Item 1. Business.
Coastal 1986 Drilling Program, Ltd. ("Partnership") was a limited partnership organized under the laws of the State of Texas on October 18, 1985. Its General Partner is Coastal Limited Ventures, Inc. ("CLV"), a Texas corporation and a wholly-owned subsidiary of The Coastal Corporation ("Coastal"). The Partnership commenced operations on October 8, 1986.
The operations of the Partnership consisted of operating, through a joint venture ("Joint Venture") described below, gas and oil wells located in several regions of the United States, which resulted from the Partnership's exploration and development drilling program ("Program") completed in 1987.
The Partnership and CLV have no employees. None of the officers of CLV devotes full time to the activities of the Partnership.
Under the terms of the Agreement of Limited Partnership dated as of September 1, 1986 (the "Partnership Agreement") and the Joint Venture Agreement dated as of October 8, 1986 (the "Joint Venture Agreement"), both the Partnership and the Joint Venture terminated on January 1, 1996. In accordance with the terms and conditions of the Joint Venture Agreement, upon dissolution, each gas and oil property will be sold or transferred to the Other Joint Venturer which assigned the property to the Joint Venture at a value determined by independent appraisal. After all Joint Venture assets have been liquidated and all Joint Venture obligations have been paid, the remaining cash in the Joint Venture will be distributed among the Joint Venturers. As among the Partners in the Partnership, the liquidating distribution will be distributed 99% to the Limited Partners and 1% to the General Partner. Final dissolution proceeds will be distributed to the Limited Partners in May 1996. During the dissolution phase of the Partnership, the General Partner shall act as liquidator and may be paid a reasonable fee for acting as such. The amounts determined by the independent appraisal which will be realized from the disposition of the remaining assets may differ materially from the amounts in the accompanying financial statements.
Joint Venture
The Joint Venture which conducted the operations of the Partnership was a Texas general partnership between the Partnership and three wholly-owned subsidiaries of Coastal. The Partnership was the managing partner of the Joint Venture. Coastal Oil & Gas Corporation, ANR Production Company and CIG Exploration, Inc. were the Other Joint Venturers, each of which is a direct or indirect, wholly-owned subsidiary of Coastal engaged primarily in gas and oil exploration and production activities.
The Other Joint Venturers contributed leasehold acreage having an agreed value of $6,300,000 to the Joint Venture to provide the drilling blocks ("Drilling Blocks") upon which the exploratory and development wells were drilled. The Partnership contributed $12,121,000 to the Joint Venture, including $12,000,000 from the public offering of 12,000 units of limited partnership interests ("Units"), which was expended for drilling, completing and equipping Program wells.
Crude oil and other liquid hydrocarbon production from Joint Venture wells was generally subject to a preferential right and option of the Other Joint Venturer to purchase such production at the higher of its posted field price or the average of the highest three prices being paid for similar production in the field. Production not sold to one of the Other Joint Venturers was sold at negotiated prices.
Most of the natural gas from Joint Venture wells was committed under contracts with pipeline companies. Contract prices for natural gas are subject to limitations under the Natural Gas Policy Act of 1978. Gas production not committed was sold at negotiated prices.
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During 1995, natural gas and crude oil, condensate and natural gas liquids sales to Coastal subsidiaries and crude oil sales to Texaco Trading & Transportation and Koch Oil Company accounted for 57%, 21% and 12% of the Joint Venture's oil and gas sales.
Participation in Costs and Revenues
Information as to participation by the Partnership and Joint Venture in costs and revenues is set forth in Note 2 of Notes to Financial Statements included herein.
Pursuant to the Partnership Agreement, CLV received administrative fee payments from the Partnership in lieu of allocating its administrative expenses as discussed in Note 4 of Notes to Financial Statements included herein.
Partnership Payout was achieved in October 1992. After payout, the Partnership's share of Joint Venture revenues and expenses was reduced to 40% from 90% and the Other Joint Venturers' share was increased to 60% from 10%.
Production Operations
The following table presents production and sales price information for 1995, 1994 and 1993.
For a discussion of "Operations," see "Management's Review," presented on pages and, included herein.
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Item 2.
Item 2. Properties.
The following table sets forth information with respect to the producing gas and oil properties in which the Partnership had an interest as of December 31, 1995.
State/Field/County Oil Gas ------------------ --- --- California Grimes, Colusa County - 1 Montana Crane, Richland County 1 - Oklahoma East Lookeba, Caddo County 2 - Southwest Hinton, Caddo County 1 - Texas Caramel, Terry County 1 - West Jeffress, Hidalgo County - 1 Utah Bitter Creek, Uintah County - 11 Wyoming South Powell, Converse County 1 - --- ---
Total 6 13 === ===
For information on proved reserves of the Partnership, see "Supplemental Information on Exploration, Development and Production Activities," pages -, included herein.
Item 3.
Item 3. Legal Proceedings.
None.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
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PART II
Item 5.
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.
The registrant had no common stock. Its ownership was represented by Units. There were 428 holders of Units as of December 31, 1995. There was no market for the Units as transfer of Units was restricted. Under the Partnership Agreement, Units were transferable only in the event of death, by operation of law, or by a natural person by gift to family members, i.e., parents, spouses, children and grandchildren or to a trust for the benefit of such family members. The General Partner was required to offer, by May 1st of each year, commencing in 1988 and ending in 1995, to repurchase Units as discussed in Note 5 of Notes to Financial Statements included herein.
