-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FoDK4v75HCgY8wdbwuA3Ti3ZUS4RCulmgmOCqrHPYZpgcwwBckK/VMoV1PmhEOxe NMOeChu+a51TJMP24C6StA== 0000950129-00-001553.txt : 20000331 0000950129-00-001553.hdr.sgml : 20000331 ACCESSION NUMBER: 0000950129-00-001553 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KCS ENERGY INC CENTRAL INDEX KEY: 0000832820 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-PETROLEUM & PETROLEUM PRODUCTS (NO BULK STATIONS) [5172] IRS NUMBER: 222889587 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-13781 FILM NUMBER: 588648 BUSINESS ADDRESS: STREET 1: 5555 SAN FELIPE ROAD CITY: HOUSTON STATE: TX ZIP: 77056 BUSINESS PHONE: 9086321770 FORMER COMPANY: FORMER CONFORMED NAME: KCS GROUP INC DATE OF NAME CHANGE: 19920310 10-K405 1 KCS ENERGY, INC. 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 1-11698 KCS ENERGY, INC. (Exact name of registrant as specified in its charter) DELAWARE 22-2889587 (State or other jurisdiction of incorporation (I.R.S. Employer Identification No.) or organization) 5555 SAN FELIPE ROAD, HOUSTON, TEXAS 77056 (Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (713) 877-8006 Securities Registered Pursuant to Section 12(b) of the Act:
TITLE OF CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED -------------- ----------------------------------------- Common Stock, par value $0.01 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: TITLE OF CLASS Common Stock, par value $0.01 per share 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 12 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. Yes: [X] No: [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the 25,550,154 shares of the Common Stock held by non-affiliates of the Registrant at the $1.375 closing price on March 1, 2000 was $35,131,462. Number of shares of Common Stock outstanding as of the close of business on March 1, 2000: 29,268,310 DOCUMENTS INCORPORATED BY REFERENCE Part III incorporates information by reference to Notice of and Proxy Statement for the 2000 Annual Meeting of Shareholders to the extent indicated herein. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I ITEM 1. BUSINESS. GENERAL DEVELOPMENT OF BUSINESS KCS Energy, Inc. ("KCS" or the "Company") is an independent oil and gas company engaged in the acquisition, exploration, exploitation and production of domestic oil and natural gas properties. The Company was formed in 1988 in connection with the spin-off of the non-utility operations of NUI Corporation, a New Jersey-based natural gas distribution company that had been engaged in the oil and gas exploration and production business since the late 1960s. The Company's properties are located in three regions: the Mid-Continent (which includes the Rocky Mountain area), onshore Gulf Coast and, primarily through its Volumetric Production Payment program ("VPP program"), the offshore Gulf of Mexico. During 1997 and 1998, due to very low prices for natural gas and crude oil and, in 1998, due to disappointing performance of certain properties in the Rocky Mountain area which resulted in non-cash ceiling writedowns of its oil and gas assets and the reduction to zero of the book value of net deferred tax assets, the Company incurred significant losses. As a result of these non-cash adjustments, the Company has negative stockholders' equity and continues to be in default of certain covenants in its bank credit facilities. As a consequence, the Company cannot borrow under the revolving credit facilities. The Company's independent public accountants issued modified reports for 1998 and 1999 with respect to the ability of the Company to continue as a going concern, which also constitutes a default under the revolving bank credit agreements. The Company is also in default with respect to its senior note and senior subordinated note obligations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and Note 2 to Consolidated Financial Statements. In 1999 gas and oil prices strengthened considerably. Average realized gas prices were 5% higher and average realized oil prices were 41% higher in 1999 as compared to 1998 (although 1999 average realized gas prices were 9% lower and 1999 oil prices were 14% lower than in 1997). Also in 1998, the Company implemented a program designed to improve its financial situation and the overall efficiency of the Company and its subsidiaries. The Company reduced its workforce by over 30% during the two-year period ending December 31, 1999, closed its New Jersey corporate office and froze senior management salaries for 1999. Expense reduction initiatives lowered lease operating expenses and general and administrative expenses by approximately 13% during 1999. Capital investments were reduced in 1999 and a property divestiture program was implemented whereby the Company sold non-core properties and raised net proceeds of approximately $27.7 million. In addition, the Company engaged financial advisors to pursue a financial restructuring. On January 18, 2000, the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court") entered an order for relief under Chapter 11 of the Bankruptcy Code against KCS Energy, Inc. Also on January 18, 2000, each of KCS Energy, Inc.'s subsidiaries filed voluntary petitions under Chapter 11 of the Bankruptcy Code with the Bankruptcy Court. KCS and its subsidiaries are currently operating their businesses and managing their properties as debtors in possession under Chapter 11 of the Bankruptcy Code. See Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources and Note 2 to Consolidated Financial Statements. FORWARD-LOOKING STATEMENTS The information discussed in this Form 10-K includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements, other than statements of historical facts, included herein regarding planned capital expenditures, 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 1 3 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 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. Some of these risks (as well as others) are described more fully elsewhere in this Form 10-K. All forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by such factors. Oil and Gas Operations All of the Company's exploration and production activities are located within the United States. The Company competes with major oil and gas companies, other independent oil and gas concerns and individual producers and operators in the areas of reserve and leasehold acquisitions and the exploration, development, production and marketing of oil and gas, as well as contracting for equipment and hiring of personnel. Oil and gas prices have been volatile historically and are expected to continue to be volatile in the future. Prices for oil and gas are subject to wide fluctuation in response to relatively minor changes in the supply of and demand for oil and gas, market uncertainty and a variety of additional factors that are beyond the Company's control. These factors include political conditions in the Middle East and elsewhere, the foreign supply of oil and gas, the price of foreign imports, the level of consumer product demand, weather conditions, domestic and foreign government regulations and taxes, the price and availability of alternative fuels and overall economic conditions. No single customer accounted for more than 10% of the Company's annual consolidated revenues in the three years ended December 31, 1999. Exploration and Production Activities During the three-year period ended December 31, 1999, the Company participated in drilling 275 gross wells, of which 74% were successful. In 1999 the Company participated in drilling 75 wells, of which 85% were successful. This included 62 development wells and 13 exploration wells with success rates of 87% and 77%, respectively. In 1999, the Company concentrated its drilling programs predominately in the Mid-Continent and Onshore Gulf Coast regions. In the Mid-Continent region the Company drilled 7 wells in the Arkoma Basin, 14 wells in the Anadarko Basin, 7 wells in North Louisiana, 17 wells in the Permian Basin and 12 wells at a non-operated Montana Field. The Company also drilled 18 wells in the Onshore Gulf Coast region. In 1999, the Company participated in the acquisition of two properties: one producing South Texas property and a group of non-producing Niagran Reef wells in Michigan. The Company intends to continue to focus its 2000 capital drilling program with low risk stepout and extension wells in the Mid-Continent Region and medium-risk exploration wells with higher reserve potential in the Gulf Coast Region. The Company also intends to supplement the drilling programs with strategic acquisitions. Volumetric Production Payment Program The Company augments its working interest ownership of properties with a VPP program, a method of acquiring oil and gas reserves scheduled to be delivered in the future at a discount to the current market price in exchange for an up-front cash payment. A VPP entitles the Company to a priority right to a specified volume of oil and gas reserves scheduled to be produced and delivered over a stated time period. Although specific terms of the Company's VPPs vary, the Company is generally entitled to receive delivery of its scheduled oil and gas volumes at agreed delivery points, free of drilling and lease operating costs and, in most cases, free of state severance taxes. The Company believes that its VPP program diversifies its reserve base and achieves attractive rates of return while minimizing the Company's exposure to certain development, 2 4 operating and reserve volume risks. Typically, the estimated proved reserves of the properties underlying a VPP are substantially greater than the specified reserve volumes required to be delivered pursuant to the production payment. Since the inception of the VPP program in August 1994 through December 31, 1999, the Company has invested $207.9 million under the VPP program and has acquired proved reserves of 117.8 Bcfe of natural gas and oil. The Company has recognized approximately $201.4 million in revenue from the sale of oil and gas acquired under the program, with 16.0 Bcfe of conventional VPPs and 14.6 Bcfe of a Michigan VPP now owned as a working interest scheduled for future deliveries. During 1999, the Company invested $12.2 million in three separate VPP transactions and acquired 6.1 Bcfe of natural gas equivalent, located in the Gulf of Mexico. Raw Materials The Company obtains its raw materials (principally natural gas and oil) from various sources, which are presently considered adequate. While the Company regards the various sources as important, it does not consider any one source to be essential to its business as a whole. Patents and Licenses There are no patents, trademarks, licenses, franchises or concessions held by the Company, the expiration of which would have a material adverse effect on its business. Seasonality Demand for natural gas and oil is seasonal, principally related to weather conditions and access to pipeline transportation. Oil and Gas Risk Factors Set forth below, are certain risk factors to which the Company is subject as a result of its operations in the oil and gas industry. Volatile Nature of Oil and Gas Markets; Fluctuation in Prices. The Company's future financial condition and results of operations are highly dependent on the demand and prices received for the Company's oil and gas production and on the costs of acquiring, developing and producing reserves. Oil and gas prices have been volatile historically and are expected by the Company to continue to be volatile in the future. Prices for oil and gas are subject to wide fluctuation in response to relatively minor changes in the supply of and demand for oil and gas, market uncertainty and a variety of additional 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 gas, the level of consumer demand, weather conditions, domestic and foreign government regulations and taxes, the price and availability of alternative fuels and overall economic conditions. A decline in oil or gas prices may adversely affect the Company's cash flow, liquidity and profitability. Lower oil or gas prices also may reduce the amount of the Company's oil and gas that can be produced economically. It is impossible to predict future oil and gas price movements with any certainty. Dependence on Acquiring and Finding Additional Reserves. The Company's prospects for future growth and profitability will depend primarily on its ability to replace reserves through acquisitions, development and exploratory drilling. The decision to purchase, explore or develop an interest or property will depend in part on the evaluation of data obtained through geophysical and geological analyses and engineering studies, the results of which are often inconclusive or subject to varying interpretations. Acquisitions may not be available at attractive prices, and there can be no assurance that the Company's acquisition and exploration activities or planned development projects will result in significant additional reserves, or that the Company will have continuing success in drilling economically productive wells. Without acquiring or developing additional reserves, the Company's proved reserves and revenues will decline. 3 5 Reliance on Estimates of Reserves and Future Net Cash Flows. There are numerous uncertainties inherent in estimating quantities of proved oil and gas reserves, including many factors beyond the Company's control. This Form 10-K includes estimates by independent petroleum engineers of the Company's oil and gas reserves and future net cash flows. Reserve engineering is a subjective process of estimating underground accumulations of oil and gas that cannot be measured in an exact manner. Estimates of oil and gas reserves and of future net cash flow depend upon a number of variable factors and assumptions, such as historical production from the area compared with production from other producing areas, the assumed effects of regulation by government agencies and assumptions concerning future oil and gas prices, operating costs, severance and excise taxes, development costs and workover and remedial costs, all of which may in fact vary considerably from actual results. For these reasons, estimates of the economically recoverable quantities of oil and gas attributable to any particular group of properties, classifications of such reserves based on risk of recovery and estimates of the future net cash flows expected therefrom prepared by different engineers or by the same engineers at different times may vary significantly. Actual production, revenues and expenditures with respect to the Company's reserves likely will vary from estimates, and such variances may be material. The Company's reserves and future cash flows may be subject to revisions, based upon production history, oil and gas prices, performance of counterparties under agreements to which the Company is a party, operating and development costs and other factors. The PV-10 values referred to in this Form 10-K should not be construed as the current market value of the estimated oil and gas reserves attributable to the Company's properties. In accordance with applicable requirements of the Securities and Exchange Commission ("SEC"), PV-10 is generally based on prices and costs as of the date of the estimate, whereas actual future prices and costs may be materially higher or lower. Actual future net cash flows also will be affected by factors such as the amount and timing of actual production, supply and demand for oil and gas, curtailments or increases in consumption by natural gas purchasers and changes in government regulations or taxation. The present value will be affected by the timing of both the production and the incurrence of expenses in connection with development and production of oil and gas properties. In addition, the 10% discount factor, which is required by the SEC to be used to calculate present value for reporting purposes, is not necessarily the most appropriate discount factor based on interest rates in effect from time to time and risks associated with the Company and its properties or the oil and gas industry in general. Exploration Risks. Exploratory drilling activities are subject to many risks, including the risk that no commercially productive reservoirs will be encountered, and there can be no assurance that new wells drilled by the Company will be productive or that the Company will recover all or any portion of its investment. Drilling for oil and gas may involve unprofitable efforts, not only from non-productive wells, but from wells that are productive but do not provide sufficient net revenues to return a profit after drilling, operating and other costs. The cost of drilling, completing and operating wells is often uncertain. The Company's drilling operations may be curtailed, delayed or canceled as a result of numerous factors, many of which are beyond the Company's control, including title problems, weather conditions, compliance with government requirements and shortages or delays in the delivery of equipment and services. Marketing Risks. The Company's ability to market oil and gas at commercially acceptable prices is dependent on, among other factors, the availability and capacity of gathering systems and pipelines, federal and state regulation of production and transportation, general economic conditions and changes in supply and demand. The Company's inability to respond appropriately to these changing factors could have a negative effect on the Company's profitability. Acquisition Risks. Acquisitions of oil and gas businesses, properties and volumetric production payments have been an important element of the Company's business, and the Company will continue to seek acquisitions in the future. Even though the Company performs a review (including review of title and other records) of the major properties it seeks to acquire that it believes is consistent with industry practices, such reviews are inherently incomplete, and it is generally not feasible for the Company to review in-depth every property and all records. Even an in-depth review may not reveal existing or potential problems or permit the Company to become familiar enough with the properties to assess fully their deficiencies and capabilities, and 4 6 the Company may assume environmental and other liabilities in connection with acquired businesses and properties. Operating Risks. The Company's operations are subject to numerous risks inherent in the oil and gas industry, including the risks of fire, explosions, blow-outs, pipe failure, abnormally pressured formations and environmental accidents such as oil spills, natural gas leaks, ruptures or discharges of toxic gases, the occurrence of any of which could result in substantial losses to the Company due to injury or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, clean-up responsibilities, regulatory investigation and penalties and suspension of operations. The Company's operations may be materially curtailed, delayed or canceled as a result of numerous factors, including the presence of unanticipated pressure or irregularities in formations, accidents, title problems, weather conditions, compliance with government requirements and shortages or delays in the delivery of equipment. In accordance with customary industry practice, the Company maintains insurance against some, but not all, of the risks described above. There can be no assurance that the levels of insurance maintained by the Company will be adequate to cover any losses or liabilities. The Company cannot predict the continued availability of insurance, or availability at commercially acceptable premium levels. Competitive Industry. The oil and gas industry is highly competitive. The Company competes for oil and gas business and property acquisitions and for the exploration, development, production, transportation and marketing of oil and gas, as well as for equipment and personnel, with major oil and gas companies, other independent oil and gas concerns and individual producers and operators. Many of these competitors have financial and other resources, which substantially exceed those available to the Company. Government Regulation. The Company's business is subject to certain federal, state and local laws and regulations relating to the drilling, production, transportation and marketing of oil and gas, as well as environmental and safety matters. Such laws and regulations have generally become more stringent in recent years, often imposing greater liability on an increasing number of parties. Because the requirements imposed by such laws and regulations are frequently changed, the Company is unable to predict the effect or cost of compliance with such requirements or their effects on oil and gas use or prices. In addition, legislative proposals are frequently introduced in Congress and state legislatures, which if enacted, might significantly affect the oil and gas industry. In view of the many uncertainties, which exist with respect to any legislative proposals, the effect on the Company of any legislation which might be enacted cannot be predicted. REGULATION General. The Company's business is affected by numerous governmental laws and regulations, including energy, environmental, conservation, tax and other laws and regulations relating to the energy industry. Changes in any of these laws and regulations could have a material adverse effect on the Company's business. In view of the many uncertainties with respect to current and future laws and regulations, including their applicability to the Company, the Company cannot predict the overall effect of such laws and regulations on its future operations. The Company believes that its operations comply in all material respects with all applicable laws and regulations and that the existence and enforcement of such laws and regulations have no more restrictive an effect on the Company's method of operations than on other similar companies in the energy industry. The following discussion contains summaries of certain laws and regulations and is qualified in its entirety by the foregoing. State Regulations Affecting Production Operations. The Company's onshore exploration, production and exploitation activities are subject to regulation at the state level. Such regulation varies from state to state, but generally includes requiring permits for drilling wells, maintaining bonding requirements to drill or operate wells, and regulating the location of wells, the method of drilling and casing wells, the surface use and restoration of properties upon which wells are drilled, plugging and abandoning wells, and the disposal of fluids used in connection with operations. The Company's operations are also subject to various state conservation laws and regulations. These include regulation of the size of drilling and spacing units or proration units, 5 7 spacing of wells and the unitization or pooling of oil and gas properties. In addition, state conservation laws establish maximum rates of production from oil and gas wells, restrict the venting or flaring of gas and impose certain requirements regarding the ratability of production. These regulations and requirements may affect the profitability of affected properties or operations, and the Company is unable to predict the future cost or impact of complying with such regulations. Regulations Affecting Sales and Transportation of Oil and Gas. Various aspects of the Company's oil and gas operations are regulated by agencies of the federal government. The Federal Energy Regulatory Commission (the "FERC") regulates the transportation of natural gas in interstate commerce pursuant to the Natural Gas Act of 1938 (the "NGA") and the Natural Gas Policy Act of 1978 (the "NGPA"), including some natural gas produced or marketed by the Company. In the past, the federal government has regulated the prices at which the Company's natural gas could be sold. Currently, "first sales" of natural gas by producers and marketers, and all sales of crude oil, condensate and natural gas liquids, can be made at uncontrolled market prices, but Congress could reenact price controls at any time. Commencing in April 1992, the FERC issued its Order No. 636 and related clarifying orders ("Order No. 636") which, among other things, restructured the interstate natural gas industry and required interstate pipelines to provide transportation services separate, or "unbundled," from the pipelines' purchases and sales of natural gas. Order No. 636 and certain related "restructuring proceedings" affecting individual pipelines were the subject of a number of judicial appeals and orders on remand by the FERC. Order No. 636 has largely been upheld on appeal. The FERC continues to address Order 636-related issues (including transportation capacity auctions, alternative and negotiated ratemaking, policy matters affecting gas markets and gas industry standards) in a number of pending proceedings. The FERC continues to examine its policies affecting the natural gas industry. It is not possible for the Company to predict what effect, if any, the ultimate outcome of the FERC's various initiatives will have on the Company's operations. Order No. 636 was issued to foster increased competition within all phases of the natural gas industry. Although Order No. 636 has provided the Company with increased access to markets and the ability to utilize new types of transportation services, the Company is required to comply with pipeline operating tariffs, including restrictive pipeline imbalance tolerances, and to respond to penalties for violations of those tariffs. The Company believes that Order No. 636 has not had any significant impact on the Company. The FERC continues to authorize the sale and abandonment from NGA regulation of natural gas gathering facilities previously owned by interstate pipelines. Such facilities (and services on such systems) may be subject to regulation by state authorities in accordance with state law. A number of states either have enacted new laws or are considering the inadequacy of existing laws affecting gathering rates and/or services. For example, the Railroad Commission of Texas recently issued a code of conduct governing transportation and gathering services provided by intrastate pipelines and gatherers, and has affirmed that services are to be provided to shippers without undue discrimination. Other states have implemented specific regulations covering gathering services. In general, state regulation of gathering facilities includes various safety, environmental and, in some circumstances, nondiscriminatory take requirements, but does not generally entail regulation of the gathering rates charged. Natural gas gathering may receive greater regulatory scrutiny by state agencies in the future, and in that event, the Company's gathering operations could be adversely affected; however the Company does not believe that it would be affected by such regulation any differently from other natural gas producers or gatherers. The effects, if any, of changes in existing state or FERC policies on the Company's gas gathering or gas marketing operations are uncertain. Sales of crude oil, condensate and natural gas liquids by the Company are not currently regulated and are made at market prices. The price the Company receives from the sale of these products is affected by the cost of transporting the products to market. Effective January 1, 1995, the FERC implemented regulations establishing an indexing system for transportation rates for oil pipelines, which generally index such rates to inflation, subject to certain conditions and limitations. The Company is not able to predict with certainty what effect, if any, these regulations will have on its business, but other factors being equal, the regulations may tend to increase transportation costs or reduce wellhead prices under certain conditions. 6 8 Federal Regulations Affecting Production Operations. The Company also operates federal and Native American oil and gas leases, which are subject to the regulation of the United States Bureau of Land Management ("BLM"), the Bureau of Indian Affairs ("BIA") and the United States Minerals Management Service ("MMS"). MMS, BIA and BLM leases contain relatively standardized terms requiring compliance with detailed regulations and, in the case of offshore leases, orders pursuant to the Outer Continental Shelf Lands Act ("OCSLA") (which are subject to change by the MMS). Such regulations specify, for example, lease operating, safety and conservation standards, as well as well plugging and abandonment and surface restoration requirements. To cover the various obligations of lessees of federal and Native American lands, including lessees of Outer Continental Shelf ("OCS") lands, the BIA, BLM and MMS generally require that lessees to post bonds or other acceptable assurances that such obligations will be met. The cost of such bonds or other surety can be substantial and there is no assurance that any particular lease operator can obtain bonds or other surety in all cases. Under certain circumstances, the MMS, BIA or BLM may require operations on federal or Native American leases to be suspended or terminated. Any such suspension or termination could adversely affect the Company's interests. The MMS has issued a notice of proposed rulemaking in which it proposes to amend its regulations governing the calculation of royalties and the valuation of crude oil produced from federal leases. This proposed rule would modify the valuation procedures for both arm's length and non-arm's length crude oil transactions to decrease reliance on oil posted prices and assign a value to crude oil that better reflects its market value, establish a new MMS form for collecting differential data, and amend the valuation procedure for the sale of federal royalty oil. The Company cannot predict what action the MMS will take on this matter, nor can it predict how the Company will be affected by any change to this regulation. The MMS also continues to consider changes to the way it values natural gas for royalty payments. These changes would establish an alternative market-based method to calculate royalties on certain natural gas sold to affiliates or pursuant to non-arm's length sales contracts. Discussions among the MMS, industry officials and Congress are continuing, although it is uncertain whether and what changes may ultimately be proposed regarding gas royalty valuation. Additional proposals and proceedings that might affect the oil and gas industry are pending before Congress, the FERC, the MMS, the BLM, the BIA, state commissions and the courts. The Company cannot predict when or whether any such proposals may become effective. Historically, the natural gas industry has been very heavily regulated. There is no assurance that the current regulatory approach pursued by various agencies will continue indefinitely. Notwithstanding the foregoing, it is not anticipated that compliance with existing federal, state and local laws, rules and regulations will have a material or significantly adverse effect upon the capital expenditures, earnings or competitive position of the Company. Operating Hazards and Environmental Matters. The oil and gas business involves a variety of operating risks, including the risk of fire, explosions, blowouts, pipe failure, casing collapse, abnormally pressured formations and environmental hazards such as oil spills, natural gas leaks, ruptures and discharge of toxic gases. The occurrence of any of these hazards could result in substantial losses to the Company due to injury or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, cleanup responsibilities, regulatory investigation and penalties and suspension of operations. Although the Company believes it is adequately insured, such hazards may hinder or delay drilling, development and production operations. Oil and gas operations are subject to extensive federal, state and local laws and regulations that regulate the discharge of materials into the environment or otherwise relate to the protection of the environment. These laws and regulations may require the acquisition of a permit before drilling commences; restrict or prohibit the types, quantities and concentration of substances that can be released into the environment or wastes that can be disposed of in connection with drilling and production activities; prohibit drilling activities on certain lands lying within wetlands or other protected areas, and impose substantial liabilities for pollution resulting from drilling and production operations. Failure to comply with these laws and regulations may also result in civil and criminal fines and penalties. 7 9 The Company's properties and any wastes generated by the Company that may have been disposed thereon or on other lands may be subject to federal or state environmental laws that could require the Company to remove the wastes or remediate contamination. For example, the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), also known as the "Superfund" law, imposes liability, without regard to fault or the original conduct, on certain classes of persons who are considered to be responsible for the release of a "hazardous substance" into the environment. These persons include the owner or operator of the disposal site or sites where the release occurred and companies that disposed or arranged for the disposal of the hazardous substances. Under CERCLA, such persons may be subject to joint and several liability for the costs of cleaning up the hazardous substances that have been released into the environment, for damages to natural resources and for the costs of certain health studies, and it is not uncommon for neighboring landowners and other third parties to assert claims for personal injury and property damage allegedly caused by the release of hazardous substances. Environment. The Company owns the following two oil and gas leases covering an aggregate of approximately 11,000 acres in Los Angeles County, California: a. Oil and Gas Lease dated June 13, 1935, from Newhall Land and Farming Company, as Lessor, to Barnsdall Oil Company, as Lessee (the "RSF Lease") and b. Oil and Gas Lease dated June 6, 1941, from the Newhall Corporation, as Lessor, to C.G. Willis, as Lessee (the "Ferguson Lease"). The RSF Lease and the Ferguson Lease are herein called "Leases." Oil and gas production from such lands commenced shortly after the RSF Lease was granted and has continued to date. From inception of the Leases until October 30, 1990, the Leases were owned by entities that through corporate succession and name change ultimately became Sun Operating Limited Partnership ("Sun L.P."). On October 30, 1990, Sun L.P. transferred the Leases to DKM Offshore Energy, Inc. ("DKM") and Neste Oil Services Inc. ("Neste"). In the assignment of the Leases, Sun L.P. indemnified DKM and Neste from environmental claims resulting from the indemnitors' operations provided that such environmental claims were made within ten years from October 30, 1990. Shortly after the transfer to DKM and Neste, DKM acquired Neste's rights and, subsequently, DKM became Medallion California Properties Company ("Medallion California"). Later, the Company acquired the stock of Medallion California . Also, Sun L.P. became Kerr-McGee Oil & Gas Onshore L.P. ("Kerr-McGee L.P."). In connection with the purchase of Medallion California by KCS, InterCoast Energy Company ("InterCoast") indemnified the Company and Medallion California for up to 90% of the costs of environmental remediation not assumed by Kerr-McGee L.P. InterCoast's parent, MidAmerican Capital Company ("MidAmerican"), guaranteed InterCoast's indemnity obligations. Kerr-McGee L.P. has identified 21 sites for cleanup on the lands covered by the Leases and has a Remedial Action Plan ("RAP") approved by the Los Angeles County Regional Water Quality Control Board to effect such cleanup. The primary contaminant identified for this cleanup is petroleum waste. The Company believes that Kerr-McGee L.P. will ultimately accomplish the RAP and that the Company has no exposure for remediation of these 21 sites. In addition to the 21 sites identified in the RAP, the Company has identified and analyzed samples from numerous additional sites and has found that certain of those sites are contaminated with petroleum waste. The Company has described those sites to the lessors, Kerr-McGee L.P., InterCoast and MidAmerican. While there can be no assurance, the Company believes that additional site analysis is required to determine whether unidentified sites may require remediation. Litigation is currently pending among Kerr-McGee L.P., InterCoast, MidAmerican and the Company in which InterCoast and MidAmerican seek a declaratory judgment declaring the rights and obligations of each party under the indemnity by Kerr-McGee L.P. and also by InterCoast and MidAmerican. See"Litigation." Also, the Company's operations may be subject to the Clean Air Act ("CAA") and comparable state and local requirements. Amendments to the CAA were adopted in 1990 and contain provisions that may result 8 10 in the gradual imposition of certain pollution control requirements with respect to air emissions from the Company's operations. The EPA and state governments have been developing regulations to implement these requirements. The Company may be required to incur certain capital expenditures in the next several years for air pollution control equipment in connection with maintaining or obtaining permits and approvals addressing other air emission-related issues. The Company does not believe that its operations will be materially adversely affected by any such requirements. In addition, the U.S. Oil Pollution Act ("OPA") requires owners and operators of facilities that could be the source of an oil spill into "waters of the United States" (a term defined to include rivers, creeks, wetlands and coastal waters) to adopt and implement plans and procedures to prevent any spill of oil into any waters of the United States. OPA also requires affected facility owners and operators to demonstrate that they have at least $35 million in financial resources to pay for the costs of cleaning up an oil spill and compensating any parties damaged by an oil spill. Such financial assurances may be increased to as much as $150 million if a formal assessment indicates such an increase is warranted. The Company's operations are also subject to the federal Clean Water Act ("CWA") and analogous state laws. The Company may be required to incur certain capital expenditures in the next several years in order to comply with prohibitions against the discharge of produced waters into coastal waters or increased operating expenses in connection with offshore operations in coastal waters. Pursuant to other requirements of the CWA, the EPA has adopted regulations concerning discharges of storm water runoff. This program requires covered facilities to obtain individual permits, participate in a group permit or seek coverage under an EPA general permit. While certain of its properties may require permits for discharges of storm water runoff, the Company believes that it will be able to obtain, or be included under, such permits, where necessary, and make minor modifications to existing facilities and operations that would not have a material effect on the Company. Additionally, pursuant to the Safe Drinking Water Act, the EPA has adopted regulations concerning permitting and operations of underground injection control ("UIC") wells, including wells used in enhanced recovery and disposal operations associated with exploration and production activities. The United States Department of Justice has alleged that certain of the Company's UIC wells in Toole and Liberty counties, Montana in the Rocky Mountain Region have not complied with such regulations in certain instances. The Company has executed a consent decree with respect to this matter and believes that resolution of this matter will not have a material adverse effect on the Company. In addition, the disposal of wastes containing naturally occurring radioactive material which are commonly generated during oil and gas production is regulated under state law. Typically, wastes containing naturally occurring radioactive material can be managed on-site or disposed of at facilities licensed to receive such waste at costs that are not expected to be material. EMPLOYEES The Company and its subsidiaries employed a total of 178 persons on December 31, 1999. 9 11 ITEM 2. PROPERTIES. OIL AND GAS PROPERTIES The following table sets forth data as of December 31, 1999 regarding the number of gross producing wells and the estimated quantities of proved oil and gas reserves attributable to the Company's properties.
