives of HEP are to maintain or expand
its reserve base and to provide cash distributions to the holders of its units
of limited partner interests ("Units"). HEPGP Ltd. became the general partner of
HEP on November 26, 1996 after the former general partner, Hallwood Energy
Corporation ("HEC") merged into The Hallwood Group Incorporated ("Hallwood
Group"). HEPGP Ltd. is a limited partnership of which Hallwood Group is the
limited partner and Hallwood G.P., Inc. ("Hallwood G.P.), a wholly owned
subsidiary of Hallwood Group, is the general partner. HEP commenced operations
in August 1985 after completing an exchange offer in which HEP acquired oil and
gas properties and operations from HEC, 24 oil and gas limited partnerships of
which HEC was the general partner and certain working interest owners that had
participated in wells with HEC and the limited partnerships.
The activities of HEP are conducted by 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.
HEP does not engage in any other line of business nor does it have any
employees. Hallwood Petroleum, Inc. ("HPI"), an affiliated entity, operates the
properties and administers the day to day activities of HEP and its affiliates.
On March 20, 1997, HPI had 127 employees.
Marketing
The oil and gas produced from the properties owned by HEP has typically been
marketed through normal channels for such products. Oil is generally sold to
purchasers at a premium over field prices posted by the principal purchasers of
crude oil in the areas where the majority of producing properties are located.
In response to the volatility in the oil markets, HEP entered into financial
contracts for hedging the price of between 3% and 46% of its estimated oil
production for 1997 through 1999.
The majority of HEP's gas production is sold on the spot market and is
transported in intrastate and interstate pipelines. HEP entered into financial
contracts for hedging the price of between 18% and 54% of its estimated gas
production for 1997 through 2000.
The purpose of the hedges is to provide protection against price drops and to
provide a measure of stability in the volatile environment of oil and natural
gas spot pricing. The amounts received or paid upon settlement of these
contracts is recognized as oil or gas revenue at the time the hedged volumes are
sold.
Both oil and natural gas are purchased by refineries, major oil companies,
public utilities, industrial customers and other users and processors of
petroleum products. HEP is not confined to, nor dependent upon, any one
purchaser or small group of purchasers. Accordingly, the loss of a single
purchaser, or a few purchasers, would not materially affect HEP's business
because there are numerous purchasers in the areas in which HEP sells its
production. However, for the years ended December 31, 1996, 1995 and 1994,
purchases by the following companies exceeded 10% of the total oil and gas
revenues of the Partnership:
-2-
<PAGE>
1996 1995 1994
---- ---- ----
Conoco Inc. 28% 30% 23%
Marathon Petroleum Company 11% 14% 12%
Factors, if they were to occur, which might adversely affect HEP include
decreases in oil and gas prices, the reduced availability of a market for
production, rising operational costs of producing oil and gas, compliance with,
and changes in, environmental control statutes and increasing costs of
transportation.
Competition
In the course of its exploration and development activities, HEP must compete
with other entities for the acquisition of undeveloped acreage and desirable
leaseholds. As described above under "Marketing," production is sold on the spot
market, thereby reducing sales competition; however, oil and gas must compete
with coal, atomic energy, hydro-electric power and other forms of energy.
Regulation
Production and sale of oil and gas is subject to federal and state governmental
regulation in a variety of ways, including environmental regulations, labor
laws, interstate sales, excise taxes and federal and Indian lands royalty
payments. Failure to comply with these regulations may result in fines,
cancellation of licenses to do business and cancellation of federal, state or
Indian leases.
The production of oil and gas is subject to regulation by the state regulatory
agencies in the states in which HEP does business. These agencies make and
enforce regulations to prevent waste of oil and gas and to protect the rights of
owners to produce oil and gas from a common reservoir. The regulatory agencies
regulate the amount of oil and gas produced by assigning allowable production
rates to wells capable of producing oil and gas.
Environmental Considerations
The exploration for, and development of, oil and gas involve the extraction,
production and transportation of materials which, under certain conditions, can
be hazardous or can cause environmental pollution problems. In light of the
current interest in environmental matters, the general partner cannot predict
what effect possible future public or private action may have on the business of
HEP. The general partner is continually taking actions it believes are necessary
in its operations to ensure conformity with applicable federal, state and local
environmental regulations and does not presently anticipate that the compliance
with federal, state and local environmental regulations will have a material
adverse effect upon capital expenditures, earnings, cash flows or the
competitive position of HEP in the oil and gas industry.
Insurance Coverage
HEP is subject to all the risks inherent in the exploration for, and development
of, oil and gas, including blowouts, fires and other casualties. HEP maintains
insurance coverage as is customary for entities of a similar size engaged in
operations similar to that of HEP, but losses can occur from uninsurable risks
or in amounts in excess of existing insurance coverage. The occurrence of an
event which is not insured or not fully insured could have an adverse impact
upon HEP's earnings, cash flows and financial position.
-3-
<PAGE>
ITEM 2 - PROPERTIES
Exploration and Development Projects
In 1996, HEP incurred $12,615,000 in direct property additions and exploration
and development costs, and approximately $441,000 for the purchase of HCRC
shares. The costs were comprised of approximately $9,467,000 for domestic
exploration and development expenditures and approximately $3,148,000 for
property acquisitions. In 1996, HEP participated in approximately 120 drilling
or recompletion projects, the highlights of which are discussed below. HEP's
1996 capital program led to the replacement, through drilling and acquisitions,
of 75% of the equivalent barrels produced during 1996. Overall replacement,
including revisions to prior year reserves, was 145% of 1996 production. Sales
of reserves in place in 1996 which were approximately 8% of 1996 production,
were excluded from this calculation. Approximately $1,325,000 of the 1996
capital expenditures were for land and seismic data anticipated to yield
prospects for 1997 and subsequent years.
Property Sales
During the first quarter of 1996, HEP received approximately $1,300,000 for the
sale of its interests in the Hoople Field in Crosby County, Texas. HEP also
received $88,000 in early April for the sale of various nonstrategic properties
at auction. In June 1996, HEP completed the sale of its interests in the Bethany
Longstreet area of Louisiana (approximately 575,000 equivalent barrels of oil,
measured using December 31, 1995 pricing) for approximately $3,800,000.
Capital Projects
During the second quarter of 1996, HEP purchased 12,965 shares of common stock
of HCRC for $34 per share. The shares were originally purchased by HCRC in
connection with an odd lot repurchase offer and then were resold to HEP at the
price paid by HCRC for such shares.
HEP continued to devote capital resources to the West Texas Kermit area in 1996.
During 1996, HEP drilled or participated in the drilling of seventeen wells,
fifteen of which were successful, and participated in nine recompletions, six of
which were successful, for a total cost to HEP of approximately $1,359,000. The
wells in this area are currently producing approximately 750 gross equivalent
barrels of oil per day. HEP's interest in these wells averages 22%. HEP plans to
drill or recomplete up to fifteen additional wells in 1997. HEP has begun
discussing secondary recovery operations with the other working interests
owners.
During 1996, HEP acquired 106 square miles of three dimensional (3-D) seismic
data on the Cowden Ranch in Crane County, Texas. The prospect is operated by a
major oil company, and HEP has a 12.5% working interest. HEP's share of costs in
1996 is $435,000. Seismic interpretation was completed in the third quarter. Two
exploratory wells, both of which were dry, were drilled in the fourth quarter at
a cost to HEP of $160,000, and a third exploratory well is being drilled in
1997.
HEP acquired 3-D seismic data and related acreage in the Merkel Project Area
which covers 18 square miles in Jones, Taylor and Nolan Counties, Texas.
Expenditures by HEP during 1996 totaled $515,000. Thus far, HEP has participated
in drilling eight wells on four exploration prospects for a total cost to HEP of
$184,000, including one well drilled in late 1995. Seven of the eight wells have
been successful. These wells are currently producing approximately 375 gross
barrels of oil per day. HEP's nonoperating interest in this production is 9%.
HEP acquired an additional 74 square miles of 3-D seismic data, which is
presently being interpreted in the same area. HEP's working interest in this
area averages 27.5%, and prospect exploratory drilling will begin in the first
quarter of 1997. HEP anticipates at least ten prospects will be tested in 1997
and subsequent years on this portion of the project area.
-4-
<PAGE>
HEP participated in the drilling of two nonoperated wells in Williams County,
North Dakota in the latter part of 1995 and the first quarter of 1996, one of
which was dry and the other only marginally successful, for a total cost to HEP
of approximately $330,000. HEP also drilled an exploratory dry hole in Richland
County, Montana, at a cost of $150,000. HEP completed an Interlake Formation
development well, drilled in the second quarter, at a total cost to HEP of
approximately $600,000. This well is currently producing at a rate of 80 gross
barrels of oil per day, and HEP's interest is 45%.
HEP incurred approximately $235,000 in the first quarter, net to HEP's interest,
for four recompletions and one drilled well in the Rocker "b" Ranch in Reagan
County, Texas. During the first quarter, HEP also acquired interests in five
additional producing leases on the Rocker "b" Ranch for a total of $93,000. In
prior years, HEP financed $6,033,000 of its drilling through Hallwood Spraberry
Drilling Company, L.L.C. ("HSD") on the Rocker "b" Ranch. Effective April 1,
1996, HEP repaid its share of the debt of HSD through additional borrowings
under its bank credit agreement and assumed direct ownership of its share of
HSD's properties. In the second and third quarters of 1996, HEP recompleted
seven wells, three of which were successful, and drilled one additional well for
a total cost to HEP of $270,000. Current production from all Rocker "b" 1996
capital projects averages 185 gross equivalent barrels of oil per day. HEP's
share of this production is approximately 29%. Minimal additional drilling or
workovers are expected in the area in 1997. HEP drilled or worked over a total
of 95 wells in this area over the past three years.
In the San Juan Basin area, HEP acquired interests in four wells in Rio Arriba
County, New Mexico, and through an affiliate, LaPlata Associates LLC ("LPA"),
acquired interests in 34 coal bed methane wells located in LaPlata County,
Colorado for $1,734,000. HEP's interest in the wells added nine bcf of gas to
its reserve base, which represents approximately 55% of its estimated 1996
production. The acquisition was completed on July 1, 1996. Nine
refracs/recompletions have been completed since July 1 at a net cost to HEP of
approximately $690,000. The recompletion work has performed according to
expectations. Numerous other facility projects were completed in 1996 at an
estimated net cost to HEP of $270,000. Gross production has increased by 4,000
mcf of gas per day as a result of the work done thus far. Similar activity
levels in 1997 are anticipated on these newly acquired properties. In other
parts of the New Mexico portion of the San Juan Basin area, HEP recompleted
three wells, two of which were successful, drilled two wells and converted
another well to be a produced water disposal well. The total cost for this work
was $575,000, and HEP's interest in this area is approximately 50%.
HEP participated in a 13 square mile 3-D seismic shoot at the Packsaddle Project
in the Big Horn Basin of Wyoming. The data is now being processed and additional
development and exploration is expected in the area following HEP's previous
discovery. HEP's ownership in the Big Horn Basin continues to increase through a
joint venture created to evaluate a 4,000 mile 2-D Seismic Data Base from which
HEP hopes to create additional drillable prospects.
In September, HEP spent $225,000 for a recompletion of the A. L. Boudreaux well
into a shallower interval of the Bol Mex 3 Formation after the previous
completion in the Bol Mex 3 Formation began to produce water and sand.
Production after the recompletion is averaging 21 mmcf per day and 420 barrels
of condensate per day.
HEP also incurred approximately $150,000 in 1996 for the successful drilling of
a 10,000 foot exploratory well in a structural 3-D seismic play in Glasscock
County, Texas. Production from this well is currently averaging 250 gross
equivalent barrels of oil per day. HEP's interest in this well is 13%.
Additional nonproducing reserves from another zone were recorded at year end as
well. As of year end, HEP has committed to at least one more exploratory well in
1997.
Numerous other projects, which are individually less significant, have been
completed or are underway in Kansas, Louisiana, Texas and New Mexico, including
participation in five other 3-D seismic data acquisition programs not included
in the above activity.
1997 Plans
For 1997, HEP's capital budget, which will be paid from cash generated from
operations and cash on hand, has been set at $12,500,000. In addition to the
above mentioned plans, HEP's domestic exploration plans include projects in
Texas, Wyoming, Oklahoma, Colorado, Louisiana and New Mexico. HEP will continue
to consider international projects in 1997 on a selective basis.
-5-
<PAGE>
HEP will aggressively pursue exploitation and development of existing
opportunities in Texas, Wyoming, Colorado, Kansas, New Mexico and Utah. HEP is
also actively pursuing acquisitions in strategic areas.
Partnership Reserves, Production and Discussion by Significant Areas and Fields
The following table presents the December 31, 1996 reserve data by significant
areas and fields.
<TABLE>
<CAPTION>
Proved Reserve Quantities Present Value of Future Net Cash Flows
Proved Proved
Mcf of Gas Bbls of Oil Undeveloped Developed Total
(In thousands)
<S> <C> <C> <C> <C> <C>
Scott/West Ridge 20,014 412 $ 60,211 $ 60,211
West Texas 18,317 5,127 $3,871 47,872 51,743
Kansas 827 592 354 3,892 4,246
San Juan Basin 26,663 15,566 15,566
Southeastern New Mexico 8,095 249 15,068 15,068
Other 14,626 1,151 2,428 56,738 59,166
------ ----- ----- -------- --------
88,542 7,531 $6,653 $199,347 $206,000
====== ===== ===== ======= =======
</TABLE>
The following table presents the oil and gas production for significant areas
and fields.
<TABLE>
<CAPTION>
Production for the Production for the
Year Ended 1996 Year Ended 1995
----------------- ----------------
Mcf of Gas Bbls of Oil Mcf of Gas Bbls of Oil
---------- ----------- ---------- -----------
(In thousands)
<S> <C> <C> <C> <C>
Scott/West Ridge 3,548 73 4,501 108
West Texas 1,325 455 1,351 458
Kansas 86 45 146 60
San Juan Basin 2,993 3,216
Southeastern New Mexico 1,462 40 2,067 52
Other 3,372 359 1,754 315
------ ---- ------ ----
12,786 972 13,035 993
====== ==== ====== ====
</TABLE>
The following table presents the Partnership's extensions and discoveries by
significant areas and fields.