Cash distributions to Limited Partners, which are paid quarterly, totaled $8.45 per $1,000 Unit for 1995, $30.95 for 1994 and $22.30 for 1993.
Item 6.
Item 6. Selected Financial Data.
The following selected financial data (in thousands of dollars except per Unit amounts) is derived from the Financial Statements included herein and Item 6 of the Partnership's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. The Notes to Financial Statements included herein contain other information relating to this data.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Management's Discussion and Analysis of Financial Condition and Results of Operations is presented on pages and herein.
Item 8.
Item 8. Financial Statements and Supplementary Data.
The Financial Statements and Supplementary Data required hereunder are included in this Annual Report as set forth in Item 14(a) herein.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
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PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant.
The Partnership does not have any directors or executive officers. Its General Partner is CLV. The following presents information with respect to the directors and executive officers of CLV as of March 13, 1996:
Name (Age), Year First Elected Director and/or Officer of CLV Positions and Offices with CLV
David A. Arledge (51), 1981 Chairman of the Board and Chief Executive Officer Jerry D. Bullock (66), 1992 President and Director Carl A. Corrallo (52), 1993 Senior Vice President and Director Rodney D. Erskine (51), 1994 Senior Vice President Coby C. Hesse (48), 1986 Senior Vice President Harvey R. Klingensmith (43), 1993 Senior Vice President and Director Austin M. O'Toole (60), 1980 Senior Vice President, Secretary and Director Charles R. Carpenter (47), 1990 Vice President Fred H. Hallman (55), 1980 Vice President and Controller Wilson Humphrey (60), 1983 Vice President Gregory W. Hutson (44), 1989 Vice President Ronald D. Matthews (48), 1994 Vice President and Treasurer B. P. McCarley (60), 1980 Vice President John C. McKay (47), 1996 Vice President Betty J. Nelson (64), 1988 Vice President Dale V. Shultz (61), 1981 Vice President
The above named persons bear no family relationship to each other. Their respective terms of office expire coincident with CLV's Annual Meeting of the sole stockholder and Annual Meeting of the Board of Directors to be held in May 1996. Each of the officers named above have been officers of CLV and/or Coastal for five years or more with the following exceptions:
Mr. Bullock was elected Senior Vice President, exploration and production, of Coastal in August 1992. From 1987 to 1990, he was an Executive Vice President of British Petroleum's BP Exploration Company and a director and a member of the management committee of BP Exploration USA. From 1990 to 1992, he was an independent petroleum consultant for several major exploration companies.
Mr. Corrallo was elected Senior Vice President and General Counsel of Coastal in March 1993. He has served as a Senior Vice President of Coastal States Management Corporation, a subsidiary of Coastal, since August 1991 and prior thereto as Vice President since December 1986.
Mr. Erskine was elected Senior Vice President, Production, of Coastal Oil & Gas Corporation in February 1994. Prior to joining Coastal Oil & Gas, he had been president and chief executive officer of Nerco Oil & Gas Inc., a subsidiary of Kennecott, since 1991. From 1975 to 1991, he held a series of engineering and executive positions with Union Texas Petroleum.
Mr. Klingensmith was elected Senior Vice President of Coastal Oil & Gas Corporation in October 1993. Prior to joining Coastal Oil & Gas, he was Vice President - Exploration at Maxus Energy since 1989. From 1977 to 1989, he held a series of engineering and executive positions with Maxus.
Mr. Matthews was elected Vice President and Treasurer in September 1994. He has held various positions in financial management with Coastal and its affiliates since 1981, and was elected Treasurer of Coastal in September 1994.
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Mr. McKay was elected Vice President, Operations Administration, of ANR Production Company, CIG Exploration, Inc., CoastalDril, Inc. and Coastal Oil & Gas Corporation in February 1996. He has served as Assistant Controller of CLV since 1986.
Item 11.
Item 11. Executive Compensation.
The Registrant has no executive officers or directors. It is managed by CLV which receives an annual administrative fee pursuant to the Partnership Agreement as discussed in Note 4 of Notes to Financial Statements included herein.
CLV is an indirect, wholly-owned subsidiary of Coastal. Information concerning the cash compensation and certain other compensation of the directors and officers of Coastal is contained in this section.
Summary of Cash and Certain Other Compensation
The following table sets forth information for the fiscal years ended December 31, 1995, 1994 and 1993 as to cash compensation paid by Coastal and its subsidiaries, as well as certain other compensation paid or accrued for those years, to Coastal's Chief Executive Officer ("CEO") and its four other most highly compensated executive officers (the "Named Executive Officers").
Coastal is negotiating an employment contract with James L. Van Lanen, Senior Vice President of Coastal responsible for coal operations, at his current annual rate of salary which will become effective upon the completion of the previously announced prospective sale of Coastal's coal subsidiaries, and which will extend through January 26, 2000. In addition, Coastal anticipates an agreement with Mr. Van Lanen under which he will receive a bonus based on the proceeds of the sale of such subsidiaries.
Stock Options
The following table sets forth information with respect to stock options granted on March 1, 1995 for the fiscal year ended December 31, 1995 to the Named Executive Officers.
