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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, 2002
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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
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KCS ENERGY, INC.
----------------
(Exact name of registrant as specified in its charter)
Delaware 22-2889587
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5555 San Felipe Road, Houston, TX 77056
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(713) 877-8006
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding twelve months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
(1) X Yes (2) No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, $0.01 par value: 36,197,810 shares outstanding as of July
31, 2002.
KCS ENERGY, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
Three Months Ended Six Months Ended
June 30, June 30,
(Amounts in thousands except -------------------------- --------------------------
per share data) Unaudited 2002 2001 2002 2001
- ------------------------------------------------------ ---------- ---------- ---------- ----------
Oil and gas revenue $ 30,808 $ 48,561 $ 60,165 $ 105,234
Other revenue, net (531) 477 (1,064) 16,513
---------- ---------- ---------- ----------
Total revenue 30,277 49,038 59,101 121,747
========== ========== ========== ==========
Operating costs and expenses
Lease operating expenses 6,873 7,730 13,409 16,953
Production taxes 1,632 2,002 2,955 5,066
General and administrative expenses 1,763 2,232 3,890 4,914
Stock compensation 194 226 510 297
Depreciation, depletion and amortization 12,835 13,907 28,011 27,479
---------- ---------- ---------- ----------
Total operating costs and expenses 23,297 26,097 48,775 54,709
---------- ---------- ---------- ----------
Operating income 6,980 22,941 10,326 67,038
---------- ---------- ---------- ----------
Interest and other income, net 9 629 79 1,018
Interest expense (4,836) (4,871) (9,666) (12,196)
---------- ---------- ---------- ----------
Income before reorganization items and income taxes 2,153 18,699 739 55,860
---------- ---------- ---------- ----------
Reorganization items
Financial restructuring costs -- (180) -- (2,819)
Interest income -- -- -- 227
---------- ---------- ---------- ----------
Total reorganization items -- (180) -- (2,592)
---------- ---------- ---------- ----------
Income before income taxes 2,153 18,519 739 53,268
Federal and state income (taxes) benefit (15,325) 709 (14,729) 6,940
---------- ---------- ---------- ----------
Net income (loss) (13,172) 19,228 (13,990) 60,208
Dividends and accretion of issuance costs on preferred stock (372) (330) (625) (493)
---------- ---------- ---------- ----------
Income (loss) available to common stockholders $ (13,544) $ 18,898 $ (14,615) $ 59,715
========== ========== ========== ==========
Earnings (loss) per share of common stock:
Basic $ (0.38) $ 0.63 $ (0.41) $ 2.01
Diluted $ (0.38) $ 0.48 $ (0.41) $ 1.62
========== ========== ========== ==========
Average shares outstanding for computation of earnings per share
Basic 35,674 29,910 35,332 29,729
Diluted 35,674 40,211 35,332 37,147
========== ========== ========== ==========
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
2
KCS ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share data) Unaudited June 30, 2002 December 31, 2001
- -------------------------------------------------------------- ------------- -----------------
Assets
Current assets
Cash and cash equivalents $ 13,565 $ 22,927
Trade accounts receivable, less allowance
for doubtful accounts of $4,190 23,409 20,342
Prepaid drilling and other current assets 4,915 6,718
------------- -----------------
Current assets 41,889 49,987
------------- -----------------
Oil and gas properties, full cost method, less accumulated DD&A-2002 $864,447;
2001 $837,096 240,102 268,517
Other property, plant and equipment, at cost less accumulated depreciation-2002
$9,686; 2001 $9,026 9,534 10,160
------------- -----------------
Property, plant and equipment, net 249,636 278,677
------------- -----------------
Deferred charges and other assets
Deferred taxes -- 15,920
Other 1,943 2,142
------------- -----------------
Deferred charges and other assets 1,943 18,062
------------- -----------------
$ 293,468 $ 346,726
============= =================
Liabilities and stockholders' (deficit) equity
Current liabilities
Accounts payable $ 23,257 $ 26,041
Accrued interest 8,248 9,089
Other accrued liabilities 11,658 17,910
Senior notes 61,274 --
------------- -----------------
Current liabilities 104,437 53,040
------------- -----------------
Deferred credits and other liabilities
Deferred revenue 87,422 111,880
Other 792 877
------------- -----------------
Deferred credits and other liabilities 88,214 112,757
------------- -----------------
Long-term debt
Bank credit facility 10,800 --
Senior notes -- 79,800
Senior subordinated notes 125,000 125,000
------------- -----------------
Long-term debt 135,800 204,800
------------- -----------------
Commitments and contingencies
Preferred stock, authorized 5,000,000; issued 30,000 shares
redeemable convertible preferred stock, par value $0.01 per share
