<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 SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission file number 1-11698
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 May 1,
2000.
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KCS ENERGY, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION)
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
(Amounts in thousands except -------------------------------
per share data) Unaudited 2000 1999
-------- --------
<S> <C> <C>
Oil and gas revenue $ 35,567 $ 32,342
Other revenue, net 440 663
-------- --------
Total revenue 36,007 33,005
Operating costs and expenses
Lease operating expenses 5,846 6,981
Production taxes 1,209 765
General and administrative expenses 2,094 3,208
Depreciation, depletion and amortization 12,622 14,105
-------- --------
Total operating costs and expenses 21,771 25,059
-------- --------
Operating income 14,236 7,946
Interest and other income, net -- 41
Interest expense (contractual interest for the three months
ended March 31, 2000 was $9,217) (6,785) (9,905)
-------- --------
Income (loss) before reorganization items and income taxes 7,451 (1,918)
Reorganization items
Write-off of deferred debt issue costs related to
senior notes and senior subordinated notes (6,132) --
Financial restructuring costs (2,065) --
Interest income 99 --
-------- --------
Total reorganization items (8,098) --
-------- --------
Loss before income taxes (647) (1,918)
Federal and state income taxes -- --
-------- --------
Net loss $ (647) $ (1,918)
======== ========
Basic loss per share of common stock $ (0.02) $ (0.07)
======== ========
Diluted loss per share of common stock $ (0.02) $ (0.07)
======== ========
Average shares outstanding for computation
of earnings per share
Basic 29,267 29,258
Diluted 29,267 29,258
======== ========
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
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KCS ENERGY, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION)
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Dollars in thousands) March 31, December 31,
Unaudited 2000 1999
--------- ---------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 13,772 $ 10,584
Trade accounts receivable 23,299 21,941
Other current assets 6,268 7,571
--------- ---------
Current assets 43,339 40,096
--------- ---------
Oil and gas properties, full cost method, net 232,610 232,281
Other property, plant and equipment, net 4,440 4,686
--------- ---------
Property, plant and equipment, net 237,050 236,967
--------- ---------
Deferred charges and other assets 2,779 7,869
--------- ---------
$ 283,168 $ 284,932
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities not subject to compromise
Current liabilities
Accounts payable $ 11,887 $ 13,340
Accrued interest on public debt -- 26,444
Other accrued liabilities 12,583 11,262
Short-term debt 99,595 381,819
--------- ---------
Current liabilities 124,065 432,865
--------- ---------
Deferred credits and other liabilities 1,954 1,910
--------- ---------
Liabilities subject to compromise
Senior notes 150,000 --
Senior subordinated notes 125,000 --
Accrued interest on public debt 30,569 --
Pre-petition accounts payable 2,070 --
--------- ---------
Liabilities subject to compromise 307,639 --
--------- ---------
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 (291,161) (290,514)
Less treasury stock, 2,167,096 shares, at cost (4,741) (4,741)
--------- ---------
Total stockholders' (deficit) equity (150,490) (149,843)
--------- ---------
$ 283,168 $ 284,932
========= =========
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
3
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KCS ENERGY, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION)
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------------
(Dollars in thousands) Unaudited 2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities
Net loss $ (647) $ (1,918)
Adjustments to reconcile net loss
to cash provided by operating activities:
Depreciation, depletion and amortization 12,622 14,105
Other non-cash charges and credits, net 539 593
Reorganization items 8,098 --
-------- --------
20,612 12,780
Net changes in assets and liabilities:
Trade accounts receivable (1,358) 9,861
Accounts payable and accrued liabilities 6,063 (21,173)
Other, net 1,346 84
-------- --------
Net cash provided by operating activities
before reorganization items 26,663 1,552
Reorganization items (excluding non-cash write-off
of deferred debt issue costs) (1,966) --
-------- --------
Net cash provided by operating activities 24,697 1,552
Cash flows from investing activities:
Investment in oil and gas properties (12,563) (9,228)
Proceeds from the sale of oil and gas properties -- 441
Other capital expenditures, net (140) (6)
-------- --------
Net cash used in investing activities (12,703) (8,793)
-------- --------
Cash flows from financing activities:
Proceeds from debt -- 16,300
Repayments of debt (7,500) (2,000)
Deferred financing costs (1,306) (372)
Other, net -- (571)
-------- --------
Net cash provided by (used in) financing activities (8,806) 13,357
-------- --------
Net increase in cash and cash equivalents 3,188 6,116
Cash and cash equivalents at beginning of period 10,584 876
-------- --------
Cash and cash equivalents at end of period $ 13,772 $ 6,992
======== ========
</TABLE>
The accompanying notes to the condensed consolidated financial statements
are an integral part of these statements.