Option/SAR Exercises and Holdings
The following table sets forth information with respect to the Named Executive Officers, concerning the exercise of options during the last fiscal year and unexercised options and SARs held as of the fiscal year ("FY") ended December 31, 1995.
COMPENSATION AND EXECUTIVE DEVELOPMENT COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The following report has been provided by The Coastal Corporation's Compensation and Executive Development Committee (the "Committee") of the Board of Directors in accordance with current S.E.C. proxy statement disclosure
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requirements. The members of the Committee include John M. Bissell (Chairman), Roy D. Chapin, Jr., and Jerome S. Katzin.
This material states Coastal's current overall compensation philosophy and program objectives. Detailed descriptions of Coastal's compensation programs are provided as well as the information on Coastal's 1995 pay levels for the CEO.
Overall Objectives of the Executive Compensation Program
Coastal's compensation philosophy and program objectives are directed by two primary guiding principles. First, the program is intended to provide fully competitive levels of compensation - at expected levels of performance - in order to attract, motivate and retain talented executives. Second, the program is intended to create an alignment of interests between Coastal's executives and stockholders such that a significant portion of each executive's compensation is directly linked to maximizing stockholder value.
In support of this philosophy, the executive compensation program is designed to reward performance that is directly relevant to Coastal's short-term and long-term success. As such, Coastal attempts to provide both short-term and long-term incentive pay that varies based on corporate and individual performance.
To accomplish these objectives, the Committee has structured the executive compensation program with three primary underlying components: base salary, annual incentives, and long-term incentives (i.e., stock options). The following sections describe Coastal's plans by element of compensation and discuss how each component relates to Coastal's overall compensation philosophy.
In reviewing this information, reference is often made to the use of competitive market data as criteria for establishing targeted compensation levels. Coastal targets the market 50th percentile for its total compensation program and actual total compensation rates in 1995 were at or below the targeted level. (However, Coastal's competitive pay posture varies by pay element, as described below.) Several market data sources are used by Coastal, including energy industry norms for the publicly traded peer companies included in Coastal's shareholder return performance graph, as reflected in these companies' proxy statements. In addition, we utilize published survey data and data obtained from independent consultants that are for general industry companies similar in size (i.e., revenues) to Coastal. The published surveys include data on over 50 companies of comparable size to Coastal, as measured by revenues. Greater emphasis is placed on the published data and data obtained from consultants than on the data for proxy peers, since the published data and consulting data are reflective of company size.
Base Salary Program
Coastal's base salary program is based on a philosophy of providing base pay levels that fall between the market 50th and 75th percentiles. Coastal periodically reviews its executive pay levels to assure consistency with the external market. Generally, Coastal's actual base salary levels for 1995 for executives as a group were consistent with the targeted percentiles. We believe it is crucial to provide strongly competitive salaries over time in order to attract and retain executives who are highly talented.
Annual salary adjustments for Coastal are based on several factors: general levels of market salary increases, individual performance, competitive base salary levels, and Coastal's overall financial results. Coastal reviews performance qualitatively considering total shareholder returns, the level of earnings, return on equity, return on total capital and individual business unit performance. These criteria are assessed qualitatively and are not weighted. All base salary increases are based on a philosophy of pay-for-performance and perceptions of an individual's long-term value to Coastal. As a result, employees with higher levels of performance sustained over time will be paid correspondingly higher salaries.
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The Annual Bonus Plan
Coastal's Annual Bonus Plan is intended to (1) reward key employees based on company/business unit and individual performance; (2) motivate key employees; and (3) provide competitive cash compensation opportunities to plan participants. Under the plan, target award opportunities vary by individual position and are expressed as a percent of base salary. The individual target award opportunities, which are slightly below market median levels, are then aggregated into a total target pool which is adjusted as described below. The amount a particular executive may earn is directly dependent on the individual's position, responsibility, and ability to impact our financial success.
The actual bonus pool is established each year by modifying the target pool based on Coastal's overall performance against measures established by the Committee. In fiscal year 1995, the key performance measure considered was earnings before interest and taxes ("EBIT") against plan. This measure was weighted 50% of the total bonus program. In 1995 Coastal's EBIT performance was above threshold standards (minimum performance level for bonus payment) but below a very aggressive plan, resulting in the EBIT portion of the bonus paid being below target. The remaining 50% of the annual bonus opportunity in 1995 is a discretionary annual bonus pool. As a result, no formula performance measures were used in establishing the size of awards under this portion of the plan. However, in establishing the size of the discretionary bonus pool, the Committee considered Coastal's Return on Equity relative to industry peers (using the same peers included in the shareholder return graph), Return on Total Capital compared to industry peers, the EBIT performance of each business unit, progress made toward improving Coastal's operational and financial performance, and the need to reward unique individual contributions. These measures were not formally weighted by the Committee. The size of the discretionary bonus pool element was established above threshold but below target based on the qualitative performance assessment described above. As a result, actual bonus payments for 1995 were below target and median market levels.
Individual awards from the established bonus pool are recommended by senior management, with advice and consent from the Committee. Individual awards from the pool are based on business unit and individual employee performance, future potential, and competitive considerations. All individual performance assessments are conducted in a non-formula fashion without specific goal weightings. The total bonus awards made may not exceed the amount of funds in the bonus pool.
