10-Q/A 1 h93180e10-qa.txt KCS ENERGY, INC. - AMENDMENT TO 03/31/2001 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/A X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE ----- SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE ----- SECURITIES EXCHANGE ACT OF 1934 For the transition period from to -------------------- -------------------- Commission file number 1-11698 KCS ENERGY, INC. ---------------- (Exact name of registrant as specified in its charter) Delaware 22-2889587 ------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5555 San Felipe Road, Houston, TX 77056 ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (713) 877-8006 ------------------------------------------------------------------------------- (Registrant's telephone number, including area code) NOT APPLICABLE ------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. (1) X Yes (2) No ------- -------- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, $0.01 par value: 29,408,810 shares outstanding as of May 1, 2001. This amendment on Form 10-Q/A is being filed to restate KCS Energy, Inc.'s March 31, 2001 unaudited consolidated financial statements related to accounting for the adoption of Statement of Financial Accounting Standard No. 133, Accounting for Derivative Instruments and Hedging Activities. See Note 10 to our unaudited consolidated financial statements for further discussion of the matter. KCS ENERGY, INC. AND SUBSIDIARIES CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
Three Months Ended March 31, (Amounts in thousands except ----------------------- per share data) Unaudited 2001 2000 -------- -------- Oil and gas revenue $ 56,673 $ 36,243 Other revenue, net 16,036 440 -------- -------- Total revenue 72,709 36,683 -------- -------- Operating costs and expenses Lease operating expenses 9,223 6,522 Production taxes 3,064 1,209 General and administrative expenses 2,753 2,094 Depreciation, depletion and amortization 13,572 12,622 -------- -------- Total operating costs and expenses 28,612 22,447 -------- -------- Operating income 44,097 14,236 -------- -------- Interest and other income, net 389 -- Interest expense (contractual interest for the three months ended March 31, 2000 was $9,217) (7,325) (6,785) -------- -------- Income before reorganization items and income taxes 37,161 7,451 -------- -------- Reorganization items Write-off of deferred debt issuance costs related to senior notes and senior subordinated notes -- (6,132) Financial restructuring costs (2,639) (2,065) Interest income 227 99 -------- -------- Total reorganization items (2,412) (8,098) -------- -------- Income (loss) before income taxes 34,749 (647) Federal and state income (taxes) benefit 6,231 -- -------- -------- Net income (loss) 40,980 (647) Preferred stock dividends (163) -- -------- -------- Income (loss) available to common stockholders $ 40,817 $ (647) ======== ======== Earnings (loss) per share of common stock: Basic 1.38 $ (0.02) Diluted 1.21 (0.02) ======== ======== Average shares outstanding for computation of earnings per share Basic 29,549 29,267 Diluted 33,957 29,267 ======== ========
The accompanying notes to condensed consolidated financial statements are an integral part of these statements. 2 KCS ENERGY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands March 31, December 31, except for per share data) Unaudited 2001 2000 ------------ ------------ Assets Current assets Cash and cash equivalents $ 44,665 $ 39,994 Trade accounts receivable 32,142 45,954 Other current assets 6,267 5,697 ------------ ------------ Current assets 83,074 91,645 ------------ ------------ Oil and gas properties, full cost method, net 246,404 245,169 Other property, plant and equipment, net 9,918 9,731 ------------ ------------ Property, plant and equipment, net 256,322 254,900 ------------ ------------ Deferred charges and other assets 828 790 Deferred taxes 15,546 -- ------------ ------------ $ 355,770 $ 347,335 ============ ============ Liabilities and stockholders' equity Current liabilities Accounts payable $ 17,449 $ 22,974 Accrued interest on public debt 4,122 -- Other accrued liabilities 21,267 19,441 Short-term debt -- 76,705 ------------ ------------ Current liabilities 42,838 119,120 Deferred credits and other liabilities Deferred revenue 162,432 -- Other 1,061 1,359 ------------ ------------ Deferred credits and other liabilities 163,493 1,359 ------------ ------------ Liabilities subject to compromise Senior notes -- 150,000 Senior subordinate notes -- 125,000 Accrued interest on public debt -- 58,198 Pre-petition accounts payable -- 1,978 ------------ ------------ Liabilities subject to compromise -- 335,176 ------------ ------------ Long-term debt Senior notes 79,800 -- Senior subordinated notes 125,000 -- ------------ ------------ Long-term debt 204,800 -- ------------ ------------ Convertible preferred stock 30,163 -- ------------ ------------ Common Stockholders' (deficit) equity Common stock, par value $0.01 per share authorized 50,000,000 shares, issued 31,575,906 and 31,433,006, respectively 320 314 Additional paid-in capital 143,853 145,098 Retained (deficit) earnings (208,174) (248,991) Accumulated other comprehensive income (16,782) -- Less treasury stock, 2,167,096 shares, at cost (4,741) (4,741) ------------ ------------ Total common stockholders' (deficit) equity (85,524) (108,320) ------------ ------------ Total liabilities and stockholders' equity $ 355,770 $ 347,335 ============ ============