ESTIMATED PROVED RESERVES GROSS ------------------------------- PRODUCING OIL NATURAL GAS TOTAL LOCATION WELLS (MBBLS) (MMCF) (MMCFE) - -------- --------- ------- ----------- ------- Mid-Continent Region: Sawyer Canyon and Sonora Fields, Texas............ 355 13 34,697 34,773 Newhall-Potrero Field, California................. 43 1,680 1,684 11,767 Hartland Area, Michigan........................... -- 682 12,675 16,768 Elm Grove Field, Louisiana........................ 32 19 13,762 13,876 Shugart, W. Field, New Mexico..................... 8 483 170 3,066 Mayfield/Hayes Properties, Michigan............... 8 374 6,944 9,190 Wilburton Field, Oklahoma......................... 8 -- 3,831 3,831 Pittsburg Field, Texas............................ 32 521 120 3,248 Mills Ranch Field, Texas.......................... 23 56 3,292 3,625 Others............................................ 354 1,488 28,987 37,913 ----- ----- ------- ------- Total..................................... 863 5,316 106,162 138,057 ----- ----- ------- ------- Rocky Mountain Area: Manderson Field, Wyoming.......................... 60 241 19,559 21,004 Battle Creek Field, Montana....................... 76 -- 4,416 4,416 Others............................................ 523 1,424 9,687 18,230 ----- ----- ------- ------- Total..................................... 659 1,665 33,662 43,650 ----- ----- ------- ------- Gulf Coast Region: Langham Creek Area, Texas......................... 20 202 21,136 22,350 Provident City Field, Texas....................... 47 125 8,521 9,269 Clara, N. Field, Mississippi...................... 1 256 950 2,486 Others............................................ 247 521 33,906 37,032 ----- ----- ------- ------- Total..................................... 315 1,104 64,513 71,137 ----- ----- ------- ------- Offshore Gulf of Mexico Region: Working Interest Properties....................... 48 241 6,915 8,361 Volumetric Production Payments (VPPs)............. n/a 15 15,867 15,960 ----- ----- ------- ------- Total..................................... 48 256 22,782 24,321 ----- ----- ------- ------- Total Company............................. 1,885 8,341 227,119 277,165 ===== ===== ======= =======
MID-CONTINENT REGION The Mid-Continent Region is primarily comprised of producing properties in the Anadarko, Ardmore, Arklatex (North Louisiana), Arkoma, Michigan and Permian basins. The Company views the Mid-Continent Region as providing a solid base of production replacement and plans to continue to exploit areas within the various basins that require additional wells for adequate reserve drainage and to drill low-risk exploration wells. These wells are generally step-out and extension type wells with moderate reserve potential. The Company endeavors to be the operator when it holds a majority of the working interest. Estimated proved reserves in the Mid-Continent Region were 138.1 Bcfe as of December 31, 1999 representing approximately 50% of the Company's reserves. During the year ended December 31, 1999, in this Region the Company participated in drilling 54 gross (28.4 net) development wells and 3 gross (1.6 net) 10 12 exploratory wells with completion success rates of 87% and 67%, respectively. At December 31, 1999, the Company owned leasehold interests within the Mid-Continent Region covering approximately 220,000 gross (139,000 net) acres. Rocky Mountain Area In the Rocky Mountain area, the Company's operations are primarily in the Big Horn Basin in Wyoming. Operationally, this geographic area reports to the Mid-Continent Division. In mid-1998, because of particularly low commodity prices and disappointing drilling results, the Company curtailed its capital spending program and implemented a cost-reduction plan, which has reduced operating and administrative expenses. Because of restricted capital, the Company plans no substantial development or exploration activity in the Rocky Mountain area. Estimated proved reserves in the Rocky Mountain area were 43.7 Bcfe as of December 31, 1999 representing approximately 16% of the Company's reserves. Twelve non-operated wells were drilled in Montana in 1999 and are included in the Mid-Continent Region drilling statistics. As of December 31, 1999, the Company owned working interests covering approximately 260,000 gross (208,000 net) acres in the area, primarily in the Big Horn Basin. ONSHORE GULF COAST REGION The Onshore Gulf Coast Region is primarily comprised of producing properties in south Texas, coastal Louisiana and the Mississippi Salt Basin. The Company conducts development programs and pursues moderate-risk, higher-exposure exploration drilling programs. The Onshore Gulf Coast Region has prospects, which are expected to provide the key area of future growth for the Company. Estimated proved reserves in the region were 71.1 Bcfe as of December 31, 1999, which represented approximately 25% of the Company's reserves. During 1999 the Company drilled 8 gross (2.7 net) development wells and 10 gross (5.6 net) exploratory wells in the Onshore Gulf Coast Region. The 1999 success rates were 87% for development wells and 80% for exploratory wells. The Company owns or controls approximately 135,000 gross (42,000 net) acres in the Onshore Gulf Coast Region. OFFSHORE GULF OF MEXICO REGION The Gulf of Mexico Region includes assets that can be characterized in two categories. The first category is minor working interest properties obtained primarily through the Medallion Acquisition. The Company has working interests ranging from 4% to 14% in 12 offshore fields (including blocks located in the East Cameron, Eugene Island, Ship Shoal, South Timbalier, Vermilion and West Cameron areas), which are operated by other companies, primarily Newfield Exploration Company. The second category is proved reserves acquired through VPP transactions. Through a series of VPP transactions, the Company has acquired certain interests in 12 federal leases off the coasts of Texas and Louisiana. Major fields include the High Island 303/304, the West Cameron 427 and the South Marsh Island 17. Proved reserves for these two categories were estimated as of December 31, 1999 to be 24.3 Bcfe, representing approximately 9% of the Company's reserves. Reserves for conventional VPPs were 16.0 Bcfe, or approximately 6% of the Company's December 31, 1999 reserves. Volumetric Production Payment (VPP) Program The Company augments its working interest ownership of properties with its VPP program, a method of acquiring proved oil and gas reserves from specified wells scheduled to be delivered in the future, at a discount to the current market price, in exchange for an up-front cash payment. Although specific terms of the Company's volumetric production payments vary, the Company is generally entitled to receive delivery of its scheduled oil and gas volumes free of drilling and lease operating costs and, in most cases, free of state severance taxes. After delivery of the oil and gas volumes, the Company arranges for further downstream 11 13 transportation and sells such volumes to available markets. The Company believes that its VPP program diversifies its reserve base and achieves attractive rates of return while minimizing the Company's exposure to certain development and operating risks. Typically, the estimated proved reserves of the properties underlying a volumetric production payment are substantially greater than the specified reserve volumes required to be delivered pursuant to the production payment. Since the inception of the VPP program in late 1994, the Company had invested $207.9 million in 28 separate transactions and had acquired proved reserves of 117.8 Bcfe, consisting of 108.2 Bcf of natural gas and 1.6 MMbbls of oil. This represents an average net acquisition cost of $1.76 per Mcfe, without the burden of development and lease operating expenses. Through December 31, 1999, the Company had recovered approximately $201.4 million from the sale of oil and gas received under its VPP program. The properties which constitute the VPP program, are principally located in the Gulf of Mexico. During 1999, the Company invested $12.2 million in three separate VPP transactions and acquired 6.1 Bcfe of natural gas, located in the Gulf of Mexico. Although it has not done so in the past, the Company is exploring the expansion of the VPP program through joint venture partnerships or similar arrangements with third parties. OIL AND GAS RESERVES The reserve estimates and associated cash flows as of December 31, 1999 for all properties were prepared by Netherland, Sewell & Associates, Inc. The reserve estimates and associated cash flows as of December 31, 1998 were prepared by KCS and several independent petroleum engineers. The reports for the KCS Medallion Resources, Inc.; KCS Mountain Resources, Inc.; KCS Resources, Inc.; and KCS Michigan Resources, Inc. properties, which collectively represent 100% of KCS's proved reserves on working interest properties, and 85.4% of KCS's total proved reserves as of December 31, 1998, were audited by Netherland, Sewell & Associates, Inc. pursuant to the principles set forth in the Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserve Information promulgated by the Society of Petroleum Engineers. The independent reserve engineers' estimates were based upon a review of production histories and other geologic, economic, ownership and engineering data provided by the Company or third-party operators. The following table sets forth, as of December 31, 1999, summary information with respect to estimates of the Company's proved oil and gas reserves. The present value of future net revenues in the table should not be construed to be the current market value of the estimated oil and gas reserves owned by the Company.
DECEMBER 31, 1999 ----------------- PROVED RESERVES: Natural gas (MMcf).................................. 227,119 Oil (Mbbls)......................................... 8,341 Total (MMcfe)....................................... 277,165 Future net revenues ($000s)......................... $435,988 Present value of future net revenues ($000s)........ $292,790 PROVED DEVELOPED RESERVES: Natural gas (MMcf).................................. 175,896 Oil (Mbbls)......................................... 7,568 Total (MMcfe)....................................... 221,304 Future net revenues ($000s)......................... $362,378 Present value of future net revenues ($000s)........ $253,943
There are numerous uncertainties inherent in estimating quantities of proved oil and gas reserves and in projecting future rates of production and future amounts and timing of development expenditures, including underground accumulations of crude oil and natural gas that cannot be measured in an exact manner. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological 12 14 interpretation and judgment. Estimates of proved undeveloped reserves are inherently less certain than estimates of proved developed reserves. The quantities of oil and gas that are ultimately recovered, production and operating costs, the amount and timing of future development expenditures, geologic success and future oil and gas sales prices all may differ from those assumed in these estimates. In addition, the Company's reserves may be subject to downward or upward revision based upon production history, purchases or sales of properties, results of future development, prevailing oil and gas prices and other factors. Therefore, the present value shown above should not be construed as the current market value of the estimated oil and gas reserves attributable to the Company's properties. In accordance with SEC guidelines, the estimates of future net revenues from the Company's proved reserves and the present value thereof are made using oil and gas sales prices in effect as of the dates of such estimates and are held constant throughout the life of the properties except where such guidelines permit alternate treatment, including, in the case of natural gas contracts, the use of fixed and determinable contractual price escalations. Gas prices are based on either a contract price or a December 31, 1999 NYMEX price of $2.329 per MMBTU, adjusted by lease for BTU content, transportation fees and regional price differentials. Oil prices are based on a December 31, 1999 West Texas Intermediate posted price of $22.75 per barrel, adjusted by lease for gravity, transportation fees and regional posted price differentials. The prices for natural gas and oil are subject to substantial seasonal fluctuations, and prices for each are subject to substantial fluctuations as a result of numerous other factors. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." ACREAGE The following table sets forth certain information with respect to the Company's developed and undeveloped leased acreage as of December 31, 1999. The leases in which the Company has an interest are for varying primary terms, and many require the payment of delay rentals to continue the primary term. The leases may be surrendered by the operator at any time by notice to the lessors, by the cessation of production, fulfillment of commitments, or by failure to make timely payments of delay rentals. Excluded from the table are the Company's interests in the properties subject to volumetric production payments.
DEVELOPED ACRES UNDEVELOPED ACRES ----------------- ----------------- STATE GROSS NET GROSS NET - ----- ------- ------- ------- ------- Texas.......................................... 106,083 63,517 71,510 22,742 Louisiana...................................... 33,896 22,026 35,589 25,636 Oklahoma....................................... 56,229 24,425 2,354 1,289 Wyoming........................................ 51,276 47,939 150,000 143,487 Offshore....................................... 84,258 7,040 -- -- Other.......................................... 75,641 24,697 33,127 13,347 ------- ------- ------- ------- Total................................ 407,383 189,644 292,580 206,501 ======= ======= ======= =======
13 15 DRILLING ACTIVITIES All of the Company's drilling activities are conducted through arrangements with independent contractors. Certain information with regard to the Company's drilling activities during the years ended December 31, 1999, 1998 and 1997, is set forth below.
YEAR ENDED DECEMBER 31, ------------------------------------------ 1999 1998 1997 ------------ ------------ ------------ TYPE OF WELL GROSS NET GROSS NET GROSS NET - ------------ ----- ---- ----- ---- ----- ---- Development: Oil........................................ 9 7.5 9 6.4 33 33.0 Natural gas................................ 45 19.5 33 16.2 42 29.2 Non-productive............................. 8 4.1 13 9.1 18 16.4 -- ---- -- ---- -- ---- Total.............................. 62 31.1 55 31.7 93 78.6 == ==== == ==== == ==== Exploratory: Oil........................................ 1 0.5 6 3.5 1 1.0 Natural gas................................ 9 4.4 3 2.2 12 7.2 Non-productive............................. 3 2.3 10 6.2 20 13.9 -- ---- -- ---- -- ---- Total.............................. 13 7.2 19 11.9 33 22.1 == ==== == ==== == ====
At December 31, 1999, the Company was participating in the drilling of 4 gross (2.0 net) wells. PRODUCTION AND SALES The following table presents certain information with respect to oil and gas production attributable to the Company's properties and average sales prices during the three years ended December 31, 1999, 1998 and 1997.
YEAR ENDED DECEMBER 31, --------------------------- 1999 1998 1997 ------- ------- ------- Production: Gas (MMcf)............................................ 50,471 50,070 43,700 Oil (Mbbl)............................................ 1,286 1,650 1,696 Liquids (Mbbl)........................................ 122 96 128 Total (MMcfe)................................. 58,919 60,547 54,644 Average Price: Gas (per Mcf)......................................... $ 2.18 $ 2.08 $ 2.40 Oil (per bbl)......................................... 16.04 11.41 18.57 Liquids (per bbl)..................................... 11.25 7.93 11.02 Total (per Mcfe).............................. 2.24 2.04 2.52
OTHER FACILITIES Principal offices of the Company and its operating subsidiaries are leased in modern office buildings in Houston, Texas and Tulsa, Oklahoma. The Company believes that all of its property, plant and equipment are well maintained, in good operating condition and suitable for the purposes for which they are used. ITEM 3. LEGAL PROCEEDINGS. Information with respect to this Item is contained in Note 10 to the Consolidated Financial Statements on pages 42 through 45 of this Form 10-K. 14 16 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matter was submitted to a vote of security holders through the solicitation of proxies or otherwise during the three months ended December 31, 1999. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. In accordance with the terms of its debt agreements, the Company is currently prohibited from paying cash dividends. See Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources and Notes 2 and 6 to Consolidated Financial Statements. The Company had been paying regular quarterly dividends from the first quarter of 1992 through the first quarter of 1999. The last dividend for $585,000 was declared in December 1998 and paid in February 1999. The aggregate amount of dividends declared in 1998 was $2,345,000. There were 1,088 stockholders of record of the Company's Common Stock on March 1, 2000. The Company's Common Stock is traded on the New York Stock Exchange under the symbol KCS. Listed below are the high and low closing sales prices for the periods indicated:
1999 ---------------------------------------------- JANUARY -- APRIL -- JULY -- OCTOBER -- MARCH JUNE SEPTEMBER DECEMBER ---------- -------- --------- ---------- Market Price High....................................... $ 3.25 $ 1.44 $ 1.25 $1.06 Low........................................ 1.25 0.38 0.63 0.63
1998 ---------------------------------------------- JANUARY -- APRIL -- JULY -- OCTOBER -- MARCH JUNE SEPTEMBER DECEMBER ---------- -------- --------- ---------- Market Price High....................................... $20.63 $16.00 $11.32 $6.19 Low........................................ 15.31 10.75 3.31 2.94
15 17 ITEM 6. SELECTED FINANCIAL DATA. The following table sets forth the Company's selected financial data for each of the five years ended December 31, 1999.