<TABLE>
<CAPTION>
For the Year Ended 1996 For the Year Ended 1995
Mcf of Gas Bbls of Oil Mcf of Gas Bbls of Oil
(In thousands)
<S> <C> <C> <C> <C>
West Texas 619 370 3,560 1,397
Kansas 63 19
San Juan Basin 670 794
Southeastern New Mexico 20 31 432 97
Other 311 83 1,211 389
------ --- ----- -----
1,683 484 5,997 1,902
===== === ===== =====
</TABLE>
-6-
<PAGE>
Scott/West Ridge
The Scott/West Ridge area consists of 10 active gas wells, one shut-in gas well
and six salt water disposal wells located in Lafayette Parish, Louisiana. The
wells produce principally from the Bol Mex formations at 13,500 to 14,500 feet
and are operated by HPI. The four most significant wells in the area, all of
which were drilled by HPI since 1989, are the A. L. Boudreaux #1, the G. S.
Boudreaux Estate #1, the Lessin Fontenot #1 and the Evangeline Shrine Club #1.
During 1996, HEP performed one workover in this area which was successful, and
HEP participated in one unsuccessful exploration well operated by another party.
West Texas
The West Texas area is comprised of three significant groups of properties. The
West Texas Spraberry area consists of 363 producing wells, nine salt water
disposal wells and 24 shut-in wells in Dawson, Upton, Reagan and Irion Counties.
HPI operates 387 of these wells. Most of the current production from the wells
is from the Upper and Lower Spraberry, Clearfork, Canyon, Dean and Fusselman at
depths ranging from 5,000 feet to 9,000 feet. During 1996, HEP sold its interest
in 35 operated and 31 outside operated properties in this area. Adding to the
field discovered in 1995, HEP successfully drilled two wells and recompleted 23
wells in eastern Reagan County, 19 of which were successful.
HEP plans several recompletions in this area in 1997.
The West Texas Kermit/Keystone area consists of 48 producing wells, 33 of which
are operated by HPI. The primary focus of this area is the development of the
Holt and San Andres formations at a depth of 5,100 feet on several leases in
Winkler County. During 1996, HEP drilled 15 wells, 12 of which were successful.
During 1997 up to 16 wells may be drilled. A study is underway for a secondary
recovery project.
The West Texas Merkel/SW Lana area consists of seven producing wells in Jones,
Nolan and Taylor Counties, Texas. All of these wells are outside operated. The
primary focus of the area is exploitation of the Canyon, Strawn and Ellenburger
formations. HEP conducted a 3-D seismic project during 1996 and, during 1997,
will drill locations identified by the seismic project.
Kansas
The Kansas area consists of 223 producing wells, of which 213 are operated by
HPI and 10 are operated by unaffiliated entities. The wells are located in 15
counties primarily in the Central Kansas Uplift and produce principally from the
Arbuckle and numerous Lansing-Kansas City formation zones from 3,000 feet to
6,500 feet. During 1996, HEP drilled one successful development well and
performed 15 recompletions, nine of which were successful. The Kansas area is a
mature operation where recompletions and limited development drilling represent
the most prudent plans for future asset base protection. HEP plans to sell three
properties in this area in 1997 and will continue to evaluate and divest
nonstrategic properties.
San Juan Basin
The San Juan Basin region consists of wells located in San Juan County, New
Mexico and LaPlata County, Colorado. In 1996, HEP and Hallwood Consolidated
Resources Corporation ("HCRC") acquired interests in 38 wells from a subsidiary
of Public Service Company of Colorado. The wells are located primarily in
LaPlata County, Colorado and produce from the Fruitland Coal formation at
approximately 3,200 feet. An unaffiliated large East Coast financial institution
formed an entity to effectively utilize the Section 29 tax credits generated by
the wells. The project was financed through a third party lender with a
production payment structure. Since the acquisition, HEP has recompleted 10 of
the newly acquired wells, seven successfully. Several additional recompletions
will be done in 1997.
-7-
<PAGE>
In San Juan County, New Mexico, HPI operates 54 wells, 34 of which produce from
the Fruitland Coal formation at approximately 2,200 feet and 20 of which produce
from the Pictured Cliffs, Mesa Verde and Dakota formations at 1,200 to 7,000
feet. During 1996, HPI successfully drilled two additional coal bed methane
wells, recompleted a well for use as a salt water disposal well in the Entrada
formation and recompleted two Fruitland Coal wells, one successfully. HEP's
acreage position has been fully drilled. Several recompletions are planned for
1997.
Southeastern New Mexico
The Southeastern New Mexico area consists of 60 producing wells, 38 of which are
operated by HPI, which produce primarily gas and are located on the northwestern
edge of the Delaware Basin in Lea, Eddy and Chaves Counties, New Mexico. These
wells produce at depths ranging from approximately 2,500 feet to 14,000 feet
from the Delaware, Atoka, Bone Springs and Morrow formations. During 1996, HEP
participated as a nonoperator in two successful development wells and as an
operator, performed four recompletions, three of which were successful. During
1997, HEP plans to perform several additional recompletions.
Average Sales Prices and Production Costs
The following table presents the average oil and gas sales price and average
production costs per equivalent barrel computed at the ratio of six mcf of gas
to one barrel of oil.
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ -----
<S> <C> <C> <C>
Oil and condensate -
includes the effects of hedging (per bbl) $20.10 $17.36 $16.47
Natural gas -
includes the effects of hedging (per mcf) 2.24 1.82 1.97
Production costs (per equivalent bbl of oil) 3.71 3.57 3.88
Productive Oil and Gas Wells
</TABLE>
The following table summarizes the productive oil and gas wells as of December
31, 1996 attributable to HEP's direct interests. Productive wells are producing
wells and wells capable of production. Gross wells are the total number of wells
in which HEP has an interest. Net wells are the sum of HEP's fractional
interests owned in the gross wells.
Gross Net
Productive Wells
Oil 736 273
Gas 369 127
------ ---
Total 1,105 400
===== ===
-8-
<PAGE>
Oil and Gas Acreage
The following table sets forth the developed and undeveloped leasehold acreage
held directly by HEP as of December 31, 1996. Developed acres are acres which
are spaced or assignable to productive wells. Undeveloped acres are acres on
which wells have not been drilled or completed to a point that would permit the
production of commercial quantities of oil and gas, regardless of whether or not
such acreage contains proved reserves. Gross acres are the total number of acres
in which HEP has a working interest. Net acres are the sum of HEP's fractional
interests owned in the gross acres.
Gross Net
Developed acreage 176,795 79,311
Undeveloped acreage 130,618 50,103
------- -------
Total 307,413 129,414
======= =======
States in which HEP holds undeveloped acreage include Texas, Louisiana, Montana,
Wyoming, New Mexico, Kansas, Colorado, North Dakota and Michigan.
Drilling Activity
The following table sets forth the number of wells attributable to HEP's direct
interest drilled in the most recent three years.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1996 1995 1994
------ ------ -----
Gross Net Gross Net Gross Net
Development Wells:
<S> <C> <C> <C> <C> <C> <C>
Productive 29 6.6 66 28.0 30 14.6
Dry 4 .9 2 .5 4 .7
--- ---- --- ------ --- ------
Total 33 7.5 68 28.5 34 15.3
== === == ==== == ====
Exploratory Wells:
Productive 2 .2 5 .6 2 .1
Dry 4 .6 1 .9 6 1.2
--- ---- --- ------ --- -----
Total 6 .8 6 1.5 8 1.3
=== ==== === ===== === =====
</TABLE>
Office Space
HPI leases office space in Denver, Colorado containing approximately 41,000
square feet, for approximately $600,000 per year. The lease payments are
included in the allocation of general and administrative expenses to HEP and
other affiliated entities. HEP is guarantor of 60% of the lease obligation, and
HCRC is guarantor of the remaining 40% of the obligation.
ITEM 3 - LEGAL PROCEEDINGS
See Notes 12 and 13 to the financial statements included in Item 8 - Financial
Statements and Supplementary Data.
-9-
<PAGE>
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1996.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED UNITHOLDER MATTERS
HEP's Class A Units are traded on the American Stock Exchange (the "Exchange")
under the symbol "HEP." As of March 20, 1997, 9,977,254 Class A Units were
outstanding, held by approximately 20,995 unitholders of record and 143,773
Class B Units were outstanding, held by Hallwood Group. The Class B Units are
not publicly traded. The following table sets forth, for the periods indicated,
the high and low reported sales prices for the Class A Units as reported on the
Exchange and the distributions paid per Class A Unit for the corresponding
periods. The Class B Units received a $.20 per unit distribution per quarter
during 1995. HEP's debt agreements limit aggregate distributions paid by HEP in
any twelve month period to 50% of cash flow from operations before working
capital changes plus distributions received from affiliates.
Class A Units High Low Distributions
First quarter 1995 6 1/4 5 3/8 $.20
Second quarter 1995 5 15/16 5 1/8 .20
Third quarter 1995 5 1/2 4 .20
Fourth quarter 1995 4 11/16 3 3/4 .20
---
$.80
First quarter 1996 5 1/4 3 3/4 $.13
Second quarter 1996 6 3/4 4 5/8 .13
Third quarter 1996 7 3/8 5 7/8 .13
Fourth quarter 1996 9 6 1/4 .13
---
$.52
On January 17, 1996, HEP's new Class C Units began trading on the Exchange under
the symbol "HEPCWI." As of March 20, 1997, 664,063 Class C Units were
outstanding, held by approximately 15,856 unitholders of record. The following
table sets forth, for the periods indicated, the high and low reported sales
prices for the Class C Units as reported on the Exchange and distributions paid
per Class C Unit for the corresponding periods.
Class C Units High Low Distributions
First quarter 1996 7 7/8 6 1/2 $ .25
Second quarter 1996 8 1/2 7 3/8 .25
Third quarter 1996 9 5/8 8 3/16 .25
Fourth quarter 1996 9 7/8 8 3/4 .25
----
$1.00
-10-
<PAGE>
ITEM 6 - SELECTED FINANCIAL DATA
The following table sets forth selected financial data regarding HEP's financial
position and results of operations as of the dates indicated. As a result of the
issuance of Class A Units in connection with a litigation settlement, all Unit
and per Unit information for periods prior to December 31, 1995 has been
retroactively restated.
<TABLE>
<CAPTION>
As of and For the Years Ended December 31,
------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ -----
(In thousands except per Unit)
Summary of Operations
<S> <C> <C> <C> <C> <C>
Oil and gas revenues and
pipeline operations $50,644 $43,454 $43,899 $ 44,106 $52,755
Litigation settlement 11,466
Total revenue 51,066 43,780 44,482 49,613 60,730
Production operating
expense 11,511 11,298 12,177 11,200 14,107
Depreciation, depletion and
amortization 13,500 15,827 18,168 17,076 18,866
Impairment 10,943 7,345
General and administrative
expense 4,540 5,580 5,630 6,812 7,732
Net income (loss) 15,726 (9,031) (10,093) 13,064 3,613
Net income (loss) per Class A
and Class B Unit 1.34 (1.07) (1.20) 1.14 .21
Distributions per Class A
and Class B Unit .52 .80 .80 .80 .80
Balance Sheet
Working capital (deficit) $ (1,355) $ (4,363) $ (9,390) $ 7,020 $ 6,306
Property, plant and
equipment, net 88,549 94,926 107,414 122,133 129,029
Total assets 122,792 125,152 136,281 171,624 186,087
Long-term debt 29,461 37,557 25,898 38,010 52,814
Long-term contract
settlement obligation 2,512 2,397 2,666 3,673 4,179
Long-term lawsuit
settlement liability 2,370
Deferred liability 1,533 1,718 1,931 1,504 1,626
Minority interest in
affiliates 3,336 3,042 2,923 3,346 3,782
Partners' capital 64,215 57,572 78,803 98,576 89,779
</TABLE>
-11-
<PAGE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Capital Resources
Cash Flow
HEP generated $26,423,000 of cash flow from operating activities during 1996.
The other primary cash inflows were:
o $9,000,000 in proceeds from long-term debt;
o $5,294,000 in proceeds from the sale of property.
Cash was used primarily for:
o Distributions to partners of $8,176,000;
o Additions to property, exploration and development costs incurred of
$12,615,000;
o Payments of long-term debt of $11,373,000;
o Refinance of Spraberry investment of $4,715,000,
o Payments of contract settlement obligations of $305,000.
When combined with miscellaneous other cash activity during the year, the result
was an increase in HEP's cash of $563,000, from $4,977,000 at December 31, 1995
to $5,540,000 at December 31, 1996.
Property Purchases, Sales and Capital Budget
In 1996, HEP incurred $12,615,000 in direct property additions and exploration
and development costs, and approximately $441,000 for the purchase of HCRC
shares. The costs were comprised of approximately $9,467,000 for domestic
exploration and development expenditures and approximately $3,148,000 for
property acquisitions. HEP's 1996 capital program led to the replacement,
through acquisitions and drilling, of 75% of the equivalent barrels produced
during 1996. Overall replacement, including revisions to prior year reserves,
was 145% of its 1996 production.
HEP's significant direct exploration and development expenditures in 1996
included approximately $1,359,000 for the drilling of seventeen wells, fifteen
of which were successful, and participation in nine recompletions, six of which
were successful, in the West Texas Kermit area; approximately $435,000 for 3-D
seismic data and $160,000 for two exploratory wells, both of which were dry, in
Crane County, Texas; approximately $515,000 for 3-D seismic data and related
acreage and $184,000 for the drilling of eight wells, seven of which were
successful, in the Merkel Project area in Texas; approximately $330,000 for the
drilling of two nonoperated wells, one of which was successful, in North Dakota;
approximately $150,000 for an exploratory dry hole and approximately $600,000
for an Interlake Formation development well in Montana; approximately $505,000
for 11 recompletions and two drilled wells in Reagan County, Texas; and
approximately $225,000 for the recompletion of one well in Louisiana.
-12-
<PAGE>
In the San Juan Basin area of Colorado and New Mexico, HEP, directly and through
an affiliate acquired interests in 38 coal bed methane wells for $1,734,000.
