<PAGE> 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
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SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
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SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------------------- --------------------
Commission file number 1-11698
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KCS ENERGY, INC.
----------------
(Exact name of registrant as specified in its charter)
Delaware 22-2889587
--------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5555 San Felipe Road, Houston, TX 77056
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(713) 877-8006
--------------------------------------------------------------------------------
(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 twelve 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.
(1) X Yes (2) No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, $0.01 par value: 29,265,810 shares outstanding
as of November 1, 2000.
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KCS ENERGY, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION)
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
(Amounts in thousands except September 30, September 30,
-------------------------- ---------------------------
per share data) Unaudited 2000 1999 2000 1999
--------------------------------------------- -------------------------- ---------------------------
<S> <C> <C> <C> <C>
Oil and gas revenue $ 46,005 $ 33,230 $ 125,048 $ 96,906
Other revenue, net 193 2,375 1,781 5,059
------------------------------------------------------------------------------------------------------------------------
Total revenue 46,198 35,605 126,829 101,965
Operating costs and expenses
Lease operating expenses 6,213 6,900 18,373 20,525
Production taxes 1,580 910 4,326 2,487
General and administrative expenses 1,939 1,683 5,755 7,313
Depreciation, depletion and amortization 11,664 11,434 36,820 38,982
------------------------------------------------------------------------------------------------------------------------
Total operating costs and expenses 21,396 20,927 65,274 69,307
------------------------------------------------------------------------------------------------------------------------
Operating income 24,802 14,678 61,555 32,658
Interest and other income, net 85 223 437 445
Interest expense (contractual interest was
$9,030 and $27,380 for the three and nine
months ended September 30, 2000, respectively) (6,698) (10,145) (20,252) (30,046)
------------------------------------------------------------------------------------------------------------------------
Income before reorganization items
and income taxes 18,189 4,756 41,740 3,057
Reorganization items
Write-off of deferred debt issuance costs
related to senior notes and senior
subordinated notes - - (6,132) -
Financial restructuring costs (1,642) - (5,138) -
Interest income 327 - 594 -
------------------------------------------------------------------------------------------------------------------------
Total reorganization items, net (1,315) - (10,676) -
------------------------------------------------------------------------------------------------------------------------
Income before income taxes 16,874 4,756 31,064 3,057
Federal and state income taxes - - - -
------------------------------------------------------------------------------------------------------------------------
Net income $ 16,874 $ 4,756 $ 31,064 $ 3,057
========================================================================================================================
Basic earnings per share
of common stock $ 0.58 $ 0.16 $ 1.06 $ 0.10
========================================================================================================================
Diluted earnings per share
of common stock $ 0.58 $ 0.16 $ 1.06 $ 0.10
========================================================================================================================
Weighted average shares outstanding for
computation of earnings per share
Basic 29,266 29,268 29,266 29,262
Diluted 29,326 29,273 29,302 29,295
========================================================================================================================
</TABLE>
The accompanying notes to condensed consolidated financial statements are
an integral part of these statements
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<PAGE> 3
KCS ENERGY, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION)
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
(Dollars in thousands) Unaudited 2000 1999
-------------------------------------------- ------------- -----------
<S> <C> <C>
Assets
------
Current assets
Cash and cash equivalents $ 26,289 $ 10,584
Trade accounts receivable, net 32,103 21,941
Other current assets 6,180 7,571
--------------------------------------------------------------------------------------------
Current assets 64,572 40,096
--------------------------------------------------------------------------------------------
Oil and gas properties, full cost method, net 248,918 232,281
Other property, plant and equipment, net 3,777 4,686
--------------------------------------------------------------------------------------------
Property, plant and equipment, net 252,695 236,967
--------------------------------------------------------------------------------------------
Deferred charges and other assets 1,682 7,869
--------------------------------------------------------------------------------------------
$ 318,949 $ 284,932
============================================================================================
Liabilities and stockholders' equity
------------------------------------
Current liabilities
Accounts payable $ 16,557 $ 13,340
Accrued interest on public debt - 26,444
Other accrued liabilities 19,189 11,262
Short-term debt 84,408 381,819
--------------------------------------------------------------------------------------------
Current liabilities 120,154 432,865
--------------------------------------------------------------------------------------------
Deferred credits and other liabilities 1,762 1,910
--------------------------------------------------------------------------------------------
Liabilities subject to compromise
Senior notes 150,000 -
Senior subordinated notes 125,000 -
Accrued interest on public debt 38,819 -
Pre-petition accounts payable 1,993 -
--------------------------------------------------------------------------------------------
Liabilities subject to compromise 315,812 -
--------------------------------------------------------------------------------------------
Stockholders' (deficit) equity
Common stock, par value $0.01 per
share - authorized 50,000,000
shares, issued 31,432,906 and
31,435,406, respectively 314 314
Additional paid-in capital 145,098 145,098
Retained (deficit) earnings (259,450) (290,514)
Less treasury stock, 2,167,096 shares, at cost (4,741) (4,741)
--------------------------------------------------------------------------------------------
Total stockholders' (deficit) equity (118,779) (149,843)
--------------------------------------------------------------------------------------------
$ 318,949 $ 284,932
============================================================================================
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
3
<PAGE> 4
KCS ENERGY, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION)
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
(Dollars in thousands) Unaudited 2000 1999
----------------------------------------------- --------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 31,064 $ 3,057
Adjustments to reconcile net income
to cash provided by operating activities:
Depreciation, depletion and amortization 36,820 38,982
Other non-cash charges and credits, net 1,665 2,024
Reorganization items 10,676 -
--------------------------------------------------------------------------------------------
80,225 44,063
Net changes in assets and liabilities:
Trade accounts receivable (10,162) 9,193
Accounts payable and accrued liabilities 13,137 (12,720)
Accrued interest on public debt 12,375 6,898
Other, net 1,007 (2,379)
--------------------------------------------------------------------------------------------
Net cash provided by operating activities
before reorganization items 96,582 45,055
Reorganization items (excluding non-cash write-off
of deferred debt issue costs) (4,544) -
--------------------------------------------------------------------------------------------
Net cash provided by operating activities 92,038 45,055
Cash flows from investing activities:
Investment in oil and gas properties (52,978) (31,077)
Net proceeds from the sale of oil and gas properties 629 25,297
Other capital expenditures, net (199) 1,039
--------------------------------------------------------------------------------------------
Net cash used in investing activities (52,548) (4,741)
--------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from debt 292 16,300
Repayments of debt (22,752) (34,989)
Deferred financing costs (1,325) (1,042)
Other, net - (564)
--------------------------------------------------------------------------------------------
Net cash used in financing activities (23,785) (20,295)
--------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 15,705 20,019
Cash and cash equivalents at beginning of period 10,584 876
--------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 26,289 $ 20,895
============================================================================================
</TABLE>
The accompanying notes to condensed consolidated financial
statements are an integral part of these statements.