liquidation preference $1,000 per share - outstanding 13,800 and
16,365, respectively 13,316 15,589
------------- -----------------
Common stockholders' (deficit) equity
Common stock, par value $0.01 per share
authorized 75,000,000 shares
issued 38,259,096 and 36,844,495 respectively 383 368
Additional paid-in capital 166,722 162,540
Retained (deficit) earnings (199,788) (185,173)
Unearned compensation (1,386) (1,292)
Accumulated other comprehensive income (9,489) (11,162)
Less treasury stock, 2,167,096 shares, at cost (4,741) (4,741)
------------- -----------------
Total common stockholders' (deficit) equity (48,299) (39,460)
------------- -----------------
$ 293,468 $ 346,726
============= =================
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
3
KCS ENERGY, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
Six Months Ended
June 30,
--------------------------
(Dollars in thousands) Unaudited 2002 2001
- ------------------------------------------ ---------- ----------
Cash flows from operating activities:
Net income (loss) $ (13,990) $ 60,208
Adjustments to reconcile net income
to cash provided by operating activities:
Depreciation, depletion and amortization 28,011 27,479
Amortization of deferred revenue (24,343) (30,277)
Deferred income taxes 14,729 (6,940)
Non-cash derivative losses, net 2,138 4,032
Other non-cash charges and credits, net 510 49
Reorganization items -- 2,592
Proceeds from Production Payment sold, net -- 175,399
Realized losses on derivative instruments terminated
in connection with Plan of reorganization -- (27,995)
Change in trade accounts receivable (3,067) 14,842
Change in accounts payable and accrued liabilities (4,484) (753)
Change in accrued interest payable (841) (49,108)
Other, net 1,262 (3,908)
---------- ----------
Net cash (used in) provided by operating activities
before reorganization items (75) 165,620
Reorganization items -- (2,592)
---------- ----------
Net cash (used in) provided by operating activities (75) 163,028
Cash flows from investing activities:
Investment in oil and gas properties (26,201) (52,530)
Proceeds from sales of oil and gas properties 24,674 --
Other capital expenditures (34) (1,029)
---------- ----------
Net cash used in investing activities (1,561) (53,559)
---------- ----------
Cash flows from financing activities:
Proceeds from credit facility, net 10,800 --
Repayment of senior notes (18,526) (146,905)
Issuance of convertible preferred stock, net -- 28,444
Other -- 75
---------- ----------
Net cash used in financing activities (7,726) (118,386)
---------- ----------
Decrease in cash and cash equivalents (9,362) (8,917)
Cash and cash equivalents at beginning of period 22,927 39,994
---------- ----------
Cash and cash equivalents at end of period $ 13,565 $ 31,077
========== ==========
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
4
KCS ENERGY, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' (DEFICIT) EQUITY
(Dollars in thousands)
Accumulated
Additional Retained Other
Common Paid-in (Deficit) Comprehensive Unearned
Unaudited Stock Capital Earnings Income Compensation
- --------------------------------------------- ------ ---------- ----------- ------------- ------------
Balance at December 31, 2001 $ 368 $ 162,540 $ (185,173) $ (11,162) $ (1,292)
Comprehensive income
Net loss -- -- (13,990) -- --
Other comprehensive income net of tax 1,673
Comprehensive income
Conversion of redeemable preferred stock 8 2,422 -- --
Stock issuances - option and benefit plans 5 1,292 (604)
Stock compensation expense -- -- -- -- 510
Dividends and accretion of issuance
costs on preferred stock 2 468 (625) -- --
------ ---------- ----------- ------------- ------------
Balance at June 30, 2002 $ 383 $ 166,722 $ (199,788) $ (9,489) $ (1,386)
====== ========== =========== ============= ============
Treasury Comprehensive
Unaudited Stock Income (Deficit) Equity
- -------------------------------------------- -------- ------------- ----------------
Balance at December 31, 2001 $ (4,741) $ (39,460)
Comprehensive income
Net loss -- $ (13,990) (13,990)
Other comprehensive income net of tax 1,673 1,673
-------------
Comprehensive income (12,317)
=============
Conversion of redeemable preferred stock -- 2,430
Stock issuances - option and benefit plans 693
Stock compensation expense -- 510
Dividends and accretion of issuance
costs on preferred stock -- (155)
-------- ----------------
Balance at June 30, 2002 $ (4,741) $ (48,299)
======== ================
The accompanying notes are an integral part of these financial statements.
5
KCS ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-Unaudited
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. Reorganization
On January 30, 2001, the United States Bankruptcy Court for the
District of Delaware (the "Bankruptcy Court") confirmed the KCS Energy, Inc.
plan of reorganization ("the Plan") under Chapter 11 of Title 11 of the United
States Bankruptcy Code after the Company's creditors and stockholders voted to
approve the Plan. On February 20, 2001, the Company completed the necessary
steps for the Plan to go effective and emerged from bankruptcy having reduced
its debt from a peak of $425.0 million in early 1999 to $215.0 million and
having cash on hand in excess of $30 million.
