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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
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SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
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SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-11698
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KCS ENERGY, INC.
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(Exact name of registrant as specified in its charter)
Delaware 22-2889587
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5555 San Felipe Road, Houston, TX 77056
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(Address of principal executive offices) (Zip Code)
(713) 877-8006
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(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
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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: 36,497,393 shares outstanding as of
October 31, 2002.
1
KCS ENERGY, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
Three Months Ended Nine Months Ended
September 30, September 30,
(Amounts in thousands except -------------------------- ---------------------------
per share data) Unaudited 2002 2001 2002 2001
- ------------------------------------------------------------ ----------- ------------ ------------ ------------
Oil and gas revenue $ 30,391 $ 38,747 $ 90,556 $ 143,981
Other revenue, net 81 719 (983) 17,232
- ---------------------------------------------------------------------------------------------------------------------------
Total revenue 30,472 39,466 89,573 161,213
- ---------------------------------------------------------------------------------------------------------------------------
Operating costs and expenses
Lease operating expenses 5,930 6,806 19,339 23,759
Production taxes 1,458 1,563 4,413 6,629
General and administrative expenses 2,363 2,207 6,253 7,121
Stock compensation 156 224 666 521
Depreciation, depletion and amortization 12,899 15,332 40,910 42,811
- ---------------------------------------------------------------------------------------------------------------------------
Total operating costs and expenses 22,806 26,132 71,581 80,841
- ---------------------------------------------------------------------------------------------------------------------------
Operating income 7,666 13,334 17,992 80,372
- ---------------------------------------------------------------------------------------------------------------------------
Interest and other income, net 42 192 121 1,210
Interest expense (4,655) (4,880) (14,321) (17,076)
- ---------------------------------------------------------------------------------------------------------------------------
Income before reorganization items and income taxes 3,053 8,646 3,792 64,506
- ---------------------------------------------------------------------------------------------------------------------------
Reorganization items
Financial restructuring costs - (356) - (3,175)
Interest income - - - 227
- ---------------------------------------------------------------------------------------------------------------------------
Total reorganization items - (356) - (2,948)
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes 3,053 8,290 3,792 61,558
Federal and state income (taxes) benefit 596 709 (14,133) 7,649
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) 3,649 8,999 # (10,341) # 69,207
Dividends and accretion of issuance costs on preferred stock (214) (248) (839) (741)
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) available to common stockholders $ 3,435 $ 8,751 $ (11,180) $ 68,466
===========================================================================================================================
Earnings (loss) per share of common stock:
Basic $ 0.09 $ 0.27 $ (0.31) $ 2.23
Diluted $ 0.09 $ 0.22 $ (0.31) $ 1.81
===========================================================================================================================
Average shares outstanding for computation of earnings per share
Basic 36,247 32,636 35,634 30,711
Diluted 40,881 40,188 35,634 38,248
===========================================================================================================================
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 September 30, 2002 December 31, 2001
- -------------------------------------------------------------------------------------------------------- -------------------
Assets
Current assets
Cash and cash equivalents $ 10,396 $ 22,927
Trade accounts receivable, less allowance
for doubtful accounts of $4,821and $4,190, respectively 19,594 20,342
Prepaid drilling and other current assets 4,526 6,718
- -----------------------------------------------------------------------------------------------------------------------------
Current assets 34,516 49,987
- -----------------------------------------------------------------------------------------------------------------------------
Oil and gas properties, full cost method, less accumulated DD&A-2002
$876,998; 2001 $837,096 236,075 268,517
Other property, plant and equipment, at cost less accumulated
depreciation-2002 $10,034; 2001 $9,026 9,074 10,160
- -----------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net 245,149 278,677
- -----------------------------------------------------------------------------------------------------------------------------
Deferred charges and other assets
Deferred taxes - 15,920
Other 1,818 2,142
- -----------------------------------------------------------------------------------------------------------------------------
Deferred charges and other assets 1,818 18,062
- -----------------------------------------------------------------------------------------------------------------------------