1999 1998(1) 1997(2) 1996 1995 --------- --------- -------- -------- -------- DOLLARS IN THOUSANDS (EXCEPT PER SHARE DATA) Revenue............................... $ 136,491 $ 129,452 $143,689 $108,374 $ 87,115 Income (loss) from continuing operations.......................... 4,340 (296,520) (97,385) 21,717 23,405 Income (loss) from discontinued operations.......................... -- -- 5,302 (1,845) (2,099) Net income (loss)..................... 4,340 (296,520) (92,083) 19,872 21,306 Total assets.......................... 284,932 308,878 502,414 511,820 306,564 Debt.................................. 381,819 410,335 292,445 310,347 165,529 Stockholders' equity (deficit)........ (149,843) (154,204) 145,070 125,622 101,576 Per common share (Basic): Income (loss) from continuing operations....................... 0.15 (10.08) (3.37) 0.94 1.02 Income (loss) from discontinued operations....................... -- -- 0.18 (0.08) (0.09) Net income (loss)................... 0.15 (10.08) (3.19) 0.86 0.93 Per common share (Diluted): Income (loss) from continuing operations....................... 0.15 (10.08) (3.37) 0.92 1.00 Income (loss) from discontinued operations....................... -- -- 0.18 (0.08) (0.09) Net income (loss)................... 0.15 (10.08) (3.19) 0.84 0.91 Per common share: Stockholders' equity (deficit)...... (5.12) (5.27) 4.93 5.42 4.42 Dividends........................... -- 0.08 0.075 0.06 0.06
- --------------- (1) 1998 includes $268.5 million pretax ($174.5 million after tax) in non-cash ceiling test writedowns of oil and gas assets and a $113.9 million reduction to zero of the book value of net deferred tax assets. Together, these adjustments accounted for $288.4 million, or $9.80 per share, of the 1998 loss. (2) Includes a $165.1 million pretax ($107.3 million after tax), or $3.72 per share, non-cash ceiling test writedown of oil and gas assets. 16 18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following is a discussion and analysis of the Company's financial condition and results of operations and should be read in conjunction with the Company's Consolidated Financial Statements (including the notes thereto) included elsewhere in this Form 10-K. GENERAL During 1997 and 1998, due to very low prices for natural gas and crude oil and, in 1998, due to disappointing performance of certain properties in the Rocky Mountain area which resulted in non-cash ceiling writedowns of its oil and gas assets and the reduction to zero of the book value of net deferred tax assets, the Company incurred significant losses. As a result of these non-cash adjustments, the Company has negative stockholders' equity and continues to be in default of certain covenants in its bank credit facilities. As a consequence, the Company cannot borrow under the revolving credit facilities. The Company's independent public accountants issued modified reports in 1998 and 1999 with respect to the ability of the Company to continue as a going concern, which also constitutes a default under the revolving bank credit agreements. The Company is also in default with respect to its senior note and senior subordinated note obligations. See "Liquidity and Capital Resources" and Note 2 to Consolidated Financial Statements. In 1999 gas and oil prices strengthened considerably. Average realized gas prices were 5% higher and average realized oil prices were 41% higher in 1999 as compared to 1998 (although 1999 average realized gas prices were 9% lower and 1999 oil prices were 14% lower than in 1997). Also in 1998, the Company implemented a program designed to improve its financial situation and the overall efficiency of the Company and its subsidiaries. The Company reduced its workforce by over 30% during the two-year period ending December 31, 1999, closed its New Jersey corporate office and froze senior management salaries for 1999. Expense reduction initiatives lowered lease operating expenses and general and administrative expenses by approximately 13% during 1999. Capital investments were reduced in 1999 and a property divestiture program was implemented whereby the Company sold non-core properties and raised net proceeds of approximately $27.7 million. In addition, the Company engaged financial advisors to pursue a financial restructuring. On January 18, 2000, the United States Bankruptcy Court for the District of Delaware (the"Bankruptcy Court") entered an order for relief under Chapter 11 of the Bankruptcy Code against KCS Energy, Inc. Also on January 18, 2000, each of KCS Energy, Inc.'s subsidiaries filed voluntary petitions under Chapter 11 of the Bankruptcy Code with the Bankruptcy Court. KCS and its subsidiaries are currently operating their businesses and managing their properties as debtors in possession under Chapter 11 of the Bankruptcy Code. See "Liquidity and Capital Resources" and Note 2 to Consolidated Financial Statements. 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 additional factors that are beyond the Company's control. These factors include political conditions in the Middle East and elsewhere, domestic and foreign supply of oil and natural gas, the level of consumer demand, weather conditions and overall economic conditions. All references in the following discussion related to earnings per share are based upon the Company's diluted earnings per share. RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 Results of Operations Net income for the year ended December 31, 1999 was $4.3 million, or $0.15 per share, compared to a net loss of $296.5 million, or $10.08 per share, for the year ended December 31, 1998. The net loss in 1998 included a $268.5 million pretax ($174.5 million after-tax) non-cash ceiling test writedown of oil and gas properties and a $113.9 million non-cash valuation allowance to reduce to zero the book value of net deferred tax assets. As a result of these charges, the 1998 net loss was increased by $288.4 million, or $9.80 per share. Excluding the effect of the 1998 non-cash asset writedowns, the 1998 net loss was $8.1 million, or $0.28 per share. The significant improvement in the 1999 results of operations reflected higher gas and oil prices 17 19 together with lower operating costs and the Company's focus on core areas of operations, partially offset by higher interest expense and restructuring costs. Net loss for the year ended December 31, 1998 was $296.5 million, or $10.08 per share, compared to a net loss of $92.1 million, or $3.19 per share, for the year ended December 31, 1997. Depressed oil and gas commodity prices since the latter part of 1997 combined with the disappointing performance of certain of the Company's Rocky Mountain properties in 1998 resulted in significant non-cash ceiling test writedowns of the Company's oil and gas assets in both 1998 and 1997. Ceiling test writedowns in 1998 were $268.5 million pretax ($174.5 million after-tax) compared to $165.1 million pretax ($107.3 million after-tax) in 1997. Additionally in 1998, the Company recorded a non-cash valuation allowance of $113.9 million ($93.9 million of which relates to the 1998 non-cash ceiling test writedowns) to reduce to zero the book value of net deferred tax assets. As a result of these charges, the 1998 net loss was increased by $288.4 million, or $9.80 per share. Excluding the effect of the non-cash asset writedowns, the Company's net loss was $8.1 million, or $0.28 per share in 1998 compared to income from continuing operations of $9.9 million, or $0.35 per share, in 1997. An 11% increase in oil and gas production during 1998 was more than offset by the impact of significantly lower energy prices and higher net interest costs. In 1997, income from discontinued operations was $5.3 million, or $0.18 per share, which was primarily attributable to the net gain on disposition of the Company's natural gas transportation and marketing operations. Revenue
YEAR ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- Production: Gas (MMcf)......................................... 50,471 50,070 43,700 Oil (Mbbl)......................................... 1,286 1,650 1,696 Liquids (Mbbl)..................................... 122 96 128 Total (MMcfe).............................. 58,919 60,547 54,644 Average Price: Gas (per Mcf)...................................... $ 2.18 $ 2.08 $ 2.40 Oil (per bbl)...................................... 16.04 11.41 18.57 Liquids (per bbl).................................. 11.25 7.93 11.02 Total (per Mcfe)........................... $ 2.24 $ 2.04 $ 2.52 Revenue: Gas................................................ $110,001 $103,906 $104,932 Oil................................................ 20,624 18,824 31,491 Liquids............................................ 1,372 761 1,414 -------- -------- -------- Total...................................... $131,997 $123,491 $137,837
Oil and Gas Production. The Company's oil and gas production in 1999 decreased 3% to 58.9 Bcfe, compared to 60.5 Bcfe in 1998. Gas production increased 1% to 50.5 Bcf, while oil and liquids production decreased 19% to 1,408 Mbbls. The net production decrease was primarily attributable to the sale of producing properties. Oil and gas production during 1998 increased 11% to 60.5 Bcfe, compared to 54.6 Bcfe produced during 1997. Gas production increased 15% to 50.1 Bcf, which was partially offset by a 4% decrease in oil and liquids production to 1,746 Mbbls. The net production increase was primarily attributable to the VPP program. Gas Revenue. In 1999, gas revenue increased $6.1 million to $110.0 million. The 5% increase in average realized gas prices added $5.2 million of gas revenue in 1999 with the remainder of the increase due to the 1% increase in gas production. 18 20 In 1998, gas revenue decreased $1.0 million to $103.9 million, compared to 1997. Production gains of 15% added $13.2 million of gas revenue in 1998 which was more than offset by a 14% decrease in average realized gas prices. Oil and Liquids Revenue. In 1999, oil and liquids revenue was $22.0 million compared to $19.6 million in 1998. A 39% increase in average realized oil and liquids prices in 1999 added $7.6 million in revenue which was partially offset by a 19% decrease in production, due to the sale of producing properties and the restructuring of two contracts. In 1998, oil and liquids revenue decreased $13.3 million to $19.6 million, compared to 1997. A 38% decrease in average realized oil and liquids prices for 1998 accounted for approximately $12.5 million of the 1998 decrease with the remainder attributable to a 4% reduction in production. Other Revenue, net. Other revenue in 1999 included $1.6 million from production tax refunds and adjustments, $1.5 million from the settlement of a production tax dispute, $0.8 million from the sale of emission reduction credits and $1.1 million from certain marketing and gathering net revenues incidental to the Company's oil and gas operations. By the end of the third quarter of 1999, the Company had filed for substantially all of the production tax refunds to which it was entitled. Other revenue in 1998 included $4.0 million related to production tax refunds and approximately $2.0 million from marketing and gathering net revenues incidental to the Company's oil and gas exploration and production operations. Lease Operating Expenses Lease operating expenses decreased $3.8 million to $26.6 million for the year ended December 31, 1999, compared to $30.4 million in 1998. The lower expense levels in 1999 reflect cost-reduction initiatives taken by the Company and the sale of marginal higher-cost oil and gas properties. For the year ended December 31, 1998, lease operating expenses increased $1.0 million to $30.4 million, compared to 1997. Higher production and full-time operation of the gas treatment plant in the Rocky Mountain area and acquisitions were the primary reasons for the 1998 increase. Production Taxes Production taxes, which are generally based on a fixed percentage of revenue (excluding VPP revenue), decreased $0.5 million to $3.5 million in 1999 compared to 1998 primarily due to lower non-VPP oil and gas revenue and production tax rates in the Rocky Mountain area. In 1998, production taxes decreased $1.9 million to $4.0 million, compared to 1997. Lower oil and gas revenue in 1998 accounted for $1.2 million of the decrease with the remainder mainly attributable to a lower average production tax rate. General and Administrative Expenses General and administrative expenses ("G&A") decreased $1.5 million to $9.8 million for the year ended December 31, 1999, compared to $11.3 million in 1998. The significant reduction in the Company's workforce, cost savings associated with the closing of the New Jersey corporate office, and other cost reduction initiatives throughout the Company were the primary reasons for the decrease. The 1999 period includes approximately $0.7 million of non-recurring costs, primarily associated with the closing of the New Jersey corporate office. In 1998, G&A expenses increased $0.6 million to $11.3 million, compared to 1997, primarily due to increased administrative activity associated with the 1998 production increases. 19 21 Restructuring Costs Restructuring costs in 1999 were $1.9 million and consist primarily of attorney fees and financial advisory fees incurred in connection with the pursuit of a restructuring transaction, which would result in deleveraging the Company's balance sheet. 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 year ended December 31, 1999, depreciation, depletion and amortization ("DD&A") decreased $8.9 million to $51.0 million compared to 1998 mainly as a result of the decline in the average depletion rate to 36.8% compared to 46.6% in 1998, which was partially offset by higher oil and gas revenues. The significant decline in the depletion rate in 1999 was largely attributable to higher oil and gas prices and the 1998 writedown of oil and gas properties. For the year ended December 31, 1998, DD&A decreased $0.7 million to $59.9 million compared to 1997, due primarily to the decrease in oil and gas revenue partially offset by an increase in the DD&A rate, both of which were the result of the lower energy prices in 1998 compared to 1997. Writedown of Oil and Gas Properties In accordance with the full cost accounting method and procedures prescribed by the Securities and Exchange Commission, capitalized cost of oil and gas properties net of accumulated amortization are limited to the sum of the present value of estimated future net revenues from proved oil and gas reserves at current prices, discounted at 10%, plus the lower of cost or fair value of unproved properties. To the extent that the capitalized costs exceed this limitation at the end of any fiscal quarter, such excess costs are charged to income. During 1997 and 1998, the Company recorded non-cash ceiling writedowns of its oil and gas properties mainly due to depressed natural gas and oil commodity prices and, in 1998, the disappointing performance of certain properties in the Rocky Mountain area. At December 31, 1997 a $165.1 million pretax writedown was recorded. Further declines in commodity prices throughout 1998 and into the first quarter of 1999 resulted in additional writedowns totaling $268.5 million pretax, including approximately $65 million for price declines subsequent to December 31, 1998. Average realized natural gas prices were $3.54, $2.46 and $2.15 per Mcf at December 31, 1996, 1997 and 1998, respectively. During the first part of 1999, average realized prices fell to $1.67 per Mcf. Average realized oil prices were $22.45, $15.15 and $8.57 per bbl at December 31, 1996, 1997 and 1998, respectively. The Company's sour gas processing facility at the Manderson Field, which was classified as other property, plant and equipment on the balance sheet at December 31, 1997, was reclassified to oil and gas properties and its net book value was reduced to fair value of approximately $5 million in connection with the year-end 1998 ceiling writedown. Interest Expense Interest expense increased $4.2 million to $40.0 million in 1999 compared to 1998. Of this increase, approximately $2.4 million was attributable to higher average borrowings, $0.4 million was attributable to higher average interest rates, with the remainder of the increase primarily attributable to less capitalized interest due to lower drilling activity in 1999 and increased amortization of deferred financing costs. Interest expense was $35.8 million in 1998, compared to $21.9 million in 1997. This increase reflects higher average borrowings related to the expansion of the Company's oil and gas operations, slightly offset by lower average interest rates. 20 22 Income Taxes No income tax expense was recorded in 1999 related to the Company's pretax book income. The income tax effect of the pretax book income was reflected in the valuation allowance of the Company's net deferred tax assets. See Note 8 to Consolidated Financial Statements. Income tax expense was $16.0 million in 1998, which reflected the establishment of a valuation allowance to reduce to zero the book value of net deferred tax assets. Due to the significant losses recorded in 1998 and the uncertainty of future oil and natural gas commodity prices, management concluded that this valuation allowance was required in accordance with SFAS 109. In making its assessment, management considered several factors, including the uncertainty in the Company's ability to generate sufficient income in order to realize its future tax benefits, and concluded that the Company could no longer consider the realization of its net deferred tax assets "more likely than not." In 1997 the income tax benefit was $52.1 million. See Note 8 for the reconciliation of the statutory federal income tax rate to the Company's effective tax rates. LIQUIDITY AND CAPITAL RESOURCES Continuation as a Going Concern; Proposed Reorganization During 1997 and 1998, due to very low prices for natural gas and crude oil and, in 1998, due to disappointing performance of certain properties in the Rocky Mountain area, the Company incurred significant losses, primarily due to $268.5 million of pretax non-cash ceiling writedowns of its oil and gas assets and a reduction from $113.9 million ($93.9 million of which relates to the 1998 non-cash ceiling test writedowns) to zero in the book value of net deferred tax assets. As a result of these non-cash charges, the net loss in 1998 was increased by $288.4 million. Also as a result of these adjustments, the Company has negative stockholders' equity and continues to be in default of certain covenants in its bank credit facilities. As a consequence, the Company cannot borrow under the revolving credit facilities. In addition, the Company's independent public accountants issued modified reports for 1998 and 1999 with respect to the ability of the Company to continue as a going concern, which also constitutes a default under the revolving bank credit agreements. On May 18, 1999, the Company and its bank lenders entered into forbearance agreements which provided that the lenders would defer redetermination of the borrowing base until July 1, 1999 and would refrain from exercising their rights and remedies as a result of the existing defaults until June 30, 1999. Under these initial forbearance agreements the Company committed 50% of monthly cash flow to payments of principal, with a minimum of $2 million monthly. In addition, a portion of the proceeds from the sale of any of the Company's oil and gas properties were dedicated to payment of principal under the bank credit facilities. On July 7, 1999, the lenders under each of the bank credit facilities reset the Company's borrowing base, which had been $165 million in the aggregate at December 31, 1998, to $91 million. The principal amount outstanding under the bank loans at June 30, 1999 was $126.7 million. Because the Company did not make the $35.7 million additional lump-sum payment, a payment default occurred. The lenders declared due all amounts owing under the bank loans, demanded payment and declared in effect the default rate of interest. The bank lenders also delivered a payment blockage notice to the indenture trustee of the 8.875% senior subordinated notes. The Company did not make the scheduled July 15, 1999 interest payments on both the 8.875% senior subordinated notes and the 11% senior notes, totaling $13.8 million. As a result of the payment default under the bank loans and the interest payment default on the notes, the holders of the requisite percentage of the Company's senior notes and senior subordinated notes and the indenture trustees of the senior notes and the senior subordinated notes have the right to declare the principal amount of the notes immediately due and payable. On December 28, 1999, holders of the senior notes alleging to hold the requisite percentage of senior notes provided notice of acceleration of maturity and declared the principal and interest of the senior notes to be immediately due and payable. Current liabilities at December 31, 1999 include accrued interest of $26.4 million on the notes. The outstanding principal amount of the senior subordinated notes is $125 million and the outstanding principal amount of the senior notes is $150 million. 21 23 On July 26, 1999, the Company and its bank lenders entered into new forbearance agreements (effective as of July 1, 1999) which provided that the lenders would refrain from exercising their rights and remedies not previously exercised until October 5, 1999. Subsequently, these new forbearance agreements were extended twice on the same terms through March 2, 2000. The lenders did not waive the payment default but rescinded their declaration that all amounts outstanding under the credit facilities are immediately due and payable and effectively waived the default rate of interest. The new forbearance agreements preclude the Company from making interest payments on its senior notes and its senior subordinated notes. Under the terms of the new forbearance agreements, the Company committed to make monthly principal payments of $2.5 million. In addition, the agreements provide that a portion of the proceeds from the sale of any of the Company's oil and gas properties will be dedicated to payment of principal under the credit facilities. From the time that the original forbearance agreements were entered into through December 31, 1999, the Company made principal repayments to its banks of $43 million, reducing the outstanding loans from $150 million to $107 million. The new forbearance agreements expired on March 2, 2000. As a result of the above factors, there is substantial doubt about the Company's ability to continue as a going concern. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of the asset carrying amounts or the amounts and classifications of liabilities that might result should the Company be unable to continue as a going concern. The Company has taken several steps to improve its financial situation. Among other things, the Company reduced its workforce by over 30% during the two-year period ending December 31, 1999, closed its New Jersey corporate office and froze senior management salaries for 1999. Expense reduction initiatives lowered lease operating expenses and general and administrative expenses by approximately 13% during 1999. Planned capital investments were reduced in 1999 and a property divestiture program was implemented whereby the Company sold non-core properties and raised net proceeds of approximately $27.7 million. On December 28, 1999, the Company announced that it had reached an agreement on a proposed restructuring with holders of more than two-thirds in amount of the senior subordinated notes and holders of a majority in amount of the senior notes. To effectuate this agreement, the parties agreed that the Company would commence a case under Chapter 11 of the Bankruptcy Code by January 18, 2000. On January 5, 2000, three holders of senior notes filed an involuntary petition for relief against KCS Energy, Inc. (the parent company only) under Chapter 11 of the Bankruptcy Code in the U. S. Bankruptcy Court in Wilmington, Delaware. On January 18, the Bankruptcy Court signed an order granting KCS relief under Chapter 11 of the Bankruptcy Code. Also on January 18, 2000, each of KCS Energy Inc.'s subsidiaries filed voluntary petitions under Chapter 11 of the Bankruptcy Code with the Bankruptcy Court. On January 18, 2000, the Company also filed a disclosure statement with the Court with respect to a proposed plan of reorganization under Chapter 11 of the Bankruptcy Code (the "Plan"). The disclosure statement and Plan have been amended in subsequent filings with the Bankruptcy Court. A hearing before the Court to consider the adequacy of the disclosure statement is currently set for April 11, 2000. The Plan as currently proposed, if ultimately confirmed by the court, would result in impairment of the existing common stockholders, holders of the senior subordinated notes and holders of the Company's warrants and stock options. If the Court approves the disclosure statement at the April 11 hearing, or shortly thereafter, the Company intends to promptly begin soliciting votes to accept or reject the Plan. However, there can be no assurance at this time that the Plan proposed currently will be confirmed by the Bankruptcy Court. Since the second quarter of 1999, the Company has been funding its capital investment program with internally generated cash flow and a portion of the proceeds from asset sales. The Company intends to fund the 2000 capital investment program in the same way pending the outcome of the bankruptcy proceedings. Since the commencement of the bankruptcy proceedings on January 18, 2000, the Company has been operating under a cash collateral agreement with its bank lenders. The agreement provides for, among other things, that the Company make monthly principal payments of $2.5 million and that the lenders have the right to review and approve the Company's projected use of cash during the bankruptcy proceedings. Since the commencement of the bankruptcy proceedings, the Company has been paying its post-petition trade obligations in the ordinary course of business. In addition, the Company petitioned the Bankruptcy 22 24 Court to allow for the payment of all pre-petition trade obligations in order to minimize the effect of the bankruptcy proceedings on the Company's operations and business relationships. The Bankruptcy Court subsequently granted the Company the authority to pay certain specified pre-petition trade obligations comprising the substantial majority of its pre-petition trade obligations. Under the proposed Plan, all pre-petition and post-petition trade obligations would be paid in full in the ordinary course of business. The Company believes that its cash flow from operations and the proceeds from asset sales should be sufficient to meet its short-term operating requirements. However, there can be no assurance that, given the Company's limited capital resources, it can continue to maintain its current production levels through oil and gas reserve replacement. Cash Flow from Operating Activities Net income adjusted for non-cash charges increased to $58.2 million for the year ended December 31, 1999, compared to $53.1 million in 1998. Net cash provided by operating activities was $71.5 million during 1999, compared to $44.0 million for 1998. The increase reflects higher average realized natural gas and oil prices and lower operating and administrative expenses, partially offset by higher interest and restructuring costs. The remainder of the increase in 1999 cash flow from operating activities, compared to 1998, was largely attributable to the non-payment of $13.8 million on July 15, 1999 of accrued interest on the senior notes and senior subordinated notes and the timing of cash receipts and disbursements. Net cash provided by operating activities was $44.0 million during 1998, compared to $100.2 million for 1997. Net income adjusted for non-cash charges decreased to $53.1 million for the year ended December 31, 1998, compared to $77.6 million in 1997. The decrease reflects higher interest costs and the depressed oil and gas prices which more than offset an 11% increase in production. The remainder of the reduction in 1998 cash flow from operating activities, compared to 1997, was largely attributable to the 1997 timing of cash receipts and disbursements of the discontinued marketing and transportation operations. Investing Activities Capital expenditures for the year ended December 31, 1999 were $60.2 million, of which $25.2 million was for development activities; $25.8 million for the acquisition of proved reserves $9.0 million for lease acquisitions, seismic surveys and exploratory drilling, and $0.2 million for other assets. Capital expenditures for the year ended December 31, 1998 were $165.5 million, of which $66.8 million was for development drilling; $73.5 million for the acquisition of proved reserves under the Company's VPP program; $23.1 million for lease acquisitions, seismic surveys and exploratory drilling, and $2.1 million for other assets. Capital expenditures in 1997 were $226.6 million, of which $107.4 million was for development drilling; $49.5 million for the purchase of proved reserves under the Company's VPP program; $54.3 million for lease acquisitions, seismic surveys and exploratory drilling, and $15.4 million for other assets. During 1997, the Company sold its principal natural gas transportation asset and its third-party gas marketing operations realizing proceeds of $28.5 million, which were used to reduce indebtedness under its bank credit facilities, and an after-tax gain of $5.4 million. YEAR 2000 ISSUE The Company completed its Year 2000 implementation plan during the fourth quarter of 1999 and has not experienced any significant disruptions to its operations as a result of the Year 2000 issue. 23 25 NEW ACCOUNTING STANDARDS In June 1998, SFAS 133 "Accounting for Derivative Instruments and Hedging Activities" was issued. SFAS 133 establishes new accounting rules and disclosure requirements for most derivative instruments and for hedging related to those instruments. In July 1999, the Financial Accounting Standards Board adopted SFAS 137, which defers the required adoption date of SFAS 133 by one year to fiscal years beginning after June 15, 2000. The Company will adopt this statement effective January 1, 2001 and is currently assessing the initial effects of adoption. 24 26 MARKET RISK DISCLOSURE The Company has utilized, and may continue to utilize, swaps, futures contracts and options to manage the price risk associated with the production of natural gas and oil. Since these contracts qualify as hedges and correlate to market price movement of natural gas or oil, any gains or losses resulting from market changes will be offset by losses or gains on corresponding physical sales transactions. These hedging arrangements have the effect of fixing for specified periods the prices the Company will receive for the volumes to which the hedge relates. As a result, while these hedging arrangements are structured to reduce the Company's exposure to decreases in the price associated with the underlying commodity, they also limit the benefit the Company might otherwise have received from any price increases associated with the hedged commodity. In accordance with Item 305 of Regulation S-K, the Company has elected the tabular method to disclose market risk related to derivative financial instruments as well as other financial instruments. The following table sets forth the Company's hedged positions at December 31, 1999. The Company accounts for oil and natural gas futures contracts, options and commodity price swaps in accordance with FASB Statement No. 80 "Accounting for Futures Contracts". See Notes 1 and 9 to the Consolidated Financial Statements for a further discussion of the Company's accounting policy related to these contracts.
