<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 June 30, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
----- SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------------------
Commission file 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: 29,268,810 shares outstanding as of July
31, 2000.
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KCS ENERGY, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION)
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30
(Amounts in thousands except ---------------------- ---------------------
per share data) Unaudited 2000 1999 2000 1999
---------------------------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Oil and gas revenue $43,476 $31,334 $79,043 $63,676
Other revenue, net 1,148 2,021 1,588 2,684
------- ------- ------- -------
Total revenue 44,624 33,355 80,631 66,360
Operating costs and expenses
Lease operating expenses 6,314 6,644 12,160 13,625
Production taxes 1,537 812 2,746 1,577
General and administrative expenses 1,722 2,422 3,816 5,630
Depreciation, depletion and amortization 12,534 13,443 25,156 27,548
------- ------- ------- -------
Total operating costs and expenses 22,107 23,321 43,878 48,380
------- ------- ------- -------
Operating income 22,517 10,034 36,753 17,980
Interest and other income, net 352 181 352 222
Interest expense (contractual interest was
$9,132 and $18,350 for the three and six
months ended June 30, 2000, respectively (6,769) (9,996) (13,554) (19,901)
------- ------- ------- -------
Income (loss) before reorganization items
and income taxes 16,100 219 23,551 (1,699)
Reorganization items
Write-off of deferred debt issue costs
related to senior notes and senior
subordinated notes -- -- (6,132) --
Financial restructuring costs (1,431) -- (3,496) --
Interest income 168 -- 267 --
------- ------- ------- -------
Total reorganization items (1,263) -- (9,361) --
------- ------- ------- -------
Income (loss) before income taxes 14,837 219 14,190 (1,699)
Federal and state income taxes -- -- -- --
------- ------- ------- -------
Net income (loss) $14,837 $ 219 $14,190 $(1,699)
======= ======= ======= =======
Basic earnings (loss) per share
of common stock $ 0.51 $ 0.01 $ 0.48 $ (0.06)
======= ======= ======= =======
Diluted earnings (loss) per share
of common stock $ 0.51 $ 0.01 $ 0.48 $ (0.06)
======= ======= ======= =======
Weighted average shares outstanding for
computation of earnings (loss) per share
Basic 29,266 29,261 29,266 29,259
Diluted 29,273 29,268 29,290 29,259
======= ======= ======= =======
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
2
<PAGE> 3
KCS ENERGY, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION)
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
(Dollars in thousands) Unaudited 2000 1999
------------------------------------ -------- ------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 20,648 $ 10,584
Trade accounts receivable, net 28,818 21,941
Other current assets 4,633 7,571
-------- --------
Current assets 54,099 40,096
-------- --------
Oil and gas properties, full cost method, net 239,165 232,281
Other property, plant and equipment, net 4,082 4,686
-------- --------
Property, plant and equipment, net 243,247 236,967
-------- --------
Deferred charges and other assets 2,205 7,869
-------- --------
$299,551 $284,932
======== ========
Liabilities and stockholders' equity
Current liabilities
Accounts payable $ 13,814 $ 13,340
Accrued interest on public debt -- 26,444
Other accrued liabilities 15,677 11,262
Short-term debt 92,038 381,819
-------- --------
Current liabilities 121,529 432,865
-------- --------
Deferred credits and other liabilities 1,963 1,910
-------- --------
Liabilities subject to compromise
Senior notes 150,000 --
Senior subordinated notes 125,000 --
Accrued interest on public debt 34,694 --
Pre-petition accounts payable 2,018 --
-------- --------
Liabilities subject to compromise 311,712 --
-------- --------
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 (276,324) (290,514)
Less treasury stock,
2,167,096 shares, at cost (4,741) (4,741)
-------- --------
Total stockholders' (deficit) equity (135,653) (149,843)
-------- --------
$299,551 $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>
Six Months Ended
June 30,
-------------------
(Dollars in thousands) Unaudited 2000 1999
-------------------------------------- ------ ------
<S> <C> <C>
Cash flows from operation activities:
Net income (loss) $ 14,190 $ (1,699)
Adjustments to reconcile net income (loss)
to cash provided by operation activities:
Depreciation, depletion and amortization 25,156 27,548
Other non-cash charges and credits, net 1,097 1,246
Reorganization items 9,361 --
-------- --------
49,804 27,095
Net changes in assets and liabilities:
Trade accounts receivable (6,877) 13,718
Accounts payable and accrued liabilities 6,907 (13,245)
Accrued interest on public debt 8,250 --