Long-Term Incentive Plan
Coastal's Long-Term Incentive Plan ("LTIP") is designed to focus executive efforts on the long-term goals of Coastal and to maximize total return to our shareholders. While Coastal's LTIP allows the Committee to use a variety of long-term incentive devices, the Committee has relied solely on stock option awards to provide long-term incentive opportunities in recent years.
Stock options align the interests of employees and shareholders by providing value to the executive through stock price appreciation only. All stock options have a ten-year term before expiration and are fully exercisable within 7 years of the grant date.
Stock options were granted to the Named Executive Officers in 1995 and it is anticipated that stock option awards will be made periodically at the discretion of the Committee in the future. As in past years, the number of shares actually granted to a particular participant is also based on Coastal's financial success, its future business plans, and the individual's position and level of responsibility within Coastal. All of these factors are assessed subjectively and are not weighted.
1995 Chief Executive Officer Pay
As previously described, the Committee considers several factors in developing an executive's compensation package. For the CEO, these include competitive market practices (consistent with the philosophy described for other executives), experience, achievement of strategic goals, and the financial success of Coastal (considering the factors described under the annual bonus plan above).
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O. S. Wyatt, Jr.
Mr. Wyatt served as CEO through October 4, 1995 when, at his recommendation, the Board of Directors elected Mr. Arledge to the CEO position.
Mr. Wyatt received no salary increase in 1995. The Committee took no action regarding Mr. Wyatt's base salary, in spite of significantly improved Coastal performance during the year. This lack of any adjustment is not a reflection of performance; rather, it is based on considering strong input from the Chairman, who wants to see continued improvement in shareholder returns before receiving any base salary increase.
Mr. Wyatt's bonus for 1995 performance was $300,000 payable in 1996. This bonus award was below targeted levels (and below market median levels) since Coastal's aggregate performance on the measures described in the annual bonus section of this report was below the aggressive Coastal targets.
The Committee granted no stock options to Mr. Wyatt in 1995 (consistent with past practices), considering his strongly expressed and longstanding opinion on this issue. Mr. Wyatt and the Committee considered Mr. Wyatt's current level of stock ownership in reaching this decision.
David A. Arledge
Mr. Arledge was elected CEO on October 5, 1995. During 1995, his base annual salary was increased to $625,000.
Mr. Arledge's bonus for 1995 was $300,000 payable in 1996. This award was below targeted levels (and below market median levels) since Coastal's aggregate performance on the measures described in the annual bonus section of this report were below the aggressive Coastal targets.
The Committee granted stock options for 50,000 shares to Mr. Arledge in 1995 in recognition of his performance and as an incentive to continue his efforts to increase shareholder value. These awards are tied to performance in that the executive only realizes income from stock options if the stock price rises. The grant is below market levels for the executive positions held by him.
$1 Million Pay Deductibility Cap
Under Section 162(m) of the Internal Revenue Code, public companies are precluded from receiving a tax deduction on compensation paid to executive officers in excess of $1 million. To address the $1 million pay deductibility cap issue, Coastal's 1995 LTIP is structured so that stock option awards (which are intended to be the primary long-term incentive vehicle for the present time) qualify for an exemption from the $1 million pay deductibility limit.
Also, at the present time, the Chairman of the Board of Directors and the CEO are the only executives whose base salary plus target bonus exceeds $1 million. In order to preserve Coastal's tax deduction for base salary plus bonus for these individuals, Coastal has established a nonqualified deferred compensation program. Under this program, any annual incentive awards that bring cash compensation to a level over $1 million may be deferred so that payments occur after the individual is no longer a Named Executive Officer, thus preserving the deductibility of the pay for Coastal.
Compensation and Executive Development Committee
John M. Bissell, Chairman Roy D. Chapin, Jr. Jerome S. Katzin
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Pension Plan
The following table shows for illustration purposes the estimated annual benefits payable currently under the Pension Plan and Coastal's Replacement Pension Plan described below upon retirement at age 65 based on the compensation and years of credited service indicated.
The Employee Retirement Income Security Act of 1974, as amended by subsequent legislation, limits the retirement benefits payable under the tax-qualified Pension Plan. Where this occurs, Coastal will provide to certain executives, including persons named in the Summary Compensation Table, additional nonqualified retirement benefits under a Coastal Replacement Pension Plan. These benefits, plus payments under the Pension Plan, will not exceed the maximum amount which Coastal would have been required to provide under the Pension Plan before application of the legislative limitations, and are reflected in the above table and footnote (B).
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PERFORMANCE GRAPH - SHAREHOLDER RETURN ON COMMON STOCK
[GRAPH]
Transaction with Management and Others
In 1987, Coastal Mart, Inc. ("Coastal Mart"), a subsidiary of Coastal, entered into a ten-year lease/purchase agreement with Pester Marketing Company ("Pester Marketing") for 220 gasoline service stations (subsequently reduced to 182 stations through disposition of assets) located in the midwestern region of the United States. Jack Pester, a principal stockholder and Chief Executive Officer of Pester Marketing, subsequently became an employee, officer and director of Coastal Mart and was elected a Senior Vice President of Coastal. Mr. Pester is no longer active in the management of Pester Marketing, and his stock interest in that company has been placed in trust. In 1994, the lease transaction was terminated pursuant to an agreement under which Coastal Mart acquired ownership of and title to 175 of the gasoline service stations and Pester Marketing retained the seven remaining stations.
