UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
MARK ONE
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 1-8921
HALLWOOD ENERGY PARTNERS, L. P.
(Exact name of registrant as specified in its charter)
Delaware 84-0987088
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4582 South Ulster Street Parkway
Suite 1700
Denver, Colorado 80237
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 850-7373
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [x] No [ ]
The registrant is a limited partnership and issues Units (representing ownership
of limited partner interests).
Number of Units outstanding as of May 12, 1998
Class A 10,011,854
Class B 143,773
Class C 2,464,063
Page 1 of 19
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
HALLWOOD ENERGY PARTNERS, L. P.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
March 31, December 31,
1998 1997
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 6,577 $ 6,622
Accounts receivable:
Oil and gas revenues 6,356 8,772
Trade 4,452 4,609
Due from affiliates 140 588
Prepaid expenses and other current assets 1,619 1,551
--------- ---------
Total 19,144 22,142
-------- --------
PROPERTY, PLANT AND EQUIPMENT, at cost Oil and gas properties (full cost
method):
Proved mineral interests 627,703 624,621
Unproved mineral interests - domestic 2,466 2,315
Furniture, fixtures and other 3,373 3,513
--------- ---------
Total 633,542 630,449
Less accumulated depreciation, depletion,
amortization and property impairment (539,532) (536,118)
------- -------
Total 94,010 94,331
-------- --------
OTHER ASSETS
Investment in common stock of HCRC 14,954 15,048
Deferred expenses and other assets 52 82
----------- -----------
Total 15,006 15,130
-------- --------
TOTAL ASSETS $128,160 $131,603
======= =======
<FN>
(Continued on the following page)
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HALLWOOD ENERGY PARTNERS, L. P.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands except Units)
March 31, December 31,
1998 1997
CURRENT LIABILITIES
<S> <C> <C>
Accounts payable and accrued liabilities $ 17,399 $ 19,915
Net working capital deficit of affiliate 35 448
Current portion of contract settlement 2,752
------------- ---------
Total 17,434 23,115
-------- --------
NONCURRENT LIABILITIES
Long-term debt 20,986 34,986
Deferred liability 1,147 1,180
--------- ---------
Total 22,133 36,166
-------- --------
Total Liabilities 39,567 59,281
-------- --------
MINORITY INTEREST IN AFFILIATES 3,071 3,258
--------- ---------
COMMITMENTS AND CONTINGENCIES (NOTE 5)
PARTNERS' CAPITAL
Class A Units - 10,011,854 and 9,977,254 Units issued in 1998 and 1997,
respectively; 9,121,612 and 9,077,949
outstanding in 1998 and 1997, respectively 65,893 66,184
Class B Subordinated Units - 147,773 Units outstanding
in 1998 and 1997 1,424 1,411
Class C Units - 2,464,063 and 664,063 Units outstanding
in 1998 and 1997, respectively 21,388 4,868
General partner 3,726 3,580
Treasury Units - 890,242 and 899,305 Units in 1998 and
1997, respectively (6,909) (6,979)
--------- ---------
Partners' Capital - Net 85,522 69,064
-------- --------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $128,160 $131,603
======= =======
<FN>
The accompanying notes are an integral part of the
financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HALLWOOD ENERGY PARTNERS, L. P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except per Unit data)
For the Three Months Ended
March 31,
1998 1997
REVENUES:
<S> <C> <C>
Gas revenue $ 6,744 $ 7,473
Oil revenue 3,090 4,511
Pipeline, facilities and other 700 763
Interest 140 123
--------- ---------
10,674 12,870
------- -------
EXPENSES:
Production operating 3,061 2,789
Facilities operating 152 178
General and administrative 1,165 1,224
Depreciation, depletion and amortization 3,539 2,952
Interest 644 851
-------- --------
8,561 7,994
------- -------
OTHER INCOME (EXPENSES):
Equity in earnings (loss) of HCRC (94) 980
Minority interest in net income of affiliates (313) (560)
Litigation settlement 45
---------
(362) 420
-------- --------
NET INCOME 1,751 5,296
CLASS C UNIT DISTRIBUTIONS ($.25 PER UNIT) 616 166
-------- --------
NET INCOME ATTRIBUTABLE TO GENERAL PARTNER,
CLASS A AND CLASS B LIMITED PARTNERS $ 1,135 $ 5,130
======== =======
ALLOCATION OF NET INCOME:
General partner $ 310 $ 627
======== ========
Class A and Class B Limited partners $ 825 $ 4,503
======== =======
Per Class A Unit and Class B Unit - basic $ .09 $ .49
========== ==========
Per Class A Unit and Class B Unit - diluted $ .09 $ .48
========== ==========
Weighted average Class A Units and Class B Units
outstanding 9,237 9,222
======== =======
<FN>
The accompanying notes are an integral part of the
financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HALLWOOD ENERGY PARTNERS, L. P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
For the Three Months Ended
March 31,
1998 1997
OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 1,751 $ 5,296
Adjustment to reconcile net income to net cash provided
by operating activities:
Depreciation, depletion and amortization 3,539 2,952
Depreciation charged to affiliates 63 55
Asset disposals (188)
Amortization of deferred loan costs and other assets 30 20
Noncash interest expense 15 57
Equity in (earnings) loss of HCRC 94 (980)
Minority interest in net income 313 560