The accompanying notes to condensed consolidated financial statements are an integral part of these statements. 3 KCS ENERGY, INC. AND SUBSIDIARIES CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
Three Months Ended March 31, ------------------------- (Dollars in thousands) Unaudited 2001 2000 --------------------------------------------------------- --------- --------- Cash flows from operating activities Net income (loss) $ 40,980 $ (647) Adjustments to reconcile net income (loss ) to cash provided by operating activities: Depreciation, depletion and amortization 13,572 12,622 Amortization of deferred revenue (12,935) -- Non-cash losses on derivative instruments 17,803 -- Tax benefit on non-cash losses on derivative instruments (6,231) -- Non-cash gains on derivative instruments (7,694) -- Realized losses on derivative instruments (8,104) -- Other non-cash charges and credits, net 134 539 Reorganization items 2,412 8,098 --------- --------- 39,937 20,612 Proceeds from Enron Production Payment, net 175,367 -- Realized losses on derivative instruments terminated in connection with Plan of reorganization (27,995) -- Change in trade accounts receivable 13,812 (1,358) Change in accounts payable and accrued liabilities (5,676) 6,063 Change in accrued interest payable (54,132) -- Other, net (902) 1,346 --------- --------- Net cash provided by operating activities before reorganization items 140,411 26,663 Reorganization items (excluding non-cash write-off of deferred debt issuance costs in 2000) (2,412) (1,966) --------- --------- Net cash provided by operating activities 137,999 24,697 Cash flows from investing activities: Investment in oil and gas properties (14,422) (12,563) Other capital expenditures, net (572) (140) --------- --------- Net cash used in investing activities (14,994) (12,703) --------- --------- Cash flows used in financing activities: Repayments of debt (146,905) (7,500) Issuance of convertible preferred stock, net 28,512 -- Deferred financing costs & other 59 (1,306) --------- --------- Net cash used in financing activities (118,334) (8,806) --------- --------- Net increase in cash and cash equivalents 4,671 3,188 Cash and cash equivalents at beginning of period 39,994 10,584 --------- --------- Cash and cash equivalents at end of period $ 44,665 $ 13,772 ========= =========
The accompanying notes to the condensed consolidated financial statements are an integral part of these statements. 4 KCS ENERGY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. The condensed interim financial statements included herein have been prepared by KCS Energy, Inc. (KCS or Company), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and reflect all adjustments which are of a normal recurring nature and which, in the opinion of management, are necessary for a fair statement of the results for interim periods. Certain information and footnote disclosures have been condensed or omitted pursuant to such rules and regulations. Although KCS believes that the disclosures are adequate to make the information presented not misleading, it is suggested that these condensed financial statements be read in conjunction with the financial statements and the notes thereto included in the Company's latest annual report to stockholders. Certain previously reported amounts have been reclassified to conform with current year presentations. 2. Reorganization On January 30, 2001, the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court") confirmed the KCS Energy, Inc. plan of reorganization ("the Plan") under Chapter 11 of Title 11 of the United States Bankruptcy Code after the Company's creditors and stockholders voted to approve the Plan. On February 20, 2001, the Company completed the necessary steps for the Plan to go effective and emerged from bankruptcy having reduced its debt from a peak of $425.0 million in early 1999 to $215.0 million and having cash on hand in excess of $30 million. Under the terms of the Plan the Company: 1) secured a new exit facility in the form of a volumetric production payment ("Enron Production Payment") whereby it sold approximately 43.1 Bcfe (38.3 Bcf of gas and 797,000 barrels of oil) of proved reserves to be delivered in accordance with an agreed schedule over a five year period for net proceeds of approximately $176 million and repaid all amounts outstanding under its existing bank credit facilities, 2) sold $30.0 million of convertible preferred stock, 3) paid to the