<PAGE> 1
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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, 1999
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)
----------------------
<TABLE>
<CAPTION>
DELAWARE 75-2658940
<S> <C>
(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)
</TABLE>
(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
NOVEMBER 12, 1999 14,101,580
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<PAGE> 2
COSTILLA ENERGY, INC.
(DEBTOR - IN - POSSESSION)
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
PART I - FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1999 (unaudited) and
December 31, 1998........................................................ 3
Consolidated Statements of Operations for the three and nine months
ended September 30, 1999 and 1998 (unaudited)............................ 4
Consolidated Statements of Cash Flows for the three and nine months
ended September 30, 1999 and 1998 (unaudited)............................ 5
Notes to Consolidated Financial Statements (unaudited)..................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk................. 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.......................................................... 18
Item 3. Defaults Upon Senior Securities............................................ 18
Item 6. Exhibits and Reports on Form 8-K........................................... 19
Signatures................................................................................... 20
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COSTILLA ENERGY, INC.
(DEBTOR - IN - POSSESSION)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
--------------- ---------------
ASSETS (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,894 $ 5,251
Accounts receivable:
Trade, net of allowance of $158 and $0, respectively 1,967 4,547
Oil and gas sales 7,647 5,673
Prepaid and other current assets 703 1,821
--------- ---------
Total current assets 14,211 17,292
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Oil and gas properties, using the successful efforts method of accounting:
Proved properties 161,585 275,972
Unproved properties 12,987 38,941
Accumulated depletion, depreciation and amortization (88,256) (133,612)
--------- ---------
86,316 181,301
Other property and equipment, net 2,637 4,252
--------- ---------
Total property, plant and equipment 88,953 185,553
--------- ---------
OTHER ASSETS:
Deferred charges 5,804 6,447
Deferred hedge charges (Note 2) 12,502 --
Other 1,991 1,662
--------- ---------
Total other assets 20,297 8,109
--------- ---------
$ 123,461 $ 210,954
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
LIABILITIES NOT SUBJECT TO COMPROMISE:
Long-term debt $ 45,940 $ 40,101
Trade accounts payable 2,241 --
Undistributed revenue 2,597 3,419
Deferred revenue 960 --
Other current liabilities 1,149 --
--------- ---------
Total liabilities not subject to compromise 52,887 43,520
--------- ---------
LIABILITIES SUBJECT TO COMPROMISE:
Trade accounts payable 2,855 26,183
Other current liabilities 7,790 5,923
Long-term debt 181,608 181,780
--------- ---------
Total liabilities subject to compromise 192,253 213,886
--------- ---------
STOCKHOLDER'S DEFICIT:
Preferred stock, $.10 par value (3,000,000 shares authorized;
50,000 shares outstanding at September 30, 1999 and 1998) 5 5
Common stock, $.10 par value (100,000,000 shares authorized;
14,101,580 shares outstanding at September 30, 1999 and
12,751,930 shares outstanding at December 31, 1998) 1,410 1,275
Additional paid-in capital 96,030 92,715
Retained deficit (219,124) (140,447)
--------- ---------
Total stockholders' deficit (121,679) (46,452)
--------- ---------
COMMITMENTS AND CONTINGENCIES -- --
--------- ---------
$ 123,461 $ 210,954
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
COSTILLA ENERGY, INC.
(DEBTOR - IN - POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -------------------------
1999 1998 1999 1998
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Oil and gas sales $ 10,977 $ 16,809 $ 36,029 $ 48,824
Interest and other 78 150 94 510
Gain on sale of assets 81 - 331 337
-------- -------- -------- ---------
11,136 16,959 36,454 49,671
-------- -------- -------- ---------
EXPENSES:
Oil and gas production 3,601 6,982 14,320 21,208
General and administrative 1,856 2,786 7,221 7,857
Exploration and abandonments 473 2,108 2,004 7,336
Depreciation, depletion and amortization 3,752 7,533 14,139 21,896
Loss on termination of purchase option 219 - 47,781 -
Impairment 943 - 10,097 -
Loss on commodity transactions 2,168 - 3,961 -
Interest 4,061 4,789 14,608 14,622
-------- -------- -------- ---------
17,073 24,198 114,131 72,919
-------- -------- -------- ---------
Income (loss) before extraordinary item (5,937) (7,239) (77,677) (23,248)
Extraordinary loss resulting from early
extinguishment of debt - - - (299)
-------- -------- -------- ---------
NET LOSS $ (5,937) $ (7,239) $(77,677) $ (23,547)
======== ======== ======== =========
CUMULATIVE PREFERRED STOCK DIVIDEND $ - $ 1,000 $ 1,000 $ 1,307
======== ======== ======== =========
LOSS BEFORE EXTRAORDINARY ITEM
APPLICABLE TO COMMON EQUITY $ (5,937) $ (8,239) $(78,677) $ (24,555)
======== ======== ======== ==========
NET LOSS APPLICABLE TO COMMON EQUITY $ (5,937) $ (8,239) $(78,677) $ (24,854)
======== ======== ======== ==========
LOSS PER SHARE:
Loss before extraordinary item $ (0.42) $ (0.83) $ (5.76) $ (2.46)
Extraordinary loss resulting from early
extinguishment of debt - - - (0.03)
-------- -------- -------- ---------
NET LOSS $ (0.42) $ (0.83) $ (5.76) $ (2.49)
======== ======== ======== =========
WEIGHTED AVERAGE SHARES OUTSTANDING 14,102 9,870 13,651 9,974
======== ======== ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
COSTILLA ENERGY, INC.
(DEBTOR - IN - POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- ---------------------------
1999 1998 1999 1998
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS $ (5,937) $ (7,239) $ (77,677) $ (23,547)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation, depletion and amortization 3,752 7,533 14,139 21,896
Impairment of oil and gas properties 943 - 10,097 -
Exploration and abandonments 192 61 540 323
Amortization of deferred charges 156 156 469 637
Amortization of deferred hedge charges 533 - 533 -
Loss on termination of purchase option - - 46,985 -
(Gain)/loss on sale of oil and gas properties (81) - (331) (337)
Extraordinary loss resulting from early extinguishment of debt - - - 299
(Gain)/loss on commodity transactions 2,168 (1) 3,961 (5)
---------- --------- ---------- ----------
1,726 510 (1,284) (734)
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable (1,399) (489) 714 3,028
Decrease (increase) in other assets (566) 359 192 518
Increase (decrease) in accounts payable (including (2,617) 6,367 (18,117) (1,286)
amounts subject to compromise)
Increase (decrease) in other liabilities (including 4,977 4,701 4,784 6,945
amounts subject to compromise)
Increase (decrease) in deferred revenue (960) - 960 -
---------- --------- ---------- ----------
Net cash provided by (used in) operating activities 1,161 11,448 (12,751) 8,471
---------- --------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil and gas properties (414) (43,342) (5,590) (91,816)
Proceeds from sale of oil and gas properties 585 - 30,617 3,158
Additions to other property and equipment (7) (202) (50) (698)
---------- --------- ---------- ----------
Net cash provided by (used in) investing activities 164 (43,544) 24,977 (89,356)
---------- --------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under long-term debt - 25,000 8,000 136,000
Payments of long-term debt (485) (21) (21,583) (91,562)
Proceeds from issuance of preferred stock, net - (30) - 47,927
Purchase of common stock - (3,539) - (5,379)
Deferred loan and financing costs - (42) - (3,355)
---------- --------- ---------- ----------
Net cash provided by (used in) financing activities (485) 21,368 (13,583) 83,631
---------- --------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 840 (10,728) (1,357) 2,746
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,054 17,089 5,251 3,615
---------- --------- ---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,894 $ 6,361 $ 3,894 $ 6,361
========== ========= ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
COSTILLA ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The interim financial information as of September 30, 1999, and for the
nine months ended September 30, 1999 and 1998, 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, 1998.
