-----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, BmvLBNpIimQbo96Td6us8woaIi34R4TGmD0h+iGOqV2U7/adUsx/AOJYN6bNpQ4v fFYuBOZXhPM6oP3WSFRa3g== 0000950129-02-005714.txt : 20021118 0000950129-02-005714.hdr.sgml : 20021118 20021114183152 ACCESSION NUMBER: 0000950129-02-005714 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KCS ENERGY INC CENTRAL INDEX KEY: 0000832820 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 222889587 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-13781 FILM NUMBER: 02827476 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-Q 1 h01191e10vq.txt KCS ENERGY, INC.- PERIOD ENDED SEPTEMBER 30, 2002 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE - ----- SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2002 ------------------ 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: 36,497,393 shares outstanding as of October 31, 2002. 1 KCS ENERGY, INC. AND SUBSIDIARIES CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
Three Months Ended Nine Months Ended September 30, September 30, (Amounts in thousands except -------------------------- --------------------------- per share data) Unaudited 2002 2001 2002 2001 - ------------------------------------------------------------ ----------- ------------ ------------ ------------ Oil and gas revenue $ 30,391 $ 38,747 $ 90,556 $ 143,981 Other revenue, net 81 719 (983) 17,232 - --------------------------------------------------------------------------------------------------------------------------- Total revenue 30,472 39,466 89,573 161,213 - --------------------------------------------------------------------------------------------------------------------------- Operating costs and expenses Lease operating expenses 5,930 6,806 19,339 23,759 Production taxes 1,458 1,563 4,413 6,629 General and administrative expenses 2,363 2,207 6,253 7,121 Stock compensation 156 224 666 521 Depreciation, depletion and amortization 12,899 15,332 40,910 42,811 - --------------------------------------------------------------------------------------------------------------------------- Total operating costs and expenses 22,806 26,132 71,581 80,841 - --------------------------------------------------------------------------------------------------------------------------- Operating income 7,666 13,334 17,992 80,372 - --------------------------------------------------------------------------------------------------------------------------- Interest and other income, net 42 192 121 1,210 Interest expense (4,655) (4,880) (14,321) (17,076) - --------------------------------------------------------------------------------------------------------------------------- Income before reorganization items and income taxes 3,053 8,646 3,792 64,506 - --------------------------------------------------------------------------------------------------------------------------- Reorganization items Financial restructuring costs - (356) - (3,175) Interest income - - - 227 - --------------------------------------------------------------------------------------------------------------------------- Total reorganization items - (356) - (2,948) - --------------------------------------------------------------------------------------------------------------------------- Income before income taxes 3,053 8,290 3,792 61,558 Federal and state income (taxes) benefit 596 709 (14,133) 7,649 - --------------------------------------------------------------------------------------------------------------------------- Net income (loss) 3,649 8,999 # (10,341) # 69,207 Dividends and accretion of issuance costs on preferred stock (214) (248) (839) (741) - --------------------------------------------------------------------------------------------------------------------------- Income (loss) available to common stockholders $ 3,435 $ 8,751 $ (11,180) $ 68,466 =========================================================================================================================== Earnings (loss) per share of common stock: Basic $ 0.09 $ 0.27 $ (0.31) $ 2.23 Diluted $ 0.09 $ 0.22 $ (0.31) $ 1.81 =========================================================================================================================== Average shares outstanding for computation of earnings per share Basic 36,247 32,636 35,634 30,711 Diluted 40,881 40,188 35,634 38,248 ===========================================================================================================================
The accompanying notes to condensed consolidated financial statements are an integral part of these statements. 2 KCS ENERGY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share data) Unaudited September 30, 2002 December 31, 2001 - -------------------------------------------------------------------------------------------------------- ------------------- Assets Current assets Cash and cash equivalents $ 10,396 $ 22,927 Trade accounts receivable, less allowance for doubtful accounts of $4,821and $4,190, respectively 19,594 20,342 Prepaid drilling and other current assets 4,526 6,718 - ----------------------------------------------------------------------------------------------------------------------------- Current assets 34,516 49,987 - ----------------------------------------------------------------------------------------------------------------------------- Oil and gas properties, full cost method, less accumulated DD&A-2002 $876,998; 2001 $837,096 236,075 268,517 Other property, plant and equipment, at cost less accumulated depreciation-2002 $10,034; 2001 $9,026 9,074 10,160 - ----------------------------------------------------------------------------------------------------------------------------- Property, plant and equipment, net 245,149 278,677 - ----------------------------------------------------------------------------------------------------------------------------- Deferred charges and other assets Deferred taxes - 15,920 Other 1,818 2,142 - ----------------------------------------------------------------------------------------------------------------------------- Deferred charges and other assets 1,818 18,062 - ----------------------------------------------------------------------------------------------------------------------------- $ 281,483 $ 346,726 ============================================================================================================================= Liabilities and stockholders' (deficit) equity Current liabilities Accounts payable $ 20,722 $ 26,041 Accrued interest 3,830 9,089 Other accrued liabilities 15,038 17,910 Senior notes 61,274 - Bank credit facility 8,800 - - ----------------------------------------------------------------------------------------------------------------------------- Current liabilities 109,664 53,040 - ----------------------------------------------------------------------------------------------------------------------------- Deferred credits and other liabilities Deferred revenue 76,627 111,880 Other 1,392 877 - ----------------------------------------------------------------------------------------------------------------------------- Deferred credits and other liabilities 78,019 112,757 - ----------------------------------------------------------------------------------------------------------------------------- Long-term debt Senior notes 79,800 Senior subordinated notes 125,000 125,000 - ----------------------------------------------------------------------------------------------------------------------------- Long-term debt 125,000 204,800 - ----------------------------------------------------------------------------------------------------------------------------- Commitments and contingencies - ----------------------------------------------------------------------------------------------------------------------------- Preferred stock, authorized 5,000,000; issued 30,000 shares redeemable convertible preferred stock, par value $0.01 per share liquidation preference $1,000 per share - outstanding 13,300 and 16,365 shares, respectively 12,849 15,589 - ----------------------------------------------------------------------------------------------------------------------------- Common stockholders' (deficit) equity Common stock, par value $0.01 per share authorized 75,000,000 shares issued 38,536,036 and 36,844,495 shares respectively 385 368 Additional paid-in capital 167,357 162,540 Retained (deficit) earnings (196,353) (185,173) Unearned compensation (1,188) (1,292) Accumulated other comprehensive income (9,509) (11,162) Less treasury stock, 2,167,096 shares, at cost (4,741) (4,741) - ----------------------------------------------------------------------------------------------------------------------------- Total common stockholders' (deficit) equity (44,049) (39,460) - ----------------------------------------------------------------------------------------------------------------------------- $ 281,483 $ 346,726 =============================================================================================================================
The accompanying notes to condensed consolidated financial statements are an integral part of these statements. 3 KCS ENERGY, INC. AND SUBSIDIARIES CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