Nine recompletions have been performed in this area for a cost of approximately
$690,000, and numerous other facility projects were completed for approximately
$270,000. HEP spent approximately $575,000 in New Mexico for the recompletion of
three wells and the drilling of two wells in New Mexico.
HEP received $1,300,000 during 1996 for the sale of its interests in the Hoople
Field in Crosby County, Texas, $3,800,000 for the sale of its interests in the
Bethany Longstreet area of Louisiana and $88,000 for the sale of various
nonstrategic properties.
For 1997, HEP's capital budget, which will be paid from cash generated from
operations and cash on hand, has been set at $12,500,000. HEP's domestic
exploitation plans include projects in Texas, Wyoming, Louisiana, Oklahoma,
Colorado and New Mexico. HEP will continue to consider international projects in
1997, utilizing stringent screening criteria.
During 1996, HEP adopted Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" ("SFAS 121"). SFAS 121 provides the standards for accounting for
the impairment of various long-lived assets. Substantially all of HEP's
long-lived assets consist of oil and gas properties, which are accounted for
using the full cost method of accounting, which requires an impairment to be
recorded when total capitalized costs exceed the present value, discounted at
10%, of estimated future net revenues from proved oil and gas reserves.
Therefore, the adoption of SFAS 121 did not have a material effect on the
financial position or results of operations of HEP.
See Item 2 - Properties, for further discussion.
Distributions
On January 19, 1996, HEP paid a dividend of one new Class C Unit for every 15
HEP Class A Units held as of the record date of December 18, 1995. Pursuant to
the regulations of the American Stock Exchange, holders of Class A Units who
sold their Units between December 14, 1995 and January 19, 1996 also sold their
right to receive the associated Class C Unit dividend. Class C Units are a newly
created class of units that trade separately from HEP's Class A Units. The Class
C Units have a distribution preference of $1.00 per year, payable quarterly, and
distributions on the new units commenced the first quarter of 1996. Class C
Units were created to give HEP greater flexibility in structuring future
acquisitions by allowing HEP to issue a security with a fixed distribution rate.
During 1996, HEP declared distributions of $.52 per Class A Unit and $1.00 per
Class C Unit to its Unitholders.
The Board of Directors of HEP's General Partner is considering the distribution
level for future quarters, taking into account oil and gas prices and the
capital needs of HEP.
Unit Option Plan
On January 31, 1995, the board of directors of the general partner approved the
adoption of the 1995 Unit Option Plan to be used for the motivation and
retention of directors, employees and consultants performing services for HEP.
The plan authorizes the issuance of options to purchase 425,000 Class A Units.
Grants of the total options authorized were made on January 31, 1995, vesting
one-third at that time, an additional one-third on January 31, 1996 and the
remaining one-third on January 31, 1997. The exercise price of the options is
$5.75, which was the closing price of the Class A Units on January 30, 1995. No
options have been exercised.
-13-
<PAGE>
During 1996, HEP adopted the disclosure provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock Based Compensation" ("SFAS
123"). SFAS 123 requires entities to use the fair value method to either account
for, or disclose, stock based compensation in their financial statements.
Because the Partnership elected the disclosure provisions of SFAS 123, the
adoption of SFAS 123 did not have a material effect on the financial position or
results of operations of HEP.
Financing
During the first quarter of 1995, HEP and its lenders amended HEP's Amended and
Restated Credit Agreement ("Credit Agreement") to extend the term date of its
line of credit to May 31, 1997. Under the Credit Agreement and an Amended and
Restated Note Purchase Agreement ("Note Purchase Agreement") (collectively
referred to as the "Credit Facilities"), HEP has a borrowing base of
$48,000,000. HEP has amounts outstanding at December 31, 1996 of $26,700,000
under the Credit Agreement and $8,571,000 under the Note Purchase Agreement.
HEP's borrowing base is further reduced by an outstanding contract settlement
obligation of $2,512,000; therefore, its unused borrowing base totaled
$10,217,000 at March 20, 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 1997 through additional
borrowings under the Credit Agreement; thus, no portion of HEP's Note Purchase
Agreement is classified as current as of December 31, 1996.
Borrowings against the Credit Agreement bear interest at the lower of the
Certificate of Deposit rate plus 1.875%, prime plus 1/2% or the Euro-Dollar rate
plus 1.75%. At December 31, 1996 the applicable interest rate was 7.4%. Interest
is payable monthly, and 16 quarterly principal payments of $1,937,000, as
adjusted for the anticipated borrowings to fund the Note Purchase Agreement
payment due in 1997, commence May 31, 1997. HEP intends to extend the maturity
date of its Credit Agreement prior to the commencement of the amortization
period.
The borrowing base for the Credit Facilities is redetermined semiannually in
March and September of each year. The Credit Facilities are secured by a first
lien on approximately 80% in value of HEP's oil and gas properties.
Additionally, aggregate distributions paid by HEP in any 12 month period are
limited to 50% of cash flow from operations before working capital changes plus
distributions received from affiliates.
HEP entered into contracts to hedge its interest rate payments on $10,000,000 of
its debt through the end of 1996, $15,000,000 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.
Gas Balancing
HEP uses the sales method for recording its gas balancing. Under this method,
HEP recognizes revenue on all of its sales of production, and any
over-production or under-production is recovered or repaid at a future date.
As of December 31, 1996, HEP had a net over-produced position of 166,000 mcf
($372,000 valued at average annual gas prices). The general partner believes
that this imbalance can be made up from production on existing wells or from
wells which will be drilled as offsets to existing wells and that this imbalance
will not have a material effect on HEP's results of operations, liquidity and
capital resources. The reserves disclosed in Item 8 have been decreased by
166,000 mcf in order to reflect HEP's gas balancing position.
-14-
<PAGE>
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-K 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-K 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.
Inflation and Changing 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 have fluctuated significantly from 1994 through
1996. The following table presents the average prices received per year by HEP,
and the effects of the hedging transactions discussed below.
<TABLE>
<CAPTION>
Oil Oil Gas Gas
(excluding effects (including effects (excluding effects (including effects
of hedging of hedging of hedging of hedging
transactions) transactions) transactions) transactions)
(per bbl) (per bbl) (per mcf) (per mcf)
<C> <C> <C> <C> <C>
1996 $20.85 $20.10 $2.38 $2.24
1995 16.98 17.36 1.58 1.82
1994 15.50 16.47 1.90 1.97
</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 drops and to provide a measure of stability in the volatile environment of
oil and natural gas spot pricing.
The following table provides a summary of HEP's financial contracts:
Oil
Percent of
Production Contract
Period Hedged Floor Price
(per bbl)
1997 46% $17.78
1998 16% $15.33
1999 3% $15.88
-15-
<PAGE>
Between 16% 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 per
barrel.
Gas
Percent of
Production Contract
Period Hedged Floor Price
(per mcf)
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 per mcf.
During the first quarter through February 26, 1997, the oil price (for barrels
not hedged) averaged between $20.00 and $25.00 per barrel. The average price of
natural gas (for mcf not hedged) was between $1.00 and $4.40 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 1996, HEP owned interests which ranged from 54.5% to
68.5% of the Mays; in 1995 HEP's ownership in the Mays ranged from 54.5% to
68.3%; and in 1994 HEP's ownership in the Mays ranged from 54.1% to 67.8%.
-16-
<PAGE>
<TABLE>
<CAPTION>
TABLE OF HEP EARNINGS FOR MANAGEMENT DISCUSSION
(In thousands except price)
For the Year Ended December 31, 1996 For the Year Ended December 31, 1995
------------------------------------ ------------------------------------
Direct Direct
Owned Mays Total Owned Mays Total
<S> <C> <C> <C> <C> <C> <C>
Oil production (bbl) 862 110 972 895 98 993
Gas production (mcf) 11,003 1,783 12,786 11,497 1,538 13,035
Average oil price $19.82 $21.52 $20.10 $17.32 $17.74 $17.36
Average gas price $ 2.11 $ 3.05 $ 2.24 $ 1.81 $ 1.92 $ 1.82
Oil revenue $17,167 $2,367 $19,534 $ 15,501 $ 1,739 $ 17,240
Gas revenue 23,178 5,440 28,618 20,822 2,948 23,770
Pipeline, facilities and other revenue 2,492 2,492 2,444 2,444
Interest income 356 66 422 263 63 326
-------- ------- -------- --------- -------- ---------
Total revenue 43,193 7,873 51,066 39,030 4,750 43,780
------ ----- ------ ------- ------ -------
Production operating expense 10,782 729 11,511 10,658 640 11,298
Facilities operating expense 726 726 794 794
General and administrative expense 4,131 409 4,540 5,131 449 5,580
Depreciation, depletion, and amortization 11,729 1,771 13,500 14,058 1,769 15,827
Impairment of oil and gas properties 10,943 10,943
Interest expense 3,878 3,878 4,245 4,245
Litigation settlement expense 223 7 230 337 49 386
Equity in (income) loss of HCRC (1,768) (1,768) 2,273 2,273
Minority interest 2,723 2,723 1,465 1,465
----------- ----- ------- ------------ ----- -------
Total expense 29,701 5,639 35,340 48,439 4,372 52,811
------ ----- ------ ------- ------ -------
Net income (loss) $13,492 $2,234 $15,726 $ (9,409) $ 378 $ (9,031)
====== ===== ====== ======== ======= ========
</TABLE>
-17-
<PAGE>
<TABLE>
<CAPTION>
TABLE OF HEP EARNINGS FOR MANAGEMENT DISCUSSION
(In thousands except price)
For the Year Ended December 31, 1994
Direct
Owned Mays Total
<S> <C> <C> <C>
Oil production (bbl) 826 113 939
Gas production (mcf) 11,521 1,687 13,208
Average oil price $16.54 $15.98 $16.47
Average gas price $ 1.93 $ 2.22 $ 1.97
Oil revenue $ 13,664 $ 1,806 $ 15,470
Gas revenue 22,287 3,739 26,026
Pipeline, facilities and other revenue 2,403 2,403
Interest income 525 58 583
--------- -------- ---------
Total revenue 38,879 5,603 44,482
------- ------ -------
Production operating expense 11,491 686 12,177
Facilities operating expense 730 730
General and administrative expense 5,107 523 5,630
Depreciation, depletion, and amortization 15,894 2,274 18,168
Impairment of oil and gas properties 7,345 7,345
Interest expense 3,839 3,839
Litigation settlement expense 3,370 3,370
Equity in loss of HCRC 1,499 1,499
Minority interest 1,822 1,822
Other (5) (5)
----------- ---------- -----------
Total expense 49,270 5,305 54,575
------- ------ -------
Net income (loss) $(10,391) $ 298 $(10,093)
======= ======= =======
</TABLE>
-18-
<PAGE>
1996 Compared to 1995
Oil Revenue
Oil revenue increased $2,294,000 during 1996 as compared with 1995. The increase
is comprised of a 16% increase in the average oil price from $17.36 per barrel
in 1995 to $20.10 per barrel in 1996, partially offset by a decrease in
production, from 993,000 barrels in 1995 to 972,000 barrels in 1996. The
decrease in production is due to property sales and normal production declines.
The effect of HEP's hedging transactions described under "Inflation and Changing
Prices" was to decrease HEP's average oil price from $20.85 per barrel to $20.10
per barrel, resulting in a $729,000 decrease in oil revenue for 1996.
Gas Revenue
Gas revenue increased by $4,848,000 during 1996 as compared with 1995. The
increase is comprised of a 23% increase in the average gas price from $1.82 per
mcf in 1995 to $2.24 per mcf in 1996, partially offset by a decrease in gas
production from 13,035,000 mcf during 1995 to 12,786,000 mcf during 1996. The
decrease in production is due to decreases in allowable production limits and
normal production declines, partially offset by increased production from
exploratory and developmental drilling projects in Montana, Wyoming and West
Texas.
The effect of HEP's hedging transactions as described under "Inflation and
Changing Prices" was to decrease HEP's average gas price from $2.38 per mcf to
$2.24 per mcf, representing a $1,790,000 decrease in gas revenues for 1996.
Interest Income
The increase in interest income of $96,000 during 1996 as compared with 1995
resulted from a higher average cash balance during 1996 as compared with 1995.
Production Operating Expense
Production operating expense increased $213,000 during 1996 as compared with
1995, primarily as a result of increased production taxes due to the 17%
increase in oil and gas revenue during 1996 discussed above.
Facilities Operating Expense
Facilities operating expense represents operating expenses associated with
various smaller gathering systems operated by HEP. The decrease in facilities
operating expense of $68,000 is primarily due to decreased maintenance activity
during 1996.
General and Administrative Expense
General and administrative expense includes costs incurred for direct
administrative services such as legal, audit and reserve reports, as well as
allocated internal overhead incurred by the operating company on behalf of HEP.
These expenses decreased $1,040,000 during 1996 as compared with 1995 primarily
due to a decrease in performance based compensation, a decrease in salaries
expense and employee benefits expense due to personnel reductions during 1995
and lower legal expense in 1996 due to the settlement of a significant lawsuit
during 1995.
Depreciation, Depletion and Amortization Expense
Depreciation, depletion and amortization expense decreased $2,327,000 during
1996 as compared with 1995. The decrease is primarily the result of lower
capitalized costs in 1996 as compared with 1995, primarily due to the property
impairments recorded during 1995 and 1994.
-19-
<PAGE>
Interest Expense
Interest expense decreased by $367,000 during 1996 as compared with 1995. The
decrease is due to a lower average outstanding debt balance during 1996 as
compared to 1995.
Litigation Settlement Expense
Litigation settlement expense during 1996 and 1995 consists primarily of
expenses incurred to settle various individually insignificant claims against
HEP.
Equity in Earnings (Loss) of HCRC
Equity in earnings of HCRC represents HEP's share of its equity investment in
HCRC. HEP's equity in HCRC's earnings increased by $4,041,000 during 1996 as
compared to 1995. The increase is primarily the result of a 6% increase in HEP's
ownership of HCRC resulting from HEP's purchase of 12,965 shares of common stock
of HCRC during the second quarter of 1996. Also contributing to the increase
were higher oil and gas prices for HCRC during 1996 and the inclusion in 1995 of
impairment expense resulting from the write-off of its investment in an
Indonesian project and other property impairments.