During 1995 Coastal and/or its subsidiaries sold approximately 13,447,600 gallons of gasoline to Pester Marketing at prevailing market prices totaling approximately $8,352,300.
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Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
(a) Security Ownership of Certain Beneficial Owners.
Holders of Units are entitled to vote only as to certain specific matters. The following table sets forth information, as of December 31, 1995, with respect to CLV and to each person known or believed by CLV to be the beneficial owner of five percent or more of the Units, the only class of securities of the Registrant outstanding.
(b) Security Ownership of Management.
CLV is an indirect, wholly-owned subsidiary of Coastal. Information concerning the security ownership of certain beneficial owners and management of Coastal is contained in this section.
The total number of shares of stock of Coastal outstanding as of March 13, 1996 is 113,480,598: consisting of 61,056 shares of $1.19 Cumulative Convertible Preferred Stock, Series A (the "Series A Preferred Stock"); 77,495 shares of $1.83 Cumulative Convertible Preferred Stock, Series B (the "Series B Preferred Stock"; 32,663 shares of $5.00 Cumulative Convertible Preferred Stock, Series C (the "Series C Preferred Stock"); 8,000,000 non-voting shares of $2.125 Cumulative Preferred Stock, Series H; 104,918,785 shares of Common Stock, and 390,599 shares of Class A Common Stock.
Each voting share of Common Stock or Preferred Stock entitles the holder to one vote with respect to all matters to come before a shareholders' meeting while each share of Class A Common Stock entitles the holder to 100 votes. However, 25% of Coastal's directors standing for election at each annual meeting will be determined solely by holders of the Common Stock and voting Preferred Stock voting as a class.
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The following table sets forth information, as of March 13, 1996, with respect to each person known or believed by Coastal to be the beneficial owner, who has or shares voting and/or investment power (other than as set forth below), of more than five percent (5%) of any class of its voting securities.
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The following table sets forth information, as of March 13, 1996, regarding each of the current directors, including Class I directors standing for election, and all directors and executive officers as a group. Each director has furnished the information with respect to age, principal occupation and ownership of shares of stock of Coastal Messrs. Bissell, Burrow, Chapin and Katzin are Class I directors whose terms expire in 1996; Messrs. Arledge, Brundrett, Wooddy and Wyatt are Class II directors whose terms expire in 1997 and Messrs. Cordes, Gates, Johnson and McDade are Class III directors whose terms expire in 1998.
No incumbent director is related by blood, marriage or adoption to another director or to any executive officer of Coastal or its subsidiaries or affiliates.
Except as hereafter indicated, the above table includes the principal occupation of each of the directors during the past five years. The listed executive officers have held various executive positions with Coastal, American Natural Resources Company, ANR Pipeline Company and/or Colorado Interstate Gas Company during the five-year period.
Mr. Bissell is a member of the Boards of Directors of Old Kent Financial Corporation and Batts Inc.
Mr. Cordes is a member of the Board of Directors of Comerica Inc.
Mr. Katzin is a member of the Board of Directors of Qualcomm Incorporated.
Mr. McDade is a trial lawyer and the founding senior partner of the Houston law firm of McDade & Fogler L.L.P. Prior to forming McDade & Fogler L.L.P., he was a senior partner in the Houston law firm of Fulbright & Jaworski. He is a member of the Board of Directors of Equity Corporation International.
Messrs. Arledge, Burrow, Cordes and Wyatt are directors of Colorado Interstate Gas Company and ANR Pipeline Company. Messrs. Bissell and Chapin are directors of ANR Pipeline Company. Both of these subsidiaries of Coastal are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
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The following table sets forth information, as of December 31, 1995, concerning ownership of units of limited partnership interests in the Coastal 1986 Drilling Program, Ltd. and Coastal 1987 Drilling Program, Ltd., by directors and all directors and executive officers as a group.
(c) Changes in Control.
Coastal knows of no arrangement which may, at a subsequent date, result in a change in control of Coastal or CLV.
Item 13.
Item 13. Certain Relationships and Related Transactions.
The General Partner and the Other Joint Venturers are Coastal subsidiaries, as discussed in Item 1 herein, and the directors of CLV are officers and/or directors of one or more Coastal subsidiaries, or of Coastal, as indicated in Item 10 herein. CLV receives payments from the Partnership of administrative fees and the Partnership has account balances with the Other Joint Venturers, as described in Note 4 of Notes to Financial Statements included herein. Certain production, in which the Partnership has an interest, is being sold to Coastal subsidiaries, as discussed in Item 1 herein. During 1995, sales of natural gas amounting to $196,000 and sales of crude oil, condensate and natural gas liquids amounting to $69,000 were made to Coastal subsidiaries at market value.
Additional information called for by this item is set forth under Item 11, "Executive Compensation," and Note 4 of Notes to Financial Statements included herein.
(b) Certain business relationships.
None.
(c) Indebetedness of management.
None.
(d) Transactions with promoters.
Not applicable.
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PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) The following documents are filed as part of this report or incorporated herein by reference.