$ 281,483 $ 346,726
=============================================================================================================================
Liabilities and stockholders' (deficit) equity
Current liabilities
Accounts payable $ 20,722 $ 26,041
Accrued interest 3,830 9,089
Other accrued liabilities 15,038 17,910
Senior notes 61,274 -
Bank credit facility 8,800 -
- -----------------------------------------------------------------------------------------------------------------------------
Current liabilities 109,664 53,040
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Deferred credits and other liabilities
Deferred revenue 76,627 111,880
Other 1,392 877
- -----------------------------------------------------------------------------------------------------------------------------
Deferred credits and other liabilities 78,019 112,757
- -----------------------------------------------------------------------------------------------------------------------------
Long-term debt
Senior notes 79,800
Senior subordinated notes 125,000 125,000
- -----------------------------------------------------------------------------------------------------------------------------
Long-term debt 125,000 204,800
- -----------------------------------------------------------------------------------------------------------------------------
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 13,300 and
16,365 shares, respectively 12,849 15,589
- -----------------------------------------------------------------------------------------------------------------------------
Common stockholders' (deficit) equity
Common stock, par value $0.01 per share
authorized 75,000,000 shares
issued 38,536,036 and 36,844,495 shares respectively 385 368
Additional paid-in capital 167,357 162,540
Retained (deficit) earnings (196,353) (185,173)
Unearned compensation (1,188) (1,292)
Accumulated other comprehensive income (9,509) (11,162)
Less treasury stock, 2,167,096 shares, at cost (4,741) (4,741)
- -----------------------------------------------------------------------------------------------------------------------------
Total common stockholders' (deficit) equity (44,049) (39,460)
- -----------------------------------------------------------------------------------------------------------------------------
$ 281,483 $ 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
Nine Months Ended
September 30,
-------------------------------
(Dollars in thousands) Unaudited 2002 2001
- ------------------------------------------------------------------ ------------- -------------
Cash flows from operating activities:
Net income (loss) $ (10,341) $ 69,207
Adjustments to reconcile net income
to cash provided by operating activities:
Depreciation, depletion and amortization 40,910 42,811
Amortization of deferred revenue (35,138) (47,152)
Deferred income taxes 14,133 (7,649)
Non-cash derivative losses, net 3,491 6,059
Other non-cash charges and credits, net 781 133
Reorganization items - 2,948
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 2,248 22,218
Change in accounts payable and accrued liabilities (8,564) 230
Change in accrued interest payable (5,260) (54,076)
Other, net 1,821 (4,991)
- ---------------------------------------------------------------------------------------------------------
Net cash provided by operating activities
before reorganization items 4,081 177,142
Reorganization items - (2,948)
- ---------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 4,081 174,194
- ---------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Investment in oil and gas properties (36,377) (71,724)
Proceeds from sales of oil and gas properties 29,413 2,128
Other capital expenditures 78 (1,199)
- ---------------------------------------------------------------------------------------------------------
Net cash used in investing activities (6,886) (70,795)
- ---------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from credit facility, net 8,800 -
Repayment of senior notes (18,526) (146,905)
Issuance of convertible preferred stock, net - 28,413
Other - 256
- ---------------------------------------------------------------------------------------------------------
Net cash used in financing activities (9,726) (118,236)
- ---------------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (12,531) (14,837)
Cash and cash equivalents at beginning of period 22,927 39,994
- ---------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 10,396 $ 25,157
=========================================================================================================
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 Treasury Comprehensive
Unaudited Stock Capital Earnings Income Compensation Stock Income (Deficit) Equity
- ---------------------------------------- ----------- ------------------------ ------------ ---------- ----------- ----------------
Balance at December 31, 2001 $ 368 $ 162,540 $ (185,173) $ (11,162) $ (1,292) $ (4,741) $ (39,460)
Comprehensive income
Net loss - - (10,341) - - - $(10,341) (10,341)
Other comprehensive
income, net of tax 1,653 1,653 1,653
-----------
Comprehensive income $ (8,688)
===========
Conversion of redeemable
preferred stock 10 2,920 - - - - 2,930
Stock issuances - option
and benefit plans 5 1,250 - - (562) - 693
Stock compensation expense - - - - 666 - 666
Dividends and accretion
of issuance costs
on preferred stock 2 647 (839) - - - (190)
-------- --------- --------- ----------- ---------- ---------- -----------
Balance at September 30, 2002 385 $ 167,357 $ (196,353) $ (9,509) (1,188) $ (4,741) $ (44,049)
======== ========== ======================== ========== ========== ===========
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 1.0 million shares were
issued during the nine months ended September 30, 2002.
