<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1995
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.)
379 THORNALL STREET, EDISON, NEW JERSEY 08837
(Address of principal executive offices) (Zip Code)
(908) 632-1770
(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: 11,486,310 shares outstanding as of
July 31, 1995.
<PAGE> 2
KCS ENERGY, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
(Thousands of Dollars) Unaudited 1995 1994 1995 1994
-------------------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue $ 126,556 $ 84,491 $ 313,901 $ 254,855
---------------------------------------------------------------------------------------------------------------
Operating costs and expenses
Cost of gas sales 103,353 63,036 242,278 200,229
Other operating and administrative 4,549 5,128 14,083 12,622
Depreciation, depletion
and amortization 9,348 5,192 26,029 11,787
---------------------------------------------------------------------------------------------------------------
Total operating costs
and expenses 117,250 73,356 282,390 224,638
---------------------------------------------------------------------------------------------------------------
Operating income 9,306 11,135 31,511 30,217
Interest and other income, net 754 238 1,568 956
Interest expense (1,678) (530) (4,174) (1,737)
---------------------------------------------------------------------------------------------------------------
Income before income taxes 8,382 10,843 28,905 29,436
Federal and state income taxes 3,005 3,928 10,214 10,132
---------------------------------------------------------------------------------------------------------------
Net income $ 5,377 $ 6,915 $ 18,691 $ 19,304
===============================================================================================================
Earnings per share of common
stock and common stock
equivalents $ 0.46 $ 0.58 $ 1.59 $ 1.63
===============================================================================================================
Average shares of common stock
and common stock equivalents
outstanding 11,784,631 11,838,138 11,759,326 11,842,721
===============================================================================================================
Cash dividends per share $ 0.03 $ 0.02 $ 0.09 $ 0.06
===============================================================================================================
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
2
<PAGE> 3
KCS ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, September 30,
(Thousands of Dollars) Unaudited 1995 1994
--------- -------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 1,663 $ 5,075
Trade accounts receivable, net 94,232 35,632
Fuel inventories 962 2,327
Federal income taxes receivable 607 840
Other current assets 1,936 3,856
--------------------------------------------------------------------------------------
Current assets 99,400 47,730
--------------------------------------------------------------------------------------
Oil and gas properties, full cost
method, net 132,716 112,470
Natural gas transportation systems, net 20,232 17,379
Other property, plant and equipment, net 1,241 1,483
--------------------------------------------------------------------------------------
Property, plant and equipment, net 154,189 131,332
--------------------------------------------------------------------------------------
Investments and other assets 2,935 2,354
--------------------------------------------------------------------------------------
$ 256,524 $ 181,416
======================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Note payable and current
maturities of long-term debt $ -- $ 1,722
Accounts payable 49,778 34,419
Accrued liabilities 7,009 5,990
--------------------------------------------------------------------------------------
Current liabilities 56,787 42,131
--------------------------------------------------------------------------------------
Deferred credits and other liabilities 27,151 16,948
--------------------------------------------------------------------------------------
Long-term debt 80,400 48,571
--------------------------------------------------------------------------------------
Stockholders' equity
Common stock, par value $0.01 per
share - authorized 50,000,000
shares, issued 12,379,058 and
12,324,116, respectively 124 123
Additional paid-in capital 24,197 23,745
Retained earnings 71,137 53,133
Less treasury stock, 892,748 and 890,248 shares,
respectively, at cost (3,272) (3,235)
--------------------------------------------------------------------------------------
Total stockholders' equity 92,186 73,766
--------------------------------------------------------------------------------------
$ 256,524 $ 181,416
======================================================================================
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
3
<PAGE> 4
KCS ENERGY, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
(Thousands of Dollars) Unaudited 1995 1994
-------------------------------- -------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 18,691 $ 19,304
