<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
or
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from _______ to _______
COMMISSION FILE NO. 0-21411
----------------------
COSTILLA ENERGY, INC.
(Exact name of registrant as specified in its charter)
----------------------
DELAWARE 75-2658940
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 WEST ILLINOIS, SUITE 1000
MIDLAND, TEXAS 79701
(Address of principal executive offices) (Zip code)
(915) 683-3092
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
----------------------
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 NO X *
----- -----
* The Registrant's Form 8-A was declared effective with the Securities and
Exchange Commission on October 2, 1996.
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF NOVEMBER 8, 1996...10,475,000
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Page 1 of 17 pages.
<PAGE>
COSTILLA ENERGY, INC.
FORM 10-Q
TABLE OF CONTENTS
PAGE
----
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1996
(unaudited) and December 31, 1995 . . . . . . . . . . . . . . . . . 3
Unaudited Consolidated Statements of Operations for the three
and nine months ended September 30, 1996 and 1995 . . . . . . . . . 4
Unaudited Consolidated Statements of Cash Flows for the three
and nine months ended September 30, 1996 and 1995 . . . . . . . . . 5
Notes to Unaudited Consolidated Financial Statements . . . . . . . . 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . 9
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . 16
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COSTILLA ENERGY, L.L.C.
(A TEXAS LIMITED LIABILITY COMPANY AND PREDECESSOR TO COSTILLA ENERGY, INC.)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,949 $ 2,866
Accounts receivable:
Trade, net 5,381 3,154
Affiliates 1,290 507
Oil and gas sales 7,558 3,915
Prepaid and other current assets 1,728 439
-------- -------
Total current assets 17,906 10,881
-------- -------
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Oil and gas properties, using the successful efforts
method of accounting:
Proved properties 131,449 79,897
Unproved properties 5,228 2,903
Accumulated depletion, depreciation and amortization (17,222) (9,413)
-------- -------
119,455 73,387
-------- -------
Other property and equipment, net 1,724 679
Deferred charges (Note 4) 3,075 1,736
Note receivable - affiliate 684 684
-------- -------
$142,844 $87,367
-------- -------
-------- -------
LIABILITIES, REDEEMABLE MEMBERS' CAPITAL AND MEMBERS' CAPITAL
CURRENT LIABILITIES:
Current maturities oflon-terin debt $ 98 $ -
Trade accounts payable 9,889 5,467
Undistributed revenue 1,017 1,227
Other current liabilities 3,419 1,691
-------- -------
Total current liabilities 14,423 8,385
-------- -------
LONG-TERM DEBT, LESS CURRENT MATURITIES (NOTE 4) 125,084 71,494
DEFERRED INCOME 2,086 3,319
OTHER NONCURRENT LIABILITIES - 38
-------- -------
Total liabilities 141,593 83,236
-------- -------
REDEEMABLE MEMBERS' CAPITAL 13,996 11,576
-------- -------
MEMBERS'CAPITAL (12,745) (7,445)
-------- -------
$142,844 $87,367
-------- -------
-------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
COSTILLA ENERGY, L.L.C.
(A TEXAS LIMITED LIABILITY COMPANY AND PREDECESSOR TO COSTILLA ENERGY, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- ------------------
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
REVENUES:
Oil and gas sales $15,343 $ 7,646 $34,787 $13,215
Interest and other 56 14 96 15
Gain on sale of assets 33 - 73 -
------- ------- ------- -------
15,432 7,660 34,956 13,233
------- ------- ------- -------
EXPENSES:
Oil and gas production 6,187 3,834 14,280 6,262
Oil and gas production - affiliates 264 160 449 145
General and administrative 947 1,053 3,385 1,730
General and administrative - affiliates 185 165 556 496
Compensation related to option settlement - - - 656
Exploration and abandonments 698 230 1,006 1,237
Depreciation, depletion and amortization 3,454 2,230 8,073 3,597
Interest 4,274 1,720 8,430 2,766
------- ------- ------- -------
16,009 9,392 36,179 16,889
------- ------- ------- -------
Income (loss) before federal income taxes
and extraordinary item (577) (1,732) (1,223) (3,656)
PROVISION FOR FEDERAL INCOME TAXES
Current 17 - 17 -
Deferred - - - -
------- ------- ------- -------
Income (loss) before extraordinary item (Note 4) (594) (1,732) (1,240) (3,656)
Extraordinary loss resulting from
extinguishment of debt - - (1,640) -
------- ------- ------- -------
NET INCOME (LOSS) (594) (1,732) (2,880) (3,656)
PREFERRED RETURN AND ACCRETION OF REDEEMABLE
MEMBERS' CAPITAL (825) (795) (2,420) (1,770)
------- ------- ------- -------
NET INCOME (LOSS) APPLICABLE TO MEMBERS' CAPITAL $(1,419) $(2,527) $(5,300) $(5,426)
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
COSTILLA ENERGY, L.L.C.