The Company is an oil and gas exploration and production concern with
properties located principally in South and East Texas and the Permian Basin
regions of the United States.
On September 3, 1999 (the "Petition Date"), the Company filed a voluntary
petition for relief under Chapter 11 of the U.S. Bankruptcy Code ("Chapter 11")
in order to facilitate the restructuring of the Company's debt. The filing was
made in the U.S. Bankruptcy Court in Midland, Texas (the "Bankruptcy Court").
The Company continues to operate as a debtor-in-possession subject to the
Bankruptcy Court's supervision and orders.
The bankruptcy petition was filed in order to give the Company the
opportunity to restructure its debt. The consummation of a plan of
reorganization is the primary objective of the Company. The plan of
reorganization will set forth the means for satisfying claims, including
liabilities subject to compromise and interests in the Company. A plan of
reorganization may result in, among other things, substantial dilution to or
elimination of existing security holders as a result of the issuance of
securities to creditors or new investors or sale of properties and distribution
of proceeds. The Company is currently actively engaged in negotiations with
certain potential purchasers, equity investors or merger partners and the
Company intends to submit a plan of reorganization for consideration by the
Bankruptcy Court as soon as practicable. The consummation of any plan of
reorganization will require approval of the Bankruptcy Court.
At this time, it is not possible to predict the outcome of the bankruptcy
proceedings, in general, or the effect on the business of the Company or on the
interests of creditors or stockholders. As a result of the bankruptcy filing,
most of the Company's liabilities incurred prior to the Petition Date are
subject to compromise.
The accompanying financial statements have been prepared on a going concern
basis which contemplates continuity of operations, realization of assets and
liquidation of liabilities in the ordinary course of business. As a result of
the bankruptcy filing and related events, there is no assurance that the
carrying amounts of assets will be realized or that liabilities will be
liquidated or settled for the amounts recorded. In addition, a plan of
reorganization, or rejection thereof, could change the amounts reported in the
financial statements. As a result, there is substantial doubt about the
Company's ability to continue as a going concern. The ability of the Company to
continue as a going concern is dependent upon confirmation of a plan of
reorganization, adequate sources of capital and the ability to sustain positive
results of operations and cash flows sufficient to continue to explore for and
develop oil and gas reserves.
6
<PAGE> 7
2. DERIVATIVE FINANCIAL INSTRUMENTS
The Company utilizes derivative financial instruments to manage
well-defined commodity price and interest rate risks. The Company is exposed to
credit losses in the event of nonperformance by the counterparties to its
commodity hedges and its interest rate swap agreements. The Company only deals
with reputable financial institutions as counterparties and anticipates 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 swap agreements to hedge the effect
of price changes on future oil and gas production. The objective of its hedging
activities is to achieve more predictable revenues and cash flows. In a typical
swap arrangement, the Company receives the difference between a fixed price per
unit of production and a price based upon a higher agreed to third party index.
However, should the fixed price exceed the agreed third party index, the Company
has to pay the difference. In the past, the Company utilized option contracts to
hedge its production. In this case, if market prices of oil and gas exceeded the
strike price of put options, the options would expire unexercised, therefore
reducing the effective price received for oil and gas sales by the cost of the
related option. If the market prices of oil and gas exceeded the strike price of
call options, the Company would be obligated to pay the contracting counterparty
an amount equal to the contracted volumes times the difference between the
market price and the strike price, therefore reducing the effective price
received for oil and gas sales by the amount paid to the counterparty.
The following table sets forth the information regarding the hedging
contracts through September 10, 1999 when the counterparty, Bankers Trust
Company ("BTCO") liquidated all positions (see note (e) to table below).
<TABLE>
<CAPTION>
OIL GAS FIXED THRESHOLD
DAILY DAILY PRICE PRICE
VOLUME VOLUME PER PER
(BBLS) (MMBTU) BBL/MMBTU BBL/MMBTU (a)
----------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Oil:
July 99 - Dec. 99 2,000 -- $ 15.00 $ 13.50
Jan. 00 - Dec. 00 2,000 -- $ 16.50 $ 14.00
Gas:
July 99 - Dec. 99 (b) -- 20,000 $ 1.96 N/A
July 99 - Aug. 99 (c) -- 20,000 $ 2.10 N/A
Sept. 99 - Dec. 99 (c) -- 20,000 $ 2.30 N/A
Jan. 00 - Dec. 00 (b) -- 45,000 $ 2.20 N/A
Jan. 01 - Dec. 01 (d) -- 20,000 $ 2.30 N/A
</TABLE>
- ---------------------------------
(a) Any trading day when the NYMEX falls below the threshold price, the
contract provides for no hedge for that day. When the NYMEX is above
the threshold price but below the fixed price, the Counterparty pays
Costilla. If the NYMEX is above the fixed price, Costilla pays the
Counterparty.
(b) In February 1999, the three year fixed price swap contract was amended
for a new period of March 1999 through December 2000 covering 45,000
Mmbtu of gas per day at a fixed price of $2.20 per Mmbtu. In February
1999 the contract for the period March 1999 through December 1999 was
liquidated resulting in cash proceeds to the Company of $3.2 million.
In addition, a new contract was entered into covering 20,000 Mmbtu of
gas per day at a fixed price of $1.96 per Mmbtu for the period March
1999 through December 1999.
(c) In April 1999, Costilla sold two calls for 20,000 Mmbtu/day.
(d) In April 1999, a swaption for the year 2001 was added. The
counterparty may elect to have Costilla cash settle all remaining
payment obligations on the last business day of each quarter from June
30, 1999 through September 30, 2000. Otherwise, notice of exercise of
the Option by the Counterparty must be provided to Costilla by
December 21, 2000.
By notice dated September 10, 1999, BTCO elected an early termination of
all outstanding transactions shown above. This early termination resulted in a
claimed loss on all open positions of $15,856,974 and unpaid invoices of
$3,605,420, for a total claimed obligation by Costilla to BTCO of $19,462,394,
excluding interest, if any. The amount of the early termination claimed loss is
being amortized over the original period of the hedge contracts in accordance
with Statement of Accounting Standards No. 80.
7
<PAGE> 8
3. LONG TERM DEBT
At the Petition Date, the Company was obligated under a credit agreement
(the "Credit Facility") with Bankers Trust, as agent in the amount of $26.4
million. In addition, the Company is obligated to Bankers Trust Company in the
claimed amount of $19.5 million for certain hedging obligations, including $15.9
million claimed for the early termination of all outstanding hedging positions.
Amounts due under the Credit Facility are secured by substantially all of the
assets of the Company. The amount due for the hedging obligations and the
secured nature, if any, of that obligation remains subject to review by the
Company.