1995 Compared to 1994
Oil Revenue
Oil revenue increased $1,770,000 during 1995 as compared with 1994. The increase
is comprised of a 5% increase in the average oil price from $16.47 per barrel in
1994 to $17.36 per barrel in 1995, combined with a 6% increase in production,
from 939,000 barrels in 1994 to 993,000 barrels in 1995. The increase in
production is due to increased production from developmental drilling projects
in West Texas, offset by normal production declines.
The effect of HEP's hedging transactions described under "Inflation and Changing
Prices" was to increase HEP's average oil price from $16.98 per barrel to $17.36
per barrel, resulting in a $377,000 increase in revenue for 1995.
Gas Revenue
Gas revenue decreased by $2,256,000 during 1995 as compared with 1994. The
decrease is comprised of a slight decrease in gas production from 13,208,000 mcf
during 1994 to 13,035,000 mcf during 1995 combined with an 8% decrease in the
average gas price from $1.97 per mcf in 1994 to $1.82 per mcf in 1995. The
decrease in production is due to decreases in allowable production limits and
normal production declines, partially offset by increased production from
developmental drilling projects in West Texas.
The effect of HEP's hedging transactions was to increase HEP's average gas price
from $1.58 per mcf to $1.82 per mcf, representing an $3,128,000 increase in
revenues for 1995.
Interest Income
The decrease in interest income of $257,000 during 1995 as compared with 1994
resulted from a lower average cash balance during 1995 as compared with 1994.
Production Operating Expense
Production operating expense decreased $879,000 during 1995 as compared with
1994, primarily as a result of general cost reductions in West Texas.
-20-
<PAGE>
Facilities Operating Expense
Facilities operating expense represents operating expenses associated with
various smaller gathering systems operated by HEP. The increase in facilities
operating expense of $64,000 is primarily due to the increased maintenance
activity during 1995.
Depreciation, Depletion and Amortization Expense
Depreciation, depletion and amortization expense decreased $2,341,000 during
1995 as compared with 1994. The decrease is primarily the result of lower
capitalized costs in 1995 as compared with 1994, primarily due to the property
impairment recorded during the second quarter of 1995 and the fourth quarter of
1994.
Impairment of Oil and Gas Properties
Impairment of oil and gas properties during 1995 represents the impairment of
$7,000,000 recorded because capitalized costs at June 30, 1995 exceeded the
present value (discounted at 10%) of estimated future net revenues from proved
oil and gas reserves, based on prices at that date of $16.50 per bbl of oil and
$1.50 per mcf of gas, as well as the write-off of HEP's investment in an
Indonesian project of $3,943,000. The impairment of oil and gas properties
during 1994 represents an impairment of $6,000,000 recorded because capitalized
costs at December 31, 1994 exceeded the present value (discounted at 10%) of
estimated future net revenues from proved oil and gas reserves, based on prices
at that date of $15.80 per bbl of oil and $1.72 per mcf of gas, as well as the
write-off of certain foreign drilling projects of $1,345,000.
Interest Expense
Interest expense increased by $406,000 during 1995 as compared with 1994. The
increase is due to a higher average outstanding debt balance during 1995 as
compared to 1994.
Litigation Settlement Expense
Litigation settlement expense during 1995 consists primarily of expenses
incurred to settle various individually insignificant claims against HEP.
Litigation settlement expense during 1994 represents the settlement of claims
against HEP which are further discussed in Note 13 to the Financial Statements
included in Item 8, as well as an amount paid to settle a claim for royalties on
a 1989 take-or-pay settlement.
Equity in Earnings (Loss) of HCRC
HEP's equity in HCRC's loss increased by $774,000 during 1995 as compared to
1994. The increase is primarily the result of HCRC's impairment expense
resulting from the write-off of its investment in an Indonesian project during
1995, as well as a second quarter 1995 property impairment recorded by HCRC.
-21-
<PAGE>
<TABLE>
<CAPTION>
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENTS: Page
<S> <C>
Independent Auditors' Report 23
Consolidated Balance Sheets at December 31, 1996 and 1995 24-25
Consolidated Statements of Operations for the years
ended December 31, 1996, 1995 and 1994 26
Consolidated Statements of Partners' Capital for the
years ended December 31, 1996, 1995 and 1994 27
Consolidated Statements of Cash Flows for the years
ended December 31, 1996, 1995 and 1994 28
Notes to Consolidated Financial Statements 29-43
SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION - (UNAUDITED) 44-47
</TABLE>
-22-
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners of Hallwood Energy Partners, L.P.:
We have audited the consolidated financial statements of Hallwood Energy
Partners, L.P. as of December 31, 1996 and 1995 and for each of the three years
in the period ended December 31, 1996, listed in the index at Item 8. These
financial statements are the responsibility of the partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Hallwood Energy Partners, L.P. at
December 31, 1996 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996 in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Denver, Colorado
February 28, 1997
-23-
<PAGE>
<TABLE>
<CAPTION>
HALLWOOD ENERGY PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31,
1996 1995
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 5,540 $ 4,977
Accounts receivable:
Oil and gas revenues 9,405 6,767
Trade 4,507 2,860
Due from affiliates 2,808
Prepaid expenses and other current assets 928 1,091
--------- --------
Total 20,380 18,503
------- -------
PROPERTY, PLANT AND EQUIPMENT, at cost Oil and gas properties (full cost
method):
Proved mineral interests 607,875 601,323
Unproved mineral interests - domestic 1,244 684
Furniture, fixtures and other 3,366 3,090
-------- ---------
Total 612,485 605,097
Less accumulated depreciation, depletion,
amortization and property impairment (523,936) (510,171)
-------- -------
Total 88,549 94,926
-------- --------
OTHER ASSETS
Investment in common stock of HCRC 13,700 11,491
Deferred expenses and other assets 163 232
---------- ----------
Total 13,863 11,723
-------- --------
TOTAL ASSETS $122,792 $125,152
======= =======
<FN>
(Continued on the following page)
</FN>
</TABLE>
-24-
<PAGE>
<TABLE>
<CAPTION>
HALLWOOD ENERGY PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31,
1996 1995
CURRENT LIABILITIES
<S> <C> <C>
Accounts payable and accrued liabilities $ 15,185 $ 17,344
Due to affiliates 159
Net working capital deficit of affiliate 581 5,061
Current portion of contract settlement 374
Current portion of long-term debt 5,810 87
-------- ----------
Total 21,735 22,866
------- -------
NONCURRENT LIABILITIES
Long-term debt 29,461 37,557
Contract settlement 2,512 2,397
Deferred liability 1,533 1,718
-------- --------
Total 33,506 41,672
------- -------
Total Liabilities 55,241 64,538
------- -------
MINORITY INTEREST IN AFFILIATES 3,336 3,042
-------- -------
COMMITMENTS AND CONTINGENCIES (NOTE 14)
PARTNERS' CAPITAL
Class A Units - 9,977,254 Units issued, 9,077,949 and
9,193,159 outstanding in 1996 and 1995, respectively 61,487 59,614
Class B Subordinated Units - 143,773 Units issued
and outstanding 1,254 1,062
Class C Units - 664,063 Units issued and outstanding in 1996
(none in 1995) 5,146
General Partner 3,307 2,981
Treasury Units - 899,305 and 784,095
Units in 1996 and 1995, respectively (6,979) (6,085)
------- -------
Partners' Capital - Net 64,215 57,572
------- -------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $122,792 $125,152
======== =======
<FN>
The accompanying notes are an integral part of the
financial statements.
</FN>
</TABLE>
-25-
<PAGE>
<TABLE>
<CAPTION>
HALLWOOD ENERGY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per Unit)
For the Years Ended December 31,
1996 1995 1994
REVENUES:
<S> <C> <C> <C>
Oil revenue $ 19,534 $ 17,240 $ 15,470
Gas revenue 28,618 23,770 26,026
Pipeline, facilities and other 2,492 2,444 2,403
Interest 422 326 583
--------- ---------- ----------
51,066 43,780 44,482
------- -------- --------
EXPENSES:
Production operating 11,511 11,298 12,177
Facilities operating 726 794 730
General and administrative 4,540 5,580 5,630
Depreciation, depletion and amortization 13,500 15,827 18,168
Impairment of oil and gas properties 10,943 7,345
Interest 3,878 4,245 3,839
Litigation settlement 230 386 3,370
--------- ---------- ---------
34,385 49,073 51,259
------- -------- --------
OTHER INCOME (EXPENSES):
Equity in earnings (loss) of HCRC 1,768 (2,273) (1,499)
Minority interest in net income of affiliates (2,723) (1,465) (1,822)
Other 5
------------ ------------- ------------
(955) (3,738) (3,316)
--------- --------- ---------
NET INCOME (LOSS) 15,726 (9,031) (10,093)
CLASS C UNIT DISTRIBUTIONS ($1.00 PER UNIT) 664
---------
NET INCOME (LOSS) ATTRIBUTABLE TO
GENERAL PARTNER, CLASS A AND
CLASS B LIMITED PARTNERS $ 15,062 $ (9,031) $ (10,093)
======= ======== ========
ALLOCATION OF NET INCOME (LOSS):
General partner $ 2,569 $ 1,289 $ 1,631
======== ======== ========
Class A and Class B Limited partners $ 12,493 $(10,320) $(11,724)
======= ======= =======
Per Class A Unit and Class B Unit $ 1.34 $ (1.07) $ (1.20)
========= ========= ==========
Weighted average Class A Units and Class B Units
and equivalent Units outstanding 9,292 9,683 9,807
======== ========= =========
<FN>
The accompanying notes are an integral part of the
financial statements.
</FN>
</TABLE>
-26-
<PAGE>
<TABLE>
<CAPTION>
HALLWOOD ENERGY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(In thousands except Units)
General Class A Class B Class C Treasury
Partner Units Units Units Units
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993 $ 4,872 $ 95,956 $ 1,662 $(3,914)
Increase in Treasury
Units (26)
Syndication costs (34)
Distributions (2,452) (7,052) (116)
Net income (loss) 1,631 (11,528) (196)
------ ------- -------
Balance, December 31, 1994 4,051 77,342 1,350 (3,940)
Increase in Treasury
Units (2,145)
Syndication costs (63)
Distributions (2,359) (7,517) (116)
Net income (loss) 1,289 (10,148) (172)
------ ------- -------
Balance, December 31, 1995 2,981 59,614 1,062 (6,085)
Increase in Treasury
Units (894)
Syndication costs (12)
Issuance of Class C Units (5,146) $5,146
Distributions (2,243) (5,270) (664)
Net income 2,569 12,301 192 664
------ ------- ------- ------
Balance, December 31, 1996 $ 3,307 $ 61,487 $ 1,254 $5,146 $(6,979)
====== ======= ====== ===== ======
<FN>
The accompanying notes are an integral part of the
financial statements.
</FN>
</TABLE>
-27-
<PAGE>
<TABLE>
<CAPTION>
HALLWOOD ENERGY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Years Ended December 31,
1996 1995 1994
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss) $ 15,726 $ (9,031) $(10,093)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation, depletion, amortization and
impairment 13,500 26,770 25,513
Depreciation charged to affiliates 265 256 348
Amortization of deferred loan costs and other
assets 167 201 260
Noncash interest expense 219 289 394
Minority interest in net income 2,723 1,465 1,822
Take-or-pay recoupment (376) (571) (313)
Equity in (earnings) loss of HCRC (1,768) 2,273 1,499
Undistributed (earnings) loss of affiliates (187) (886) 158
--------- -------- ---------
Cash from operations before working capital
changes 30,269 20,766 19,588
Changes in operating assets and liabilities provided (used) cash net of
noncash activity:
Oil and gas revenues receivable (2,638) (547) 3,341
Trade receivables (1,647) 182 2,757
Due from affiliates 2,808 (1,161) (1,529)
Prepaid expenses and other current assets 163 261 3,590
Accounts payable and accrued liabilities (2,159) (1,052) (6,172)
Due to affiliates (373)
Net cash provided by operating activities 26,423 18,449 21,575
------- ------- -------
INVESTING ACTIVITIES:
Additions to property, plant and equipment (3,148) (2,727) (3,657)
Exploration and development costs incurred (9,467) (8,404) (9,978)
Proceeds from sales of property, plant and equipment 5,294 394 2,599
Investment in affiliates (449)
Refinance of Spraberry investment (4,715)
Other investing activities (25)
------------ ------------ ----------
Net cash used in investing activities (12,485) (10,737) (11,061)
------- ------- -------
FINANCING ACTIVITIES:
Payments of long-term debt (11,373) (7,379) (12,375)
Proceeds from long-term debt 9,000 15,000 4,300
Distributions paid (8,176) (10,020) (9,547)
Distributions paid by consolidated affiliates to
minority interest (2,429) (1,346) (2,245)
Payment of contract settlement (305) (1,336) (1,343)
Other financing activities (92) (63) (34)
---------- ---------- ----------
Net cash used in financing activities (13,375) (5,144) (21,244)
------- -------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 563 2,568 (10,730)
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR 4,977 2,409 13,139
-------- -------- -------
END OF YEAR $ 5,540 $ 4,977 $ 2,409
======== ======== ========
<FN>
The accompanying notes are an integral part of the
financial statements.
</FN>
</TABLE>
-28-
<PAGE>
HALLWOOD ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Hallwood Energy Partners, L.P. ("HEP" or the "Partnership") is a publicly traded
Delaware limited partnership engaged in the production, sale and transportation
of oil and gas and in the acquisition, exploration, development and operation of
oil and gas properties. The Partnership's properties are primarily located in
the Rocky Mountain, Mid-Continent, Texas and Gulf Coast regions of the United
States. The principal objectives of HEP are to maintain or expand its reserve
base and to provide cash distributions to holders of its units representing
limited partner interests ("Units"). HEPGP Ltd. became the general partner of
HEP on November 26, 1996 after its former general partner, Hallwood Energy
Corporation ("HEC") merged into The Hallwood Group Incorporated ("Hallwood
Group"). HEPGP Ltd. is a limited partnership of which Hallwood Group is the
limited partner and Hallwood G.P., Inc. ("Hallwood G.P."), a wholly owned
subsidiary of Hallwood Group, is the general partner. HEP commenced operations
in August 1985 after completing an exchange offer in which HEP acquired oil and
gas properties and operations from HEC, 24 oil and gas limited partnerships of
which HEC was the general partner, and certain working interest owners that had
participated in wells with HEC and the limited partnerships.