Nine Months Ended September 30, ------------------------------- (Dollars in thousands) Unaudited 2002 2001 - ------------------------------------------------------------------ ------------- ------------- Cash flows from operating activities: Net income (loss) $ (10,341) $ 69,207 Adjustments to reconcile net income to cash provided by operating activities: Depreciation, depletion and amortization 40,910 42,811 Amortization of deferred revenue (35,138) (47,152) Deferred income taxes 14,133 (7,649) Non-cash derivative losses, net 3,491 6,059 Other non-cash charges and credits, net 781 133 Reorganization items - 2,948 Proceeds from Production Payment sold, net - 175,399 Realized losses on derivative instruments terminated in connection with Plan of reorganization - (27,995) Change in trade accounts receivable 2,248 22,218 Change in accounts payable and accrued liabilities (8,564) 230 Change in accrued interest payable (5,260) (54,076) Other, net 1,821 (4,991) - --------------------------------------------------------------------------------------------------------- Net cash provided by operating activities before reorganization items 4,081 177,142 Reorganization items - (2,948) - --------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 4,081 174,194 - --------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Investment in oil and gas properties (36,377) (71,724) Proceeds from sales of oil and gas properties 29,413 2,128 Other capital expenditures 78 (1,199) - --------------------------------------------------------------------------------------------------------- Net cash used in investing activities (6,886) (70,795) - --------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Proceeds from credit facility, net 8,800 - Repayment of senior notes (18,526) (146,905) Issuance of convertible preferred stock, net - 28,413 Other - 256 - --------------------------------------------------------------------------------------------------------- Net cash used in financing activities (9,726) (118,236) - --------------------------------------------------------------------------------------------------------- Decrease in cash and cash equivalents (12,531) (14,837) Cash and cash equivalents at beginning of period 22,927 39,994 - --------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 10,396 $ 25,157 =========================================================================================================
The accompanying notes to condensed consolidated financial statements are an integral part of these statements. 4 KCS ENERGY, INC. AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED STOCKHOLDERS' (DEFICIT) EQUITY (Dollars in thousands)
Accumulated Additional Retained Other Common Paid-in (Deficit) Comprehensive Unearned Treasury Comprehensive Unaudited Stock Capital Earnings Income Compensation Stock Income (Deficit) Equity - ---------------------------------------- ----------- ------------------------ ------------ ---------- ----------- ---------------- Balance at December 31, 2001 $ 368 $ 162,540 $ (185,173) $ (11,162) $ (1,292) $ (4,741) $ (39,460) Comprehensive income Net loss - - (10,341) - - - $(10,341) (10,341) Other comprehensive income, net of tax 1,653 1,653 1,653 ----------- Comprehensive income $ (8,688) =========== Conversion of redeemable preferred stock 10 2,920 - - - - 2,930 Stock issuances - option and benefit plans 5 1,250 - - (562) - 693 Stock compensation expense - - - - 666 - 666 Dividends and accretion of issuance costs on preferred stock 2 647 (839) - - - (190) -------- --------- --------- ----------- ---------- ---------- ----------- Balance at September 30, 2002 385 $ 167,357 $ (196,353) $ (9,509) (1,188) $ (4,741) $ (44,049) ======== ========== ======================== ========== ========== ===========
The accompanying notes are an integral part of these financial statements. 5 KCS ENERGY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. The condensed interim financial statements included herein have been prepared by KCS Energy, Inc. (KCS or Company), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and reflect all adjustments which are of a normal recurring nature and which, in the opinion of management, are necessary for a fair statement of the results for interim periods. Certain information and footnote disclosures have been condensed or omitted pursuant to such rules and regulations. Although KCS believes that the disclosures are adequate to make the information presented not misleading, it is suggested that these condensed financial statements be read in conjunction with the financial statements and the notes thereto included in the Company's latest annual report to stockholders. Certain previously reported amounts have been reclassified to conform with current year presentations. 2. Reorganization On January 30, 2001, the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court") confirmed the KCS Energy, Inc. plan of reorganization (the "Plan") under Chapter 11 of Title 11 of the United States Bankruptcy Code after the Company's creditors and stockholders voted to approve the Plan. On February 20, 2001, the Company completed the necessary steps for the Plan to go effective and emerged from bankruptcy having reduced its debt from a peak of $425.0 million in early 1999 to $215.0 million and having cash on hand in excess of $30 million. Under the terms of the Plan the Company: 1) sold a 43.1 Bcfe (38.3 Bcf of gas and 797,000 barrels of oil) production payment ("Production Payment") to be delivered in accordance with an agreed schedule over a five year period for net proceeds of approximately $175 million and repaid all amounts outstanding under its existing bank credit facilities, 2) sold $30.0 million of convertible preferred stock, 3) paid to the holders of the Company's 11% Senior Notes, on a pro rata basis, cash equal to the sum of (a) $60.0 million plus the amount of past due accrued and unpaid interest of $15.1 million on $60.0 million of the Senior Notes as of the effective date, compounded semi-annually at 11% per annum and (b) the amount of past due accrued and unpaid interest of $21.5 million on $90.0 million of the Senior Notes as of January 15, 2001, compounded semi-annually at 11% per annum, 4) paid to the holders of the Company's 8 7/8% Senior Subordinated Notes, cash in the amount of past due accrued and unpaid interest of $23.7 million as of January 15, 2001, compounded semi-annually at 8 7/8% per annum, 5) renewed the remaining outstanding $90.0 million principal amount of Senior Notes and $125.0 million principal amount of Senior Subordinated Notes under amended indentures but without a change in interest rates, and 6) paid pre-petition trade creditors in full. Shareholders retained 100% of their common stock, subject to dilution from conversion of the new convertible preferred stock. 3. Redeemable Convertible Preferred Stock As a result of conversions of the redeemable convertible preferred stock issued in connection with the Plan of Reorganization, 4.6 million shares of common stock were issued in 2001 and an additional 1.0 million shares were issued during the nine months ended September 30, 2002. 4. Deferred Revenue Pursuant to the Production Payment discussed in Note 2, the Company recorded the net proceeds of approximately $175 million as deferred revenue on the balance sheet. In accordance with SFAS No. 19 "Financial Accounting and Reporting by Oil and Gas Producing Companies," deliveries under this Production Payment are recorded as non-cash oil and gas revenue with a corresponding reduction of deferred revenue at the average price per Mcf of natural gas and per barrel of oil received when the Production Payment was sold. The Company also reflects the production volumes and depletion expense 6 as deliveries are made. However, the associated oil and gas reserves are excluded from the Company's reserve data. For the nine months ended September 30, 2002, the Company delivered 8,715 MMcfe and recorded $35.1 million of oil and gas revenue. Since the sale of the Production Payment in February 2001 through September 30, 2002, the Company has delivered 24.4 Bcfe, or 57% of the total quantity to be delivered. 5. Debt
September 30 December 31 (dollars in thousands) 2002 2001 - -------------------------------------- ------------ ------------- 11% Senior Notes $ 61,274 $ 79,800 8 7/8% Senior Subordinated Notes 125,000 125,000 Bank Credit Facility 8,800 - ----------- ------------ 195,074 204,800 Classified as current liabilities (70,074) - ----------- ------------ Long-term debt $ 125,000 $ 204,800 =========== ============