In October 1996, the Company issued $100 million principal amount of 10.25%
Senior Notes due October 1, 2006 (the "Notes") and in January 1998 issued an
additional $80 million principal amount, bringing the aggregate principal amount
to $180 million. The Notes are general unsecured senior obligations of the
Company and rank equally in right of payment with all other unsecured
indebtedness of the Company. As a result of the Chapter 11 the Notes are subject
to compromise.
4. CONVERTIBLE PREFERRED STOCK
On June 3, 1998 the Company closed a private placement of 50,000 shares of
its 7% (8% Paid in Kind) Series A Cumulative Convertible Preferred Stock (the
"Preferred Stock") to Enron Capital & Trade Resources Corp. and Joint Energy
Development Investments II Limited Partnership for a purchase price of $50.0
million (the "Convertible Preferred Stock Offering"). A plan of reorganization
may result in, among other things, substantial dilution to or elimination of the
Preferred Stock as a result of the issuance of securities to creditors and/or
new investors.
5. TERMINATION OF PIONEER ACQUISITION
In September 1998, Costilla entered into an agreement with Pioneer Natural
Resources USA, Inc. ("Pioneer") to acquire certain oil and gas properties (the
"Pioneer Acquisition Properties") for $410 million. As part of this agreement,
Costilla made a $25 million forfeitable deposit plus an additional $16 million
would be paid if the transaction did not close in December 1998. In December
1998, the previous agreement was terminated and replaced by a new agreement.
Pioneer retained the $25 million deposit and Costilla issued three million
shares of its common stock and relinquished its right to a property interest. In
return, Costilla executed a new agreement to purchase the Pioneer Acquisition
Properties for $294 million. This agreement terminated on March 31, 1999, and
Costilla and Pioneer then entered into a new agreement whereby Costilla would
acquire certain of the Pioneer Acquisition Properties for $250 million. In
connection with the new agreement, the Company issued to Pioneer one million
shares of its common stock. The new agreement terminated by its terms on April
15, 1999 and the related costs, none of which are recoverable, were expensed.
The Company is reviewing potential causes of action against Pioneer related to
this transaction.
The loss on the termination of the Pioneer acquisition consists of the
following:
<TABLE>
<CAPTION>
(in thousands)
---------------
<S> <C>
Cash Deposit $ 25,000
Four million shares of Costilla common stock 13,700
Oil & gas property assigned to Pioneer 3,558
Interest capitalized for acquisition 1,012
Due diligence, legal, accounting and engineering 4,511
--------------
Total loss on termination of acquisition $ 47,781
==============
</TABLE>
8
<PAGE> 9
6. LEGAL PROCEEDINGS
On August 18, 1999, the 87th Judicial Court of Freestone County, Texas
entered a Judgment against the Company in a lawsuit styled GNK, Inc., et al v.
Costilla Energy, Inc., et al. The case resulted from a dispute over the
ownership of certain undeveloped oil and gas leases in Freestone County, Texas.
The Court entered Judgment awarding the Plaintiff's actual damages against the
Company in the approximate amount of $525,000, as well as exemplary damages
against the Company in the sum of $5,000,000. Enforcement of this Judgment
against the Company is subject to the Automatic Stay provided the Company due to
its Chapter 11 filing. The Company has filed a Motion with the Court to allow
the Automatic Stay to be lifted for the purpose of allowing the Company to
prosecute an appeal of the Judgment. The Company's trial counsel has advised it
that the Judgment will be overturned on appeal.
9
<PAGE> 10
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 public filings with the Securities and Exchange Commission.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following table sets forth certain operating data of Costilla for the
periods presented:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
1999 1998 1999 1998
-------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
OIL AND GAS PRODUCTION:
Oil (Mbbls) 124 461 710 1,510
Gas (Mmcf) 4,280 4,814 13,571 12,376
MMCFE (1) 5,027 7,580 17,831 21,436
AVERAGE SALES PRICES (1):
Oil (per Bbbl) $ 14.87 $ 14.96 $ 12.10 $ 15.26
Gas (per Mcf) 2.13 2.06 2.02 2.08
COSTS PER MCFE (2):
Production cost, including production taxes $ 0.72 $ 0.92 $ 0.80 $ 0.99
Production cost, excluding production taxes 0.57 0.80 0.66 0.85
Depreciation, depletion and amortization 0.75 0.99 0.79 1.02
General and administrative expenses 0.37 0.37 0.41 0.37
</TABLE>
- ----------------------------------
(1) MCFE represents equivalent Mcf of gas. In reference to oil, natural gas
equivalents are determined using the ratio of one barrel of crude oil,
condensate or natural gas liquids to six Mcf of natural gas. MMCFE
represents one thousand Mcf of gas equivalent.
(2) Before deduction of production taxes and net of any hedging results.
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 unit-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
10
<PAGE> 11
unproved properties are amortized based on the Company's experience of
successful drilling and average holding period.
The Company utilizes put option contracts, costless collars and swaps to
hedge the effect of price changes on a portion of its future oil and gas
production. Premiums paid and amounts receivable under the put 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
sales by the proceeds received from the related option.
A costless collar establishes both a floor price and a ceiling for the
commodity through the simultaneous purchase of a put option contract and the
sale of a call option contract. Since the value of the put option and the call
option offset at the time of their purchase, the collar is costless, therefore
there are no premiums to amortize. 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 sales by the proceeds
received from the related option. Conversely, if market prices of oil and gas
exceed the strike price of call options, the Company is obligated to pay the
contracting counterparty an amount equal to the contracted volumes times the
difference between the market price and the strike price, therefore, reducing
the effective price received for oil and gas sales by the amount paid to the
counterparty.
Swaps establish a fixed price for the commodity. No premiums are paid for
these price swap contracts and therefore there are no premiums to amortize. If
market prices of oil and gas decline below the swap price, the counterparty pays
the Company the difference between the swap price and the market price for the
contract volumes, therefore, increasing the effective price received for oil and
gas sales by the proceeds received under the swaps. Conversely, if market prices
of oil and gas exceed the swap price, the Company is obligated to pay the
counterparty an amount equal to the difference between the market price and the
swap price for the contract volumes, therefore, reducing the effective price
received for oil and gas sales by the amount paid to the counterparty.
The net effect of the Company's commodity hedging activities decreased oil
and gas revenues by $1,317,000 for the three month period ended September 30,
1999, increased oil and gas revenues by $705,000 for the nine month period ended
September 30, 1999 and increased oil and gas revenues by $3,163,000 and
$7,300,000 for the comparable periods in 1998.
By notice dated September 10, 1999, BTCO elected an early termination of
all outstanding hedging positions. This early termination resulted in a claimed
loss on all open positions of $15,856,974 and claimed unpaid invoices of
$3,605,420, for a total obligation by Costilla to BTCO of $19,462,394, excluding
interest, if any.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1999 Compared to Three Months Ended
September 30, 1998
The Company's oil and gas revenues for the three months ended September 30,
1999 were $10,977,000, representing a decrease of $5,832,000 (35%) from revenues
of $16,809,000 in 1998. The improvement in gross oil and gas prices, excluding
the effect of hedging, during the third quarter of 1999 had a positive impact on
revenues in the amount of $3,127,000 on comparable volumes from 1998. However,
due to property sales, oil and gas production declined (see volumes discussion
below) and reduced revenues by $4,479,000. The average net oil price per barrel
received in 1999 was $14.87 compared to $14.96 in 1998, a 1% decrease, and the
average net gas price received in 1999 was $2.13 per Mcf compared to $2.06 in
1998, a 3% increase. Oil and gas hedges were a negative $1,317,000 in 1999
compared to a positive $3,163,000 in 1998, a $4,480,000 (142%) decrease.