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 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.
Accounting Policies
Consolidation
HEP fully consolidates majority owned entities and reflects a minority interest
in the consolidated financial statements. HEP accounts for its interest in 50%
or less owned affiliated oil and gas partnerships and limited liability
companies using the proportionate consolidation method of accounting. HEP's
investment in approximately 46% of the common stock of its affiliate, Hallwood
Consolidated Resources Corporation ("HCRC"), is accounted for under the equity
method.
The accompanying financial statements include the activities of HEP, its
subsidiaries, Hallwood Petroleum, Inc. ("HPI") and Hallwood Oil and Gas, Inc.
("Hallwood Oil") and majority owned affiliates, the May Limited Partnerships
1983-1, 1983-2, 1983-3, 1984-1, 1984-2, 1984-3 ("Mays").
Derivatives
HEP has entered into numerous financial contracts to hedge the price of its oil
and natural gas. The purpose of the hedges is to provide protection against
price drops and to provide a measure of stability in the volatile environment of
oil and natural gas spot pricing. The amounts received or paid upon settlement
of these contracts are recognized as oil or gas revenue at the time the hedged
volumes are sold.
Gas Balancing
HEP uses the sales method for recording its gas balancing. Under this method,
HEP recognizes revenue on all of its sales of production, and any
over-production or under-production is recovered at a future date.
-29-
<PAGE>
As of December 31, 1996, HEP had a net over-produced position of 166,000 mcf
($372,000 valued at average gas prices). The general partner believes that this
imbalance can be made up from or repaid by production on existing wells or from
wells which will be drilled as offsets to existing wells and that this imbalance
will not have a material effect on HEP's results of operations, liquidity and
capital resources. HEP's oil and gas reserves as of December 31, 1996 have been
decreased by 166,000 mcf in order to reflect HEP's gas balancing position.
Allocations
Partnership costs and revenues are allocated to Unitholders and the general
partner pursuant to the partnership agreement as set forth below.
Unitholders General Partner
Property Costs and Revenues
Initial acquisition costs -
Acreage other than exploratory 100% 0%
Exploratory acreage 98% 2%
Producing wells -
Costs and revenues 98% 2%
Development wells (1) -
Costs through completion 100% 0%
All other costs and revenues 95% 5%
Exploratory wells (1) -
Costs through completion 90% 10%
All other costs and revenues 75% 25%
All other costs and revenues 98% 2%
(1) These percentages are for wells drilled under the EDPO partnership
agreement. The majority of wells drilled under the HEPO partnership
agreement share costs through completion in a ratio of 7.5% to the
general partner and 92.5% to the Unitholders and share all other costs
and revenues in a ratio of 18.75% to the general partner and 81.25% to
the Unitholders.
Property, Plant and Equipment
HEP follows the full cost method of accounting whereby all costs related to the
acquisition of oil and gas properties are capitalized in a single cost center
("full cost pool") and are amortized over the productive life of the underlying
proved reserves using the units of production method. Proceeds from property
sales are generally credited to the full cost pool.
Capitalized costs of oil and gas properties may not exceed an amount equal to
the present value, discounted at 10%, of estimated future net revenues from
proved oil and gas reserves plus the cost, or estimated fair market value, if
lower, of unproved properties. Should capitalized costs exceed this ceiling, an
impairment is recognized. The present value of estimated future net revenues is
computed by applying current prices of oil and gas to estimated future
production of proved oil and gas reserves as of year end, less estimated future
expenditures to be incurred in developing and producing the proved reserves
assuming continuation of existing economic conditions.
HEP does not accrue costs for future site restoration, dismantlement and
abandonment costs related to proved oil and gas properties because the
Partnership estimates that such costs will be offset by the salvage value of the
equipment sold upon abandonment of such properties. The Partnership's estimates
are based upon its historical experience and upon review of current properties
and restoration obligations.
-30-
<PAGE>
Unproved properties are withheld from the amortization base until such time as
they are either developed or abandoned. The properties are evaluated
periodically for impairment.
During 1996, HEP adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" ("SFAS 121"). SFAS 121 provides the standards for accounting for
the impairment of various long-lived assets. Substantially all of HEP's
long-lived assets consist of oil and gas properties which are evaluated for
impairment as described above. Therefore, the adoption of SFAS 121 did not have
a material effect on the financial position or results of operations of HEP.
Deferred Liability
The deferred liability as of December 31, 1996 and 1995 consists primarily of
HEP's share of the unrecouped portion of a 1989 take-or-pay settlement, which is
recoupable in gas volumes.
Distributions
HEP paid a $.13 per Class A Unit and a $.25 per Class C Unit distribution on
February 14, 1997 to Unitholders of record on December 31, 1996. This amount and
the general partner distribution were accrued as of year end. At December 31,
1996 and 1995, distributions payable of $1,996,000 and $2,477,000, respectively
were included in accounts payable and accrued liabilities. HEP declared
distributions of $.52 per Class A Unit and $1.00 per Class C Unit for 1996 and
$.80 per Class A and Class B Unit for 1995.
Income Taxes
No provision for federal income taxes is included in HEP's financial statements
because, as a partnership, it is not subject to federal income tax and the tax
effect of its activities accrues to the partners. In certain circumstances,
partnerships may be held to be associations taxable as corporations. The
Internal Revenue Service has issued regulations specifying circumstances under
current law when such a finding may be made, and management has obtained an
opinion of counsel based on those regulations that HEP is not an association
taxable as a corporation. A finding that HEP is an association taxable as a
corporation could have a material adverse effect on the financial position, cash
flows and results of operations of HEP.
As a result of the differences in the accounting treatment of certain items for
income tax purposes as opposed to financial reporting purposes, primarily
depreciation, depletion and amortization of oil and gas properties and the
recognition of intangible drilling costs as an expense or capital item, the
income tax basis of oil and gas properties differs from the basis used for
financial reporting purposes. At December 31, 1996 and 1995, the income tax
bases of the Partnership's oil and gas properties were approximately
$122,000,000 and $129,000,000, respectively.
Cash and Cash Equivalents
All highly liquid investments purchased with an original maturity of three
months or less are considered to be cash equivalents.
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 described in
Note 9 are considered to be Unit equivalents since June 1, 1996 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
-31-
<PAGE>
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). All Unit and per
Unit information has been restated to reflect the issuance of Class A Units in
connection with a lawsuit settlement further described in Note 12.
At December 31, 1996 and 1995, HEP owned approximately 46% and 40%, respectively
of the outstanding common stock of HCRC, which owns approximately 19% of HEP's
Class A Units; consequently, HEP has an interest in 899,305 and 784,095 of its
own Units as of December 31, 1996 and 1995, respectively. These Units are
treated as treasury Units in the accompanying financial statements.
Use of Estimates
The preparation of the financial statements for the Partnership in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.
Significant Customers
Although the Partnership sells the majority of its oil and gas production to a
few purchasers, there are numerous other purchasers in the area in which HEP
sells its production, therefore, the loss of its significant customers would not
adversely affect HEP's operations. For the years ended December 31, 1996, 1995
and 1994, purchases by the following companies exceeded 10% of the total oil and
gas revenues of the Partnership:
1996 1995 1994
---- ---- ----
Conoco Inc. 28% 30% 23%
Marathon Petroleum Company 11% 14% 12%
Environmental Concerns
HEP is continually taking actions it believes are necessary in its operations to
ensure conformity with applicable federal, state and local environmental
regulations. As of December 31, 1996, HEP has not been fined or cited for any
environmental violations which would have a material adverse effect upon capital
expenditures, earnings or the competitive position of HEP in the oil and gas
industry.
Reclassifications
Certain reclassifications have been made to prior years' amounts to conform to
the classifications used in the current year.
-32-
<PAGE>
NOTE 2 - OIL AND GAS PROPERTIES
The following table summarizes certain cost information related to HEP's oil and
gas activities:
<TABLE>
<CAPTION>
For the Years Ended December 31,
1996 1995 1994
(In thousands)
Property acquisition costs:
<S> <C> <C> <C>
Proved $ 2,321 $ 2,727 $ 3,724
Unproved 560 793 183
Development costs 9,587 11,880 4,995
Exploration costs 831 2,368 4,983
-------- ------ ------
Total $13,299 $17,768 $13,885
====== ====== ======
</TABLE>
Depreciation, depletion, amortization and impairment expense related to proved
oil and gas properties, per equivalent barrel of production for the years ended
December 31, 1996, 1995 and 1994, was $4.35, $7.21 and $.70, respectively.
At December 31, unproved properties consist of the following:
1996 1995
---- ----
(In thousands)
Texas $1,062 $227
South Louisiana 11 86
Utah 137
Other 171 234
------ ---
$1,244 $684
===== ===
NOTE 3 - PRINCIPAL ACQUISITIONS AND SALES
1996
On July 1, 1996, HEP and HCRC completed a transaction involving the acquisition
from Fuel Resources Development Co., a wholly owned subsidiary of Public Service
Company of Colorado, and other interest owners of their interests in 38 coal bed
methane wells located in LaPlata County, Colorado and Rio Arriba County, New
Mexico. Thirty-four of the wells, estimated to have reserves of 53 bcf, were
assigned to 44 Canyon LLC ("44 Canyon"), a special purpose entity owned by a
large east coast financial institution. The wells qualify for tax credits under
Section 29 of the Internal Revenue Code. HPI manages and operates the properties
on behalf of 44 Canyon. The $28.4 million purchase price was funded by 44 Canyon
through the sale of a volumetric production payment to an affiliate of Enron
Capital & Trade Resources Corp., a subsidiary of Enron Corp., the sale of a
subordinated production payment and certain other property interests for $3.45
million to an affiliate of HEP and HCRC, and additional cash contributed by the
owners of 44 Canyon. The affiliate of HEP and HCRC which purchased the
subordinated production payment and other property interests is owned equally by
HEP and HCRC. The interests in the four wells in Rio Arriba County were acquired
directly by HEP and HCRC.
1995
During 1995, HEP had no individually significant property acquisitions or sales.
-33-
<PAGE>
1994
During the second quarter of 1994, HEP and HCRC formed a limited partnership
with a third party for the purpose of producing natural gas qualified for the
Section 29 tax credit under the Internal Revenue Code. A limited liability
company owned by HEP and HCRC is the general partner of the partnership. In
1994, HEP and HCRC sold a term working interest in certain wells in San Juan
County, New Mexico to the limited partnership. In November 1996, HEP and HCRC
sold to the limited partnership their 80% reversionary interest in the
properties owned by the limited partnership. As consideration for the sale, HEP
and HCRC received a production payment, an increase in incentive payments and a
90% springing reversionary interest in the properties.
In the 1994 transaction, HEP and HCRC received a cash payment totaling
$3,400,000. HEP recorded its $1,870,000 share of the cash payment received as a
credit to oil and gas properties in the accompanying financial statements. As a
result of the 1994 and 1996 transactions, HEP and HCRC receive 97% of the cash
flow from production from the wells sold until 22.3 bcf are produced from the
wells (from November 1, 1996) and 80% of the cash flow until 31 bcf are
produced. HEP and HCRC also receive quarterly cash incentive payments equal to
34% of the Section 29 tax credit generated from the production from the wells
until 10.3 bcf are produced from the wells (from November 1, 1996), and 55%
thereafter. HEP and HCRC share in all proceeds 55% and 45%, respectively.
NOTE 4 - DERIVATIVES
HEP has entered into numerous financial contracts to hedge the price of its oil
and natural gas. HEP does not use these hedges for trading purposes, but rather
for the purpose of providing a protection against price drops 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 these contracts is
recognized as oil or gas revenue at the time the hedged volumes are sold.
The financial contracts used by HEP to hedge the price of its oil and natural
gas production are swaps, collars and participating hedges. Under the swap
contracts, HEP 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.
The following table provides a summary of HEP's financial contracts:
Oil
Quantity of Production
Period Hedged Contract Floor Price
(bbl) (per bbl)
1994 361,000 $17.93
1995 380,000 17.41
1996 300,000 18.33
1997 346,000 17.78
1998 103,000 15.38
1999 16,000 15.88
From 1997 forward, between 16% 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. From 1997 forward, 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.
-34-
<PAGE>
Gas
Quantity of Production
Period Hedged Contract Floor Price
(mcf) (per mcf)
1994 6,461,000 $1.88
1995 6,439,000 1.94
1996 5,479,000 1.94
1997 5,386,000 1.97
1998 4,235,000 2.02
1999 1,860,000 1.86
2000 1,244,000 2.01
From 1997 forward, 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.
In the event of nonperformance by the counterparties to the financial contracts,
HEP is exposed to credit loss, but has no off-balance sheet risk of accounting
loss. The Partnership anticipates that the counterparties will be able to
satisfy their obligations under the contracts because the counterparties consist
of well-established banking and financial institutions which have been in
operation for many years. Certain of HEP's hedges are secured by the lien on
HEP's oil and gas properties which also secures HEP's Credit Facilities
described in Note 6.
NOTE 5 - INVESTMENT IN AFFILIATED CORPORATION
HEP accounts for its approximate 46% interest in HCRC using the equity method of
accounting. The following presents summarized financial information for HCRC at
December 31, 1996, 1995 and 1994:
1996 1995 1994
------ ------ -----
(In thousands)
Current assets $10,802 $ 8,312 $ 7,076
Noncurrent assets 67,616 65,627 55,049
Current liabilities 10,849 15,514 6,646
Noncurrent liabilities 24,558 21,790 11,890
Revenue 34,445 25,484 20,644
Net income (loss) 8,160 (4,670) (2,974)
No other individual entity in which HEP owns an interest comprises in excess of
10% of the revenues, net income or assets of HEP.
HCRC repurchased approximately 99,000 and 26,000 shares of its common stock in
odd lot repurchase offers which were completed January 26, 1996 and May 3, 1996,
respectively. HCRC resold 12,965 of these shares to HEP at the price paid by
HCRC for such shares. As a result of these transactions, HEP's ownership in HCRC
increased from 40% to 46% at the end of May 1996.