Non-cash charges (credits):
Depreciation, depletion and amortization 26,029 11,787
Other non-cash charges and credits, net 10,432 6,325
------------------------------------------------------------------------------
55,152 37,416
Net changes in assets and liabilities:
Trade accounts receivable (58,600) 14,589
Accounts payable and accrued liabilities 15,833 (18,675)
Fuel inventories 1,365 677
Other, net 3,816 3,784
------------------------------------------------------------------------------
Net cash provided by operating activities 17,566 37,791
------------------------------------------------------------------------------
Cash flows from investing activities:
Investment in oil and gas properties (46,713) (33,938)
Other capital expenditures (3,770) (1,260)
------------------------------------------------------------------------------
Net cash used in investing activities (50,483) (35,198)
------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from debt 54,400 11,400
Repayments of debt (23,748) (17,543)
Tax benefit on stock option exercises 200 1,182
Dividends paid (917) (687)
Other, net (430) 150
------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 29,505 (5,498)
------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (3,412) (2,905)
Cash and cash equivalents at beginning of period 5,075 11,348
------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 1,663 $ 8,443
==============================================================================
</TABLE>
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 $3,473,000 and $1,378,000 for the nine months ended June 30, 1995
and June 30, 1994, respectively. No income tax payments were made during the
nine months ended June 30, 1995, compared with payments of $2,669,000 for the
nine months ended June 30, 1994.
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
4
<PAGE> 5
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. Revenues and operating income by business segment were as
follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
(Thousands of Dollars) Unaudited 1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue
Oil and Gas Exploration
and Production $ 20,727 $ 18,801 $ 64,438 $ 45,864
Energy Marketing and Services 101,847 60,920 240,077 197,632
Natural Gas Transportation 6,836 5,686 17,716 14,568
Intercompany Sales (2,854) (916) (8,330) (3,209)
--------------------------------------------------------------------------------------------
$ 126,556 $ 84,491 $ 313,901 $ 254,855
============================================================================================
Operating Income
Oil and Gas Exploration
and Production $ 9,599 $ 11,308 $ 31,898 $ 28,601
Energy Marketing and Services 2 337 432 2,481
Natural Gas Transportation 419 185 1,150 1,213
--------------------------------------------------------------------------------------------
Total Business Segments 10,020 11,830 33,480 32,295
Corporate Expenses (714) (695) (1,969) (2,078)
--------------------------------------------------------------------------------------------
9,306 11,135 31,511 30,217
Interest and Other Income, net 754 238 1,568 956
Interest Expense (1,678) (530) (4,174) (1,737)
--------------------------------------------------------------------------------------------
Income Before Income Taxes $ 8,382 $ 10,843 $ 28,905 $ 29,436
============================================================================================
</TABLE>
5
<PAGE> 6
KCS ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3. A KCS subsidiary, KCS Resources, Inc. ("KCS"), is currently
selling gas produced from certain leases in south Texas under a
contract with Tennessee Gas Pipeline Company ("Tennessee Gas"). KCS has
asserted that the contract, which expires in January 1999, provides
that the gas price is to be calculated in accordance with Section
102(b)(2) of the Natural Gas Policy Act of 1978 ("NGPA"), plus
reimbursement of severance taxes.
Tennessee Gas filed suit in August 1990, in the 57th District
Court of Bexar County, Texas, against KCS and its cosellers under the
contract contending, among other things, that a portion of the leases
were no longer subject to the contract; that for the balance of the
leases, the purchase price was to be based on Section 101 of the NGPA
which, while less than the price calculated under Section 102(b)(2), is
still considerably above current spot market prices; and that the
leases could not be pooled under the contract with other lands. In
August 1995, the Texas Supreme Court decided all of these issues in
favor of KCS and its co-sellers.
In its suit, Tennessee Gas also asked the Court to characterize
the contract as an output contract, and therefore subject to Section
2.306 of the Texas Uniform Commercial Code. In its August 1995 opinion,
the Texas Supreme Court held that Section 2.306 was applicable to the
contract. The Court remanded to the trial court for plenary trial the
question of whether, as required by Section 2.306, gas volumes tendered
to Tennessee Gas under the contract were tendered in good faith and
were not unreasonably disproportionate to any normal or otherwise
comparable prior output.