Oil and gas production was 5,027 Mmcfe in 1999 compared to 7,580 Mmcfe in
1998, a 2,553 Mmcfe (34%) decrease. Gas production decreased to 4,280 Mmcf in
1999 from 4,814 Mmcf in 1998 (11%). However, oil
11
<PAGE> 12
production decreased to 124,000 Bbls in 1999 from 461,000 in 1998 (73%). The
major decrease in oil production was due to the Rocky Mountain properties that
were sold.
Oil and gas production costs for the three month period ended September 30,
1999 were $3,601,000 ($0.72 per Mcfe), compared to $6,982,000 in 1998 ($0.92 per
Mcfe), representing a decrease of $3,381,000 (48%), due principally to the sale
of higher cost Rocky Mountain oil and gas properties and continued cost
containment by the Company.
General and administrative expenses for the three months ended September
30, 1999 were $1,856,000, representing a decrease of $930,000 (33%) from 1998 of
$2,786,000. The decrease is primarily related to reductions in personnel and
associated expenses due to workforce reductions in December 1998 and May 1999,
offset somewhat by costs related to the Company's reorganization efforts of
approximately $682,000 in the third quarter of 1999.
Exploration and abandonment expense decreased to $473,000 for the three
months ended September 30, 1999 compared to $2,108,000 in 1998. Dry hole and
abandonment costs decreased to $293,000 in 1999 from $1,468,000 in 1998. There
were no seismic costs for the three months ended September 30, 1999, compared to
$177,000 in the comparable period in 1998. The Company incurred $180,000 of
other geological and geophysical costs during the third quarter of 1999 compared
to $463,000 for the same period in 1998. The decrease in exploration and
abandonments expense was primarily related to the Company's curtailed drilling
activities.
Depreciation, depletion and amortization ("DD&A") expense for the three
month period ended September 30, 1999 was $3,752,000 compared to $7,533,000 for
1998, representing a decrease of $3,781,000 (50%). During the 1999 period, DD&A
on oil and gas production was provided at an average rate of $0.75 per Mcfe
compared to $0.99 per Mcfe for 1998. The decrease was primarily a result of less
basis in remaining properties due to property sales, prior periods DD&A and
impairments.
Impairment of oil and gas properties for the three months ended September
30, 1999, was $943,000 compared to none for the same period of 1998. The
impairment was due to the near term expiration of acreage located in east Texas
to which proved undeveloped reserves had been attributed.
The loss on commodity transactions for the three month period ended
September 30, 1999, was $2,168,000 compared to none for the same period of 1998.
The loss was due to recording a liability for the mark-to-market value of a gas
call contract and the portion of an oil contract which did not qualify as a
hedge through August 31, 1999. For the quarter, the loss on the gas call was
$232,000 and the oil swap was $995,000. Premiums for the call and the
over-hedged portion of the oil contract were also accounted for as a loss on
commodity transactions which amounted to $939,000. On September 10, 1999, the
counterparty to the hedging transactions elected an early termination of the
contracts due to Costilla's bankruptcy filing. The cash-out values of these
contracts have been capitalized on the Balance Sheet as deferred hedge charges,
and they will be amortized over the applicable period of such contracts. In the
third quarter of 1999, $2,000 was amortized as a loss on commodity transactions
compared to none in 1998.
Interest expense was $4,061,000 for the three months ended September 30,
1999, compared to $4,789,000 for the comparable period in 1998. The $728,000
(15%) decrease was partially attributable to the Company, due to its Chapter 11
filing, discontinuing the accrual of interest on the 10 1/4% Senior Notes as of
the Petition Date, which resulted in a savings of $1,435,000. Such savings were
offset by additional interest expense on the secured debt due to higher
outstanding balances and interest rates in 1999 as compared to 1998. The average
amounts of applicable interest-bearing debt in 1999 and 1998 were $206,706,000
and $187,837,000, respectively. The effective annualized interest rate in 1999
was 7.9%, as compared to 10.2% in 1998.
Nine months Ended September 30, 1999 Compared to Nine months Ended September
30, 1998
The Company's oil and gas revenues for the nine months ended September 30,
1999 were $36,029,000, representing a decrease of $12,795,000 (26%) from
revenues of $48,824,000 in 1998. Higher commodity prices accounted for an
increase in oil revenues of $1,244,000 on comparable volumes in 1998. However,
lower oil production due to properties sold and normal production declines
caused oil sales to decrease to 710,000 Bbls in
12
<PAGE> 13
1999 from 1,510,000 Bbls in 1998. This reduced oil revenues by $9,106,000.
However, gas production increased to 13,571,000 Mcf in 1999 from 12,376,000 Mcf
in 1998, a 1,195,000 Mcf (10%) increase, which offset the above oil price and
volume declines and increased revenue by $1,664,000. Hedging revenues decreased
to $705,000 for 1999 from $7,300,000 in 1998, a $6,595,000 decrease (90%). The
average net oil price per barrel received in 1999 was $12.10 compared to $15.26
in 1998, a 21% decrease, and the average net gas price received in 1999 was
$2.02 compared to $2.08 in 1998, a 3% decrease. Oil and gas hedges cost $1.03
per barrel and produced revenue of $0.11 per Mcf for 1999. Revenues received
from oil and gas hedges produced revenue of $3.88 per barrel and $0.12 per Mcf
for the nine months ended September 30, 1998.
Oil and gas production was 17,831 Mmcfe in 1999 compared to 21,436 Mmcfe in
1998, a 17% decrease. Oil production decreased primarily as a result of property
sales, but gas production increased due to the drilling activity conducted in
1998.
Gain on sale of assets was $331,000 for the nine months ended September 30,
1999 compared to a gain of $337,000 for 1998, representing a decrease of $6,000.
These gains consisted of the following:
<TABLE>
<CAPTION>
Gain/(Loss)
(in thousands)
--------------
<S> <C>
Sale of miscellaneous assets $ 342
Sale of miscellaneous properties (681)
Sale of foreign operation (1,206)
Sale of Rocky Mountain properties 1,876
-------------
Total gain on sale of assets $ 331
-------------
</TABLE>
Oil and gas production costs for the nine month period ended September 30,
1999 were $14,320,000 ($0.80 per Mcfe), compared to $21,208,000 in 1998 ($0.99
per Mcfe), representing a decrease of $6,888,000. The 19% decrease in the oil
and gas production cost per Mcfe is due principally to a combination of lower
production costs on newly completed wells in late 1998, the sale of higher cost
Rocky Mountain oil and gas properties and continued cost containment by the
Company.
General and administrative expenses for the nine months ended September 30,
1999 were $7,221,000, representing a decrease of $636,000 (8%) from 1998 of
$7,857,000. The decrease is primarily related to reductions in personnel and
associated expenses due to workforce reductions in December 1998 and May 1999,
offset somewhat by costs related to the Company's workforce reductions and
reorganization efforts of approximately $1,925,000 since May 1999.