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
6
as deliveries are made. However, the associated oil and gas reserves are
excluded from the Company's reserve data. For the nine months ended September
30, 2002, the Company delivered 8,715 MMcfe and recorded $35.1 million of oil
and gas revenue. Since the sale of the Production Payment in February 2001
through September 30, 2002, the Company has delivered 24.4 Bcfe, or 57% of the
total quantity to be delivered.
5. Debt
September 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 8,800 -
----------- ------------
195,074 204,800
Classified as current liabilities (70,074) -
----------- ------------
Long-term debt $ 125,000 $ 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
Senior Notes also contain cross-default provisions which would result in the
acceleration of payments if the Company defaults on its other debt instruments.
The Company redeemed $70.2 million of Senior Notes in 2001 and an
additional $18.5 million of Senior Notes during the nine months ended September
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 $44 million and $47 million, of which $38.3 million was invested in the
first nine months of 2002, sold certain non-core oil and gas properties for net
proceeds of $30.9 million during the nine months ended September 30, 2002 and
has entered into a non-binding letter of intent with an institutional lender for
a $60 million senior secured credit facility (the "$60 Million Credit
Facility"). In connection therewith, the Company will be required to amend or
replace its existing Credit Agreement (the "Revolving Credit Facility")
described below under "Bank Credit Facility." The Company anticipates that the
amended or replacement Revolving Credit Facility and the $60 Million Credit
Facility will close by year-end, although each proposed facility is subject to
lender due diligence and negotiation of definitive agreements and will require
the other facility be closed as well.
While the Company believes that it will be successful in obtaining an
amended or replacement Revolving Credit Facility as well as a new $60 Million
Credit Facility, there can be no assurance that this will occur. If the
financing is obtained, the Company anticipates that it will meet the Senior Note
maturity obligations. However, in the event that the Company is unable to meet
its Senior Note obligations when
7
due and the Company is unable to obtain an extension of the maturity of the
Senior Note obligations, 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 and this would put into doubt the Company's ability to
continue as a going concern.
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. The Senior Subordinated Notes also contain cross-default provisions
which would result in the acceleration of payments if the Company defaults on
its other debt instruments.
Bank Credit Facility
On November 28, 2001 the Company entered into a three-year bank credit
agreement ("Credit Agreement"). 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 and the borrowing base at December 31, 2001
was $32.5 million. The borrowing base was adjusted to reflect the sales of
certain non-core oil and gas properties in 2002. The amount available under
the Credit Agreement was $11.0 million at September 30, 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.
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 was recently amended to change the
acceleration of the maturity date from November 15, 2002 to December 15, 2002.
As part of the amendment, the Company agreed to reduce the borrowing base and
the amounts
8
outstanding to $4 million and to limit subsequent amounts outstanding so that
the total would not exceed the Company's cash balance at any time.
The Company expects that the Credit Agreement and the revolving credit
facility provided under the Credit Agreement will be amended or replaced
concurrently with the Company's consummation of the $60 Million Credit Facility
discussed above. The Company anticipates that the amended or replacement
Revolving Credit Facility and the $60 Million Credit Facility will close by
year-end, although each proposed facility is subject to lender due diligence and
negotiation of definitive agreements and will require the other facility be
closed as well.