KCS intends to seek a rehearing by the Texas Supreme Court of
the Section 2.306 issue. If the Court does not grant a rehearing or
does not change its ruling after rehearing the matter, KCS expects the
trial on this issue to take place no earlier than 1996. While KCS
believes it will prevail at trial, there can be no assurance of the
ultimate outcome of this matter. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in this Form
10-Q for further information regarding the Tennessee Gas contract.
At June 30, 1995, the Company had recorded cumulative revenue
of approximately $126 million for gas sold under the Tennessee Gas
contract, of which approximately 70% is at issue in the Tennessee Gas
litigation. While the Company expects to prevail at trial, an adverse
decision could require the Company to reverse some or all of the
contested revenue and repay Tennessee Gas (less amounts not yet
received). Accounts receivable from Tennessee Gas increased from $1.8
million at September 30, 1994 to $42.4 million at June 30, 1995. The
Company expects receipt of these funds within the next twelve months.
4. Three lawsuits involving claims by the holders of the royalty
interests on the acreage covered by the Tennessee Gas contract have
been instituted in the Texas State Courts. The royalty holders claim
that their royalty payments should be based on the price paid by
Tennessee Gas for the gas purchased by it under the contract. KCS has
been paying royalties for this gas based upon the spot market price.
Because its leases have market-value royalty provisions, KCS believes
it is in full compliance under the leases with its royalty holders. The
lawsuits have only recently been filed, and only procedural matters
have been decided to date.
6
<PAGE> 7
KCS ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The amount at issue cannot be determined at this time. It is a function
of the quantity of gas for which Tennessee Gas ultimately is obligated to pay at
the contract price. Unless KCS is successful in its rehearing efforts before the
Texas Supreme Court, the quantity of gas for which payment is to be made at the
contract price will be determined after plenary trial.(See Note 3). As of June
30, 1995, the amount of gas taken by Tennessee Gas attributable to these royalty
interests was approximately 2.0 Bcf, for which royalties have been paid by KCS
at the average spot price of approximately $1.42 per Mcf, net of severance tax.
The average contract price was approximately $7.32 per Mcf, net of severance
tax. Consequently, should KCS prevail in its litigation with Tennessee Gas, and
should the royalty interest owners be successful in their claim that the gas
attributable to the royalty interests is to be paid for by KCS at the contract
price, the maximum amount claimed as a result of the foregoing information would
be approximately $11.8 million.
7
<PAGE> 8
KCS ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations - Consolidated
Net income for the three months ended June 30, 1995 was $5,377,000, or
$0.46 per share, compared to $6,915,000, or $0.58 per share, for the same period
a year ago. For the nine months ended June 30, 1995, net income was $18,691,000,
or $1.59 per share, compared to $19,304,000, or $1.63 per share, last year. The
decline in earnings in the current three and nine-month periods was largely due
to lower market prices for natural gas resulting from near-term excess supply in
North America in part due to the warmer than normal weather conditions during
the peak winter heating season.
Results of Operations - Business Segments
Segment information reflects volumes, revenues and expenses associated
with transactions involving affiliates which are eliminated in consolidation.
Oil and Gas Exploration and Production
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
(Thousands of Dollars) Unaudited 1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue(a) $20,727 $18,801 $64,438 $45,864
Production costs 1,259 1,930 4,511 4,786
Depreciation, depletion
and amortization 9,069 4,904 25,156 10,956
Other operating expenses 800 659 2,873 1,521
-----------------------------------------------------------------------------------
Operating income $ 9,599 $11,308 $31,898 $28,601
===================================================================================
Oil production (Mbbl) 35 47 127 153
Natural gas production (MMcf):
Tennessee Gas contract 1,646 1,969 6,199 5,331
Non-contract 2,594 824 6,340 2,324
-----------------------------------------------------------------------------------
Total gas production 4,240 2,793 12,539 7,655
===================================================================================
Average sales price:
Oil (per bbl) $ 18.33 $ 15.92 $ 16.69 $ 14.57
Gas (per Mcf) 4.80 6.43 5.00 5.66
DD&A as a percent of revenue 43.8% 26.0% 39.0% 23.8%
===================================================================================
</TABLE>
(a) Excludes $262 and $806 of revenue recorded by the Energy Marketing and
Services segment for the three and nine months ended June 30, 1995,
respectively, related to the volumetric production payment program.