The following amounts represent HEP's share of the property related costs and
reserve quantities and values of its equity investee HCRC (in thousands):
-35-
<PAGE>
Capitalized Costs Relating to Oil and Gas Activities:
<TABLE>
<CAPTION>
As of December 31,
1996 1995 1994
------ ------ -----
<S> <C> <C> <C>
Unproved properties $ 573 $ 230 $ 1,052
Proved properties 113,085 94,925 89,284
Accumulated depreciation, depletion,
amortization and property impairment (89,175) (74,168) (68,587)
------- ------- -------
Net property $ 24,482 $ 20,987 $ 21,749
======= ======= =======
Costs Incurred in Oil and Gas Activities:
For the Years Ended December 31,
--------------------------------
1996 1995 1994
------ ------ -----
Acquisition costs $1,008 $ 4,168 $1,531
Development costs 3,670 2,124 1,531
Exploration costs 382 845 825
------- ------- -----
Total $5,060 $ 7,137 $3,887
===== ======= =====
Results of Operations for Oil and Gas Activities:
For the Years Ended December 31,
--------------------------------
1996 1995 1994
------ ------ -----
Oil and gas revenue $11,690 $ 7,825 $ 6,522
Production operating expense (3,790) (2,894) (3,008)
Depreciation, depletion, amortization
and property impairment expense (3,257) (2,792) (3,695)
Income tax benefit (expense) 23 (813) 73
-------- ------ ------
Net income (loss) from oil and gas
activities $ 4,666 $ 1,326 $ (108)
====== ====== ======
</TABLE>
Proved Oil and Gas Reserve Quantities:
Gas Oil
Mcf Bbl
(unaudited)
Balance, December 31, 1996 22,786 2,680
====== =====
Balance, December 31, 1995 15,782 2,482
====== =====
Balance, December 31, 1994 14,548 1,771
====== =====
-36-
<PAGE>
Standardized Measure of Discounted Future Net Cash Flows:
(unaudited)
December 31, 1996 $47,701
======
December 31, 1995 $25,532
======
December 31, 1994 $16,466
======
NOTE 6 - DEBT
HEP's long-term debt at December 31, 1996 and 1995 consisted of the following:
1996 1995
------ -----
(In thousands)
Note Purchase Agreement $ 8,571 $12,857
Credit Agreement 26,700 24,700
Other 87
Total 35,271 37,644
Less current maturities (5,810) (87)
------ ---------
Long-term debt $29,461 $37,557
====== ======
During the first quarter of 1995, HEP and its lenders amended HEP's Amended and
Restated Credit Agreement ("Credit Agreement") to extend the term date of its
line of credit to May 31, 1997. Under the Credit Agreement and an Amended and
Restated Note Purchase Agreement ("Note Purchase Agreement") (collectively
referred to as the "Credit Facilities"), HEP has a borrowing base of
$48,000,000. HEP has amounts outstanding at December 31, 1996 of $26,700,000
under the Credit Agreement and $8,571,000 under the Note Purchase Agreement.
HEP's borrowing base is further reduced by an outstanding contract settlement
obligation of $2,512,000 (See Note 7); therefore, its unused borrowing base
totaled $10,217,000 at February 28, 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 1997 through additional
borrowings under the Credit Agreement; thus, no portion of HEP's Note Purchase
Agreement is classified as current as of December 31, 1996.
Borrowings against the Credit Agreement bear interest at the lower of the
Certificate of Deposit rate plus 1.875%, prime plus 1/2% or the Euro-Dollar rate
plus 1.75%. At December 31, 1996 the applicable interest rate was 7.4%. Interest
is payable monthly, and 16 quarterly principal payments of $1,937,000, as
adjusted for the anticipated borrowings to fund the Note Purchase Agreement
payment due in 1997, commence May 31, 1997. HEP intends to extend the maturity
date of its Credit Agreement prior to the commencement of the amortization
period.
The borrowing base for the Credit Facilities is redetermined semiannually in
March and September of each year. The Credit Facilities are secured by a first
lien on approximately 80% in value of HEP's oil and gas properties.
Additionally, aggregate distributions paid by HEP in any 12 month period are
limited to 50% of cash flow from operations before working capital changes plus
distributions received from affiliates.
-37-
<PAGE>
HEP entered into contracts to hedge its interest rate payments on $10,000,000 of
its debt through the end of 1996, $15,000,000 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, of which one 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.
At December 31, 1996, HEP's debt maturity schedule is as follows:
(In thousands)
1997 $ 5,810
1998 12,032
1999 7,746
2000 7,746
2001 1,937
------
Total $35,271
======
NOTE 7 - CONTRACT SETTLEMENT OBLIGATION
In the first quarter of 1989, HEP settled a take-or-pay contract claim on its
Bethany-Longstreet field. In accordance with the settlement, HEP received
$7,623,000 in cash. This amount was recoupable in cash or gas volumes from April
1992 through March 1996, with a cash balloon payment due during the first
quarter of 1998. A liability has been recorded equal to the present value of
this amount discounted at 10.68%, HEP's estimated borrowing cost at the time of
settlement. HEP also repaid $1,629,000 which represented suspended payments to
the pipeline for previous years in equal monthly installments of $33,937 which
began April 1992 and continued through March 1996. This amount was previously
recorded as an offset to the full cost pool at the time the contract was
initially abrogated by the pipeline. As payment of this obligation was made it
was charged to the full cost pool.
At December 31, 1996, the long-term contract settlement balance consists of a
payment of $2,767,000 due in March 1998, net of unaccreted discount of $255,000.
NOTE 8 - PARTNERS' CAPITAL
HEP Units that trade on the American Stock Exchange under the symbol "HEP" are
referred to as "Class A Units," and Units that trade under the symbol "HEPC" are
referred to as "Class C Units."
Class B Subordinated Units
The Class B Units have equal liquidation rights and identical tax allocation
rights and provisions to the Class A Units. However, the Class B Units have the
following subordinated distribution provisions:
1. Distribution rights equal to Class A Units while the Class A Units
receive distributions of $.20 or more per Class A Unit per calendar quarter.
2. No current distribution right should Class A Units receive distributions
less than $.20 per Class A Unit for any calendar quarter.
-38-
<PAGE>
3. An accumulated distribution deficit account is maintained for the benefit
of the Class B Units for any distributions suspended under 2 above. The
amount in the deficit account is payable in whole or in part to the Class B
Unitholders in any quarter in which distributions equal to or greater than
$.20 per Class A Unit are made on Class A Units.
The Class B Units may be converted into Class A Units on a 1:1 ratio at the
option of the holder or holders thereof. Upon conversion, any amount remaining
unpaid in the accumulated distribution deficit account relating to Class B Units
converted is waived.
The Class B Units vote as a separate class on all matters required or otherwise
brought for a vote of the Unitholders of HEP.
Class C Units
The Class C Units were issued on January 19, 1996 to Class A Unitholders in the
ratio of one Class C Unit for every 15 Class A Units outstanding. In connection
with the issuance of the Class C Units, HEP transferred $5,146,000 of partners
capital from the Class A Unitholders to the Class C Unitholders based on the
initial trading price of the Class C Units.
The Class C Units have a distribution preference of $1.00 per year, payable
quarterly, commencing in the first quarter of 1996. HEP may not declare or make
any cash distributions on the Class A or Class B Units unless all accrued and
unpaid distributions on the Class C Units have been paid.
Class C Units vote as a separate class on all matters submitted to the
unitholders of HEP for a vote.
Rights Plan
On February 6, 1995 the board of directors of the general partner approved the
adoption of a rights plan designed to protect Unitholders in the event of a
takeover action that would otherwise deny them the full value of their
investment.
Under the terms of the rights plan, one right was distributed for each Class A
Unit of HEP to holders of record at the close of business on February 17, 1995.
The rights trade with the Class A Units. The rights will become exercisable only
in the event, with certain exceptions, that an acquiring party accumulates 15%
or more of HEP's Class A Units, or if a party announces an offer to acquire 30%
or more of HEP. The rights will expire on February 6, 2005. In addition, upon
the occurrence of certain events, holders of the rights will be entitled to
purchase, for $24, either HEP Class A Units or shares in an "acquiring entity,"
with a market value at that time of $48.
HEP will generally be entitled to redeem the rights at one cent per right at any
time until the tenth day following the acquisition of a 15% position in its
Units.
NOTE 9 - EMPLOYEE INCENTIVE PLANS
Every year beginning in 1992, the Board of Directors of the general partner has
adopted an incentive plan. Each year the Board of Directors determines the
percentage of HEP's interest in the cash flow from certain wells drilled,
recompleted or enhanced during the year allocated to the incentive plan for that
year. The specified percentage was 2.4% for 1996, 1.4% for domestic wells for
1995 and 1% for domestic wells for 1994. In 1994 and 1995, HEP also had an
international incentive plan and the percentage interest in cash flow for that
plan was 3%. Beginning in 1996, the domestic and international plans were
combined. The specified percentage of cash flow is then allocated among certain
key employees who are participants in the Plan for that year. Each award under
the plan (with regard to domestic properties) represents the right to receive
for five years a portion of the specified share of the cash award, the
participants are each paid a share of an amount equal to a specified percentage
(80% for 1995 and 1996 and 40% for
-39-
<PAGE>
1994) of the remaining net present value of the qualifying wells, and the award
for that year terminates. The expenses attributable to the plans were $148,000
in 1996, $119,000 in 1995 and $88,000 in 1994 and are included in general and
administrative expense in the accompanying financial statements.
On January 31, 1995, the board of directors of the general partner approved the
adoption of the Unit Option Plan ("Option Plan") to be used for the motivation
and retention of directors, employees and consultants performing services for
HEP. The plan authorizes the issuance of options to purchase 425,000 Class A
Units. Grants of the total options authorized were made on January 31, 1995,
vesting one-third at that time, an additional one-third on January 31, 1996 and
the remaining one-third on January 31, 1997. The exercise price of the options
is $5.75, which was the closing price of the Class A Units on January 30, 1995.
A summary of options granted under the Option Plan as of December 31, 1996 and
1995 and the changes therein during the years then ended on those dates is
presented below:
<TABLE>
<CAPTION>
1996 1995
------ ----
Exercise Exercise
Units Price Units Price
<S> <C> <C> <C> <C>
Outstanding at beginning of year 425,000 $5.75
Granted 425,000 $5.75
------------- ------- ------- ----
Outstanding at end of year 425,000 $5.75 425,000 $5.75
======= ==== ======= ====
Options exercisable at year end 283,330 141,665
======= =======
</TABLE>
The Partnership has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). Accordingly, no compensation cost has been
recognized for the Option Plan. Had compensation expense for the Option Plan
been determined based on the fair value at the grant date for the options
awarded in 1995 consistent with the provisions of SFAS 123, HEP's net income
(loss) and net income (loss) per Unit would have been reduced to the pro forma
amounts indicated below:
1996 1995
------ -----
Net income (loss): as reported $15,726,000 $(9,031,000)
pro forma 15,544,000 (9,432,000)
Net income (loss)
per Class A and B Unit: as reported $1.34 $(1.07)
pro forma 1.32 (1.11)
The fair value of the Unit options for disclosure purposes was estimated on the
date of the grant using the Binomial Option Pricing Model with the following
assumptions:
Expected dividend yield 6%
Expected price volatility 28%
Risk-free interest rate 7.6%
Expected life of options 10 years
-40-
<PAGE>
NOTE 10 - RELATED PARTY TRANSACTIONS
HPI manages and operates certain oil and gas properties on behalf of independent
joint interest owners, HEP and its affiliates. In such capacity, HPI pays all
costs and expenses of operations and distributes all revenues associated with
such properties. HPI has payables to affiliates of HEP of $159,000 at December
31, 1996 and receivables from affiliates of HEP of $2,808,000 at December 31,
1995, which represent net revenues net of operating costs and expenses. The
intercompany balances are settled monthly.
HPI is reimbursed by HEP for costs and expenses which includes office rent,
salaries and associated overhead for personnel of HPI engaged in the acquisition
and evaluation of oil and gas properties (technical expenditures which are
capitalized as costs of oil and gas properties) and lease operating and general
and administrative expenses necessary to conduct the business of HEP
(nontechnical expenditures which are expensed as general and administrative or
production operating expenses). Reimbursements during 1996, 1995 and 1994 were
as follows:
1996 1995 1994
------ ------ -----
(In thousands)
Technical $1,249 $1,100 $ 747
Nontechnical 1,110 1,321 1,502
Included in the nontechnical allocation attributable to HEP's direct interest
for 1996, 1995 and 1994 is approximately $152,000, $156,000 and $159,000,
respectively, of consulting fees under a consulting agreement with Hallwood
Group.
Also included in the nontechnical allocation is $309,000, $369,000 and $363,000
in 1996, 1995 and 1994, respectively, representing costs incurred by Hallwood
Group and its affiliates on behalf of the Partnership.
During the third quarter of 1994, HPI entered into a consulting agreement with
its Chairman of the Board to provide advisory services regarding the activities
of its affiliates. The amount of consulting fees allocated to the Partnership
under this agreement is $125,000 in both 1996 and 1995 and $62,500 in 1994.
NOTE 11 - STATEMENT OF CASH FLOWS
Cash paid during 1996, 1995 and 1994 for interest totaled $3,492,000, $3,356,000
and $3,185,000, respectively.
NOTE 12 - LITIGATION SETTLEMENTS
In September 1995, the court order approving the settlement in the class action
lawsuit styled In re. Hallwood Energy Partners, L.P. Securities Litigation
became final. As part of the settlement, on September 28, 1995, HEP paid
$2,870,000 in cash (which was recorded as an expense in the December 31, 1994
financial statements as the estimated cost associated with the litigation) and
issued 1,158,696 Class A Units with a market value of $5,330,000 to a nominee of
the class. HCRC subsequently exercised an option to purchase these Units from
the nominee for $5,330,000 in cash. Other defendants contributed an additional
$900,000 in cash to the settlement. The net proceeds of the settlement were
distributed to a class consisting of former owners of limited partner interests
in Energy Development Partners, Ltd. ("EDP") who exchanged their units in that
entity for Units of HEP pursuant to the merger of EDP and HEP on May 9, 1990
(the "Transaction").