Other, net 2,775 (2,110)
-------- --------
Net cash provided by operating activities
before reorganization items 60,859 25,458
Reorganization items (excluding non-cash write-off
of deferred debt issue costs) (3,229) --
-------- --------
Net cash provided by operating activities 57,630 25,458
Cash flows from investing activities:
Investment in oil and gas properties (31,421) (21,596)
Net proceeds from sale of oil and gas properties 143 21,432
Other capital expenditures, net (158) 5
-------- --------
Net cash used in investing activities (31,436) (159)
Cash flows from financing activities:
Proceeds from debt 292 16,300
Repayments of debt (15,105) (25,289)
Deferred financing costs (1,317) (686)
Other, net -- (566)
-------- --------
Net cash used in financing activities (16,130) (10,241)
-------- --------
Net increase in cash and cash equivalents 10,064 15,058
Cash and cash equivalents at beginning of period 10,584 876
-------- --------
Cash and cash equivalents at end of period $20,648 $ 15,934
======== ========
</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
comprised by $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 June 30, 2000, the Company has
made principal payments, pursuant to the forbearance agreements and the cash
collateral agreement, of $58 million to its banks, reducing the outstanding
loans from $150 million to $92 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 June 30, 2000, accrued interest on the senior notes and senior
subordinated notes was $34.7 million and the contractual interest payable was
$40.2 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 24%
in the second quarter of 2000 compared to the same period in 1998 and by 11%
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.
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.
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<PAGE> 7
On April 20, 2000, the Company reported that Credit Suisse First Boston
("CSFB") had exercised its right to terminate the Restructuring 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 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. The Bankruptcy
Court has scheduled a hearing for August 31, 2000 to consider the adequacy of
both the Company's disclosure statement and the Committee/CSFB disclosure
statement.
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
$58 million in accordance with the forbearance agreements and cash collateral
agreement. The Company intends to fund the balance of its 2000 capital
investment program in the same way pending the outcome of the bankruptcy
proceedings.
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's current Plan, if ultimately confirmed by the Bankruptcy
Court, would result in impairment of the existing common stockholders, holders
of senior subordinated notes, the Company's bank group and general unsecured
creditors. The current Committee/CSFB plan, if ultimately confirmed by the
Bankruptcy Court, would result in impairment of the existing common
stockholders, the holders of senior notes and holders of senior subordinated
notes.
The Company is continuing to discuss alternative plans of
reorganization 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 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.
In addition, SOP 90-7 requires the Company to report interest expense
during the bankruptcy
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<PAGE> 8
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 June 30,
2000 was $6.8 million compared to $10.0 million for the same period in the prior
year. For the six months ended June 30, 2000 interest expense and amortization
of deferred debt issuance costs was $13.6 million compared to $19.9 million for
the same period in the prior year. The reported interest expense as well as the
contractual interest expense for the three and six months ended June 30, 2000
are disclosed in the accompanying Condensed Statements of Consolidated
Operations. The contractual interest amount is not comparable to the interest
expense in the prior year period as this amount does not include amounts for
amortization of debt issuance costs ($0.5 million for the three-month period and
$1.1 million for the six-month period) and capitalized interest ($0.1 million
for the three-month period and $0.3 million for the six-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. In the accompanying Condensed Statements of
Consolidated Operations for the three months ended June 30, 2000, the Company
recorded financial restructuring costs of $1.4 million primarily for legal and
financial advisory services. In addition, the Company earned interest income of
$0.2 million on accumulated cash resulting from the Chapter 11 proceedings.
For the six months ended June 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 $3.5 million and earned interest income was $0.3
million.