4
<PAGE> 5
KCS ENERGY, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The condensed interim financial statements included herein have been
prepared by KCS Energy, Inc. ("KCS" or "Company"), without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission ("SEC") and
reflect all adjustments which are of a normal recurring nature and which, in the
opinion of management, are necessary for a fair statement of the results for
interim periods. Certain information and footnote disclosures have been
condensed or omitted pursuant to such rules and regulations. Although KCS
believes that the disclosures are adequate to make the information presented not
misleading, it is suggested that these condensed financial statements be read in
conjunction with the financial statements and the notes thereto included in the
Company's latest annual report to stockholders. Certain previously reported
amounts have been reclassified to conform with current year presentations.
2. Financial Condition and Bankruptcy Proceedings.
During 1997 and 1998, due to very low prices for natural gas and
crude oil and, in 1998, due to disappointing performance of certain properties
in the Rocky Mountain area, the Company incurred significant losses, primarily
due to $268.5 million of pretax non-cash ceiling writedowns of its oil and gas
assets and a reduction from $113.9 million ($93.9 million of which relates to
the 1998 non-cash ceiling test writedowns) to zero in the book value of net
deferred tax assets. As a result of these non-cash charges, the net loss in 1998
was increased by $288.4 million. Also as a result of these adjustments, the
Company has negative stockholders' equity and continues to be in default of
certain covenants in its bank credit facilities. As a consequence, the Company
cannot borrow under the revolving credit facilities. In addition, the Company's
independent public accountants issued modified reports for 1998 and 1999 with
respect to the ability of the Company to continue as a going concern, which also
constitutes a default under the revolving bank credit agreements.
On May 18, 1999, the Company and its bank lenders entered into
forbearance agreements which provided that the bank lenders would defer
redetermination of the borrowing base until July 1, 1999 and would refrain from
exercising their rights and remedies as a result of the existing defaults until
June 30, 1999. Under these initial forbearance agreements, the Company committed
50% of monthly cash flow to payments of principal, with a minimum of $2 million
monthly. In addition, a portion of the proceeds from the sale of any of the
Company's oil and gas properties were dedicated to payment of principal under
the bank credit facilities.
On July 7, 1999, the lenders under each of the bank credit facilities
reset the Company's borrowing base, which had been $165 million in the aggregate
at December 31, 1998, to $91 million. The principal amount outstanding under the
bank loans at June 30, 1999 was $126.7 million. Because the Company did not make
the $35.7 million additional lump-sum payment, a payment default occurred. The
bank lenders declared due all amounts owed under the bank loans, demanded
payment and declared in effect the default rate of interest. The bank lenders
also delivered a payment blockage notice to the indenture trustee of the 8.875%
senior subordinated notes. The Company did not make the scheduled July 15, 1999
interest payments on both the 8.875% senior subordinated notes and the 11%
senior notes, totaling $13.8 million.
On July 26, 1999, the Company and its bank lenders entered into new
forbearance agreements (effective as of July 1, 1999) which provided that the
lenders would refrain from exercising their rights and remedies not previously
exercised until October 5, 1999. Subsequently, these new forbearance agreements
were extended twice on the same terms through March 2, 2000. The bank lenders
did not waive the payment default but rescinded their declaration that all
amounts outstanding under the credit facilities are immediately due and payable
and effectively waived the default rate of interest. The new forbearance
agreements precluded the Company from making interest payments on its senior
notes and its senior subordinated notes. Under the terms of the new forbearance
agreements, the Company
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<PAGE> 6
committed to make aggregate monthly principal payments of $2.5 million. In
addition, the agreements provided that a portion of the proceeds from the sale
of any of the Company's oil and gas properties would be dedicated to the payment
of principal under the credit facilities. The new forbearance agreements expired
on March 2, 2000. Since the commencement of the bankruptcy proceedings on
January 18, 2000, the Company has been operating under a cash collateral
agreement with its bank lenders. The agreement provides, among other things,
that the Company make monthly principal payments of $2.5 million and that the
bank lenders have the right to review and approve the Company's projected use of
cash during the bankruptcy proceedings. From the time that the original
forbearance agreements were entered into through September 30, 2000, the Company
has made principal payments, pursuant to the forbearance agreements and the cash
collateral agreement, of $65.6 million to its banks, reducing the outstanding
loans from $150 million to $84.4 million.
As a result of the payment default under the bank loans and the
interest payment default on the notes, the holders of the requisite percentage
of the Company's senior notes and senior subordinated notes and the indenture
trustees of the senior notes and the senior subordinated notes had the right to
declare the principal amount of the notes immediately due and payable. On
December 28, 1999, holders of the senior notes alleging to hold the requisite
percentage of senior notes provided notice of acceleration of maturity and
declared the principal and interest of the senior notes to be immediately due
and payable. At September 30, 2000, accrued interest on the senior notes and
senior subordinated notes was $38.8 million and the contractual interest payable
was $47.1 million. The outstanding principal amount of the senior subordinated
notes is $125 million and the outstanding principal amount of the senior notes
is $150 million.
As a result of the above factors, there is substantial doubt about
the Company's ability to continue as a going concern. The accompanying financial
statements do not include any adjustments relating to the recoverability and
classification of the asset-carrying amounts or the amounts and classifications
of liabilities that might result should the Company be unable to continue as a
going concern.
The Company took numerous steps to improve its financial situation.
Among other things, the Company reduced its workforce by over 30% during the
two-year period ended December 31, 1999, closed its New Jersey corporate office
and froze senior management salaries for 1999. Expense reduction initiatives
reduced lease operating expenses and general and administrative expenses by 23%
for the nine months ended September 30, 2000 compared to the same period in 1998
and by 13% compared to the same period in 1999. Planned capital investments were
reduced in 1999, especially VPP expenditures, and a property divestiture program
was implemented whereby the Company sold non-core properties and raised net
proceeds of approximately $27.7 million to reduce outstanding bank debt. During
the third quarter of 2000, the Company increased its drilling program to
capitalize on the dramatic increases in natural gas and oil prices and the
Company's available drilling opportunities. While the reduced capital investment
in the VPP program has meant a decline in VPP production, those initiatives have
enabled the Company to reduce debt while increasing working interest production
through its drilling program.
On December 28, 1999, the Company announced that it had reached an
agreement on a proposed restructuring (the "Restructuring Agreement") with
holders of more than two-thirds in amount of the senior subordinated notes and
holders of a majority in amount of the senior notes. To effectuate the
Restructuring Agreement, the parties agreed that the Company would commence a
case under Chapter 11 of Title 11 of the United States Bankruptcy Code (the
"Bankruptcy Code") by January 18, 2000. On January 5, 2000, however, certain
entities filed an involuntary petition for relief against KCS Energy, Inc. (the
parent company only) under Chapter 11 of the Bankruptcy Code in the U. S.
Bankruptcy Court for the District of Delaware ("Bankruptcy Court"). On January
18, 2000, (the "Commencement Date"), the Bankruptcy Court entered an order for
relief under Chapter 11 of the Bankruptcy Code against KCS. Also on the
Commencement Date, KCS Energy, Inc.'s subsidiaries filed separate voluntary
petitions under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court and
the Company filed its initial disclosure statement with the Bankruptcy Court for
approval in
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<PAGE> 7
connection with its proposed plan of reorganization under Chapter 11 of the
Bankruptcy Code (as currently amended, the "Plan"). Amended versions of the
disclosure statement and Plan were subsequently filed. Since the Commencement
Date, the Company and its subsidiaries have continued to operate their
businesses as debtors-in-possession pursuant to sections 1107 and 1108 of the
Bankruptcy Code.