holders of the Company's 11% Senior Notes, on a pro rata basis, cash equal to the sum of (a) $60.0 million plus the amount of past due accrued and unpaid interest of $15.1 million on $60.0 million of the Senior Notes as of the effective date, compounded semi-annually at 11% per annum and (b) the amount of past due accrued and unpaid interest of $21.5 million on $90.0 million of the Senior Notes as of January 15, 2001, compounded semi-annually at 11% per annum, 4) paid to the holders of the Company's 8 7/8% Senior Subordinated Notes, cash in the amount of past due accrued and unpaid interest of $23.7 million as of January 15, 2001, compounded semi-annually at 8 7/8% per annum, 5) renewed the remaining outstanding $90.0 million principal amount of Senior Notes and $125.0 million principal amount of Senior Subordinated Notes under amended indentures governing the Senior Notes and Senior Subordinated Notes, but without a change in interest rates, and 6) paid pre-petition trade creditors in full. Shareholders retained 100% of their common stock, subject to dilution from conversion of the new convertible preferred stock. The convertible preferred stock offering consisted of 30,000 shares of Series A Convertible Preferred Stock ("Preferred Stock") at a price of $1,000 per share convertible at any time into 10,000,000 shares of KCS Energy, Inc. at a conversion price of $3.00 per share. The Preferred Stock pays a 5% per annum dividend payable quarterly in cash or, during the first two years following issuance, the Company has the option to pay the dividend in shares of KCS common stock. 3. Deferred Revenue Pursuant to the Enron Production Payment discussed in Note 2, the Company recorded the net proceeds of approximately $176 million as deferred revenue on the balance sheet. Deliveries under the Enron Production Payment are recorded as oil and gas sales revenue with a corresponding reduction of deferred revenue at the effective average discounted price per Mcf of natural gas and per barrel of oil received at closing. For the months of February and March 2001, the Company delivered 3,242 MMcfe and recorded $12.9 million of oil and gas revenue in connection with the Enron Production Payment. 5 4. Debt Reduction In addition to the debt reduction pursuant to the Plan as outlined in Note 2 above, the Company redeemed an additional $10.2 million of the Senior Notes in March 2001. As of March 31, 2001, the Company's long-term debt consisted of $79.8 million of 11% Senior Notes due January 15, 2003 and $125 million of 8 7/8% Senior Subordinated Notes due January 15, 2006. 5. Accounting and Reporting Requirements During Bankruptcy During 2000 and until the Plan was effective, the Company conducted its business and reported its results of operations and financial position as a debtor-in-possession pursuant to AICPA Statement of Position 90-7 "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"). In connection therewith, the Company reported all liabilities which it deemed subject to compromise at amounts reasonably expected to be paid. 6. Derivative Instruments and Other Comprehensive Income Oil and gas prices are historically volatile. The Company manages the risk associated with the price fluctuations affecting it, by entering in to derivative contracts effectively fixing the price of certain sales volumes for certain time periods. The Company has entered and may continue to enter into derivative contracts to manage this price risk. Effective January 1, 2001, the Company adopted SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as amended, establishes accounting and disclosure standards requiring that all derivative instruments be recorded in the balance sheet as an asset or liability, measured at fair value. SFAS No. 133 requires that changes in a derivative instrument's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. At January 1, 2001, the Company's derivative instruments included swaps and collars to manage price risk associated with the production of natural gas. Upon adoption of SFAS No. 133, the Company recorded a liability of $43.8 million representing the fair market value of its derivative instruments at adoption, a related deferred tax asset of $15.3 million and an after-tax cumulative effect of change in accounting principle of $28.5 million to accumulated other comprehensive income. The Company elected not to designate its existing derivative instruments as hedges which, subsequent to adoption of SFAS No. 133, would require that changes in a derivative instrument's fair value be recognized currently in earnings. However, SFAS No. 133 requires the Company's derivative instruments that had been designated as cash flow hedges under accounting principles generally accepted prior to the initial application of SFAS No. 133 continue to be accounted for as cash flow hedges with a transition adjustment reported as a cumulative-effect-type adjustment to accumulated other comprehensive income as mentioned