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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K/A
(AMENDMENT NO. 1)
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
August 28, 1997
(Date of earliest event reported)
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COSTILLA ENERGY, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 0-21411 75-2658940
(State or other jurisdiction of (Commission File Number) (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)
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COSTILLA ENERGY, INC.
FORM 8-K/A
TABLE OF CONTENTS
PAGE
----
ITEM 7. Financial Statements & Exhibits
(a) Financial Statements of the Ballard Acquisition
Independent Auditors' Report 3
Statements of Revenues and Direct Operating Expenses for the year
ended December 31, 1996 and for the six months ended
June 30, 1997 and 1996 (unaudited) 4
Notes to the Statements of Revenues and Direct Operating Expenses 5
(b) Pro Forma Financial Information
Preliminary Statement 7
Unaudited Pro Forma Condensed Statement of Operations for
the year ended December 31, 1996 8
Unaudited Pro Forma Condensed Statement of Operations for
the nine months ended September 30, 1997 9
Notes to Unaudited Pro Forma Condensed Financial Statements 10
Signatures 13
2
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Costilla Energy, Inc.:
We have audited the accompanying statement of revenues and direct operating
expenses of the Ballard Acquisition (see Note 1) for the year ended December
31, 1996. The statement is the responsibility of the Company's management.
Our responsibility is to express an opinion on the statement based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the statement of revenues and
direct operating expenses is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management,
as well as evaluating the overall statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
The accompanying statement of revenues and direct operating expenses was
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission (for inclusion in Form 8-K of Costilla
Energy, Inc. as described in Note 1) and is not intended to be a complete
presentation of the Ballard Acquisition interests' revenues and expenses.
In our opinion, the statement of revenues and direct operating expenses
referred to above presents fairly, in all material respects, the revenues and
direct operating expenses of the Ballard Acquisition for the year ended
December 31, 1996 in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Midland, Texas
November 7, 1997
3
COSTILLA ENERGY, INC.
BALLARD ACQUISITION
STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
(IN THOUSANDS)
(Unaudited)
Six months ended
Year ended June 30,
December 31, ------------------
1996 1997 1996
---- ---- ----
Revenues:
Oil and condensate $ 9,833 $4,553 $4,540
Natural gas 1,481 1,571 853
------- ------ ------
11,314 6,124 5,393
------- ------ ------
Direct operating expenses:
Lease operating 2,453 1,465 1,099
Workovers 417 290 406
Production taxes 732 402 325
------- ------ ------
3,602 2,157 1,830
------- ------ ------
Revenues in excess of direct
operating expenses $ 7,712 $3,967 $3,563
------- ------ ------
------- ------ ------
See the accompanying notes to these statements.
4
NOTES TO THE STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
(1) BASIS OF PRESENTATION
On August 28, 1997 Costilla Energy, Inc., (the "Company") acquired from
Ballard Petroleum, LLC certain oil and gas properties (the "Ballard
Acquisition") for approximately $41.2 million. The accompanying statements
of revenues and direct operating expenses for the Ballard Acquisition do not
include general and administrative expenses, interest income or expense, a
provision for depreciation, depletion and amortization, or any provision for
income taxes since historical expenses of this nature incurred by Ballard are
not necessarily indicative of the costs to be incurred by the Company.
Historical financial information reflecting financial position, results
of operations, and cash flows of the Ballard Acquisition were not available
and are not presented because the purchase price was assigned to the oil and
gas property interests acquired. Other assets acquired and liabilities
assumed were not material. Accordingly, the historical statements of
revenues and direct operating expenses of the Ballard Acquisition are
presented in lieu of the financial statements required under Rule 3-05 of
Securities and Exchange Commission Regulation S-X.
Revenues in the accompanying statements of revenues and direct operating
expenses are recognized on the sales method. Under this method, revenues are
recognized based on actual volumes of oil and natural gas sold to purchasers.
Direct operating expenses are recognized on the accrual method.
Preparation of the accompanying statements of revenues and direct
operating expenses requires management to make estimates and assumptions that
affect the reported amounts of revenues and direct operating expenses during
the reporting period. Actual results could differ from those estimates.