4
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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
Background. 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
5
<PAGE> 6
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 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 March 31, 2000, the
Company has made principal repayments, pursuant to the forbearance agreements
and the cash collateral agreement, of $50 million to its banks, reducing the
outstanding loans from $150 million to $100 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 March 31, 2000, accrued interest on the senior notes and senior
subordinated notes was $30.6 million and the contractual interest payable was
$33.0 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 has taken several 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
approximately 13% during 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.
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 the Bankruptcy Code by January 18, 2000. On January 5,
2000, three holders of senior notes 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 in Wilmington, Delaware
("Bankruptcy Court"). On January 18, 2000, the Bankruptcy Court signed an order
granting KCS relief under Chapter 11 of the Bankruptcy Code. Also on January 18,
2000, each of KCS Energy, Inc.'s subsidiaries filed voluntary petitions under
Chapter 11 of the Bankruptcy Code with the Bankruptcy Court. On January 18,
2000, the Company also filed a disclosure statement with the
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Bankruptcy Court with respect to a proposed plan of reorganization under Chapter
11 of the Bankruptcy Code (the "Plan"). The disclosure statement and Plan have
been amended in subsequent filings with the Bankruptcy Court. The Plan would
have resulted in impairment of the existing common stockholders, holders of the
senior subordinated notes and holders of the Company's warrants and stock
options. As result of the Bankruptcy Court rulings on impairment (the most
recent of which is being appealed) and Credit Suisse First Boston's termination
of the Restructuring Agreement (discussed below), the Company is endeavoring to
negotiate a new consensual plan.
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 making the required
repayments on its bank debt. The Company intends to fund the 2000 capital
investment program in the same way pending the outcome of the bankruptcy
proceedings.
Since the commencement of the bankruptcy proceedings, 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 the
previously proposed Plans, all pre-petition and post-petition trade obligations
were to be paid in full in the ordinary course of business.
Recent Developments. On April 20, 2000, the Company reported that
Credit Suisse First Boston had exercised its right to terminate the
restructuring agreement dated December 27, 1999 among the Company and certain
holders of its senior notes and senior subordinated notes. On April 28, 2000,
the Bankruptcy Court ruled that the Company's proposed second amended Plan
impaired the senior noteholders. The Company claimed that the senior noteholders
were unimpaired under this Plan. The Company has filed a notice of appeal
regarding the Bankruptcy Court's ruling. The Company also decided, under the
circumstances, to withdraw the plan from further consideration by the Bankruptcy
Court. In addition, 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. The Company is continuing to discuss alternative plans of
reorganization with the official committee of unsecured creditors in its Chapter
11 cases, holders of its senior and senior subordinated notes and others with
the goal of achieving a consensus plan that will enable a timely conclusion of
the current 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
levels through oil and gas reserve replacement.
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 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 on the accompanying condensed consolidated balance sheet.
The Company's bank debt was not included in liabilities subject to compromise as
it is fully secured.
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<PAGE> 8
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 months ended March 31, 2000 was $6.8 million compared to $9.9 million for
the same period in the prior year. The reported interest expense as well as the
contractual interest expense for the three months ended March 31, 2000 are
disclosed in the accompanying Condensed Statements of Consolidated Operations.
The contractual interest disclosure is not comparable to the interest expense in
the prior year period as the disclosure does not include amounts for
amortization of debt issuance costs ($0.8 million) and capitalized interest
($0.2 million).
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. In the accompanying Condensed Statements of
Consolidated Operations for the three months ended March 31, 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
claim. The Company incurred financial restructuring costs of $2.1 million
primarily for legal and financial advisory services. In addition, the Company
earned interest income of $0.1 million on accumulated cash resulting from the
Chapter 11 proceedings.