above. In February 2001, the Company terminated certain derivative instruments in connection with its emergence from bankruptcy for a cash payment of $28.0 million, which was offset against the accrued liability recorded in connection with the adoption of SFAS No. 133. During the quarter ended March 31, 2001, as a result of market price decreases, the ultimate cost to settle derivative instruments in place at January 1, 2001 was reduced by $7.7 million. This non-cash gain was recorded in other revenue during the quarter. The actual cost to settle the remaining derivatives was $8.1 million. Under the provisions of SFAS No. 133, if a derivative instrument accounted for as a cash flow hedge is sold, terminated or exercised, the net gain or loss shall remain in accumulated other comprehensive income and be reclassified into earnings in the same period or periods during which the hedged anticipated transaction affects earnings. Accordingly, accumulated other comprehensive income at March 31, 2001 includes $16.9 million (after tax) of the loss realized upon termination of derivative instruments that will be reclassified into earnings over the original term of the derivative instruments, which extended through August 2005. During the three months ended March 31, 2001, the Company reclassified into earnings as oil and gas revenues $17.8 million related to the expiration of certain instruments and the amortization of the loss realized on natural gas produced during the quarter. The related tax benefit amounted to $6.2 million. At March 31, 2001 the Company had entered into contracts for derivative instruments, designated as cash flow hedges, covering 600,000 MMBtu with a floor price of $4.50 per MMBtu and a ceiling price of $7.90 per MMBtu which resulted in recording other current assets of $0.1 million and $0.1 million of accumulated other comprehensive income representing the effective portion of unrealized hedge gains under the SFAS No. 133 associated with these derivative instruments. In addition, the company had entered into derivative contracts covering 1,000,000 MMBtu with a floor price of $4.50 per MMBtu and ceilings ranging from $6.23 to $7.26 per MMBtu that were not designated as hedges. 7. New York Stock Exchange Listing In October 1999, the Company reported that it did not meet the current New York Stock Exchange ("NYSE") continued listing standards. These standards require a minimum share price of $1.00, a minimum market capitalization of $50 million and minimum book equity of $50 million. The Company had been trading pursuant to an approved business plan to return to compliance within a prescribed time frame. The NYSE has determined to forbear from initiating any formal removal action in view of the fact that the Company's stock price is now above $1.00 and the Company has successfully met one half of the conjunction test requiring that the Company return to $50 million each in stockholders' equity and market capitalization, as defined, and has made substantial progress on meeting the other component of the test. The Company's market capitalization at May 14, 2001 was approximately $242 million, excluding $30 million of convertible preferred stock. 6 8. Supplemental cash flow information The Company considers all highly liquid debt instruments with a maturity of three months or less when purchased to be cash equivalents. Interest payments were $61.5 million and $2.3 million for the three months ended March 31, 2001 and March 31, 2000, respectively. Interest payments in the current year period were made primarily in connection with the Plan (see Note 2). No income tax payments were made during the three months ended March 31, 2001 and the three months ended March 31, 2000. 9. Earnings Per Share The following is a reconciliation of the numerators and the denominators of the basic and diluted earnings per share computations for income before the cumulative effect of accounting change for the three months ended March 31, 2001:
2001 ---------------------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount ------------- ------------- ------------- Net income $ 40,980 Less: preferred stock dividends (163) ------------- ------------- ------------- Income available to common stockholders 40,817 29,549* $ 1.38 Effect of dilutive securities: Preferred stock conversion 4,333 Preferred stock dividends 163 27 Stock options 48 ------------- ------------- ------------- Income available to common stockholders assuming dilution $ 40,980 33,957 1.21 ============= ============= =============