NATURAL GAS OIL --------------------------------------- ---------------------------------- CONTRACT WEIGHTED UNREALIZED WEIGHTED UNREALIZED MATURITY DATE VOLUME AVG. PRICE GAIN (LOSS) VOLUME AVG. PRICE GAIN (LOSS) - ------------- --------- ------------- ----------- ------ ----------- ----------- (MMBTU) ($ PER MMBTU) ($000S) (BBL) ($ PER BBL) ($000S) 2000 First quarter.............. 870,000 $2.055 $ (240,700) 30,200 22.88 $(45,354) Second quarter............. 870,000 2.055 (248,240) 24,200 22.49 (2,160) Third quarter.............. 870,000 2.055 (298,410) -- -- -- Fourth quarter............. 870,000 2.055 (443,410) -- -- -- --------- ----------- ------ -------- Total 2000......... 3,480,000 2.055 (1,230,760) 54,400 -- (47,514) 2001......................... 3,000,000 2.055 (1,293,000) -- -- -- 2002......................... 2,520,000 2.055 (1,121,400) -- -- -- 2003......................... 2,040,000 2.055 (907,800) -- -- -- THEREAFTER................... 2,800,000 2.055 (1,246,000) -- -- --
The Company uses fixed and variable rate long-term debt to finance the Company's capital spending program. These debt arrangements expose the Company to market risk related to changes in interest rates. The Company's weighted average interest rate on its fixed rate debt of $275 million is 10.0%. The weighted average interest rate on its variable rate debt of $107.1 million was 9.0%. All of the Company's debt has been classified as short-term as a result of defaults under its debt agreements. See Note 2 to Consolidated Financial Statements. 25 27 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To KCS Energy, Inc.: We have audited the accompanying consolidated balance sheets of KCS Energy, Inc. (a Delaware Corporation) and subsidiaries as of December 31, 1999 and 1998, and the related statements of consolidated operations, stockholders' (deficit) equity and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of KCS Energy, Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Notes 2 and 6 to the consolidated financial statements, the Company has incurred significant losses due primarily to non-cash ceiling writedowns of its oil and gas assets, has negative stockholders' equity, has violated certain financial covenants within its bank credit facilities and is in default on its senior notes and senior subordinated notes. In addition, as described in Note 2 to the consolidated financial statements, in January 2000, the Company was granted an order of relief under Chapter 11 of the United States Bankruptcy Code and has filed a proposed plan of reorganization. These matters, among others, raise substantial doubt about the Company's ability to continue as a going concern. In the event a plan of reorganization is accepted, continuation of the business thereafter is dependent on the Company's ability to implement the plan and achieve successful future operations. The financial statements do not include any adjustments relating to the recoverability and classification of the asset carrying amounts or the amounts and classifications of liabilities that might result should the Company be unable to continue as a going concern. ARTHUR ANDERSEN LLP Houston, Texas March 29, 2000 26 28 KCS ENERGY, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) STATEMENTS OF CONSOLIDATED OPERATIONS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEAR ENDED DECEMBER 31, -------------------------------- 1999 1998 1997 -------- --------- --------- Oil and gas revenue........................................ $131,997 $ 123,491 $ 137,837 Other revenue, net......................................... 4,494 5,961 5,852 -------- --------- --------- Total revenue.................................... 136,491 129,452 143,689 Operating costs and expenses Lease operating expenses................................. 26,624 30,434 29,393 Production taxes......................................... 3,524 3,996 5,873 General and administrative expenses...................... 9,847 11,327 10,753 Restructuring costs...................................... 1,886 -- -- Depreciation, depletion and amortization................. 50,967 59,888 60,554 Writedown of oil and gas properties...................... -- 268,468 165,149 -------- --------- --------- Total operating costs and expenses............... 92,848 374,113 271,722 -------- --------- --------- Operating income (loss).................................... 43,643 (244,661) (128,033) Interest and other income (expense), net................... 702 (73) 476 Interest expense........................................... (40,005) (35,787) (21,883) -------- --------- --------- Income (loss) from continuing operations before income taxes.................................................... 4,340 (280,521) (149,440) Federal and state income taxes (benefit)................... -- 15,999 (52,055) -------- --------- --------- Income (loss) from continuing operations................... 4,340 (296,520) (97,385) Discontinued operations Net loss from operations................................. -- -- (72) Net gain on disposition.................................. -- -- 5,374 -------- --------- --------- Net income (loss).......................................... $ 4,340 $(296,520) $ (92,083) ======== ========= ========= Basic earnings (loss) per share of common stock Continuing operations.................................... $ 0.15 $ (10.08) $ (3.37) Discontinued operations.................................. -- -- 0.18 -------- --------- --------- $ 0.15 $ (10.08) $ (3.19) ======== ========= ========= Diluted earnings (loss) per share of common stock Continuing operations.................................... $ 0.15 $ (10.08) $ (3.37) Discontinued operations.................................. -- -- 0.18 -------- --------- --------- $ 0.15 $ (10.08) $ (3.19) ======== ========= ========= Average shares outstanding for computation of earnings per share Basic.................................................... 29,263 29,428 28,856 Diluted.................................................. 29,288 29,428 28,856 ======== ========= =========
The accompanying notes are an integral part of these financial statements. 27 29 KCS ENERGY, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
DECEMBER 31, --------------------- 1999 1998 --------- --------- ASSETS Current assets Cash and cash equivalents................................. $ 10,584 $ 876 Trade accounts receivable................................. 21,941 36,548 Other current assets...................................... 7,571 5,650 --------- --------- Current assets.................................... 40,096 43,074 --------- --------- Property, plant and equipment Oil and gas properties, full cost method, less accumulated DD&A -- 1999 $731,496; 1998 $682,913................... 232,281 248,582 Other property, plant and equipment, at cost less accumulated depreciation -- 1999 $5,930; 1998 $4,442... 4,686 7,910 --------- --------- Property, plant and equipment, net................ 236,967 256,492 --------- --------- Deferred charges and other assets........................... 7,869 9,312 --------- --------- $ 284,932 $ 308,878 ========= ========= LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY Current liabilities Accounts payable.......................................... $ 13,340 $ 24,267 Accrued interest on public debt........................... 26,444 12,647 Other accrued liabilities................................. 11,262 12,937 Short-term debt........................................... 381,819 135,700 --------- --------- Current liabilities............................... 432,865 185,551 --------- --------- Deferred credits and other liabilities...................... 1,910 2,896 --------- --------- Long-term debt.............................................. -- 274,635 --------- --------- Commitments and contingencies --------- --------- Preferred stock, authorized 5,000,000 shares -- unissued.... -- -- --------- --------- Stockholders' (deficit) equity Common stock, par value $0.01 per share, authorized 50,000,000 shares issued 31,435,406 and 31,420,231, respectively........................................... 314 314 Additional paid-in capital................................ 145,098 145,077 Retained (deficit) earnings............................... (290,514) (294,854) Less treasury stock, 2,167,096 shares, at cost............ (4,741) (4,741) --------- --------- Stockholders' (deficit) equity.................... (149,843) (154,204) --------- --------- $ 284,932 $ 308,878 ========= =========
The accompanying notes are an integral part of these financial statements. 28 30 KCS ENERGY, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) STATEMENTS OF CONSOLIDATED STOCKHOLDERS' (DEFICIT) EQUITY (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
ADDITIONAL RETAINED COMMON PAID-IN (DEFICIT) TREASURY STOCKHOLDERS' STOCK CAPITAL EARNINGS STOCK (DEFICIT) EQUITY ------ ---------- --------- -------- ---------------- BALANCE AT DECEMBER 31, 1996.......... $249 $ 30,463 $ 98,298 $(3,388) $ 125,622 Stock issuance -- public offering... 60 110,527 110,587 Stock issuances -- option and benefit plans.................... 3 2,073 -- -- 2,076 Tax benefit on stock option exercises........................ -- 1,072 -- -- 1,072 Net loss............................ -- -- (92,083) -- (92,083) Dividends ($0.075 per share)........ -- -- (2,204) -- (2,204) ---- -------- --------- ------- --------- BALANCE AT DECEMBER 31, 1997.......... 312 144,135 4,011 (3,388) 145,070 Stock issuances -- option and benefit plans.................... 2 489 -- -- 491 Tax benefit on stock option exercises........................ -- 453 -- -- 453 Net loss............................ -- -- (296,520) -- (296,520) Dividends ($0.08 per share)......... -- -- (2,345) -- (2,345) Purchase of treasury stock.......... -- -- -- (1,353) (1,353) ---- -------- --------- ------- --------- BALANCE AT DECEMBER 31, 1998.......... 314 145,077 (294,854) (4,741) (154,204) Stock issuances -- option and benefit plans.................... -- 21 -- -- 21 Net income.......................... -- -- 4,340 -- 4,340 ---- -------- --------- ------- --------- BALANCE AT DECEMBER 31, 1999.......... $314 $145,098 $(290,514) $(4,741) $(149,843) ==== ======== ========= ======= =========
The accompanying notes are an integral part of these financial statements. 29 31 KCS ENERGY, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) STATEMENTS OF CONSOLIDATED CASH FLOWS (DOLLARS IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31, -------------------------------- 1999 1998 1997 -------- --------- --------- Cash flows from operating activities: Net income (loss)........................................ $ 4,340 $(296,520) $ (92,083) Non-cash charges (credits): Depreciation, depletion and amortization.............. 50,967 59,888 60,554 Writedown of oil and gas properties................... -- 268,468 165,149 Deferred income taxes................................. -- (94,992) (52,106) Tax valuation allowance............................... -- 113,944 -- Gain on sale of discontinued operations............... -- -- (5,374) Other non-cash charges and credits, net............... 2,862 2,291 1,466 -------- --------- --------- 58,169 53,079 77,606 Net changes in assets and liabilities: Trade accounts receivable............................. 14,607 3,567 51,824 Other current assets.................................. (1,921) 1,102 2,630 Accounts payable and accrued liabilities.............. 1,779 (14,315) (34,100) Federal and state income taxes........................ -- 82 1,563 Other, net............................................ (1,171) 517 698 -------- --------- --------- Net cash provided by operating activities.................. 71,463 44,032 100,221 -------- --------- --------- Cash flows from investing activities: Investment in oil and gas properties..................... (60,000) (163,396) (211,228) Proceeds from the sale of oil and gas properties......... 27,718 6,962 4,940 Proceeds from the sale of pipeline assets................ -- -- 27,907 Investment in other property, plant and equipment, net... 840 (2,082) (15,341) -------- --------- --------- Net cash used in investing activities...................... (31,442) (158,516) (193,722) -------- --------- --------- Cash flows from financing activities: Proceeds from borrowings................................. 16,300 276,600 156,800 Repayments of debt....................................... (44,905) (158,800) (174,791) Issuance of common stock................................. 21 491 112,663 Tax benefit on stock option exercises.................... -- 453 1,072 Purchase of treasury stock............................... -- (1,353) -- Dividends paid........................................... (585) (2,347) (1,962) Deferred financing costs and other, net.................. (1,144) (4,486) (579) -------- --------- --------- Net cash provided by (used in) financing activities........ (30,313) 110,558 93,203 -------- --------- --------- Increase (decrease) in cash and cash equivalents........... 9,708 (3,926) (298) Cash and cash equivalents at beginning of year............. 876 4,802 5,100 -------- --------- --------- Cash and cash equivalents at end of year................... $ 10,584 $ 876 $ 4,802 ======== ========= =========
The accompanying notes are an integral part of these financial statements. 30 32 KCS ENERGY, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES KCS Energy, Inc. is an independent oil and gas company engaged in the acquisition, exploration, exploitation and production of natural gas and crude oil. Basis of Presentation The consolidated financial statements include the accounts of KCS Energy, Inc. and its wholly owned subsidiaries ("KCS" or "Company"). All significant intercompany accounts and transactions have been eliminated in consolidation. Certain previously reported amounts have been reclassified to conform to current year presentation. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The financial statements have been prepared assuming the Company will continue as a going concern. As explained in Note 2, it is uncertain that this will be the case. The financial statements do not include any adjustments that reflect these uncertainties. Cash Equivalents The Company considers as cash equivalents all highly liquid investments with a maturity of three months from date of purchase. Cash at December 31, 1999 includes $0.8 million restricted for funding expenditures on specific oil and gas properties. Hedging Transactions The Company utilizes oil and natural gas futures contracts and commodity price swaps for the purpose of hedging the risks associated with fluctuating crude oil and natural gas prices and accounts for such contracts in accordance with FASB Statement No. 80 "Accounting for Futures Contracts." These contracts permit settlement by delivery of commodities and, therefore, are not financial instruments as defined by FASB Statement Nos. 107 and 119. Changes in the market value of these transactions are deferred until the sale of the underlying production is recognized. See Note 9 for further discussion of the Company's price risk management activities. In June 1998, SFAS 133 "Accounting for Derivative Instruments and Hedging Activities" was issued. SFAS 133 establishes new accounting rules and disclosure requirements for most derivative instruments and for hedging related to those instruments. In July 1999, the Financial Accounting Standards Board adopted SFAS 137, which defers the required adoption date of SFAS 133 by one year to fiscal years beginning after June 15, 2000. The Company will adopt this statement effective January 1, 2001 and is currently assessing the initial effects of adoption. Imbalances The Company follows the sales method of accounting for natural gas revenues whereby revenues are recognized based on volume sold to the purchaser. The volume of gas sold may differ from the volume to which KCS is entitled based on its working interest. There were no material imbalances at December 31, 1999. 31 33 Property, Plant and Equipment The Company follows the full cost method of accounting under which all costs incurred in acquisition, exploration and development activities are capitalized in a country-wide cost center. Such costs include lease acquisitions, geological and geophysical services, drilling, completion, equipment and certain general and administrative costs directly associated with acquisition, exploration and development activities. General and administrative costs related to production and general overhead are expensed as incurred. The Company provides for depreciation, depletion and amortization of evaluated costs using the future gross revenue method based on recoverable reserves valued at current prices. Capitalized costs of oil and gas properties net of accumulated amortization and related deferred taxes are limited to the sum of the present value of estimated future net revenues from proved oil and gas reserves at current prices discounted at 10% plus the lower of cost or fair value of unproved properties. To the extent that the capitalized costs exceed this limitation at the end of any quarter, such excess is expensed. For the years ended December 31, 1998 and 1997, respectively, the Company recorded $268.5 million and $165.1 million in pretax non-cash ceiling writedowns of its oil and gas properties. See Note 2 to Consolidated Financial Statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Costs of unevaluated properties excluded from amortization were $8.4 million and $17.7 million at December 31, 1999 and 1998, respectively. Such costs relate to acquisitions and exploration efforts for which proved reserves have not been established. The Company will begin to amortize these costs when proved reserves are established or impairment is determined. Proceeds from dispositions of oil and gas properties are credited to the cost center. Depreciation of other property, plant and equipment is provided on a straight-line basis over the useful lives of the assets. Repairs of all property, plant and equipment and replacements and renewals of minor items of property are charged to expense as incurred. Income Taxes The Company accounts for income taxes in accordance with FASB Statement No. 109 "Accounting for Income Taxes." Deferred income taxes are recorded to reflect the future tax consequences of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year end. A valuation allowance is recognized if it is anticipated that some or all of a deferred tax asset may not be realized. For income tax purposes, the Company deducts the difference between market value and exercise price arising from the exercise of stock options. The tax effect of this deduction which, for financial reporting purposes, is accounted for as an increase to additional paid-in capital, amounted to $0.5 million and $1.1 million in 1998 and 1997, respectively. No stock options were exercised in 1999. Earnings Per Share Basic earnings per share were computed by dividing net income by the weighted average number of common shares outstanding during the year as required by FASB Statement No. 128 "Earnings per Share". Diluted earnings per share have been computed by dividing net income by the weighted average number of common shares outstanding plus the incremental shares that would have been outstanding assuming the exercise of stock options and stock warrants as applicable. A reconciliation of shares used for basic earnings per share and those used for diluted earnings per share is as follows:
YEAR ENDED DECEMBER 31, ------------------------ 1999 1998 1997 ------ ------ ------ (AMOUNTS IN THOUSANDS) Average common stock outstanding........................... 29,263 29,428 28,856 Common stock equivalents................................... 25 248 515 ------ ------ ------ Average common stock and common stock equivalents outstanding.............................................. 29,288 29,676 29,371 ====== ====== ======
32 34 Common stock equivalents are not applicable for 1998 and 1997 earnings per share as they would be anti-dilutive. Segment Reporting In June 1997, FASB Statement No. 131 "Disclosures about Segments of an Enterprise and Related Information" was issued which requires that the Company disclose selected information about operating segments in its annual and interim financial statements, commencing with the fiscal year 1998 financial statements. The Company operates in one reportable segment, as an independent oil and gas company engaged in the acquisition, exploration, exploitation and production of domestic oil and gas properties. The Company's operations are conducted entirely in the United States. No customer accounted for more than 10% of the Company's revenues in 1999, 1998 or 1997. 2. FINANCIAL CONDITION AND BANKRUPTCY PROCEEDINGS During 1997 and 1998, due to very low prices for natural gas and crude oil and, in 1998, due to disappointing performance of certain properties in the Rocky Mountain area, the Company incurred significant losses, primarily due to $268.5 million of pretax non-cash ceiling writedowns of its oil and gas assets and a reduction from $113.9 million ($93.9 million of which relates to the 1998 non-cash ceiling test writedowns) to zero in the book value of net deferred tax assets. As a result of these non-cash charges, the net loss in 1998 was increased by $288.4 million. Also as a result of these adjustments, the Company has negative stockholders' equity and continues to be in default of certain covenants in its bank credit facilities. As a consequence, the Company cannot borrow under the revolving credit facilities. In addition, the Company's independent public accountants issued modified reports for 1998 and 1999 with respect to the ability of the Company to continue as a going concern, which also constitutes a default under the revolving bank credit agreements. On May 18, 1999, the Company and its bank lenders entered into forbearance agreements which provided that the lenders would defer redetermination of the borrowing base until July 1, 1999 and would refrain from exercising their rights and remedies as a result of the existing defaults until June 30, 1999. Under these initial forbearance agreements, the Company committed 50% of monthly cash flow to payments of principal, with a minimum of $2 million monthly. In addition, a portion of the proceeds from the sale of any of the Company's oil and gas properties were dedicated to payment of principal under the bank credit facilities. On July 7, 1999 the lenders under each of the bank credit facilities reset the Company's borrowing base, which had been $165 million in the aggregate at December 31, 1998, to $91 million. The principal amount outstanding under the bank loans at June 30, 1999 was $126.7 million. Because the Company did not make the $35.7 million additional lump-sum payment, a payment default occurred. The lenders declared due all amounts owing under the bank loans, demanded payment and declared in effect the default rate of interest. The bank lenders also delivered a payment blockage notice to the indenture trustee of the 8.875% senior subordinated notes. The Company did not make the scheduled July 15, 1999 interest payments on both the 8.875% senior subordinated notes and the 11% senior notes, totaling $13.8 million. As a result of the payment default under the bank loans and the interest payment default on the notes, the holders of the requisite percentage of the Company's senior notes and senior subordinated notes and the indenture trustees of the senior notes and the senior subordinated notes have the right to declare the principal amount of the notes immediately due and payable. On December 28, 1999, holders of the senior notes alleging to hold the requisite percentage of senior notes provided notice of acceleration of maturity and declared the principal and interest of the senior notes to be immediately due and payable. Current liabilities at December 31, 1999 include accrued interest of $26.4 million on the notes. The outstanding principal amount of the senior subordinated notes is $125 million and the outstanding principal amount of the senior notes is $150 million. On July 26, 1999, the Company and its bank lenders entered into new forbearance agreements (effective as of July 1, 1999) which provided that the lenders would refrain from exercising their rights and remedies not previously exercised until October 5, 1999. Subsequently, these new forbearance agreements were extended twice on the same terms through March 2, 2000. The lenders did not waive the payment default but rescinded 33 35 their declaration that all amounts outstanding under the credit facilities are immediately due and payable and effectively waived the default rate of interest. The new forbearance agreements preclude the Company from making interest payments on its senior notes and its senior subordinated notes. Under the terms of the new forbearance agreements, the Company has committed to make monthly principal payments of $2.5 million. In addition, the agreements provide that a portion of the proceeds from the sale of any of the Company's oil and gas properties will be dedicated to payment of principal under the credit facilities. From the time that the original forbearance agreements were entered into through December 31, 1999, the Company made principal repayments to its banks of $43 million, reducing the outstanding loans from $150 million to $107 million. The new forbearance agreements expired on March 2, 2000. Since the commencement of the bankruptcy proceedings on January 18, 2000, the Company has been operating under a cash collateral agreement with its bank lenders. The agreement provides for, among other things, that the Company make monthly principal payments of $2.5 million and that the lenders have the right to review and approve the Company's projected use of cash during the bankruptcy proceedings. As a result of the above factors, there is substantial doubt about the Company's ability to continue as a going concern. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of the asset-carrying amounts or the amounts and classifications of liabilities that might result should the Company be unable to continue as a going concern. The Company has taken several steps to improve its financial situation. Among other things, the Company reduced its workforce by over 30% during the two-year period ending December 31, 1999, closed its New Jersey corporate office and froze senior management salaries for 1999. Expense reduction initiatives lowered lease operating expenses and general and administrative expenses by approximately 13% during 1999. Planned capital investments were reduced in 1999 and a property divestiture program was implemented whereby the Company sold non-core properties and raised net proceeds of approximately $27.7 million. On December 28, 1999, the Company announced that it had reached an agreement on a proposed restructuring with holders of more than two-thirds in amount of the senior subordinated notes and holders of a majority in amount of the senior notes. To effectuate this agreement, the parties agreed that the Company would commence a case under Chapter 11 of the Bankruptcy Code by January 18, 2000. On January 5, 2000, three holders of senior notes filed an involuntary petition for relief against KCS Energy, Inc. (the parent company only) under Chapter 11 of the Bankruptcy Code in the U. S. Bankruptcy Court in Wilmington, Delaware. On January 18, the Bankruptcy Court signed an order granting KCS relief under Chapter 11 of the Bankruptcy Code. Also on January 18, 2000, each of KCS Energy Inc.'s subsidiaries filed voluntary petitions under Chapter 11 of the Bankruptcy Code with the Bankruptcy Court. On January 18, 2000, the Company also filed a disclosure statement with the Court with respect to a proposed plan of reorganization under Chapter 11 of the Bankruptcy Code (the "Plan"). The disclosure statement and Plan have been amended in subsequent filings with the Bankruptcy Court. A hearing before the Court to consider the adequacy of the disclosure statement is currently set for April 11, 2000. The Plan as currently proposed, if ultimately confirmed by the court, would result in impairment of the existing common stockholders, holders of the senior subordinated notes and holders of the Company's warrants and stock options. If the Court approves the disclosure statement at the April 11 hearing, or shortly thereafter, the Company intends to promptly begin soliciting votes to accept or reject the Plan. However, there can be no assurance at this time that the Plan proposed currently will be confirmed by the Bankruptcy Court. Since the second quarter of 1999, the Company has been funding its capital investment program with internally generated cash flow and a portion of the proceeds from asset sales. The Company intends to fund the 2000 capital investment program in the same way pending the outcome of the bankruptcy proceedings. Since the commencement of the bankruptcy proceedings, the Company has been paying its post-petition trade obligations in the ordinary course of business. In addition, the Company petitioned the Bankruptcy Court to allow for the payment of all pre-petition trade obligations in order to minimize the effect of the bankruptcy proceedings on the Company's operations and business relationships. The Bankruptcy Court subsequently granted the Company the authority to pay certain specified pre-petition trade obligations 34 36 comprising the substantial majority of its pre-petition trade obligations. Under the proposed Plan, all pre-petition and post-petition trade obligations would be paid in full in the ordinary course of business. The Company believes that its cash flow from operations and the proceeds from assets sales should be sufficient to meet its short-term operating requirements. However, there can be no assurance that, given the Company's limited capital resources, it can continue to maintain its current production levels through oil and gas reserve replacement. Under Chapter 11 of the Bankruptcy Code, certain claims against the debtor in existence prior to the filing of the bankruptcy petitions for relief under the U.S. bankruptcy laws are stayed while the debtor continues business operations as debtor in possession. Under AICPA Statement of Position 90-7 "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code, ("SOP 90-7") the Company is required to adjust liabilities subject to compromise to the amount of the claim allowed by the court. This will result in a write off of certain deferred debt issuance costs and debt discounts. These adjustments will be reflected in the Company's results of operations for the quarter ended March 31, 2000. In addition, SOP 90-7 requires the Company to report interest expense during the bankruptcy proceedings only to the extent that it will be paid during the proceeding or that it is probable to be an allowed priority, secured, or unsecured claim. The Company will adjust its interest expense on a prospective basis according to these guidelines. The difference between the reported interest expense and the stated amount of interest will be disclosed in future filings. The Company engaged financial and legal advisors in the second quarter of 1999 to assist in developing a restructuring plan that would lead to the deleveraging of its balance sheet. Costs directly related to these activities were $1.9 million and are included as "Restructuring costs" in the 1999 Consolidated Statement of Operations. 