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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q/A
(Amendment No. 1)
[x] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
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
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COSTILLA ENERGY, INC.
(Exact name of registrant as specified in its charter)
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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 x NO
------- -------
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF JULY 31, 1997.... 10,378,500
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COSTILLA ENERGY, INC.
FORM 10-Q
TABLE OF CONTENTS
PAGE
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PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1997 (unaudited)
and December 31, 1996 ......................................... 3
Consolidated Statements of Operations for the three and six
months ended June 30, 1997 and 1996 (unaudited) ............... 4
Consolidated Statements of Cash Flows for the three and
six months ended June 30, 1997 and 1996 (unaudited) ........... 5
Notes to Consolidated Financial Statements (unaudited) .......... 6
PART II - OTHER INFORMATION
Signatures ............................................................... 10
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COSTILLA ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- -------------
ASSETS (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 6,005 $ 12,618
Accounts receivable:
Trade, net 4,975 6,675
Affiliates - 332
Oil and gas sales 9,198 9,031
Prepaid and other current assets 1,368 1,753
----------- -----------
Total current assets 21,546 30,409
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Oil and gas properties, using the successful efforts
method of accounting:
Proved properties 168,244 140,477
Unproved properties 9,915 4,482
Accumulated depletion, depreciation and amortization (29,829) (20,435)
----------- -----------
148,330 124,524
Other property and equipment, net 3,259 2,420
----------- -----------
Total property, plant and equipment 151,589 126,944
----------- -----------
OTHER ASSETS:
Deferred charges 4,310 4,503
Note receivable - other 250 250
Note receivable - affiliate 476 684
----------- -----------
Total other assets 5,036 5,437
----------- -----------
$ 178,171 $ 162,790
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 98 $ 98
Trade accounts payable 15,395 12,718
Undistributed revenue 4,274 3,517
Other current liabilities 3,946 3,756
----------- -----------
Total current liabilities 23,713 20,089
----------- -----------
LONG-TERM DEBT, LESS CURRENT MATURITIES 114,826 100,262
----------- -----------
OTHER NONCURRENT LIABILITIES 430 1,870
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DEFERRED INCOME TAXES - -
----------- -----------
STOCKHOLDERS' EQUITY :
Preferred stock, $.10 par value (3,000,000 shares authorized;
no shares outstanding) - -
Common stock, $.10 par value (20,000,000 shares authorized;
10,378,500 shares outstanding at June 30, 1997 and
10,475,000 shares outstanding at December 31, 1996) 1,048 1,047
Additional paid-in capital 39,847 41,081
Retained earnings (deficit) (1,693) (1,559)
----------- -----------
Total stockholders' equity 39,202 40,569
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COMMITMENTS AND CONTINGENCIES - -
----------- -----------
$ 178,171 $ 162,790
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
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COSTILLA ENERGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- ------------------------
1997 1996 1997 1996
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Oil and gas sales $ 15,279 $ 10,613 $ 34,892 $ 19,446
Other 154 (38) 920 80
---------- ---------- ---------- -----------
15,433 10,575 35,812 19,526
---------- ---------- ---------- -----------
EXPENSES:
Oil and gas production 6,794 4,621 14,163 8,279
General and administrative 1,856 1,449 3,370 2,810
Exploration and abandonments 1,774 78 3,115 308
Depreciation, depletion and amortization 4,806 2,710 9,720 4,619
Interest 2,809 2,375 5,516 4,156
---------- ---------- ---------- -----------
18,039 11,233 35,884 20,172
---------- ---------- ---------- -----------
Income (loss) before federal income taxes (2,606) (658) (72) (646)
PROVISION FOR FEDERAL INCOME TAXES (BENEFIT)
Current - - 62 -
Deferred (191) - - -
---------- ---------- ---------- -----------
Income (loss) before extraordinary item (2,415) (658) (134) (646)
Extraordinary loss resulting from early
extinguishment of debt - (1,640) - (1,640)
---------- ---------- ---------- -----------
NET INCOME (LOSS) $ (2,415) $ (2,298) $ (134) $ (2,286)
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
PREFERRED RETURN AND ACCRETION OF REDEEMABLE
MEMBERS' CAPITAL $ - $ (805) $ - $ (1,595)
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM
APPLICABLE TO COMMON EQUITY $ - $ (1,463) $ - $ (2,241)
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