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 carry forwards 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 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 $19.7 million and $71.4 million for the nine months ended
September 30, 2002 and September 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
nine-month periods ended September 30, 2002 and September 30, 2001.
8. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
9
Three months ended Nine months ended
(amounts in thousands September 30 September 30
except per share data) 2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------- --------------------------
Basic earnings per share:
Income (loss) available to common stockholders $ 3,435 $ 8,751 $ (11,180) $ 68,466
------------------------- --------------------------
Average common stock outstanding 36,247 32,636 35,634 30,711
------------------------- --------------------------
Basic earnings (loss) per share $ 0.09 $ 0.27 $ (0.31) $ 2.23
========================= ==========================
Diluted earnings per share:
Income (loss) available to common stockholders $ 3,435 $ 8,751 $ (11,180) $ 68,466
Assumed conversion of convertible
preferred stock 214 248 N/A 741
------------------------- --------------------------
$ 3,649 $ 8,999 $ (11,180) $ 69,207
------------------------- --------------------------
Average common stock outstanding 36,247 32,636 35,634 30,711
Assumed conversion of convertible
preferred stock 4,530 7,351 N/A 7,223
Dividends on convertible preferred stock 104 71 N/A 154
Stock options and warrants - 130 - 160
------------------------- --------------------------
40,881 40,188 35,634 38,248
Diluted earnings (loss) per share $ 0.09 $ 0.22 $ (0.31) $ 1.81
========================= ==========================
Common shares on assumed conversion of convertible preferred stock
amounting to 5.1 million shares for the nine months ended September 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 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
10
$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 nine months of 2002, $3.3 million, net of tax, of the
above $28.5 million charged to OCI was reclassified into earnings. The $9.6
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 ($1.1 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 September 30, 2002 the Company had swaps in place covering
1,530,000 Mmbtu of natural gas at $3.85 per Mmbtu and 46,000 barrels of oil at
26.50 per barrel extending 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 310,000 Mmbtu at $4.02 per
Mmbtu for October 2002 if the NYMEX contract for the months covered is over
$2.50 and puts covering 310,000 Mmbtu at $3.00 for 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.
12. Litigation
The Company was a defendant in a lawsuit originally brought by InterCoast
Energy Company and MidAmerican Capital Company ("Plaintiffs") against KCS
Energy, Inc., KCS Medallion Resources, Inc. and Medallion California Properties
Company ("KCS Defendants"), and Kerr-McGee Oil & Gas Onshore LP and Kerr-McGee
Corporation ("Kerr-McGee Defendants") in the 234th Judicial District Court of
Harris County, Texas under Cause Number 1999-45998. The suit sought a
declaratory judgment declaring the rights and obligations of each of the
Plaintiffs, the KCS Defendants and the Kerr-McGee Defendants in connection with
environmental damages and surface restoration on lands located in Los Angeles
County, California which are covered by an Oil & Gas Lease dated June 13, 1935,
from Newhall Land and Farming Company, as Lessor, to Barnsdall Oil Company, as
Lessee (the "RSF Lease") and by an Oil and Gas Lease dated June 6, 1941, from
the Newhall Corporation, as Lessor, to C. G. Willis, as Lessee (the "Ferguson
Lease" and together with the RSF Lease, the "Leases").