* Includes the effect of 487,512 shares of restricted stock granted on February 20, 2001 but not formally issued as of March 31, 2001. For the three months ended March 31, 2000, basic earnings per share were computed by dividing net loss by the average number of common shares outstanding during the period. There were no reconciling items between basic and diluted earnings per share for that period. 7 Note 10 - Restatement The Company has been advised by its outside auditors that their earlier advice regarding the Company's treatment of the adoption of Statement of Financial Accounting Standard No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133") was incorrect. Upon adoption of SFAS No. 133 on January 1, 2001, the Company recorded a liability of $43.8 million representing the fair market value of its derivative instruments. All of the Company's derivative instruments that existed at January 1, 2001 were scheduled to expire during the first quarter of 2001 or were terminated in connection with the Company's emergence from Chapter 11 in February 2001. The Company elected not to designate its existing derivatives as hedges and reported the $43.8 million ($28.5 million after-tax) currently through earnings, as a cumulative effect of an accounting change. The outside auditors now believe that the Company's initial adoption of SFAS No. 133 was incorrectly reported through earnings as a traditional cumulative-effect type component of net income at January 1, 2001. Rather, the outside auditors have advised the Company that their current view is that SFAS No. 133 requires the Company's derivative instruments that had been designated as cash flow hedges under accounting principles generally accepted prior to the initial application of SFAS No. 133 continue to be accounted for as cash flow hedges with a transition adjustment reported as a cumulative-effect-type adjustment to accumulated other comprehensive income, a component of stockholders' equity, and not recognized currently through earnings. Under the provisions of SFAS No. 133, if a derivative instrument accounted for as a cash flow hedge is sold, terminated or exercised, the net gain or loss shall remain in accumulated other comprehensive income and be reclassified into earnings in the same period or periods during which the hedged anticipated transaction affects earnings. Accordingly, even though all of the Company's derivatives that existed at January 1, 2001 either expired or were terminated during the first quarter of 2001, accumulated other comprehensive income at March 31, 2001 includes $16.9 million (after tax) of the loss realized upon termination of derivative instruments. This component of accumulated other comprehensive income will be reclassified into earnings over the original term of the derivative instruments, which extended through August 2005. See Note 6. The restatement has no effect on cash flow, total assets, total liabilities and total stockholders' equity (deficit) but does have a non-cash impact on earnings as outlined below:
--------- ------------ --------- Restated As Reported Change --------- ------------ --------- Condensed Statement of Consolidated Operations for the Three Months Ended March 31, 2001 ------------------------------------------------------ Oil and gas revenues $ 56,673 $ 74,476 $(17,803) Federal and state income tax benefit 6,231 -- 6,231 Cumulative effect of accounting change, net of tax -- (28,451) 28,451 Net income 40,980 24,101 16,879 Basic earnings per share of common stock 1.38 0.81 0.57 Diluted earnings per share of common stock 1.21 0.71 0.50 Condensed Consolidated Balance Sheet at March 31, 2001 ------------------------------------------------------ Current assets 83,074 83,074 -- Current liabilities 42,838 42,838 -- Retained (deficit) earnings (208,174) (225,053) 16,879 Accumulated other comprehensive income (16,782) 97 (16,879) Total common stockholders' (deficit) equity (85,524) (85,524) -- Condensed Statement of Consolidated Cash Flows for the Three Months Ended March 31, 2001 ------------------------------------------------------ Net cash provided by operating activities 137,999 137,999 -- Net increase in cash and cash equivalents 4,671 4,671 --
KCS ENERGY, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General On January 30, 2001, the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court") confirmed the KCS Energy, Inc. Plan of Reorganization ("the Plan") under Chapter 11 of Title 11 of the United States Bankruptcy Code after the Company's creditors and stockholders voted to approve the Plan. On February 20, 2001, the Company completed the necessary steps for the Plan to go effective and emerged from bankruptcy having reduced its debt from a peak of $425.0 million in early 1999 to $215.0 million and having cash on hand in excess of $30 million. See Note 2 to Condensed Consolidated Financial Statements for the key terms of the Plan. Prices for oil and natural gas are subject to wide fluctuations in response to relatively minor changes in the supply of and demand for oil and natural gas, market uncertainty and a variety of other factors that are beyond the Company's control. These factors include political conditions in the Middle East and elsewhere, domestic and foreign supply of oil and natural gas, the level of consumer demand, weather conditions and overall economic conditions. Results of Operations Income before reorganization items and income taxes for the three months ended March 31, 2001 was $37.2 million compared to $7.5 million for the same period in 2000. This increase was attributable to higher natural gas prices, increased working interest production and higher other revenue, partially offset by lower production from the Company's volumetric production payment ("VPP") program and higher operating expenses. Reorganization items for the three months ended March 31, 2001 were $2.4 million compared to $8.1 million for the same period last year. Net income for the three months ended March 31, 2001 was $41.0 million compared to a net loss of $0.6 million for the same period a year ago. 8