3. DISCONTINUED OPERATIONS During the first quarter of 1997, the Board of Directors approved a plan to discontinue the Company's natural gas transportation and marketing operations in order to focus on the core oil and gas exploration and production operations. During 1997, the Company sold its Texas intrastate natural gas pipeline system and its third-party natural gas marketing operations, realizing proceeds of $28.5 million and an after-tax gain of $5.4 million. Income taxes associated with the discontinued operations were $2.8 million. The summarized results of these operations for the year ended 1997 are as follows: revenue of $22.0 million and net loss from operations of $0.1 million. By December 31, 1997, all assets of the discontinued operations were divested. Discontinued operations have not been segregated in the Statements of Consolidated Cash Flows and, therefore, amounts for certain captions will not agree with the respective Statements of Consolidated Operations. 4. RETIREMENT BENEFIT PLANS The Company sponsors a Savings and Investment Plan ("Savings Plan") under Section 401(k) of the Internal Revenue Code. Eligible employees may contribute up to 16% of their base salary to the Savings Plan subject to certain IRS limitations. The Company may make matching contributions, which have been set by the Board of Directors at 50% of the employee's contribution (up to 6% of the employee's annual base salary). The Savings Plan also contains a profit-sharing component whereby the Board of Directors may declare annual discretionary profit-sharing contributions. Profit-sharing contributions are allocated to eligible employees based upon their pro-rata share of total eligible compensation. Employee and profit-sharing contributions are invested at the direction of the employee in one or more funds or can be directed to purchase common stock of the Company at fair market value. Company matching contributions are invested in shares of KCS common stock. Eligible employees vest in both the Company matching and discretionary profit-sharing contributions over a four-year period based upon years of service with the Company. Company contributions to the Savings Plan were $221,520 in 1999, $393,851 in 1998 and $420,090 in 1997. These amounts are included in general and administrative expense. 35 37 5. STOCK OPTION AND INCENTIVE PLANS Under the 1992 Stock Plan, stock options, stock appreciation rights and restricted stock may be granted to employees of KCS. The 1992 Stock Plan also provides that bonus stock may be granted to employees. The 1994 Directors' Stock Plan provides that each non-employee director be granted stock options for 2,000 shares annually. This plan also provides that in lieu of cash, each non-employee director be issued KCS stock with a fair market value equal to 50% of their annual retainer. In 1999 each non-employee director waived his annual retainer. Each plan provides that the option price of shares issued be equal to the market price on the date of grant. All options expire 10 years after the date of grant. Restricted shares awarded under the 1992 Stock Plan have a fixed restriction period during which ownership of the shares cannot be transferred and the shares are subject to forfeiture if employment terminates. Restricted stock has the same dividend and voting rights as other common stock and is considered to be currently issued and outstanding. The cost of the awards, determined as the fair market value of the shares at the date of grant, is expensed ratably over the restricted period. Restricted stock totaling 46,100 shares was outstanding at December 31, 1999. At December 31, 1999, a total of 395,152 shares were available for future grants under the 1992 Stock Plan and the 1994 Directors' Stock Plan. No grants were made pursuant to these plans in 1999. Under the 1988 KCS Energy, Inc. Employee Stock Purchase Program (the "Program"), all eligible employees and directors may purchase full shares from the Company at a price per share equal to 90% of the market value determined by the closing price on the date of purchase. The minimum purchase is 25 shares. The maximum annual purchase is the number of shares costing no more than 10% of the eligible employee's annual base salary, and for directors, 6,000 shares. The number of shares issued in connection with the Program was 14,775, 44,661 and 14,520 during 1999, 1998 and 1997, respectively. At December 31, 1999, there were 798,108 shares available for issuance under the Program. As permitted under FASB Statement No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123") the Company has elected to continue to account for stock-based compensation under the provisions of APB Opinion No. 25. Had compensation cost for the following plans been determined consistent with SFAS 123, the impact on the Company's net income (loss) would have been $2.3 million in 1999, $2.3 million in 1998 and $0.7 million in 1997. The impact on basic and diluted loss per share would have been $0.07 in 1999, $0.08 in 1998 and $0.02 in 1997. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 1998 and 1997, respectively: risk-free interest rates of 5.17% and 6.39%; expected dividend yield of 0.00% and 0.46%; expected lives of 4.0 years and 5.6 years; expected stock price volatility of 70.0% and 50.1%. 36 38 As required under SFAS 123, a summary of the status of the stock options under the 1992 Stock Plan and the 1994 Directors' Stock Plan at December 31, 1999, 1998 and 1997 and changes during the years then ended is presented in the table and narrative below:
1999 1998 1997 -------------------------- -------------------------- -------------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE --------- -------------- --------- -------------- --------- -------------- OUTSTANDING AT BEGINNING OF YEAR..................... 1,720,230 $10.37 1,063,800 $ 7.76 1,059,150 $ 5.46 Granted.................. -- -- 899,300 12.57 349,400 16.82 Exercised................ -- -- (123,320) 1.48 (236,250) 8.04 Forfeited................ (200,600) 13.34 (119,550) 12.86 (108,500) 13.83 --------- ------ --------- ------ --------- ------ OUTSTANDING AT END OF YEAR..................... 1,519,630 9.98 1,720,230 10.37 1,063,800 7.76 --------- ------ --------- ------ --------- ------ Exercisable at end of year.................. 899,355 $ 7.84 645,530 $ 5.93 697,300 $ 4.58 --------- ------ --------- ------ --------- ------ Weighted average fair value of options granted............... $ -- $ 7.14 $ 8.79 ====== ====== ======
The following table summarizes information about stock options outstanding at December 31, 1999:
WEIGHTED NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED RANGE OF OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE EXERCISE PRICES DECEMBER 31, 1999 CONTRACTUAL LIFE EXERCISE PRICE DECEMBER 31, 1999 EXERCISE PRICE - --------------- ----------------- ---------------- -------------- ----------------- -------------- $ 0.92-$ 3.12 240,000 1.42 $ 0.94 240,000 $ 0.94 3.13- 4.68 60,000 2.92 3.13 60,000 3.13 4.69- 7.01 385,000 7.98 5.70 173,125 6.05 7.02- 10.52 105,000 4.94 7.33 105,000 7.33 10.53- 18.81 729,630 7.34 16.16 321,230 15.00 ------------- --------- ---- ------ ------- ------ $ 0.92-$18.81 1,519,630 4.60 $ 9.98 899,355 $ 7.84 ============= ========= ==== ====== ======= ======
6. DEBT Debt consists of the following:
DECEMBER 31, ----------------------- 1999 1998 ---------- ---------- (DOLLARS IN THOUSANDS) 11% Senior Notes Due 2003................................... $149,724 $149,635 8 7/8% Senior Subordinated Notes due 2008................... 125,000 125,000 Revolving Credit Agreement.................................. 49,501 80,000 Credit Facility............................................. 57,594 55,700 -------- -------- 381,819 410,335 Less short-term debt........................................ 381,819 135,700 -------- -------- Long-term debt.............................................. $ -- $274,635 ======== ========
The Company is currently in default under its bank credit facilities and the indentures concerning its senior notes and senior subordinated notes. See Note 2. Senior Subordinated Notes On January 15, 1998, KCS Energy, Inc. (the "Parent") completed a public offering of $125 million senior subordinated notes at an interest rate of 8.875% due January 15, 2008 (the "Subordinated Notes"). The Subordinated Notes are noncallable for five years and are unsecured subordinated obligations of the Parent. 37 39 Prior to January 15, 2001, the Parent may use proceeds from a public equity offering to redeem up to 33 1/3% of the Subordinated Notes. The subsidiaries of the Parent have guaranteed the Subordinated Notes on an unsecured subordinated basis. The net proceeds of approximately $121 million were used to reduce outstanding indebtedness under the credit agreements discussed below. The Subordinated Notes 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 restrict the aggregate cash dividends paid to 50% of the Company's cumulative net income, as defined in the indenture covering the Subordinated Notes, during the period beginning October 1, 1997. A ceiling writedown is not a charge against net income as defined in the indenture. Currently, these covenants prohibit the Company from paying dividends and incurring additional Indebtedness (as defined in the indenture), except for Permitted Indebtedness (also as defined in the indenture). As a result of the payment default under the Company's bank loans and the interest payment default on the Subordinated Notes, the holders of the requisite percentage of the Company's Subordinated Notes and the indenture trustee have the right to declare the principal amount of the notes immediately due and payable. Senior Notes KCS Energy, Inc. has outstanding $150 million principal amount of 11% senior notes due 2003 issued pursuant to an indenture governing the Senior Notes dated January 25, 1996 (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 Parent, in whole or in part, commencing January 15, 2000, at predetermined redemption prices set forth within the Senior Notes indenture. The subsidiaries of the Parent have guaranteed the Senior Notes on a senior unsecured basis. The Senior Notes 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 and restrict the aggregate cash dividends paid to 50% of the Company's cumulative net income, as defined in the indenture covering the Senior Notes, during the period beginning October 1, 1995. A ceiling writedown is not a charge against net income as defined in the indenture. Currently, these covenants prohibit the Company from paying dividends and incurring additional Indebtedness (as defined in the indenture), except for Permitted Indebtedness (also as defined in the indenture). As a result of the payment default under the Company's bank loans and the interest payment default on the Senior Notes, the holders of the requisite percentage of the Senior Notes and the indenture trustee have the right to declare the principal amount of the notes immediately due and payable. On December 28, 1999, holders of the Senior Notes alleging to hold the requisite percentage of Senior Notes provided notice of acceleration of maturity and declared the principal and interest of the senior notes to be immediately due and payable. Revolving Credit Agreement Simultaneous with the consummation of the Medallion acquisition as of December 31, 1996, the Company entered into a revolving credit agreement ("Revolving Credit Agreement") with a group of banks, which will mature on September 30, 2000. The Revolving Credit Agreement is used for general corporate purposes, including working capital, and to support the Company's capital expenditure program. The Company cannot borrow under the Revolving Credit Agreement due to the existing defaults. The borrowing base is reviewed at least semiannually and may be adjusted based on the lenders' valuation of the borrowers' oil and gas reserves and other factors. In July 1999, the borrowing base was reset. See "Forbearance Agreements" below. The obligations under the Revolving Credit Agreement are secured by substantially all of the oil and gas reserves acquired in the Medallion acquisition, a pledge of the Medallion entities' common stock and certain VPP assets. The Revolving Credit Agreement permits the borrowers under this facility to choose interest rate options based on the bank's prime rate or LIBOR and from maturities ranging up to 12 months. The applicable spread is based on the percentage of the borrowing base that is outstanding. A commitment fee ranging between 0.375% and 0.50% is paid on the unused portion of the borrowing base. The weighted average effective interest 38 40 rate during 1999 was 7.87%. As of December 31, 1999, the weighted average interest rate under the Revolving Credit Agreement was 8.89% and $49.5 million was outstanding. As of December 31, 1998, the weighted average interest rate under the Revolving Credit Agreement was 7.5% and $80.0 million was outstanding. Credit Facility The Company's revolving credit facility ("Credit Facility"), which matures on September 30, 2000, is used for general corporate purposes, including working capital, and to support the Company's capital expenditure program. The company cannot borrow under the Credit Facility due to the existing defaults. The borrowing base is reviewed at least semiannually and may be adjusted based on the lenders' valuation of the borrowers' oil and gas reserves and other factors. In July 1999, the borrowing base was reset. See "Forbearance Agreements" below. Substantially all of the Company's oil and gas reserves (excluding those pledged under the Revolving Credit Agreement) have been pledged to secure the Credit Facility. The Credit Facility permits the borrowers to choose interest rate options based on the bank's prime rate or LIBOR and from maturities ranging up to 12 months. The applicable spread is based on the percentage of the borrowing base that is outstanding. A commitment fee ranging between 0.375% and 0.50% is paid on the unused portion of the borrowing base. The weighted average effective interest rate during 1999 was 8.14%. As of December 31, 1999, the weighted average interest rate under the Credit Facility was 9.12% and $57.6 million was outstanding. As of December 31, 1998, the weighted average interest rate under the Credit Facility was 7.67% and $55.7 million was outstanding. Forbearance Agreements On May 18, 1999, the Company and its bank lenders entered into forbearance agreements which provided that the lenders would defer redetermination of the borrowing base until July 1, 1999 and would refrain from exercising their rights and remedies as a result of the existing defaults until June 30, 1999. Under these initial forbearance agreements the Company committed 50% of monthly cash flow to payments of principal, with a minimum of $2 million monthly. In addition, a portion of the proceeds from the sale of any of the Company's oil and gas properties were dedicated to payment of principal under the bank credit facilities. On July 7, 1999 the lenders under each of the bank credit facilities reset the Company's borrowing base, which had been $165 million in the aggregate at December 31, 1998, to $91 million. The principal amount outstanding under the bank loans at June 30, 1999 was $126.7 million. Because the Company did not make the $35.7 million additional lump-sum payment, a payment default occurred. The lenders declared due all amounts owing under the bank loans, demanded payment and declared in effect the default rate of interest. The bank lenders also delivered a payment blockage notice to the indenture trustee of the 8.875% senior subordinated notes. The Company did not make the scheduled July 15, 1999 interest payments on both the 8.875% senior subordinated notes and the 11% senior notes, totaling $13.8 million. As a result of the payment default under the bank loans and the interest payment default on the notes, the holders of the requisite percentage of the Company's senior notes and senior subordinated notes and the indenture trustees of the senior notes and the senior subordinated notes have the right to declare the principal amount of the notes immediately due and payable. On December 28, 1999, holders of the senior notes alleging to hold the requisite percentage of senior notes provided notice of acceleration of maturity and declared the principal and interest of the senior notes to be immediately due and payable. On July 26, 1999, the Company and its bank lenders entered into new forbearance agreements (effective as of July 1, 1999) which provided that the lenders would refrain from exercising their rights and remedies not previously exercised until October 5, 1999. Subsequently, these forbearance agreements were extended twice on the same terms through March 2, 2000. The lenders did not waive the payment default but rescinded their declaration that all amounts outstanding under the credit facilities are immediately due and payable and effectively waived the default rate of interest. The new forbearance agreements precluded the Company from making interest payments on its senior notes and its senior subordinated notes. Under the terms of the new forbearance agreements, the Company committed to make monthly principal payments of $2.5 million. In addition, the agreements provide that a portion of the proceeds from the sale of any of the Company's oil and gas properties be dedicated to payment of principal under the credit facilities. The forbearance agreements expired on March 2, 2000. 39 41 Since the commencement of the bankruptcy proceedings on January 18, 2000, the Company has been operating under a cash collateral agreement with its bank lenders. The agreement provides for, among other things, that the Company make monthly principal payments of $2.5 million and that the lenders have the right to review and approve the Company's projected use of cash during the bankruptcy proceedings. Other Information The estimated fair value of the Company's Senior Notes and Senior Subordinated Notes at December 31, 1999 were $120.0 million and $34.4 million, respectively. These values were estimated based upon the December 31, 1999 quoted market price of $80.00 for the Senior Notes and $27.50 for the Subordinated Notes. Subsequent to year end the Senior Notes and the Senior Subordinated Notes have traded as low as $78.00 and $25.00, respectively. The estimated fair value of the Company's Senior Notes and Subordinated Notes at December 31, 1998 were $132.0 million and $68.8 million, respectively. These values were estimated based upon the December 31, 1998 quoted market price of $88.00 for the Senior Notes and $55.00 for the Subordinated Notes. The carrying amounts of the remaining debt at year-end 1999 and 1998 approximate fair value. Without providing for the effect of bankruptcy, the scheduled maturities of the Company's debt during the next five years is as follows: 2000 $107.17 million, 2001 $-0- million, 2002 $-0- million, 2003 $150 million and 2004 $-0-. Interest payments were $25.4 million in 1999, $30.0 million in 1998 and $22.5 million in 1997. 7. LEASES Future minimum lease payments under non-cancelable operating leases are as follows: $0.7 million in 2000, $0.7 million in 2001, $0.5 million in 2002, $0.3 million in 2003 and $0.3 million in 2004. Lease payments charged to operating expenses amounted to $0.7 million, $0.8 million and $0.8 million during 1999, 1998 and 1997, respectively. 8. INCOME TAXES Federal and state income tax provision (benefit) includes the following components:
FOR THE YEAR ENDED DECEMBER 31, --------------------------------- 1999 1998 1997 ------- --------- --------- (DOLLARS IN THOUSANDS) Current (benefit) provision....................... $ -- $ (3,248) $ -- Deferred provision (benefit), net................. -- 19,702 (52,406) ------- --------- --------- Federal income tax expense (benefit).............. -- 16,454 (52,406) State income tax benefit (provision) (deferred provision $0 in 1999, $750 in 1998, and $300 in 1997)........................................... -- (455) 351 ------- --------- --------- $ -- $ 15,999 $ (52,055) ======= ========= ========= Reconciliation of federal income tax expense (benefit) at statutory rate to provision for income taxes: Income (loss) before income taxes................. $ 4,340 $(280,521) $(149,440) ------- --------- --------- Tax provision (benefit) at 35% statutory rate..... 1,519 (98,183) (52,304) State income tax, net of federal income tax benefit......................................... -- (296) 228 Statutory depletion............................... -- (20) (23) Reversal of prior year Section 29 credits......... -- 529 -- Valuation allowance............................... (1,532) 113,944 -- Other, net........................................ 13 25 44 ------- --------- --------- $ -- $ 15,999 $ (52,055) ======= ========= =========
40 42 The primary differences giving rise to the Company's net deferred tax assets are as follows:
DECEMBER 31, 1999 ---------------------- (DOLLARS IN THOUSANDS) Income tax effects of: Ceiling test writedowns and other property related items............................... $ 24,865 Alternative minimum tax credit carry forwards.................................... 2,776 Net operating loss carry forward............... 84,771 Valuation allowance............................ (112,412) --------- $ -- =========
Income tax payments were $-0- million in 1999, $0.3 million in 1998 and $0.5 million in 1997. Also, in 1998, the Company received a federal income tax refund of $3.2 million. Historically, the Company has recorded tax benefits relating to its pretax book losses even though it has been in a net operating loss carryforward position for federal income purposes. SFAS 109 allows for such tax benefits to be recorded as deferred tax assets if management believes that it is "more likely than not" that these assets will be realized through the generation of future taxable income. Due to the significant losses recorded in 1998 and the uncertainty of future oil and natural gas commodity prices, management concluded that a valuation allowance against net deferred tax assets is required in accordance with SFAS 109. In making its assessment, management considered several factors, including uncertainty of the Company's ability to generate sufficient income in order to realize its future tax benefits. Accordingly, the Company recorded a valuation allowance at December 31, 1998 to reduce to zero its deferred tax assets. The valuation allowance was $112.4 million and $113.9 million at December 31, 1999 and 1998, respectively. The valuation allowance will be monitored for potential adjustments as future events so indicate. Deferred tax assets relate primarily to the Company's pre-tax book losses, the net operating loss and alternative minimum tax credit carryforwards. At December 31, 1999, the Company had tax net operating losses ("NOLs") of approximately $242.2 million available to offset future taxable income, of which approximately $14.5 million will expire in 2011, $82.7 million will expire in 2012, $73.8 million will expire in 2018 and $71.2 will expire in 2019. 9. FINANCIAL INSTRUMENTS The Company has, at times, utilized swaps, futures contracts and options to manage risks associated with fluctuations in the prices of its natural gas and oil production. Commodity Price Swaps. Commodity price swap agreements require the Company to make or receive payments from the counterparties based upon the differential between a specified fixed price and a price related to those quoted on the New York Mercantile Exchange. The Company accounts for these transactions as hedges and, accordingly, gains or losses are deferred until the time the underlying product is produced. At December 31, 1999, the Company was party to commodity price swap agreements covering approximately 3.5 million MMBtu, 3.0 million MMBtu and 7.3 million MMBtu of natural gas production for the years 2000 and 2001, and for the period 2002 through 2005, respectively. At December 31, 1999, the unrealized loss on these contracts was $5.8 million. Additionally, the Company had deferred losses of $0.4 million from closed swap contracts relating to gas production in the year 2000. The Company also utilized swap agreements to lock in the price of 36,200 barrels of oil production in the first half of the year 2000. At December 31, 1999, the unrealized loss was negligible. Futures and Options Contracts. Oil or natural gas futures contracts require the Company to sell oil or natural gas at a future time at a fixed price. Periodically, the Company uses these futures contracts to hedge price risk on a portion of its production. Option contracts provide the right, not the requirement, to buy or sell a commodity at a fixed price. By buying a "put" option, the Company is able to set a floor price for a specified quantity of its oil or gas production. By selling a "call" option, the Company receives an upfront premium to 41 43 sell its oil or gas production at a fixed price. By selling call options and buying put options, the Company, at little or no cost, effectively places a "collar" on the price it will receive for that quantity of future production. At December 31, 1999, the Company had no open futures contracts, but had collars in place covering 18,200 barrels of production in the second quarter of the year 2000 with a negligible unrealized loss. At December 31, 1998, the Company had no open futures contracts. The Company realized $0.8 million in net hedging gains during 1999. None of the outstanding agreements impose cash margin requirements on the Company. 