8
<PAGE> 9
KCS ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Natural gas production increased 52% to 4,240 MMcf and 69% to 12,539
MMcf for the three and nine months ended June 30, 1995, respectively, compared
to the same periods a year ago. These increases were primarily due to the
expansion of the company's volumetric production payment program and increased
exploration and development drilling on properties not covered by the Tennessee
Gas contract. Non-contract gas production accounted for 61% and 51% of total gas
production during the current year three and nine-month periods compared to 30%
in the prior year periods. The increases in non-contract production as a
percentage of total gas production, while an integral part of the company's
overall growth strategy, make the company more sensitive to fluctuations in the
market price of natural gas. The lower average gas prices for both periods
reflected approximately 30% lower average non-contract gas prices and the higher
percentage of non-contract production. (See Note 7 to Consolidated Financial
Statements in the Company's 1994 Annual Report to Stockholders and Note 3 to
Condensed Consolidated Financial Statements of this Form 10-Q for information
regarding the Tennessee Gas contract).
The increase in revenue for the three months ended June 30, 1995
compared to the same period last year reflected higher non-contract production
partially offset by lower production covered under the Tennessee Gas contract
and the decrease in noncontract gas prices. The increase in revenue in the
current year nine-month period reflected higher Tennessee Gas contract
production during the first half of the fiscal year along with higher
non-contract production, partially offset by the decrease in non-contract gas
prices.
The increases in other costs and expenses were mainly attributable to
the increase in production volume. The increase in depreciation, depletion and
amortization ("DD&A") reflected the increase in volume along with an increase in
the DD&A rate. The DD&A rate reflects, among other things, current lower gas
prices applied to reserves to be produced in the future. In addition, the
increase in the Company's reserves not covered by the Tennessee Gas contract, as
a percentage of total reserves, contributed to the increase in the DD&A rate.
Natural Gas Transportation
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
(Thousands of Dollars) Unaudited 1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue $6,836 $5,686 $17,716 $14,568
Cost of gas sales 5,764 4,866 14,618 11,638
--------------------------------------------------------------------------------
Gross Margin 1,072 820 3,098 2,930
Depreciation 213 221 650 644
Other operating expenses 440 414 1,298 1,073
--------------------------------------------------------------------------------
Operating income $ 419 $ 185 $ 1,150 $ 1,213
================================================================================
Volume (MMcf) 6,233 5,757 18,058 16,901
Gross Margin per Mcf $0.172 $0.142 $ 0.172 $ 0.173
================================================================================
</TABLE>
9
<PAGE> 10
KCS ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
The increase in transportation gross margins for the current three and
nine-month periods was due mainly to the increase in the processing of high Btu
gas from a portion of the natural gas supply from the Company's Texas intrastate
pipeline. Processing of high Btu gas to extract liquid hydrocarbons contributes
to operating income during periods when gas prices are low relative to liquids
prices, acting as a "natural hedge" for a portion of the Company's gas
production during such periods.
The increase in other operating expenses for the nine months ended June
30, 1995 compared to the same period a year ago was primarily due to costs
associated with the operation of the company's gathering systems, the timing of
routine repairs and maintenance and the expansion of supply laterals on the
Company's Texas intrastate pipeline.