Exploration and abandonment expense decreased to $2,004,000 for the nine
months ended September 30, 1999 compared to $7,336,000 in 1998. Dry hole and
abandonment costs decreased to $875,000 in 1999 from $5,461,000 in 1998. The
Company had $518,000 of seismic costs for the nine months ended September 30,
1999, compared to $801,000 in the comparable period in 1998. The Company
incurred $611,000 of other geological and geophysical costs during the nine
month period ended September 30, 1999 compared to $1,074,000 for the same period
in 1998. The reduction in exploration and abandonments expense was primarily
related to the Company's decreased exploratory drilling activities in 1999
compared to 1998.
Depreciation, depletion and amortization ("DD&A") expense for the nine
month period ended September 30, 1999 was $14,139,000 compared to $21,896,000
for 1998, representing a decrease of $7,757,000 (35%). During the 1999 period,
DD&A on oil and gas production was provided at an average rate of $0.79 per Mcfe
compared to $1.02 per Mcfe for 1998. The decrease was a result of less basis in
remaining properties due to property sales, previous DD&A and impairments.
Loss on termination of purchase option relates to the termination of the
Pioneer acquisition. The costs, none of which are recoverable, were expensed.
The $47,781,000 loss includes a cash payment of $25,000,000, the relinquishment
of Costilla's right to a property interest of $3,558,000, 4,000,000 shares of
common stock valued at $13,700,000 and capitalized interest, legal, accounting,
engineering and due diligence costs of $5,523,000. There was no comparable cost
in 1998.
13
<PAGE> 14
Impairment of oil and gas properties for the nine months ended September
30, 1999, was $10,097,000 compared to none for the same period of 1998. The
impairment is due to the near term expiration of acreage located in east Texas
to which proved undeveloped reserves had been attributed.
The loss on commodity transactions for the nine month period ended
September 30, 1999, was $3,961,000 compared to none for the same period of 1998.
The loss was due to recording a liability in the amount of $1,226,000 for a gas
call contract and $1,593,000 for the portion of the oil contract which did not
qualify as hedges. An additional $1,140,000 of loss was due to the premiums on
the non-hedge contracts being accounted for as losses on commodity transactions.
On September 10, 1999, the counterparty to the hedging transactions elected an
early termination of the contracts due to Costilla's bankruptcy filing. The
cash-out values of these contracts have been capitalized on the Balance Sheet as
deferred hedge charges, and they will be amortized over the applicable period of
such contract. In the third quarter of 1999, $2,000 was amortized as a loss on
commodity transactions compared to none in 1998.
Interest expense was $14,608,000 for the nine months ended September 30,
1999, compared to $14,622,000 for the comparable period in 1998. The $14,000
decrease was partially attributable to the Company, due to its Chapter 11
filing, discontinuing the accrual of interest on the 10 1/4% Senior Notes as of
the Petition Date, which resulted in a savings of $1,435,000. Such savings were
offset by additional interest expense on the secured debt due to higher
outstanding balances and interest rates in 1999 as compared to 1998. The average
amounts of applicable interest-bearing debt in 1999 and 1998 were $212,437,000
and $188,995,000, respectively. The effective annualized interest rate in 1999
was 9.2%, as compared to 10.3% in 1998.
LIQUIDITY AND CAPITAL RESOURCES
On September 3, 1999 (the "Petition Date"), the Company filed a voluntary
petition for relief under Chapter 11 of the U.S. Bankruptcy Code ("Chapter 11")
in order to facilitate the restructuring of the Company's debt. The filing was
made in the U.S. Bankruptcy Court in Midland, Texas (the "Bankruptcy Court").
The Company continues to operate as a debtor-in-possession subject to the
Bankruptcy Court's supervision and orders.
The bankruptcy petition was filed in order to give the Company the
opportunity to restructure its debt. The consummation of a plan of
reorganization is the primary objective of the Company. The plan of
reorganization will set forth the means for satisfying claims, including
liabilities subject to compromise and interests in the Company. A plan of
reorganization may result in, among other things, substantial dilution to or
elimination of existing security holders as a result of the issuance of
securities to creditors or new investors or sale of properties and distribution
of proceeds. The Company is currently actively engaged in negotiations with
certain potential purchasers, equity investors or merger partners and the
Company intends to submit a plan of reorganization for consideration by the
Bankruptcy Court as soon as practicable. The consummation of any plan of
reorganization will require approval of the Bankruptcy Court.
At this time, it is not possible to predict the outcome of the bankruptcy
proceedings, in general, or the effect on the business of the Company or on the
interests of creditors or stockholders. As a result of the bankruptcy filing,
most of the Company's liabilities incurred prior to the Petition Date are
subject to compromise.
The accompanying financial statements have been prepared on a going concern
basis which contemplates continuity of operations, realization of assets and
liquidation of liabilities in the ordinary course of business. As a result of
the bankruptcy filing and related events, there is no assurance that the
carrying amounts of assets will be realized or that liabilities will be
liquidated or settled for the amounts recorded. In addition, a plan of
reorganization, or rejection thereof, could change the amounts reported in the
financial statements. As a result, there is substantial doubt about the
Company's ability to continue as a going concern. The ability of the Company to
continue as a going concern is dependent upon confirmation of a plan of
reorganization, adequate sources of capital and the ability to sustain positive
results of operations and cash flows sufficient to continue to explore for and
develop oil and gas reserves.
14
<PAGE> 15
Net Cash Provided By Operating Activities
For the nine months ended September 30, 1999, net cash provided by
operating activities decreased to a negative $12.8 million from $8.5 million for
1998. Cash provided by operations, before changes in operating assets and
liabilities, was a negative $1.3 million as compared to a negative $0.7 million
in 1998.
Net Cash Used in Investing Activities
Net cash provided by investing activities for the nine months ended
September 30, 1999 was $25.0 million. Expenditures of $5.5 million were used for
exploration and development activities and $50,000 was used for other property
and equipment. Proceeds from the sale of various oil and gas properties resulted
in gross cash from investing activities of $31.0 million.
Financing Activities
For the nine months ended September 30, 1999, the Company incurred $8.0
million of indebtedness under the Credit Facility which was used to pay the
April 1 interest payment to holders of its 10 1/4% Senior Notes. Proceeds
received from sales of properties and other assets were used to pay $21.6
million on the Credit Facility.
Capital Resources
Subsequent to the Petition Date, Costilla filed an Emergency Motion for
Interim Order Authorizing Use of Cash Collateral (the "Cash Collateral Motion"),
pursuant to which Costilla sought the use of the secured lenders' cash
collateral in on-going operations. On September 10, 1999, the Bankruptcy Court
signed a Preliminary Order Authorizing Use of Cash Collateral, thereby
authorizing Costilla's use of cash collateral in accordance with a budget
attached thereto. Since the preliminary order, the Bankruptcy Court has
conducted a hearing on Costilla's continued use of cash collateral and on
September 23, 1999, the Final Order Authorizing Use of Cash Collateral ("Cash
Collateral Order") was signed and is the order under which the Company currently
operates. To the extent that on-going expenses are for post-petition goods and
services (after September 3, 1999), are within the ordinary course of business,
and are reflected on the court-approved budget, Costilla is permitted to make
such expenditures without further Bankruptcy Court order. Any expenditure,
however, that is outside the ordinary course of business, or that is not
reflected on the budget or not otherwise authorized by the Cash Collateral
Order, must be specifically authorized by the Bankruptcy Court. The Company's
cash balance as of October 31, 1999, was $9.2 million that can be used for
operations pursuant to the terms of the Cash Collateral Order. The Cash
Collateral Order expires on November 30, 1999. If the Company and the Bank Group
and Bankers Trust Company all agree, the terms of the Cash Collateral Order may
be extended to cover periods following November 30, 1999 without the need for a
subsequent order of the Bankruptcy Court by the filing of a budget for such
period with the Court, together with a statement that the Bank Group and Bankers
Trust Company consent to such budget.