10. LITIGATION Royalty Suits The Company was a party to six lawsuits in the Texas State Courts involving various claims asserted by various holders of royalty interests under leases on the acreage that was dedicated to the Tennessee Gas Contract or pooled therewith. One suit involves claims by the holder of an overriding royalty interest in the dedicated acreage of certain rights in the Tennessee Gas Contract. Of the other five (the "Royalty Basis Suits"), one seeks a declaratory judgment on the royalty payment basis for non-dedicated acreage in which the Company owns no interest. The other four suits seek declaratory judgments to determine whether royalties payable to the holders of landowner royalty interests in the dedicated acreage should be based on the net proceeds received by the Company for gas sales under the Tennessee Gas Contract or on the spot market price. The Company paid royalties based upon the spot market price to the holders of royalty interests (other than the overriding royalty interest) because the Company's leases, which cover only dedicated acreage, have market value royalty provisions. Initially, there were three Royalty Basis Suits, one in Dallas County, Texas, in which the Company is a co-plaintiff and two subsequently filed suits in Zapata County, Texas, in which the Company is a co-defendant (the "Las Blancas Suit" and the "Gonzalez Suit"). The Dallas suit was subsequently split into four separate lawsuits, based on issues concerning 1) the dedicated acreage in the Guerra "A" and Guerra "B" Units (the "Los Santos Suit"); 2) the non-dedicated acreage in those Units (the "Collins Suit"), in which the Company has no interests; 3) the Jesus Yzaguirre Unit, which consists entirely of dedicated acreage owned only by the Company (the "Jesus Yzaguirre Suit"), and 4) the overriding royalty interest in the dedicated acreage (the "Matthews Suit"). On March 4, 1997, the holder of an overriding royalty interest filed a claim against the Company and its co-lessees in the Matthews Suit, alleging breach of duties arising from the termination of the Tennessee Gas Contract and for certain tortious acts. Effective January 23, 1998, the Company and the royalty holder settled their disputes. On February 3, 1998, the Company and its co-lessees were dismissed from the Matthews Suit. In addition, in May 1997, the Gonzalez Suit was dismissed and in October 1997 the Las Blancas Suit was dismissed. The Los Santos Suit and the Jesus Yzaguirre Suit have resulted in separate summary judgments in favor of the Company's position that royalty payments based upon the spot market price are all that is required to be paid under the leases and granting dismissal of the royalty owners' counterclaims and affirmative defenses. In early 1997, the summary judgment in the Los Santos Suit was appealed to the Fifth Court of Appeals in Dallas by the royalty holders, who requested oral argument on 11 points of error. These points of error concern the granting of summary judgment against them on issues of lease provisions on market value royalties and on their counterclaims and affirmative defenses of fraud, negligent misrepresentations, conspiracy and estoppel; for denial of their efforts to supplement summary judgment evidence; for denial of efforts to transfer venue to Zapata County; for failure to abate the Dallas lawsuit in favor of the two suits filed later by them in Zapata County, and for the entry of final judgment in favor of the Company and its co-plaintiffs. Supplemental briefs to present recent Texas Supreme Court decisions relevant to the appeal were filed with the Fifth Court of Appeals by the Company and its co-plaintiffs on December 18, 1998, and responded to by Appellants on January 6, 1999. On January 12, 1999, oral argument was held, and on April 27, 1999, the Fifth Court of Appeals overruled the royalty owners' 11 points of error and affirmed the trial court's judgment in favor of the 42 44 Company's position. On May 10, 1999, the royalty holders moved for a rehearing. The Company and its co-appellees filed their response on May 24, 1999, and on August 17, 1999, the Fifth Court of Appeals issued an opinion nunc pro tunc and judgment that affirmed the trial court's judgment. A subsequent motion for rehearing was denied on September 21, 1999, and the royalty holders applied to the Texas Supreme Court for review on September 28, 1999. On November 12, 1999, their petition for review was denied by the Texas Supreme Court. However, the royalty holders moved the Supreme Court for a rehearing and several friend-of- court briefs were filed in support of a rehearing by the Supreme Court. On December 27, 1999, the Company and the other respondents were requested to file a response to the motion for rehearing, which was done on January 11, 2000. The royalty holders filed a reply to this response on January 20, 2000, and on January 26, 2000, the Texas Supreme Court requested that the parties file briefs on the merits of the matter, but stated that the petition for review had not been granted and remained under consideration. The royalty holders' brief was filed on February 25, 2000, and the response brief by the Company and the other respondents was filed on March 16, 2000. Any reply brief by the royalty holders must be filed with the Texas Supreme Court by March 31, 2000. In the Jesus Yzaguirre Suit, certain of the royalty owners counterclaimed against the Company, asserting that the largest lease contained therein had terminated in December 1975, and that they were entitled to the Tennessee Gas Contract price because of the execution of certain division orders in 1992 that allegedly varied the market value royalty provision of their lease. On May 30, 1997, the Company and these royalty owners reached a settlement of the lease termination claims, and on June 2, 1997, this issue was dismissed from the Jesus Yzaguirre Suit. On June 17, 1997, the Company and the royalty owners moved for summary judgment on the issue of the effect of division orders. The trial judge granted the Company's motion and denied the competing motion on August 12, 1997. On October 29, 1997, a final judgment was signed, and on November 19, 1997, the royalty owners gave notice of their appeal to the Fifth Court of Appeals in Dallas, Texas, and caused the appellate record to be filed. The royalty owners' brief was filed with the Fifth Court of Appeals on March 18, 1998. The Company filed its brief in response on April 16, 1998. The parties requested oral argument on the Appellants' issues that it was an error for the trial court to grant summary judgment for the Company on the unambiguous lease provisions requiring the Company to pay market value royalties and against them on their contention that the implied duty to market required the Company to pay royalties based upon the higher contract price; to grant summary judgment to the Company that the 1992 division orders did not override the express royalty provisions of their leases under Texas law; to grant summary judgment declaring that their counterclaims and affirmative defenses of fraud, negligent misrepresentations, conspiracy and estoppel, as well as allegations of oral promises and a course of conduct by the Company, did not change the unambiguous terms of the written leases; to exclude Appellants' expert witness testimony on "market value" as being inadmissible; to deny Appellants' efforts to transfer venue from Dallas County to Zapata County; and to refuse to abate this suit in favor of Appellants' later-filed suit against the Company in Zapata County. On October 28, 1999, the parties were notified that the Fifth Court of Appeals in Dallas had determined that oral argument would not significantly aid it in determining the legal and factual issues presented. Accordingly, the royalty owners' appeal was submitted for decision on January 4, 2000, without oral argument. Given the inherent uncertainties of appellate matters and notwithstanding that the Company's position on the market value and other issues is based upon established decisional law in Texas, the Company is unable to provide any assurance of a favorable outcome of the Texas Supreme Court's ongoing consideration of the royalty owners' petition for review in the Los Santos Suit or of their appeal before the Fifth Court of Appeals from the summary judgments and evidentiary rulings in the Jesus Yzaguirre Suit, inasmuch as the royalty owners can obtain a reversal and remand for plenary trial, in each instance, upon showing that summary judgment was improper because there exists an issue of material fact. The aggregate amount at issue in the Los Santos and Jesus Yzaguirre Suits, apart from certain tort counterclaims and affirmative defenses alleged by the landowner royalty holders, is a function of the quantity of natural gas for which Tennessee Gas paid at the contract price. As of January 1, 1997 (the date of the termination of the Tennessee Gas Contract) the amount of natural gas taken by Tennessee Gas attributable to the royalty interests involved in the Royalty Basis Suits was approximately 3.8 Bcf for which royalties have 43 45 been paid by the Company at the average price of approximately $1.63 per Mcf, net of severance tax, compared to the average Tennessee Gas Contract price of approximately $7.60 per Mcf, net of severance tax. Consequently, if the Company loses in its litigation with these royalty interest owners on these claims, the Company faces a maximum liability in the Royalty Basis Suits of approximately $22.7 million, plus interest thereon. Site Restoration The Company is a defendant in a lawsuit 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") currently pending in the 234th Judicial District Court of Harris County, Texas under Cause Number 1999-45998. The suit seeks a declaratory judgment declaring the rights and obligations of each of Plaintiffs, the KCS Defendants and the Kerr-McGee Defendants in connection with environmental damages and surface restoration on lands covered by the following two oil and gas leases: a. Oil and Gas Lease dated June 13, 1935, from Newhall Land and Farming Company, as Lessor, to Barnsdall Oil Company, as Lessee (the "RSF Lease") and b. Oil and Gas Lease dated June 6, 1941, from the Newhall Corporation, as Lessor, to C.G. Willis, as Lessee (the "Ferguson Lease"). The RSF Lease and the Ferguson Lease are herein called "Leases." Oil and gas production from such lands commenced shortly after the RSF Lease was granted and has continued to date. From inception of the Leases until October 30, 1990, the Leases were owned by entities that through corporate succession and name change ultimately became Sun Operating Limited Partnership ("Sun L.P."). On October 30, 1990, Sun L.P. transferred the Leases to DKM Offshore Energy, Inc. ("DKM") and Neste Oil Services Inc. ("Neste"). In the assignment of the Leases, Sun L.P. indemnified DKM and Neste from environmental claims resulting from the indemnitors' operations provided that such environmental claims were made within ten years from October 30, 1990. Shortly after the transfer to DKM and Neste, DKM acquired Neste's rights and, subsequently, DKM became Medallion California Properties Company ("Medallion California"). Later, the Company acquired the stock of Medallion California Properties Company. Also, Sun L.P. became Kerr-McGee Oil & Gas Onshore L.P. ("Kerr-McGee L.P."). In connection with the sale of Medallion California to KCS, InterCoast Energy Company ("InterCoast") indemnified the Company and Medallion California for up to 90% of the costs of environmental remediation not assumed by Kerr-McGee L.P., and InterCoast's parent, MidAmerican Capital Company ("MidAmerican"), guaranteed InterCoast's indemnity obligations. For a more in-depth discussion of the environmental condition of the property, see "Regulation." Other The Company and several of its subsidiaries have been named as co-defendants along with numerous other industry parties in an action brought by Jack Grynberg on behalf of the Government of the United States. The complaint, filed under the Federal False Claims Act, alleges underpayment of royalties to the Government of the United States as a result of alleged mismeasurement of the volume and wrongful analysis of the heating content of natural gas produced from federal and Native American lands. The complaint is substantially similar to other complaints filed by Jack Grynberg on behalf of the Government of the United States against multiple other industry parties. All of the complaints have been consolidated in one proceeding. In April 1999, the Government of the United States filed notice that it had decided not to intervene in these actions. The Company believes that the allegations in the complaint are without merit. In another legal matter, the Company received a $1.75 million settlement in May 1999 in connection with a lawsuit regarding a severance tax dispute. 44 46 KCS Energy, Inc. has been named as a co-defendant in a lawsuit that is pending in District Court in Ector County, Texas. The litigation involves claims by the plaintiff against KCS and the co-defendant for damages allegedly caused by drainage to an oil and gas lease. The plaintiff seeks damages of up to $18.1 million. KCS is considering possible counterclaims. 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. 11. NEW YORK STOCK EXCHANGE LISTING In October 1999, the Company reported that it does not currently meet the newly effective New York Stock Exchange (NYSE) continued listing standards. These standards require total market capitalization of not less than $50 million and total stockholders' equity of not less than $50 million. At the close of business on March 28, 2000, the Company's total market capitalization was approximately $40.2 million. As a result of the non-cash ceiling writedown at December 31, 1998, the Company currently has negative stockholders' equity. The Company has submitted a plan to the NYSE's Listings and Compliance Committee that sets forth a strategy to enable the Company to comply with the new standards by the deadline established by the NYSE. That plan was accepted by the NYSE in November 1999. The Company will be monitored quarterly for compliance with the plan. Should the Company not meet its compliance objectives, it will be subject to trading suspension and delisting procedures. 12. QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTERS --------------------------------------------- FIRST SECOND THIRD FOURTH -------- ---------- -------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 Revenue........................................... $33,005 $ 33,355 $35,605 $ 34,526 Operating income.................................. 7,946 10,034 14,678 10,985 Income (loss) from continuing operations.......... (1,918) 219 4,756 1,283 Net income (loss)................................. $(1,918) $ 219 $ 4,756 $ 1,283 Basic earnings (loss) per common share............ $ (0.07) $ 0.01 $ 0.16 $ 0.04 Diluted earnings (loss) per common share.......... $ (0.07) $ 0.01 $ 0.16 $ 0.04
QUARTERS --------------------------------------------- FIRST SECOND(A) THIRD FOURTH(B) -------- ---------- -------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 Revenue........................................... $31,309 $ 33,663 $32,277 $ 32,203 Operating income (loss)........................... 7,556 (51,158) 4,801 (205,860) Loss from continuing operations................... (140) (38,877) (3,581) (253,922) Net loss.......................................... $ (140) $(38,877) $ 3,581) $(253,922) Basic loss per common share....................... $ -- $ (1.32) $ (0.12) $ (8.68) Diluted loss per common share..................... $ -- $ (1.32) $ (0.12) $ (8.68)
- --------------- (A) Includes a $57.6 million pretax, $37.5 million after-tax, or $1.27 per share, non-cash ceiling writedown of oil and gas assets. (B) Includes a $210.8 million pretax, $137.0 million after-tax, non-cash ceiling writedown and a $113.9 million non-cash tax valuation allowance aggregating $8.58 per share. 45 47 The total of the earnings per share for the quarters does not equal the earnings per share elsewhere in the Consolidated Financial Statements as a result of the change in the number of shares outstanding during the applicable periods. 13. OIL AND GAS PRODUCING OPERATIONS The following data is presented pursuant to FASB Statement No. 69 with respect to oil and gas acquisition, exploration, development and producing activities, which is based on estimates of year-end oil and gas reserve quantities and forecasts of future development costs and production schedules. These estimates and forecasts are inherently imprecise and subject to substantial revision as a result of changes in estimates of remaining volumes, prices, costs and production rates. Except where otherwise provided by contractual agreement, future cash inflows are estimated using year-end prices. Oil and gas prices at December 31, 1999 are not necessarily reflective of the prices the Company expects to receive in the future. Other than gas sold under contractual arrangements, including swaps, futures contracts and options, gas prices were based on NYMEX prices of $2.33, $2.15 and $2.50 at December 31, 1999, 1998 and 1997, respectively, and oil prices were based on West Texas Intermediate (WTI) prices of $22.75, $8.57 and $15.15 at December 31, 1999, 1998 and 1997, respectively. VPP volumes represent oil and gas reserves purchased from third parties which generally entitle the Company to a specified volume of oil and gas to be delivered over a stated time period. The related volumes stated herein reflect scheduled amounts of oil and gas to be delivered to the Company at agreed delivery points and future cash inflows are estimated at year-end prices. Although specific terms of the Company's VPPs vary, the Company is generally entitled to receive delivery of its scheduled oil and gas volumes, free of drilling and lease operating costs. 46 48 PRODUCTION REVENUES AND COSTS Information with respect to production revenues and costs related to oil and gas producing activities is as follows:
FOR THE YEAR ENDED DECEMBER 31, --------------------------------- 1999 1998 1997 --------- --------- --------- (DOLLARS IN THOUSANDS) Revenue........................................... $ 131,997 $ 123,491 $ 137,837 Production (lifting) costs........................ 30,148 34,430 35,266 Technical support and other....................... 4,432 7,113 6,978 Depreciation, depletion and amortization.......... 50,816 59,746 58,465 Writedown of oil and gas properties............... -- 268,468 165,149 --------- --------- --------- Total expenses.......................... 85,396 369,757 265,858 --------- --------- --------- Pretax income (loss) from producing activities.... 46,601 (246,266) (128,021) Income tax benefit................................ -- -- (48,344) --------- --------- --------- Results of oil and gas producing activities (excluding corporate overhead and interest)..... $ 46,601 $(246,266) $ (79,677) ========= ========= ========= Capitalized costs incurred: Property acquisition............................ $ 25,847 $ 80,741 $ 70,364 Exploration..................................... 8,949 15,865 33,440 Development..................................... 25,204 66,790 107,424 --------- --------- --------- Total capitalized costs incurred........ $ 60,000 $ 163,396 $ 211,228 ========= ========= ========= Capitalized costs at year end: Proved properties............................... $ 955,340 $ 913,777 $ 739,551 Unproved properties............................. 8,437 17,718 21,080 --------- --------- --------- 963,777 931,495 760,631 Less accumulated depreciation, depletion and amortization.................................... (731,496) (682,913) (356,877) --------- --------- --------- Net investment in oil and gas properties.......... $ 232,281 $ 248,582 $ 403,754 ========= ========= =========
DISCOUNTED FUTURE NET CASH FLOWS (UNAUDITED) The following information relating to discounted future net cash flows has been prepared on the basis of the Company's estimated net proved oil and gas reserves in accordance with FASB Statement No. 69. DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL AND GAS RESERVES
DECEMBER 31, ----------------------- 1999 1998 ---------- ---------- (DOLLARS IN THOUSANDS) Future cash inflows......................................... $ 713,067 $ 639,062 Future costs: Production................................................ (235,328) (183,550) Development............................................... (41,751) (40,827) Discount -- 10% annually.................................. (143,198) (120,926) --------- --------- Present value of future net revenues...................... 292,790 293,759 Future income taxes, discounted at 10%.................... -- -- --------- --------- Standardized measure of discounted future net cash flows.... $ 292,790 $ 293,759 ========= =========
47 49 CHANGES IN DISCOUNTED FUTURE NET CASH FLOWS FROM PROVED RESERVE QUANTITIES
FOR THE YEAR ENDED DECEMBER 31, --------------------------------- 1999 1998 1997 --------- --------- --------- (DOLLARS IN THOUSANDS) BALANCE, BEGINNING OF YEAR................................ $ 293,759 $ 374,882 $ 437,599 Increases (decreases) Sales, net of production costs.......................... (101,849) (89,061) (102,571) Net change in prices, net of production costs........... 41,610 (104,375) (201,580) Discoveries and extensions, net of future production and development costs.................................... 25,402 40,599 101,004 Changes in estimated future development costs........... 344 18,774 (18,912) Change due to acquisition of reserves in place.......... 41,142 93,200 40,509 Development costs incurred during the period............ 8,400 25,291 34,674 Revisions of quantity estimates......................... (10,666) (110,677) (19,160) Accretion of discount................................... 28,068 41,049 55,761 Net change in income taxes.............................. -- 35,624 84,390 Sales of reserves in place.............................. (24,345) (5,918) (2,225) Changes in production rates (timing) and other.......... (9,075) (25,629) (34,607) --------- --------- --------- Net increase (decrease)................................. (969) (81,123) (62,717) --------- --------- --------- BALANCE, END OF YEAR...................................... $ 292,790 $ 293,759 $ 374,882 ========= ========= =========
RESERVE INFORMATION (UNAUDITED) The following information with respect to the Company's 1999 net proved oil and gas reserves are estimates prepared by Netherland, Sewell & Associates, Inc. Proved developed reserves represent only those reserves expected to be recovered through existing wells using equipment currently in place. Proved undeveloped reserves represent proved reserves expected to be recovered from new wells or from existing wells after material recompletion expenditures. All of the Company's reserves are located within the United States.
1999 1998 1997 ---------------- ----------------- ---------------- GAS OIL GAS OIL GAS OIL MMCF MBBL MMCF MBBL MMCF MBBL ------- ------ ------- ------- ------- ------ Proved developed and undeveloped reserves BALANCE, BEGINNING OF YEAR............ 257,690 8,693 326,168 19,063 268,025 14,631 Production............................ (50,471) (1,408) (50,070) (1,746) (43,700) (1,824) Discoveries, extensions, etc.......... 13,953 777 38,783 1,413 110,010 6,172 Acquisition of reserves in place...... 31,857 906 50,705 557 23,281 155 Sales of reserves in place............ (18,118) (604) (8,948) (260) (698) (23) Revisions of estimates................ (7,792) (23) (98,948) (10,334) (30,750) (48) ------- ------ ------- ------- ------- ------ BALANCE, END OF YEAR.................. 227,119 8,341 257,690 8,693 326,168 19,063 ======= ====== ======= ======= ======= ====== Proved developed reserves BALANCE, BEGINNING OF YEAR.......... 204,327 6,963 234,091 13,008 236,454 12,133 ------- ------ ------- ------- ------- ------ BALANCE, END OF YEAR................ 175,896 7,568 204,327 6,963 234,091 13,008 ------- ------ ------- ------- ------- ------
48 50 PART III Item 10 -- Directors and Executive Officers of the Registrant, Item 11 -- Executive Compensation, Item 12 -- Security Ownership of Certain Beneficial Owners and Management, and Item 13 -- Certain Relationships and Related Transactions are incorporated by reference from the Company's definitive proxy statement relating to its 2000 Annual Meeting of Stockholders. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) Financial statements, financial statement schedules and exhibits. (1) The following consolidated financial statements of KCS and its subsidiaries are presented in Item 8 of this Form 10-K.
PAGE ----- Report of Independent Public Accountants.................... 26 Statements of Consolidated Operations for the years ended December 31, 1999, 1998 and 1997.......................... 27 Consolidated Balance Sheets at December 31, 1999 and 1998... 28 Statements of Consolidated Stockholders' (Deficit) Equity for the years ended December 31, 1999, 1998 and 1997...... 29 Statements of Consolidated Cash Flows for the years ended December 31, 1999, 1998 and 1997.......................... 30 Notes to Consolidated Financial Statements.................. 31-48
(3) Exhibits See "Exhibit Index" located on pages 51-53 of this Form 10-K for a listing of all exhibits filed herein or incorporated by reference to a previously filed registration statement or report with the Securities and Exchange Commission ("SEC"). (b) Reports on Form 8-K. On December 28, 1999, the registrant reported, under Item 5 of Form 8-K, that it had entered into a restructuring agreement with certain of its senior noteholders and senior subordinated noteholders. On January 31, 2000, the registrant reported, under Item 3 of Form 8-K, that on January 18, 2000 the Bankruptcy Court for the District of Delaware had signed an order granting the registrant and its subsidiaries relief under Chapter 11 of the Bankruptcy Code. 49 51 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. ------------------------------------ (Registrant) By: /s/ FREDERICK DWYER ---------------------------------- Frederick Dwyer Vice President, Controller and Secretary Date: March 29, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ JAMES W. CHRISTMAS President & Chief Executive March 29, 2000 - ----------------------------------------------------- Officer and Director James W. Christmas /s/ STEWART B. KEAN Chairman and Director March 29, 2000 - ----------------------------------------------------- Stewart B. Kean /s/ G. STANTON GEARY Director March 29, 2000 - ----------------------------------------------------- G. Stanton Geary /s/ JAMES E. MURPHY, JR. Director March 29, 2000 - ----------------------------------------------------- James E. Murphy, Jr. Director - ----------------------------------------------------- Robert G. Raynolds /s/ JOEL D. SIEGEL Director March 29, 2000 - ----------------------------------------------------- Joel D. Siegel /s/ CHRISTOPHER A. VIGGIANO Director March 29, 2000 - ----------------------------------------------------- Christopher A. Viggiano /s/ FREDERICK DWYER March 29, 2000 - ----------------------------------------------------- Frederick Dwyer Vice President, Controller and Secretary
50 52 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------- ----------- (3)i -- Certificate of Incorporation of KCS filed as Exhibit 4.3 to Form S-8 Registration Statement No. 33-63982 filed with SEC June 8, 1993. ii -- By-Laws of KCS filed as Exhibit 4.4 to Form S-8 Registration Statement No. 33-63982 filed with SEC June 8, 1993. (4)i -- Form of Common Stock Certificate, $0.01 par Value, filed as Exhibit 4 of Registrant's Form 10-K Report for Fiscal 1988. ii -- Form of Common Stock Certificate, $0.01 par Value, filed as Exhibit 5 of Registrant's Form 8-A Registration Statement No. 1-11698 filed with the SEC, January 27, 1993. iii -- Indenture dated as of January 15, 1996 between KCS, certain of its subsidiaries and Fleet National Bank of Connecticut, Trustee, filed as Exhibit 4 to Current Report on Form 8-K dated January 25, 1996. iv -- Form of 11% Senior Note due 2003 (included in Exhibit (4)(iii)). (10)i -- Performance Unit Plan filed as Exhibit 10B of Registrant's Form 10 filed with the SEC May 13, 1988.* ii -- 1988 KCS Group, Inc. Employee Stock Purchase Program filed as Exhibit 4.1 to Form S-8 Registration Statement No. 33-24147 filed with the SEC on September 1, 1988.* iii -- Amendments to 1988 KCS Energy, Inc. Employee Stock Purchase Program filed as Exhibit 4.2 to Form S-8 Registration Statement No. 33-63982 filed with SEC June 8, 1993.* iv -- 1988 Stock Plan filed as Exhibit 10A of Registrant's Form 10 filed with the SEC May 13, 1988 and as Exhibit 4.1 to Form S-8 Registration Statement No. 33-25707 filed with the SEC on November 21, 1988.* v -- KCS Group, Inc. Savings and Investment Plan filed as Exhibit 4.1 to Form S-8 Registration Statement No. 33-28899 filed with the SEC on May 16, 1989.* vi -- 1992 Stock Plan filed as Exhibit 4.1 to Form S-8 Registration Statement No. 33-45923 filed with the SEC on February 24, 1992.* vii -- Purchase and Sale Agreement dated as of November 30, 1995 between the Company and Hawkins Oil of Michigan, Inc. (formerly Savoy Oil & Gas, Inc.), Conveyance of Production Payment dated as of November 30, 1995, Production and Delivery Agreement dated as of November 30, 1995, Option Agreement dated as of November 30, 1995, Drilling Participation Agreement dated December 7, 1995, Assignment and Bill of Sale (Working Interests) filed with the SEC as Exhibits 2.1 through 2.6 to Form 8-K on December 22, 1995. viii -- Purchase and Sale Agreement dated September 8, 1995 by and between Natural Gas Processing Co., a Wyoming corporation, and KCS Resources, Inc., a Delaware corporation filed with the SEC as Exhibit 2.1 to Form 8-K on November 22, 1995. ix -- Stock Purchase Agreement by, between and among KCS Energy, Inc., InterCoast Energy Company, and InterCoast Gas Services Company dated November 14, 1996 filed with the SEC as Exhibit 2.1 to Form 8-K/A on November 15, 1996.