Three Months Ended March 31, --------------------- 2001 (a) 2000 -------- ------- Production: Gas (MMcf) 9,548 10,733 Oil (Mbbl) 331 333 Liquids (Mbbl) 83 35 Summary (Mmcfe): Working interest 10,869 9,452 VPP 1,161 3,496 ------- ------- Total 12,030 12,948 Average Price: Gas (per Mcf) $ 4.97 $ 2.53 Oil (per bbl) 23.54 25.84 Liquids (per bbl) 17.83 15.17 Total (per Mcfe) 4.71 2.80 Revenue: Gas $47,409 $27,108 Oil 7,786 8,604 Liquids 1,478 531 ------- ------- Total $56,673 $36,243 ======= =======
(a) Includes 3,242 MMcfe dedicated to the Enron Production Payment. See Notes 2 and 3 to Condensed Consolidated Financial Statements. Gas revenue For the three months ended March 31, 2001, gas revenue increased $20.3 million to $47.4 million due to a 96% increase in average realized gas prices and a 15% increase in working interest production, partially offset by a 67% decrease in production from the VPP program. The decrease in VPP production in 2001 was primarily attributable to the expiration of certain VPPs and limited investment in this program since 1999. Oil and liquids revenue Oil and liquids revenue was $9.3 million for the three months ended March 31, 2001 compared to $9.1 million for the same period in 2000 as increased liquids production more than offset the effect of lower average realized oil prices. Other revenue For the three months ended March 31, 2001, other revenue was $16.0 million. Of this, $7.0 million was from the sale of emission reduction credits, $7.7 million was from non-cash gains on derivative instruments that were not designated as oil and gas hedges when the Company adopted SFAS No. 133 (see Note 6 to Condensed Consolidated Financial Statements), and the remainder was primarily attributable to marketing and transportation revenue. 9 Lease operating expenses Lease operating expenses were $9.2 million for the three months ended March 31, 2001 compared to $6.5 million for the same period last year. The 2001 period reflects start-up costs associated with the Hartland gas processing plant in Michigan, higher advalorem taxes, higher working interest production and an increased level of workovers of oil and gas wells in order to maximize production during this period of high oil and gas prices. Production taxes Production taxes, which are generally based on a percentage of revenue (excluding VPP revenue) were $3.1 million during the first quarter of 2001 compared to $1.2 million for the same period a year ago due to higher non-VPP oil and gas revenue. General and administrative expenses For the three-month period ended March 31, 2001, general and administrative expenses increased $0.7 million to $2.8 million compared to the same period in 2000 largely due to the employee retention bonus program that was put in place in October 2000 in order for the Company to retain its employees during the reorganization process. The 2001 period also reflects salary increases and expense associated with restricted stock grants to employees. Depreciation, depletion and amortization The Company provides for depreciation, depletion and amortization ("DD&A") on its oil and gas properties using the future gross revenue method based on recoverable reserves valued at current prices. For the three months ended March 31, 2001, DD&A increased $0.9 million to $13.6 million due to higher oil and gas revenue partially offset by a lower DD&A rate. Interest expense Interest expense for the three months ended March 31, 2001 was $7.3 million compared to reported interest expense of $6.8 million for the same period a year ago. The 2000 period excluded $2.8 million of interest expense associated with the Company's senior subordinated notes in accordance with SOP 90-7. See Note 5 to Condensed Consolidated Financial Statements. Reorganization items For the three months ended March 31, 2001, the Company recorded $2.4 million of reorganization items, primarily for legal and financial advisory services in connection with the Chapter 11 proceedings. For the three months ended March 31, 2000, reorganization items were $8.1 million, $6.1 million of which was a non-cash write-off of deferred debt issuance costs associated with the Company's Senior Notes and Senior Subordinated Notes in accordance with SOP 90-7 and the remainder was