Capital Expenditures
Due to matters discussed under "Capital Resources" above, the Company does
not anticipate any significant amount of capital expenditures for 1999 until its
reorganization efforts have been concluded.
Recent Accounting Pronouncements
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - In June 1998, the FASB
issued Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS No. 133"). SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized
15
<PAGE> 16
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on a hedged item in the income statement. Companies must
formally document, designate, and assess the effectiveness of transactions that
receive hedge accounting.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999;
however, beginning June 16, 1998, companies may implement the statement as of
the beginning of any fiscal quarter. SFAS No. 133 cannot be applied
retroactively and must be applied to (a) derivative instruments and (b) certain
derivative instruments, embedded in hybrid contracts that were issued, acquired,
or substantively modified after December 31, 1997 (and, at the Company's
election, before January 1, 1998.) The Company has not yet quantified the impact
of adopting SFAS no. 133 on its financial statements and has not determined the
timing of or method of adoption of SFAS No. 133.
YEAR 2000 - The Year 2000 ("Y2K") issue is the result of computerized
systems being written to store and process the year portion of dates from and
after January 1, 2000 in a manner which may result in systems failures. Because
of the importance of occurrence dates in the oil and gas industry, the
consequences of not pursuing Y2K compliance could be significant to the
Company's ability to manage and report operating activities. During 1998, the
Company implemented a program to identify, evaluate and address Y2K risks to
ensure that the Company's Information Technology ("IT") Systems and Non-IT
Systems will be Y2K compliant. As a result, the third-party software vendor for
the Company's integrated oil and gas information system has modified the system
to accurately handle the Y2K Issue. All necessary programming modifications were
tested and updated by February 28, 1999. Additionally, the Company successfully
tested the Y2K modifications using Company data. From a cost viewpoint, these
modifications were included in the routine updates the Company receives from its
third-party software vendor as part of the systems support contract already in
place. The Company has completed a preliminary assessment of all date-sensitive
components related to its Non-IT Systems, which primarily consist of systems
with embedded technology. Based upon this assessment, the Company has determined
that there will be no modification required to become Y2K compliant.
In addition to its own informational systems, the Company may also be
effected by the Y2K compliance and readiness of third parties with whom the
Company has a material business relationship. The Company has received
notification of Y2K compliance from some of the major third parties and expects
to receive additional responses before December 31, 1999.
The Company has begun an analysis of the operational problems and costs
that would be likely to result from the failure by the Company or significant
third parties to complete efforts necessary to achieve Y2K compliance on a
timely basis. A contingency plan has not been developed for dealing with the
most likely worst case scenario, and such scenario has not yet been clearly
identified. However, included among the potential "worst case" problems the
Company could face would be the loss of electricity used to power well pumps and
compressors that would result in wells being shut-in, or the inability of a
third party gathering company or pipeline to accept oil or gas from wells or
gathering lines which could also result in wells being shut-in. A disruption in
production would result in the loss of income and delays of payments for oil and
gas sales. The risk should be minimized by the Company's efforts to communicate
with and evaluate third party compliance. The Company plans to complete such
analysis by December 31, 1999.
The Company presently does not expect to incur significant operational
problems due to the Y2K issue. However, if all Y2K issues are not properly and
timely identified, assessed, remediated and tested, both by the Company and
others, there can be no assurances that the Y2K issue will not materially impact
the Company's results of operations or adversely affect relationships with
customers, vendors, or others. Additionally, there can be no assurance that the
Y2K issues of other entities will not have a material adverse impact on the
Company's systems or results of operations.
SEGMENT REPORTING - In June 1997, the FASB issued Statement of Accounting
Standards No. 131 "Disclosures about Segments of an Enterprise and Related
Information" ("FAS 131") which establishes standards for public business
enterprises for reporting information about operating segments in annual
financial statements and requires that such enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. This statement also established standards for related disclosures
about products and
16
<PAGE> 17
services, geographic areas, and major customers. FAS 131 is effective for
financial statements for years beginning after December 15, 1997.
The Company operates in the one product line of oil and gas production in
limited geographic areas. This information and information about major customers
historically has been disclosed in the Company's annual financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The interim information should be read and considered in conjunction with
the information included in "Quantitative and Qualitative Disclosures About
Market Risk" in Item 7A of Costilla's 1998 Annual Report on Form 10-K. Such
information includes a description of Costilla's potential exposure to market
risks, including commodity price risk, interest rate risk and foreign currency
risk. For interim information as of September 30, 1999 please see NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS, Footnote 2, Derivative Financial Instruments,
and Management's Discussion and Analysis of Financial Condition and Results of
Operations, General.
17
<PAGE> 18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 18, 1999, the 87th Judicial Court of Freestone County, Texas
entered a Judgment against the Company in a lawsuit styled GNK, Inc., et al v.
Costilla Energy, Inc., et al. The case resulted from a dispute over the
ownership of certain undeveloped oil and gas leases in Freestone County, Texas.
The Court entered Judgment awarding the Plaintiff's actual damages against the
Company in the approximate amount of $525,000, as well as exemplary damages
against the Company in the sum of $5,000,000. Enforcement of this Judgment
against the Company is subject to the Automatic Stay provided the Company due to
its Chapter 11 filing. The Company has filed a Motion with the Court to allow
the Automatic Stay to be lifted for the purpose of allowing the Company to
prosecute an appeal of the Judgment. The Company's trial counsel has advised it
that the Judgment will be overturned on appeal.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company's Chapter 11 filing created an event of default under the
Company's Secured Credit Facility and under the Indenture governing the
Company's 10 1/4% Senior Notes due 2006. Although the maturity of all amounts
due under the Secured Credit Facility and the Indenture has been accelerated,
enforcement of the claims is subject to the Automatic Stay provided pursuant to
the Company's Chapter 11 filing.
18
<PAGE> 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------ ----------------------
<S> <C>
*10.1 Twelfth Amendment to Amended and Restated Credit
Agreement dated as of August 16, 1999 between Bankers
Trust Company, as Agent and Costilla Energy, Inc.
*27.1 Financial Data Schedule
</TABLE>
* Filed herewith
REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K on September 13, 1999 to
report under Item 3 that on September 3, 1999 the Company filed a petition for
relief under Chapter 11 of the United States Bankruptcy Code, and under Item 5
to report (i) that a judgement was entered against the Company in a lawsuit, and
(ii) that on August 16, 1999 the Company received notice from the Nasdaq Stock
market that the Company's common stock would no longer be listed on the Nasdaq
National Market.