51 EX-10.XVII 2 AMENDMENT TO FORBEARANCE AGREEMENTINS OIL 1 EXHIBIT 10(XVII) SECOND AMENDMENT TO FORBEARANCE AGREEMENT THIS SECOND AMENDMENT TO FORBEARANCE AGREEMENT, dated as of December 3, 1999 (herein called this "Amendment"), is entered into by and among KCS MEDALLION RESOURCES, INC., a Delaware corporation (formerly known as InterCoast Oil and Gas Company) ("KCS Medallion"), KCS ENERGY, INC., a Delaware corporation ("KCS"), KCS ENERGY SERVICES, INC., a Delaware corporation (formerly known as InterCoast Gas Services Company) ("Medallion Gas Services" and together with KCS Medallion, KCS and KCS Energy Services, each individually, a "Borrower" and collectively, the "Borrowers", each lender that is a signatory hereto or becomes a party hereto as provided in Sections 9.1 or 2.25 of the Credit Agreement (hereinafter defined) (individually, together with its successors and assigns, a "Lender" and, collectively, together with their respective successors and assigns, the "Lenders"), CANADIAN IMPERIAL BANK OF COMMERCE, acting through its New York agency (in its individual capacity, "CIBC"), and as agent for the Lenders (in such capacity, together with its successors in such capacity, the "Agent"), and CIBC Inc., a Delaware corporation as collateral agent for the Lenders (in such capacity pursuant to the terms hereof, the "Collateral Agent"). Terms used herein which are defined in the Forbearance Agreement (as hereinafter defined) are used herein with the meanings given them therein. W I T N E S S E T H: WHEREAS, the Borrowers, the Lenders, the Collateral Agent and the Agent have entered into a Forbearance Agreement dated as of July 26, 1999 but effective as of July 1, 1999, which Forbearance Agreement was amended by an Amendment to Forbearance Agreement dated as of September 30, 1999 (such agreement, as so amended, the "Forbearance Agreement") pursuant to which, on the terms provided therein, the Lenders have agreed (x) to forbear from exercising any further rights and remedies as provided in the Loan Documents or otherwise during the Forbearance Period and (y) to rescind the declaration contained in a notice of default dated July 12, 1999 that all Obligations of the Borrowers pursuant to the Loan Documents are immediately due and payable, such rescission and forbearance to be in effect until termination of the Forbearance Period and notice to the Borrowers from the Agent accelerating the date for payment of the Obligations; and WHEREAS, the Borrowers, the Lenders, the Collateral Agent and the Agent now wish to amend the Forbearance Agreement in certain respects; NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, the parties hereto agree as follows: SECTION 1. Amendment to Section 1.2. Section 1.2 of the Forbearance Agreement is hereby amended by deleting the reference to the date "December 3, 1999" in the ninth line thereof and inserting in lieu thereof the date "March 2, 2000." 2 SECTION 2. Amendment to Section 2.1. Section 2.1 of the Forbearance Agreement is hereby amended by the addition of the following definition immediately after the definition of "Interest Period": "Specified Value" means, with respect to any Oil and Gas Property, a value specified by the Agent, with the consent of the Required Lenders. SECTION 3. Amendment to Section 3.3. Section 3.3 of the Forbearance Agreement is hereby amended as follows: (i) The first sentence of clause (a) of Section 3.3 of the Forbearance Agreement is amended and restated in its entirety to read as follows: "(a) Accrued and unpaid interest on each outstanding Base Rate Loan shall be due and payable on July 31, 1999, August 31, 1999, September 30, 1999, October 31, 1999, November 30, 1999, December 31, 1999, January 31, 2000 and February 29, 2000." (ii) The first sentence of clause (b) of Section 3.3 of the Forbearance Agreement is amended and restated in its entirety to read as follows: "(b) During the Forbearance Period, payments of principal of the Tranche A Loans shall be due and payable in the amount of $1,250,000 on each of July 31, 1999, August 31, 1999, September 30, 1999, October 31, 1999, November 30, 1999, December 31, 1999, January 31, 2000 and February 29, 2000." SECTION 4. Amendment to Section 3.4. Section 3.4(a) of the Forbearance Agreement is amended by deleting the reference to the date "December 3, 1999" in the seventh line thereof and inserting in lieu thereof the date "March 2, 2000". SECTION 5. Amendment to Section 3.6. Section 3.6 of the Forbearance Agreement is hereby amended and restated in its entirety to read as follows: Section 3.6 Sales of Oil and Gas Properties. At any time during the Forbearance Period that any of the Oil and Gas Properties are sold (other than Oil and Gas Properties described in Section 7.1(iii) of this Agreement), the Borrowers shall, substantially concurrently with the sale thereof, pay principal of the Obligations in an amount equal to the Specified Value until the principal of the Obligations is paid in full. In addition, upon the sale of any such Oil and Gas Properties, if the Net Cash Proceeds are greater than the Specified Value, the Borrowers shall pay an amount equal to twenty percent (20%) of the portion of the Net Cash Proceeds in excess of the Specified Value which shall be applied to the repayment of the principal of the Obligations until the principal amount of such Obligations is repaid in full. At the time of the making of each payment hereunder, the Borrowers shall specify to the Agent the Loans to which such payment is to be applied in accordance with the terms of this Agreement. In the event the Borrowers fail to so specify, the Agent may apply such payment to Loans as it may elect in its discretion and in 2 3 accordance with the terms of the Credit Agreement and this Agreement. The Agent shall have the necessary authority to release, and each Lender hereby consents to the Agent releasing, Liens on the Oil and Gas Properties sold pursuant to this Section 3.6 (and Oil and Gas Properties described in Section 7.1(iii) of this Agreement) so long as the Net Cash Proceeds equal or exceed the Specified Value. SECTION 6. Amendment to Section 7.1. Clause (iii) of Section 7.1 of the Forbearance Agreement is hereby amended and restated to read as follows: "(iii) have an aggregate value for all such sales during the period beginning December 3, 1999 and continuing thereafter of less than $250,000 (excluding sales of Oil and Gas Properties, the proceeds of which are applied to the Loans in accordance with other provisions of this Agreement)." SECTION 7. Deletion of Exhibit A. Exhibit A of the Forbearance Agreement is hereby deleted in its entirety. SECTION 8. Conditions to Effectiveness. The effectiveness of this Amendment is conditioned upon receipt by the Agent of all the following documents, each in form and substance satisfactory to the Agent: (i) Multiple counterparts of this Amendment as requested by the Agent; and (ii) certificates of the secretary or an assistant secretary of each Borrower, certifying as to resolutions of the board of directors of such entity authorizing this amendment and the incumbency and signatures of the officers of such company authorized to execute this Amendment. SECTION 9. Effect. This Amendment shall be deemed to be an amendment to the Forbearance Agreement, and the Forbearance Agreement, as amended hereby, is hereby ratified, approved and confirmed in each and every respect. All references to the Forbearance Agreement in any other document, instrument, agreement or writing shall hereafter be deemed to refer to the Forbearance Agreement as amended hereby. SECTION 10. Counterparts. This Amendment may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and any party hereto may execute this Amendment by signing one or more counterparts. SECTION 11. Successors. This Amendment shall be binding upon each of the Borrowers, the Lenders, the Collateral Agent and the Agent and their respective successors and assigns, and shall inure to the benefit of each of the Borrowers, the Lenders, the Collateral Agent and the Agent and the successors and assigns of the Lenders, the Collateral Agent and the Agent. 3 4 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first written above. BORROWERS: KCS MEDALLION RESOURCES, INC. By: --------------------------------- Name: ------------------------------ Title: ----------------------------- KCS ENERGY, INC. By: --------------------------------- Name: ------------------------------ Title: ----------------------------- KCS ENERGY SERVICES, INC. By: --------------------------------- Name: ------------------------------ Title: ----------------------------- KCS MEDALLION GAS SERVICES, INC. By: --------------------------------- Name: ------------------------------ Title: ----------------------------- 4 5 LENDERS: BANK ONE, TEXAS, NATIONAL ASSOCIATION By: --------------------------------- Name: ------------------------------ Title: ----------------------------- COMERICA BANK-TEXAS By: --------------------------------- Name: ------------------------------ Title: ----------------------------- SOCIETE GENERALE, SOUTHWEST AGENCY By: --------------------------------- Name: ------------------------------ Title: ----------------------------- DEN NORSKE BANK ASA By: --------------------------------- Name: ------------------------------ Title: ----------------------------- By: --------------------------------- Name: ------------------------------ Title: ----------------------------- 6 PARIBAS By: --------------------------------- Name: ------------------------------ Title: ----------------------------- GENERAL ELECTRIC CAPITAL CORPORATION By: --------------------------------- Name: ------------------------------ Title: ----------------------------- CIBC INC., Lender and Collateral Agent By: --------------------------------- Authorized Signatory AGENT: CANADIAN IMPERIAL BANK OF COMMERCE By: --------------------------------- 7 EXHIBIT (10)xx UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE In re: ) ) Chapter 11 KCS ENERGY, INC., a Delaware corporation ) ) Case No. 00-0310 (PJW) et al. ) ) Jointly Administered Debtors. ) ) FINAL ORDER AUTHORIZING AND RESTRICTING USE OF CASH COLLATERAL AND GRANTING ADEQUATE PROTECTION(1) The Debtors having filed the Motion of Debtors for Entry of Order Authorizing and Restricting Use of Cash Collateral and Granting Adequate Protection ("the Motion") seeking entry of an order authorizing and restricting use of cash collateral and granting adequate protection of (a) the secured claims of CIBC Inc., as lender, Canadian Imperial Bank of Commerce ("CIBC"), as Agent for CIBC Inc. and the other Medallion Lenders and Resources Lenders and CIBC Inc., as Collateral Agent for itself and the other Medallion Lenders and Resources Lenders, and (b) the secured claims of the Medallion Hedging Lender (CIBC, CIBC Inc., the Medallion Lenders, the Resources Lenders and the Medallion Hedging Lender, together with their successors and permitted assigns, are hereinafter referred to as the "Lenders"); the Debtors and the Lenders having stipulated and agreed to the entry of the Interim Order; the Court having reviewed the Motion, having held a preliminary hearing on the Motion and having entered the Interim Order; objections having been raised to the Motion by certain holders of 11% - ---------------------- (1) All terms not otherwise defined herein shall have the meaning ascribed to them in the Order Authorizing and Restricting Use of Cash Collateral and Granting Adequate Protection dated as of January 19, 2000 (the "Interim Order"). 8 Senior Notes due in 2003 and such objections having been overruled by the Court; the Debtors having provided due and adequate notice of the Motion and Order on the parties entitled to such notice; the Interim Order providing that if no objection is timely filed and served, the Court may enter an order continuing the Interim Order as a final order without conducting a final hearing; and no objections to the Motion or Order having been filed by any party. IT IS HEREBY ORDERED THAT: 1. The Motion is granted in its entirety. 2. The Interim Order is continued as a final order effective as of February 7, 2000 and is incorporated herein in its entirety. Dated: February 7, 2000 /s/ PETER J. WALSH ---------------- ------------------------------ UNITED STATES BANKRUPTCY JUDGE -2- EX-10.XVIII 3 AMENDMENT TO FORBEARANCE AGREEMENT 1 EXHIBIT 10(XVIII) SECOND AMENDMENT TO FORBEARANCE AGREEMENT THIS SECOND AMENDMENT TO FORBEARANCE AGREEMENT, dated as of December 3, 1999 (herein called this "Amendment"), is entered into by and among KCS Energy, Inc., a Delaware corporation ("KCS"), KCS RESOURCES, INC., a Delaware corporation ("KRI") for itself and as successor by merger to KCS Pipeline Systems, Inc., a Delaware corporation; KCS MICHIGAN RESOURCES, INC., a Delaware corporation ("KCS Michigan"); and KCS ENERGY MARKETING, INC., a New Jersey corporation ("KCS Marketing," and together with KRI and KCS Michigan, each individually, a "Borrower" and collectively, the "Borrowers"), each lender that is a signatory hereto or becomes a party hereto as provided in Sections 9.1 or 2.25 of the Credit Agreement (hereinafter defined) (individually, together with its successors and assigns, a "Lender" and, collectively, together with their respective successors and assigns, the "Lenders"), CANADIAN IMPERIAL BANK OF COMMERCE, acting through its New York agency (in its individual capacity, "CIBC"), and as agent for the Lenders (in such capacity, together with its successors in such capacity, the "Agent"), BANK ONE, TEXAS, NATIONAL ASSOCIATION, a national banking association, as co-agent for the Lenders, and BANK OF AMERICA, N.A., formerly known as NationsBank, N.A., as co-agent for the Lenders, and CIBC Inc., a Delaware corporation as collateral agent for the Lenders (in such capacity pursuant to the terms hereof, the "Collateral Agent"). Terms used herein which are defined in the Forbearance Agreement (as hereinafter defined) are used herein with the meanings given them therein. W I T N E S S E T H: WHEREAS, KCS, the Borrowers, the Lenders, the Collateral Agent and the Agent have entered into a Forbearance Agreement dated as of July 26, 1999 but effective as of July 1, 1999, which Forbearance Agreement was amended by an Amendment to Forbearance Agreement dated as of September 30, 1999, (such agreement, as so amended, the "Forbearance Agreement") pursuant to which, on the terms provided therein, the Lenders have agreed (x) to forbear from exercising any further rights and remedies as provided in the Loan Documents or otherwise during the Forbearance Period and (y) to rescind the declaration contained in a notice of default dated July 12, 1999 that all Obligations of KCS and the Borrowers pursuant to the Loan Documents are immediately due and payable, such rescission and forbearance to be in effect until termination of the Forbearance Period and notice to the Borrowers from the Agent accelerating the date for payment of the Obligations; and WHEREAS, KCS, the Borrowers, the Lenders, the Collateral Agent and the Agent now wish to amend the Forbearance Agreement in certain respects; NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, the parties hereto agree as follows: 2 SECTION 1. Amendment to Section 1.2. Section 1.2 of the Forbearance Agreement is hereby amended by deleting the reference to the date "December 3, 1999" in the ninth line thereof and inserting in lieu thereof the date "March 2, 2000." SECTION 2. Amendment to Section 2.1. Section 2.1 of the Forbearance Agreement is hereby amended by the addition of the following definition immediately after the definition of "Interest Period": "Specified Value" means, with respect to any Oil and Gas Property, a value specified by the Agent, with the consent of the Required Lenders. SECTION 3. Amendment to Section 3.3. Section 3.3 of the Forbearance Agreement is hereby amended as follows: (i) The first sentence of clause (a) of Section 3.3 of the Forbearance Agreement is amended and restated in its entirety to read as follows: "(a) Accrued and unpaid interest on each outstanding Base Rate Loan shall be due and payable on July 31, 1999, August 31, 1999, September 30, 1999, October 31, 1999, November 30, 1999, December 31, 1999, January 31, 2000 and February 29, 2000." (ii) The first sentence of clause (b) of Section 3.3 of the Forbearance Agreement is amended and restated in its entirety to read as follows: "(b) During the Forbearance Period, payments of principal of the Tranche A Loans shall be due and payable in the amount of $1,250,000 on each of July 31, 1999, August 31, 1999, September 30, 1999, October 31, 1999, November 30, 1999, December 31, 1999, January 31, 2000 and February 29, 2000." SECTION 4. Amendment to Section 3.4. Section 3.4(a) of the Forbearance Agreement is amended by deleting the reference to the date "December 3, 1999" in the ninth line thereof and inserting in lieu thereof the date "March 2, 2000". SECTION 5. Amendment to Section 3.6. Section 3.6 of the Forbearance Agreement is hereby amended and restated in its entirety to read as follows: Section 3.6 Sales of Oil and Gas Properties. At any time during the Forbearance Period that any of the Oil and Gas Properties are sold (other than Oil and Gas Properties described in Section 7.1(iii) of this Agreement), KCS and the Borrowers shall, substantially concurrently with the sale thereof, pay principal of the Tranche A Obligations in an amount equal to the Specified Value until the principal of the Tranche A Obligations is paid in full and next to the Tranche B Obligations. In addition, upon the sale of any such Oil and Gas Properties, if the Net Cash Proceeds are greater than the Specified Value, KCS and the Borrowers shall pay an amount equal to twenty percent (20%) of the portion of the Net Cash Proceeds in excess of the Specified Value which shall be applied (i) first to the repayment of the 2 3 principal of the Tranche A Obligations until the principal amount of such Tranche A Obligations is repaid in full, and (ii) next to the repayment of Tranche B Obligations until the principal amount of such Tranche B Obligations is repaid in full. At the time of the making of each payment hereunder, the Borrowers shall specify to the Agent the Loans to which such payment is to be applied in accordance with the terms of this Agreement. In the event the Borrowers fail to so specify, the Agent may apply such payment to Loans as it may elect in its discretion and in accordance with the terms of the Credit Agreement and this Agreement. The Agent shall have the necessary authority to release, and each Lender hereby consents to the Agent releasing, Liens on the Oil and Gas Properties sold pursuant to this Section 3.6 (and Oil and Gas Properties described in Section 7.1(iii) of this Agreement) so long as the Net Cash Proceeds equal or exceed the Specified Value. SECTION 6. Amendment to Section 7.1. Clause (iii) of Section 7.1 of the Forbearance Agreement is hereby amended and restated to read as follows: "(iii) have an aggregate value for all such sales during the period beginning December 3, 1999 and continuing thereafter of less than $250,000 (excluding sales of Oil and Gas Properties, the proceeds of which are applied to the Loans in accordance with other provisions of this Agreement)." SECTION 7. Deletion of Exhibit A. Exhibit A of the Forbearance Agreement is hereby deleted in its entirety. SECTION 8. Conditions to Effectiveness. The effectiveness of this Amendment is conditioned upon receipt by the Agent of all the following documents, each in form and substance satisfactory to the Agent: (i) Multiple counterparts of this Amendment as requested by the Agent; and (ii) certificates of the secretary or an assistant secretary of KCS and each Borrower, certifying as to resolutions of the board of directors of such entity authorizing this amendment and the incumbency and signatures of the officers of such company authorized to execute this Amendment. SECTION 9. Effect. This Amendment shall be deemed to be an amendment to the Forbearance Agreement, and the Forbearance Agreement, as amended hereby, is hereby ratified, approved and confirmed in each and every respect. All references to the Forbearance Agreement in any other document, instrument, agreement or writing shall hereafter be deemed to refer to the Forbearance Agreement as amended hereby. SECTION 10. Counterparts. This Amendment may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and any party hereto may execute this Amendment by signing one or more counterparts. 3 4 SECTION 11. Successors. This Amendment shall be binding upon each of KCS and the Borrowers, the Lenders, the Collateral Agent and the Agent and their respective successors and assigns, and shall inure to the benefit of each of KCS and the Borrowers, the Lenders, the Collateral Agent and the Agent and the successors and assigns of the Lenders, the Collateral Agent and the Agent. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first written above. 4 5 KCS ENERGY, INC. By: -------------------------------- Name: ------------------------------- Title: ------------------------------ BORROWERS: KCS RESOURCES, INC. By: -------------------------------- Name: ------------------------------- Title: ------------------------------ KCS MICHIGAN RESOURCES, INC. By: -------------------------------- Name: ------------------------------- Title: ------------------------------ KCS ENERGY MARKETING, INC. By: -------------------------------- Name: ------------------------------- Title: ------------------------------ 6 CO-AGENT AND A LENDER: BANK ONE, TEXAS, NATIONAL ASSOCIATION By: -------------------------------- Name: ------------------------------- Title: ------------------------------ 7 CO-AGENT AND A LENDER: BANK OF AMERICA, N.A., formerly known as NationsBank, N.A. By: -------------------------------- Name: ------------------------------- Title: ------------------------------ 8 LENDERS: COMERICA BANK-TEXAS By: -------------------------------- Name: ------------------------------- Title: ------------------------------ 9 DEN NORSKE BANK ASA By: -------------------------------- Name: ------------------------------- Title: ------------------------------ By: -------------------------------- Name: ------------------------------- Title: ------------------------------ 10 GENERAL ELECTRIC CAPITAL CORPORATION By: -------------------------------- Name: ------------------------------- Title: ------------------------------ 11 CIBC INC., Lender and Collateral Agent By: ----------------------------------- Authorized Signatory AGENT: CANADIAN IMPERIAL BANK OF COMMERCE By: ----------------------------------- EX-10.XIX 4 BANKRUPTCY COURT ORDER - USE OF CASH 1 EXHIBIT (10) xix UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE In re: ) Case Nos. 00-310 through 00-318 ) KCS ENERGY, INC., a Delaware corporation ) Jointly Administered ) et al. ) Hon. PJW ) Debtors. ) ____________________________________________) ORDER AUTHORIZING AND RESTRICTING USE OF CASH COLLATERAL AND GRANTING ADEQUATE PROTECTION KCS Energy, Inc. ("KCS Energy"), KCS Resources, Inc. ("KCS Resources"), KCS Energy Marketing, Inc. ("KCS Marketing"), KCS Michigan Resources, Inc. ("KCS Michigan" and with KCS Energy, KCS Resources and KCS Marketing, the "Resources Borrowers"), Medallion Gas Services, Inc. ("Medallion Gas"), KCS Energy Services, Inc. ("KCS Energy Services"), KCS Medallion Resources, Inc. ("KCS Medallion," and with KCS Energy, Medallion Gas and KCS Energy Services, the "Medallion Borrowers"), Medallion California Properties, Inc. ("Medallion California"), National Enerdrill Corporation ("National") and Proliq, Inc. ("Proliq"), debtors and debtors in possession, (collectively, the "Debtors") having filed a motion ("the Motion") for entry of an order authorizing and restricting use of cash collateral and granting adequate protection of (a) the secured claims of CIBC Inc., as lender, Canadian Imperial Bank of Commerce ("CIBC"), as Agent for CIBC Inc., and the other hereinafter defined Medallion Lenders and Resources Lenders and CIBC Inc., as Collateral Agent for itself and the other hereinafter referred to collectively as the "Agent") and (b) the secured claims of the 2 hereinafter defined Medallion Hedging Lender) (CIBC, CIBC Inc, the Medallion Lenders, the Resources Lenders and the Medallion Hedging Lender, together with their successors and permitted assigns, are hereinafter referred to as the "Lenders"), the Court having reviewed the Motion, the Debtors and the Lenders having stipulated and agreed to the entry of this Order, and upon completion of a preliminary hearing as provided for under Fed. R. Bankr. Pro. 4001(b); THE PARTIES STIPULATE as follows: A. On January 5, 2000, an involuntary petition for relief under Chapter 11 of the Bankruptcy Code was filed against KCS Energy by three holders of 11% senior notes due in 2003. On January 18, 2000, KCS Energy filed a motion in response to the involuntary petition, in which it did not object to the entry of an order for relief by this Court, an order for relief was entered as to KCS Energy and the other Debtors filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code (the "Petition Date"). Since the Petition Date, each of the Debtors has remained in possession of its assets and continued to operate and manage its business as a debtor in possession. B. No statutory committee of creditors holding unsecured claims or any other statutory committee has been appointed. C. As of the Petition Date, the Resources Borrowers (including KCS Energy, as guarantor) were indebted to the Agent as agent, collateral agent and lender; Bank One, Texas, National Association, as co-agent and lender; Bank of America, National Association, successor to NationsBank, N.A., as co agent and lender; Comerica Bank - Texas; Den Norske Bank ASA and General Electric Capital Corporation (together with their successors and permitted assigns, the "Resources Lenders") in the aggregate principal amount of $57,594,200.60, plus interest -2- 3 accrued thereon through the Petition Date, plus other costs and expenses provided for in the Resources Loan Documents, as hereinafter defined (the "Resources Indebtedness"), all as evidenced by a First Amended and Restated Credit Agreement dated as of December 22, 1998 (the "Resources Credit Agreement") and related notes, security agreements and other instruments (the "Resources Loan Documents"). D. As of the Petition Date, the Medallion Borrowers were indebted to the Agent as agent, collateral agent and lender; Bank One, Texas, National Association; Comerica Bank - Texas; Societe Generale, Southwest Agency; Den Norske Bank ASA; Paribas and General Electric Capital Corporation (together with their successors and permitted assigns, the "Medallion Lenders") in the aggregate principal amount of $49,500,688.30, plus interest accrued thereon through the Petition Date, plus other costs and expenses provided for in the Medallion Loan Documents, as hereinafter defined (the "Medallion Indebtedness"), all as evidenced by a First Amended and Restated Credit Agreement dated as of December 22, 1998 (the "Medallion Credit Agreement") and related notes, security agreements and other instruments (the "Medallion Loan Documents"). E. As of the Petition Date, the Medallion Borrowers were parties to certain commodity hedging agreements (the "Medallion Hedging Agreements") with CIBC or its affiliates (the "Medallion Hedging Lender") which provide for monthly reconciliations among the parties thereto, and which require payments to be made to the Medallion Hedging Lender under certain circumstances (the "Medallion Hedging Agreement Indebtedness"). F. As security for the payment of the Resources Indebtedness, the Resources Lenders have, and the Debtors acknowledge and agree that the Resources Lenders have, valid, perfected, -3- 4 and unavoidable liens upon, and security interests in, substantially all of the real and personal property of the Resources Borrowers as more particularly described in, and evidenced by, the Resources Loan Documents. The collateral described in the Resources Loan Documents is hereinafter collectively referred to as the "Pre-Petition Resources Collateral." G. As security for the payment of the Medallion Indebtedness, the Medallion Lenders have, and the Debtors acknowledge and agree that the Medallion Lenders have, valid, perfected, and unavoidable liens upon, and security interests in, substantially all of the real and personal property of the Medallion Borrowers and Medallion California, as more particularly described in, and evidenced by, the Medallion Loan Documents. The collateral described in the Medallion Loan Documents is hereinafter collectively referred to as the "Pre-Petition Medallion Collateral" and with the Pre-Petition Resources Collateral, the "Pre-Petition Collateral." H. As security for payment of the Medallion Hedging Agreement Indebtedness, the Medallion Hedging Lender has, and the Debtors acknowledge and agree that the Medallion Hedging Lender has, valid, perfected, and unavoidable liens upon, and security interests in, certain of the Medallion Borrowers' real and personal property (the "Pre-Petition Medallion Hedging Collateral"). I. The Resources Borrowers and the Medallion Borrowers are in default under the Resources Loan Documents and the Medallion Loan Documents, respectively. J. The Debtors require the use of the Lenders' Pre-Petition Collateral, the Pre-Petition Medallion Hedging Collateral and the cash and cash equivalent proceeds of or generated from the Pre-Petition Collateral and the Pre-Petition Medallion Hedging Collateral ("the Cash Collateral") for the maintenance and preservation of the Debtors' property, for the operation of -4- 5 their businesses in the ordinary course and for payment of the expenses attendant thereto. The Lenders are willing to consent to the limited use by the Debtors of the Cash Collateral, but only upon the terms and conditions of this Order, including the requirements of the budgetary process set forth herein. The Lenders have also made a good faith request for adequate protection of their interests in the Pre-Petition Collateral and the Pre-Petition Medallion Hedging Collateral. K. Prior to the Petition Date, the Debtors and the Lenders were parties to certain forbearance agreements, pursuant to which the parties agreed that 50% of certain payments made under those agreements would be paid to the Resources Lenders and the remaining 50% would be paid to the Medallion Lenders. The Debtors and Lenders have likewise agreed that the payment of Excess Cash Collateral (as hereinafter defined) under this Order will be divided 50/50 between the Resources Lenders and the Medallion Lenders. L. The terms and conditions of the Debtor's use of funds and Cash Collateral are fair and reasonable under the circumstances and were negotiated in good faith at arm's length. M. There is good cause, and, in the case of each Debtor, it is in the best interests of the estate and its creditors, that the Debtors be authorized to use the Pre-Petition Collateral, the Pre-Petition Medallion Hedging Collateral and the Cash Collateral pursuant to the terms and conditions of this Order. N. Notice of the Motion and of the hearing thereon has been given to creditors holding the 20 largest claims against the Debtors, the United States Trustee and the Lenders by [fax/overnight mail]. -5- 6 O. The Court has jurisdiction over the Chapter 11 cases of the Debtors and the Debtors' Motion pursuant to 28 U.S.C. Sections 1.57 and 1334. This Order is entered in a core proceeding within the meaning of 28 U.S.C. Section 157(b)(2)(M). IT IS HEREBY ORDERED as follows: 1. The Debtors shall not use any of their funds, including Cash Collateral, except as authorized and permitted herein or by subsequent order of the Court. 