1. Financial Statements of Registrant and supplemental information included in response to Item 8 herein.
Page
Independent Auditors' Report ..................................
Balance Sheet - December 31, 1995 and 1994 ....................
Statement of Partners' Capital for the years ended December 31, 1995, 1994 and 1993 .......................................
Statement of Operations for the years ended December 31, 1995, 1994 and 1993 .............................................
Statement of Cash Flows for the years ended December 31, 1995, 1994 and 1993 .............................................
Notes to Financial Statements .................................
Supplemental Information on Exploration, Development and Production Activities (unaudited) .........................
2. Financial statement schedules.
Schedules are omitted as not applicable or not required, or the required information is shown in the Financial Statements or Notes thereto.
3. Exhibits.
3.1+ Agreement of Limited Partnership.
3.2+ Certificate of Limited Partnership.
10.1+ Joint Venture Agreement among Coastal 1986 Drilling Program, Ltd., Coastal Oil & Gas Corporation, ANR Production Company and CIG Exploration, Inc.
24* Powers of Attorney (included on signature page herein).
27* Financial Data Schedule
+Incorporated by reference from Registration Statement No. 33-1658. *Indicates filed herewith.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the last quarter of 1995.
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POWERS OF ATTORNEY
Each person whose signature appears below hereby appoints David A. Arledge, Coby C. Hesse and Austin M. O'Toole and each of them, any one of whom may act without the joinder of the others, as his attorney-in-fact to sign on his behalf and in the capacity stated below and to file all amendments to this Annual Report on Form 10-K, which amendment or amendments may make such changes and additions thereto as such attorney-in-fact may deem necessary or appropriate.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
COASTAL 1986 DRILLING PROGRAM, LTD. (Registrant)
By Its General Partner, Coastal Limited Ventures, Inc.
By: JERRY D. BULLOCK -------------------------------- Jerry D. Bullock President March 28, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
By: DAVID A. ARLEDGE -------------------------------- David A. Arledge Principal Financial Officer and Director March 28, 1996
By: JERRY D. BULLOCK -------------------------------- Jerry D. Bullock Director March 28, 1996
By: CARL A. CORRALLO -------------------------------- Carl A. Corrallo Director March 28, 1996
By: HARVEY R. KLINGENSMITH -------------------------------- Harvey R. Klingensmith Director March 28, 1996
By: AUSTIN M. O'TOOLE -------------------------------- Austin M. O'Toole Director March 28, 1996
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MANAGEMENT'S REVIEW
Management's Discussion and Analysis of Financial Condition and Results of Operations
LIQUIDITY AND CAPITAL RESOURCES
Effective January 1, 1996, the Partnership terminated in accordance with the provisions for dissolution set forth in the Partnership Agreement as summarized in Note 1 of Notes to Financial Statements. Final dissolution proceeds will be distributed in May 1996.
RESULTS OF OPERATIONS
Annual changes shown in this discussion are in comparison with the year immediately preceding.
Production
Natural gas production decreased 139 million cubic feet (43%) in 1995 and increased 170 million cubic feet (111%) in 1994. The decrease in 1995 was primarily attributable to decreased production from the Bitter Creek Field in Utah due to market conditions in the area. The 1994 increase was primarily due to an increase from the Bitter Creek Field in Utah due to improved marketing alternatives in the area and to prior maintenance activities in the field.
Production of crude oil, condensate and natural gas liquids decreased 1,353 barrels (9%) in 1995 and 2,237 barrels (12%) in 1994. The reductions in 1995 and 1994 were primarily due to normal production declines.
Revenues
Revenues from the sale of production decreased $350,000 (43%) in 1995 and increased $202,000 (33%) in 1994.
Natural gas revenues decreased $347,000 (59%) in 1995 and increased $280,000 (92%) in 1994. The reduction in 1995 was attributable to a decrease in production volumes and a lower net weighted average price. The 1994 increase was due to increased production volumes, partially offset by a lower net weighted average price.
Crude oil, condensate and natural gas liquids revenues decreased $3,000 (1%) in 1995 and $78,000 (25%) in 1994. The 1995 decrease was due to a decrease in production volumes, partially offset by a higher net weighted average price. The decrease in 1994 was due to a decrease in production volumes and a lower net weighted average price.
Interest income decreased $8,000 (100%) in 1995 and $1,000 (11%) in 1994 due primarily to varying levels of cash available for investment purposes.
Operating Expenses
Lease operating expenses decreased $88,000 (26%) in 1995 and increased $94,000 (38%) in 1994. The decrease in 1995 was primarily attributable to decreased production taxes. The increase in 1994 was primarily due to increased production taxes and maintenance expenses.
Depreciation and Amortization
Depreciation and amortization decreased $191,000 (37%) in 1995 and $198,000 (27%) in 1994. The decrease in 1995 was primarily due to decreased equivalent production volumes, a decreased rate and reduced carrying value charges. The 1994 decrease was primarily a result of decreased carrying value charges and a decreased rate, partially offset by increased production volumes. Non-cash charges of $165,000, $231,000 and $489,000 in 1995, 1994 and 1993, respectively, were recorded so that the net investment in gas and oil properties would not exceed the estimated
future net revenues from proved reserves, computed at prices at the end of the reported period, and discounted at 10% as required under the full-cost method of accounting for gas and oil properties.