19
<PAGE> 20
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 13, 1999. By: /s/ Bobby W. Page
--------------------------
Bobby W. Page
Senior Vice President
and Chief Financial Officer
20
<PAGE> 21
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
*10.1 Twelfth Amendment to Amended and Restated Credit
Agreement dated as of August 16, 1999 between Bankers
Trust Company, as Agent and Costilla Energy, Inc.
*27.1 Financial Data Schedule
</TABLE>
* Filed herewith
<PAGE> 1
EXHIBIT 10.1
TWELFTH AMENDMENT TO
AMENDED AND RESTATED CREDIT AGREEMENT
This Twelfth Amendment to Amended and Restated Credit Agreement (this
"Amendment") dated as of August 16, 1999 is among COSTILLA ENERGY, INC., a
Delaware corporation (the "Borrower"), the banks named on the signature pages
hereto (together with their respective successors and assigns in such capacity,
the "Banks") and BANKERS TRUST COMPANY, as agent for the Banks (together with
its successors and assigns in such capacity, the "Agent").
PRELIMINARY STATEMENT
A. The Borrower and the Bank Group have entered into that certain
Amended and Restated Credit Agreement dated as of August 28, 1997 as amended by
that certain First Amendment to Amended and Restated Credit Agreement dated as
of December 30, 1997, that certain Second Amendment to Amended and Restated
Credit Agreement dated as of January 14, 1998, that certain Third Amendment to
Amended and Restated Credit Agreement dated as of February 26, 1998, that
certain Fourth Amendment to Amended and Restated Credit Agreement dated as of
March 24, 1998, that certain Fifth Amendment to Amended and Restated Credit
Agreement dated as of June 30, 1998, that certain Sixth Amendment to Amended and
Restated Credit Agreement dated as of November 19, 1998, that certain Seventh
Amendment to Amended and Restated Credit Agreement dated as of March 9, 1999,
that certain Eighth Amendment to Amended and Restated Credit Agreement dated as
of March 31, 1999, that certain Ninth Amendment to Amended and Restated Credit
Agreement dated as of May 12, 1999, that certain Tenth Amendment to Amended and
Restated Credit Agreement dated as of May 27, 1999 and that certain Eleventh
Amendment to Amended and Restated Credit Agreement dated as of June 17, 1999 (as
so amended, the "Credit Agreement").
B. Union Bank of California, N.A. has assigned all of its rights and
obligations under the Credit Agreement, the Loans owing to it, the Note held by
it and the other Loan Documents to Foothill Income Trust, L.P. pursuant to that
certain Assignment and Acceptance dated July 12, 1999.
C. The Borrower and the Bank Group desire to further amend the Credit
Agreement as set forth herein.
NOW THEREFORE, in consideration of the foregoing and the mutual
agreements set forth herein, the parties agree as follows:
SECTION 1. Definitions. Unless otherwise defined in this Amendment,
each capitalized term used in this Amendment has the meaning assigned to such
term in the Credit Agreement.
<PAGE> 2
Section 2. Amendments. The Credit Agreement is hereby amended as
follows:
a. Section 2.07(b) of the Credit Agreement is hereby amended in its
entirety to read as follows:
"(b) On the date set forth below (the "Scheduled Loan Paydown Date")
the Borrower shall repay the Loans comprising part of the same Borrowing
in whole or ratably in part in an amount equal to the "Scheduled Paydown
Amount" set forth opposite such Scheduled Loan Paydown Date:
<TABLE>
<CAPTION>
Scheduled Loan Scheduled
Paydown Date Paydown Amount
-------------- --------------
<S> <C>
September 15, 1999 $5,937,529
</TABLE>
b. The date of "August 31, 1999" set forth in Section 4.17(b) of the
Credit Agreement is hereby amended to read "September 15, 1999."
c. Section 6.02(l) of the Credit Agreement is hereby amended in its
entirety to read as follows:
"and (l) Liens described on Schedule 6.02 securing the Indebtedness
described on Schedule 6.02 so long as such Liens have been released and/or
extinguished on or before September 15, 1999;"
d. Schedule 6.02 of the Credit Agreement is hereby amended in its entirety
to read the same as Schedule 6.02 attached to this Amendment.
Section 3. Payment of Obligations. In addition to the payment
obligations under the Credit Agreement, the Borrower shall make the following
payments in respect of the Obligations:
(a) On or before August 18, 1999, the Borrower shall make a payment on
the Obligations in an amount equal to $975,000. Notwithstanding anything to the
contrary in the Credit Agreement, such payment shall be applied first to the
amendment fee provided for in Section 7 of this Amendment, second to all
accrued, unpaid interest on the Loans as of the date of such payment, and third
to the outstanding principal of the Loans.
(b) On or before the day following the date the "Final Notice of
Disbursement" is executed by the Borrower and Prima Exploration, Inc. and
delivered to the "Escrow Agent" under that certain Escrow Agreement dated June
3, 1999 by and among Prima Exploration, Inc., the Borrower, and Chase Bank of
Texas, N.A. as the Escrow Agent, the Borrower shall make a payment on the
Obligations in an amount equal to all "Pre-Effective Time Claims Funds" held by
the Escrow Agent as of the date of such payment under such Escrow Agreement. The
Borrower shall use all
-2-
<PAGE> 3
reasonable efforts to cause such "Pre-Effective Time Claims Funds" to be
released by the Escrow Agent on or before August 27, 1999. Notwithstanding
anything to the contrary in the Credit Agreement, such payment shall be applied
first to all accrued, unpaid interest on the Loans as of the date of such
payment and second to the outstanding principal of the Loans.
(c) Any principal payment on the Loans made under this Section 3 shall
be applied to the principal payment required under Section 2.07(b) of the Credit
Agreement.
Section 4. Limited Waiver of Credit Agreement. (a) The Bank Group
hereby waives the Event of Default under Section 7.01(a) of the Credit Agreement
resulting from the Borrower's failure to make a principal payment on the Loans
in the amount of $2,687,529 that became due and payable on August 10, 1999 under
Section 2.07(b) of the Credit Agreement (as in effect prior to this Amendment).
The foregoing waiver is limited to the above-described Event of Default and
shall not be construed as a waiver of any provision of the Credit Agreement or
any other Loan Document with respect to any other matter or as a waiver of any
other current or future Default or Event of Default under the Credit Agreement,
including, without limitation, any future Event of Default under Section 7.01(a)
of the Credit Agreement.
(b) The Bank Group hereby waives compliance by the Borrower with
Sections 9(a) and 9(b) of the Eighth Amendment to Amended and Restated Credit
Agreement dated as of March 31, 1999 until September 15, 1999. The Bank Group
hereby waives, until September 15, 1999, the Default under Section 7.01(e) of
the Credit Agreement resulting from the Borrower's failure to pay BTCo. (i) an
amount equal to $368,900 that became due on May 5, 1999 under a certain Bank
Group Derivative between the Borrower and BTCo., (ii) an amount equal to
$206,640 that became due on June 3, 1999 under a certain Bank Group Derivative
between the Borrower and BTCo., (iii) an amount equal to $171,802 that became
due on June 7, 1999 under a certain Bank Group Derivative between the Borrower,
(iv) an amount equal to $301, 568 that became due on July 6, 1999 under a
certain Bank Group Derivative between the Borrower and BTCo., (v) an amount
equal to $175,200 that became due on July 8, 1999 under a certain Bank Group
Derivative between the Borrower and BTCo., (vi) an amount equal to $674,312 that
became due on August 4, 1999 under a certain Bank Group Derivative between the
Borrower and BTCo., and (vii) an amount equal to $315,934.27 that became due on
August 6, 1999 under a certain Bank Group Derivative between the Borrower and
BTCo. The Bank Group hereby waives, until September 15, 1999, compliance by the
Borrower with Sections 6.04 and 6.05 of the Credit Agreement for the calendar
quarter ending June 30, 1999. The foregoing waivers are limited to the above
described matters and time period, shall expire on September 15, 1999, and shall
not be construed as a waiver of any provision of the Credit Agreement or any
other Loan Document with respect to any other matter or as a waiver of any other
current or future Default or Event of Default under the Credit Agreement.