Undistributed (earnings) loss of affiliates 253 (123)
Recoupment of take-or-pay liability (33) (45)
Changes in operating assets and liabilities provided (used) cash net of
noncash activity:
Oil and gas revenues receivable 2,416 2,215
Trade receivables 157 1,011
Due from affiliates 8
Prepaid expenses and other current assets (68) (33)
Accounts payable and accrued liabilities (2,516) 1,127
Due to affiliates 331
------------ ----------
Net cash provided by operating activities 5,834 12,443
-------- --------
INVESTING ACTIVITIES:
Additions to property, plant and equipment (714) (469)
Exploration and development costs incurred (2,555) (1,708)
Proceeds from sales of property, plant and equipment 20
Other investing activities (70)
------------ ----------
Net cash used in investing activities (3,249) (2,247)
-------- --------
FINANCING ACTIVITIES:
Payments of long-term debt (14,000)
Distributions paid (2,253) (1,914)
Distribution paid by consolidated affiliates to minority interest (500) (445)
Payment of contract settlement (2,767)
Proceeds from the issuance of Class C Units net of syndication 16,520
costs
Capital contribution from the general partner 171
Exercise of Unit Options 199
Other (4)
------------ -----------
Net cash used in financing activities (2,630) (2,363)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(45) 7,833
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD 6,622 5,540
-------- --------
END OF PERIOD $ 6,577 $ 13,373
======== =======
<FN>
The accompanying notes are an integral part of the financial statements.
</FN>
</TABLE>
HALLWOOD ENERGY PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - GENERAL
Hallwood Energy Partners, L. P. ("HEP") is a publicly traded Delaware limited
partnership engaged in the development, acquisition and production of oil and
gas properties in the continental United States. HEP's objective is to provide
its partners with an attractive return through a combination of cash
distributions and capital appreciation. To achieve its objective, HEP utilizes
operating cash flow, first, to reinvest in operations to maintain its reserve
base and production; second, to make stable cash distributions to Unitholders;
and third, to grow HEP's reserve base over time. HEP's future growth will be
driven by a combination of development of existing projects, exploration for new
reserves and select acquisitions. The general partner of HEP is HEPGP Ltd.
The activities of HEP are conducted through HEP Operating Partners, L. P.
("HEPO") and EDP Operating, Ltd. ("EDPO"). HEP is the sole limited partner and
HEPGP Ltd. is the sole general partner of HEPO and of EDPO. Solely for purposes
of simplicity herein, unless otherwise indicated, all references to HEP in
connection with the ownership, exploration, development or production of oil and
gas properties include HEPO and EDPO.
The interim financial data are unaudited; however, in the opinion of the general
partner, the interim data include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results for the
interim periods. These financial statements should be read in conjunction with
the financial statements and accompanying notes included in HEP's December 31,
1997 Annual Report on Form 10-K.
Accounting Policies
Consolidation
HEP fully consolidates entities in which it owns a greater than 50% equity
interest 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 and 1984-3 ("Mays").
Computation of Net Income Per Unit
During February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 Earnings per Share ("SFAS 128"). SFAS
128 establishes standards for computing and presenting earnings per share (EPS),
and supersedes APB Opinion No. 15 and its related interpretations. It replaces
the presentation of primary EPS with a presentation of basic EPS, which excludes
dilution, and requires dual presentation of basic and diluted EPS for all
entities with complex capital structures. Diluted EPS is computed similarly to
fully diluted EPS pursuant to Opinion No. 15. SFAS 128 is effective for periods
ending after December 15, 1997, including interim periods, and requires
restatement of all prior period EPS data presented. HEP adopted SFAS 128
effective December 31, 1997, and has restated all prior period EPS data
presented to give retroactive effect to the new accounting standard.
<PAGE>
Basic income (loss) per Class A and Class B Unit is computed by dividing net
income (loss) attributable to the Class A and Class B limited partners' interest
(net income excluding income (loss) attributable to the general partner and
Class C Units) by the weighted average number of Class A Units and Class B Units
outstanding during the periods. Diluted income per Class A and Class B Unit
includes the potential dilution that could occur upon exercise of options to
acquire Class A Units, computed using the treasury stock method which assumes
that the increase in the number of Units is reduced by the number of Units which
could have been repurchased by the Partnership with the proceeds from the
exercise of the options (which were assumed to have been made at the average
market price of the Class A Units during the reporting period).
The following table reconciles the number of Units outstanding used in the
calculation of basic and diluted income (loss) per Class A and Class B Unit.