Cash Distributions
Cash distributions to Limited Partners since commencement of operations were (December distribution is made in the subsequent February):
The 1991 fourth quarter distribution includes proceeds attributable to the sale of Program wells in the Roaring Fork Field in Virginia and Kentucky.
INDEPENDENT AUDITORS' REPORT
To the Partners of Coastal 1986 Drilling Program, Ltd. Houston, Texas
We have audited the accompanying balance sheets of Coastal 1986 Drilling Program, Ltd. (a Texas limited partnership) as of December 31, 1995 and 1994, and the related statements of partners' capital, operations and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are 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 financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial position of Coastal 1986 Drilling Program, Ltd. as of December 31, 1995 and 1994, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the Financial Statements, both the Partnership and the Joint Venture terminated on January 1, 1996, under the terms of the Partnership Agreement and the Joint Venture Agreement. The amounts determined by the independent engineer which will be realized from the disposition of the remaining assets may differ materially from the amounts in the accompanying financial statements.
DELOITTE & TOUCHE LLP
Houston, Texas March 4, 1996
See Notes to Financial Statements
See Notes to Financial Statements
NOTES TO FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Organization and Basis of Presentation
Coastal 1986 Drilling Program, Ltd. (the "Partnership") commenced operations on October 8, 1986, as a Texas limited partnership to participate in drilling development and exploratory wells located in the United States on leasehold acreage held by subsidiaries of The Coastal Corporation ("Coastal"). The Partnership was funded primarily through the sale of 12,000 Limited Partnership Units providing $12,000,000. Under the terms of the Partnership Agreement, the General Partner, Coastal Limited Ventures, Inc., a wholly-owned subsidiary of Coastal, incurred all costs of organizing the Partnership and contributed 1% of the total capital, or $121,000, as general partner capital.
The drilling operations were conducted through a joint venture in the form of a Texas general partnership (the "Joint Venture") between the Partnership and three wholly-owned subsidiaries of Coastal ("Other Joint Venturers"). For financial reporting purposes, the Partnership's investment in such venture was accounted for by consolidating its share of the operating results of the venture.
All costs and revenues of the Partnership were allocated 1% to the General Partner and 99% to the Limited Partners. Net loss per Limited Partnership Unit was calculated by dividing the net loss attributable to Limited Partners by the 12,000 units outstanding.
Under the terms of the Partnership Agreement and the Joint Venture Agreement, both the Partnership and the Joint Venture terminated effective January 1, 1996. In accordance with the terms and conditions of the dissolution, each gas and oil property will be sold or transferred to the Other Joint Venturer which assigned the property to the Joint Venture at a value determined by independent appraisal (see "Partnership Interest in Proved Reserves" on page). After all Joint Venture assets have been liquidated and all Joint Venture obligations have been paid, the remaining cash in the Joint Venture will be distributed among the Joint Venturers. As among the Partners in the Partnership, the liquidating distribution will be distributed 99% to the Limited Partners and 1% to the General Partner in May 1996. The amounts determined by the independent appraisal which will be realized from the disposition of the remaining assets may differ materially from the amounts in the accompanying financial statements.
Statement of Cash Flows
Cash equivalents include time deposits, certificates of deposit and all highly liquid instruments with original maturities of three months or less.
Gas and Oil Properties
The Partnership followed the full-cost method of accounting for gas and oil properties. Under this method, all costs incurred in the exploration and development of gas and oil properties, including unproductive wells, were capitalized. Depreciation and amortization of gas and oil properties was provided on the unit-of-production basis whereby the unit rate was determined by dividing the total unrecovered carrying value of all gas and oil properties by the estimated proved reserves included therein, as estimated by an independent engineer, adjusted so that the net investment in gas and oil properties did not exceed the estimated future net revenues from proved reserves, computed at prices at the end of the reported period, discounted at 10%. In 1995, 1994 and 1993, such additional depreciation and amortization expense of $165,000, $231,000 and $489,000, respectively, was recorded. The depreciation and amortization rates, excluding the adjustments, amounted to $0.56, $0.70 and $0.89 per equivalent unit of a thousand cubic feet of natural gas production during 1995, 1994 and 1993, respectively.
No property acquisition costs were recorded by the Partnership since all drilling blocks were contributed to the Joint Venture by the Other Joint Venturers. Development costs incurred by the Partnership during 1995, 1994 and 1993 were $38,000, $12,000 and $12,000, respectively. These development costs were attributable to capitalized well maintenance activities and abandonments, net of salvage.
Taxes
No provision for income tax expense is reflected in the financial statements since the income and deductions of the Partnership are reported on the separate tax returns of the individual partners. State severance taxes are classified as lease operating expenses.
Note 2. Participation in Costs And Revenues
Under the terms of the Partnership and Joint Venture Agreements, revenues, costs and expenses were allocated on the following basis:
All costs and revenues of the Partnership were allocated 1% to the General Partner and 99% to the Limited Partners.