(A TEXAS LIMITED LIABILITY COMPANY AND PREDECESSOR TO COSTILLA ENERGY, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- ------------------
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) $ (594) $(1,732) $(2,880) $(3,656)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS)
TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation, depletion and amortization 3,454 2,230 8,074 3,597
Amortization of deferred charges 824 68 993 68
Other noncash 2 0 81 (28)
Compensation related to option settlement 0 0 0 656
Gain on sale of oil and gas properties (33) 0 (73) 0
Extraordinary loss resulting from
extinguishment of debt 0 0 1,640 0
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable (5,444) (1,805) (6,653) (5,373)
Decrease (increase) in other assets 901 29 (1,289) (78)
Increase (decrease) in accounts payable 5,302 1,010 4,422 3,198
Increase (decrease) in other liabilities 809 (103) 1,480 1,864
Increase (decrease) in deferred income (537) 0 (1,233) 0
------- ------- ------- -------
Total adjustments 5,278 1,429 7,442 3,904
------- ------- ------- -------
Net cash provided by (used in)
operating activities 4,684 (303) 4,562 248
------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for oil and gas properties (5,299) (170) (53,026) (61,022)
Additions to other property and equipment (172) (150) (2,168) (662)
------- ------- ------- -------
Net cash provided by (used in)
investing activities (5,471) (320) (55,194) (61,684)
------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under long-term debt 2,817 0 128,207 62,680
Payments of long-term debt 0 (330) (74,519) (8,232)
Proceeds from redeemable members' capital 0 0 0 10,000
Deferred loan and financing costs (1,245) 0 (3,973) (2,587)
Withdrawals 0 0 0 (97)
------- ------- ------- -------
Net cash provided by (used in)
financing activities 1,572 (330) 49,715 61,764
------- ------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 785 (953) (917) 328
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,164 1,418 2,866 137
------- ------- ------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,949 $ 465 $ 1,949 $ 465
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
COSTILLA ENERGY, L.L.C.
(A TEXAS LIMITED LIABILITY COMPANY AND PREDECESSOR TO COSTILLA ENERGY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The interim financial information as of September 30, 1996, and for the
nine months ended September 30, 1996 and 1995, is unaudited. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted in this Form 10-Q pursuant to the
rules and regulations of the Securities and Exchange Commission. However, in
the opinion of management, these interim financial statements include all the
necessary adjustments to fairly present the results of the interim periods
and all such adjustments are of a normal recurring nature. The interim
consolidated financial statements should be read in conjunction with the
audited financial statements for the year ended December 31, 1995.
On October 8, 1996, Costilla Energy, Inc., a Delaware corporation formed
in June, 1996 ("Costilla" or the "Company") to consolidate and continue the
activities of the Costilla Energy, L.L.C. (the "LLC") consummated its initial
public offering of common stock and completed the planned reorganization (see
Note 5). At that time, the LLC ceased to exist and its business activities
are now being continued by the Company.
2. DERIVATIVE FINANCIAL INSTRUMENTS
The Company utilizes derivative financial instruments to manage
well-defined interest rate and commodity price risks. The Company is exposed
to credit losses in the event of nonperformance by the counterparties to its
interest rate swap agreements and its commodity hedges. The Company
anticipates, however, that such counterparties will be able to fully satisfy
their obligations under the contracts. The Company does not obtain
collateral or other security to support financial instruments subject to
credit risk but monitors the credit standing of the counterparties.
COMMODITY HEDGES. The Company utilizes option contracts to hedge the
effect of price changes on future oil and gas production. The following
table sets forth the future volumes hedged by year and the strike price of
the option contracts at September 30, 1996:
Oil Gas
Volume Volume Strike Price
(BBLS) (MMBtu) per BBL/MMBTU
------ ------- -------------
Oil:
1996 460,000 $17.20 (a)
1997 1,912,500 $16.52 - $20.65 (b)
Gas:
1996 1,200,000 $1.68 (a)
1997 1,500,000 $1.65 (a)
(a) Represents the weighted-average strike price on purchased put option
contracts.
(b) Represents the weighted-average price of collars established with the
purchase of put option contracts and the sale of call option
contracts.
6
<PAGE>
3. ACQUISITION
On June 14, 1996, the Company consummated the purchase from Parker and
Parsley Petroleum Company of certain oil and gas properties for an estimated
adjusted purchase price of approximately $42.5 million (the "1996
Acquisition"). The properties are located primarily in south and west Texas.