Energy Marketing and Services
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
(Thousands of Dollars) Unaudited 1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue $101,847 $60,920 $240,077 $197,632
Cost of gas sales 100,249 59,076 235,329 191,007
------------------------------------------------------------------------------------
Gross Margin 1,598 1,844 4,748 6,625
Other operating expenses 1,596 1,507 4,316 4,144
------------------------------------------------------------------------------------
Operating income $ 2 $ 337 $ 432 $ 2,481
====================================================================================
Volume (MMcf) 64,659 35,159 154,109 105,582
Gross Margin per Mcf $ 0.025 $ 0.052 $ 0.031 $ 0.063
====================================================================================
</TABLE>
While the Company recorded its highest volume totals in its history
during the current three and nine-month periods, operating income was down
significantly due largely to market conditions. Natural gas sale prices were
approximately 20% lower for the current year three- month period and 25% lower
for the current year nine-month period compared to the same periods a year ago
while per unit gross margins were approximately 50% lower during the current
year periods. Warmer than normal winter weather conditions in the eastern half
of the U.S., where the Company's major markets are located, coupled with high
levels of gas supplies, were the major reasons for lower natural gas prices.
During the prior year periods, when extreme winter weather conditions were
present, the Company capitalized on opportunities presented by extended periods
of severe weather and more volatile gas prices. Low natural gas prices also
reduced the per unit margins from the Company's volumetric production payment
program. Current year profitability was also affected by a major cogeneration
plant serviced by the company being under repair and out of service during the
first fiscal quarter and two other cogeneration plants serviced by the company
being placed in a standby mode (where they will only operate on an as needed or
emergency basis) since the end of the first fiscal quarter.
10
<PAGE> 11
KCS ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Interest Expense
Approximately 30% of the current year increase in interest expense was
due to higher average interest rates and approximately 70% was due to higher
average borrowings. The increase in borrowings was largely due to an interim
agreement with Tennessee Gas (See "Working Capital"), under which the Company
receives currently only a partial non-refundable cash payment (with the balance
being covered by a bond) from Tennessee Gas for sales of gas production under
the contract, an amount substantially less than it anticipates will ultimately
be collected for sales of its contract production. In the interim, KCS has been
utilizing its credit facilities to a larger extent in order to finance its
capital spending program. (See "Liquidity and Capital Resources" for further
information).
Interest and Other Income
Interest and other income in fiscal 1995 consisted mainly of interest
income recorded on the difference between the full contract price and the price
paid currently by Tennessee Gas pursuant to the interim agreement (see "Working
Capital"). In 1994, other income consisted primarily of a one-time payment for
interest on funds previously held by the operator of the jointly-owned wells
covered by the Tennessee Gas contract ($0.5 million) and the amortization of the
balance of deferred gain on the sale of the propane business in 1989 ($0.3
million).
Liquidity and Capital Resources
Operating cash flow (net income adjusted for non-cash charges) was
$55.1 million for the nine months ended June 30, 1995 compared to $37.4 million
for the same period a year ago. This increase was largely due to the continued
growth of the Company's oil and gas exploration and production business.
(Operating cash flow, as thus defined, is not a measure of financial performance
or liquidity under generally accepted accounting principles ("GAAP") and should
not be considered in isolation or as a substitute for those measures accepted
under GAAP).
Working Capital
Working capital increased to $42.6 million at June 30, 1995 from $5.6
million at September 30, 1994 due mainly to an increase in accounts receivable
from Tennessee Gas which increased from $1.8 million at September 30, 1994 to
$41.2 million at June 30, 1995. KCS, its co-sellers under the Tennessee Gas
contract and Tennessee Gas entered into an agreement in October 1994 whereby
Tennessee Gas agreed to take no less than 85% of the delivery capacity, if
available, from the wells covered by the contract on a monthly basis, and to pay
$3.00 (non-refundable) per MMBtu, for all gas taken under the contract from
September 17, 1994 thru August 14, 1995. Tennessee Gas also posted a $120
million supersedeas bond to suspend enforcement of the declaratory judgement
entered against it based upon its obligation to pay the differential between the
contract price ($7.74 per MMBtu plus severance tax reimbursements for sales of
gas production during the nine months ended June 30, 1995) and the $3.00 per
MMBtu, while it appeals the decision favorable to KCS and its co-sellers in the
ongoing litigation (See Note 7 to Consolidated Financial Statements in the
Company's 1994 Annual Report to Stockholders and Note 3 to Condensed
Consolidated Financial Statements of this Form 10-Q). That differential is
included in accounts receivable. The Company expects receipt of these funds
within the next twelve months. A hearing on the supersedeas bond is scheduled
for August 10, 1995. Working Capital was also affected by the timing of cash
receipts and cash payments
11
<PAGE> 12
KCS ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
inherent in the high volume activity of the Company's energy marketing and
services business.