On April 20, 2000, the Company reported that Credit Suisse First
Boston ("CSFB") had exercised its right to terminate the Restructuring Agreement
because a joint plan of reorganization was not confirmed by the date specified
in the agreement. On April 28, 2000, the Bankruptcy Court ruled that the
Company's proposed second amended Plan impaired the senior noteholders. The
Company maintains that the senior noteholders were unimpaired pursuant to the
second amended Plan and filed a notice of appeal regarding the Bankruptcy
Court's ruling. The appeal is currently pending.
On May 4, 2000, the Bankruptcy Court terminated the time period under
which the Company had the exclusive right to propose a plan of reorganization.
On June 13, 2000, the statutory unsecured creditors' committee in the Company's
Chapter 11 cases (the "Committee") and CSFB filed a disclosure statement with
respect to their proposed joint plan of reorganization. On June 30, 2000, the
Company filed its fourth amended disclosure statement and third amended Plan.
On October 25, 2000, the Bankruptcy Court judge entered orders
approving the disclosure statements describing the Company's Plan and the
Committee / CSFB plan. Beginning on November 3, 2000, the Company's disclosure
statement and the Committee / CSFB disclosure statement, along with ballots,
voting instructions and preference forms were mailed to impaired creditors and
shareholders entitled to vote. These disclosure statements are included as
exhibits to this Form 10-Q. The Bankruptcy Court has scheduled January 30, 2001
for the commencement of the Confirmation Hearing on both plans. The Bankruptcy
Court will also consider confirmation of any plan filed by a party in interest
on or before December 15, 2000 that provides for each class of claims or
interests to be unimpaired under section 1124 of the Bankruptcy Code (thereby
not requiring the solicitation of votes to accept or reject such plan from any
class of claims or interests). If any such plan is filed, notice of filing and
the deadline for objections to confirmation will be served on the parties
entitled to such notice. Since the second quarter of 1999, the Company has been
funding its capital investment program with internally generated cash flow and a
portion of the proceeds from asset sales while at the same time reducing its
bank debt by $65.6 million in accordance with the forbearance agreements and
cash collateral agreement. The Company intends to fund its short-term capital
investment program in the same way pending the outcome of the bankruptcy
proceedings. The Company has increased its cash balances from $10.6 million at
December 31, 1999 to $26.3 million at September 30, 2000.
Since the Commencement Date, the Company has been paying its
post-petition trade obligations in the ordinary course of business. In addition,
the Company filed a motion in the Bankruptcy Court to allow for the payment of
all pre-petition trade obligations in order to minimize the effect of the
bankruptcy proceedings on the Company's operations and business relationships.
The Bankruptcy Court subsequently granted the Company the authority to pay
certain specified pre-petition trade obligations comprising the substantial
majority of its pre-petition trade obligations. Under both proposed plans, all
pre-petition and post-petition trade obligations will be paid in full.
The Company is continuing to discuss alternatives with the Committee,
holders of its senior and senior subordinated notes and others with the goal of
achieving a consensual plan that will enable a timely conclusion of the Chapter
11 proceedings.
The Company believes that its cash flow from operations and the
proceeds from assets sales should be sufficient to meet its short-term operating
requirements. However, there can be no assurance that, given the Company's
limited capital resources, it can continue to maintain its current production or
oil and gas reserve replacement levels.
3. Accounting and Reporting Requirements During Bankruptcy
Under Chapter 11 of the Bankruptcy Code, most claims against the
debtors in existence prior to the filing of the bankruptcy petitions are stayed
while the debtors continue business operations as
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<PAGE> 8
debtors-in-possession. Under AICPA Statement of Position 90-7 "Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code", ("SOP
90-7"), the Company is required to adjust liabilities subject to compromise to
the amount of the claim allowed by the court. Since a plan of reorganization has
not been confirmed by the Bankruptcy Court, all unsecured, pre-petition
obligations that have not been approved for payment by the Bankruptcy Court have
been segregated as liabilities subject to compromise in the accompanying
Condensed Consolidated Balance Sheet. The Company's bank debt was not included
in liabilities subject to compromise as it is fully secured.
In addition, SOP 90-7 requires the Company to report interest expense
during the bankruptcy proceedings only to the extent that it will be paid during
the proceedings or it is probable that it will be an allowed priority, secured,
or unsecured claim. Accordingly, the Company recorded interest expense for its
bank debt and its senior notes but not for its senior subordinated notes
subsequent to the filing of the involuntary Chapter 11 petition on January 5,
2000. Interest expense and amortization of deferred debt issuance costs for the
three and nine months ended September 30, 2000 was $6.7 million and $20.3
million, respectively, compared to $10.1 million and $30.0 million,
respectively, for the same periods in the prior year. The reported interest
expense as well as the contractual interest expense for the three and nine
months ended September 30, 2000 are disclosed in the accompanying Condensed
Statements of Consolidated Operations. The contractual interest amounts are not
comparable to the interest expense in the prior year periods as these amounts do
not include amounts for amortization of debt issuance costs ($0.6 million for
the three-month period and $1.7 million for the nine-month period) and
capitalized interest ($0.1 million for the three-month period and $0.5 million
for the nine-month period).
4. Reorganization Items
In accordance with SOP 90-7, the Condensed Statements of Consolidated
Operations present the results of operations of the Company while it is in
Chapter 11 proceedings. Expenses resulting from the restructuring are reported
separately as reorganization items. For the three months ended September 30,
2000, the Company recorded financial restructuring costs of $1.6 million
primarily for legal and financial advisory services. In addition, the Company
earned interest income of $0.3 million on accumulated cash resulting from the
Chapter 11 proceedings.
For the nine months ended September 30, 2000 the Company recorded a
non-cash write-off of $6.1 million of deferred debt issuance costs associated
with its senior notes and senior subordinated notes in order to value the
liabilities subject to compromise at the expected amount of the allowed claims.
Financial restructuring costs were $5.1 million and earned interest income was
$0.6 million.
5. New York Stock Exchange Listing
In October 1999, the Company reported that it did not meet the
current New York Stock Exchange ("NYSE") continued listing standards. These
standards require total market capitalization of not less than $50 million and
total stockholders' equity of not less than $50 million. At the close of
business on November 7, 2000, the Company's total market capitalization was
approximately $62.3 million. As a result of the non-cash ceiling writedown at
December 31, 1998, the Company currently has negative stockholders' equity.
The Company has submitted a plan to the NYSE's Listings and
Compliance Committee that sets forth a strategy to enable the Company to comply
with new standards established by the NYSE. That plan was accepted by the NYSE
in November 1999 and as part of the plan, the Company will be monitored for
compliance. Should the Company not meet its compliance objectives, it will be
subject to trading suspension and delisting procedures.