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 August 11, 2000, the Company's total market capitalization
was approximately $45.7 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 $4.6 million and $20.2 million, for the six months ended June 30,
2000 and June 30, 1999, respectively. No income tax payments were made during
the six months ended June 30, 2000. Income tax payments were $0.1 million, for
the six months ended June 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
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rehearing.
On June 27, 2000, the Fifth Circuit Court of Appeals at Dallas, Texas
overruled the royalty owner's issues and 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.
In addition to 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 Company has received a
letter dated July 26, 2000 from Newhall Land & Farming Company demanding
remediation of environmental conditions on the lands covered by the RSF Lease
(as defined and described in such Form 10-K). The Company has delivered a copy
of the Newhall Letter to Kerr-McGee LP and has requested indemnification.
Kerr-McGee has not yet responded to the Company's indemnity request.
8. Earnings Per Share
Basic earnings per share were computed by dividing net income (loss) by
the average number of common shares outstanding during the quarter as required
by FASB Statement No. 128, "Earnings per Share" ("SFAS 128"). 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 Six Months Ended
June 30, June 30,
-------------------- --------------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Average common stock outstanding 29,266 29,261 29,266 29,259
Average common stock equivalents 7 7 24 47
------ ------ ------ ------
Average common stock and common
stock equivalents outstanding 29,273 29,268 29,290 29,306
====== ====== ====== ======
</TABLE>
Common stock equivalents are not applicable for the six months ended June 30,
1999 earnings per share as they would be antidilutive.
9. New Accounting Standards
In June 1998, SFAS 133 "Accounting for Derivative Instruments and
Hedging Activities" was issued. SFAS 133 establishes new accounting rules and
disclosure requirements for most derivative instruments and for hedging related
to those instruments. In July 1999, the Financial Accounting Standards Board
issued SFAS 137, which defers the required adoption date of SFAS 133 by one year
to fiscal years beginning after June 15, 2000. In June 2000, the Financial
Accounting Standards Board issued SFAS 138 which amends certain provisions of
SFAS 133. The Company will adopt these statements effective January 1, 2001 and
is currently assessing the initial effects of adoption.
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<PAGE> 10
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 lowered lease operating expenses and general and
administrative expenses by 24% in the second quarter of 2000 compared to the
same period in 1998 and by 11% 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. 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.
10
<PAGE> 11
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 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. The Bankruptcy
Court has scheduled a hearing for August 31, 2000 to consider the adequacy of
both the Company's disclosure statement and the Committee/CSFB disclosure
statement.
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
$58 million in accordance with the forebearance agreements and cash collateral
agreement. The Company intends to fund the balance of its 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 both
proposed plans, all pre-petition and post-petition trade obligations will be
paid in full.
The Company's current Plan, if ultimately confirmed by the Bankruptcy
Court, would result in impairment of the existing common stockholders, holders
of senior subordinated notes, the Company's bank group and general unsecured
creditors. The current Committee/CSFB plan, if ultimately confirmed by the
Bankruptcy Court, would result in impairment of the existing common
stockholders, the holders of senior notes and holders of senior subordinated
notes.
The Company is continuing to discuss alternative plans of
reorganization 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.
Results of Operations
Income before reorganization items for the three months ended June 30,
2000 was $16.1 million compared to $0.2 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 income for the three months ended June 30, 2000 was $14.8 million, or $0.51
per share, compared to a net income of $0.2 million, or $0.01 per share, for the
same period last year. Reorganization items totaled $1.3 million for the
three-month period.
Income before reorganization items was $23.6 million for the six-month
period in 2000 compared to a loss of $1.7 million for the same period in 1999.
Higher oil and gas prices and lower lease operating expenses, general and
administrative expenses and interest expense were factors in this improvement.