Capital Expenditures
Capital expenditures for the nine months ended June 30, 1995 were $50.5
million, of which $46.7 million were invested in oil and gas operations,
including $19.5 million attributable to the purchase of gas reserves under the
Company's volumetric production payment program. The other $27.2 million
invested during the nine-month period in oil and gas operations was expended
largely to conduct exploratory and development drilling. The Company funded its
capital expenditures for the period with a mix of internally generated cash and
additional borrowings under its credit facilities.
Credit Facilities
In January 1995 the Company's natural gas marketing subsidiary replaced
its existing working capital facility with two new revolving credit facilities
designed to support the expansion of its gas marketing operations and its
volumetric production payment program. The first new facility is a $25 million
revolving bank credit facility, which matures in February 1998 and is secured by
the oil and gas reserves purchased through certain volumetric production
payments. Under the terms of this facility, the subsidiary's borrowing limit is
a function of a borrowing base which may be adjusted from time to time by the
lender's valuation of the pledged assets. The facility permits the borrower to
choose between interest rate options based on the bank's prime rate, its
certificate of deposit rate or LIBOR. A commitment fee is paid on the unused
portion of the borrowing base. At June 30, 1995 the borrowing base was $8.0
million, of which $7.0 million was outstanding.
The Company's natural gas marketing subsidiary entered into a second
new revolving credit facility with another bank which matures in August 1996 and
is secured by its accounts receivable and other assets (excluding those pledged
under the volumetric production payment facility above). Under the terms of this
agreement the subsidiary may borrow the lesser of the maximum credit commitment
or the borrowing base supported by the eligible accounts receivable, as defined
in the agreement. The borrowing base, or actual availability, was $25 million at
June 30, 1995, and is reviewed monthly. The Company has the option to choose the
interest rate to be charged by the bank on each advance based either on its
prime rate or on LIBOR. A commitment fee is paid on the unused portion of the
credit commitment. At June 30, 1995, $25 million was outstanding under this
facility. In August 1995, the maximum commitment was increased from $25 million
to $35 million.
The Company also has a Master Note Facility with a bank group which is
used for the expansion of the Company's exploration and production and natural
gas transportation businesses and is secured by substantially all their assets.
The borrowing base, or actual availability, of the Company's Master Note
Facility was increased from $64 million to $75 million in January 1995. At June
30, 1995, the Company had utilized $59.5 million of the availability under the
facility, $48.4 million as cash advances and $11.1 million for the issuance of a
letter of credit in favor of the operator of the Bob West Field as a condition
to the release of certain funds.
12
<PAGE> 13
KCS ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Tennessee Gas Litigation
At June 30, 1995, the Company had recorded cumulative revenue of
approximately $126 million for gas sold under the Tennessee Gas contract, of
which approximately 70% is at issue in the Tennessee Gas litigation. Unless the
Company is successful in its rehearing efforts before the Texas Supreme Court
(see Note 3), a trial will be held to determine whether the quantity of gas
tendered to Tennessee Gas under the contract complied with the requirements of
Section 2.306 of the Texas Uniform Commercial Code. While the Company expects to
prevail at trial, an adverse decision could require the Company to reverse some
or all of the contested revenue and repay Tennessee Gas (less amounts not yet
received). In addition, the borrowing base of the Master Note Facility could be
reduced, since it is based in part on an evaluation of the gas reserves on the
acreage covered by the Tennessee Gas contract.