Under the terms of the Plan the Company: 1) sold a 43.1 Bcfe (38.3 Bcf
of gas and 797,000 barrels of oil) production payment ("Production Payment") to
be delivered in accordance with an agreed schedule over a five year period for
net proceeds of approximately $175 million and repaid all amounts outstanding
under its existing bank credit facilities, 2) sold $30.0 million of convertible
preferred stock, 3) paid to the holders of the Company's 11% Senior Notes, on a
pro rata basis, cash equal to the sum of (a) $60.0 million plus the amount of
past due accrued and unpaid interest of $15.1 million on $60.0 million of the
Senior Notes as of the effective date, compounded semi-annually at 11% per annum
and (b) the amount of past due accrued and unpaid interest of $21.5 million on
$90.0 million of the Senior Notes as of January 15, 2001, compounded
semi-annually at 11% per annum, 4) paid to the holders of the Company's 8 7/8%
Senior Subordinated Notes, cash in the amount of past due accrued and unpaid
interest of $23.7 million as of January 15, 2001, compounded semi-annually at
8 7/8% per annum, 5) renewed the remaining outstanding $90.0 million principal
amount of Senior Notes and $125.0 million principal amount of Senior
Subordinated Notes under amended indentures but without a change in interest
rates, and 6) paid pre-petition trade creditors in full. Shareholders retained
100% of their common stock, subject to dilution from conversion of the new
convertible preferred stock.
3. Redeemable Convertible Preferred Stock
As a result of conversions of the redeemable convertible preferred
stock issued in connection with the Plan of Reorganization, 4.6 million shares
of common stock were issued in 2001 and an additional 0.8 million shares were
issued during the six months ended June 30, 2002.
6
4. Deferred Revenue
Pursuant to the Production Payment discussed in Note 2, the Company
recorded the net proceeds of approximately $175 million as deferred revenue on
the balance sheet. In accordance with SFAS No. 19 "Financial Accounting and
Reporting by Oil and Gas Producing Companies," deliveries under this Production
Payment are recorded as non-cash oil and gas revenue with a corresponding
reduction of deferred revenue at the average price per Mcf of natural gas and
per barrel of oil received when the Production Payment was sold. The Company
also reflects the production volumes and depletion expense as deliveries are
made. However, the associated oil and gas reserves are excluded from the
Company's reserve data. For the six months ended June 30, 2002, the Company
delivered 6,043 MMcfe and recorded $24.3 million of oil and gas revenue. Since
the sale of the Production Payment in February 2001 through June 30, 2002, the
Company has delivered 21.8 Bcfe, or 51% of the total quantity to be delivered.
5. Debt
June 30 December 31
(dollars in thousands) 2002 2001
- --------------------------- --------- -----------
11% Senior Notes $ 61,274 $ 79,800
8 7/8% Senior Subordinated Notes 125,000 125,000
Bank Credit Facility 10,800 --
--------- -----------
197,074 204,800
Classified as current liabilities (61,274) --
--------- -----------
Long-term debt $ 135,800 $ 204,800
========= ===========
Senior Notes
On January 25, 1996, KCS Energy, Inc. issued $150.0 million principal
amount of 11% Senior Notes due 2003 (the "Senior Notes"). The Senior Notes
mature on January 15, 2003 and bear interest at the rate of 11% per annum. The
Senior Notes are redeemable at the option of the Company, in whole or in part,
at par. The subsidiaries of KCS have guaranteed the Senior Notes on a senior
unsecured basis. The guarantees are full and unconditional and joint and
several. The parent company's independent assets are minor and it has no
independent operations.
On February 20, 2001, in connection with the Plan, the indenture
governing the Senior Notes was amended. The Senior Notes, as amended, contain
certain restrictive covenants which, among other things, limit the Company's
ability to incur additional indebtedness, require the repurchase of the Senior
Notes upon a change of control, limit the Company's ability to purchase and
redeem the Subordinated Notes and the Company's common stock, prohibit the
Company from purchasing or redeeming the Series A Convertible Preferred Stock
and prohibit the Company from paying any cash dividends on capital stock.
The Company redeemed $70.2 million of Senior Notes in 2001 and an
additional $18.5 million of Senior Notes during the six months ended June 30,
2002.
In order to meet its obligations under the Senior Notes due in January
2003, the Company has curtailed its planned capital expenditures for 2002 to be
between $45 million and $50 million, of which $23.6 million was deployed in the
first half of 2002, sold certain non-core oil and gas properties for net
proceeds of $24.7 million during the first half of 2002 and is currently
negotiating $50 million to $60 million of additional financing. In addition, the
Company has signed a purchase and sale agreement to sell certain non-operated
properties in central Montana for approximately $8.1 million. While the Company
is confident that the new financing will be secured, there can be no assurance
that this will occur. If the financing is secured, the Company anticipates that
its cash flow and proceeds from asset sales, combined with additional amounts
which could be refinanced or made available under its credit facility should be
more than sufficient to carry out its business operations and meet the Senior
Note maturity obligations. The Company is committed to modify its capital
investment and asset divestiture programs if necessary in order meet its Senior
Note obligations. However, in the event that the Company is unable to meet its
Senior Note obligations when due, holders of the Senior Subordinated Notes would
have the right to declare the principal amount ($125 million) on the Senior
Subordinated Notes to be immediately due and payable. In such event, the Company
would not have sufficient resources to pay the outstanding Senior Notes and
Senior Subordinated Notes.