The Kerr-McGee Defendants, KCS Defendants and Plaintiffs entered into
an Agreed Interlocutory Judgment that contains clarification of the language of
the 1990 Agreement between predecessors of the
11
KCS Defendants and the Kerr-McGee Defendnats (the "1990 Agreement") under which
the Leases were transferred from Kerr-McGee's predecessor to predecessors of
Medallion California Properties Company ("MCPC"). The Court previously entered
the Agreed Interlocutory Judgment, which essentially disposed of interpretation
questions concerning the 1990 Agreement. After entry of the Agreed Interlocutory
Judgment, the remaining issues in the case concerned the interpretation of the
1996 Stock Purchase Agreement through which certain of the KCS Defendants
acquired the stock of MCPC. Specifically, the remaining issues involved the
extent to which Plaintiffs are obligated to indemnify the KCS Defendants for
environmental investigation costs previously incurred by the KCS Defendants and
also for costs of defense and liability to the KCS Defendants, if any, in the
California litigation described below. By Compromise and Settlement Agreement
dated as of October 19, 2001, the Plaintiffs and KCS Defendants agreed: (i) to
settle those issues dealing with the Plaintiffs' obligations to reimburse costs
previously incurred in connection with defense of the California case described
below; (ii) to provide prospectively for the control of defense and settlement
and the sharing of defense costs in the California case described below; and
(iii) to defer any disputes concerning the respective liability of Plaintiffs
and KCS Defendants for any individual claims until the extent of such individual
claim liability, after giving effect to indemnification obligations under the
1990 Agreement, is fully and finally determined. The Agreed Interlocutory
Judgment has now been entered as a final judgment.
MCPC is a defendant in a lawsuit filed January 30, 2001, by The Newhall
Land and Farming Company ("Newhall") against MCPC and Kerr-McGee Corporation and
several Kerr-McGee affiliates. The case is currently pending in Los Angeles
County Superior Court under Cause Number BC244203. In the suit, Newhall seeks
damages for alleged environmental contamination and surface restoration on the
lands covered by the RSF Lease and also seeks a declaration that Newhall may
terminate the RSF Lease or alternatively, that it may terminate those portions
of the RSF Lease on which there is currently default under the Lease. MCPC
claims that Newhall is not entitled to lease termination as a remedy and that
Kerr-McGee and InterCoast and MidAmerican owe indemnities to MCPC for defense
and certain potential liability under Newhall's action, all as more particularly
described in the Harris County, Texas litigation described above. Discovery is
ongoing, and the lawsuit is set for trial in March 2003. A more in-depth
discussion of the environmental condition of the property covered by the Leases
is included in the Company's Annual Report on Form 10-K under "Regulation -
Environmental Claims."
The Company is also a party to various other lawsuits and governmental
proceedings, all arising in the ordinary course of business. Although the
outcome of all of the above proceedings cannot be predicted with certainty,
management does not expect such matters to have a material adverse effect,
either singly or in the aggregate, on the financial position or results of
operations of the Company. It is possible, however, that charges could be
required that would be significant to the operating results of a particular
period.
12
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
Net income for the three months ended September 30, 2002 was $3.6
million compared to $9.0 million for the same period in 2001. This decrease was
attributable to lower natural gas and oil production, due largely to the sale of
certain non-core properties, and lower natural gas prices, partially offset by
decreased operating expenses.
Income before income taxes for the nine months ended September 30, 2002
was $3.8 million compared to $61.6 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 nine months
ended September 30, 2002 was $14.1 million compared to an income tax benefit of
$7.6 million for the same period in 2001. As a result of the non-cash income tax
expense in 2002 (see Note 6 to Condensed Consolidated Financial Statements), the
Company reported a net loss of $10.3 million for the nine months ended September
30, 2002 compared to net income of $69.2 million for the nine months ended
September 30, 2001.