The transaction was accounted for using the purchase method. The results of
operations of the acquired properties are included in the Consolidated
Statements of Operations as of the acquisition closing date, June 14, 1996.
In June 1995 the Company acquired a group of oil and gas properties from
Parker and Parsley Petroleum Company for approximately $46.6 million (the
"1995 Acquisition"). The properties are located in the Permian Basin, Gulf
Coast and Rocky Mountain regions. The transaction was accounted for using
the purchase method. The results of operations of the acquired properties
are included in the Consolidated Statements of Operations as of the
acquisition date of June 12, 1995.
PRO FORMA RESULTS OF OPERATIONS
The following table reflects the pro forma results of operations for the
nine months ended September 30, 1996 and 1995, as though the 1995 Acquisition
and the 1996 Acquisition had each occurred as of January 1, 1995. The pro
forma amounts are not necessarily indicative of results that may be reported
in the future.
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1996 1995
-------- --------
(IN THOUSANDS)
Revenues $44,179 $ 38,339
Net loss (1,526) (9,340)
4. LONG-TERM DEBT
On June 10, 1996, the Company entered into a new loan agreement with
NationsBridge L.L.C. to provide financing of up to $125 million in advances
(the "Bridge Facility"), subject to certain terms and conditions. Proceeds
of the Bridge Facility were used to fund the 1996 Acquisition, to refinance
substantially all of the Company's outstanding indebtedness, and for other
general corporate purposes. Concurrently, the deferred charges associated
with the 1995 Credit Agreement were expensed as an extraordinary loss.
Advances under the Bridge Facility are to be made in two portions,
Tranche A is up to $95,000,000 and Tranche B is $30,000,000. Tranche A
initially bears interest, at the Company's option, at the applicable prime
rate ("Prime") plus 0.75% or LIBOR plus 3.0%. Each margin above Prime and
LIBOR increases by 0.50% at the end of each successive three-month period, up
to maximum of 2.75% and 5.0% for Prime and LIBOR, respectively. Tranche B
initially bears interest at 14.00% per annum, increasing 0.50% at the end of
each successive three-month period, up to a maximum of 16.5%.
Tranche A loans are subject to a borrowing base determination. The
initial borrowing base is $95,000,000 which is automatically reduced by
$3,000,000 per quarter beginning January 1, 1997. The borrowing base is also
subject to periodic redetermination by Nations Bridge L.L.C. based on its
determination of the collateral value of the Company's oil and gas
properties. Final maturity of loans made under Tranches A and B is June 10,
1999.
7
<PAGE>
The Bridge Facility is secured by first priority liens, assignments, and
security interests in substantially all oil and gas properties, pipelines and
gathering systems of the Company and stock of the Company's subsidiaries.
Additionally, the Bridge Facility are subject to various restrictive
covenants and compliance requirements, including but not limited to (a)
restrictions on dividends and the incurrence of additional indebtedness, (b)
minimum limitations on the Company's current ratio and tangible net worth,
(c) limitations on payments for leases and executive compensation, (d)
maximum limitations on general and administrative expenses, capital
expenditures, and the Company's ratio of debt to adjusted cash flow, and (e)
a requirement to pay to the lender all net oil and gas revenues (as defined
and as adjusted for capital expenditures) on a quarterly basis.
The Company paid the lender's fees and expenses in connection with
obtaining the Bridge Facility, which were approximately $3,250,000, and which
are being amortized as additional interest expense over a period of one year
from the date of the Bridge Facility.
5. SUBSEQUENT EVENTS
INITIAL PUBLIC OFFERING AND NOTES OFFERING
On October 2, 1996 the Company made an initial public offering and sold
4,800,000 shares of Common Stock to the public at $12.50 per share and also
issued $100,000,000 aggregate principal amount of 10 1/4% Senior Notes due
2006 (collectively the "Offerings"). The net proceeds to the Company were
approximately $151.5 million. Approximately $125.8 million of such proceeds
was used to repay all of the existing senior indebtedness. In addition,
$15.5 million of the net proceeds was used to redeem a membership interest in
the LLC, $0.7 million was used to acquire the stock and assets of two
affiliated companies, $3.5 million was distributed to three principals of the
LLC for estimated federal income taxes, and $0.8 million was distributed to
another LLC member. The remaining $5.1 million will be used by the Company
for general corporate purposes. In addition, on November 1, 1996 the
underwriters exercised a portion of the over-allotment option, granted to the
underwriters in connection with the initial public offering, and purchased an
additional 475,000 shares of Common Stock at $12.50 per share. The
additional net proceeds to the Company were approximately $5.5 million and
will be used for general corporate purposes.