2. The Debtors have acknowledged and agreed that as of the Petition Date (a) the Resources Lenders have valid, perfected and unavoidable liens in the Pre-Petition Resources Collateral, (b) the Medallion Lenders have valid, perfected and unavoidable liens in the Pre-Petition Medallion Collateral, (c) the Medallion Hedging Lender has valid, perfected and unavoidable liens in the Pre-Petition Medallion Hedging Collateral, (d) the Resources Lenders have an allowed secured claim within the meaning of Section 506 of the Bankruptcy Code in an amount that is not less than $57,594,200.60, plus interest, fees and costs, (e) the Medallion Lenders have an allowed secured claim within the meaning of Section 506 of the Bankruptcy Code in an amount that is not less than $49,500,688.30, plus interest, fees and costs, and (f) the Medallion Hedging Lender has an allowed secured claim within the meaning of Section 506 of the Bankruptcy Code in an amount that was not less than $5,577,231 as of January 14, 2000, plus interest, fees and costs. 3. The Debtors will furnish to the Lenders not later than the twentieth (20th) day of the month preceding each calendar month (or if such day is not a business day, on the next succeeding business day) a budget ("a Budget") for the Debtors, signed by an appropriate officer, employee or agent of the Debtors, in form and substance satisfactory to the Lenders, of all -6- 7 projected cash receipts and cash disbursements of the Debtors for the next three months, together with any request for use of Cash Collateral for the next calendar month. With respect to the period from January 18, 2000 through February 29, 2000 ("the Initial Budget Period"), the Debtors have furnished an initial Budget, a copy of which is attached hereto as Exhibit 1. The initial Budget has been approved by the Lenders. 4. Within five (5) business days after receipt of each Budget, the Lenders shall notify the Debtors as to whether they will, in the exercise of their sole discretion, authorize expenditure by the Debtors of any or all of the amounts proposed to be expended by the Debtors pursuant to such Budget for the next calendar month. The Lenders may approve or may disapprove any items of proposed expenditures set forth in a Budget, and the aggregate of items approved by the Lenders in a Budget for a calendar month shall constitute an "Approved Budget." Any Budget or item of proposed expenditure not approved or disapproved by the Lenders in such five (5) business day period shall be deemed approved. The aggregate expenditures by the Debtors for any calendar month and for the Initial Budget Period shall not in any event exceed the aggregate amount budgeted therefor in such Approved Budget or the initial Budget Period's Approved Budget by more than a factor of five percent (5%) of the budgeted amount. Additionally, the expenditures of the Debtors for any calendar month shall not, for each line item, exceed the amount budgeted for that line item in that Approved Budget by more than a factor of ten percent (10%) of the budgeted amount. As to any calendar month and the Initial Budget Period, the Debtors shall not be authorized to expend any funds for an item or expenditure not included in the Approved Budget for such calendar month or Initial Budget Period; provided, however, (a) any item or expenditure -7- 8 contained and authorized in any prior Approved Budget may be paid in a subsequent budget period if (i) a contractual commitment was actually incurred by the Debtors during the period covered by such prior Approved Budget with respect to said item or expenditure, and (ii) said item or expenditure has been rebudgeted and listed in the budget for the period during which the Debtors proposes to pay said item or expenditure, and (b) the Lenders, in their sole discretion, may approve in writing any such additional expenditure not included in the Approved Budget for such budget period. 5. The Debtors, in their sole discretion, may seek permission from the Court to use funds and Cash Collateral on terms and conditions other than those set forth in this Order at any time which is five (5) business days after actual receipt of a written notice to the Agent and the Lenders of their intent to do so, provided that the terms and conditions of this Order shall govern the use of any funds or Cash Collateral by the Debtors until the entry of any new order by the Court with respect thereto. 6. The Debtors shall submit to the Court and to the Lenders, on or before the twentieth (20th) day of each calendar month, a detailed report, in a form satisfactory to the Lenders, of the source, use and application of funds expended by the Debtors during the previous calendar month pursuant to that Approved Budget for the previous budget period, and a reconciliation, including a line by line item comparison of budgeted to actual expenditures setting forth in reasonable detail an explanation of any differences between budgeted and actual amounts, of funds received or used and expended by the Debtors during said calendar month. 7. In order (a) adequately to protect the Lenders for the use of Cash Collateral by the Debtors under this Order, and (b) to provide the Lenders with adequate protection in respect to -8- 9 any decrease in the value of their interest in the Pre-Petition Collateral and the Pre-Petition Medallion Hedging Collateral resulting from the stay imposed under Section 362 of the Bankruptcy Code, or the use of such property by the Debtors, (i) the Resources Lenders shall have, and hereby are granted to the extent not heretofore granted, a lien against and security interest in all presently owned and hereafter-acquired property, assets, and rights, of any kind or nature, of the Resources Borrowers, wherever located (which, in the case of presently owned property, is already encumbered by the Pre-Petition Liens of the Resources Lenders) to secure the Resources Indebtedness and any diminution in value of the Pre-Petition Resources Collateral, (ii) the Medallion Lenders and the Medallion Hedging Lender shall have, and hereby are granted to the extent not heretofore granted, a lien against and security interest in all presently owned and hereafter-acquired property, assets, and rights, of any kind or nature, of the Medallion Borrowers, wherever located (which, in the case of presently owned property, is already encumbered by the Pre-Petition Liens of the Medallion Lenders and the Medallion Hedging Lenders) to secure the Medallion Indebtedness and the Medallion Hedging Indebtedness and any diminution in value of the Pre-Petition Medallion Collateral and the Pre-Petition Medallion Hedging Collateral and (iii) the Resources Lenders, the Medallion Lenders and the Medallion Hedging Lender shall have and hereby are granted to the extent not heretofore granted, a lien against and security interest in all presently owned and hereafter-acquired property, assets and rights, of any kind or nature, of Medallion California, National and Proliq, wherever located to be shared pro rata between the Resources Lenders, the Medallion Lenders and the Medallion Hedging Lender based upon amount of the Resources Indebtedness, the Medallion Indebtedness, and the Medallion Hedging Indebtedness as of the Petition Date. Such liens and security interests shall be a first and prior -9- 10 lien on and security interest in the aforesaid property, assets, and rights of each of the Resources Borrowers and the Medallion Borrowers and Medallion California, National and Proliq, subject only to valid and enforceable liens and security interests existing on said property, assets, or rights of the Resources Borrowers and the Medallion Borrowers and Medallion California, National and Proliq at the time of the commencement of these bankruptcy cases or, in the case of property, assets or rights acquired Post-Petition, at the time the Debtors' estates acquire the property, assets or rights; provided, however, that the proceeds of or generated from the sale, use, lease, or operation of any property subject to such a preexisting lien or security interest shall first secure the return to the Resources Lenders, the Medallion Lenders and the Medallion Hedging Lender, as applicable, of any amounts of Cash Collateral which have been used by the Debtors in connection with such property and would be recoverable from such property or the proceeds thereof under section 506(c) of the Bankruptcy Code. As additional adequate protection for the Medallion Hedging Lender, and notwithstanding the foregoing, the Debtors are authorized and directed to make any payment to the Medallion Hedging Lender that is required under the Medallion Hedging Agreements provided that such payments are contained in an Approved Budget and are not triggered by any bankruptcy terminations or the like. The Debtors may continue, without further order of this Court, but subject to the prior consent of the Medallion Lenders or the Resources Lenders, as applicable, to enter into additional hedging transactions and to grant counterparties first liens to secure such transactions. 8. (a) As further adequate protection for the Resource Lenders' interests in the Pre-Petition Resources Collateral, and consistent with Section 552 of the Bankruptcy Code, proceeds, products, rents and profits of the Pre-Petition Resources Collateral, and all property -10- 11 and assets of the Debtors which are of the same type or nature as the Pre-Petition Resources Collateral, coming into existence or acquired by the Debtors on or after the commencement of this Bankruptcy case (including, without limitation, all accounts receivable and inventory generated after the commencement of these Bankruptcy cases) are hereby deemed to be Pre-Petition Resources Collateral, subject to the pre-petition mortgages, security interests and collateral documents of the Resources Lenders. (b) As further adequate protection for the Medallion Lenders' interests in the Pre-Petition Medallion Collateral, and consistent with Section 552 of the Bankruptcy Code, proceeds, products, rents and profits of the Pre-Petition Medallion Collateral, and all property and assets of the Debtors which are of the same type or nature as the Pre-Petition Medallion Collateral, coming into existence or acquired by the Debtors on or after the commencement of this Bankruptcy case (including, without limitation, all accounts receivable and inventory generated after the commencement of these Bankruptcy cases) are hereby deemed to be Pre-Petition Medallion Collateral, subject to the pre-petition mortgages, security interests and collateral documents of the Medallion Lenders. (c) As further adequate protection for the Medallion Hedging Lender's interest in the Pre-Petition Medallion Hedging Collateral, and consistent with Section 552 of the Bankruptcy Code, proceeds, products, rents and profits of the Pre-Petition Medallion Hedging Collateral, and all property and assets of the Debtors which are of the same type or nature as the Pre-Petition Medallion Hedging Collateral, coming into existence or acquired by the Debtors on or after the commencement of this Bankruptcy case (including, without limitation, all accounts receivable and inventory generated after the commencement of these Bankruptcy cases) are hereby deemed -11- 12 to be Pre-Petition Medallion Hedging Collateral, subject to the pre-petition mortgages, security interests and collateral documents of the Medallion Hedging Lender. 9. The full amount of any adequate protection claim of any Lender as determined by the Bankruptcy Court shall be granted and given a secured and priority status under Section 364(c)(l), (2) and (3) of the Bankruptcy Code. No costs or expenses of administration which have been or may be incurred in these proceedings, or in any other proceeding related hereto, and no priority claims are or will be prior to or on a parity with the adequate protection claims of the Lenders subject only to (x) all accrued and unpaid professional fees and expenses of the Debtors and an unsecured creditors' committee from time to time allowed as an administrative expense by the Court in these Chapter 11 cases and (y) expenses pursuant to 28 U.S.C. Section 1930, which expenses, when included in an Approved Budget, or, if disputed, when allowed by the Court, shall be deemed to be included in the then extant Approved Budget, and may be paid as set forth in the order allowing such expenses. Except as approved in the Budget no cost or expense of administration of any kind whatsoever shall be imposed upon the Lenders, the Pre-Petition Collateral, the Pre-Petition Medallion Hedging Collateral, or the Cash Collateral. 10. The liens and security interests granted to the Lenders pursuant to paragraphs 7, 8 and 9 hereof shall be valid and perfected, as of the date of this Order, without the need for the execution or filing of any further document or instrument otherwise required to be executed or filed under applicable nonbankruptcy law. Notwithstanding that no documents need be executed or filed to create or perfect the liens and security interests granted hereunder, the Debtors, and their officers and agents on their behalf, are hereby directed to execute and deliver such further documents as the Lenders may request to evidence and give notice of the liens granted hereunder. -12- 13 11. To enable the Debtors to reduce interest accrual and expense, and as further adequate protection, on or before the tenth (10th) day of each calendar month, and more frequently if and as the Debtors and the Lenders may agree, the Debtors shall make payments to the Lenders in an amount equal to the excess of the beginning cash balances plus the receipts for the immediately preceding month over the sum of (i) the actual disbursements (excluding any disbursements to be made to the Lenders pursuant to this Order) during such month pursuant to an Approved Budget plus (ii) appropriate reserves agreed to monthly by the Debtors and the Lenders, including any reserve authorized by the Medallion and Resources Lenders for the payment of items in subsequent budget periods pursuant to paragraph 3 hereof ("Excess Cash Collateral"). Such Excess Cash Collateral payments shall be distributed to the Resources Lenders and the Medallion Lenders as follows: First to unpaid interest and professional fees and other costs of the Resources Lenders and the Medallion Lenders, and as to the remaining Excess Cash Collateral, fifty percent (50%) of the Excess Cash Collateral shall be paid to and applied by the Resources Lenders against the Resources Indebtedness in accordance with the provisions of the Resources Loan Documents and applicable law and fifty percent (50%) of the Excess Cash Collateral shall be paid to and applied by the Medallion Lenders against the Medallion Indebtedness in accordance with the provisions of the Medallion Loan Documents and applicable law; provided, however, that no more than $2.5 million of Excess Cash Collateral per month shall be paid to the Resources Lenders and the Medallion Lenders to amortize the principal amounts of the Resources Indebtedness and the Medallion Indebtedness absent the Debtors' consent. All amounts of Excess Cash Collateral to be distributed to the Resources Lenders and to the Medallion Lenders shall be included in the Budgets and Approved Budgets. As long as -13- 14 (a) an Event of Default (as defined in paragraph 20 hereof) has not occurred, (b) the Debtors make timely payments of interest, professional fees and other costs of the Resources Lenders and the Medallion Lenders hereunder and (c) the Debtors make timely principal payments of at least $2.5 million per month from Excess Cash Collateral to the Resources Lenders and the Medallion Lenders to amortize the principal amounts of the Resources Indebtedness and the Medallion Indebtedness, interest on the Resources Indebtedness and the Medallion Indebtedness shall accrue according to the terms and conditions of the Forbearance Agreements between the Debtors and the Resources Lenders and the Medallion Lenders, respectively, dated as of July 26, 1999 and effective as of July 1, 1999, as amended. 12. All applications as provided for in paragraph 11 hereof are provisional only and are subject to further order of this Court. Except with respect to the Debtors as set forth in paragraph 2 above, nothing contained in this Order shall be deemed to constitute a determination of (i) the validity or priority of the pre-petition liens and security interests claimed by the Lenders in the Pre-Petition Collateral, the Pre-Petition Medallion Hedging Collateral or the Cash Collateral, or (ii) the propriety of the application of any monies received by the Resources Lenders and the Medallion Lenders pursuant to paragraph 11 above. 13. The Debtors shall sell or dispose of their oil and gas inventory and products only in the ordinary course of business consistent with an Approved Budget upon terms and conditions usual and customary in the industry. 14. The Debtors are hereby prohibited from making any borrowings or incurring any debt under Sections 363 or 364 of the Bankruptcy Code (other than trade credit and other -14- 15 obligations included in an Approved Budget), except with the consent of the Lenders or further order of the Court. 15. The terms and provisions of this Order shall be binding upon the Debtors and their successors and assigns, including, but not limited to, any trustee appointed in this case, in any superseding case or in any case related hereto, and shall survive to the benefit of the Lenders and the Debtors. 16. The Agent and any successor agents of the Resources Lenders, the Medallion Lenders or the Medallion Hedging Lender and their respective agents shall be given access to the books, records and documents of the Debtors and their affiliates during normal business hours and without interferring with the Debtors' operations, including, without limitation, the following: check registers (general disbursements, other disbursements), general ledgers, journal entries, payroll journals, cash activity reports, aged accounts receivable, aged accounts payable, bank reconciliations, canceled checks, bank debit and credit advices, bank statements, leases, and contracts. 17. The Debtors shall provide to the Lenders the following reports and information: (i) monthly operating statements, (ii) all documentation and reports required under the Resources Loan Documents and the Medallion Loan Documents, and (iii) such other information that the Lenders may from time to time request. 18. The automatic stay imposed by Section 362 of the Bankruptcy Code shall be, and hereby is, lifted and vacated to the extent necessary, if any, to authorize the payments hereunder and to implement and effectuate the terms and conditions of this Order. The automatic stay, in -15- 16 all other respects, shall remain in effect during the pendency of this case including the stay against enforcement by the Lenders of their claims, pending further Order of this Court. 19. The authority of the Debtors to use Cash Collateral shall terminate on the earlier of (i) the date of entry by the Court of an order with respect to the Final Hearing on the Debtors' request to use cash collateral (pursuant to paragraph 5 hereof), or (ii) an Event of Default. 20. Each of the following events shall constitute an Event of Default: (a) Entry of an order converting the Debtors' Chapter 11 cases to cases under Chapter 7 of the Bankruptcy Code which order is not stayed within ten (10) days of the entry thereof; (b) Entry of an order dismissing the Chapter 11 cases of the Debtors which order is not stayed within ten (10) days of the entry thereof; and (c) Failure of any Debtor to comply with any material terms, conditions, or covenants contained in this Order or the Resources Loan Documents or Medallion Loan Documents (other than various events and conditions and Defaults set forth in (i) the Annual Report of KCS Energy, Inc. on Form 10-K filed with the SEC on March 31, 1999, and in Forms 10-Q, filed as of the periods ending March 30, 1999, June 30, 1999 and September 30, 1999, (ii) certain notices of default from the Agent to the Debtors dated April 7, 1999 and July 12, 1999) within five (5) business days of actual delivery of a written notice of default, and (iii) the filing of an involuntary bankruptcy petition against KCS Energy on January 5, 2000). -16- 17 21. Upon the occurrence of an Event of Default, the Debtors shall immediately cease using Cash Collateral, and shall segregate and hold such Cash Collateral, subject to further order of the Court. 22. The Debtors are authorized and directed to perform all acts and execute and comply with the terms of such other documents, instruments and agreements necessary to effectuate the terms and conditions of this Order. 23. Nothing contained herein or in the Budgets shall prejudice the Lenders, or the Debtors with respect to any contested matter involving relief from the automatic stay, appointment of a trustee or examiner, the assumption or rejection or executory contracts, dismissal of the Chapter 11 cases, or with respect to any other matter whatsoever. This Order shall in no way limit the rights of (a) the Lenders to seek other or additional adequate protection, to seek relief from the automatic stay, or to take any action in these bankruptcy cases, or (b) the Debtors to request the use of funds or Cash Collateral on other terms. This Order is without prejudice to the Debtors' rights to show that the Lenders are adequately protected by an equity cushion, without the need for any monthly payments, replacement liens, or the priority administrative claims set forth herein, provided that the terms and conditions of any other Order(s) granting adequate protection to the Lenders different than set forth herein shall only apply prospectively from the date of said additional Order(s). 24. Nothing in this Order shall terminate, diminish, or otherwise affect in any way the rights or interests of any person with respect to any property of the Debtors to the extent such rights or interests in such property are (a) created pursuant to any applicable law, (b) accorded by such law a priority equal or senior to that of any right or interest in such Property asserted by the -17- 18 Lenders or their affiliates, and (c) not subject to avoidance pursuant to Section 545 or any other provision of the Bankruptcy Code. 25. The Debtors shall serve a copy of the Motion and this Order by the conclusion of the next business day after its entry upon any committee of creditors appointed in these cases, the twenty largest creditors included on the lists filed pursuant to Fed. R. Bankr. Pro. 1007(d), any party that has requested notice in the cases and the United States Trustee by first class mail, postage pre-paid. Any objection to the continued effectiveness of this Order shall be in writing and shall be filed with the Court and served by overnight mail service on the Debtors, care of Fredrick Dwyer, KCS Energy, Inc., Suite 1200, 5555 San Felipe, Houston, Texas, 77056 and their counsel, Martin J. Bienenstock, Weil, Gotshal & Manges, 767 Fifth Avenue, New York, New York 10153 and on the Agent, care of Robert N. Greer, Canadian Imperial Bank of Commerce, 425 Lexington Ave., New York, New York 10017 and on its counsel, J. Robert Stoll, Mayer, Brown & Platt, 190 S. LaSalle Street, Chicago, IL 60603 and the United States Trustee within 15 days of the mailing of a copy of this Order. If an objection is timely filed and served, a final hearing will be held on February 7, 2000 at 3:30 p.m., as the same may be continued or adjourned by the Court, in Room 2, [address] (the "Final Hearing"). If no objection is timely filed and served, the Court may enter an order continuing this Order as a final order without conducting the Final Hearing. Dated: January 19, 2000 PETER J. WALSH ------------------ ------------------------------ UNITED STATES BANKRUPTCY JUDGE AGREED AND STIPULATED: -18- 19 DEBTORS IN POSSESSION: KCS ENERGY, INC. By: /s/ FREDERICK DWYER -------------------- KCS RESOURCES, INC. By: /s/ FREDERICK DWYER -------------------- KCS ENERGY MARKETING, INC. By: /s/ FREDERICK DWYER -------------------- KCS MICHIGAN RESOURCES, INC. By: /s/ FREDERICK DWYER -------------------- MEDALLION GAS SERVICES, INC. By: /s/ FREDERICK DWYER -------------------- KCS ENERGY SERVICES, INC. By: /s/ FREDERICK DWYER -------------------- KCS MEDALLION RESOURCES, INC. By: /s/ FREDERICK DWYER -------------------- MEDALLION CALIFORNIA PROPERTIES, INC. By: /s/ FREDERICK DWYER -------------------- -19- 20 NATIONAL ENERDRILL CORPORATION By: /s/ FREDERICK DWYER -------------------- PROLIQ, INC. By: /s/ FREDERICK DWYER -------------------- LENDER AND COLLATERAL AGENT: CIBC, INC. By: /s/ ROBERT N. GREER -------------------- AGENT: Robert N. Greer CANADIAN IMPERIAL BANK OF COMMERCE /s/ ROBERT N. GREER ASSISTANT GENERAL MANAGER By: Robert N. Greer -20- EX-10.XX 5 BANKRUPTCY COURT ORDER - USE OF CASH 1 EXHIBIT (10)xx UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE In re: ) ) Chapter 11 KCS ENERGY, INC., a Delaware corporation ) ) Case No. 00-0310 (PJW) et al. ) ) Jointly Administered Debtors. ) ) FINAL ORDER AUTHORIZING AND RESTRICTING USE OF CASH COLLATERAL AND GRANTING ADEQUATE PROTECTION(1) The Debtors having filed the Motion of Debtors for Entry of Order Authorizing and Restricting Use of Cash Collateral and Granting Adequate Protection ("the Motion") seeking entry of an order authorizing and restricting use of cash collateral and granting adequate protection of (a) the secured claims of CIBC Inc., as lender, Canadian Imperial Bank of Commerce ("CIBC"), as Agent for CIBC Inc. and the other Medallion Lenders and Resources Lenders and CIBC Inc., as Collateral Agent for itself and the other Medallion Lenders and Resources Lenders, and (b) the secured claims of the Medallion Hedging Lender (CIBC, CIBC Inc., the Medallion Lenders, the Resources Lenders and the Medallion Hedging Lender, together with their successors and permitted assigns, are hereinafter referred to as the "Lenders"); the Debtors and the Lenders having stipulated and agreed to the entry of the Interim Order; the Court having reviewed the Motion, having held a preliminary hearing on the Motion and having entered the Interim Order; objections having been raised to the Motion by certain holders of 11% - ---------------------- (1) All terms not otherwise defined herein shall have the meaning ascribed to them in the Order Authorizing and Restricting Use of Cash Collateral and Granting Adequate Protection dated as of January 19, 2000 (the "Interim Order"). 2 Senior Notes due in 2003 and such objections having been overruled by the Court; the Debtors having provided due and adequate notice of the Motion and Order on the parties entitled to such notice; the Interim Order providing that if no objection is timely filed and served, the Court may enter an order continuing the Interim Order as a final order without conducting a final hearing; and no objections to the Motion or Order having been filed by any party. IT IS HEREBY ORDERED THAT: 1. The Motion is granted in its entirety. 2. The Interim Order is continued as a final order effective as of February 7, 2000 and is incorporated herein in its entirety. Dated: February 7, 2000 /s/ PETER J. WALSH ---------------- ------------------------------ UNITED STATES BANKRUPTCY JUDGE -2- EX-21 6 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 KCS ENERGY, INC. LIST OF WHOLLY-OWNED SUBSIDIARIES KCS Resources, Inc. National Enerdrill Corporation Proliq, Inc. KCS Energy Marketing, Inc. KCS Michigan Resources, Inc. KCS Energy Services, Inc. KCS Medallion Resources, Inc. Medallion California Properties, Inc. Medallion Gas Services, Inc. EX-23.I 7 CONSENT OF ARTHUR ANDERSEN LLP 1 EXHIBIT 23(I) CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports dated March 29, 2000 included in KCS Energy, Inc.'s Form 10-K, for the year ended December 31, 1999, into previously filed Registration Statement File Nos. 33-25707, 33-28899, 33-45923 and 33-63982. ARTHUR ANDERSEN LLP Houston, Texas March 29, 2000 EX-23.II 8 CONSENT OF NETHERLAND, SEWELL AND ASSOCIATES, INC. 1 EXHIBIT 23(II) CONSENT OF INDEPENDENT PETROLEUM ENGINEER We hereby consent to the filing of the Annual Report on Form 10-K, for the year ended December 31, 1999, for KCS Energy, Inc. in accordance with the requirements of the Securities Act of 1933, with the inclusion in such Annual Report of our reserve report incorporated therein, and references to our name in the form and context in which they appear. NETHERLAND, SEWELL & ASSOCIATES, INC. Houston, Texas March 28, 2000 EX-27 9 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 10,584 0 21,941 0 0 40,096 963,777 731,496 284,932 432,865 274,724 0 0 314 (150,157) 284,932 131,997 136,491 0 92,848 0 0 40,005 4,340 0 4,340 0 0 0 4,340 .15 .15
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