<TABLE>
<CAPTION>
Income Units Per Unit
(In thousands except per Unit)
For the Three Months Ended March 31, 1998
<S> <C> <C> <C>
Net income per Class A Unit and Class B Unit - basic $ 825 9,237 $.09
===
Effect of Unit Options 86
------ -----
Net Income per Class A Unit and Class B Unit - diluted $ 825 9,323 $.09
====== ===== ===
For the Three Months Ended March 31, 1997
Net income per Class A Unit and Class B Unit -basic $ 4,503 9,222 $.49
===
Effect of Unit Options 162
------ -----
Net Income per Class A Unit and Class B Unit - diluted $ 4,503 9,384 $.48
====== ===== ===
</TABLE>
Treasury Units
HEP owns approximately 46% of the outstanding common stock of HCRC, while HCRC
owns approximately 19% of HEP's Class A Units. Consequently, HEP has an interest
in 890,242 and 899,305 of its own Units at March 31, 1998 and December 31, 1997,
respectively. These Units are treated as treasury Units in the accompanying
financial statements.
Recently Issued Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SAFS
130"). SAFS 130 establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains, and losses) in a full set
of general-purpose financial statements. SFAS 130 requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. Reclassification of financial
statements for earlier periods provided for comparative purposes is required.
The Partnership adopted SFAS 130 on January 1, 1998. The Partnership does not
have any items of other comprehensive income for the three month periods ended
March 31, 1998 and 1997. Therefore, total comprehensive income was the same as
net income for those periods.
Reclassifications
Certain reclassifications have been made to the prior period amounts to conform
to the classifications used in the current period.
<PAGE>
NOTE 2 - DEBT
During the first quarter of 1997, HEP and its lenders amended and restated HEP's
Second Amended and Restated Credit Agreement (as amended, the "Credit
Agreement") to extend the term date of its line of credit to May 31, 1999. Under
the Credit Agreement, HEP has a borrowing base of $49,000,000 at May 12, 1998.
HEP had amounts outstanding at March 31, 1998 of $16,700,000 under the Credit
Agreement and $4,286,000 under an Amended and Restated Note Purchase Agreement
("Note Purchase Agreement"). HEP's unused borrowing base totaled $28,014,000 at
May 12, 1998. When the acquisition of the volumetric production payment
described in Note 6 is consummated, HEP's borrowing base will increase to
$61,000,000.
Borrowings under the Note Purchase Agreement bear interest an annual rate of
11.85%, which is payable quarterly. Annual principal payments of $4,286,000
began April 30, 1992, and the debt was paid in full on April 30, 1998. HEP
funded the payment due in April 1998 through additional borrowings under the
Credit Agreement; thus, no portion of HEP's Note Purchase Agreement is
classified as current as of March 31, 1998.
Borrowings against the Credit Agreement bear interest at the lower of the
Certificate of Deposit rate plus from 1.375% to 1.875%, prime plus 1/2% or the
Euro-Dollar rate plus from 1.25% to 1.75%. The applicable interest rate was 6.9%
at March 31, 1998. Interest is payable monthly, and quarterly principal payments
of $1,312,000 commence May 31, 1999.
The borrowing base for the Credit Facilities is redetermined semiannually. The
Credit Facilities are secured by a first lien on approximately 80% in value of
HEP's oil and gas properties. Additionally, aggregate distributions paid by HEP
in any 12 month period are limited to 50% of cash flow from operations before
working capital changes and distributions received from affiliates, if the
principal amount of debt of HEP is 50% or more of the borrowing base. Aggregate
distributions paid by HEP are limited to 65% of cash flow from operations before
working capital changes and 65% of distributions received from affiliates, if
the principal amount of debt is less than 50% of the borrowing base.
HEP entered into contracts to hedge its interest rate payments on $15,000,000 of
its debt for 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
Credit Agreement, which has a floating interest rate. In general, it is HEP's
goal to hedge 50% of the principal amount of its debt for the next two years and
25% for each year of the remaining term of the debt. HEP has entered into four
hedges, one of which is an interest rate collar pursuant to which it pays a
floor rate of 7.55% and a ceiling rate of 9.85%, and the others are interest
rate swaps with fixed rates ranging from 5.75% to 6.57%. The amounts received or
paid upon settlement of these transactions are recognized as interest expense at
the time the interest payments are due.
NOTE 3 - STATEMENTS OF CASH FLOWS
Cash paid for interest during the three months ended March 31, 1998 and 1997 was
$599,000 and $774,000, respectively.
NOTE 4 - CLASS C UNIT ISSUANCE
On February 17, 1998, HEP closed its public offering of 1.8 million Class C
Units, priced at $10.00 per Unit. Proceeds to HEP, net of underwriting expenses,
were approximately $16,520,000. HEP used $14,000,000 of the net proceeds to
repay borrowings under its Credit Agreement and applied the remaining proceeds
toward the repayment of HEP's outstanding contract settlement obligation at
December 31, 1997 of $2,752,000.
<PAGE>
NOTE 5 - LEGAL PROCEEDINGS
On December 3, 1997, Arcadia Exploration and Production Company ("Arcadia")
filed a Demand for Arbitration with the American Arbitration Association against
Hallwood Energy Partners, L.P., Hallwood Consolidated Resources Corporation,
E.M. Nominee Partnership Company and Hallwood Consolidated Partners, L.P.
(collectively referred to herein as "Hallwood"), claiming that Hallwood breached
a Purchase and Sale Agreement dated August 25, 1997, between Arcadia and HEP and
HCRC. Arcadia's Demand for Arbitration seeks specific performance of the
agreement which Arcadia claims requires Hallwood to purchase oil and gas
properties from Arcadia for approximately $27 million. HEP and HCRC terminated
the agreement because of environmental and title problems with the properties.