13
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Production:
Gas (MMcf) ............. 7,382 8,956 23,270 28,292
Oil (Mbbl) ............. 248 288 776 934
Liquids (Mbbl) ......... 79 98 221 275
Summary (MMcfe):
Working interest .... 8,716 10,167 27,098 32,008
VPP ................. 628 1,105 2,153 3,538
------------ ------------ ------------ ------------
Total ..... 9,344 11,272 29,251 35,546
============ ============ ============ ============
Average Price:
Gas (per Mcf) .......... $ 3.26 $ 3.49 $ 3.13 $ 4.21
Oil (per bbl) .......... 22.35 21.77 20.12 22.20
Liquids (per bbl) ...... 9.57 12.46 9.55 14.76
Total (per Mcfe) ....... 3.25 3.44 3.10 4.05
Revenue:
Gas .................... $ 24,092 $ 31,256 $ 72,841 $ 119,189
Oil .................... 5,543 6,270 15,605 20,733
Liquids ................ 756 1,221 2,110 4,059
------------ ------------ ------------ ------------
Total ..... $ 30,391 38,747 $ 90,556 $ 143,981
============ ============ ============ ============
Note: Production includes 2,671 MMcfe and 8,715 MMcfe, respectively, for the
three and nine months ended September 30, 2002 compared to 4,210 MMcfe and
11,752 MMcfe for the three and nine months ended September 30, 2001,
respectively, dedicated to the Production Payment sold in February 2001. See
Notes 2 and 4 to Condensed Consolidated Financial Statements.
Gas revenue
For the three months ended September 30, 2002, gas revenue decreased
$7.2 million to $24.1 million due to a 7% decrease in average realized natural
gas prices and an 18% decrease in production. For the nine months ended
September 30, 2002, gas revenue decreased $46.3 million to $72.9 million due to
a 26% decrease in average realized natural gas prices and an 18% decrease in
production.
The decrease in production in 2002 was attributable to the sale of oil
and gas properties, natural declines of producing properties, expiration of
certain VPPs and no additional investment in the VPP program in 2000 and 2001.
The natural decline of producing properties was not fully 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 September 30, 2002, oil and liquids revenue
was $6.3 million compared to $7.5 million during the same period in 2001, due to
a 15% decrease in production and a 1% decrease in the weighted average realized
price. For the nine months ended September 30, 2002, oil and liquids revenue
decreased 29% to $17.7 million due to an 18% decrease in production and a 13%
decrease in weighted average realized prices. The decrease in production in 2002
was attributable to the sale of oil and gas properties and the natural declines
of producing properties.
14
Other revenue, net
Other revenue was $0.1 million for the three months ended September 30,
2002 compared to $0.7 million for the same period a year ago. The 2001 period
included $1.2 million from sale of emission credits. For the nine months ended
September 30, 2001, other revenue was $17.2 million. Of this, $8.2 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 10 to Condensed Consolidated
Financial Statements), and the remainder was primarily attributable to marketing
and transportation revenue. This compares to a net cost of $1.0 million for the
nine months ended September 30, 2002 primarily attributed to marketing and
transportation activities.
Lease operating expenses
Lease operating expenses ("LOE") decreased $0.9 million, or 13%, to
$5.9 million for the three months ended September 30, 2002 compared to $6.8
million for the same period in 2001. For the nine months ended September 30,
2002, LOE decreased $4.4 million, or 18%, to $19.3 million compared to $23.8
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.
Production taxes
Production taxes, which are generally based on a percentage of revenue
(excluding VPP revenue) decreased $0.1 million to $1.5 million for the third
quarter of 2002 and $2.2 million to $4.4 million for the nine months ended
September 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") for the three months ended
September 30, 2002 were $2.4 million compared to $2.2 million for the same
period a year ago. This slight increase was primarily the result of severance
costs associated with a reduction in workforce in September 2002. For the nine
months ended September 30, 2002, G&A decreased $0.9 million, or 13%, to $6.2
compared to the same period in 2001 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 $0.7 million for the nine-month period ended
September 30, 2002 compared to $0.5 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
realized prices. For the three months ended September 30, 2002, depreciation,
depletion and amortization ("DD&A") decreased $2.4 million to $12.9 million
compared to the same period in 2001. For the nine months ended September 30,
2002, DD&A was $40.9 million compared to $42.8 million for the same period in
2001. The decreases in the 2002 periods were primarily the result of lower oil
and gas revenues and a lower depletion base, partially offset by a higher
depletion rate resulting from lower natural gas prices.
Interest and other income
Interest and other income for the nine months ended September 30, 2002
was $0.1 million compared to $1.2 million for the same period a year ago
reflecting lower interest income associated with accumulated cash and cash
equivalents in the current year period.