6. Supplemental Cash Flow Information
The Company considers all highly liquid debt instruments with a
maturity of three months or less when purchased to be cash equivalents. Interest
payments were $6.7 million and $22.9 million, for the nine months ended
September 30, 2000 and September 30, 1999, respectively. No income tax
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<PAGE> 9
payments were made during the nine months ended September 30, 2000. Income tax
payments were $0.1 million, for the nine months ended September 30, 1999.
7. Litigation
On May 11, 2000, the Texas Supreme Court denied the royalty holders'
motion for rehearing in the Los Santos Suit. Under its rules, the Texas Supreme
Court will not consider another motion for rehearing.
On June 27, 2000, the Fifth Circuit Court of Appeals at Dallas, Texas
affirmed the trial court's judgment in favor of the Company in the Jesus
Yzaguirre Suit. The royalty owners did not move for a rehearing but on August
10, 2000, they applied to the Texas Supreme Court for review. On October 26,
2000, the Texas Supreme Court denied the royalty owners' petition for review.
The royalty owners filed a motion for a rehearing on November 10, 2000.
The Company has filed a counterclaim against MidAmerican and a
cross-action against Kerr-McGee in the litigation among Kerr-McGee L.P.,
InterCoast, MidAmerican and the Company which is described in the Company's
Annual Report on Form 10-K for the year ended December 31, 1999. The
counterclaim and cross-action seek a declaratory judgment that the Company is
entitled to indemnity from such parties under agreements with such parties
described in the Company's 10-K. Discovery in the litigation is proceeding and
trial has been set for May 14, 2001.
8. Earnings Per Share
Basic earnings per share were computed by dividing net income by the
average number of common shares outstanding during the quarter as required by
the Financial Accounting Standards Board ("FASB") Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share". Diluted earnings
per share have been computed by dividing net income by the average number of
common shares outstanding plus the incremental shares that would have been
outstanding assuming the exercise of stock options.
A reconciliation of shares used for basic earnings per share and those used for
diluted earnings per share is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
2000 1999 2000 1999
------ ------ ------ ------
(amounts in thousands)
<S> <C> <C> <C> <C>
Average common stock outstanding 29,266 29,268 29,266 29,262
Average common stock equivalents 60 5 36 33
------ ------ ------ ------
Average common stock and common
stock equivalents outstanding 29,326 29,273 29,302 29,295
====== ====== ====== ======
</TABLE>
9. New Accounting Standards
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No.133, as amended,
establishes accounting and reporting standards requiring that all derivative
instruments be recorded in the balance sheet as an asset or liability, measured
at fair value. SFAS No. 133 requires that changes in a derivative instrument's
fair value be recognized currently in earnings unless specific hedge accounting
criteria are met. Accounting for qualifying hedges allows a derivative
instrument's gains and losses to be recognized with the related physical results
of the hedged item in the income statement during the period of actual
production. It also requires that a company formally document, designate and
assess the effectiveness of transactions that receive hedge accounting. In June
1999, the FASB issued SFAS No 137, " Accounting for
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<PAGE> 10
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133" which defers the effective date of SFAS No. 133 until
all fiscal years beginning after June 15, 2000. The Company will adopt this
statement on January 1, 2001.
The Company currently utilizes swaps and collars to reduce its
exposure to fluctuations in natural gas prices and to achieve a more predictable
cash flow. Based upon management's current assessment of its derivative
contracts, if the Company had adopted SFAS No. 133 on October 1, 2000, it would
have recorded (i) a liability of approximately $20.9 million, representing the
fair market value of its derivative instruments on that date, (ii) a reduction
of equity through other comprehensive income of $20.0 million, representing the
intrinsic value of the cash flow hedges using natural gas prices as of September
29, 2000 and (iii) a loss from the cumulative effect of a change in accounting
principle of $0.9 million, representing the time value component of the
derivative instruments as of September 29, 2000. Essentially this entire loss
would reverse by March 31, 2001. As the futures contracts settle each month, the
liability will be adjusted to reflect the current fair market value and the
monthly settlement will be recorded in revenues through an adjustment to other
comprehensive income and the time value component of the hedge will be recorded
as Other Revenue, net.
Changing market conditions, effects of transactions not yet
identified or new transactions and interpretations from the FASB's Derivative
Implementation Group could change the current assessment.
FASB 133, as amended, could increase the volatility of KCS's future
earnings.
In July and September 2000, the Emerging Issues Task Force ("EITF")
reached consensuses on Issue No. 00-10, "Accounting for Shipping and Handling
Fees and Costs." This Issue addresses the income statement classification for
shipping and handling fees and costs. The Company will adopt the consensuses in
the fourth quarter of 2000. The Company is currently assessing the impact of
EITF Issue No. 00-10; however, it will have no impact on net income. The Company
is still evaluating whether or not additional disclosures may be required by the
consensuses.
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<PAGE> 11
KCS ENERGY, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
During 1997 and 1998, due to very low prices for natural gas and
crude oil and, in 1998, due to disappointing performance of certain properties
in the Rocky Mountain area which resulted in non-cash ceiling writedowns of its
oil and gas assets and the reduction to zero of the book value of net deferred
tax assets, the Company incurred significant losses. As a result of these
non-cash adjustments, the Company has negative stockholders' equity and
continues to be in default of certain covenants in its bank credit facilities.
As a consequence, the Company cannot borrow under the revolving credit
facilities. The Company's independent public accountants issued modified reports
for 1998 and 1999 with respect to the ability of the Company to continue as a
going concern, which also constitutes a default under the revolving bank credit
agreements. The Company is also in default with respect to its senior note and
senior subordinated note obligations. See "Liquidity and Capital Resources" and
Note 2 to Condensed Consolidated Financial Statements.
In 1999, gas and oil prices strengthened. Average realized gas prices
were 5% higher and average realized oil prices were 41% higher in 1999 as
compared to 1998 (although 1999 average realized gas prices were 9% lower and
1999 oil prices were 14% lower than in 1997). Also in 1998, the Company
implemented a program designed to improve its financial situation and the
overall efficiency of the Company and its subsidiaries. The Company reduced its
workforce by over 30% during the two-year period ended December 31, 1999, closed
its New Jersey corporate office and froze senior management salaries for 1999.
Expense reduction initiatives reduced lease operating expenses and general and
administrative expenses by 23% for the nine months ended September 30, 2000
compared to the same period in 1998 and by 13% compared to the same period in
1999. Planned capital investments were reduced in 1999 and a property
divestiture program was implemented whereby the Company sold non-core properties
and raised net proceeds of approximately $27.7 million. In addition, the Company
engaged financial advisors to pursue a financial restructuring.
On December 28, 1999, the Company announced that it had reached an
agreement on a proposed restructuring (the "Restructuring Agreement") with
holders of more than two-thirds in amount of the senior subordinated notes and
holders of a majority in amount of the senior notes. To effectuate the
Restructuring Agreement, the parties agreed that the Company would commence a
case under Chapter 11 of Title 11 of the United States Bankruptcy Code (the
"Bankruptcy Code") by January 18, 2000. On January 5, 2000, however, certain
entities filed an involuntary petition for relief against KCS Energy, Inc. (the
parent company only) under Chapter 11 of the Bankruptcy Code in the U. S.