Senior Notes On January 25, 1996, KCS Energy, Inc. issued $150.0 million principal amount of 11% Senior Notes due 2003 (the "Senior Notes"). The Senior Notes mature on January 15, 2003 and bear interest at the rate of 11% per annum. The Senior Notes are redeemable at the option of the Company, in whole or in part, at par. The subsidiaries of KCS have guaranteed the Senior Notes on a senior unsecured basis. The guarantees are full and unconditional and joint and several. The parent company's independent assets are minor and it has no independent operations. On February 20, 2001, in connection with the Plan, the indenture governing the Senior Notes was amended. The Senior Notes, as amended, contain certain restrictive covenants which, among other things, limit the Company's ability to incur additional indebtedness, require the repurchase of the Senior Notes upon a change of control, limit the Company's ability to purchase and redeem the Subordinated Notes and the Company's common stock, prohibit the Company from purchasing or redeeming the Series A Convertible Preferred Stock and prohibit the Company from paying any cash dividends on capital stock. The Senior Notes also contain cross-default provisions which would result in the acceleration of payments if the Company defaults on its other debt instruments. The Company redeemed $70.2 million of Senior Notes in 2001 and an additional $18.5 million of Senior Notes during the nine months ended September 30, 2002. In order to meet its obligations under the Senior Notes due in January 2003, the Company has curtailed its planned capital expenditures for 2002 to be between $44 million and $47 million, of which $38.3 million was invested in the first nine months of 2002, sold certain non-core oil and gas properties for net proceeds of $30.9 million during the nine months ended September 30, 2002 and has entered into a non-binding letter of intent with an institutional lender for a $60 million senior secured credit facility (the "$60 Million Credit Facility"). In connection therewith, the Company will be required to amend or replace its existing Credit Agreement (the "Revolving Credit Facility") described below under "Bank Credit Facility." The Company anticipates that the amended or replacement Revolving Credit Facility and the $60 Million Credit Facility will close by year-end, although each proposed facility is subject to lender due diligence and negotiation of definitive agreements and will require the other facility be closed as well. While the Company believes that it will be successful in obtaining an amended or replacement Revolving Credit Facility as well as a new $60 Million Credit Facility, there can be no assurance that this will occur. If the financing is obtained, the Company anticipates that it will meet the Senior Note maturity obligations. However, in the event that the Company is unable to meet its Senior Note obligations when 7 due and the Company is unable to obtain an extension of the maturity of the Senior Note obligations, holders of the Senior Subordinated Notes would have the right to declare the principal amount ($125 million) on the Senior Subordinated Notes to be immediately due and payable. In such event, the Company would not have sufficient resources to pay the outstanding Senior Notes and Senior Subordinated Notes and this would put into doubt the Company's ability to continue as a going concern. Senior Subordinated Notes On January 15, 1998, the Company completed a public offering of $125.0 million of Senior Subordinated Notes at an interest rate of 8 7/8% (the "Subordinated Notes"). The Subordinated Notes are non-callable for five years and are unsecured subordinated obligations of KCS. The subsidiaries of KCS have guaranteed the Subordinated Notes on an unsecured subordinated basis. The guarantees are full and unconditional and joint and several. On February 20, 2001, in connection with the Plan (see Note 2), the indenture governing the Subordinated Notes was amended to, among other things, accelerate the maturity date of the Subordinated Notes from January 15, 2008 to January 15, 2006. The Subordinated Notes, as amended, contain certain restrictive covenants which, among other things, limit the Company's ability to incur additional indebtedness, require the repurchase of the Subordinated Notes upon a change of control, and limit: a) the aggregate purchases and redemptions of the Company's Series A Convertible Preferred Stock for cash and b) the aggregate cash dividends paid on capital stock, collectively, to 50% of the Company's cumulative net income, as defined, during the period beginning after December 31, 2000. The Senior Subordinated Notes also contain cross-default provisions which would result in the acceleration of payments if the Company defaults on its other debt instruments. Bank Credit Facility On November 28, 2001 the Company entered into a three-year bank credit agreement ("Credit Agreement"). The Credit Agreement is to be used for general corporate purposes, including support of the Company's capital expenditure program, repurchase of the Senior Notes and working capital. The stated amount of this Credit Agreement is $100 million, with the amount that is available determined semi-annually based on the lenders' valuation of the Company's oil and gas reserves and other factors including the Company's other debt obligations and obligations under the Production Payment sold as discussed in Note 2. The initial amount available and the borrowing base at December 31, 2001 was $32.5 million. The borrowing base was adjusted to reflect the sales of certain non-core oil and gas properties in 2002. The amount available under the Credit Agreement was $11.0 million at September 30, 2002. Loans under the Credit Agreement are on a revolving basis, and the Company is permitted to choose interest rate options based on the lead bank's prime rate or LIBOR. The applicable margin above prime or LIBOR ranges between 0% and 3%, based on the type of interest rate chosen and the percentage of the borrowing base that is outstanding. A commitment fee of 0.5% is paid on the unused portion of the borrowing base. Substantially all of the Company's oil and gas assets are pledged to secure the Credit Agreement. The Credit Agreement, as amended, contains restrictive covenants, which among other things, require minimum interest and debt coverage ratios. In addition, these covenants require a minimum level of working capital, as defined, limit the Company's ability to incur additional indebtedness and sell assets, require payment upon a change of control, prohibit the Company from purchasing and redeeming the Company's common stock or the Series A Convertible Preferred Stock and prohibit the Company from paying any cash dividends on common stock. The Credit Agreement was recently amended to change the acceleration of the maturity date from November 15, 2002 to December 15, 2002. As part of the amendment, the Company agreed to reduce the borrowing base and the amounts 8 outstanding to $4 million and to limit subsequent amounts outstanding so that the total would not exceed the Company's cash balance at any time. The Company expects that the Credit Agreement and the revolving credit facility provided under the Credit Agreement will be amended or replaced concurrently with the Company's consummation of the $60 Million Credit Facility discussed above. The Company anticipates that the amended or replacement Revolving Credit Facility and the $60 Million Credit Facility will close by year-end, although each proposed facility is subject to lender due diligence and negotiation of definitive agreements and will require the other facility be closed as well. 6. Income Taxes The Company accounts for income taxes in accordance SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 requires the Company to recognize income tax benefits for loss carry forwards which have not previously been recorded. The tax benefits recognized must be reduced by a valuation allowance in certain circumstances where the realization of the net deferred tax assets is not assured. At June 30, 2002, the Company increased its valuation allowance by $15.9 million, thereby reducing to zero the carrying amount of net deferred tax assets with a corresponding non-cash charge to income tax expense. The Company will continue to assess the valuation allowance and to the extent it is determined that such allowance is no longer required, the tax benefit of the remaining net deferred tax assets will be recognized in the future. 7. Supplemental cash flow information The Company considers all highly liquid debt instruments with a maturity of three months or less when purchased to be cash equivalents. Interest payments were $19.7 million and $71.4 million for the nine months ended September 30, 2002 and September 30, 2001, respectively. Interest payments in the prior year period included approximately $60.7 million made in connection with the Plan (see Note 2). No income tax payments were made during the nine-month periods ended September 30, 2002 and September 30, 2001. 8. Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share: 9
Three months ended Nine months ended (amounts in thousands September 30 September 30 except per share data) 2002 2001 2002 2001 - ---------------------------------------------------------------------------------------------- -------------------------- Basic earnings per share: Income (loss) available to common stockholders $ 3,435 $ 8,751 $ (11,180) $ 68,466 ------------------------- -------------------------- Average common stock outstanding 36,247 32,636 35,634 30,711 ------------------------- -------------------------- Basic earnings (loss) per share $ 0.09 $ 0.27 $ (0.31) $ 2.23 ========================= ========================== Diluted earnings per share: Income (loss) available to common stockholders $ 3,435 $ 8,751 $ (11,180) $ 68,466 Assumed conversion of convertible preferred stock 214 248 N/A 741 ------------------------- -------------------------- $ 3,649 $ 8,999 $ (11,180) $ 69,207 ------------------------- -------------------------- Average common stock outstanding 36,247 32,636 35,634 30,711 Assumed conversion of convertible preferred stock 4,530 7,351 N/A 7,223 Dividends on convertible preferred stock 104 71 N/A 154 Stock options and warrants - 130 - 160 ------------------------- -------------------------- 40,881 40,188 35,634 38,248 Diluted earnings (loss) per share $ 0.09 $ 0.22 $ (0.31) $ 1.81 ========================= ==========================