INTERIM STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
The interim financial information for the periods ended June 30, 1997 and
1996, is unaudited. However, in the opinion of management, the interim
statements of revenues and direct operating expenses 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
statements of revenues and direct operating expenses should be read in
conjunction with the audited statement of revenues and direct operating
expenses for the year ended December 31, 1996.
(2) SUPPLEMENTARY FINANCIAL INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)
ESTIMATED QUANTITIES OF PROVED OIL AND GAS RESERVES
Reserve information presented below for the Ballard Acquisition, as of
January 1, 1996 and December 31,1996, is based on reserve estimates prepared
by the Company's engineers, using prices and costs in effect at that date.
Changes in reserve estimates were derived by adjusting such quantities and
values for actual production using historical prices and costs.
Proved reserves are estimated quantities of crude oil and natural gas
which geological and engineering data demonstrate with reasonable certainty
to be recoverable in future years from known reservoirs under existing
economic and operating conditions. Proved developed reserves are those which
are expected to be recovered through existing wells with existing equipment
and operating methods. Oil and gas reserve quantity estimates are subject to
numerous uncertainties inherent in the estimation of quantities of proved
reserves and in the projection of future rates of production and the timing
of development expenditures. The accuracy of such estimates is a function of
the quality of available data and of engineering and geological
interpretation and judgment. Results of subsequent drilling, testing and
production may cause either upward or downward revision of previous
estimates. Further, the volumes considered to be commercially recoverable
fluctuate with changes in prices and operating costs. The Company emphasizes
that reserve estimates are inherently imprecise and that estimates of new
discoveries are more imprecise than those of currently producing oil and gas
properties. Accordingly, these reserve estimates are expected to change as
additional information becomes available in the future.
5
Below are the net estimated quantities of proved reserves and proved
developed reserves for the Ballard Acquisition.
Oil Gas
(MBbls) (Mmcf)
------- ------
Proved reserves at January 1, 1996 4,746 10,529
Extensions and discoveries 18 2,457
Production (510) (651)
----- ------
Proved reserves at December 31, 1996 4,254 12,335
----- ------
----- ------
Proved developed reserves at December 31, 1996 4,138 9,878
----- ------
----- ------
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS OF PROVED OIL AND GAS
RESERVES
The Company has estimated the standardized measure of discounted future net
cash flows and changes therein relating to proved oil and gas reserves in
accordance with the standards established by the Financial Accounting Standards
Board through its Statement No. 69. The estimates of future cash flows and
future production and development costs are based on year-end sales prices for
oil and gas, estimated future production of proved reserves, and estimated
future production and development costs of proved reserves, based on current
costs and economic conditions. The estimated future net cash flows are then
discounted at a rate of 10%.
Discounted future net cash flow estimates like those shown below are not
intended to represent estimates of the fair market value of oil and gas
properties. Estimates of fair market value should also consider probable
reserves, anticipated future oil and gas prices, interest rates, changes in
development and production costs and risks associated with future production.
Because of these and other considerations, any estimate of fair market value is
necessarily subjective and imprecise.