Bankruptcy Court for the District of Delaware ("Bankruptcy Court"). On January
18, 2000, (the "Commencement Date"), the Bankruptcy Court entered an order for
relief under Chapter 11 of the Bankruptcy Code against KCS. Also on the
Commencement Date, KCS Energy, Inc.'s subsidiaries filed separate voluntary
petitions under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court and
the Company filed its initial disclosure statement with the Bankruptcy Court for
approval in connection with its proposed plan of reorganization under Chapter 11
of the Bankruptcy Code (as currently amended, the "Plan"). Amended versions of
the disclosure statement and Plan were subsequently filed. Since the
Commencement Date, the Company and its subsidiaries have continued to operate
their businesses as debtors-in-possession pursuant to sections 1107 and 1108 of
the Bankruptcy Code.
On April 20, 2000, the Company reported that Credit Suisse First
Boston ("CSFB") had exercised its right to terminate the Restructuring Agreement
because a joint plan of reorganization was not confirmed by the date specified
in the agreement. On April 28, 2000, the Bankruptcy Court ruled that the
Company's proposed second amended Plan impaired the senior noteholders. The
Company maintains that the senior noteholders were unimpaired pursuant to the
second amended Plan and filed a notice of appeal regarding the Bankruptcy
Court's ruling. The appeal is currently pending.
11
<PAGE> 12
On May 4, 2000, the Bankruptcy Court terminated the time period under
which the Company had the exclusive right to propose a plan of reorganization.
On June 13, 2000, the statutory unsecured creditors' committee in the Company's
Chapter 11 cases (the "Committee") and CSFB filed a disclosure statement with
respect to their proposed joint plan of reorganization. On June 30, 2000, the
Company filed its fourth amended disclosure statement and third amended Plan.
On October 25, 2000, the Bankruptcy Court judge entered orders
approving the disclosure statements describing the Company's Plan and the
Committee / CSFB plan. Beginning on November 3, 2000, the Company's disclosure
statement and the Committee / CSFB disclosure statement, along with ballots,
voting instructions and preference forms were mailed to impaired creditors and
shareholders entitled to vote. These disclosure statements are included as
exhibits to this Form 10-Q. The Bankruptcy Court has scheduled January 30, 2001
for the commencement of the Confirmation Hearing on both plans. The Bankruptcy
Court will also consider confirmation of any plan filed by a party in interest
on or before December 15, 2000 that provides for each class of claims or
interests to be unimpaired under section 1124 of the Bankruptcy Code (thereby
not requiring the solicitation of votes to accept or reject such plan from any
class of claims or interests). If any such plan is filed, notice of filing and
the deadline for objections to confirmation will be served on the parties
entitled to such notice.
The Company is continuing to discuss alternatives with the Committee,
holders of its senior and senior subordinated notes and others with the goal of
achieving a consensual plan that will enable a timely conclusion of the Chapter
11 proceedings.
Prices for oil and natural gas are subject to wide fluctuations in
response to relatively minor changes in the supply of and demand for oil and
natural gas, market uncertainty and a variety of other factors that are beyond
the Company's control. These factors include political conditions in the Middle
East and elsewhere, domestic and foreign supply of oil and natural gas, the
level of consumer demand, weather conditions and overall economic conditions.
All references in the following discussion related to earnings per
share are based upon the Company's diluted earnings per share.
12
<PAGE> 13
Results of Operations
Income before reorganization items for the three months ended
September 30, 2000 was $18.2 million compared to $4.8 million for the same
period in 1999. This increase was attributable to significantly higher gas and
oil prices, lower lease operating expenses and lower interest expense. Net
income for the three months ended September 30, 2000 was $16.9 million, or $0.58
per share, compared to net income of $4.8 million, or $0.16 per share, for the
same period last year.
For the nine months ended September 30, 2000, income before
reorganization items was $41.7 million compared to $3.1 million for the same
period in 1999. Higher gas and oil prices and lower lease operating expenses,
general and administrative expenses and interest expense were factors in this
improvement. Net income for the nine-month period in 2000 was $31.1 million, or
$1.06 per share, compared to $3.1 million, or $0.10 per share, for the same
period in 1999. Reorganization items totaled $10.7 million, of which $6.1
million was a non-cash write-off of deferred debt issuance costs associated with
the Company's senior notes and senior subordinated notes. The remainder of the
reorganization items was primarily for legal and financial advisory services.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2000 1999 2000 1999
---------- -------- -------- ----------
Production:
<S> <C> <C> <C> <C>
Natural gas (MMcf) 9,164 11,387 30,233 38,889
Oil (Mbbl) 324 299 997 967
Liquids (Mbbl) 107 33 189 85
Summary (MMcfe):
Working interest 9,524 8,839 28,541 26,889
VPP 2,237 4,544 8,815 18,313
---------- -------- -------- ----------
Total 11,761 13,383 37,356 45,202
Average Realized Price:
Gas (per Mcf) $ 3.85 $ 2.39 $ 3.17 $ 2.12
Oil (per bbl) 29.27 18.80 26.94 14.25
Liquids (per bbl) 11.13 10.52 12.58 9.71
Total (per Mcfe) 3.91 2.48 3.35 2.14
Revenue:
Gas $ 35,279 $ 27,266 $ 95,780 $ 82,310
Oil 9,532 5,617 26,891 13,770
Liquids 1,194 347 2,377 826
---------- -------- -------- ----------
Total $ 46,005 $ 33,230 $125,048 $ 96,906
========== ======== ======== ==========
</TABLE>
Gas revenue
For the three months ended September 30, 2000, gas revenue
increased $8.0 million to $35.3 million due to a 61% increase in average
realized natural gas prices. While working interest production increased
slightly in the current year three month period, total gas production decreased
20%, primarily as a result of the expiration of certain VPPs. In addition,
scheduled production of
13
<PAGE> 14
approximately 750 MMcf associated with certain VPPs was curtailed in the
quarter. It is currently anticipated that this production will be made up during
the first half of 2001. Gas revenues were reduced by $2.7 million and $1.3
million, respectively, for the three months ended September 30, 2000 and
September 30, 1999 as a result of hedging.
For the nine months ended September 30, 2000, gas revenue increased
$13.5 million to $95.8 million due to a 50% increase in average realized natural
gas prices. Working interest production increased 2% while VPP production
decreased 51% for the nine months ended September 30, 2000 compared to the same
period in 1999. The 1999 nine-month period included 2,000 MMcf of non-recurring
production related to the make up of under-deliveries associated with the VPP
program in 1998. The remainder of the decrease in VPP production in the 2000
period was primarily attributable to the sale of VPP producing properties in
1999, the expiration of certain VPPs and the VPP curtailments discussed above.
Gas revenues were reduced by $4.6 million for the nine months ended September
30, 2000 and were increased by $2.1 million for the same period in 1999 as a
result of hedging.