Common shares on assumed conversion of convertible preferred stock amounting to 5.1 million shares for the nine months ended September 30, 2002 were not included in the computations of diluted earnings per common share nor were assumed conversion of dividends on convertible preferred stock or stock options and warrants since they would be anti-dilutive. 9. New Accounting Standards In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143 requires entities to record the fair value of a liability for legal obligations associated with the retirement obligations of tangible long-lived assets in the periods in which it is incurred. When the liability is initially recorded, the entity increases the carrying amount of the related long-lived asset. The liability is accreted to the fair value at the time of settlement over the useful life of the asset, and the capitalized cost is depreciated over the useful life of the related asset. The standard is effective for fiscal years beginning after June 15, 2002, with earlier application encouraged. The Company is currently evaluating the effect of adopting Statement No. 143 on its financial statements. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144 addresses the financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121 but retains its fundamental provisions for the (a) recognition/measurement of impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sale. SFAS No. 144 also supersedes the accounting/reporting provisions of APB Opinion No. 30 for segments of a business to be disposed of but retains the requirement to report discontinued operations separately from continuing operations and extends that reporting to a component of an entity that either has been disposed of or is classified as held for sale. SFAS No. 144 is effective for the Company beginning in 2002. The Company adopted the provisions of SFAS No. 144 effective January 1, 2002, with no significant impact. 10. Adoption of SFAS No.133 Upon adoption of SFAS No. 133 effective on January 1, 2001, the Company recorded a liability of 10 $43.8 million representing the fair market value of its derivative instruments at adoption, a related deferred tax asset of $15.3 million and an after-tax cumulative effect of change in accounting principle of $28.5 million to accumulated other comprehensive income (OCI). The Company elected not to designate its then existing derivative instruments as hedges which, subsequent to adoption of SFAS No. 133, would require that changes in a derivative investment's fair value be recognized currently in earnings. However, SFAS No. 133 requires the Company's derivative instruments that had been designated as cash flow hedges under accounting principles generally accepted prior to the initial application of SFAS No. 133 to continue to be accounted for as cash flow hedges with the transition adjustment reported as a cumulative-effect-type adjustment to accumulated OCI as mentioned above. In February 2001, the Company terminated certain derivative instruments in connection with its emergence from bankruptcy for a cash payment of $28.0 million, which was offset against the accrued liability recorded in connection with the adoption of SFAS No. 133. During the quarter ended March 31, 2001, as a result of market price decreases, the ultimate cost to settle the remaining derivative instruments in place at January 1, 2001 was reduced by $7.7 million. This non-cash gain was recorded in other revenue during the quarter. The actual cost to settle the remaining derivatives was $8.1 million. During the first nine months of 2002, $3.3 million, net of tax, of the above $28.5 million charged to OCI was reclassified into earnings. The $9.6 million remaining in accumulated other comprehensive income will be amortized into earnings over the original term of the derivative instruments, which extends through August 2005 ($1.1 million remaining in 2002, $3.6 million in 2003, $2.9 million in 2004 and $2.0 million in 2005). 11. Oil And Natural Gas Hedging Activities The Company has entered into and was party to various derivative contracts. At September 30, 2002 the Company had swaps in place covering 1,530,000 Mmbtu of natural gas at $3.85 per Mmbtu and 46,000 barrels of oil at 26.50 per barrel extending through December 2002. These derivatives have been designated as cash flow hedges. In addition, the Company had open positions on contracts with Enron North America Corp. consisting of swaps covering 310,000 Mmbtu at $4.02 per Mmbtu for October 2002 if the NYMEX contract for the months covered is over $2.50 and puts covering 310,000 Mmbtu at $3.00 for October 2002. Enron has not performed under its derivative contracts with the Company since November 2001. See Note 9 to Consolidated Financial Statements in the Company's 2001 annual report on Form 10-K. 12. Litigation The Company was a defendant in a lawsuit originally brought by InterCoast Energy Company and MidAmerican Capital Company ("Plaintiffs") against KCS Energy, Inc., KCS Medallion Resources, Inc. and Medallion California Properties Company ("KCS Defendants"), and Kerr-McGee Oil & Gas Onshore LP and Kerr-McGee Corporation ("Kerr-McGee Defendants") in the 234th Judicial District Court of Harris County, Texas under Cause Number 1999-45998. The suit sought a declaratory judgment declaring the rights and obligations of each of the Plaintiffs, the KCS Defendants and the Kerr-McGee Defendants in connection with environmental damages and surface restoration on lands located in Los Angeles County, California which are covered by an Oil & Gas Lease dated June 13, 1935, from Newhall Land and Farming Company, as Lessor, to Barnsdall Oil Company, as Lessee (the "RSF Lease") and by an Oil and Gas Lease dated June 6, 1941, from the Newhall Corporation, as Lessor, to C. G. Willis, as Lessee (the "Ferguson Lease" and together with the RSF Lease, the "Leases"). The Kerr-McGee Defendants, KCS Defendants and Plaintiffs entered into an Agreed Interlocutory Judgment that contains clarification of the language of the 1990 Agreement between predecessors of the 11 KCS Defendants and the Kerr-McGee Defendnats (the "1990 Agreement") under which the Leases were transferred from Kerr-McGee's predecessor to predecessors of Medallion California Properties Company ("MCPC"). The Court previously entered the Agreed Interlocutory Judgment, which essentially disposed of interpretation questions concerning the 1990 Agreement. After entry of the Agreed Interlocutory Judgment, the remaining issues in the case concerned the interpretation of the 1996 Stock Purchase Agreement through which certain of the KCS Defendants acquired the stock of MCPC. Specifically, the remaining issues involved the extent to which Plaintiffs are obligated to indemnify the KCS Defendants for environmental investigation costs previously incurred by the KCS Defendants and also for costs of defense and liability to the KCS Defendants, if any, in the California litigation described below. By Compromise and Settlement Agreement dated as of October 19, 2001, the Plaintiffs and KCS Defendants agreed: (i) to settle those issues dealing with the Plaintiffs' obligations to reimburse costs previously incurred in connection with defense of the California case described below; (ii) to provide prospectively for the control of defense and settlement and the sharing of defense costs in the California case described below; and (iii) to defer any disputes concerning the respective liability of Plaintiffs and KCS Defendants for any individual claims until the extent of such individual claim liability, after giving effect to indemnification obligations under the 1990 Agreement, is fully and finally determined. The Agreed Interlocutory Judgment has now been entered as a final judgment. MCPC is a defendant in a lawsuit filed January 30, 2001, by The Newhall Land and Farming Company ("Newhall") against MCPC and Kerr-McGee Corporation and several Kerr-McGee affiliates. The case is currently pending in Los Angeles County Superior Court under Cause Number BC244203. In the suit, Newhall seeks damages for alleged environmental contamination and surface restoration on the lands covered by the RSF Lease and also seeks a declaration that Newhall may terminate the RSF Lease or alternatively, that it may terminate those portions of the RSF Lease on which there is currently default under the Lease. MCPC claims that Newhall is not entitled to lease termination as a remedy and that Kerr-McGee and InterCoast and MidAmerican owe indemnities to MCPC for defense and certain potential liability under Newhall's action, all as more particularly described in the Harris County, Texas litigation described above. Discovery is ongoing, and the lawsuit is set for trial in March 2003. A more in-depth discussion of the environmental condition of the property covered by the Leases is included in the Company's Annual Report on Form 10-K under "Regulation - Environmental Claims." The Company is also a party to various other lawsuits and governmental proceedings, all arising in the ordinary course of business. Although the outcome of all of the above proceedings cannot be predicted with certainty, management does not expect such matters to have a material adverse effect, either singly or in the aggregate, on the financial position or results of operations of the Company. It is possible, however, that charges could be required that would be significant to the operating results of a particular period. 