BANK FINANCING
In October 1996, the Company entered into a credit agreement (the "1996
Credit Facility") with NationsBank of Texas, N.A. (the "Bank"). The 1996 Credit
Facility provides a revolving line of credit with the availability of funds and
letters of credit being subject to a borrowing base determination at least
semiannually. The borrowing base provides a maximum availability of $50.0
million (which amount is also the initial borrowing base), $500,000 of which was
outstanding at October 31, 1996. Availability under the borrowing base is
initially limited to $20.0 million for working capital and $30.0 million for
acquisitions of oil and gas properties meeting certain criteria established by
the Bank. Borrowings under the 1996 Credit Facility bear interest at the
Company's option at a floating rate which is at or above the NationsBank, N.A.
prime rate or the LIBOR rate, depending on the percentage of committed funds
which have been borrowed. Interest is payable quarterly and principal will be
amortized in twelve equal installments commencing two years from the date of the
credit agreement. Under the 1996 Credit Facility, the Company is obligated to
pay certain fees to the Bank, including a commitment fee based on the unused
portion of the commitment. The 1996 Credit Facility contains customary
restrictive covenants (including restrictions on the payment of dividends and
the incurrence of additional indebtedness) and requires the Company to maintain
a current ratio of not less than 1.0 to 1.0, a ratio of Adjusted EBITDA to
interest expense of not less than 2.0 to 1.0 and a minimum tangible net worth.
Borrowings under the 1996 Credit Facility are secured by substantially all of
the assets of the Company and any subsidiary of the Company that guarantees the
Company's obligations under the 1996 Credit Facility. Initially, none of the
Company's subsidiaries have guaranteed the Company's obligations under the 1996
Credit Facility.
8
<PAGE>
COSTILLA ENERGY, L.L.C.
(A TEXAS LIMITED LIABILITY COMPANY AND PREDECESSOR TO COSTILLA ENERGY, INC.)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Costilla is an independent energy company engaged in the exploration,
acquisition and development of oil and gas properties. The Company's
predecessor began operating in 1988 and through mid-1995 had grown primarily
through a series of small acquisitions of oil and gas properties and the
exploitation of those properties. In June 1995, Costilla consummated the
1995 Acquisition for a purchase price of approximately $46.6 million, and in
June 1996, the 1996 Acquisition was consummated for a purchase price of
approximately $42.5 million.
To date, the Company has achieved its high rate of growth primarily
through acquisitions. This has impacted its reported financial results in a
number of ways. Properties sold by others frequently have not received
focused attention prior to sale. After acquisition, certain of these
properties are in need of maintenance, workovers, recompletions and other
remedial activity not constituting capital expenditures, which substantially
increase lease operating expenses. The increased production and revenue
resulting from these expenditures is predominately realized in periods
subsequent to the period of expense. In addition, the rapid growth of the
Company has required it to develop operating, accounting and administrative
personnel compatible with its increased size. The Company believes it has
now achieved a sufficient size to expand its reserve base without a
corresponding increase in its general and administrative expense. The
Company also believes it now has a sufficient inventory of prospects and the
professional staff necessary to follow a more balanced program of exploration
and exploitation activities to complement its acquisition efforts.
Costilla's strategy is to increase its oil and gas reserves, production
and cash flow from operations through a two-pronged approach which combines
an active exploration program with the acquisition and exploitation of proved
reserves. In addition, Costilla continues to evaluate the acquisition of
undeveloped acreage for its exploration efforts. Costilla has in-house
exploration expertise using 3-D seismic technology to identify new drilling
opportunities as well as for the exploitation of acquired properties.
Costilla has shown a significant increase in its oil and gas reserves and
production, especially due to the 1995 Acquisition and the 1996 Acquisition.
The following table sets forth certain operating data of Costilla for the
periods presented:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
1996 1995 1996 1995
-------- -------- -------- -------
OIL AND GAS PRODUCTION:
Oil (Mbbls) 502 351 1,211 584
Gas (Mmcf) 2,698 1,717 6,202 2,950
MBOE (1) 951 637 2,245 1,076
AVERAGE SALES PRICES:
Oil (per Bbbl) $20.02 15.09 $18.92 $15.51
Gas (per Mcf) 1.96 1.37 1.92 1.41
COSTS PER BOE (1):
Production cost $6.78 6.27 $6.56 $5.96
Depreciation, depletion and amortization 3.63 3.50 3.60 3.34
General and administrative expenses 1.19 1.91 1.76 2.07
- -------------------------------------------
(1) BOE represents equivalent barrels of oil. In reference to natural gas,
natural gas equivalents are determined using the ratio of six Mcf of
natural gas to one barrel of crude oil, condensate or natural gas
liquids. MBOE represents one thousand barrels of oil equivalent.
