10-Q 1 d85754e10-q.txt FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 2000 1 ================================================================================ 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, 2000 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to ---------- ---------- COMMISSION FILE NO. 0-21411 ---------- COSTILLA ENERGY, INC. (Exact name of registrant as specified in its charter) ---------- DELAWARE 75-2658940 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 400 WEST ILLINOIS, SUITE 900 MIDLAND, TEXAS 79701 (Address of principal executive offices) (Zip code) (915) 683-3092 (Registrant's telephone number, including area code) Not applicable (Former name, former address and former fiscal year, if changed since last report) ---------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [ ] NO [X] THERE ARE ZERO SHARES OF REGISTRANT'S COMMON STOCK CURRENTLY OUTSTANDING. ALL SUCH SHARES WERE CANCELED AS OF THE EFFECTIVE DATE OF THE REGISTRANT'S CHAPTER 11 PLAN AS DESCRIBED THEREIN. ================================================================================ 2 COSTILLA ENERGY, INC. FORM 10-Q TABLE OF CONTENTS

2 3 SPECIAL NOTE REGARDING BANKRUPTCY PROCEEDINGS Costilla Energy, Inc. (the "Company") filed Chapter 11 bankruptcy on September 3, 1999 in a case styled In Re: Costilla Energy, Inc. Case No. 99-70653, in the United States Bankruptcy Court for the Western District of Texas, Midland Division. The Company conducted its business as debtor in possession from the date of filing of the bankruptcy through the sale of all of the oil and gas assets of the Company in June 2000 and until confirmation of the Company's Plan of Reorganization (Liquidation) as Amended, on September 15, 2000, effective October 1, 2000 (the "Plan"). The Plan provides, among other things, for the establishment of a liquidating trust, distributions to creditors at the discretion of the trustee of the liquidating trust, and the cancellation of all of the Company's common stock, preferred stock and other equity securities. As a result, effective October 1, 2000, the Company had no shareholders, and was and continues to be under the management and control of the trustee of the liquidating trust subject to the terms of the Plan and the supervision of the bankruptcy court. A more detailed discussion of these and related matters is set forth in the Company's Annual Report on Form 10-K for the year ended December 31, 1999 (the "1999 10-K"). The information contained herein is provided as of the date of the period covered by this report. 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 normal course of business. However, as a result of the bankruptcy filing, the sale of all of the Company's oil and gas assets in June 2000 and the confirmation of a plan of reorganization (liquidation) in September 2000, the carrying amounts of all assets may not be realized and certain liabilities will be settled for less than the amounts recorded. Therefore, no analysis or information is provided with respect to the Company as a going concern, whether in terms of capital resources, capital expenditures or otherwise, due to the liquidation of the Company in the bankruptcy as discussed above. Discussions of material events which occurred subsequent to the period covered by this report are contained in the 1999 10-K and Current Reports on Form 8-K filed throughout 2000 and the exhibits thereto. 3 4 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS COSTILLA ENERGY, INC. (DEBTOR-IN-POSSESSION) CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) (UNAUDITED)

See accompanying notes to consolidated financial statements. 4 5 COSTILLA ENERGY, INC. (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)

See accompanying notes to consolidated financial statements. 5 6 COSTILLA ENERGY, INC (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)

See accompanying notes to consolidated financial statements. 6 7 COSTILLA ENERGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2000 (UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The interim financial information as of September 30, 2000, and for the nine months ended September 30, 2000 and 1999, 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 unaudited financial statements for the year ended December 31, 1999. The Company is an oil and gas exploration and production concern with properties located principally in the Gulf Coast region, the Rocky Mountain region and the Permian Basin area of Texas and New Mexico. 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. There were no hedge contracts outstanding at December 31, 1999 or September 30, 2000. 3. 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 commons 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 7 8 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 review potential causes of action against Pioneer related to this transaction. The loss on the termination of the Pioneer acquisition consists of the following:

4. SALE OF OIL AND GAS ASSETS On June 15, 2000 Costilla closed the sale of its oil and gas assets to Louis Dreyfus Natural Gas Corp. The gross purchase price for the properties was $133.25 million, which is subject to certain adjustments called for in the Asset Purchase Agreement with Louis Dreyfus. Proceeds from the sale have been distributed to Costilla's creditors in accordance with an amended plan of reorganization confirmed by the Bankruptcy Court's Order in September 2000. 8 9 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 RESULTS OF OPERATIONS Three Months Ended September 30, 2000 Compared to Three Months Ended September 30, 1999 The Company had no oil and gas revenues for the three months ended September 30, 2000. The oil and gas properties of the Company were sold in June, 2000. Loss on termination of purchase option relates to the termination of the Pioneer acquisition. At March 31, 1999, management believed the probability of successful completion of the acquisition was questionable. The costs, none of which are recoverable, were expensed as of that date. 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. General and administrative expenses for the three months ended September 30, 2000 were $2,984,000, representing an increase of $1,128,000 (60%) from 1999 of $1,856,000. The Company's agreement with Ballard Petroleum to reimburse Ballard for certain general and administrative expenses was terminated effective March 1, 1999 and is expected to result in a savings of approximately $124,000 per month. Subsequent to March 31, 1999 the Company further reduced its staff and related expenses by approximately $225,000 monthly, the effect of which was realized beginning approximately June 1, 1999. This decrease was offset by severance paid to terminated employees, retention bonuses for remaining employees and increased costs related to the Company's efforts to reorganize. There were no exploration costs in three month period ending September 30, 2000 due to the sale of all prospects. Depreciation, depletion and amortization ("D D & A") expense for the three month period ended September 30, 2000 was $210,000 compared to $3,752,000 for 1999, representing a decrease of $3,542,000 (94%). The decrease was due to the sale of all the Company's oil and gas properties in June 2000. 9 10 Interest expense was $804,000 for the three months ended September 30, 2000, compared to $4,061,000 for the comparable period in 1999. The $3,257,000 (80%) decrease was primarily attributable to the termination of interest accrual on 10 1/4% notes and a paydown of debt, which was partially offset by an increase in bank interest rates on the Company's revolver. Nine Months Ended September 30, 2000 Compared to Nine Months Ended September 30, 1999 The Company's oil and gas revenues for the nine months ended September 30, 2000 were $19,023,000 compared to $36,029,000 in 1999. The decrease was due to the sale of certain properties in mid-1999 and the remainder in June 2000. Oil and gas production was 7,368 MMcfe in 2000 compared to 17,831 MMcfe in 1999, a 59% decrease. This decline was due to the sale of certain properties in mid 1999 and the remainder in June of 2000. Oil and gas production costs for the nine month period ended September 30, 2000 were $6,537,000 compared to $14,320,000 in 1999, representing a decrease of $7,783,000 (54%), due principally to the sale of certain oil and gas properties in 1999 and the remainder in June of 2000. Loss on termination of purchase option relates to the termination of the Pioneer acquisition. At March 31, 1999, management believed the probability of successful completion of the acquisition was questionable. The costs, none of which are recoverable, were expensed as of that date. 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. General and administrative expenses for the nine months ended September 30, 2000 were $8,217,000, representing an increase of $996,000 (14%) from 1999 of $7,221,000, The Company's agreement with Ballard Petroleum to reimburse Ballard for certain general and administrative expenses was terminated effective March 1, 1999 and is expected to result in a savings of approximately $124,000 per month. Subsequent to March 31, 1999 the Company further reduced its staff and related expenses by approximately $225,000 monthly, the effect of which was realized beginning approximately June 1, 1999. This decrease was offset by severance paid to terminated employees, retention bonuses for remaining employees and increased costs related to the Company's efforts to reorganize. Depreciation, depletion and amortization ("D D & A") expense for the nine month period ended September 30, 2000 was $6,398,000 compared to $14,139,000 for 1999, representing a decrease of $7,741,000 (55%). The decrease was due to the sale of all the Company's oil and gas properties in June 2000. Interest expense was $3,293,000 for the nine months ended September 30, 2000, compared to $14,608,000 for the comparable period in 1999. The $11,315,000 (77%) decrease was primarily attributable to the termination of interest accrual on 10 1/4% notes and a paydown of debt, which was partially offset by an increase in bank interest rates on the Company's revolver. 10 11 LIQUIDITY AND CAPITAL RESOURCES Due to the Company's sale of all of its oil and gas assets in June 2000 and the plan under which it is currently being liquidated, no information is being provided. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Since the Company had no hedging instruments in place at December 31, 1999 or September 30, 2000, and due to the sale of all of its oil and gas assets in June 2000, no information is provided. 11 12 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K EXHIBITS NONE. REPORTS ON FORM 8-K None. 12 13 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: March 30, 2001 By: /s/ BOBBY W. PAGE ----------------------------- Bobby W. Page Plan Trustee of the Costilla Liquidating Trust 13

COSTILLA ENERGY INC 10-Q