12 KCS ENERGY, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General KCS emerged from bankruptcy in February, 2001 under the Plan (see Note 2 to Condensed Consolidated Financial Statements), in which the Company repaid its two bank credit facilities in full, paid past due interest on its Senior Notes and Senior Subordinated Notes, including interest on interest, and repaid $60.0 million of Senior Notes. The balance of the Senior Notes and the Senior Subordinated Notes were reinstated under amended indentures. Trade creditors were paid in full and shareholders retained 100% of their common stock, subject to dilution from conversion of the new convertible preferred stock Prices for oil and natural gas are subject to wide fluctuations in response to relatively minor changes in the supply of and demand for oil and natural gas, market uncertainty and a variety of other factors that are beyond the Company's control. These factors include political conditions in the Middle East and elsewhere, domestic and foreign supply of oil and natural gas, the level of consumer demand, weather conditions and overall economic conditions. Results of Operations Net income for the three months ended September 30, 2002 was $3.6 million compared to $9.0 million for the same period in 2001. This decrease was attributable to lower natural gas and oil production, due largely to the sale of certain non-core properties, and lower natural gas prices, partially offset by decreased operating expenses. Income before income taxes for the nine months ended September 30, 2002 was $3.8 million compared to $61.6 million for the same period in 2001. Dramatically lower natural gas and oil prices, lower non-oil and gas revenue and lower production were partially offset by significantly lower operating, reorganization and interest expenses. Income tax expense for the nine months ended September 30, 2002 was $14.1 million compared to an income tax benefit of $7.6 million for the same period in 2001. As a result of the non-cash income tax expense in 2002 (see Note 6 to Condensed Consolidated Financial Statements), the Company reported a net loss of $10.3 million for the nine months ended September 30, 2002 compared to net income of $69.2 million for the nine months ended September 30, 2001. 13
Three Months Ended Nine Months Ended September 30, September 30, ---------------------------- ---------------------------- 2002 2001 2002 2001 ------------ ------------ ------------ ------------ Production: Gas (MMcf) ............. 7,382 8,956 23,270 28,292 Oil (Mbbl) ............. 248 288 776 934 Liquids (Mbbl) ......... 79 98 221 275 Summary (MMcfe): Working interest .... 8,716 10,167 27,098 32,008 VPP ................. 628 1,105 2,153 3,538 ------------ ------------ ------------ ------------ Total ..... 9,344 11,272 29,251 35,546 ============ ============ ============ ============ Average Price: Gas (per Mcf) .......... $ 3.26 $ 3.49 $ 3.13 $ 4.21 Oil (per bbl) .......... 22.35 21.77 20.12 22.20 Liquids (per bbl) ...... 9.57 12.46 9.55 14.76 Total (per Mcfe) ....... 3.25 3.44 3.10 4.05 Revenue: Gas .................... $ 24,092 $ 31,256 $ 72,841 $ 119,189 Oil .................... 5,543 6,270 15,605 20,733 Liquids ................ 756 1,221 2,110 4,059 ------------ ------------ ------------ ------------ Total ..... $ 30,391 38,747 $ 90,556 $ 143,981 ============ ============ ============ ============
Note: Production includes 2,671 MMcfe and 8,715 MMcfe, respectively, for the three and nine months ended September 30, 2002 compared to 4,210 MMcfe and 11,752 MMcfe for the three and nine months ended September 30, 2001, respectively, dedicated to the Production Payment sold in February 2001. See Notes 2 and 4 to Condensed Consolidated Financial Statements. Gas revenue For the three months ended September 30, 2002, gas revenue decreased $7.2 million to $24.1 million due to a 7% decrease in average realized natural gas prices and an 18% decrease in production. For the nine months ended September 30, 2002, gas revenue decreased $46.3 million to $72.9 million due to a 26% decrease in average realized natural gas prices and an 18% decrease in production. The decrease in production in 2002 was attributable to the sale of oil and gas properties, natural declines of producing properties, expiration of certain VPPs and no additional investment in the VPP program in 2000 and 2001. The natural decline of producing properties was not fully offset by new production largely due to the reduced capital investment program. See Liquidity and Capital Resources. Oil and liquids revenue For the three months ended September 30, 2002, oil and liquids revenue was $6.3 million compared to $7.5 million during the same period in 2001, due to a 15% decrease in production and a 1% decrease in the weighted average realized price. For the nine months ended September 30, 2002, oil and liquids revenue decreased 29% to $17.7 million due to an 18% decrease in production and a 13% decrease in weighted average realized prices. The decrease in production in 2002 was attributable to the sale of oil and gas properties and the natural declines of producing properties. 14 Other revenue, net Other revenue was $0.1 million for the three months ended September 30, 2002 compared to $0.7 million for the same period a year ago. The 2001 period included $1.2 million from sale of emission credits. For the nine months ended September 30, 2001, other revenue was $17.2 million. Of this, $8.2 million was from the sale of emission reduction credits, $7.7 million was from non-cash gains on derivative instruments that were not designated as oil and gas hedges when the Company adopted SFAS No. 133 (see Note 10 to Condensed Consolidated Financial Statements), and the remainder was primarily attributable to marketing and transportation revenue. This compares to a net cost of $1.0 million for the nine months ended September 30, 2002 primarily attributed to marketing and transportation activities. Lease operating expenses Lease operating expenses ("LOE") decreased $0.9 million, or 13%, to $5.9 million for the three months ended September 30, 2002 compared to $6.8 million for the same period in 2001. For the nine months ended September 30, 2002, LOE decreased $4.4 million, or 18%, to $19.3 million compared to $23.8 million for the same period in 2001. Increased focus on cost reductions and operating efficiency along with the sale of certain properties contributed to the current year reductions. Production taxes Production taxes, which are generally based on a percentage of revenue (excluding VPP revenue) decreased $0.1 million to $1.5 million for the third quarter of 2002 and $2.2 million to $4.4 million for the nine months ended September 30, 2002, compared to the same periods in 2001, due to lower oil and gas revenue associated with the decrease in working interest production and lower average realized prices. General and administrative expenses General and administrative expenses ("G&A") for the three months ended September 30, 2002 were $2.4 million compared to $2.2 million for the same period a year ago. This slight increase was primarily the result of severance costs associated with a reduction in workforce in September 2002. For the nine months ended September 30, 2002, G&A decreased $0.9 million, or 13%, to $6.2 compared to the same period in 2001 largely due to lower personnel costs resulting from the reduction of the Company's workforce and lower incentive compensation accruals. Stock compensation Stock compensation was $0.7 million for the nine-month period ended September 30, 2002 compared to $0.5 million for the same period a year ago. These amounts reflect the non-cash amortization of restricted stock grants issued to employees under the Company's 2001 stock plan. Depreciation, depletion and amortization The Company provides for depletion on its oil and gas properties using the future gross revenue method based on recoverable reserves valued at current realized prices. For the three months ended September 30, 2002, depreciation, depletion and amortization ("DD&A") decreased $2.4 million to $12.9 million compared to the same period in 2001. For the nine months ended September 30, 2002, DD&A was $40.9 million compared to $42.8 million for the same period in 2001. The decreases in the 2002 periods were primarily the result of lower oil and gas revenues and a lower depletion base, partially offset by a higher depletion rate resulting from lower natural gas prices. Interest and other income Interest and other income for the nine months ended September 30, 2002 was $0.1 million compared to $1.2 million for the same period a year ago reflecting lower interest income associated with accumulated cash and cash equivalents in the current year period. 