-41-
<PAGE>
Upon issuance, these Class A Units were treated, for financial statement
purposes, as additional Class A Units issued in connection with the Transaction,
which was accounted for as a reorganization of entities under common control, in
a manner similar to a pooling of interest, and have been reflected as
outstanding Class A Units since May 9, 1990, the date of the Transaction. As a
result of the settlement, the number of Units outstanding and the net income
(loss) per Class A Unit and Class B Unit have been retroactively restated for
all periods subsequent to the Transaction date.
NOTE 13 - LEGAL PROCEEDINGS
In June 1996, HEP and the other parties to the lawsuits styled Lamson Petroleum
Corporation v. Hallwood Petroleum, Inc. et al. settled the lawsuits. The
plaintiffs in the lawsuits claimed they had valid leases covering streets and
roads in the units of the A. L. Boudreaux #1 well, G. S. Boudreaux #1 well, Paul
Castille #1 well, Evangeline Shrine Club #1 well and Duhon #1 well, which
represented approximately .4% to 2.3% of HEP's interest in these properties, and
they were entitled to a portion of the production from the wells dating from
February 1990. In the settlement, HEP and the plaintiffs agreed to cross-convey
interests in certain leases to one another, and HEP agreed to pay the plaintiffs
$728,000. HEP has not recognized revenue attributable to the contested leases
since January 1993. These revenues plus accrued interest, totaling $506,000, had
been placed in escrow pending the resolution of the lawsuits. The excess of the
cash paid over the escrowed amounts, is reflected as litigation settlement
expense in the accompanying financial statements. The cross-conveyance of the
interests in the leases resulted in a decrease in HEP's reserves of $374,000 in
future net revenues, discounted at 10%.
The Partnership is involved in other legal proceedings and claims which have
arisen in the ordinary course of its business and have not been finally
adjudicated. The Partnership believes that its liability, if any, as a result of
such proceedings and claims will not materially affect its financial condition,
cash flows or operations.
NOTE 14 - COMMITMENTS
HPI leases office facilities under operating leases which expire in 1999. Rent
expense under these leases is allocated to HEP and its affiliates. Remaining
commitments under these leases mature as follows:
Year Ending
December 31, Annual Rentals
(in thousands)
1997 $ 632
1998 632
1999 316
---
$1,580
NOTE 15 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments is
made in accordance with the requirements of SFAS No. 107, "Disclosures about
Fair Value of Financial Instruments." The estimated fair value amounts have been
determined by the Partnership, using available market information and
appropriate valuation methodologies. However, considerable judgment is
necessarily required in interpreting market data to develop the estimates of
fair value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts that the Partnership could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
-42-
<PAGE>
<TABLE>
<CAPTION>
December 31, 1996
Carrying Estimated Fair
Amount Value
(In thousands)
Liabilities:
<S> <C> <C>
Interest rate hedge contracts $ -0- $ 250
Oil and gas hedge contracts -0- 20,000
Current portion of long-term debt 5,810 5,810
Long-term debt 29,461 29,716
Contract settlement 2,512 2,524
</TABLE>
The estimated fair value of the interest rate hedge contracts is computed by
multiplying the difference between the year end interest rate and the contract
interest rate by the amounts under contract. This amount has been discounted
using an interest rate that could be available to the Partnership.
The estimated fair value of the oil and gas hedge contracts is determined by
multiplying the difference between year end oil and gas prices and the hedge
contract prices by the quantities under contract. This amount has been
discounted using an interest rate that could be available to the Partnership.
The current portion of long-term debt is carried in the accompanying balance
sheets at an amount which is a reasonable estimate of its fair value.
The estimated fair value of long-term debt and contract settlement is determined
using interest rates that could be available to the Partnership for similar
instruments with similar terms.
The fair value estimates presented herein are based on pertinent information
available to management as of December 31, 1996. Although management is not
aware of any factors that would significantly affect the estimated fair value
amounts, such amounts have not been comprehensively revalued for purposes of
these financial statements since that date, and current estimates of fair value
may differ significantly from the amounts presented herein.
-43-
<PAGE>
HALLWOOD ENERGY PARTNERS, L.P.
SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION
DECEMBER 31, 1996
(Unaudited)
The following reserve quantity and future net cash flow information for HEP
represents proved reserves which are located in the United States. The reserves
have been estimated by HPI's in-house engineers. A majority of these reserves
has been reviewed by independent petroleum engineers. The determination of oil
and gas reserves is based on estimates which are highly complex and
interpretive. The estimates are subject to continuing change as additional
information becomes available.
The standardized measure of discounted future net cash flows provides a
comparison of HEP's proved oil and gas reserves from year to year. No
consideration has been given to future income taxes for HEP as it is not a tax
paying entity. Under the guidelines set forth by the Securities and Exchange
Commission (SEC), the calculation is performed using year end prices. At
December 31, 1996, oil and gas prices averaged $24.18 per bbl of oil and $3.76
per mcf of gas for HEP, including its indirect interests in affiliated
partnerships and the Mays. Future production costs are based on year end costs
and include severance taxes. The present value of future cash inflows is based
on a 10% discount rate. The reserve calculations using these December 31, 1996
prices result in 7.5 million bbls of oil, and 88.5 billion cubic feet of gas and
a standardized measure of $206,000,000. The Mays are included on a consolidated
basis, and 63,000 bbls of oil and 1.7 billion cubic feet of gas, representing a
discounted present value of $6,800,000 are attributable to the minority
ownership of these entities. This standardized measure is not necessarily
representative of the market value of HEP's properties. The portion of the
reserves attributable to the general partner's interest totaled 300,000 bbls of
oil and 6 billion cubic feet of gas with a standardized measure of $16,000,000
at December 31, 1996.
HEP's standardized measure of future net cash flows has been decreased by
$20,000,000 at December 31, 1996 for the effects of its hedge contracts. This
amount represents the difference between year end oil and gas prices and the
hedge contract prices multiplied by the quantities subject to contract,
discounted at 10%.
-44-
<PAGE>
<TABLE>
<CAPTION>
HALLWOOD ENERGY PARTNERS, L.P.
RESERVE QUANTITIES
(In thousands)
(Unaudited)
Gas Oil
Mcf Bbls
Proved Reserves:
<S> <C> <C>
Balance, December 31, 1993 91,607 5,453
Extensions and discoveries 5,985 1,052
Revisions of previous estimates 1,318 1,113
Sales of reserves in place (816) (84)
Purchase of reserves in place 699 143
Production (13,208) (939)
------- -------
Balance, December 31, 1994 85,585 6,738
Extensions and discoveries 5,997 1,902
Revisions of previous estimates 4,248 464
Sales of reserves in place (45) (41)
Purchase of reserves in place 362 28
Production (13,035) (993)
------- ------
Balance, December 31, 1995 83,112 8,098
Extensions and discoveries 1,683 484
Revisions of previous estimates 10,552 385
Sales of reserves in place (3,369) (481)
Purchase of reserves in place 9,350 17
Production (12,786) (972)
------- ------
Balance, December 31, 1996 88,542 7,531
======= ======
Proved Developed Reserves:
Balance, December 31, 1994 79,699 6,166
======= ======
Balance, December 31, 1995 77,378 7,444
======= ======
Balance, December 31, 1996 85,848 7,056
======= ======
</TABLE>
-45-
<PAGE>
<TABLE>
<CAPTION>
HALLWOOD ENERGY PARTNERS, L. P.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
(In thousands)
(Unaudited)
December 31,
1996 1995 1994
------ ------ -----
<S> <C> <C> <C>
Future cash flows $509,000 $317,000 $262,000
Future production and development costs (175,000) (130,000) (109,000)
-------- ------- -------
Future net cash flows before discount 334,000 187,000 153,000
10% discount to present value (128,000) (63,000) (49,000)
-------- ------- -------
Standardized measure of discounted future net
cash flows $206,000 $124,000 $104,000
======= ======= =======
</TABLE>
-46-
<PAGE>
<TABLE>
<CAPTION>
HALLWOOD ENERGY PARTNERS, L. P.
CHANGES IN THE STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
(In thousands)
(Unaudited)
For the Years Ended December 31,
1996 1995 1994
Standardized measure of discounted future net
<S> <C> <C> <C>
cash flows at beginning of year $124,000 $104,000 $121,000
Sales of oil and gas produced, net of
production costs (35,915) (29,712) (29,319)
Net changes in prices and production costs 75,085 17,015 (19,175)
Extensions and discoveries, net of future
production and development costs 7,144 16,836 10,537
Changes in estimated future development costs (7,492) (11,868) (5,614)
Development costs incurred 9,195 11,880 4,995
Revisions of previous quantity estimates 20,032 6,817 6,852
Purchases of reserves in place 14,721 513 1,334
Sales of reserves in place (9,742) (281) (1,131)
Accretion of discount 12,400 10,400 12,100
Changes in production rates and other (3,428) (1,600) 2,421
--------- --------- ---------
Standardized measure of discounted future net
cash flows at end of year $206,000 $124,000 $104,000
======= ======= =======
</TABLE>
-47-
<PAGE>
ITEM 9 - DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES
None.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The registrant is a limited partnership managed by the general partner and has
no officers or directors. The general partner is HEPGP Ltd., a Colorado limited
partnership. The general partner of HEPGP Ltd. is Hallwood G.P., Inc., a
Delaware corporation, which is a wholly owned subsidiary of Hallwood Group.
The principal duties and powers of the general partner are arranging financing
for HEP, seeking out, negotiating and acquiring for HEP suitable leases and
other prospects, managing properties owned by HEP, generally dealing for HEP
with third parties and attending to the general administration of HEP and its
relations with the limited partners.
HEPGP Ltd. is the sole general partner of HEP. HEPGP Ltd. is a limited
partnership, and its general partner is Hallwood G. P., Inc. Hallwood Petroleum,
Inc. ("HPI") performs duties related to the management of HEP, including the
operation of various properties in which HEP owns an interest.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the officers and
directors of Hallwood G.P., Inc., and persons who own more than ten percent of
HEP's Units, to file reports of ownership and changes in ownership with the
Securities and Exchange Commission. Officers, directors and greater than ten
percent owners are required by SEC regulation to furnish HEP with copies of all
Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no forms were
required for those persons, HEP believes that, during the year ended December
31, 1996, all officers and directors of Hallwood G.P., Inc. and greater than
ten-percent beneficial owners complied with applicable filing requirements.
ITEM 11 - EXECUTIVE COMPENSATION
HEP pays no salaries or other direct remuneration to officers, directors or key
employees of the general partner. HEP is charged for a portion of compensation
paid by HPI based upon HPI's allocation procedures which are applied
consistently to all entities which it manages.
For information regarding reimbursement made to the general partner and HPI see
Item 8 - Financial Statements and Supplementary Data (Note 10 to the Financial
Statements).
-48-
<PAGE>
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of February 27, 1997, about any
individual, partnership or corporation which is known to HEP to be the
beneficial owner of more than 5% of each class of Units issued and outstanding.
<TABLE>
<CAPTION>
Class A Class A Class C Class C
Unit Unit Unit Unit
Name and Address of Owner Amount Percent Amount Percent
------------------------- -------- ------- -------- -------
<S> <C> <C> <C> <C>
The Hallwood Group Incorporated 657,260 (1) 6.5 (1) 43,816 6.6
3710 Rawlins Street, Suite 1500
Dallas, Texas 75219
Hallwood Consolidated Resources Corporation 1,948,189 19.5 129,877 19.5
4582 S. Ulster Street Parkway, Suite 1700
Denver, Colorado 80237
Heartland Advisors, Inc. 1,045,500 (2) 10.5 (2)
790 North Milwaukee Street
Milwaukee, WI 53202
<FN>
(1) Includes 143,773 Class B Units (100% of the Class B Units) which are convertible into Class A Units one-
for-one.
(2) According to the Amendment to Schedule 13G filed February 14, 1997 by
Heartland Advisors, Inc., the Units to which the schedule relates are
held in investment advisory accounts of Heartland Advisors, Inc. As a
result, various persons have the right to receive or the power to direct
the receipt of dividends from, or the proceeds from the sale of, the
securities. No such account is known to have such an interest relating
to more than 5% of the class.
</FN>
</TABLE>
As of February 27, 1997, officers and directors of the general partner, as a
group, held 803 Class A Units and currently exercisable options to purchase
386,750 Class A Units, or 3.7% of the total Class A Units currently outstanding
assuming exercise of all currently exercisable options held by officers and
directors, and 52 Class C Units, or less than .01% of the total Class C Units
currently outstanding.
See Item 8 - Financial Statements and Supplementary Data (Note 9 to the
Financial Statements) for a description of HEP's Unit Option Plan.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Item 8 - Financial Statements and Supplementary Data (Note 10 to the
Financial Statements).
-49-
<PAGE>
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Financial Statement Schedules.
(See Index at Item 8).
(b) Reports on Form 8-K.
HEP filed no current reports on Form 8-K during the last quarter of the
period covered by this report. (c) Exhibits.
(1) 4.1 - Third Amended and Restated Agreement of Limited Partnership of
Hallwood Energy Partners, L. P.
(5) 4.2 - Unit Purchase Rights Agreement dated as of February 6, 1995
between HEP and The First National Bank of Boston.
(9) 4.3 - First Amendment to the Third Amended and Restated Agreement of
Limited Partnership of Hallwood Energy Partners, L. P.
4.4 - Amendment to the Third Amended and Restated Agreement of
Limited Partnership of Hallwood Energy Partners, L.P.
(3) 10.1 - Third Amended and Restated Agreement of Limited Partnership of
HEP Operating Partners, L.P.
(7) 10.3 - Second Amended and Restated Credit Agreement dated March 31,
1995.
(2) 10.4 - Amended and Restated Note Purchase Agreement dated May 7,1990.
(Exhibit 10.2)
(3) 10.5 - Amended and Restated Agreement of Limited Partnership of EDP
Operating, Ltd.
(6) 10.6 - Financial Consulting Agreement between The Hallwood Group
Incorporated and Hallwood Petroleum, Inc. dated June 30,1993.
(4) 10.7 - Financial Consulting Agreement between The Hallwood Group
Incorporated and Hallwood Petroleum, Inc. dated June 30,1994.