15
Interest expense
Interest expense for the nine months ended September 30, 2002 was $14.3
million compared to $17.1 million for the same period a year ago. The $2.8
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 nine months ended September 30,
2001, the Company recorded $2.9 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 nine months ended September 30, 2002 was
$14.1 million compared to an income tax benefit in the same period of 2001 of
$7.6 million. The Company increased its valuation allowance against net deferred
assets at June 30, 2002 by $15.9 million. See Note 6 to Condensed Consolidated
Financial Statements.
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 $44 million and $47 million, of which $38.3 million was invested in the
first nine months of 2002, sold certain non-core oil and gas properties for net
proceeds of $30.9 million during the nine months September 30, 2002 and has
entered into a non-binding letter of intent with an institutional lender
for a $60 Million Credit Facility. In connection therewith, the Company will be
required to amend or replace its existing Revolving Credit Facility. The Company
anticipates that the amended or replacement Revolving Credit Facility and the
$60 Million Credit Facility will close by year-end, although each proposed
facility is subject to lender due diligence and negotiation of definitive
agreements and will require the other facility be closed as well.
While the Company believes that it will be successful in obtaining an
amended or replacement Revolving Credit Facility as well as a new $60 Million
Credit Facility, there can be no assurance that this will occur. If the
financing is obtained, the Company anticipates that it will meet the Senior Note
maturity obligations. However, in the event that the Company is unable to meet
its Senior Note obligations when due and the Company is unable to obtain an
extension of the maturity of the Senior Note obligations, 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 and this would put into
doubt the Company's ability to continue as a going concern.
If the Company is successful in consummating the amended or replacement
Revolving Credit Facility as well as a new $60 Million Credit Facility and
retiring the Senior Notes when due, then the Company believes that its cash flow
and the amounts available under the new Revolving Credit Facility should be
sufficient to carry out its business operations and meet its obligations.
Cash flow from operating activities
Net income adjusted for non-cash charges and reorganization items for
the nine months ended September 30, 2002 was $13.8 million compared to $66.4
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 provided by operating activities for the nine months ended September
30, 2002 was $4.1 million compared to net cash provided by operating activities
of $174.2 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,
16
the payment of $71.4 million of interest and the $28 million cost of terminating
certain derivative instruments in connection with the emergence from Chapter 11.
The decrease in trade accounts receivable is mainly due to a decrease in joint
interest receivables due to decreased drilling activity and the timing of cash
receipts. The decrease in accounts payable and accrued liabilities is largely
due to curtailment of capital expenditures, the payment of a retention bonus
approved in the Chapter 11 proceedings and the timing of cash disbursements.
Investing activities
Capital expenditures for the nine months ended September 30, 2002 were
$38.3 million of which $4.8 million was for the acquisition of proved reserves,
$22.5 million was for development activities, and $11.0 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 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.
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 refinancing of debt, liquidity,
planned capital expenditures, increases in oil and gas production, the number of
anticipated wells to be drilled after the date hereof, the Company's financial
position, business strategy and other plans and objectives for 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 be correct. The
Company's actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including the
Company's failure to obtain the $60 Million Credit Facility and amend or replace
the Revolving Credit Facility, or in the alternative, obtain an extension of the
maturity of the Senior Note obligations, the timing and success of the Company's
drilling activities, the volatility of prices and supply 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 changes in
regulatory requirements.
17
All forward-looking statements attributable to the Company or persons
acting on its behalf are expressly qualified in their entirety by such factors.