Oil and liquids revenue
For the three months ended September 30, 2000, oil and liquids
revenue was $10.7 million, compared to $6.0 million during the 1999 three-month
period as a result of a 56% increase in average realized oil prices combined
with a 30% increase in oil and liquids production.
For the nine months ended September 30, 2000, oil and liquids revenue
increased approximately 101% from the 1999 period to $29.3 million due mainly to
the 89% increase in average realized oil prices.
Other revenue, net
Other revenue for the three months ended September 30, 2000 included
$0.4 million from the sale of emission reduction credits. The 1999 three-month
period included $1.4 million from production tax refunds and adjustments and
$0.8 million from the sale of emission reduction credits.
For the nine months ended September 30, 2000, other revenue also
included $1.0 million in connection with the settlement of certain obligations
related to a 1996 acquisition. The 1999 nine-month period also included $1.5
million from a settlement of a severance tax dispute.
Lease operating expenses
Lease operating expenses decreased 10% to $6.2 million for the three
months ended September 30, 2000 and 10% to $18.4 million for the nine months
ended September 30, 2000 compared to the same periods last year. The lower
expense levels in the current year reflect the Company's 1999 cost reduction
initiatives and sales of marginal higher-cost oil and gas properties.
Production taxes
Production taxes, which are generally based on a percentage of
revenue (excluding VPP revenue), increased $0.7 million to $1.6 million for the
third quarter of 2000 and $1.8 million to $4.3 million for the nine months ended
September 30, 2000, compared to the same periods in 1999 due primarily to higher
prices being realized on oil and gas sales.
General and administrative expenses
General and administrative expenses ("G&A") for the three months
ended September 30, 2000 were $1.9 million compared to $1.7 million for the same
period in 1999. For the nine months ended September 30, 2000, G&A decreased 21%
to $5.8 million. Reduction in the Company's workforce, cost savings associated
with the closing of the New Jersey corporate office, and other cost reduction
initiatives throughout the Company were the primary reasons
14
<PAGE> 15
for the decrease in G&A in 2000.
Depreciation, depletion and amortization ("DD&A")
The Company provides for depletion on its oil and gas properties
using the future gross revenue method based on recoverable reserves valued at
current prices. During the three months ended September 30, 2000, DD&A increased
$0.2 million to $11.7 million. The impact of the decrease in the DD&A rate from
33% to 25% due to higher oil and gas prices was offset by higher oil and gas
revenue in the current year three-month period.
For the nine months ended September 30, 2000, DD&A decreased $2.2
million primarily due to a lower DD&A rate. The DD&A rate decreased to 29% for
the current year nine-month period compared to 38% for the nine months ended
September 30, 1999 due mainly to higher oil and gas prices. The impact of the
lower DD&A rate was partially offset by higher oil and gas revenue.
Interest expense
In accordance with AICPA Statement of Position 90-7 "Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"),
the Company is required to report interest expense during the bankruptcy
proceedings only to the extent that interest expense will be paid during the
proceedings or that it is probable that interest expense will be an allowed
priority, secured, or unsecured claim. Accordingly, the Company recorded
interest expense only for its bank debt and its senior notes but not for its
senior subordinated notes subsequent to the filing of the involuntary Chapter 11
petition on January 5, 2000. This was the primary reason that interest expense
decreased $3.4 million to $6.7 million for the three months ended September 30,
2000 and $9.8 million to $20.3 million for the nine months ended September 30,
2000 compared to the same periods in 1999. In addition, lower average borrowings
on the Company's bank debt resulted in decreases in interest expense of $1.1
million for the three months ended September 30, 2000 and $3.3 million for the
nine months ended September 30, 2000 compared to the same periods a year ago,
partially offset by higher average interest rates in 2000.
Reorganization items
For the three months ended September 30, 2000, the Company recorded
$1.6 million of gross reorganization items primarily for legal and financial
advisory services. In addition, the Company earned interest income of $0.3
million on accumulated cash resulting from the Chapter 11 proceedings.
For the nine months ended September 30, 2000, the Company recorded
$10.7 million of net reorganization items, $6.1 million of which was a non-cash
write-off of deferred debt issuance costs associated with the Company's senior
notes and senior subordinated notes in accordance with SOP 90-7. The balance
reflects restructuring costs of $5.1 million primarily for legal and financial
advisory services. In addition, the Company earned interest income of $0.6
million on accumulated cash resulting from the Chapter 11 proceedings.
Liquidity and Capital Resources
Continuation as a Going Concern; Proposed Reorganization
During 1997 and 1998, due to very low prices for natural gas and
crude oil and, in 1998, due to disappointing performance of certain properties
in the Rocky Mountain area, the Company incurred significant losses, primarily
due to $268.5 million of pretax non-cash ceiling writedowns of its oil and gas
assets and a reduction from $113.9 million ($93.9 million of which relates to
the 1998 non-cash ceiling test writedowns) to zero in the book value of net
deferred tax assets. As a result of these non-cash charges, the net loss in 1998
was increased by $288.4 million. Also as a result of these adjustments, the
Company has negative stockholders' equity and continues to be in default of
certain covenants in its bank credit facilities. As a consequence, the Company
cannot borrow under the revolving credit facilities. In addition, the Company's
independent public accountants issued modified
15
<PAGE> 16
reports for 1998 and 1999 with respect to the ability of the Company to continue
as a going concern, which also constitutes a default under the revolving bank
credit agreements.
On May 18, 1999, the Company and its bank lenders entered into
forbearance agreements which provided that the bank lenders would defer
redetermination of the borrowing base until July 1, 1999 and would refrain from
exercising their rights and remedies as a result of the existing defaults until
June 30, 1999. Under these initial forbearance agreements, the Company committed
50% of monthly cash flow to payments of principal, with a minimum of $2 million
monthly. In addition, a portion of the proceeds from the sale of any of the
Company's oil and gas properties were dedicated to payment of principal under
the bank credit facilities.
On July 7, 1999, the lenders under each of the bank credit facilities
reset the Company's borrowing base, which had been $165 million in the aggregate
at December 31, 1998, to $91 million. The principal amount outstanding under the
bank loans at June 30, 1999 was $126.7 million. Because the Company did not make
the $35.7 million additional lump-sum payment, a payment default occurred. The
bank lenders declared due all amounts owed under the bank loans, demanded
payment and declared in effect the default rate of interest. The bank lenders
also delivered a payment blockage notice to the indenture trustee of the 8.875%
senior subordinated notes. The Company did not make the scheduled July 15, 1999
interest payments on both the 8.875% senior subordinated notes and the 11%
senior notes, totaling $13.8 million.