7
Senior Subordinated Notes
On January 15, 1998, the Company completed a public offering of $125.0
million of Senior Subordinated Notes at an interest rate of 8 7/8% (the
"Subordinated Notes"). The Subordinated Notes are non-callable for five years
and are unsecured subordinated obligations of KCS. The subsidiaries of KCS have
guaranteed the Subordinated Notes on an unsecured subordinated basis. The
guarantees are full and unconditional and joint and several.
On February 20, 2001, in connection with the Plan (see Note 2), the
indenture governing the Subordinated Notes was amended to, among other things,
accelerate the maturity date of the Subordinated Notes from January 15, 2008 to
January 15, 2006.
The Subordinated Notes, as amended, contain certain restrictive
covenants which, among other things, limit the Company's ability to incur
additional indebtedness, require the repurchase of the Subordinated Notes upon a
change of control, and limit: a) the aggregate purchases and redemptions of the
Company's Series A Convertible Preferred Stock for cash and b) the aggregate
cash dividends paid on capital stock, collectively, to 50% of the Company's
cumulative net income, as defined, during the period beginning after December
31, 2000.
Bank Credit Facility
On November 28, 2001 the Company entered into a three-year credit
agreement ("Credit Agreement") with certain banks. The Credit Agreement is to be
used for general corporate purposes, including support of the Company's capital
expenditure program, repurchase of the Senior Notes and working capital. The
stated amount of this Credit Agreement is $100 million, with the amount that is
available determined semi-annually based on the lenders' valuation of the
Company's oil and gas reserves and other factors including the Company's other
debt obligations and obligations under the Production Payment sold as discussed
in Note 2. The initial amount available, or borrowing base, at December 31, 2001
was $32.5 million and adjusted to $26.5 million contemporaneously with the sale
of certain the non-core oil and gas properties in June 2002. Loans under the
Credit Agreement are on a revolving basis, and the Company is permitted to
choose interest rate options based on the lead bank's prime rate or LIBOR. The
applicable margin above prime or LIBOR ranges between 0% and 3%, based on the
type of interest rate chosen and the percentage of the borrowing base that is
outstanding. A commitment fee of 0.5% is paid on the unused portion of the
borrowing base with interest on borrowed funds due quarterly.
Substantially all of the Company's oil and gas assets are pledged to
secure the Credit Agreement.
The Credit Agreement, as amended, contains restrictive covenants, which
among other things, require minimum interest and debt coverage ratios. In
addition, these covenants require a minimum level of working capital, as
defined, limit the Company's ability to incur additional indebtedness and sell
assets, require payment upon a change of control, prohibit the Company from
purchasing and redeeming the Company's common stock or the Series A Convertible
Preferred Stock and prohibit the Company from paying any cash dividends on
common stock. The Credit Agreement provides for acceleration, to November 15,
2002, of all payments due if the Senior Notes balance outstanding on that date
is: 1) greater than $20 million or 2) greater than the sum of cash plus credit
available under the agreement.
6. Income Taxes
The Company accounts for income taxes in accordance SFAS No. 109,
"Accounting for Income Taxes." SFAS No. 109 requires the Company to recognize
income tax benefits for loss carryforwards which have not previously been
recorded. The tax benefits recognized must be reduced by a valuation allowance
in certain circumstances where the realization of the net deferred tax assets is
not assured. At June 30, 2002, the Company increased its valuation allowance by
$15.9 million, thereby reducing to zero the carrying amount of net deferred tax
assets with a corresponding non-cash charge to income tax expense. The Company
will continue to assess the valuation allowance and to the extent it is
determined that such
8
allowance is no longer required, the tax benefit of the remaining net deferred
tax assets will be recognized in the future.
7. 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 $10.6 million and $61.5 million for the six months ended June 30,
2002 and June 30, 2001, respectively. Interest payments in the prior year period
included approximately $60.7 million made in connection with the Plan (see Note
2). No income tax payments were made during the six-month periods ended June 30,
2002 and June 30, 2001.
8. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
Three months ended Six months ended
(amounts in thousands June 30 June 30
except per share data) 2002 2001 2002 2001
- ---------------------- ---------- ---------- ---------- ----------
Basic earnings per share:
Income (loss) available to common stockholders $ (13,544) $ 18,898 $ (14,615) $ 59,715
---------- ---------- ---------- ----------
Average common stock outstanding 35,674 29,910 35,332 29,729
---------- ---------- ---------- ----------
Basic earnings (loss) per share $ (0.38) $ 0.63 $ (0.41) $ 2.01
========== ========== ========== ==========
Diluted earnings per share:
Income (loss) available to common stockholders $ (13,544) $ 18,898 $ (14,615) $ 59,715
Assumed conversion of convertible
preferred stock N/A 330 N/A 493
---------- ---------- ---------- ----------
$ (13,544) $ 19,228 $ (14,615) $ 60,208
---------- ---------- ---------- ----------
Average common stock outstanding 35,674 29,910 35,332 29,729
Assumed conversion of convertible
preferred stock N/A 9,986 N/A 7,160
Dividends on convertible preferred stock N/A 56 N/A 83
Stock options and warrants N/A 259 N/A 175
---------- ---------- ---------- ----------
35,674 40,211 35,332 37,147
---------- ---------- ---------- ----------
Diluted earnings (loss) per share $ (0.38) $ 0.48 $ (0.41) $ 1.62
========== ========== ========== ==========
Common shares on assumed conversion of convertible preferred stock amounting to
5.0 million shares for the three months ended June 30, 2002 and 5.1 million
shares for the six months ended June 30, 2002 were not included in the
computations of diluted earnings per common share nor were assumed conversion of
dividends on convertible preferred stock or stock options and warrants since
they would be anti-dilutive.