Net income for the six-month period in 2000 was $14.2 million, or $0.48 per
share, compared to a $1.7 million loss, or $.06 per share, for the same period
in 1999. Reorganization items totaled $9.4 million, of which $6.1 million was a
non-cash write-off of deferred debt issuance costs
11
<PAGE> 12
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 Six Months Ended
June 30, June 30,
---------------------- ----------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Production:
Gas (MMcf) 10,336 12,760 21,069 27,502
Oil (Mbbl) 340 306 673 668
Liquids (Mbbl) 47 27 82 52
Total (MMcfe) 12,647 14,755 25,595 31,819
Average Price:
Gas (per Mcf) $ 3.30 $ 2.08 $ 2.87 $ 2.00
Oil (per bbl) 25.80 14.91 25.81 12.22
Liquids (per bbl) 14.17 9.60 14.50 9.20
Total (per Mcfe) 3.44 2.12 3.09 2.00
Revenue:
Gas $34,069 $26,518 $60,501 $55,044
Oil 8,755 4,559 17,359 8,153
Liquids 652 257 1,183 479
------- ------- ------- -------
Total $43,476 $31,334 $79,043 $63,676
======= ======= ======= =======
</TABLE>
Gas revenue
For the three months ended June 30, 2000, gas revenue increased $7.6
million to $34.1 million due to a 59% increase in average realized natural gas
prices, partially offset by a 19% decrease in natural gas production primarily
as a result of sales of producing properties in 1999 and the expiration of
certain VPPs.
For the six months ended June 30, 2000, gas revenue increased $5.5
million to $60.5 million due to a 44% increase in average realized natural gas
prices, partially offset by a 23% decrease in natural gas production. The 1999
six-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 production in the 2000 period was primarily
attributable to the sale of producing properties in 1999 and the expiration of
certain VPPs.
Oil and liquids revenue
For the three months ended June 30, 2000, oil and liquids revenue was
$9.4 million, compared to $4.8 million during the 1999 three-month period as a
result of a 73% increase in average realized oil prices combined with a 16%
increase in oil and liquids production.
For the six months ended June 30, 2000, oil and liquids revenue more
than doubled from the 1999 period to $18.5 million due to the 111% increase in
average realized oil prices.
Other revenue, net
Other revenue for the three months ended June 30, 2000 included $1.0
million in connection with the settlement of certain obligations related to a
1996 acquisition. The 1999 three-month period included $1.5 million related to a
settlement of a severance tax dispute.
12
<PAGE> 13
Lease operating expenses
Lease operating expenses decreased 5% to $6.3 million for the three
months ended June 30, 2000 and 11% to $12.2 million for the six months ended
June 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 $1.5 million for the second
quarter of 2000 and $1.2 million to $2.7 million for the six months ended June
30, 2000, compared to the same periods in 1999.
General and administrative expenses
General and administrative expenses ("G&A") decreased 29% or $0.7
million to $1.7 million for the three months ended June 30, 2000 and decreased
32% or $1.8 million to $3.8 million for the six months ended June 30, 2000
compared to the same periods in 1999. 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
for the decrease in G&A in 2000.
Depreciation, depletion and amortization
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 June 30, 2000, depreciation, depletion and
amortization ("DD&A") decreased $0.9 million to $12.5 million. The impact of the
decrease in the DD&A rate from 39% to 28% due to higher oil and gas prices was
largely offset by higher oil and gas revenue in the current year three-month
period. The 1999 three-month period included a $0.7 million writedown to market
value of a Company-owned building in the Rocky Mountain region which was sold in
the third quarter of 1999.
For the six months ended June 30, 2000, DD&A decreased $2.4 million
primarily due to a lower DD&A rate. The DD&A rate decreased to 31% for the
current year six-month period compared to 41% for the six months ended June 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 $3.2 million to $6.8 million for the three months ended June 30, 2000
and $6.3 million to $13.6 million for the six months ended June 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 June 30, 2000 and $2.2 million for the six
months ended June 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 June 30, 2000, the Company recorded $1.4
million of reorganization items primarily for legal and financial advisory
services. In addition, the Company earned interest income of $0.2 million on
accumulated cash resulting from the Chapter 11 proceedings.
13
<PAGE> 14
For the six months ended June 30, 2000, the Company recorded $9.4
million of reorganization items. Of the $9.4 million, $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 in accordance with SOP 90-7. The
Company incurred financial restructuring costs of $3.5 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.