On July 26, 1999, the Company and its bank lenders entered into new
forbearance agreements (effective as of July 1, 1999) which provided that the
lenders would refrain from exercising their rights and remedies not previously
exercised until October 5, 1999. Subsequently, these new forbearance agreements
were extended twice on the same terms through March 2, 2000. The bank lenders
did not waive the payment default but rescinded their declaration that all
amounts outstanding under the credit facilities are immediately due and payable
and effectively waived the default rate of interest. The new forbearance
agreements precluded the Company from making interest payments on its senior
notes and its senior subordinated notes. Under the terms of the new forbearance
agreements, the Company committed to make aggregate monthly principal payments
of $2.5 million. In addition, the agreements provided that a portion of the
proceeds from the sale of any of the Company's oil and gas properties would be
dedicated to the payment of principal under the credit facilities. The new
forbearance agreements expired on March 2, 2000. Since the Commencement Date,
the Company has been operating under a cash collateral agreement with its bank
lenders. The agreement provides, among other things, that the Company make
monthly principal payments of $2.5 million and that the bank lenders have the
right to review and approve the Company's projected use of cash during the
bankruptcy proceedings. From the time that the original forbearance agreements
were entered into through September 30, 2000, the Company has made principal
payments, pursuant to the forbearance agreements and the cash collateral
agreement, of $65.6 million to its banks, reducing the outstanding loans from
$150 million to $84.4 million.
As a result of the payment default under the bank loans and the
interest payment default on the notes, the holders of the requisite percentage
of the Company's senior notes and senior subordinated notes and the indenture
trustees of the senior notes and the senior subordinated notes had the right to
declare the principal amount of the notes immediately due and payable. On
December 28, 1999, holders of the senior notes alleging to hold the requisite
percentage of senior notes provided notice of acceleration of maturity and
declared the principal and interest of the senior notes to be immediately due
and payable. At September 30, 2000, accrued interest on the senior notes and
senior subordinated notes was $38.8 million and the contractual interest payable
was $47.1 million. The outstanding principal amount of the senior subordinated
notes is $125 million and the outstanding principal amount of the senior notes
is $150 million.
As a result of the above factors, there is substantial doubt about
the Company's ability to continue as a going concern. The accompanying financial
statements do not include any adjustments relating to the recoverability and
classification of the asset-carrying amounts or the amounts and
16
<PAGE> 17
classifications of liabilities that might result should the Company be unable to
continue as a going concern.
The Company took numerous steps to improve its financial situation.
Among other things, the Company reduced its workforce by over 30% during the
two-year period ended December 31, 1999, closed its New Jersey corporate office
and froze senior management salaries for 1999. Expense reduction initiatives
reduced lease operating expenses and general and administrative expenses by 23%
for the nine months ended September 30, 2000 compared to the same period in 1998
and by 13% compared to the same period in 1999. Planned capital investments were
reduced in 1999, especially VPP expenditures, and a property divestiture program
was implemented whereby the Company sold non-core properties and raised net
proceeds of approximately $27.7 million to reduce outstanding bank debt. During
the third quarter of 2000, the Company increased its drilling program to
capitalize on the dramatic increases in natural gas and oil prices and the
Company's available drilling opportunities. While the reduced capital investment
in the VPP program has meant a decline in VPP production, those initiatives have
enabled the Company to reduce debt while increasing working interest production
through its drilling program.
On December 28, 1999, the Company announced the Restructuring
Agreement with holders of more than two-thirds in amount of the senior
subordinated notes and holders of a majority in amount of the senior notes. To
effectuate the Restructuring Agreement, the parties agreed that the Company
would commence a case under Chapter 11 of Title 11 of the Bankruptcy Code by
January 18, 2000. On January 5, 2000, however, certain entities filed an
involuntary petition for relief against KCS Energy, Inc. (the parent company
only) under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court. On the
Commencement Date, the Bankruptcy Court entered an order for relief under
Chapter 11 of the Bankruptcy Code against KCS. Also on the Commencement Date,
KCS Energy, Inc.'s subsidiaries filed separate voluntary petitions under Chapter
11 of the Bankruptcy Code in the Bankruptcy Court and the Company filed its
initial disclosure statement with the Bankruptcy Court for approval in
connection with its proposed Plan. Amended versions of the disclosure statement
and Plan were subsequently filed. Since the Commencement Date, the Company and
its subsidiaries have continued to operate their businesses as
debtors-in-possession pursuant to sections 1107 and 1108 of the Bankruptcy Code.
On April 20, 2000, the Company reported that CSFB had exercised its
right to terminate the Restructuring Agreement because a joint plan of
reorganization was not confirmed by the date specified in the agreement. On
April 28, 2000, the Bankruptcy Court ruled that the Company's proposed second
amended Plan impaired the senior noteholders. The Company maintains that the
senior noteholders were unimpaired pursuant to the second amended Plan and filed
a notice of appeal regarding the Bankruptcy Court's ruling. The appeal is
currently pending.
On May 4, 2000, the Bankruptcy Court terminated the time period under
which the Company had the exclusive right to propose a plan of reorganization.
On June 13, 2000, the Committee and CSFB filed a disclosure statement with
respect to their proposed joint plan of reorganization. On June 30, 2000, the
Company filed its fourth amended disclosure statement and third amended Plan.
On October 25, 2000, the Bankruptcy Court judge entered orders
approving the disclosure statements describing the Company's Plan and the
Committee / CSFB plan. Beginning on November 3, 2000, the Company's disclosure
statement and the Committee / CSFB disclosure statement, along with ballots,
voting instructions and preference forms were mailed to impaired creditors and
shareholders. The Bankruptcy Court has scheduled January 30, 2001 for the
commencement of the Confirmation Hearing on both plans. The Bankruptcy Court
shall also consider confirmation of any plan filed by a party in interest on or
before December 15, 2000 that provides for each class of claims or interests to
be unimpaired under section 1124 of the Bankruptcy Code (thereby not requiring
the solicitation of votes to accept or reject such plan from any class of claims
or interests). If any such plan is filed, notice of filing and the deadline for
objections to confirmation will be served on the parties entitled to such
notice.
17
<PAGE> 18
Since the second quarter of 1999, the Company has been funding its
capital investment program with internally generated cash flow and a portion of
the proceeds from asset sales while at the same time reducing its bank debt by
$65.6 million in accordance with the forbearance agreements and cash collateral
agreement. The Company intends to fund its short-term capital investment program
in the same way pending the outcome of the bankruptcy proceedings. The Company
has increased its cash balances from $10.6 million at December 31, 1999 to $26.3
million at September 30, 2000.
Since the Commencement Date, the Company has been paying its
post-petition trade obligations in the ordinary course of business. In addition,
the Company filed a motion in the Bankruptcy Court to allow for the payment of
all pre-petition trade obligations in order to minimize the effect of the
bankruptcy proceedings on the Company's operations and business relationships.
The Bankruptcy Court subsequently granted the Company the authority to pay
certain specified pre-petition trade obligations comprising the substantial
majority of its pre-petition trade obligations. Under both proposed plans, all
pre-petition and post-petition trade obligations will be paid in full.
The Company believes that its cash flow from operations and the
proceeds from asset sales should be sufficient to meet its short-term operating
requirements. However, there can be no assurance that, given the Company's
limited capital resources, it can continue to maintain its current production
and oil and gas reserve replacement levels.