NET INCOME (LOSS) APPLICABLE TO COMMON EQUITY $ - $ (3,103) $ - $ (3,881)
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
INCOME (LOSS) PER SHARE:
Income (loss) before extraordinary item $ (0.23) $ (0.28) $ (0.01) $ (0.43)
Extraordinary loss resulting from early
extinguishment of debt, net of deferred
tax benefit - (0.32) - (0.32)
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
Net income (loss) $ (0.23) $ (0.60) $ (0.01) $ (0.75)
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
WEIGHTED AVERAGE SHARES OUTSTANDING 10,459 5,200 10,468 5,200
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
4
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COSTILLA ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- ------------------------
1997 1996 1997 1996
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) $ (2,415) $ (2,298) $ (134) $ (2,286)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS)TO
NET CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation, depletion and amortization 4,806 2,710 9,720 4,620
Exploration and abandonments 11 - 58 -
Amortization of deferred charges 459 92 610 169
Deferred income tax expense (191) - - -
Allowance for doubtful accounts 208 - 208 -
Other noncash - 49 - 79
Gain (loss) on sale of oil and gas properties - (10) 30 (40)
Extraordinary loss resulting from early
extinguishment of debt - 1,640 - 1,640
Gain on investment transactions (224) - (981) -
---------- ---------- ---------- -----------
2,654 2,183 9,511 4,182
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 2,485 (1,202) 1,864 (1,209)
Increase in other assets (21) (1,829) (429) (2,190)
Increase (decrease) in accounts payable (1,580) (1,603) 3,435 (880)
Increase (decrease) in other liabilities (2,425) 528 191 671
Decrease in deferred revenue - (475) - (696)
---------- ---------- ---------- -----------
Net cash provided by (used in) operating activities 1,113 (2,398) 14,572 (122)
---------- ---------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil and gas properties (20,672) (42,977) (35,878) (47,727)
Proceeds from sale of oil and gas properties 1,842 - 2,709 -
Additions to other property and equipment (613) (1,614) (1,284) (1,996)
---------- ---------- ---------- -----------
Net cash used in investing activities (19,443) (44,591) (34,453) (49,723)
---------- ---------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under long-term debt 14,600 122,390 14,600 125,390
Payments of long-term debt (19) (74,519) (37) (74,519)
Proceeds from issuance of common stock, net - - 14 -
Purchase of common stock (1,248) - (1,248) -
Deferred loan and financing costs - (2,728) (61) (2,728)
---------- ---------- ---------- -----------
Net cash provided by financing activities 13,333 45,143 13,268 48,143
---------- ---------- ---------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (4,997) (1,846) (6,613) (1,702)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 11,002 3,010 12,618 2,866
---------- ---------- ---------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,005 $ 1,164 $ 6,005 $ 1,164
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
5
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COSTILLA ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The interim financial information as of June 30, 1997, and for the six
months ended June 30, 1997 and 1996, 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, 1996.
Costilla Energy, Inc. ("Costilla" or the "Company") was incorporated in
Delaware in June 1996 to consolidate and continue the activities previously
conducted by Costilla Energy, L.L.C., a Texas limited liability company (the
"LLC"), and its wholly owned subsidiaries, to acquire the assets of CSL
Management Corporation (which owned certain office equipment used by the
Company), and to acquire the stock of Valley Gathering Company. Costilla was
formed for the purpose of conducting a $60 million initial public offering of
common stock and a $100 million senior notes offering (the "Offerings"), which
Offerings were completed in early October 1996.
The Company is an oil and gas exploration and production concern with
properties located principally in West Texas, South Texas, and the Rocky
Mountain regions of the United States.
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. 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.
The following table sets forth the future volumes hedged by year and the
weighted-average strike price of the option contracts at June 30, 1997:
OIL GAS
VOLUME VOLUME STRIKE PRICE
(Bbls) (Mmbtu) PER Bbl/Mmbtu
------------ ------------ -----------------------
Oil:
1997 . . . . . . 1,052,757 - $16.56 - $20.65(a)
Gas:
1997 . . . . . . - 1,800,000 $1.78(b)
- --------------------
(a) Represents the weighted-average price of a purchased put option
contract and of a collar established with the purchase of a put option
contract and the sale of a call option contract.
(b) Represents the strike price on purchased put option contracts.