Additionally, Arcadia seeks incidental and special damages, prejudgment interest
and attorneys' fees and costs. Hallwood filed its Answering Statement and
Counterclaim asserting that it properly terminated and/or rescinded the
Agreement and seeking refund of Hallwood's earnest money deposit, prejudgment
interest, attorneys' fees and costs. HEP's management intends to vigorously
defend the claims asserted by Arcadia and intends to vigorously pursue the
counterclaim against Arcadia. This matter is currently set for hearing before
the arbitrators in May 1998.
Concise Oil and Gas Partnership ("Concise"), a wholly owned subsidiary of the
Partnership, is a defendant in a lawsuit styled Dr. Allen J. Ellender, Jr. et
al. vs. Goldking Production Company, et al., filed in the Thirty-Second Judicial
District Court, Terrebonne Parish, Louisiana on May 30, 1996. The approximately
150 plaintiffs in this proceeding are seeking unspecified damages for alleged
breaches of certain oil, gas and mineral leases in the Northeast Montegut Field,
Terrebonne Parrish, Louisiana. In addition, they are asking for an accounting
from Concise for production of natural gas for the period of time from 1983
through November 1987. Specifically, as to the claims against Concise, the suit
alleges that Concise failed to obtain the prices to which it was allegedly
entitled for natural gas sold in this field in the 1980s under a long-term
natural gas sales contract. The plaintiffs, royalty and overriding royalty
owners, allege that as a result of the alleged imprudent marketing practices,
they are entitled to their share of the prices which Concise should have
obtained. Plaintiffs have also sued approximately 35 other companies and
individuals, and allege that Concise is jointly and severally liable with the
rest of the defendants for the claims raised by the plaintiffs. The judge has
recently ruled against the plaintiffs on their claim of joint and several
liability, and has also ruled that the applicable statute of limitations is
three years, rather than ten years as the plaintiffs claimed. The trial date in
this case is set for February 1999. The Partnership believes that the claims
asserted against Concise are without merit and intends to vigorously defend
against them.
In addition to the litigation noted above, the Partnership and its subsidiaries
are from time to time subject to routine litigation and claims incidental to
their business, which the Partnership believes will be resolved without material
effect on the Partnership's financial condition, cash flows or operations.
NOTE 6 - SUBSEQUENT EVENT
On May 8, 1998, HEP signed an agreement to purchase a volumetric production
payment in 34 coal bed methane wells located in La Plata County, Colorado. HEP
plans to fund its $17,257,000 share of the acquisition price from operating cash
flow and borrowings under its Credit Agreement. The production payment will be
owned by a limited liability company owned equally by HEP and its affiliate
HCRC. The acquisition is scheduled to close at the end of May. HEP's lenders
have agreed to increase HEP's borrowing base under its Credit Agreement to
$61,000,000 when the acquisition is consummated.
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Capital Resources
Cash Flow
HEP generated $5,834,000 of cash flow from operating activities during the first
three months of 1998.
Cash was used primarily for:
Payments of long-term debt of $14,000,000
Additions to property and development costs incurred of $3,269,000
Payment of contract settlement of $2,767,000 and
Distributions to Unitholders of $2,253,000
When combined with proceeds from the issuance of Class C Units, net of
syndication costs, of $16,520,000, the general partner capital contribution of
$171,000, the exercise of Unit options of $199,000 and miscellaneous other cash
activity during the period, the result was a decrease of $45,000 in HEP's cash
from $6,622,000 at December 31, 1997 to $6,577,000 at March 31, 1998.
Exploration and Development Projects
Through March 31, 1998, HEP incurred $3,269,000 in direct property additions and
exploration and development costs. The costs were comprised of approximately
$2,555,000 for domestic exploration and development expenditures and
approximately $714,000 for property acquisitions. HEP's 1998 capital budget has
been set at $25,000,000 and includes projects in more than 35 areas, including
167 development, exploration and seismic projects. A description of significant
exploration and development projects to date in 1998 follows.
Greater Permian Region
During the first quarter of 1998, HEP expended approximately $1,520,000 of its
capital budget in the Greater Permian Region located in Texas and Southeast New
Mexico. HEP spent approximately $360,000 drilling nine development wells and
four exploration wells and acquiring undeveloped acreage and geological and
geophysical data. Seven (54%) of the wells drilled were successful. A discussion
of several of the larger projects within the region follows.
HEP spent approximately $165,000 successfully recompleting four wells in the
Carlsbad/Catclaw Draw areas in Lea, Eddy and Chaves Counties, New Mexico.
In 1997, HEP acquired 74 square miles of proprietary 3-D seismic data in Jones,
Taylor and Nolan Counties, Texas, in a project area originated in 1995. In 1997,
HEP drilled 10 exploration wells, seven of which were successful. During the
first quarter of 1998, HEP continued work in the area by drilling two
exploration wells, one of which was successful. Seven additional exploration
projects are in progress. Costs incurred by HEP in 1998 are approximately
$535,000.