9. New Accounting Standards
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations". SFAS No. 143 requires entities to record the fair
value of a liability for legal obligations associated with the retirement
obligations of tangible long-lived assets in the periods in which it is
incurred. When the liability is initially recorded, the entity increases the
carrying amount of the related long-lived asset. The liability is accreted to
the fair value at the time of settlement over the useful life of the asset, and
the capitalized cost is depreciated over the useful life of the related asset.
The standard is effective for fiscal years beginning after June 15, 2002, with
earlier application encouraged. The Company is currently evaluating the effect
of adopting Statement No. 143 on its financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144
addresses the financial accounting and reporting
9
for the impairment or disposal of long-lived assets. SFAS No. 144 supersedes
SFAS No. 121 but retains its fundamental provisions for the (a)
recognition/measurement of impairment of long-lived assets to be held and used
and (b) measurement of long-lived assets to be disposed of by sale. SFAS No. 144
also supersedes the accounting/reporting provisions of APB Opinion No. 30 for
segments of a business to be disposed of but retains the requirement to report
discontinued operations separately from continuing operations and extends that
reporting to a component of an entity that either has been disposed of or is
classified as held for sale. SFAS No. 144 is effective for the Company beginning
in 2002. The Company adopted the provisions of SFAS No. 144 effective January 1,
2002, with no significant impact.
10. Adoption of SFAS No.133
Upon adoption of SFAS No. 133 effective on January 1, 2001, the Company
recorded a liability of $43.8 million representing the fair market value of its
derivative instruments at adoption, a related deferred tax asset of $15.3
million and an after-tax cumulative effect of change in accounting principle of
$28.5 million to accumulated other comprehensive income (OCI). The Company
elected not to designate its then existing derivative instruments as hedges
which, subsequent to adoption of SFAS No. 133, would require that changes in a
derivative investment's fair value be recognized currently in earnings. However,
SFAS No. 133 requires the Company's derivative instruments that had been
designated as cash flow hedges under accounting principles generally accepted
prior to the initial application of SFAS No. 133 to continue to be accounted for
as cash flow hedges with the transition adjustment reported as a
cumulative-effect-type adjustment to accumulated OCI as mentioned above.
In February 2001, the Company terminated certain derivative instruments
in connection with its emergence from bankruptcy for a cash payment of $28.0
million, which was offset against the accrued liability recorded in connection
with the adoption of SFAS No. 133. During the quarter ended March 31, 2001, as a
result of market price decreases, the ultimate cost to settle the remaining
derivative instruments in place at January 1, 2001 was reduced by $7.7 million.
This non-cash gain was recorded in other revenue during the quarter. The actual
cost to settle the remaining derivatives was $8.1 million.
During the first six months of 2002, $2.2 million, net of tax, of the
above $28.5 million charged to OCI was reclassified into earnings. The $10.7
million remaining in accumulated other comprehensive income will be amortized
into earnings over the original term of the derivative instruments, which
extends through August 2005 ($2.2 million remaining in 2002, $3.6 million in
2003, $2.9 million in 2004 and $2.0 million in 2005).
11. Oil And Natural Gas Hedging Activities
The Company has entered into and was party to various derivative
contracts. At June 30, 2002 the Company had swaps in place covering 920,000
Mmbtu natural gas swaps at $3.70 per Mmbtu extending through September 2002 and
920,000 Mmbtu natural gas swaps at $3.95 per Mmbtu extending from October 2002
through December 2002. These derivatives have been designated as cash flow
hedges.
In addition, the Company had open positions on contracts with Enron
North America Corp. consisting of swaps covering 1,230,000 Mmbtu at $4.02 per
Mmbtu through October 2002 if the NYMEX contract for the months covered is over
$2.50 and puts covering 1,230,000 Mmbtu at $3.00 extending through October 2002.
Enron has not performed under its derivative contracts with the Company since
November 2001. See Note 9 to Consolidated Financial Statements in the Company's
2001 annual report on Form 10-K.
10
KCS ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
KCS emerged from bankruptcy in February, 2001 under the Plan (see Note
2 to Condensed Consolidated Financial Statements), in which the Company repaid
its two bank credit facilities in full, paid past due interest on its Senior
Notes and Senior Subordinated Notes, including interest on interest, and repaid
$60.0 million of Senior Notes. The balance of the Senior Notes and the Senior
Subordinated Notes were reinstated under amended indentures. Trade creditors
were paid in full and shareholders retained 100% of their common stock, subject
to dilution from conversion of the new convertible preferred stock
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.