The following are the Company's estimated standardized measure of
discounted future net cash flows from proved reserves attributable to the
Ballard Acquisition as of December 31, 1996 (in thousands):
Future:
Cash inflows $143,236
Production costs (46,312)
Development costs (871)
--------
Net cash flows before income taxes 96,053
10% annual discount for estimated timing of
cash flows (34,735)
--------
Standardized measure of discounted future net
cash flows before income taxes $ 61,318
--------
--------
The following are the sources of changes in the standardized measure of
discounted net cash flows for the year ended December 31, 1996 (in thousands):
Standardized measure, January 1, 1996 $32,538
Extensions and discoveries, net of development
costs 5,452
Sales, net of production costs (7,712)
Net change in prices 29,762
Accretion of discount 3,254
Other (1,976)
-------
Standardized measure, December 31, 1996 $61,318
-------
-------
6
ITEM 7(a) PRO FORMA FINANCIAL INFORMATION
PRO FORMA CONDENSED FINANCIAL STATEMENTS
The unaudited Pro Forma Condensed Statements of Operations of the Company
have been prepared to give effect to the Company's Corporate Reorganization on
October 8, 1996, the Common Stock Offering of 4,800,000 shares of its Common
Stock on October 8, 1996, the Notes Offering on October 8, 1996 in which the
Company issued $100 million aggregate principal amount of 10.25% Senior notes
due 2006, the issuance of an additional 475,000 shares of its Common Stock on
November 1, 1996 pursuant to the exercise of the over-allotment option by its
underwriters, the 1996 Acquisition and the Ballard Acquisition as if such
transactions had taken place on January 1, 1996. The Pro Forma Condensed
Statements of Operations of the Company are not necessarily indicative of the
results for the periods presented had the Ballard Acquisition and the 1996
Acquisition taken place on January 1, 1996. In addition, future results may
vary significantly from the results reflected in the accompanying Pro Forma
Condensed Statements of Operations because of normal production declines,
changes in product prices, and the success of future exploration and development
activities, among other factors. This information should be read in conjunction
with the Consolidated Financial Statements of Costilla Energy, Inc. and the
Statements of Revenues and Direct Operating Expenses with respect to the
properties acquired in the Ballard Acquisition.
7
COSTILLA ENERGY, INC.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS -- UNAUDITED
YEAR DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA
COSTILLA 1996 BALLARD PRO FORMA COSTILLA
ENERGY, INC. ACQUISITION ACQUISITION ADJUSTMENTS ENERGY, INC.
------------ ----------- ----------- ----------- ------------
Revenues $55,026 $9,223 $11,314 $75,563
Expenses:
Oil and gas production 21,774 5,167 3,602 (225)(1) 30,318
General and administrative 5,238 (129)(1) 7,220
431 (2)
1,680 (3)
Exploration and abandonments 2,550 247 300 (4) 3,097
Depreciation, depletion and
amortization 12,430 75 (1) 17,473
4,968 (5)
Interest 11,281 5,271 (6) 15,906
(646)(7)
------- ------ ------- -------
53,273 5,414 3,602 74,014
------- ------ ------- -------
Net income (loss) before
federal income taxes 1,753 3,809 7,712 1,549
Provision for federal income taxes
Current 176 176
Deferred 1,042 (676)(8) 366
------- ------ ------- -------
Net income (loss) $ 535 $3,809 $ 7,712 $ 1,007
------- ------ ------- -------
------- ------ ------- -------
Net income (loss) per share $ 0.08 $ 0.10
------- -------
------- -------
Weighted average shares outstanding 6,473 4,003 (9) 10,476
------- -------
------- -------
See accompanying notes to unaudited pro forma condensed financial statements.
8
COSTILLA ENERGY, INC.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS - UNAUDITED
NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
PRE OFFERING
COSTILLA BALLARD PRO FORMA COSTILLA
ENERGY, INC. ACQUISITION ADJUSTMENTS ENERGY, INC.
------------ ----------- ----------- ------------
Revenues $55,113 $5,688 $60,801
Expenses:
Oil and gas production 21,038 2,603 23,641
General and administrative 5,543 1,120 (1) 6,663
Exploration and abandonments 3,748 200 (2) 3,948
Depreciation, depletion and
amortization 15,758 2,030 (3) 17,788
Interest 8,856 1,635 (4) 10,491
------- ------ -------
54,943 2,603 62,532
------- ------ -------
Net income (loss) before federal
income taxes 170 3,085 (1,731)
Provision for federal income taxes
Current 62 62
Deferred 90 (758) (8) (668)
------- ------ -------
Net income (loss) $ 18 $3,085 $(1,125)
------- ------ -------
------- ------ -------
Net income (loss) per share $ - $ (0.11)
------- -------
------- -------
Weighted average shares outstanding 10,425 10,425
------- -------
------- -------
See accompanying notes to unaudited pro forma condensed financial statements.