In 1997, HEP purchased an interest in proprietary 3-D seismic data and selected
acreage within an 85 square mile area. During the first quarter of 1998, HEP
attempted completion on one exploration well began in 1997 and drilled one
additional development well. Both wells were unsuccessful. HEP is currently
participating in the drilling of one exploration well and has incurred
approximately $255,000 in this area in 1998. HEP also plans to participate in
two nonoperated development projects in the area during 1998.
HEP has delayed drilling 16 West Texas Spraberry and Clearfork formation
development wells to permit HEP to further evaluate the effects of both lower
oil prices and declining drilling costs.
Other projects begun in 1997 in the Greater Permian Region have cost HEP
approximately $430,000 in 1998.
Rocky Mountain Region
HEP expended approximately $615,000 of its capital budget in the Rocky Mountain
Region located in Colorado, Montana, North Dakota, Northwest New Mexico and
Wyoming. During the first quarter of 1998, HEP spent approximately $335,000
recompleting two development wells, one of which was successful and drilling one
unsuccessful well. A discussion of the larger projects within the region
follows.
HEP incurred approximately $125,000 on one unsuccessful recompletion attempt in
San Juan County, New Mexico. HEP has begun a project to significantly increase
gas gathering, processing and compression capacity for its New Mexico coalbed
methane properties. Work should be completed in the third quarter and production
increases are expected.
In the Lone Tree area of Montana, HEP drilled one unsuccessful exploration well
for a cost of approximately $205,000.
Development drilling is anticipated to begin on HEP's Piceance Basin Douglas
Arch Properties in the second quarter of 1998. Three of the 16 identified
locations will be drilled in the first segment of this project.
HEP plans to drill an exploration well to test the Muddy/Minnelusa formation in
Campbell County, Wyoming in the third quarter. HEP has a 29.5% working interest
in the well.
HEP plans to drill three development wells in Toole County, Montana in the third
quarter. HEP has a 50% working interest in this project.
Other projects begun in 1997 in the Rocky Mountain Region have cost HEP
approximately $240,000 in 1998.
On May 8, 1998, HEP signed an agreement to purchase a volumetric production
payment in 34 coal bed methane wells located in La Plata County, Colorado. HEP
plans to fund its $17,257,000 share of the acquisition price from operating cash
flow and borrowings under its Credit Agreement. The production payment will be
owned by a limited liability company owned equally by HEP and its affiliate
HCRC. The acquisition is scheduled to close at the end of May. HEP's lenders
have agreed to increase HEP's borrowing base under its Credit Agreement to
$61,000,000 when the acquisition is consummated.
Gulf Coast Region
During first quarter 1998, HEP expended approximately $750,000 of its capital
budget in the Gulf Coast Region in Louisiana and South and East Texas. Costs
associated with plugging two nonoperated nearshore platform wells were
approximately $505,000.
Drilling is expected to begin in the third quarter on two recently defined
operated exploration projects. HEP has a 32.5% working interest in a project to
evaluate the Buda, Woodbine, and Dexter formations, and a 17.5% working interest
in a project to test the Frio formation.
Mid-Continent Region
HEP expended approximately $180,000 of its capital budget in the Mid-Continent
Region located in Oklahoma and Kansas.
<PAGE>
HEP is participating in an exploration prospect in Carter County, Oklahoma. This
nonoperated project is a 19,000 feet deep multi-formation structural test and is
currently in the completion phase. The operator was unable to test the targeted
Hunton and Viola formation objectives, and secondary uphole objectives are now
being evaluated. The drilling costs for the first quarter of 1998 were
approximately $125,000.
Approximately $35,000 was incurred in 1998 by HEP to complete one successful
exploration well in the Anadarko Basin.
Weak crude oil prices have delayed development drilling plans for HEP's Kansas
properties; however, most of the scheduled workovers and recompletions are
proceeding.
Other
The remaining $204,000 of HEP's 1998 capital expenditures were devoted
principally to drilling one unsuccessful exploration well in Yolo County,
California and to other miscellaneous projects. HEP is also participating in two
additional nonoperated 3-D projects underway in nearby Solano and Colusa
Counties.
HEP's partner on the Peruvian offshore Z-3 Block anticipates that it will begin
seismic data acquisition in June or July. HEP will not incur capital costs on
this project until actual drilling operations begin.
Class C Unit Issuance
On February 17, 1998, HEP closed its public offering of 1.8 million Class C
Units, priced at $10.00 per Unit. Proceeds to HEP, net of underwriting expenses,
were approximately $16,520,000. HEP used $14,000,000 of the net proceeds to
repay borrowings under its Credit Agreement and applied the remaining proceeds
toward the repayment of HEP's outstanding contract settlement obligation at
December 31, 1997 of $2,752,000.
Distributions
HEP declared distributions of $.13 per Class A Unit and $.25 per Class C Unit,
payable on May 15, 1998 to Unitholders of record on March 31, 1998.
Distributions on the Class B Units are suspended if the Class A Units receive a
distribution of less than $.20 per Class A Unit per calendar quarter. In any
quarter for which distributions of $.20 or more per unit are made on the Class A
Units, the Class B Units are entitled to be paid, in whole or in part, suspended
distributions.