15 Interest expense Interest expense for the nine months ended September 30, 2002 was $14.3 million compared to $17.1 million for the same period a year ago. The $2.8 million decrease reflects the reduction of outstanding debt and, to a lesser extent, lower interest rates on the new credit facility. Reorganization items The Company completed its reorganization in 2001 and consequently there were no reorganization items in 2002. For the nine months ended September 30, 2001, the Company recorded $2.9 million of reorganization items, primarily for legal and financial advisory services in connection with the Chapter 11 proceedings. Income Taxes Income tax expense for the nine months ended September 30, 2002 was $14.1 million compared to an income tax benefit in the same period of 2001 of $7.6 million. The Company increased its valuation allowance against net deferred assets at June 30, 2002 by $15.9 million. See Note 6 to Condensed Consolidated Financial Statements. Liquidity and Capital Resources In order to meet its obligations under the Senior Notes due in January 2003, the Company has curtailed its planned capital expenditures for 2002 to be between $44 million and $47 million, of which $38.3 million was invested in the first nine months of 2002, sold certain non-core oil and gas properties for net proceeds of $30.9 million during the nine months September 30, 2002 and has entered into a non-binding letter of intent with an institutional lender for a $60 Million Credit Facility. In connection therewith, the Company will be required to amend or replace its existing Revolving Credit Facility. The Company anticipates that the amended or replacement Revolving Credit Facility and the $60 Million Credit Facility will close by year-end, although each proposed facility is subject to lender due diligence and negotiation of definitive agreements and will require the other facility be closed as well. While the Company believes that it will be successful in obtaining an amended or replacement Revolving Credit Facility as well as a new $60 Million Credit Facility, there can be no assurance that this will occur. If the financing is obtained, the Company anticipates that it will meet the Senior Note maturity obligations. However, in the event that the Company is unable to meet its Senior Note obligations when due and the Company is unable to obtain an extension of the maturity of the Senior Note obligations, holders of the Senior Subordinated Notes would have the right to declare the principal amount ($125 million) on the Senior Subordinated Notes to be immediately due and payable. In such event, the Company would not have sufficient resources to pay the outstanding Senior Notes and Senior Subordinated Notes and this would put into doubt the Company's ability to continue as a going concern. If the Company is successful in consummating the amended or replacement Revolving Credit Facility as well as a new $60 Million Credit Facility and retiring the Senior Notes when due, then the Company believes that its cash flow and the amounts available under the new Revolving Credit Facility should be sufficient to carry out its business operations and meet its obligations. Cash flow from operating activities Net income adjusted for non-cash charges and reorganization items for the nine months ended September 30, 2002 was $13.8 million compared to $66.4 million during the same period in 2001. The decrease was primarily due to the effect of lower realized natural gas prices and production as discussed above. Net cash provided by operating activities for the nine months ended September 30, 2002 was $4.1 million compared to net cash provided by operating activities of $174.2 million for the same period in 2001. In addition to lower realized natural gas prices and production in the current year period, the prior year period reflects the net proceeds of $175.4 million from the Production Payment sold in February 2001, 16 the payment of $71.4 million of interest and the $28 million cost of terminating certain derivative instruments in connection with the emergence from Chapter 11. The decrease in trade accounts receivable is mainly due to a decrease in joint interest receivables due to decreased drilling activity and the timing of cash receipts. The decrease in accounts payable and accrued liabilities is largely due to curtailment of capital expenditures, the payment of a retention bonus approved in the Chapter 11 proceedings and the timing of cash disbursements. Investing activities Capital expenditures for the nine months ended September 30, 2002 were $38.3 million of which $4.8 million was for the acquisition of proved reserves, $22.5 million was for development activities, and $11.0 million was for lease acquisitions, seismic surveys and exploratory drilling. New Accounting Standards In July 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 requires entities to record the fair value of a liability for legal obligations associated with the retirement obligations of tangible long-lived assets in the periods in which it is incurred. When the liability is initially recorded, the entity increases the carrying amount of the related long-lived asset. The liability is accreted to the fair value at the time of settlement over the useful life of the asset, and the capitalized cost is depreciated over the useful life of the related asset. The standard is effective for fiscal years beginning after June 15, 2002, with earlier application encouraged. The Company is currently evaluating the effect of adopting Statement No. 143 on its financial statements. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144 addresses the financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121 but retains its fundamental provisions for the (a) recognition/measurement of impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sale. SFAS No. 144 also supersedes the accounting/reporting provisions of APB Opinion No. 30 for segments of a business to be disposed of but retains the requirement to report discontinued operations separately from continuing operations and extends that reporting to a component of an entity that either has been disposed of or is classified as held for sale. SFAS No. 144 is effective for the Company beginning in 2002. The Company adopted the provisions of SFAS No. 144 effective January 1, 2002, with no significant impact. Forward-looking Statements The information discussed in this Form 10-Q includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements, other than statements of historical facts, included herein regarding refinancing of debt, liquidity, planned capital expenditures, increases in oil and gas production, the number of anticipated wells to be drilled after the date hereof, the Company's financial position, business strategy and other plans and objectives for future operations, are forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, they do involve certain assumptions, risks and uncertainties, and the Company can give no assurance that such expectations will prove to be correct. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the Company's failure to obtain the $60 Million Credit Facility and amend or replace the Revolving Credit Facility, or in the alternative, obtain an extension of the maturity of the Senior Note obligations, the timing and success of the Company's drilling activities, the volatility of prices and supply and demand for oil and gas, the numerous uncertainties inherent in estimating quantities of oil and gas reserves and actual future production rates and associated costs, the usual hazards associated with the oil and gas industry (including blowouts, cratering, pipe failure, spills, explosions and other unforeseen hazards), and changes in regulatory requirements. 17 All forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by such factors. 18 Item 3. Quantitative and Qualitative Disclosures about Market Risk The Company has entered and may continue to enter into swaps, futures contracts and options to manage the price risk associated with the production of natural gas and oil. These derivatives have the effect of fixing for specified periods the prices the Company will receive for the volumes to which the derivative relates. As a result, while these derivatives are structured to reduce the Company's exposure to decreases in the price associated with the underlying commodity, they also limit the benefit the Company might otherwise have received from any price increases associated with the commodity. In accordance with Item 305 of Regulation S-K, the Company has elected the tabular method to disclose market-risk related to derivative financial instruments as well as other financial instruments. The following table sets forth the Company's oil and natural gas hedged position at September 30, 2002.