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INTEREST RATE SWAP AGREEMENTS. Prior to the Offerings, the Company
utilized two interest rate swap agreements to reduce the potential impact of
increases in interest rates on floating-rate long-term debt. Concurrent with
the issuance of the $100 million of 10.25% fixed-rate senior notes in early
October 1996, the two interest rate swap agreements ceased to be hedges. These
interest rate swap agreements were marked-to-market and the related liability
recorded. The liability for the two interest rate swap agreements was
$1,712,000 at December 31, 1996. The $60 million interest rate swap expired
agreement in May, 1997. During the three months ended June 30, 1997, the
Company borrowed $14.6 million against its line of credit which bears interest
on a floating rate basis. As a result of this borrowing, a portion of the
interest rate swap agreement is a hedge. At each borrowing date, the interest
rate swap agreement was marked-to-market and the hedge portion is being
amortized over the remaining life of the agreement. The liability for the
non-hedge portion of the remaining interest rate swap agreement was $272,000 at
June 30, 1997. As a result of expiration and marking the agreements to market
during the six and three month periods ended June 30, 1997, the Company recorded
net investment gains of approximately $63,000 for the three month period then
ended and $604,000 for the six month period then ended. The following table
sets forth the term, fixed rate and notional amounts of the interest rate swap
agreement in place as of June 30, 1997:
NOTIONAL
PRINCIPAL FIXED
TERM AMOUNT INTEREST RATE
- ------------------------------- --------------- ---------------
Jan. 25, 1996 to Jan. 25, 1999 $24 million 7.50%
3. INCOME TAXES
At December 31, 1996, the Company had provided a valuation allowance equal
to its net deferred tax asset of $1,712,000. In light of the Company's net loss
before income taxes for the six month period ended June 30, 1997, it is still
uncertain whether it is more likely than not the Company will be able to utilize
a portion of its available carryforwards to the extent that such utilization
would provide a deferred tax benefit. Thus, the Company has continued to
provide a valuation allowance equal to its net deferred tax asset as of June 30,
1997.
4. SUBSEQUENT EVENTS
PURCHASE OF OIL AND GAS PROPERTIES
On July 2, 1997, the Company announced an agreement to purchase oil and gas
properties for approximately $42.0 million from Ballard Petroleum, LLC (the
"Ballard Acquisition"). The Company expects to provide funding for the
acquisition through the combination of a new acquisition facility and borrowings
under a new credit facility. The acquisition is scheduled to close in late
August 1997.
NEW BANK COMMITMENT
The Company has received a commitment from Bankers Trust Company (the
"Lender") to provide an acquisition facility for financing $30.0 million of the
Ballard Acquisition (the "Acquisition Facility"). In addition, the commitment
will provide the Company with a new revolving line of credit (the "New Credit
Facility"), which will replace its existing revolving line of credit, with the
availability of funds being subject to a borrowing base determined at least
semi-annually. Closing of the Acquisition Facility and the New Credit Facility
is expected contemporaneously with the closing of the Ballard Acquisition.
The Acquisition Facility is a term loan in the amount of $30.0 million and is
subject to a borrowing base to be determined at least semi-annually. Borrowings
under the Acquisition Facility will bear interest, at the Company's option, at a
floating rate which is above the Lender's prime rate or the LIBOR rate.
Interest is payable quarterly,
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with principal payments, commencing February 1998, of $1.7 million quarterly for
the first year and $1.4 million each quarter thereafter for two years, with a
balloon payment of 40% due at maturity. Borrowings under the Acquisition
Facility will be secured by the assets being acquired from Ballard Petroleum.
The New Credit Facility will provide for a maximum availability of $75.0
million, with an initial borrowing base of $50.0 million. At June 30, 1997, the
Company had $14.7 million borrowed against the existing revolving line of
credit, which will be renewed under the New Credit Facility. In addition, the
Company will utilize funds available under the New Credit Facility to fund the
remaining portion of the Ballard Petroleum Acquisition. Borrowings under the
New Credit Facility will bear interest at the Company's option at a floating
rate which is at or above the Lender's prime rate or the LIBOR rate, depending
on the percentage of committed funds which have been borrowed. Interest is
payable quarterly and principal under the New Credit Facility is to be amortized
in twelve equal quarterly installments of 5% each, commencing, August 1999, with
a balloon payment of 40% due at maturity. Under the New Credit Facility, the
Company is obligated to pay certain fees to the Lender, including a commitment
fee based on the unused portion of the commitment. The New 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 2.25 to 1 until October 1,
1997 and thereafter 2.5 to 1 and a minimum tangible net worth. At June 30,
1997, the Company was in compliance with all of the ratios to be required by the
New Credit Facility. Borrowings under the New Credit Facility are secured by
substantially all of the existing assets of the Company.
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COSTILLA ENERGY, INC.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-Q constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 (the
"Reform Act"). Such forward-looking statements involve known and unknown risks,
uncertainties, and other factors which may cause the actual results,
performance, or achievements of Costilla to be materially different from any
future results, performance, or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
the volatility of oil and gas prices, the Company's drilling results and ability
to replace oil and gas reserves, the availability of capital resources, the
reliance upon estimates of proved reserves, operating hazards and uninsured
risks, competition, government regulation, and the ability of the Company to
implement its business strategy, and other factors referenced in the Company's
recent prospectus for its initial public offering of common stock.
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SIGNATURES
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 10, 1997 By: /s/ Bobby W. Page
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Bobby W. Page
Senior Vice President
and Chief Financial Officer
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