Financing
During the first quarter of 1997, HEP and its lenders amended and restated HEP's
Second Amended and Restated Credit Agreement (as amended, the "Credit
Agreement") to extend the term date of its line of credit to May 31, 1999. Under
the Credit Agreement, HEP has a borrowing base of $49,000,000 at May 12, 1998.
HEP has amounts outstanding at March 31, 1998 of $16,700,000 under the Credit
Agreement and $4,286,000 under an Amended and Restated Note Purchase Agreement
("Note Purchase Agreement"). HEP's unused borrowing base totaled $28,014,000 at
May 12, 1998. When the acquisition of the volumetric production payment
described above is consummated, HEP's borrowing base will increase to
$61,000,000.
Borrowings under the Note Purchase Agreement bear interest an annual rate of
11.85%, which is payable quarterly. Annual principal payments of $4,286,000
began April 30, 1992, and the debt was paid in full on April 30, 1998. HEP
funded the payment due in April 1998 through additional borrowings under the
Credit Agreement; thus, no portion of HEP's Note Purchase Agreement is
classified as current as of March 31, 1998.
Borrowings against the Credit Agreement bear interest at the lower of the
Certificate of Deposit rate plus from 1.375% to 1.875%, prime plus 1/2% or the
Euro-Dollar rate plus from 1.25% to 1.75%. The applicable interest rate was 6.9%
at March 31, 1998. Interest is payable monthly, and quarterly principal payments
of $1,312,000, commence May 31, 1999.
<PAGE>
The borrowing base for the Credit Facilities is redetermined semiannually. The
Credit Facilities are secured by a first lien on approximately 80% in value of
HEP's oil and gas properties. Additionally, aggregate distributions paid by HEP
in any 12 month period are limited to 50% of cash flow from operations before
working capital changes and distributions received from affiliates, if the
principal amount of debt of HEP is 50% or more of the borrowing base. Aggregate
distributions paid by HEP are limited to 65% of cash flow from operations before
working capital changes and 65% of distributions received from affiliates, if
the principal amount of debt is less than 50% of the borrowing base.
HEP entered into contracts to hedge its interest rate payments on $15,000,000 of
its debt for 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
Credit Agreement, which has a floating interest rate. In general, it is HEP's
goal to hedge 50% of the principal amount of its debt for the next two years and
25% for each year of the remaining term of the debt. HEP has entered into four
hedges, one of which is an interest rate collar pursuant to which it pays a
floor rate of 7.55% and a ceiling rate of 9.85%, and the others are interest
rate swaps with fixed rates ranging from 5.75% to 6.57%. The amounts received or
paid upon settlement of these transactions are recognized as interest expense at
the time the interest payments are due.
Cautionary Statement Regarding Forward-Looking Statements
In the interest of providing the Partnership's Unitholders and potential
investors with certain information regarding the Partnership's future plans and
operations, certain statements set forth in the Form 10-Q relate to management's
future plans and objectives. Such statements are forward-looking statements.
Although any forward-looking statements contained in this Form 10-Q or otherwise
expressed by or on behalf of the Partnership are, to the knowledge and in the
judgment of the officers and directors of the General Partner, expected to prove
true and 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
Prices obtained for oil and gas production depend upon numerous factors that are
beyond the control of HEP, including the extent of domestic and foreign
production, imports of foreign oil, market demand, domestic and worldwide
economic and political conditions, and government regulations and tax laws.
Prices for both oil and gas fluctuated significantly throughout 1997 and 1998.
The following table presents the weighted average prices received each quarter
by HEP and the effects of the hedging transactions discussed below.
<TABLE>
<CAPTION>
Oil Oil Gas Gas
(excluding the (including the (excluding the (including the
effects of effects of effects of effects of
hedging hedging hedging hedging
transactions) transactions) transactions) transactions)
(per bbl) (per bbl) (per mcf) (per mcf)
<S> <C> <C> <C> <C> <C>
First quarter - 1997 $22.10 $21.08 $2.89 $2.52
Second quarter - 1997 17.71 17.71 2.02 1.98
Third quarter - 1997 18.40 18.47 2.25 2.13
Fourth quarter - 1997 18.72 18.69 2.92 2.56
First quarter - 1998 14.80 15.30 2.11 2.07
</TABLE>
HEP has entered into numerous financial contracts to hedge the price of its oil
and natural gas. The purpose of the hedges is to provide protection against
price decreases and to provide a measure of stability in the volatile
environment of oil and natural gas spot pricing. The amounts received or paid
upon settlement of these contracts are recognized as oil or gas revenue at the
time the hedged volumes are sold.
The following table provides a summary of HEP's outstanding financial contracts:
Oil
Percent of Production Contract
Period Hedged Floor Price
(per bbl)
Last nine months of 1998 23% $16.62
1999 2% 15.38
Between 9% 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 25% of the difference between the contract price and the posted
futures price if the posted futures price is greater than the contract price.
Between 59% and 100% of the volumes hedged in each year are subject to a collar
agreement whereby HEP will receive the contract price if the spot price is lower
than the contract price, the cap price if the spot price is higher than the cap
price, and the spot price if that price is between the contract price and the
cap price. The cap prices range from $17.00 to $18.85.