Results of Operations
Income before income taxes for the three months ended June 30, 2002 was
$2.2 million compared to $18.5 million for the same period in 2001. This
decrease was attributable to significantly lower natural gas prices and lower
natural gas and oil production, partially offset by decreased operating
expenses. Income tax expense for the three months ended was $15.3 million
compared to an income tax benefit of $0.7 million for the three months ended
June 30, 2001. The non-cash income tax expense in 2002 was the result of an
increase in the Company's valuation allowance against net deferred tax assets.
See note 6 to Condensed Consolidated financial statements. As a result of this
net loss for the three months ended June 30, 2002 was $13.2 million compared to
net income of $19.2 million for the same period a year ago.
Income before income taxes for the six months ended June 30, 2002 was
$0.7 million compared to $53.3 million for the same period in 2001. Dramatically
lower natural gas and oil prices, lower non-oil and gas revenue and lower
production were partially offset by significantly lower operating,
reorganization and interest expenses. Income tax expense for the six months
ended June 30, 2002 was $14.7 million compared to an income tax benefit of $6.9
million for the same period in 2001. As a result of the increase in the
Company's valuation allowance against net deferred tax assets, the Company
reported a net loss of $14.0 million for the six months ended June 30, 2002
compared to net income of $60.2 million for the six months ended June 30, 2001.
11
Three months ended Six months ended
June 30 June 30
--------------------- ---------------------
2002 2001 2002 2001
-------- -------- -------- --------
Production:
Gas (MMcf) 7,576 9,788 15,888 19,336
Oil (Mbbl) 260 315 528 646
Liquids (Mbbl) 71 94 142 177
Summary (MMcfe):
Working interest 8,912 10,972 18,382 21,841
VPP 646 1,272 1,525 2,433
-------- -------- -------- --------
Total 9,558 12,244 19,907 24,274
Average Price:
Gas (per Mcf) $ 3.27 $ 4.14 $ 3.07 $ 4.55
Oil (per bbl) 20.45 21.20 19.05 22.39
Liquids (per bbl) 10.10 14.47 9.56 16.03
Total (per Mcfe) 3.22 3.97 3.02 4.34
Revenue:
Gas $ 24,784 $ 40,524 $ 48,749 $ 87,933
Oil 5,309 6,677 10,062 14,463
Liquids 715 1,360 1,354 2,838
-------- -------- -------- --------
Total $ 30,808 $ 48,561 $ 60,165 $105,234
-------- -------- -------- --------
Note: Production includes 2,809 MMcfe and 6,043 MMcfe, respectively, for the
three and six months ended June 30, 2002 compared to 4,300 MMcfe and 7,542 MMcfe
for the three and six months ended June 30, 2001, respectively dedicated to the
Production Payment sold in February 2001. See Notes 2 and 3 to Condensed
Consolidated Financial Statements.
Gas revenue
For the three months ended June 30, 2002, gas revenue decreased $15.7
million to $24.8 million due to a 21% decrease in average realized natural gas
prices and a 23% decrease in production. For the six months ended June 30, 2002,
gas revenue decreased $39.2 million to $48.7 million due to a 33% decrease in
average realized natural gas prices and an 18% decrease in production.
The decrease in production in 2002 was attributable to natural
declines of producing properties, sale of oil and gas properties, expiration of
certain VPPs and no additional investment in this program in 2000 and 2001. The
natural decline of producing properties was not offset by new production largely
due to the reduced capital investment program. See Liquidity and Capital
Resources.
Oil and liquids revenue
For the three months ended June 30, 2002, oil and liquids revenue was
$6.0 million compared to $8.0 million during the same period in 2001, due to a
7% decrease in average realized prices and a 19% decrease in production. For the
six months ended June 30, 2002, oil and liquids revenue decreased 34% to $11.4
million due to a 19% decrease in production and a 19% decrease in weighted
average realized prices.
The decrease in production in 2002 was attributable to the natural
declines of producing properties and the sale of oil and gas properties.
12
Other revenue, net
Other revenue decreased $1.0 million to a net cost of $0.5 million for
the three months ended June 30, 2002 compared to income of $0.5 million for the
same period a year ago. The 2001 period included gains of $0.8 million from
derivative instruments that were not designated as hedges pursuant to SFAS No.
133. For the six months ended June 30, 2001, other revenue was $16.5 million. Of
this, $7.0 million was from the sale of emission reduction credits, $7.7 million
was from non-cash gains on derivative instruments that were not designated as
oil and gas hedges when the Company adopted SFAS No. 133 (see Note 6 to
Condensed Consolidated Financial Statements), and the remainder was primarily
attributable to marketing and transportation revenue. This compares to a net
cost of $1.1 million for the six months ended June 30, 2002 primarily attributed
to marketing and transportation activities.