5. New York Stock Exchange Listing
In October 1999, the Company reported that it does not currently meet
the newly effective 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 May 11, 2000, the Company's total market capitalization was
approximately $25.6 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 the
new standards by the deadline established by the NYSE. That plan was accepted by
the NYSE in November 1999. The Company will be monitored for compliance with the
plan. 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 $2.3 million and $16.7 million for the
three months ended March 31, 2000 and March 31, 1999, respectively. No income
tax payments were made during the three months ended March 31, 2000 and the
three months ended March 31, 1999.
7. There are no reconciling items between basic and diluted earnings per share
in either period presented.
8. In April 2000, the Company received $1.7 million plus working interests in
properties having 2.5 Bcf of natural gas reserves (net to the Company) in
connection with the settlement of certain obligations related to a 1996
acquisition.
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9. 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.
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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 considerably. 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 lowered lease operating expenses and general
and administrative expenses by approximately 13% during 1999. 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 January 5, 2000, three holders of senior notes 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 in Wilmington,
Delaware ("Bankruptcy Court"). On January 18, 2000, the Bankruptcy Court signed
an order granting KCS relief under Chapter 11 of the Bankruptcy Code. Also on
January 18, 2000, each of KCS Energy, Inc.'s subsidiaries filed voluntary
petitions under Chapter 11 of the Bankruptcy Code with the Bankruptcy Court. KCS
and its subsidiaries are currently operating their businesses and managing their
properties as debtors in possession under Chapter 11 of the Bankruptcy Code. See
"Liquidity and Capital Resources" and Note 2 to Condensed Consolidated Financial
Statements.
On April 20, 2000, the Company reported that Credit Suisse First Boston
had exercised its right to terminate the restructuring agreement dated December
27, 1999 among the Company and certain holders of its senior notes and senior
subordinated notes. On April 28, 2000, the Bankruptcy Court ruled that the
Company's proposed second amended Plan impaired the senior noteholders. The
Company claimed that the senior noteholders were unimpaired under this Plan. The
Company has filed a notice of appeal regarding the Bankruptcy Court's ruling.
The Company also decided, under the circumstances, to withdraw the plan from
further consideration by the Bankruptcy Court. In addition, 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. The Company is continuing
to discuss alternative plans of reorganization with the official committee of
unsecured creditors in its Chapter 11 cases, holders of its senior and senior
subordinated notes and others with the goal of achieving a
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consensus plan that will enable a timely conclusion of the current 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.
Results of Operations
Income before reorganization items for the three months ended March 31,
2000 was $7.2 million compared to a loss of $1.9 million for the same period in
1999. This increase was attributable to significantly higher oil and gas prices,
lower operating and general and administrative expenses and lower interest
expense. Net loss for the three months ended March 31, 2000 was $0.6 million, or
$0.02 per share compared to a net loss of $1.9 million, or $0.07 per share for
the same period last year. The significant improvement in operating results
during the current year period was partially offset by reorganization items
totaling $8.1 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 with the remainder primarily attributable to legal and
financial advisory services.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
2000 1999
------- -------
Production:
<S> <C> <C>
Gas (MMcf) 10,733 14,742
Oil (Mbbl) 333 362
Liquids (Mbbl) 35 25
Total (MMcfe) 12,948 17,064
Average Price:
Gas (per Mcf) $ 2.46 $ 1.93
Oil (per bbl) 25.84 9.94
Liquids (per bbl) 15.17 8.78
Total (per Mcfe) 2.75 1.90
Revenue:
Gas $26,432 $28,526
Oil 8,604 3,594
Liquids 531 222
------- -------
Total $35,567 $32,342
------- -------
</TABLE>
Gas revenue
For the three months ended March 31, 2000, gas revenue decreased $2.1
million to $26.4 million. The average realized gas price increased 27% to $2.46
which added $7.6 million of gas revenue. The impact of higher prices was more
than offset by lower production associated with the volumetric production
payment ("VPP") program. Production in the prior year three-month period
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included a non-recurring 2,000 MMcf make-up of previously underdelivered gas
associated with the VPP program. The underdeliveries occurred during August 1998
through October 1998 as a result of storms in the Gulf of Mexico. The remainder
of the decrease in production was due mainly to the expiration of certain of the
Company's VPPs and 1999 property sales including one VPP which produced 1.5 Bcf
in the 1999 period. This was partially offset by new production from the 1999
drilling program.