<PAGE>
Gas
Percent of Production Contract
Period Hedged Floor Price
(per mcf)
Last nine months of 1998 48% $2.06
1999 37% 2.01
2000 29% 2.14
2001 21% 2.14
2002 10% 2.42
Between 23% and 100% 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 $2.59 to $2.93.
During the second quarter through April 25, 1998 the weighted average oil price
(for barrels not hedged) was approximately $14.25 per barrel. The weighted
average price of natural gas (for mcf not hedged) during that period was
approximately $2.15 per mcf.
Inflation
Inflation did not have a material impact on HEP in 1997 and is not anticipated
to have a material impact in 1998.
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 1998 and 1997, HEP owned interests which ranged from
57.5% to 68.2% of the Mays.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF HEP EARNINGS FOR MANAGEMENT DISCUSSION
(In thousands except price)
For the Quarter Ended March 31, 1998 For the Quarter Ended March 31, 1997
------------------------------------ ------------------------------------
Direct Direct
Owned Mays Total Owned Mays Total
<S> <C> <C> <C> <C> <C> <C>
Gas production (mcf) 2,945 320 3,265 2,609 359 2,968
Oil production (bbl) 187 15 202 192 22 214
Average gas price (per mcf) $ 2.02 $ 2.47 $ 2.07 $ 2.41 $ 3.28 $ 2.52
Average oil price (per bbl) $15.30 $15.27 $15.30 $20.90 $22.68 $21.08
Gas revenue $ 5,952 $ 792 $ 6,744 $ 6,295 $ 1,178 $ 7,473
Oil revenue 2,861 229 3,090 4,012 499 4,511
Pipeline, facilities and other revenue 700 700 763 763
Interest income 122 18 140 106 17 123
------- --------- ------- -------- --------- -------
Total revenue 9,635 1,039 10,674 11,176 1,694 12,870
------ ------ ------ ------ ------ ------
Production operating expense 2,940 121 3,061 2,633 156 2,789
Facilities operating expense 152 152 178 178
General and administrative expense 1,066 99 1,165 1,115 109 1,224
Depreciation, depletion, and amortization 3,217 322 3,539 2,611 341 2,952
Interest expense 644 644 851 851
Equity in (income) loss of HCRC 94 94 (980) (980)
Minority interest 313 313 560 560
Litigation settlement (45) (45)
-------- ---------- -------- ------- ------- -------
Total expense 8,068 855 8,923 6,408 1,166 7,574
------ ------ ------ ------ ------ ------
Net income $ 1,567 $ 184 $ 1,751 $ 4,768 $ 528 $ 5,296
====== ====== ====== ====== ======= ======
</TABLE>
<PAGE>
First Quarter of 1998 Compared to First Quarter of 1997
Gas Revenue
Gas revenue decreased $729,000 during the first quarter of 1998 as compared with
the first quarter of 1997. The decrease is the result of a decrease in the
average gas price from $2.52 per mcf in 1997 to $2.07 per mcf in 1998 partially
offset by an increase in production from 2,968,000 mcf in 1997 to 3,265,000 mcf
in 1998. The increase in production is primarily due to workover procedures
performed during the second quarter of 1997.
The effect of HEP's hedging transactions during the first quarter of 1998, was
to decrease HEP's average gas price from $2.11 per mcf to $2.07 per mcf,
representing a $131,000 reduction in revenue from hedging transactions.
Oil Revenue
Oil revenue decreased $1,421,000 during the first quarter of 1998 as compared
with the first quarter of 1997. The decrease is the result of a decrease in
production from 214,000 barrels in 1997 to 202,000 barrels in 1998 and a
decrease in the average oil price from $21.08 per barrel in 1997 to $15.30 in
1998. The decrease in oil production is primarily due to normal production
declines.
The effect of HEP's hedging transactions, as described under "Inflation and
Changing Prices," during the first quarter of 1998, was to increase HEP's
average oil price from $14.80 per barrel to $15.30 per barrel, resulting in a
$101,000 increase in revenue from hedging transactions.
Pipeline, Facilities and Other
Pipeline, facilities and other revenue consists primarily of facilities income
from two gathering systems located in New Mexico, revenues derived from salt
water disposal and incentive payments related to certain wells in San Juan
County, New Mexico. Pipeline, facilities and other revenue decreased $63,000
during the first quarter of 1998 as compared with the first quarter of 1997 due
to fluctuations in numerous miscellaneous items, none of which are individually
significant.
Interest Income
Interest income increased $17,000 during the first quarter of 1998 as compared
with the first quarter of 1997 due to a higher average cash balance during 1998.
Production Operating Expense
Production operating expense increased $272,000 during the first quarter of 1998
as compared with the first quarter of 1997, primarily due to increased
maintenance activity and increased production taxes resulting from the increase
in gas production discussed above.
Facilities Operating Expense
Facilities operating expense represents the costs of operating and maintaining
two gathering systems located in New Mexico. Costs decreased $26,000 during the
first quarter of 1998 as compared with the first quarter of 1997 primarily due
to decreased maintenance activity during 1998.
General and Administrative
General and administrative expense includes costs incurred for direct
administrative services such as legal, audit and reserve reports as well as
allocated internal overhead incurred by the operating company on behalf of HEP.