(c) The Bank Group reserves the right to exercise any rights or
remedies with respect to any other current or future Default or Event of Default
under the Credit Agreement. In addition, the Bank Group reserves the right to
exercise, on or after September 15, 1999, any rights or remedies with respect to
the Defaults waived under Section 3(b). The foregoing waiver of Section
-3-
<PAGE> 4
7.01(e) of the Credit Agreement shall not be deemed as a waiver of any right or
remedy of BTCo. with respect to any Bank Group Derivative between the Borrower
and BTCo. or as a release or forgiveness by BTCo. of any amount at any time
owing by the Borrower to BTCo. in respect of any such Bank Group Derivative.
Section 5. Limitations of Amendments. THE AMENDMENTS TO THE CREDIT
AGREEMENT AND WAIVERS SET FORTH HEREIN SHALL NOT (A) ESTABLISH A COURSE OF
DEALING BETWEEN THE BORROWER AND THE BANK GROUP, (B) BE CONSIDERED A NORMAL AND
CUSTOMARY PRACTICE BY ANY MEMBER OF THE BANK GROUP, OR (C) OBLIGATE ANY BANK TO
AGREE TO ANY OTHER AMENDMENT OR WAIVER IN THE FUTURE FOR ANY PURPOSE. THE
BORROWER FURTHER ACKNOWLEDGES THAT THE AMENDMENTS AND WAIVERS SET FORTH HEREIN
ARE AN ACCOMMODATION TO THE BORROWER, MADE AT ITS REQUEST, AND THAT NO SIMILAR
ACCOMMODATION IS PRESENTLY CONTEMPLATED OR CAN BE EXPECTED IN THE FUTURE.
Section 6. Ratification. The Borrower hereby ratifies and confirms all
of the Obligations under the Credit Agreement (as amended hereby) and the other
Loan Documents. All references in the Loan Documents to the "Credit Agreement"
shall mean the Credit Agreement as amended hereby and as the same may be
amended, supplemented, restated or otherwise modified and in effect from time to
time in the future.
Section 7. Amendment Fee. As consideration for the execution of this
Amendment, the Borrower shall pay to each Bank an amendment fee in an amount
equal to such Bank's Commitment Percentage of $125,000.00, which amendment fee
shall be due and payable on August 18, 1999.
Section 8. Effectiveness. This Amendment shall become effective in
accordance with the terms of the Credit Agreement subject to the condition
precedent that the Borrower shall have paid all outstanding fees and expenses of
the Agent's counsel.
Section 9. Delivery of Certain Information. On or before September 8,
1999, the Borrower shall deliver to each member of the Bank Group a report
detailing the Borrower's proposed restructuring plan or plans with any potential
restructure partner, investor and/or holder of the Borrower's Senior Unsecured
Notes, including copies of all relevant term sheets, offers, letters of intent,
correspondence and other related information; provided, however, that the
Borrower may redact the names of any potential restructure partner or investor
from the information provided to the Bank Group. The Borrower's failure to
deliver such report by such deadline shall constitute an immediate Event of
Default under the Credit Agreement without any notice, grace period or other
action by any member of the Bank Group.
Section 10. Representations and Warranties. The Borrower hereby
represents and warrants to the Bank Group that (a) the execution, delivery and
performance of this Amendment has
-4-
<PAGE> 5
been duly authorized by all requisite corporate action on the part of the
Borrower, (b) each of the Credit Agreement (as amended hereby) and the other
Loan Documents to which it is a party constitutes a valid and legally binding
agreement enforceable against the Borrower in accordance with its terms except,
as such enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium, fraudulent transfer or other similar laws relating to or affecting
the enforcement of creditors' rights generally and by general principles of
equity, (c) the representations and warranties by the Borrower contained in the
Credit Agreement as amended hereby and in the other Loan Documents are true and
correct on and as of the date hereof in all material respects as though made as
of the date hereof, (d) no Default or Event of Default exists under the Credit
Agreement (as amended hereby) or any of the other Loan Documents.
Section 11. Choice of Law. This Amendment shall be governed by, and
construed in accordance with, the laws of the State of New York.
Section 12. Final Agreement. THE CREDIT AGREEMENT (AS AMENDED HEREBY)
AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES
AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT
ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO ORAL AGREEMENTS BETWEEN THE
PARTIES.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by its officers thereunto duly authorized as of the date first above
written.
COSTILLA ENERGY, INC.
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
-5-
<PAGE> 6
BANKERS TRUST COMPANY,
as Agent and Bank
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
FOOTHILL INCOME TRUST, L.P.
as Bank
By: FIT GP LLC, its general partner
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
DEN NORSKE BANK ASA,
as Bank
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
WELLS FARGO BANK (TEXAS), N.A.,
as Bank
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
-6-
<PAGE> 7
SCHEDULE 6.02
1. Oil and Gas Lien filed by Rock Tool Company covering the Greer McKinley
#1 Well in Ward County, Texas and claiming indebtedness owed in the
amount of $69,072.14.
2. Oil and Gas Liens recorded in Book 351, Page 968 of the real property
records of Eddy County and Book 370, Page 878 of the real property
records of Chavez County, New Mexico, filed by Dawson Geophysical,
covering the Harpo Prospect and claiming indebtedness owed in the
amount of $521,883.05.
3. Judgment Lien, if any, resulting from a judgment being entered against
the Borrower in Cause No. 97-311-B; GNK, Inc. v. Williford, et al. in
the 87th Judicial District Court of Freestone County, Texas.
Schedule 6.02 Page 1
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OF COSTILLA ENERGY, INC. FOR THE
QUARTER ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 3,894
<SECURITIES> 0
<RECEIVABLES> 10,546
<ALLOWANCES> 842
<INVENTORY> 0
<CURRENT-ASSETS> 14,211
<PP&E> 179,633
<DEPRECIATION> 90,680
<TOTAL-ASSETS> 123,461
<CURRENT-LIABILITIES> 52,887
<BONDS> 181,608
0
5
<COMMON> 1,410
<OTHER-SE> (123,094)
<TOTAL-LIABILITY-AND-EQUITY> 123,461
<SALES> 10,977
<TOTAL-REVENUES> 11,136
<CGS> 3,601
<TOTAL-COSTS> 4,074
<OTHER-EXPENSES> 8,938
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,061
<INCOME-PRETAX> (5,937)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,937)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,937)
<EPS-BASIC> (.42)
<EPS-DILUTED> (.42)
</TABLE>