9
COSTILLA ENERGY, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
NOTE 1. -- BASIS OF PRESENTATION
The Pro Forma Condensed Statements of Operations of the Company have been
prepared to give effect to the Company's Corporate Reorganization on October 8,
1996, the Common Stock Offering of 4,800,000 shares of its Common Stock on
October 8, 1996, the Notes Offering on October 8, 1996 in which the Company
issued $100 million aggregate principal amount of 10.25% Senior notes due 2006,
the issuance of an additional 475,000 shares of its Common Stock on November 1,
1996 pursuant to the exercise of the over-allotment option by its underwriters,
the 1996 Acquisition and the Ballard Acquisition as if such transactions had
taken place on January 1, 1996. The Ballard Acquisition and the 1996
Acquisition are accounted for by the purchase method.
Costilla Energy, Inc. -- Represents the historical consolidated statements
of operations for the year ended December 31, 1996 and the nine months
ended September 30, 1997.
1996 Acquisition -- Represents the revenues and direct operating expenses
of the properties acquired in the 1996 Acquisition for the period from
January 1, 1996 to June 14, 1996 (date of the 1996 Acquisition).
Ballard Acquisition -- Represents the revenues and direct operating expenses
of the properties acquired in the Ballard Acquisition for the period from
January 1, 1996 to August 28, 1997 (date of the Ballard Acquisition).
NOTE 2. -- PRO FORMA ENTRIES
(1) To record the acquisition of Valley Gathering Company and CSL
Management Corporation from certain members of Costilla Energy, LLC and to
record the related additional depreciation and amortization, and reduction in
oil and gas production and general and administrative expenses.
(2) Estimated incremental general and administrative expenses necessary to
administer the properties acquired in the 1996 Acquisition and increased public
reporting and administration costs including salary and benefits for one
executive level employee and revised compensation arrangements for the remaining
executives, directors' fees, insurance coverage and estimated costs to
administer shareholder communications.
(3) To record the incremental general and administrative expenses
incurred at a contractual rate of approximately $140,000 per month as a
result of the Ballard Acquisition.
(4) To record the incremental geological and geophysical expenses
incurred at a contractual rate of approximately $25,000 per month as a result
of the Ballard Acquisition.
(5) To record estimated incremental depletion expense for the properties
acquired in the 1996 Acquisition from January 1, 1996 through June 14, 1996
(date of the 1996 Acquisition) and for the properties acquired in the Ballard
Acquisition from January 1, 1996 through August 28, 1997 (date of the Ballard
Acquisition).
(6) To adjust interest expense to reflect additional borrowings for the
properties acquired in the 1996 Acquisition from January 1, 1996 to June 14,
1996 (date of the 1996 Acquisition) and for the properties acquired in the
Ballard Acquisition from January 1, 1996 to August 28, 1997 (date of the Ballard
Acquisition). Also included is the amortization of loan fees of $478,000 over a
four-year period.
Incremental interest expense includes the following components:
10
Year Ended Nine Months Ended
December 31, 1996 September 30, 1997
----------------- ------------------
Additional interest on borrowings for the 1996
Acquisition through June 14, 1996 $ 2,400 $ -
Additional interest on borrowings associated with
the Ballard Acquisition 2,851 1,555
Amortization of loan fees 120 80
----------- -----------
$ 5,271 $ 1,635
----------- -----------
----------- -----------
(7) To reverse interest on the Existing Debt and to adjust interest
expense to reflect issuance of the Notes at 10.25% plus the amortization of
estimated debt issuance costs over 10 years ($385,000 annually).
(8) Assumes the Company had been a Subchapter C Corporation for federal
income tax purposes effective January 1, 1996.
(9) To reflect the issuance of 5,275,000 shares of Common Stock at an
estimated price of $12.50 per share for estimated proceeds of $60,800,000,
net of estimated expenses of the Common Stock Offering.
NOTE 3. -- SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION
The estimates of proved oil and gas reserves, which are located in the
United States, were prepared by the Company as of January 1, 1996 and
December 31, 1996. Reserves were estimated in accordance with guidelines
established by the Securities and Exchange Commission and FASB which require
that reserve estimates be prepared under existing economic and operating
conditions with no provision for price and cost escalations, except by
contractual arrangements. The Company has presented the pro forma reserve
estimates utilizing an oil price of $23.88 per Bbl and a gas price of $3.94
per Mcf as of December 31, 1996. The pro forma information assumes that both
the 1996 Acquisition and the Ballard Acquisition took place on January 1, 1996.