Cash flow from operating activities
Net income adjusted for non-cash charges and reorganization items for the
nine months ended September 30, 2000 increased 82% to $80.2 million compared to
$44.1 million during the same period in 1999. The increase reflects higher
average realized natural gas and oil prices, lower lease operating and general
and administrative expenses, and lower interest expense. Net cash provided by
operating activities before reorganization items increased 114% to $96.6 million
during the current year nine-month period, compared to $45.1 million for the
nine months ended September 30, 1999. The net increase in accounts payable and
accrued liabilities, inclusive of accrued interest, during the current year
nine-month period was primarily due to accrued interest on the senior notes and
accrued restructuring costs. The remainder of changes in working capital in 2000
and 1999 was largely related to the timing of cash receipts and payments.
Investing activities
Capital expenditures for the nine months ended September 30, 2000
were $53.2 million of which $30.0 million was for development activities
(including $3.8 for a production processing plant), $15.9 million for lease
acquisitions, seismic surveys and exploratory drilling, $7.1 million for the
acquisition of proved reserves and $0.2 million for other assets.
Forward-looking Statements
The information discussed in this Form 10-Q includes "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act"), and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). All statements other than statements
of historical facts included herein regarding planned capital expenditures, the
Company's financial position and future operations, are forward-looking
statements. Although the Company believes that the expectations reflected in
such forward-looking statements are reasonable, they do involve certain
assumptions, risks and uncertainties, and the Company can give no assurance that
such expectations will prove to have been correct. The Company's actual results
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including the timing and success of
the Company's drilling activities, the volatility of prices and supply of and
demand for oil and gas, the numerous uncertainties inherent in estimating
quantities of oil and gas reserves and actual future production rates and
associated costs, the usual hazards associated with the oil and gas industry
(including blowouts, cratering, pipe failure, spills, explosions
18
<PAGE> 19
and other unforeseen hazards), and increases in regulatory requirements.
All forward-looking statements attributable to the Company or persons
acting on its behalf are expressly qualified in their entirety by such factors.
19
<PAGE> 20
MARKET RISK DISCLOSURE
The Company has entered, and may continue to enter, into swaps,
futures contracts, options and collars to manage the price risk associated with
the production of natural gas and oil. Since these contracts qualify as hedges
and correlate to market price movement of natural gas or oil, any gains or
losses resulting from market changes will be offset by losses or gains on
corresponding physical transactions.
These hedging arrangements have the effect of fixing for specified
periods the prices the Company will receive for the volumes to which the hedge
relates. As a result, while these hedging arrangements are structured to reduce
the Company's exposure to decreases in the price associated with the underlying
commodity, they also limit the benefit the Company might otherwise receive from
any price increases associated with the hedged commodity. In accordance with
Item 305 of Regulation S-K, the Company has elected the tabular method to
disclose market-risk related to derivative financial instruments as well as
other financial instruments.
The following table sets forth the Company's natural gas hedged
position at September 30, 2000.
<TABLE>
<CAPTION>
Collars (prices per MMBtu)
---------------------------------
Swaps Floors from $2.70 to $3.53
-----------------------------------------------------------
@ $2.055 per MMBtu @ $5.04 per MMBtu Ceilings from $4.00 to $5.50
---------------------------- -------------------------- ---------------------------------
Unrealized Unrealized Unrealized
Volume Loss Volume Gain(Loss) Volume Loss
MMBtu ($000's) MMBtu ($000's) MMBtu ($000's)
<S> <C> <C> <C> <C> <C> <C>
2000 870,000 (2,786) 90,000 (20) 3,000,000 (2,481)
2001 3,000,000 (7,678) 90,000 2 3,000,000 (1,774)
2002 2,520,000 (5,161) - - - -
2003 2,040,000 (3,396) - - - -
Thereafter 2,800,000 (4,176) - - - -
</TABLE>
The Company accounts for oil and natural gas futures contracts and commodity
price swaps in accordance with FASB Statement No. 80 "Accounting for Futures
Contracts". The Company will adopt SFAS No. 133, as amended, effective January
1, 2001. See Note 9 to Condensed Consolidated Financial Statements.
The Company uses fixed and variable rate long-term debt to finance
the Company's capital spending program. These debt arrangements expose the
Company to market risk related to changes in interest rates. During the nine
months ended September 30, 2000, the Company's weighted average contractual
interest rate on its fixed rate debt of $275 million was 10%. The weighted
average interest rate on its variable rate debt of $84.4 million was 9.3%. The
Company's bank debt has been classified as short-term as a result of defaults
under its debt agreements. The Company's senior notes and senior subordinated
notes have been classified as liabilities subject to compromise as a result of
the Chapter 11 proceedings.
20
<PAGE> 21
KCS ENERGY, INC. - FORM 10-Q
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is made to Item 3, Legal Proceedings, in the Company's
Annual Report on Form 10-K for the year ended December 31, 1999.
On May 11, 2000, the Texas Supreme Court denied the royalty holders'
motion for rehearing in the Los Santos Suit. Under its rules, the Texas Supreme
Court will not consider another motion for rehearing.
On June 27, 2000, the Fifth Circuit Court of Appeals at Dallas, Texas
affirmed the trial court's judgment in favor of the Company in the Jesus
Yzaguirre Suit. The royalty owners did not move for a rehearing but on August
10, 2000, they applied to the Texas Supreme Court for review. On October 26,
2000, the Texas Supreme Court denied the royalty owners' petition for review.
The royalty owners filed a motion for a rehearing on November 10, 2000.
The Company has filed a counterclaim against MidAmerican and a
cross-action against Kerr-McGee in the litigation among Kerr-McGee L.P.,
InterCoast, MidAmerican and the Company which is described in the Company's
Annual Report on Form 10-K for the year ended December 31, 1999. The
counterclaim and cross-action seek a declaratory judgment that the Company is
entitled to indemnity from such parties under agreements with such parties
described in the Company's 10-K. Discovery in the litigation is proceeding and
trial has been set for May 14, 2001.
Item 3. Defaults Upon Senior Securities
The Company did not make scheduled interest payments on July 15,
1999, January 15, 2000 and July 15, 2000 on its senior notes and senior
subordinated notes. These scheduled but unpaid interest obligations aggregate to
$41.4 million. See Note 2 to Condensed Consolidated Financial Statements. Also
see Note 2 to Condensed Consolidated Financial Statements for a discussion of
the Company's defaults under its bank credit facilities.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
Exhibit 27 - Financial Data Schedule.
Exhibit 99 (i) - Fourth Amended Disclosure Statement For
Debtors' Third Amended Joint Plan of Reorganization Under
Chapter 11 Of The Bankruptcy Code.
Exhibit 99 (ii) - Second Amended Disclosure Statement For
Second Amended Joint Plan Of Reorganization Under Chapter
11 of the Bankruptcy Code Proposed By The Official
Committee Of Unsecured Creditors And Credit Suisse First
Boston Corporation.
(b) Reports on Form 8-K. There were no reports on Form 8-K
iled during the three months ended September 30, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KCS ENERGY, INC.
November 10, 2000 /S/ FREDERICK DWYER
--------------------
Frederick Dwyer
Vice President, Controller
and Secretary
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