primarily for legal and financial advisory services. Income tax benefit In connection with the adoption of SFAS No. 133, the Company recorded a liability of $43.8 million representing the fair market value of its derivative instruments upon adoption and an after-tax loss from the cumulative effect of a change in accounting principle to other comprehensive income of $28.5 million. For the three months ended March 31, 2001, the Company reclassified $17.8 million of the liability as a non-cash reduction to oil and gas revenues and recorded a related tax benefit of $6.2 million. Liquidity and Capital Resources The Company's liquidity and financial condition have improved significantly in the past year. Year 2000 earnings were a record $41.5 million and cash flow from operating activities (before reorganization items) was $137.3 million. In addition, the Company funded a $69.1 million capital investment program while significantly reducing debt and increasing cash balances. Following confirmation of the Company's Plan of reorganization on January 30, 2001, KCS emerged from Chapter 11 on February 20, 2001 having reduced its outstanding debt balances from a peak of $425 million in early 1999 to $215 million and reduced it further to $204.8 million by March 31, 2001. For the first quarter of 2001, the Company reported record quarterly earnings of $24.1 million, 10 increased its cash balances to $44.7 million as of March 31, 2001 and reduced its outstanding debt an additional $10.2 million beyond that required by the plan of reorganization. Cash flow from operating activities Net income adjusted for non-cash charges and reorganization items for the three months ended March 31, 2001 was $39.9 million compared to $20.6 million last year primarily due to the effect of higher realized natural gas prices, partially offset by amortization of deferred revenue associated with the Enron Production Payment. Net cash provided by operating activities before reorganization items for the first three months of 2001 was $140.4 million compared to $26.7 million for the same period a year ago. In addition to the items noted above, the current year period also reflects the net proceeds of $175.6 million from the Enron Production Payment, the payment of $61.5 million of interest and the $28 million cost of terminating certain derivative instruments in connection with the emergence from Chapter 11. The decrease in trade accounts receivable is mainly the result of the Enron Production Payment. The decrease in accounts payable and accrued liabilities is due to the payment of reorganization costs and to the timing of cash receipts and cash disbursements. Investing activities Capital expenditures for the three months ended March 31, 2001 were $15.0 million of which $12.7 million was for development activities, $1.7 million for lease acquisitions, seismic surveys and exploratory drilling, and $0.6 million for other assets. Capital expenditures for 2001 are currently budgeted at $80.0 million. The Company believes that its cash flow from operations should be sufficient to meet its short-term operating requirements and that it has sufficient resources available to support its business and long-term growth strategies. Forward-looking Statements The information discussed in this Form 10-Q includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements, other than statements of historical facts, included herein regarding planned capital expenditures, increases in oil and gas production, the number of anticipated wells to be drilled after the date hereof, the Company's financial position, business strategy and other plans and objectives for future operations, are forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, they do involve certain assumptions, risks and uncertainties, and the Company can give no assurance that such expectations will prove to be correct. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the 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. All forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by such factors. 11 MARKET RISK DISCLOSURE The Company has entered and may continue to enter into swaps, futures contracts and options to manage the price risk associated with the production of natural gas and oil. These derivatives have the effect of fixing for specified periods the prices the Company will receive for the volumes to which the derivative relates. As a result, while these derivatives are structured to reduce the Company's exposure to decreases in the price associated with the underlying commodity, they also limit the benefit the Company might otherwise have received from any price increases associated with the commodity. In accordance with Item 305 of Regulation S-K, the Company has elected the tabular method to disclose market-risk related to derivative financial instruments as well as other financial instruments. The following table sets forth the Company's derivative position at March 31, 2001.