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
comprised by $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 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
14
<PAGE> 15
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 June 30, 2000, the Company has
made principal payments, pursuant to the forbearance agreements and the cash
collateral agreement, of $58 million to its banks, reducing the outstanding
loans from $150 million to $92 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 June 30, 2000, accrued interest on the senior notes and senior
subordinated notes was $34.7 million and the contractual interest payable was
$40.2 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 24%
in the second quarter of 2000 compared to the same period in 1998 and by 11%
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.
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. 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
15
<PAGE> 16
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. The Bankruptcy Court has scheduled
a hearing for August 31, 2000 to consider the adequacy of both the Company's
disclosure statement and the Committee/CSFB disclosure statement.
The Company's current Plan, if ultimately confirmed by the Bankruptcy
Court, would result in impairment of the existing common stockholders, holders
of senior subordinated notes, the Company's bank group and general unsecured
creditors. The current Committee/CSFB plan, if ultimately confirmed by the
Bankruptcy Court, would result in impairment of the existing common
stockholders, the holders of senior notes and holders of senior subordinated
notes.
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
$58 million in accordance with the forbearance agreements and cash collateral
agreement. The Company intends to fund the balance of its 2000 capital
investment program in the same way pending the outcome of the bankruptcy
proceedings.
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 six months ended June 30, 2000 increased 84% to $49.8 million compared to
$27.1 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 increased 126% to $57.6 million during the current year
six-month period, compared to $25.5 million for the six months ended June 30,
1999. The net increase in accounts payable and accrued liabilities, inclusive of
accrued interest, during the current year six-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 six months ended June 30, 2000 were $31.6
million of which $20.3 million was for development activities, $6.8 million for
lease acquisitions, seismic surveys and exploratory drilling, $4.3 million for
the acquisition of proved reserves through the VPP program 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
16
<PAGE> 17
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.
17
<PAGE> 18
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 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 hedged
position at June 30, 2000.
<TABLE>
<CAPTION>
Swaps Collars
------------------------------------- ---------------------------------------------------------
Contract Weighted Unrealized Range of Range of Unrealized
Maturity Date Volume Avg. Price Loss Volume Floor Price Ceiling Price Loss
--------------- --------- ------------- ---------- --------- ------------- ------------- ----------
(MMbtu) ($ per MMbtu) ($000's) (MMbtu) ($ per MMbtu) ($ per MMbtu) ($000's)
<S> <C> <C> <C> <C> <C> <C> <C>
2000
Third quarter 870,000 2.055 (2,114) 3,000,000 2.70-3.53 4.00-5.50 (842)
Fourth quarter 870,000 2.055 (2,102) 3,000,000 2.70-3.53 4.00-5.50 (817)
--------- ------- --------- ------
Total 2000 1,740,000 2.055 (4,216) 6,000,000 2.70-3.53 4.00-5.50 (1,659)
2001 3,000,000 2.055 (4,857) 3,000,000 2.70-3.53 4.00-5.50 (416)
2002 2,520,000 2.055 (2,591) -- -- -- --
2003 2,040,000 2.055 (1,927) -- -- -- --
Thereafter 2,800,000 2.055 (2,646) -- -- -- --
</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 133 and SFAS 138 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 six months ended
June 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 $92.0 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.
18
<PAGE> 19
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
overruled the royalty owner's issues and 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.
In addition to 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 Company has received a
letter dated July 26, 2000 from Newhall Land & Farming Company demanding
remediation of environmental conditions on the lands covered by the RSF Lease
(as defined and described in such Form 10-K). The Company has delivered a copy
of the Newhall Letter to Kerr-McGee LP and has requested indemnification.
Kerr-McGee has not yet responded to the Company's indemnity request.
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.
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed during the three months ended
June 30, 2000.
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.
August 14, 2000 /S/ FREDERICK DWYER
-----------------------------
Frederick Dwyer
Vice President, Controller
and Secretary
19
<PAGE> 20
INDEX TO EXHIBITS
Exhibit
Number Description
------- -----------
27 Financial Data Schedule