Enron Swap @ $4.02 per MMbtu if NYMEX above $2.50 Enron Puts @ $3.00 per MMbtu ------------------------------- -------------------------------- Unrealized Unrealized Volume Gain Volume Gain MMBtu ($000s) MMBtu ($000s) ---------- ---------- ----------- ---------- 2002 4th Qtr........ 310,000 104 310,000 - ----------- --------- ----------- ------ Total... 31,000 $ 104 30,000 - =========== ========= =========== ====== Swaps @ $3.85 avg. per MMbtu Swaps @ $26.50 per barrel ------------------------------- -------------------------------- Unrealized Unrealized Volume Loss Volume Loss MMBtu ($000s) Barrels ($000s) ---------- ---------- ----------- ---------- 2002 4th Qtr........ 1,530,000 (206) 46,000 (158) ----------- --------- ----------- ------ Total... 1,530,000 $ (206) $46,000 (158) =========== ========= =========== ========
The Company accounts for oil and natural gas futures contracts and commodity price swaps in accordance with SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities". Enron has not performed under its derivative contracts with the Company since November 2001. See Note 9 to Consolidated Financial Statements in the Company's 2001 annual report on Form 10-K. The Company uses fixed and variable rate long-term debt to finance its capital-spending program. These debt arrangements exposed the Company to market risk related to changes in interest rates. During the third quarter of 2002, the Company's weighted average contractual interest rate on its weighted average fixed rate debt of $186.3 million was 9.6%. The weighted average interest rate on its weighted average variable rate debt of $9.3 million was 4.2%. During the nine months ended September 30, 2002, the Company's weighted average contractual interest rate on its weighted average fixed rate debt of $193.7 million was 9.6%. The weighted average interest rate on its weighted average variable rate debt of $10.7 million was 4.1%. 19 Item 4. Controls and Procedures Within the 90 days prior to the date of this report, the Company conducted an evaluation, under the supervision of and with the participation of the Company's management, including the President and Chief Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934. Based upon that evaluation, the President and Chief Executive Officer and Principal Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic SEC filings. There were no significant changes in the Company's internal controls or other factors that could significantly affect such controls subsequent to the date of their evaluation and there were no corrective actions with regard to significant deficiencies or material weaknesses in the Company's internal controls. 20 KCS ENERGY, INC. - FORM 10-Q PART II - OTHER INFORMATION Item 1. Legal Proceedings. Reference is made to Item 3, Legal Proceedings, in the Company's Annual Report on Form 10-K for the year ended December 31, 2001 and Note 12 to Condensed Consolidated Financial Statements included herein. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits: 10.1 Third Amendment to Credit Agreement dated as of November 13, 2002, is among KCS ENERGY, INC. (the "BORROWER"), certain commercial lending institutions named on the signature pages hereto (together with their respective successors and assigns in such capacity, each as a "LENDER" and collectively as the "LENDERS"), CANADIAN IMPERIAL BANK OF COMMERCE, NEW YORK AGENCY, as agent for the Lenders (in such capacity, together with its successors and assigns, the "AGENT"), CIBC INC., as collateral agent for the Lenders (in such capacity, together with its successors and assigns, "COLLATERAL AGENT"). 99.1 Certification of James W. Christmas, President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002. 99.2 Certification of Frederick Dwyer, Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002. (b) Reports on Form 8-K. The Company filed a current Report on Form 8-K, dated July 1, 2002, reporting on "Item 4. Changes in Registrant's Certifying Accountant" the change of the Company's independent public accountants to Ernst & Young LLP for the fiscal year ending December 31, 2002 replacing Arthur Andersen LLP. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. KCS ENERGY, INC. November 14, 2002 /s/ FREDERICK DWYER --------------------------------- Frederick Dwyer Vice President, Controller and Secretary 21 CERTIFICATIONS I, James W. Christmas, certify that: 1. I have reviewed this quarterly report on Form 10-Q of KCS Energy, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ JAMES W. CHRISTMAS --------------------------- James W. Christmas President and Chief Executive Officer November 14, 2002 22 I, Frederick Dwyer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of KCS Energy, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ FREDERICK DWYER --------------------------------- Frederick Dwyer Vice President, Controller and Secretary November 14, 2002 23 EXHIBIT INDEX 10.1 Third Amendment to Credit Agreement dated as of November 13, 2002, is among KCS ENERGY, INC. (the "BORROWER"), certain commercial lending institutions named on the signature pages hereto (together with their respective successors and assigns in such capacity, each as a "LENDER" and collectively as the "LENDERS"), CANADIAN IMPERIAL BANK OF COMMERCE, NEW YORK AGENCY, as agent for the Lenders (in such capacity, together with its successors and assigns, the "AGENT"), CIBC INC., as collateral agent for the Lenders (in such capacity, together with its successors and assigns, "COLLATERAL AGENT"). 99.1 Certification of James W. Christmas, President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002. 99.2 Certification of Frederick Dwyer, Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002. EX-10.1 3 h01191exv10w1.txt THIRD AMENDMENT TO CREDIT AGREEMENT EXHIBIT 10.1 THIRD AMENDMENT TO CREDIT AGREEMENT This Third Amendment to Credit Agreement (this "AMENDMENT") dated as of November 13, 2002, is among KCS ENERGY, INC. (the "BORROWER"), certain commercial lending institutions named on the signature pages hereto (together with their respective successors and assigns in such capacity, each as a "LENDER" and collectively as the "LENDERS"), CANADIAN IMPERIAL BANK OF COMMERCE, NEW YORK AGENCY, as agent for the Lenders (in such capacity, together with its successors and assigns, the "AGENT"), CIBC INC., as collateral agent for the Lenders (in such capacity, together with its successors and assigns, "COLLATERAL AGENT"). PRELIMINARY STATEMENT A. The Borrower, the Lenders, the Agent and the Collateral Agent have entered into that certain Credit Agreement, dated as of November 28, 2001, among the Borrower, the Lenders, the Agent and the Collateral Agent, as amended by that certain First Amendment to Credit Agreement, dated as of May 14, 2002, among the Borrower, the Lenders, the Agent and the Collateral Agent, as further amended by that certain Second Amendment to Credit Agreement, dated as of August 14, 2002, but effective as of June 30, 2002, among the Borrower, the Lenders, the Agent and the Collateral Agent (as so amended, and as from time to time amended, supplemented, restated or otherwise modified, including pursuant to this Amendment, the "CREDIT AGREEMENT"). B. The Borrower, the Lenders, the Agent and the Collateral Agent intend to amend certain provisions of the Credit Agreement to (i) extend the Final Maturity (as defined in the Credit Agreement) under the Credit Agreement, (ii) to reduce the Commitment Amount (as defined in the Credit Agreement), and (iii) to make other changes, as set forth herein. NOW THEREFORE, in consideration of the foregoing and the mutual agreements set forth