Even in the event of an adverse outcome in the litigation, the Company
believes it has sufficient resources to support its business and growth
strategies, albeit at a somewhat slower rate of growth.
Equity Availability
KCS has 5 million authorized but unissued shares of preferred stock and
over 38.5 million shares of common stock available for future equity financing.
13
<PAGE> 14
KCS ENERGY, INC. - FORM 10-Q
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Incorporated by reference from Notes 3 and 4 to Notes to
Condensed Consolidated Financial Statements of this Form 10-Q.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 11 - Statement re computation of per share earnings.
Exhibit 27 - Financial Data Schedule.
(b) Reports on Form 8-K - There were no reports on Form 8-K
filed for the three months ended June 30, 1995.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KCS ENERGY, INC.
August 14, 1995 /S/ HENRY A. JURAND
--------------------------------
Henry A Jurand
Vice President, Treasurer
and Secretary
(Principal Financial Officer)
14
<PAGE> 15
EXHIBIT INDEX
-------------
Exhibit
No.
-------
11 Statement re Computation of Per Share Earnings.
27 Financial Data Schedule.
<PAGE> 1
Exhibit 11
Statement Re Computation of Per Share Earnings
Primary earnings per share were calculated as follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
June 30, June 30,
-------------------------------------------
1995 1994 1995 1994
---- ---- ---- ----
In Thousands
Except per share amounts
<S> <C> <C> <C> <C>
Net income $ 5,377 $ 6,915 $18,691 $19,304
==========================================================================================
Average shares of common stock outstanding 11,480 11,517 11,461 11,477
Add: Net shares assumed to be issued for
dilutive stock options 305 321 298 366
------------------------------------------------------------------------------------------
Average shares of common stock and
common stock equivalents outstanding 11,785 11,838 11,759 11,843
==========================================================================================
Earnings per share of common stock and
common stock equivalents $ 0.46 $ 0.58 $ 1.59 $ 1.63
==========================================================================================
</TABLE>
Fully diluted earnings per share were calculated as follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
June 30, June 30,
-------------------------------------------
1995 1994 1995 1994
---- ---- ---- ----
In Thousands
Except per share amounts
<S> <C> <C> <C> <C>
Net income $ 5,377 $ 6,915 $18,691 $19,304
==========================================================================================
Average shares of common stock outstanding 11,480 11,517 11,461 11,477
Add: Net shares assumed to be issued for
dilutive stock options 320 321 305 366
------------------------------------------------------------------------------------------
Average shares of common stock and
common stock equivalents outstanding
assuming full dilution 11,800 11,838 11,766 11,843
==========================================================================================
Earnings per share of common stock and
common stock equivalents assuming full
dilution $ 0.46 $ 0.58 $ 1.59 $ 1.63
==========================================================================================
</TABLE>
15
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-START> OCT-01-1994
<PERIOD-END> JUN-30-1995
<CASH> 1,663
<SECURITIES> 0
<RECEIVABLES> 94,586
<ALLOWANCES> 354
<INVENTORY> 962
<CURRENT-ASSETS> 99,400
<PP&E> 226,191
<DEPRECIATION> 72,002
<TOTAL-ASSETS> 256,524
<CURRENT-LIABILITIES> 56,787
<BONDS> 0
<COMMON> 124
0
0
<OTHER-SE> 92,062
<TOTAL-LIABILITY-AND-EQUITY> 256,524
<SALES> 313,901
<TOTAL-REVENUES> 313,901
<CGS> 242,278
<TOTAL-COSTS> 242,278
<OTHER-EXPENSES> 40,112
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,174
<INCOME-PRETAX> 28,905
<INCOME-TAX> 10,214
<INCOME-CONTINUING> 18,691
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,691
<EPS-PRIMARY> 1.59
<EPS-DILUTED> 1.59
</TABLE>