9
<PAGE>
Costilla uses the successful efforts method of accounting for its oil and
gas activities. Costs to acquire mineral interests in oil and gas
properties, to drill and equip exploratory wells that result in proved
reserves, and to drill and equip development wells are capitalized. Costs to
drill exploratory wells that do not result in proved reserves, geological,
geophysical and seismic costs, and costs of carrying and retaining unproved
properties are expensed. Capitalized costs of producing oil and gas
properties, after considering estimated dismantlement and abandonment costs
and estimated salvage values, are depreciated and depleted using the
units-of-production method. Unproved oil and gas properties that are
individually significant are periodically reviewed for impairment of value,
and a loss is recognized at the time of impairment by providing an impairment
allowance. Other unproved properties are amortized based on the Company's
experience of successful drilling and average holding period.
The Company utilizes option contracts to hedge the effect of price
changes on a portion of its future oil and gas production. Premiums paid and
amounts receivable under the option contracts are amortized and accrued to
oil and gas sales, respectively. If market prices of oil and gas exceed the
strike price of put options, the options will expire unexercised, therefore,
reducing the effective price received for oil and gas sales by the cost of
the related option. Conversely, if market prices of oil and gas decline
below the strike price of put options, the options will be exercised,
therefore, increasing the effective price received for oil and gas sale by
the proceeds received from the related option. The net effect of the
Company's commodity hedging activities reduced oil and gas revenues by
$563,000 for the three months ended September 30, 1996 and by $80,000 and
$1,255,000 for the nine months ended September 30, 1995 and 1996,
respectively. There was no net effect from commodity hedging activities for
the three months ended September 30, 1995.
The Company utilizes interest rate swap agreements to reduce the
potential impact of increases in interest rates on floating-rate, long term
debt. If market rates of interest experienced during the applicable swap
term are below the rate of interest effectively fixed by the swap agreement,
the rate of interest incurred by the Company will exceed the rate that would
have been experienced under the Credit Agreement. The net effect of the
Company's interest rate hedging activities increased interest expense by
$213,000 for the three months ended September 30, 1996 and $572,000 for the
nine months ended September 30, 1996.
The Company's predecessors were classified as partnerships for federal
income tax purposes. Therefore, no income taxes were paid or provided for by
the company prior to the Offerings. Future tax amounts, if any, will be
dependent upon several factors, including but not limited to the Company's
results of operations.
RECENT DEVELOPMENTS
The Company's production for the three months ended September 30, 1996 was
an average of 10,337 BOE per day. At October 31, 1996, the Company's average
daily production had increased to approximately 11,400 BOE per day, reflecting
the initial results of the Company's accelerated exploration and exploitation
program.
Financial results for the three months ended September 30, 1996 included
the acquisition of properties in June 1996 from Parker & Parsley Petroleum
Company for the full three month period and, therefore, is comparable to pro
forma results as presented in the Company's prospectus dated October 2, 1996.
During the third quarter, lease operating costs excluding production
taxes dropped to $5.46 per BOE, down from $5.81 for the six months ended June
30, 1996, assuming the Company's June 1996 $42.5 million property acquisition
from Parker & Parsley Petroleum Company occurred as of January 1, 1996.
General and administrative expenses declined to $1.19 per BOE from $1.91 per
BOE for the three months ended September 30, 1996 versus the comparable
period in 1995.
10
<PAGE>
The following table presents additional pro forma financial data for the
three months ended September 30, 1996:
PRO FORMA (a)
Net income $ 1,021
Net income per share $ 0.10
Cash flow (b) $ 5,269
Cash flow per share $ 0.50
EBITDA (c) $ 7,849
EBITDA/interest 2.9x
Shares outstanding 10,475
--------------------
(a) Assurnes the Offerings had taken place on July 1, 1996 and that the
amount of debt and interest had been adjusted therefor.
(b) Net income plus deferred taxes, depreciation, depletion and
amortization, exploration and abandonment expenses and extraordinary
loss resulting from extinguishment of debt.
(c) Net income plus interest, income taxes, depreciation, depletion and
amortization, exploration and abandonment expenses and extraordinary
loss resulting from extinguishment of debt.