Oil and liquids revenue
For the three months ended March 31, 2000, oil and liquids revenue
increased $5.3 million to $9.1 million. Average realized oil prices increased
160% to $25.84 per barrel which added $5.8 million of oil revenue, partially
offset by an 8% decrease in oil production. The decrease in production was
mainly attributable to the sale of producing properties in 1999, partially
offset by new production from the 1999 drilling program.
Lease operating expenses
During the three months ended March 31, 2000, lease operating expenses
decreased 16% to $5.8 million, compared to $7.0 million during the same period
last year as a result of cost reduction initiatives taken by the Company
including the sale of higher-cost, non-strategic properties in 1999.
Production taxes
Production taxes, which are generally based on a percentage of revenue
(excluding VPP revenue), increased $0.4 million to $1.2 million during the first
quarter of 2000, compared to the same period a year ago. This increase reflects
higher non-VPP oil and gas revenue, due mainly to higher oil and gas prices.
General and administrative expenses
For the three-month period ended March 31, 2000, general and
administrative expenses decreased 35% or $1.1 million to $2.1 million compared
to the same period in 1999. The 1999 three-month period included approximately
$0.7 million of non-recurring costs, primarily associated with the closing of
the New Jersey corporate office. The remainder of the decrease in 2000 compared
to 1999 reflects cost reduction initiatives taken by the Company.
Depreciation, depletion and amortization
The Company provides for depreciation, depletion and amortization
("DD&A") 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 March 31, 2000, DD&A decreased $1.5 million primarily due to a lower DD&A
rate. The DD&A rate decreased to 34% for the current year three-month period
compared to 42% for the three months ended March 31, 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
12
<PAGE> 13
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 to $6.8 million for the three months
ended March 31, 2000 compared to $9.9 million for the same period in 1999. In
addition, lower average borrowings on the Company's bank debt resulted in a $1.0
million decrease in interest expense, partially offset by higher average
interest rates.
Reorganization items
For the three months ended March 31, 2000, the Company recorded $8.1
million of reorganization items. Of this, $6.1 million was a non-cash write-off
of deferred debt issuance costs associated with its senior notes and senior
subordinated notes in accordance with SOP 90-7. The Company incurred financial
restructuring costs of $2.1 million primarily for legal and financial advisory
services. In addition, the Company earned interest income of $0.1 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 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
13
<PAGE> 14
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 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 March 31, 2000, the
Company made principal repayments, pursuant to the forbearance agreements and
the cash collateral agreement, of $50 million to its banks, reducing the
outstanding loans from $150 million to $100 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 March 31, 2000, accrued interest on the senior notes and senior
subordinated notes was $30.6 million and the contractual interest payable was
$33.3 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 has taken several 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
approximately 13% during 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.
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 the Bankruptcy Code by January 18, 2000. On January 5,
2000, three holders of senior notes 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 in Wilmington, Delaware
("Bankruptcy Court"). On January 18, 2000, the Bankruptcy Court signed an order
granting KCS relief under Chapter 11 of the Bankruptcy Code. Also on January 18,
2000, each of KCS Energy, Inc.'s subsidiaries filed voluntary petitions under
Chapter 11 of the Bankruptcy Code with the Bankruptcy Court. On January 18,
2000, the Company also filed a disclosure statement with the
14
<PAGE> 15
Bankruptcy Court with respect to a proposed plan of reorganization under Chapter
11 of the Bankruptcy Code (the "Plan"). The disclosure statement and Plan have
been amended in subsequent filings with the Bankruptcy Court. The Plan would
have resulted in impairment of the existing common stockholders holders of the
senior subordinated notes and holders of the Company's warrants and stock
options. As a result of the Bankruptcy Court rulings on impairment (the most
recent of which is being appealed) and Credit Suisse First Boston's termination
of the Restructuring Agreement, the Company is endeavoring to negotiate a new
consensual plan.
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 making the required
repayments on its bank debt. The Company intends to fund the 2000 capital
investment program in the same way pending the outcome of the bankruptcy
proceedings.
Since the commencement of the bankruptcy proceedings, 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 the
previously proposed Plans, all pre-petition and post-petition trade obligations
were to be paid in full in the ordinary course of business.
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
levels through oil and gas reserve replacement.