Lease operating expenses
Lease operating expenses ("LOE") decreased $0.8 million, or 11%, to
$6.9 million for the three months ended June 30, 2002 compared to $7.7 million
for the same period in 2001. For the six months ended June 30, 2002, LOE
decreased $3.5 million, or 21%, to $13.4 million compared to $17.0 million for
the same period in 2001. Increased focus on cost reductions and operating
efficiency along with the sale of certain properties contributed to the current
year reductions. The 2001 six-month period reflected start-up costs associated
with the Hartland gas processing plant in Michigan, higher ad valorem taxes,
higher working interest production and an increased level of workovers of oil
and gas wells in order to maximize production during that period of high oil and
gas prices.
Production taxes
Production taxes, which are generally based on a percentage of revenue
(excluding VPP revenue) decreased $0.4 million to $1.6 million for the second
quarter of 2002 and $2.1 million to $3.0 million for the six months ended June
30, 2002, compared to the same periods in 2001, due to lower oil and gas revenue
associated with the decrease in working interest production and lower average
realized prices.
General and administrative expenses
General and administrative expenses ("G&A") decreased $0.5 million, or
21%, to $1.8 million for the three months ended June 30, 2002 compared to $2.2
million for the same period in 2001. For the six months ended June 30, 2002 G&A
decreased $1.0 million, or 21%, to $3.9 million compared to $4.9 million for the
same period in 2001. The decrease in G&A during the 2002 three and six month
periods is largely due to lower personnel costs resulting from the reduction of
the Company's workforce and lower incentive compensation accruals.
Stock compensation
Stock compensation was $0.5 million for the six-month period ended June
30, 2002 compared to $0.3 million for the same period a year ago. These amounts
reflect the non-cash amortization of restricted stock grants issued to employees
under the Company's 2001 stock plan.
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. For the three months ended June 30, 2002, depreciation, depletion and
amortization ("DD&A") decreased $1.1 million to $12.8 million compared to the
same period in 2001, due to lower oil and gas revenues, partially offset by a
higher depletion rate resulting from lower natural gas prices and higher
depletable base. For the six months ended June 30, 2002 DD&A increased $0.5
million to $28.0 million compared to the same period in 2001 due to a higher
DD&A rate.
Interest and other income
Interest and other income for the six months ended June 30, 2002 was
$0.1 million compared to $1.0 million for the same period a year ago reflecting
lower interest income associated with accumulated cash and cash equivalents in
the current year period.
13
Interest expense
Interest expense for the six months ended June 30, 2002 was $9.7
million compared to $12.2 million for the same period a year ago. The $2.5
million decrease reflects the reduction of outstanding debt and, to a lesser
extent, lower interest rates on the new credit facility
Reorganization items
The Company completed its reorganization in 2001 and consequently there
were no reorganization items in 2002. For the six months ended June 30, 2001,
the Company recorded $2.6 million of reorganization items, primarily for legal
and financial advisory services in connection with the Chapter 11 proceedings.
Income Taxes
Income tax expense for the three and six months ended June 30, 2002 was
$15.3 million and $14.7 million, respectively as a result of Company increasing
its valuation allowance against net deferred tax assets at June 30, 2002 by
$15.9 million. See Note 6 to Condensed Consolidated Financial Statements. This
compares to income tax benefits of $0.7 million and $6.9 million, respectively
for the three and six months ended June 30, 2001.
Liquidity and Capital Resources
In order to meet its obligations under the Senior Notes due in January
2003, the Company has curtailed its planned capital expenditures for 2002 to be
between $45 million and $50 million, of which $23.6 million was deployed in the
first half of 2002, sold certain non-core oil and gas properties for net
proceeds of $24.7 million during the first half of 2002 and is currently
negotiating $50 million to $60 million of additional financing. In addition, the
company has signed a purchase and sale agreement to sell certain non-operated
properties in central Montana for $8.1 million. While the Company is confident
that the new financing will be secured, there can be no assurance that this will
occur. If the financing is secured, the Company anticipates that its cash flow
and proceeds from asset sales, combined with additional amounts which could be
refinanced or made available under its credit facility should be more than
sufficient to carry out its business operations and meet the Senior Note
maturity obligations. The Company is committed to modify its capital investment
and asset divestiture programs if necessary in order meet its Senior Note
obligations. However, in the event that the Company is unable to meet its Senior
Note obligations when due, holders of the Senior Subordinated Notes would have
the right to declare the principal amount ($125 million) on the Senior
Subordinated Notes to be immediately due and payable. In such event, the Company
would not have sufficient resources to pay the outstanding Senior Notes and
Senior Subordinated Notes.
Cash flow from operating activities
Net income adjusted for non-cash charges and reorganization items for
the six months ended June 30, 2002 was $7.1 million compared to $57.1 million
during the same period in 2001. The decrease was primarily due to the effect of
lower realized natural gas prices and production as discussed above. Net cash
used by operating activities for the first half of 2002 was $0.1 million
compared to net cash provided by operating activities of $165.6 million for the
same period in 2001. In addition to lower realized natural gas prices and
production in the current year period, the prior year period reflects the net
proceeds of $175.4 million from the Production Payment sold in February 2001,
the payment of $61.5 million of interest and the $28 million cost of terminating
certain derivative instruments in connection with the emergence from Chapter 11.