OIL AND GAS PRODUCING ACTIVITIES
Oil and gas reserve quantity estimates are subject to numerous uncertainties
inherent in the estimation of quantities of proved reserves and in the
projection of future rates of production and the timing of development
expenditures. The accuracy of such estimates is a function of the quality of
available data and of engineering and geological interpretation and judgment.
Results of subsequent drilling, testing and production may cause either upward
or downward revision of previous estimates. Further, the volumes considered to
be commercially recoverable fluctuate with changes in prices and operating
costs. The Company emphasizes that reserve estimates are inherently imprecise
and that estimates of new discoveries are more imprecise that those of currently
producing oil and gas properties. Accordingly, these estimates are expected to
change as additional information becomes available in the future.
11
OIL AND NATURAL
CONDENSATE (MBbls) GAS (MMcf)
------------------ ----------
Total Proved Reserves:
Balance January 1, 1996 20,686 123,173
Revisions of previous estimates 1,789 5,321
Extensions and discoveries 1,187 16,038
Production (2,540) (11,673)
Purchases of minerals-in-place 251 230
Sales of minerals-in-place (119) (482)
-------- --------
Balance, December 31, 1996 21,254 132,607
-------- --------
-------- --------
Proved Developed Reserves:
December 31, 1996 18,156 99,901
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL
AND GAS RESERVES
The standardized measure of discounted future net cash flows is computed by
applying period-end prices of oil and gas (with consideration of price changes
only to the extent provided by contractual arrangements) to the estimated future
production of proved oil and gas reserves less estimated future expenditures
(based on period-end costs) to be incurred in developing and producing the
proved reserves, less estimated future income tax expenses (based on period-end
statutory tax rates, with consideration of future tax rates already legislated)
to be incurred on pretax net cash flows less tax basis of properties and
available credits, and assuming continuation of existing economic conditions.
The estimated future net cash flows are then discounted using a rate of 10% per
year to reflect the estimated timing of the future cash flows.
Discounted future cash flow estimates like those shown below are not
intended to represent estimates of the fair value of oil and gas properties.
Estimates of fair value should also consider probable reserves, anticipated
future oil and gas prices, interest rates, changes in development and
production costs and risks associated with future production. Because of
these and other considerations, estimates of fair value are necessarily
subjective and imprecise.
YEAR ENDED
DECEMBER 31, 1996
-----------------
(THOUSANDS)
Future cash flows $ 1,030,336
Future costs:
Production (369,601)
Development (26,340)
------------
Future net cash flows before income taxes 634,395
Future income taxes (178,454)
------------
Future net cash flows 455,941
------------
10% annual discount for estimated timing of
cash flows (187,778)
------------
Standardized measure of discounted net cash
flows $ 268,163
------------
------------
- --------------------
(a) Present value of estimated future net cash flows, before income taxes
would be approximately $373 million as of December 31, 1996.
12
CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS FROM PROVED
RESERVES
YEAR ENDED
DECEMBER 31, 1996
-----------------
(THOUSANDS)
Increase (decrease):
Purchase of minerals-in-place $ 2,219
Extensions and discoveries and improved
recovery, net of future production and
development costs 37,802
Accretion of discount 20,421
Net change in sales prices net of production
costs 157,162
Changes in estimated future
development costs 2,674
Revisions of quantity estimates 23,878
Net change in income taxes (47,371)
Sales, net of production costs (43,913)
Sales of minerals in place (1,330)
Changes of production rates (timing) and
other (30,011)
-----------
Net increase 121,531
Standardized measure of discounted future
net cash flows:
Beginning of period 146,631
-----------
End of period $ 268,162
-----------
-----------
13
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 12, 1997 By: /s/ BOBBY W. PAGE
------------------------------
Bobby W. Page
Senior Vice President
and Chief Financial Officer
14