These expenses decreased $59,000 during the first quarter of 1998 primarily due
to a net decrease in numerous miscellaneous items, none of which are
individually significant.
<PAGE>
Depreciation, Depletion and Amortization Expense
Depreciation, depletion and amortization expense increased $587,000 during the
first quarter of 1998 as compared with the first quarter of 1997. The increase
is primarily the result of a higher depletion rate in 1998 due to the increase
in production previously discussed.
Interest Expense
Interest expense decreased $207,000 during the first quarter of 1998 as compared
with the first quarter of 1997, primarily as a result of lower outstanding debt
during 1998.
Equity in Earnings (Loss) of HCRC
Equity in earnings (loss) of HCRC decreased $1,074,000 during the first quarter
of 1998 as compared with the first quarter of 1997. The decrease is primarily
due to HCRC's decreased oil and gas revenue resulting from decreased production
and prices.
Minority Interest in Net Income of Affiliates
Minority interest in net income of affiliates represents unaffiliated partners'
interest in the net income of the May Partnerships. The decrease of $247,000 is
due to a decrease in the net income of the May Partnerships resulting primarily
from lower oil and gas prices and decreased production on their properties.
Litigation Settlement
Litigation settlement income during the first quarter of 1998 represents the
settlement of a take-or-pay contract claim.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Reference is made to Item 8 - Notes 12 and 13 of Form 10-K for the
year ended December 31, 1997 and Note 5 of this Form 10-Q.
ITEM 2 - CHANGES IN SECURITIES
None.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5 - OTHER INFORMATION
None.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
Exhibit
4.5 Correction to the First Amendment to the Third
Amended and Restated Limited Partnership Agreement of
Hallwood Energy Partners, L. P.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Partnership has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HALLWOOD ENERGY PARTNERS, L. P.
By: HEPGP LTD.
General Partner
By: HALLWOOD G. P., INC.
General Partner
Date: May 12, 1998 By: /s/Thomas J. Jung
-------------------- -----------------------------
Thomas J. Jung, Vice President
(Chief Financial Officer)
CORRECTION TO THE FIRST AMENDMENT TO
THE THIRD AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT
OF HALLWOOD ENERGY PARTNERS, L.P.
This Correction (this "Correction") to the First Amendment to the Third
Amended and Restated Limited Partnership Agreement of Hallwood Energy Partners,
L.P. (the "Partnership"), is executed by HEPGP LTD., a Colorado limited
partnership, as General Partner of the Partnership (the "General Partner").
RECITALS
WHEREAS, the First Amendment to the Third Amended and Restated Limited
Partnership Agreement (as heretofore corrected, the "Partnership Agreement") of
the Partnership contained a typographical error;
WHEREAS, the General Partner deems it to be in the best interest of the
Partnership to correct the First Amendment to the Partnership Agreement; and
NOW, THEREFORE, in consideration of the foregoing the Partnership Agreement
is corrected as follows:
I. Correction to the Partnership Agreement.
Article I is hereby corrected by replacing the term "Excess
Capital Account" with the term "Unpaid Preference Amount" in the
last sentence of the definition of Excess Capital Account, with
the result that the definition of Excess Capital Account reads in
its entirety as follows:
"Excess Capital Account: The excess of a unit=s positive Capital
Account balance over the Unpaid Preference Amount attributable to
such unit. The Unpaid Preference Amount of each Class A Unit and
Class B Subordinated Unit shall be zero."
II. Ratification. Except as specified hereinabove, all other terms of
the Partnership Agreement shall remain unchanged and are hereby
ratified and confirmed. All references to "this Agreement" or
"the Agreement" appearing in the Partnership Agreement, and all
references to the Partnership Agreement appearing in any other
document or instrument shall be deemed to refer to the
Partnership Agreement as corrected by this Correction.
IN WITNESS WHEREOF, this Correction has been duly executed by the General
Partner on this the 3rd day of March, 1998, but effective as of the date of the
First Amendment to the Partnership Agreement.
By: HEPGP LTD., a Colorado limited partnership,
its General Partner
By: HALLWOOD GP, INC., a Delaware
corporation, its General Partner
By: /s/ Cathleen M. Osborn
Its: Vice President
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Form 10-Q
for Hallwood Energy Partners, L.P. for the quarter ended March 31, 1998 and is
qualified in its entirety by reference to such Form 10-Q.
</LEGEND>
<CIK> 0000768172
<NAME> Hallwood Energy Partners, L.P.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 6,577
<SECURITIES> 0
<RECEIVABLES> 10,948
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 19,144
<PP&E> 633,542
<DEPRECIATION> 539,532
<TOTAL-ASSETS> 128,160
<CURRENT-LIABILITIES> 17,434
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 85,522
<TOTAL-LIABILITY-AND-EQUITY> 128,160
<SALES> 10,534
<TOTAL-REVENUES> 10,674
<CGS> 0
<TOTAL-COSTS> 5,022
<OTHER-EXPENSES> 362
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 644
<INCOME-PRETAX> 1,751
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,751
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,751
<EPS-PRIMARY> .09
<EPS-DILUTED> .09
</TABLE>