Cash flow from operating activities
Net income adjusted for non-cash charges and reorganization items for
the three months ended March 31, 2000 increased 61% to $20.6 million compared to
$12.8 million during the same period in 1999. The increase reflects higher
average realized natural gas and oil prices, lower operating expenses and lower
interest expense. Net cash provided by operating activities was $24.7 million
during the current year three-month period, compared to cash provided by
operating activities of $1.6 million for the three months ended March 31, 1999.
The net increase in accounts payable and accrued liabilities, inclusive of
accrued interest, during the current year three month period was primarily due
to accrued interest on the senior notes and accrued restructuring costs. The
significant decrease in accounts payable and accrued liabilities in the 1999
three-month period was mainly due to the payment of accrued interest on the
senior notes and senior subordinated notes on January 15, 1999. The remainder of
changes in working capital was largely related to the timing of cash receipts
and payments.
Investing activities
Capital expenditures for the three months ended March 31, 2000 were
$12.7 million of which $8.9 million was for development activities, $3.7 million
for lease acquisitions, seismic surveys and exploratory drilling, and $0.1
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,
15
<PAGE> 16
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 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.
16
<PAGE> 17
MARKET RISK DISCLOSURE
The Company has, and may continue to, enter into swaps, futures
contracts and options 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 have received
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, oil and
natural gas liquids hedged position at March 31, 2000. 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".
<TABLE>
<CAPTION>
Natural Gas Oil & Natural Gas Liquids
------------------------------------------------ ---------------------------------
Contract Weighted Unrealized Weighted Unrealized
Maturity Date Volume Avg. Price Loss Volume Avg. Price Loss
------------- --------- ------------- ---------- ------- ---------- ----------
(MMbtu) ($ per MMbtu) ($000's) (Bbl) ($ per Bbl) ($000's)
2000
<S> <C> <C> <C> <C> <C> <C>
Second quarter 870,000 2.055 (724) 51,780 21.81 (123)
Third quarter 870,000 2.055 (749) -- -- --
Fourth quarter 870,000 2.055 (850) -- -- --
--------- ---------- ------- ----------
Total 2000 2,610,000 2.055 (2,323) 51,780 -- (123)
2001 3,000,000 2.055 (2,240) -- -- --
2002 2,520,000 2.055 (1,648) -- -- --
2003 2,040,000 2.055 (1,334) -- -- --
Thereafter 2,800,000 2.055 (1,831) -- -- --
</TABLE>
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 first quarter of
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 $99.6 million was 9.0%. 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.
Subsequent to March 31, 2000, KCS entered into hedging agreements
establishing a floor price of $2.77 per Mmbtu and a ceiling price of $4.00 per
Mmbtu, subject to basis differentials, for 550,000 Mmbtu per month of natural
gas production for the months of July 2000 through March 2001. These hedges were
accomplished via no-cost collars.
17
<PAGE> 18
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.
Item 3. Defaults Upon Senior Securities
The Company did not make scheduled interest payment on July 15, 1999
and January 15, 2000 on its senior notes and senior subordinated notes.
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.
(b) Reports on Form 8-K.
On January 31, 2000, the registrant reported, under Item 3 of
Form 8-K, that on January 18, 2000 the Bankruptcy Court for
the District of Delaware had signed an order granting the
registrant and its subsidiaries relief under Chapter 11 of the
Bankruptcy Code.
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.
May 15, 2000 /s/ FREDERICK DWYER
------------------------------
Frederick Dwyer
Vice President, Controller
and Secretary
18
<PAGE> 19
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
27 -- Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 13,772
<SECURITIES> 0
<RECEIVABLES> 23,299
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 43,339
<PP&E> 987,097
<DEPRECIATION> 750,047
<TOTAL-ASSETS> 283,168
<CURRENT-LIABILITIES> 124,065
<BONDS> 275,000
0
0
<COMMON> 314
<OTHER-SE> (150,804)
<TOTAL-LIABILITY-AND-EQUITY> 283,168
<SALES> 35,567
<TOTAL-REVENUES> 36,007
<CGS> 0
<TOTAL-COSTS> 21,771
<OTHER-EXPENSES> 8,098
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,785
<INCOME-PRETAX> (647)
<INCOME-TAX> 0
<INCOME-CONTINUING> (647)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (647)
<EPS-BASIC> (.02)
<EPS-DILUTED> (.02)
</TABLE>