Note 3. Partnership Payout
Partnership Payout is defined in the Partnership Agreement as the close of business on the last day of the calendar month during which revenues from the sale of production less operating costs of the Joint Venture allocated to the Partnership and less amounts applied to pay in full the principal of, and interest on, the Joint Venture Note plus gains on the sale or other disposition of Joint Venture assets credited to the capital account of the Partnership plus interest earned after October 8, 1986 (effective date of operations), by the Partnership plus any contributions distributed pro rata to the Partners as a return of capital, first equal the sum of $12,121,000 plus Permitted Excess Drilling Costs. Partnership Payout was achieved in October 1992.
Note 4. Transactions With Related Parties
Accounts with Affiliated Companies
The accounts receivable - affiliates and accounts payable - affiliates balances are with the General Partner and Other Joint Venturers, and result from provisions of the Partnership Agreement, Joint Venture Agreement and transactions in the ordinary course of business as more fully explained in the following paragraphs.
Fee to General Partner
Under terms of the Partnership Agreement, the General Partner was entitled to an annual fee (paid in quarterly installments) of $400,000 in 1986, $300,000 in 1987 and $200,000 in each year from 1988 through 1995 in lieu of general and administrative overhead costs. The cumulative amount of such fee paid at any point in time could not exceed 15% of the Partnership's cumulative revenues received up to and including that point in time, with any remaining balance due carried forward and paid in subsequent quarters. However, the General Partner reduced the management fee to $81,000 for each of the years 1995, 1994 and 1993, respectively, as a result of a restructuring of the fee by the
General Partner. Fees paid to the General Partner totaled $58,000, $82,000 and $80,000 in 1995, 1994 and 1993, respectively. As of December 31, 1995, there was a remaining balance of $44,000 payable to the General Partner.
Balances with Other Joint Venturers
Such balances arose in the normal course of business from advance payments or billings for development and exploratory drilling activities, the sale of gas and oil production, and the operating costs of producing wells. In 1995, 1994 and 1993, two unrelated companies accounted for more than 10% of gas and oil sales from the Joint Venture. The Partnership's share of these sales was $154,000, $290,000 and $229,000 in 1995, 1994 and 1993, respectively. All costs and revenues were allocated to the respective parties as indicated in Note 2.
Sales to Affiliated Companies
During 1995, 1994 and 1993, sales of natural gas amounting to $196,000, $289,000 and $223,000, respectively, and sales of crude oil, condensate and natural gas liquids amounting to $69,000, $67,000 and $76,000, respectively, were made to Coastal subsidiaries at market value.
Note 5. Repurchase of Partnership Units
During the 1995 repurchase period, 415 of the 10,152 eligible units were tendered by Limited Partners and were purchased by the General Partner. In 1994, 516 units were tendered and purchased. As of December 31, 1995, the General Partner held 2,263 of the 12,000 units outstanding.
SUPPLEMENTAL INFORMATION ON EXPLORATION, DEVELOPMENT AND PRODUCTION ACTIVITIES (Unaudited)
Introduction
This section presents information on Partnership and Joint Venture costs, revenues, reserves and estimates of future gas and oil operations. The estimates of gas and oil reserves and future net cash flows from gas and oil production were prepared by independent engineers, Huddleston & Co., Inc., Houston, Texas.
Total Costs
Total costs shown in the following tables were allocated as indicated in Note 2 to the accompanying financial statements. (Thousands of Dollars)
Total Revenues
Total revenues for the cumulative period October 8, 1986 (effective date of operations), to December 31, 1995, and for the year ended December 31, 1995, are shown in the following tables. Revenues were allocated as indicated in Note 2 to the accompanying financial statements. (Thousands of Dollars).
Partnership Interest in Proved Reserves
Presented below are the quantities associated with the Partnership's interest in estimated proved reserves as of December 31, 1992, 1993, 1994 and 1995. Also included are the changes in net quantities for the years ended December 31, 1993, 1994 and 1995. Natural gas is stated in millions of cubic feet. Oil includes condensate and natural gas liquids and is stated in barrels.
Presented below is an estimate of the Partnership's interest at December 31, 1995, 1994 and 1993, in future net cash flows from the Joint Venture proved reserves, a standardized measure of discounted future net cash flows, and the commensurate standardized measure per Limited Partnership Unit. (Thousands of Dollars except per Limited Partnership Unit)
The standardized measure of discounted future net cash flows per Limited Partnership Unit is calculated in accordance with Securities and Exchange Commission regulations and should not be construed as the liquidation price of units as described in Note 1 of Notes to Financial Statements included herein.
The Partnership's interest in the net quantities of gas and oil reserves and the Partnership's interest in the standardized measure of discounted future net cash flows for 1995, 1994 and 1993, were calculated by the independent engineers using a discount factor of 10%. The upward revision attributed to oil in 1995 was primarily due to the production of various wells exceeding previously recognized quantity estimates.
In the opinion of the General Partner, the above estimates do not necessarily represent the current value of the reserves or of future net cash flows which may reasonably be expected to be realized from future production.
EXHIBIT INDEX
Exhibit Number Document - ------- -------- 3.1+ Agreement of Limited Partnership.
3.2+ Certificate of Limited Partnership.
10.1+ Joint Venture Agreement among Coastal 1986 Drilling Program, Ltd., Coastal Oil & Gas Corporation, ANR Production Company and CIG Exploration, Inc.
24* Powers of Attorney (included on signature page herein).
27* Financial Data Schedule.
+Incorporated by reference from Registration Statement No. 33-1658. *Indicates filed herewith.