18
Item 3. Quantitative and Qualitative Disclosures about Market Risk
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 oil and natural gas hedged position
at September 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
4th Qtr........ 310,000 104 310,000 -
----------- --------- ----------- ------
Total... 31,000 $ 104 30,000 -
=========== ========= =========== ======
Swaps @ $3.85 avg. per MMbtu Swaps @ $26.50 per barrel
------------------------------- --------------------------------
Unrealized Unrealized
Volume Loss Volume Loss
MMBtu ($000s) Barrels ($000s)
---------- ---------- ----------- ----------
2002
4th Qtr........ 1,530,000 (206) 46,000 (158)
----------- --------- ----------- ------
Total... 1,530,000 $ (206) $46,000 (158)
=========== ========= =========== ========
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 third quarter of 2002, the
Company's weighted average contractual interest rate on its weighted average
fixed rate debt of $186.3 million was 9.6%. The weighted average interest rate
on its weighted average variable rate debt of $9.3 million was 4.2%. During the
nine months ended September 30, 2002, the Company's weighted average contractual
interest rate on its weighted average fixed rate debt of $193.7 million was
9.6%. The weighted average interest rate on its weighted average variable rate
debt of $10.7 million was 4.1%.
19
Item 4. Controls and Procedures
Within the 90 days prior to the date of this report, the Company
conducted an evaluation, under the supervision of and with the participation of
the Company's management, including the President and Chief Executive Officer
and Principal Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures pursuant to Rule
13a-14 of the Securities Exchange Act of 1934. Based upon that evaluation, the
President and Chief Executive Officer and Principal Financial Officer concluded
that the Company's disclosure controls and procedures are effective in timely
alerting them to material information relating to the Company (including its
consolidated subsidiaries) required to be included in the Company's periodic SEC
filings.
There were no significant changes in the Company's internal controls or
other factors that could significantly affect such controls subsequent to the
date of their evaluation and there were no corrective actions with regard to
significant deficiencies or material weaknesses in the Company's internal
controls.
20
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, 2001 and Note 12 to
Condensed Consolidated Financial Statements included herein.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
10.1 Third Amendment to Credit Agreement dated as of November 13,
2002, is among KCS ENERGY, INC. (the "BORROWER"), certain
commercial lending institutions named on the signature pages
hereto (together with their respective successors and assigns
in such capacity, each as a "LENDER" and collectively as the
"LENDERS"), CANADIAN IMPERIAL BANK OF COMMERCE, NEW YORK
AGENCY, as agent for the Lenders (in such capacity, together
with its successors and assigns, the "AGENT"), CIBC INC., as
collateral agent for the Lenders (in such capacity, together
with its successors and assigns, "COLLATERAL AGENT").
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.
The Company filed a current Report on Form 8-K, dated July 1,
2002, reporting on "Item 4. Changes in Registrant's Certifying
Accountant" the change of the Company's independent public
accountants to Ernst & Young LLP for the fiscal year ending
December 31, 2002 replacing Arthur Andersen LLP.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KCS ENERGY, INC.
November 14, 2002 /s/ FREDERICK DWYER
---------------------------------
Frederick Dwyer
Vice President, Controller
and Secretary
21
CERTIFICATIONS
I, James W. Christmas, certify that:
1. I have reviewed this quarterly report on Form 10-Q of KCS Energy, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ JAMES W. CHRISTMAS
---------------------------
James W. Christmas
President and Chief
Executive Officer
November 14, 2002
22
I, Frederick Dwyer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of KCS Energy, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ FREDERICK DWYER
---------------------------------
Frederick Dwyer
Vice President, Controller and
Secretary
November 14, 2002
23
EXHIBIT INDEX
10.1 Third Amendment to Credit Agreement dated as of November 13, 2002,
is among KCS ENERGY, INC. (the "BORROWER"), certain commercial
lending institutions named on the signature pages hereto (together
with their respective successors and assigns in such capacity, each
as a "LENDER" and collectively as the "LENDERS"), CANADIAN IMPERIAL
BANK OF COMMERCE, NEW YORK AGENCY, as agent for the Lenders (in
such capacity, together with its successors and assigns, the
"AGENT"), CIBC INC., as collateral agent for the Lenders (in such
capacity, together with its successors and assigns, "COLLATERAL
AGENT").
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.