* (4) 10.8 - Compensation Agreement between Hallwood Petroleum, Inc. and
Anthony J. Gumbiner dated August 1, 1994.
* (7) 10.9 - Domestic Incentive Plan between the Partnership and Hallwood
Petroleum, Inc. dated January 14, 1993.
* (8) 10.10 - 1995 Unit Option Plan
* (7) 10.11 - 1995 Unit Option Plan Loan Program
10.12 - Amendment to the Third Amended and Restated Agreement of
Limited Partnership of HEP Operating Partners, L.P.
10.13 - Second Amendment to the Second Amended and Restated Agreement
of Limited Partnership of EDP Operating, Ltd.
(9) 21 - Subsidiaries of Registrant
23.1 - Consent of Deloitte & Touche LLP
23.2 - Consent of Deloitte & Touche LLP
23.3 - Consent of Deloitte & Touche LLP
(1) Incorporated by reference to Prospectus/Proxy Statement dated
February 14, 1990 as supplemented March 22, 1990, March 30, 1990
and April 5, 1990, of Hallwood Energy Partners, L. P., filed as
part of Registration Statement No. 33-33452.
(2) Incorporated by reference to the exhibit shown in parentheses filed
with current report on Form 8-K dated May 9, 1990 of Hallwood
Energy Partners, L.P.
(3) Incorporated by reference to the same exhibit number filed with the
Registrant's Annual Report on Form 10-K for fiscal year ended
December 31, 1990.
(4) Incorporated by reference to the same exhibit number filed with the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1994.
(5) Incorporated by reference to Exhibit 1 filed with the Registrant's
Form 8-A for Limited Partner Unit Purchase Rights filed with the
SEC on February 8, 1995.
(6) Incorporated by reference to the same exhibit number filed with the
Registrant's Annual Report on Form 10-K for fiscal year ended
December 31, 1993.
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(7) Incorporated by reference to the same exhibit number filed with
Registrant's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1995.
(8) Incorporated by reference to the same exhibit number filed with the
Registrant's Annual Report on Form 10-K for fiscal year ended
December 31, 1994.
(9) Incorporated by reference to the same exhibit number filed with the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995.
*Designates management contracts or compensatory plans or arrangements.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant 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: March 20, 1997 By:/s/William L. Guzzetti
------------------------------------------- ----------------------
William L. Guzzetti
President and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
<S> <C> <C>
/s/Anthony J. Gumbiner Chairman of the Board and March 20, 1997
- ---------------------------------------------- --------------
Anthony J. Gumbiner Director (Chief Executive Officer)
Director March 20, 1997
Brian M. Troup
/s/Hans-Peter Holinger Director March 20, 1997
Hans-Peter Holinger
/s/Rex A. Sebastian Director March 20, 1997
Rex A. Sebastian
/s/Nathan C. Collins Director March 20, 1997
Nathan C. Collins
/s/Robert S. Pfeiffer Principal Accounting Officer March 20, 1997
- ---------------------------------------------- --------------
Robert S. Pfeiffer
</TABLE>
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<TABLE>
<CAPTION>
INDEX TO EXHIBITS
Page
<S> <C>
4.4 Amendment to the Third Amended and Restated Agreement of Limited
partnership of Hallwood Energy Partners, L.P. 55
10.12 Amendment to the Third Amended and Restated Agreement of Limited
Partnership of HEP Operating Partners, L.P 59
10.13 Second Amendment to the Second Amended and Restated Agreement of
Limited Partnership of EDP Operating, Ltd. 62
23.1 Consent of Deloitte & Touche LLP 65
23.2 Consent of Deloitte & Touche LLP 67
23.3 Consent of Deloitte & Touche LLP 69
</TABLE>
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EXHIBIT 4.4
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EXHIBIT 4.4
AMENDMENT TO THE THIRD AMENDED AND RESTATED AGREEMENT
OF LIMITED PARTNERSHIP OF
HALLWOOD ENERGY PARTNERS, L.P.
This Amendment ("Amendment") to the Third Amended and Restated
Agreement of Limited Partnership (the "Agreement") of Hallwood Energy Partners,
L.P. (the "Partnership"), is executed as of November 26, 1996, by The Hallwood
Group Incorporated, a Delaware corporation, as the outgoing general partner of
the Partnership on behalf of itself and the Limited Partners on the books and
records of the Partnership, pursuant to the powers of attorney executed by such
Limited Partners, and by HEPGP Ltd., the incoming general partner of the
Partnership.
WHEREAS, the Third Amended and Restated Agreement of Limited
Partnership of Hallwood Energy Partners, L.P. was entered into on May 9, 1990,
with Hallwood Energy Corporation as the sole general partner.
WHEREAS, Hallwood Energy Corporation was merged into The Hallwood Group
Incorporated effective November 26, 1996;
WHEREAS, pursuant to Sections 11.2(b) and 12.3 of the Agreement, The
Hallwood Group Incorporated assumed the rights and duties of the General Partner
as a result of its merger with Hallwood Energy Corporation;
WHEREAS, the General Partner has determined that the Agreement permits,
and that it is in the best interest of the Partnership to effect, the Amendment
of the Partnership to authorize the transfer of the general partner interest to
a limited partnership 100% of the interest of which is owned by The Hallwood
Group Incorporated;
WHEREAS, the General Partner has determined that the Agreement permits,
and that it is in the best interest of the Partnership to effect, the transfer
of the general partner interest in the Partnership to HEPGP Ltd., a limited
partnership 100% of the interest of which is owned by The Hallwood Group
Incorporated, with the effect that HEPGP Ltd. become the new general partner of
the Partnership.
NOW, THEREFORE, the Agreement is hereby amended as follows:
1. Section 11.2(b) of the Agreement is revised to read in its entirety as
follows:
"(b) Neither subsection (a) of this Section nor any other provision of
this Agreement shall be construed to prevent (and all Partners hereby expressly
consent to) the transfer by the General Partner upon its merger or consolidation
into any other corporation, the transfer by it of all or substantially all of
its assets to another corporation, and the assumption of the rights and duties
of the General Partner by the transferee corporation or the transfer by it of
its Partnership Interest as a General Partner to a corporation, partnership,
limited liability company or other
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entity, all of the equity interests of which are owned, and continue to be
owned, directly or indirectly by the transferor; provided the transferee
certifies that it is a United States Citizen, and furnishes to the Partnership
an Opinion of Independent Counsel that such merger, consolidation, transfer or
assumption will not result in a loss of limited liability of any Limited
Partner, or the limited partner in any Operating Partnership or result in the
Partnership, or any Operating Partnership, being treated as an association
taxable as a corporation for federal income tax purposes."
2. That HEPGP Ltd. be and it is hereby admitted and substituted as the
general partner of the Partnership for all purposes, The Hallwood Group
Incorporated is withdrawn as the general partner of the Partnership, and all
references to the General Partner in the Agreement shall refer to HEPGP Ltd.
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of
the date first set forth above.
OUTGOING GENERAL PARTNER:
THE HALLWOOD GROUP INCORPORATED
By: /s/William L. Guzzetti
Name: William L. Guzzetti
Title: Vice President
INCOMING GENERAL PARTNER:
HEPGP LTD.
By: Hallwood G.P., Inc.
By: /s/William L. Guzzetti
Name: William L. Guzetti
Title: President
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LIMITED PARTNERS
By: The Hallwood Group Incorporated,
as Attorney-in-Fact for each of
the Limited Partners
By: /s/William L. Guzzetti
Name: William L. Guzzetti
Title: Vice President
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EXHIBIT 10.12
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EXHIBIT 10.12
AMENDMENT TO THE THIRD AMENDED AND RESTATED AGREEMENT
OF LIMITED PARTNERSHIP OF
HEP OPERATING PARTNERS, L.P.
This Amendment ("Amendment") to the Third Amended and Restated
Agreement of Limited Partnership (the "Agreement") of HEP Operating Partners,
L.P. (the "Partnership"), is executed as of November 26, 1996, by The Hallwood
Group Incorporated, a Delaware corporation, as the outgoing general partner of
the Partnership on behalf of itself and Hallwood Energy Partners, L.P., the
Limited Partners of the Partnership, and by HEPGP Ltd., the incoming general
partner of the Partnership.
WHEREAS, the Third Amended and Restated Agreement of Limited
Partnership of HEP Operating Partners, L.P. was entered into on May 9, 1990,
with Hallwood Energy Corporation as the sole general partner.
WHEREAS, Hallwood Energy Corporation was merged into The Hallwood Group
Incorporated effective November 26, 1996;
WHEREAS, pursuant to Sections 10.2(b) and 11.2 of the Agreement, The
Hallwood Group Incorporated assumed the rights and duties of the General Partner
as a result of its merger with Hallwood Energy Corporation;
WHEREAS, the General Partner has determined that the Agreement permits,
and that it is in the best interest of the Partnership to effect, the transfer
of the general partner interest in the Partnership to HEPGP Ltd., a limited
partnership 100% of the interest of which is owned by The Hallwood Group
Incorporated, with the effect that HEPGP Ltd. become the new general partner of
the Partnership.
NOW, THEREFORE, the Agreement is hereby amended as follows:
1. To reflect that HEPGP Ltd. be and it is hereby admitted and
substituted as the general partner of the Partnership for all purposes, The
Hallwood Group Incorporated is withdrawn as the general partner of the
Partnership, and all references to the General Partner in the Agreement shall
refer to HEPGP Ltd.
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IN WITNESS WHEREOF, the undersigned have executed this Amendment as of
the date first set forth above.
OUTGOING GENERAL PARTNER:
THE HALLWOOD GROUP INCORPORATED
By: /s/William L. Guzzetti
Name: William L. Guzzetti
Title: Vice President
INCOMING GENERAL PARTNER:
HEPGP LTD.
By: Hallwood G.P., Inc
By: /s/William L. Guzzetti
Name: William L. Guzzetti
Title: President
LIMITED PARTNER
By: Hallwood Energy Partners, L.P.
By: The Hallwood Group Incorporated,
General Partner
By: /s/William L. Guzzetti
Name: William L. Guzzetti
Title: President
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EXHIBIT 10.13
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EXHIBIT 10.13
SECOND AMENDMENT TO
SECOND AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP OF
EDP OPERATING, LTD.
(A Colorado Limited Partnership)
This Second Amendment ("Amendment") to the Second Amended and Restated
Agreement of Limited Partnership ("Agreement") of EDP Operating, Ltd., a
Colorado Limited Partnership (the "Partnership"), is executed as of the 5th day
of December, 1996, but effective as of November 27, 1996, by and between HEPGP
Ltd., a Colorado limited partnership (the "General Partner") and Hallwood Energy
Partners, L.P., a Delaware limited partnership (the "Limited Partner").
WHEREAS, Quinoco Energy, Inc. changed its name to Hallwood G.P., Inc.
effective May 25, 1990.
WHEREAS, the former General Partner, Hallwood G.P., Inc. assigned its
general partner interest to HEPGP Ltd., effective November 27, 1996.
WHEREAS, Energy Development Partners, Ltd. was merged into Hallwood
Energy Partners, L.P. in May of 1990.
WHEREAS, it is the desire of the General Partner and the Limited
Partner to amend this Agreement to evidence the change of the General Partner.
WHEREAS, this Amendment does not involve any new, increased or
additional contributions to the Partnership.
NOW, THEREFORE, the Agreement is hereby amended as follows:
"ARTICLE I
DEFINITIONS
General Partner shall mean HEPGP Ltd. or any successor admitted pursuant to
Section 10.4."
IN WITNESS WHEREOF, the undersigned have executed this Agreements as of
the date first set forth above, but effective as of November 27, 1996.
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NEW GENERAL PARTNER:
HEPGP Ltd.
By: Hallwood G.P., Inc., General Partner
By: /s/Cathleen M. Osborn
Cathleen M. Osborn, Vice President
LIMITED PARTNER:
HALLWOOD ENERGY PARTNERS, L.P.
By: HEPGP Ltd., General Partner
By: Hallwood G.P., Inc.,
General Partner
By: /s/Cathleen M. Osborn
Cathleen M. Osborn, Vice President
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EXHIBIT 23.1
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EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-76668 of Hallwood Energy Partners, L.P. on Form S-2 of our report dated
February 28, 1997, appearing in this Annual Report on Form 10-K of Hallwood
Energy Partners, L.P. for the year ended December 31, 1996.
DELOITTE & TOUCHE LLP
Denver, Colorado
March 20, 1997
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EXHIBIT 23.2
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EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-73946 of Hallwood Energy Partners, L.P. on Form S-4 of our report dated
February 28, 1997, appearing in this Annual Report on Form 10-K of Hallwood
Energy Partners, L.P. for the year ended December 31, 1996.
DELOITTE & TOUCHE LLP
Denver, Colorado
March 20, 1997
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EXHIBIT 23.3
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EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-22563 of Hallwood Energy Partners, L.P. on Form S-8 of our report dated
February 28, 1997, appearing in this Annual Report on Form 10-K of Hallwood
Energy Partners, L.P. for the year ended December 31, 1996.
DELOITTE & TOUCHE LLP
Denver, Colorado
March 20, 1997
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Form 10-K
the year ended December 31, 1996 for Hallwood Energy Partners, L.P. and is
qualified in its entirety by reference to such Form 10-K.
</LEGEND>
<CIK> 0000768172
<NAME> Hallwood Energy Partners, L.P.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-END> Dec-31-1996
<CASH> 5,540
<SECURITIES> 0
<RECEIVABLES> 13,912
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 20,380
<PP&E> 612,485
<DEPRECIATION> 523,936
<TOTAL-ASSETS> 122,792
<CURRENT-LIABILITIES> 21,735
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 64,215
<TOTAL-LIABILITY-AND-EQUITY> 122,792
<SALES> 50,644
<TOTAL-REVENUES> 51,066
<CGS> 0
<TOTAL-COSTS> 12,237
<OTHER-EXPENSES> 1,185
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,878
<INCOME-PRETAX> 15,726
<INCOME-TAX> 0
<INCOME-CONTINUING> 15,726
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,726
<EPS-PRIMARY> 1.34
<EPS-DILUTED> 1.34
</TABLE>