The Company is currently negotiating to sell certain non-strategic assets
including its Pennsylvania pipeline. The Company anticipates that one or more
of these sales will be completed in the fourth quarter.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1995
The Company's total oil and gas revenues for the three months ended
September 30, 1996 were $15,343,000, an increase of $7,696,000 (101%) over
revenues of $7,646,000 for the comparable period in 1995. This increase was
primarily due to the 1995 Acquisition and the 1996 Acquisition which accounted
for approximately $543,000 and $6,444,000 of the revenue increase, respectively.
The remainder of the increase was due to a combination of successful drilling
activities and the enhancement of existing production. The average oil price
received in 1996 was $20.02 compared to $15.09 in 1995, a 33% increase, and the
average gas price received in 1996 was $1.96 compared to $1.37 in 1995, a 43%
increase.
Oil and gas production was 951 MBOE in the 1996 period compared to 637
MBOE in the 1995 period, an increase of 49%. The 314 MBOE increase was
primarily composed of a 382 MBOE increase which was due to the properties
acquired in the 1996 Acquisition, offset in part by a decline in other
production.
Interest and other revenues were $56,000 for the three months ended
September 30, 1996 compared to $14,000 for the comparable period in 1995,
representing an increase of $42,000, which was primarily comprised of an
increase in interest income of $26,000 in 1996 due to increased funds earning
interest. Also in the 1996 period, the Company realized gains of $32,000 on
various transactions for which there were no comparable sales in 1995.
11
<PAGE>
Oil and gas production costs in 1996 were $6,451,000 ($6.78 per BOE),
compared to $3,994,000 in 1995 ($6.27 per BOE), an increase of $2,457,000 (62%),
due principally to the 1996 Acquisition. On a per BOE basis, production costs
increased $0.51 due primarily to higher production costs for the properties
acquired in that Acquisition.
General and administrative expense for the three months ended September 30,
1996 was $1,132,000, representing an decrease of $86,000 (7%) from the
comparable period in 1995 of $1,218,000. As noted above, production increased
49% and, therefore, general and administrative expenses per BOE decreased to
$1.19 per BOE for the three months ended September 30, 1996 from $1.91 per BOE
for the comparable 1995 period.
Exploration and abandonment expense increased to $698,000 in the 1996
period compared to $230,000 in 1995. The Company incurred $601,000 of seismic
costs for the three months ended September 30, 1996, compared to $467,000
incurred during the comparable period in 1995. Dry hole and abandonment costs
increased from $2,000 to $97,000 for the comparable periods in 1995 and 1996,
respectively.
Depreciation, depletion and amortization expense for the 1996 period was
$3,454,000 compared to $2,230,000 for the 1995 period, representing an increase
of $1,224,000 (55%). During 1996, depreciation, depletion and amortization on
oil and gas production was provided at an average rate of $3.63 per BOE compared
to $3.50 per BOE for 1995. The increase was due primarily to the 1996
Acquisition.
Interest expense was $4,274,000 in the 1996 period, compared to $1,720,000
for the comparable period in 1995. The $2,554,000 (148%) increase was
attributable primarily to increased levels of debt which the Company used to
finance the 1996 Acquisition. The average amounts of applicable
interest-bearing debt for the comparable periods in 1996 and 1995 were
$124,651,000 and $74,576,000, respectively. The effective annualized
interest rate in 1996 was 13.7%, as compared to 9.2% in 1995.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1995
The Company's total oil and gas revenues for the nine months ended
September 30, 1996 were $34,787,000, representing an increase of $21,572,000
(163%) over revenues of $13,215,000 for the comparable period in 1995. This
increase was primarily due to the 1995 Acquisition and 1996 Acquisition, which
accounted for approximately $10,317,000 and $8,127,000 of the revenue increase,
respectively. The remainder of the increase was due to a combination of
successful drilling activities and the enhancement of existing production. The
average oil price received in 1996 was $18.92 compared to $15.51 in 1995, a 22%
increase in 1996, and the average gas price received in 1996 was $1.92 compared
to $1.41 in 1995, a 36% increase.
Oil and gas production was 2,245 MBOE in the 1996 period compared to 1,076
MBOE in the 1995 period, an increase of 109%. Of the 1,169 MBOE increase,
approximately 488 MBOE was due to the properties acquired in the 1996
Acquisition and 507 MBOE was due to the properties acquired in the 1995
Acquisition. The remainder of the increase was due to a combination of
successful drilling activities and the enhancement of existing production.
Interest and other revenues were $96,000 for the nine months ended
September 30, 1996 compared to $18,000 for the comparable period in 1995,
representing an increase of $78,000, which was primarily comprised of an
increase in interest income of $58,000 in 1996 due to increased funds earning
interest. Also in the 1996 period, the Company realized gains of $73,000 on
various transactions for which no comparable sales were recorded in 1995.