Collars (prices per MMBtu) Swaps ---------------------------------- ----------------------------- Floors $4.50 @ $5.04 per MMBtu Ceilings from $6.23 to $7.90 ----------------------------- ---------------------------------- Unrealized Unrealized Volume Gain(Loss) Volume Gain(Loss) MMBtu ($000's) MMBtu ($000's) 2001 2nd Qtr. 90,000 (11) 1,000,000 -- 3rd Qtr. 90,000 (8) 600,000 -- 4th Qtr. -- -- -- -- ----------------------------- ---------------------------------- Total 180,000 (19) 1,600,000 -- 2002 -- -- -- -- 2003 -- -- -- -- 2004 -- -- -- -- 2005 -- -- -- --
The Company accounts for oil and natural gas futures contracts and commodity price swaps in accordance with SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities". Prior to the implementation of the Plan on February 20, 2001, the Company used fixed and variable rate long-term debt to finance the Company's capital spending program. See Note 2 to Condensed Consolidated Financial Statements. These debt arrangements exposed the Company to market risk related to changes in interest rates. During the first quarter of 2001, the Company's weighted average contractual interest rate on its weighed average fixed rate debt of $246 million was 9.9%. The weighted average interest rate on its weighed average variable rate debt of $42.1 million was 9.3%. 12 KCS ENERGY, INC. - FORM 10-Q PART II - OTHER INFORMATION Item 1. Legal Proceedings. Reference is made to Item 3, Legal Proceedings, in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. Item 2. Changes in Securities and Use of Proceeds. On February 20, 2001, KCS sold 30,000 shares of Series A Convertible Preferred Stock, $.01 par value ("Preferred Stock"), at a purchase price of $1,000 per share. The Preferred Stock was sold through a private placement by Sanders Morris Harris Inc., the placement agent (the "Placement Agent"). The Preferred Stock was offered and sold to accredited investors pursuant to Regulation D under the Securities Act of 1933. The Placement Agent received (a) a fee equal to 4.5% of the gross proceeds to the Company and (b) warrants to purchase 400,000 shares of KCS common stock at a price of $4.00 per share. The Preferred Stock is convertible into common stock of the Company at $3.00 per share of common stock. Each share of the Preferred Stock is convertible into the number of shares of common stock of the Company as is determined by dividing $1,000 (the stated value) by the conversion price ($3.00 per share subject to Anti-Dilution Adjustments). Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits: None. (b) Reports on Form 8-K. On February 28, 2001, the registrant reported, under Item 3 of Form 8-K, that on February 20, 2001 it had completed the necessary steps for its plan of reorganization under Chapter 11 of Title 11 of the United States Bankruptcy Code to go effective and emerged from bankruptcy. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. KCS ENERGY, INC. December 28, 2001 /s/ FREDERICK DWYER ---------------------------------- Frederick Dwyer Vice President, Controller and Secretary