The increase in trade accounts receivable is mainly due to higher oil and gas
prices in the second quarter of the year compared to the fourth quarter of 2001
and the timing of cash receipts. The decrease in accounts payable and accrued
liabilities is largely due to curtailment of capital expenditures and the timing
of cash disbursements.
Investing activities
Capital expenditures for the six months ended June 30, 2002 were $23.6
million of which $1.1 million was for the acquisition of proved reserves, $15.0
million was for development activities, $7.5 million was for lease acquisitions,
seismic surveys and exploratory drilling.
New Accounting Standards
In July 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. SFAS No. 143 requires entities to record the fair value
of a liability for legal obligations associated with the retirement obligations
of tangible long-lived assets in the periods in which it is incurred. When the
liability is initially recorded, the entity increases the carrying amount of the
related long-lived asset. The liability is
14
accreted to the fair value at the time of settlement over the useful life of the
asset, and the capitalized cost is depreciated over the useful life of the
related asset. The standard is effective for fiscal years beginning after June
15, 2002, with earlier application encouraged. The Company is currently
evaluating the effect of adopting Statement No. 143 on its financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144
addresses the financial accounting and reporting for the impairment or disposal
of long-lived assets. SFAS No. 144 supersedes SFAS No. 121 but retains its
fundamental provisions for the (a) recognition/measurement of impairment of
long-lived assets to be held and used and (b) measurement of long-lived assets
to be disposed of by sale. SFAS No. 144 also supersedes the accounting/reporting
provisions of APB Opinion No. 30 for segments of a business to be disposed of
but retains the requirement to report discontinued operations separately from
continuing operations and extends that reporting to a component of an entity
that either has been disposed of or is classified as held for sale. SFAS No. 144
is effective for the Company beginning in 2002. The Company adopted the
provisions of SFAS No. 144 effective January 1, 2002, with no significant
impact.
15
MARKET RISK DISCLOSURE
The Company has entered 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. These derivatives have the effect of fixing for specified
periods the prices the Company will receive for the volumes to which the
derivative relates. As a result, while these derivatives 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 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, 2002.
Enron Swap @ $4.02 per MMbtu
if NYMEX above $2.50 Enron Puts @ $3.00 per MMbtu
---------------------------- ----------------------------
Unrealized Unrealized
Volume Gain Volume Gain
----------- ------------ ---------- ------------
MMBtu ($000s) MMBtu ($000s)
----------- ------------ ---------- ------------
2002
3rd Qtr ...... 920,000 694 920,000 --
4th Qtr ...... 310,000 222 310,000 --
----------- ------------ ---------- ------------
Total ..... 1,230,000 $ 916 1,230,000 $ --
Swaps @ $3.83 avg. per MMbtu
----------------------------
Unrealized
Volume Gain
----------- ------------
MMBtu ($000s)
----------- ------------
2002
3rd Qtr ...... 920,000 400
4th Qtr ...... 920,000 326
----------- ------------
Total ..... 1,840,000 $ 726
The Company accounts for oil and natural gas futures contracts and commodity
price swaps in accordance with SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities". Enron has not performed under its
derivative contracts with the Company since November 2001. See Note 9 to
Consolidated Financial Statements in the Company's 2001 annual report on Form
10-K.
The Company uses fixed and variable rate long-term debt to finance its
capital spending program. These debt arrangements exposed the Company to market
risk related to changes in interest rates. During the second quarter of 2002,
the Company's weighted average contractual interest rate on its weighted average
fixed rate debt of $195.9 million was 9.6%. The weighted average interest rate
on its weighted average variable rate debt of $12.0 million was 4.2%. During the
six months ended June 30, 2002, the Company's weighted average contractual
interest rate on its weighted average fixed rate debt of $197.4 million was
9.7%. The weighted average interest rate on its weighted average variable rate
debt of $11.5 million was 4.1%.
16
KCS ENERGY, INC. - FORM 10-Q/A
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, 2001
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
10(i) Second amendment to the Credit Agreement among KCS Energy,
Inc., Canadian Imperial Bank of Commerce, New York Agency,
as Agent, CIBC, Inc. as Collateral Agent and the lenders
party thereto.
99.1 Certification of James W. Christmas, President and Chief
Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
99.2 Certification of Frederick Dwyer, Principal Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed during the three
months ended June 30, 2002.
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, 2002 /s/ FREDERICK DWYER
--------------------
Frederick Dwyer
Vice President, Controller
and Secretary
INDEX TO EXHIBITS
Exhibits: Description
10(i) Second amendment to the Credit Agreement among KCS Energy,
Inc., Canadian Imperial Bank of Commerce, New York Agency,
as Agent, CIBC, Inc. as Collateral Agent and the lenders
party thereto.
99.1 Certification of James W. Christmas, President and Chief
Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
99.2 Certification of Frederick Dwyer, Principal Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.