12
<PAGE>
Oil and gas production costs in the 1996 period were $14,729,000 ($6.56 per
BOE), compared to $6,407,000 in 1995 ($5.96 per BOE), representing an increase
of $8,322,000 (130%), due principally to the 1995 Acquisition. On a per BOE
basis, production costs increased $0.60 due primarily to higher production costs
per BOE for the properties acquired in the 1996 Acquisition.
General and administrative expenses for the nine months ended September 30,
1996 were $3,941,000, representing an increase of $1,715,000 (77%) from the
comparable period in 1995 of $2,226,000. The increase is primarily due to an
increase in personnel and related costs necessary to accommodate the increased
activities of the Company due to the 1995 and 1996 Acquisitions. However, as
noted above, production increased 109% and, therefore, general and
administrative expenses per BOE decreased to $1.76 per BOE for the nine months
ended September 30, 1996 from the $2.07 per BOE for the comparable 1995 period.
Results of operations for the nine months ended September 30, 1995 include
non-cash compensation expense of $656,000 deemed to have been accrued to a
minority owner of the Company who was deemed to have benefited from the
cancellation of an option to purchase an additional interest held by the other
minority owner.
Exploration and abandonment expense decreased to $1,006,000 in the 1996
period compared to $1,237,000 in 1995. The Company incurred $681,000 of seismic
costs for the nine months ended September 30, 1996, compared to $695,000 which
were incurred for the comparable period in 1995. Dry hole and abandonment
costs decreased from $542,000 to $325,000 for the comparable periods in 1995
and 1996, respectively.
Depreciation, depletion and amortization expense for the 1996 period was
$8,073,000 compared to $3,597,000 for the 1995 period, representing an increase
of $4,476,000 (124%). During 1996, depreciation, depletion and amortization on
oil and gas production was provided at an average rate of $3.60 per BOE compared
to $3.34 per BOE for 1995. The increase was due primarily to the 1996 and 1995
Acquisitions.
Interest expense was $8,430,000 in the 1996 period, compared to $2,766,000
for the comparable period in 1995. The $5,664,000 (205%) increase was
attributable primarily to increased levels of debt which the Company used to
finance the 1996 Acquisition. The average amounts of applicable
interest-bearing debt for the comparable periods in 1996 and 1995 were
$93,429,000 and $41,742,000, respectively. The effective annualized interest
rate in 1996 was 11.5%, as compared to 8.8% in 1995.
Results of operations for the nine months ended September 30, 1996 include
an extraordinary charge of $1,640,000 related to the early extinguishment of the
Company's prior bank credit facility (the "1995 Credit Facility"). The charge
consisted of previously capitalized debt issuance costs. The 1995 Credit
Facility was replaced by the Bridge Facility outstanding at September 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
RECENT STOCK AND NOTES OFFERING
The Company's liquidity and capital resources were improved significantly
when on October 2, 1996 the Company made an initial public offering and sold
4,800,000 shares of Common Stock to the public at $12.50 per share and also
issued $100,000,000 aggregate principal amount of 10 1/4% Senior Notes due 2006.
The net proceeds to the Company were approximately $151.5 million. Approximately
$125.8 million of such proceeds was used to repay all of the existing senior
indebtedness. In addition, $15.5 million of the net proceeds was used to
redeem a membership interest in the predecessor LLC, $0.7 million was used to
acquire the stock and assets of two affiliated companies, $3.5 million was
distributed to three principals of the predecessor LLC for estimated federal
income taxes, and $0.8 million was distributed to another LLC member. The
remaining $5.1 million will be used by the Company for general corporate
purposes. In addition, on November 1, 1996 the underwriters exercised a
13
<PAGE>
portion of the over-allotment option and purchased an additional 475,000
shares of Common Stock at $12.50 per share. The net proceeds to the Company
were approximately $5.5 million and will be used for general corporate
purposes.
NET CASH USED IN OPERATING ACTIVITIES
For the nine months ended September 30, 1996, net cash provided by operating
activities increased to $4.6 million from $0.2 million for the comparable period
in 1995. Cash provided by operations, before changes in operating assets and
liabilities, increased to $7.8 million from $0.6 million for the comparable
period in 1995 due primarily to the 1995 Acquisition and, to a lesser extent,
the 1996 Acquisition, and the increase in results of operations therefrom.
NET CASH USED IN INVESTING ACTIVITIES
Net cash used in investing activities for the nine months ended September
30, 1996 was $55.2 million. Approximately $42.5 million was used for the 1996
Acquisition, $10.5 million was used for other oil and gas expenditures and $2.2
million was used for other property and equipment.