herein, the parties hereto agree as follows: Section 1. DEFINITIONS. (a) Unless otherwise defined in this Amendment, each capitalized term used in this Amendment has the meaning assigned to such term in the Credit Agreement. Section 2. AMENDMENT OF CREDIT AGREEMENT. (a) The definition of "Final Maturity" as set forth in Section 1.2 of the Credit Agreement is hereby amended in its entirety to read as follows: "Final Maturity" shall mean November 28, 2004 unless the Liquidity Condition shall not have been satisfied, as shall be determined by the Lenders in their sole discretion, by December 15, 2002, in which event it shall mean December 15, 2002. (b) The definition of "Liquidity Condition" as set forth in Section 1.2 of the Credit Agreement is hereby amended in its entirety to read as follows: "Liquidity Condition" shall mean that (i) less than $20,000,000 in principal amount of the Borrower's Senior Notes are outstanding on August 31, 2002 and (ii) the Borrower shall have cash plus Available Commitment of not less than the then outstanding principal amount of the Senior Notes on August 31, 2002; provided, however, that if the Borrower fails to satisfy one or both of clause (i) and (ii) on August 31, 2002, the Borrower shall have a one-hundred-and-six (106) day period in which to remedy such failure, which remedy shall be subject to the approval of the Lenders in their sole discretion. (c) The Credit Agreement is hereby amended by adding the following Section 5.21 immediately following the existing Section 5.20 of the Credit Agreement: "5.21 Maintenance of Cash Balance. Maintain on deposit in the Borrower's accounts a cash balance in an amount equal to the amount of the Loan Balance under this Agreement, and provide to the Agent any information relating to such balance, deposits or accounts as the Agent may from time to time reasonably request." Section 3. REDETERMINATION OF THE BORROWING BASE. As of the Effective Date, the parties hereto agree that the Borrowing Base shall be $4,000,000, subject to redetermination pursuant to Section 2.12 of the Credit Agreement or reduction pursuant to Section 6.5 of the Credit Agreement. Section 4. RATIFICATION. The Borrower hereby ratifies and confirms all of the Obligations under the Credit Agreement and the other Loan Documents. This Amendment is an amendment to the Credit Agreement, and the Credit Agreement as amended hereby, is hereby ratified, approved and confirmed in each and every respect. Section 5. EFFECTIVENESS. This Amendment shall be effective as of the date hereof (the "EFFECTIVE DATE"), provided that the conditions set forth in this Section 5 are satisfied: (a) On or before the Effective Date, the Agent shall have received duly executed counterparts of this Amendment from the Borrower, the Agent, the Collateral Agent and from all of the Lenders. (b) Within one (1) day following the Effective Date, the Agent shall have received prepayment of the Loans by the Borrower to the Agent for the account of the Lenders, to be shared by the Lenders based on their respective pro rata share of the total Commitments, in an amount equal to $1,000,000 for application on the Loan Balance, which following such prepayment, such Loan Balance shall not exceed $4,000,000. (c) On or before the Effective Date, the Agent shall have received such other instruments and documents as the Agent may reasonably request. 2 Section 6. REPRESENTATIONS AND WARRANTIES. The Borrower hereby represents and warrants to the Agent, the Collateral Agent and the Lenders, that (i) the execution, delivery and performance of this Amendment has been duly authorized by all requisite corporate action on the part of the Borrower; (ii) the Credit Agreement and each other Loan Document to which it is a party constitute valid and legally binding agreements enforceable against the Borrower in accordance with their respective terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer or other similar laws relating to or affecting the enforcement of creditors' rights generally and by general principles of equity, (iii) the representations and warranties by the Borrower contained in the Credit Agreement and in the other Loan Documents are true and correct on and as of the date hereof in all material respects as though made as of the date hereof, except those that by their terms relate solely as to an earlier date, in which event they shall be true and correct on and as of such earlier date, and (iv) no Default or Event of Default exists under the Credit Agreement or any of the other Loan Documents. Section 7. GOVERNING LAW. THIS AMENDMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK. Section 8. MISCELLANEOUS. (a) On and after the effectiveness of this Amendment, each reference in each Loan Document to "the Credit Agreement", "thereunder", "thereof" or words of like import referring to the Credit Agreement shall mean and be a reference to the Credit Agreement as amended or otherwise modified by this Amendment; (b) the execution, delivery and effectiveness of this Amendment shall not, except as expressly provided herein, operate as a waiver of any default of the Borrower or any right, power or remedy of the Agent, the Collateral Agent or the Lenders under any of the Loan Documents, nor constitute a waiver of any provision of any of the Loan Documents; (c) this Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement; and (d) delivery of an executed counterpart of a signature page to this Amendment by telecopier shall be effective as delivery of a manually executed counterpart of this Amendment. Section 9. FINAL AGREEMENT. THIS AMENDMENT, THE CREDIT AGREEMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO ORAL AGREEMENTS BETWEEN THE PARTIES. [Remainder of Page Left Intentionally Blank] 3 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by its officers thereunto duly authorized as of the date first above written. BORROWER: KCS ENERGY, INC., a Delaware corporation By: ----------------------------------------- Name: James W. Christmas Title: President and Chief Executive Officer S-1 CANADIAN IMPERIAL BANK OF COMMERCE, NEW YORK AGENCY, as Agent By: ----------------------------------------- Name: Title: S-2 CIBC INC. as Collateral Agent and Lender By: -------------------------------------- Name: Title: S-3 GUARANTY BANK as Lender By: -------------------------------------- Name: Richard Menchaca Title: Vice President S-4 EX-99.1 4 h01191exv99w1.txt CERTIFICATION OF JAMES W. CHRISTMAS, CEO EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of KCS Energy, Inc. (the "Company") on Form 10-Q for the period ending September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, James W. Christmas, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2) The information contained in the Report fairly presents, in all material respects the financial condition and results of operations of the Company. /s/ James W. Christmas - ---------------------------- James W. Christmas President and Chief Executive Officer November 14, 2002 EX-99.2 5 h01191exv99w2.txt CERTIFICATION OF FREDERICK DWYER, CFOP EXHIBIT 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of KCS Energy, Inc. (the "Company") on Form 10-Q for the period ending September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Frederick Dwyer, Principal Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2) The information contained in the Report fairly presents, in all material respects the financial condition and results of operations of the Company. /s/ Frederick Dwyer - ---------------------------- Frederick Dwyer Principal Financial Officer November 14, 2002 -----END PRIVACY-ENHANCED MESSAGE-----