NET CASH PROVIDED BY FINANCING ACTIVITIES
The Company entered into the Bridge Facility in June 1996, against which
$125.0 million was borrowed at September 30, 1996. Approximately $74.5 million
was for the extension and refinancing of prior debt, $42.5 million was used for
the 1996 Acquisition and approximately $8.0 million was used for general
corporate purposes.
CAPITAL SOURCES
Funding for the Company's business activities has historically been
provided by bank financings, cash flow from operations, private equity sales,
property divestitures and joint ventures with industry participants. The
Company completed a $10.0 million private equity placement in February 1995.
Subsequently, the 1995 Acquisition and the 1996 Acquisition were substantially
funded by bank financings. The Company plans to finance its continuing
operations and execute its business strategy with cash flow from operations, net
proceeds from the Offerings and borrowings under the Credit Facility.
While the Company regularly engages in discussions relating to potential
acquisitions, the Company has no present agreement, commitment or understanding
with respect to any such acquisition, other than the acquisition of undeveloped
acreage and mineral interests in its normal course of business. Any future
acquisition may require additional financing and will be dependent upon
financing arrangements available at the time.
Concurrently with the closing of the Offering in October 1996, the Company
entered into the 1996 Credit Facility with the Bank. The 1996 Credit Facility
provides a revolving line of credit with the availability of funds and letters
of credit being subject to a borrowing base determination at least semiannually.
The borrowing base provides a maximum availability of $50.0 million (which
amount is also the initial borrowing base), $500,000 of which was outstanding at
October 31, 1996. Availability under the borrowing base is initially limited to
$20.0 million for working capital and $30.0 million for acquisitions of oil and
gas properties meeting certain criteria established by the Bank. Borrowings
under the 1996 Credit Facility bear interest at the Company's option at a
floating rate which is at or above the NationsBank, N.A. prime rate or the LIBOR
rate, depending on the percentage of committed funds which have been borrowed.
Interest is payable quarterly and principal will be amortized in twelve equal
installments commencing two years from the date of the credit agreement. Under
the 1996 Credit Facility, the Company is obligated to pay certain fees to the
Bank, including a commitment fee based on the unused portion of the commitment.
The 1996 Credit Facility contains customary restrictive covenants (including
restrictions on the payment of dividends and the incurrence of additional
indebtedness) and requires the
14
<PAGE>
Company to maintain a current ratio of not less than 1.0 to 1.0, a ratio of
Adjusted EBITDA to interest expense of not less than 2.0 to 1.0 and a minimum
tangible net worth. Borrowings under the 1996 Credit Facility are secured by
substantially all of the assets of the Company and any subsidiary of the
Company that guarantees the Company's obligations under the 1996 Credit
Facility. Initially, none of the Company's subsidiaries have guaranteed the
Company's obligations under the 1996 Credit Facility.
The Company believes that cash on hand, cash flow from operations and funds
available under the 1996 Credit Facility will be sufficient for anticipated
operating and capital expenditure requirements. However, because future cash
flows and the availability of financing are subject to a number of variables
beyond the Company's control, there can be no assurance that the Company's
capital resources will be sufficient to maintain currently planned levels of
capital expenditures.
CAPITAL EXPENDITURES
The Company requires capital primarily for the exploration, development and
acquisition of oil and gas properties, the repayment of indebtedness and general
working capital needs.
The Company anticipates that costs incurred for 1996 for acquisition,
exploration and development activities will be approximately $64.8 million.
During the nine months ended September 30, 1996, approximately $42.5 million was
expended for the 1996 Acquisition and approximately $11.0 million was expended
on exploration and development activities. The Company anticipates spending the
remaining $11.3 million in the fourth quarter for exploration and development
activities.
DELIVERY COMMITMENT
In November 1995, the Company entered into gas sales agreements whereby it
committed delivery of a total of 2,379,000 Mmbtu, from December 1, 1995 through
December 1, 1996, for a total fixed price of $3,429,610. Income from the
agreements is recognized in the period of delivery.
15
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS - NONE
(B) REPORTS ON FORM 8-K
The Company did not file a report on Form 8-K for the quarter
for which this report is filed.
16
<PAGE>
S I G N A T U R E S
Pursuant to the requirements 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.
COSTILLA ENERGY, INC.
Date: November 14, 1996 By: /s/ BOBBY W. PAGE
-----------------------------------
Bobby W. Page
Senior Vice President
and Chief Financial Officer
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF COSTILLA ENERGY L.L.C. FOR THE UNAUDITED PERIOD
SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
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<NAME> CONSTILLA ENERGY INC
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,949
<SECURITIES> 0
<RECEIVABLES> 14,229
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<CURRENT-ASSETS> 17,906
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