<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 March 31, 1995
--------------
OR
_____ TRANSITION REPORT PURSUANT TO SECTION 3 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: 11,476,163 shares outstanding as of
April 30, 1995.
1
<PAGE> 2
KCS ENERGY, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
(Thousands of Dollars) Unaudited 1995 1994 1995 1994
- -------------------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue $ 96,039 $ 85,173 $ 187,345 $ 170,364
- ----------------------------------------------------------------------------- --------------------------
Operating costs and expenses
Cost of gas sales 72,422 68,710 138,925 137,193
Other operating and administrative 4,311 3,461 9,534 7,494
Depreciation, depletion
and amortization 9,122 3,622 16,681 6,595
- ----------------------------------------------------------------------------------------------------------
Total operating costs
and expenses 85,855 75,793 165,140 151,282
- ----------------------------------------------------------------------------------------------------------
Operating income 10,184 9,380 22,205 19,082
Interest and other income, net 706 592 814 718
Interest expense (1,372) (662) (2,496) (1,207)
- ----------------------------------------------------------------------------------------------------------
Income before income taxes 9,518 9,310 20,523 18,593
Federal and state income taxes 3,299 3,140 7,209 6,204
- ----------------------------------------------------------------------------------------------------------
Net income $ 6,219 $ 6,170 $ 13,314 $ 12,389
==========================================================================================================
Earnings per share of common
stock and common stock
equivalents $0.53 $0.52 $1.13 $1.05
==========================================================================================================
Average shares of common stock
and common stock equivalents
outstanding 11,753,891 11,857,249 11,746,673 11,845,012
==========================================================================================================
Cash dividends per share $0.03 $0.02 $0.06 $0.04
==========================================================================================================
</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>
March 31, September 30,
(Thousands of Dollars) Unaudited 1995 1994
- -------------------------------- ---- ----
<S> <C> <C>
Assets
------
Current assets
Cash and cash equivalents $ 1,645 $ 5,075
Trade accounts receivable, net 72,474 35,632
Fuel inventories 1,355 2,327
Federal income taxes receivable 598 840
Other current assets 1,558 3,856
- ------------------------------------------------------------------------------------------
Current assets 77,630 47,730
- ------------------------------------------------------------------------------------------
Oil and gas properties, full cost
method, net 134,134 112,470
Natural gas transportation systems, net 18,131 17,379
Other property, plant and equipment, net 1,232 1,483
- ------------------------------------------------------------------------------------------
Property, plant and equipment, net 153,497 131,332
- ------------------------------------------------------------------------------------------
Investments and other assets 2,707 2,354
- ------------------------------------------------------------------------------------------
$233,834 $181,416
==========================================================================================
Liabilities and stockholders' equity
------------------------------------
Current liabilities
Note payable and current
maturities of long-term debt $ 335 $ 1,722
Accounts payable 44,428 34,419
Accrued liabilities 6,060 5,990
- ------------------------------------------------------------------------------------------
Current liabilities 50,823 42,131
- ------------------------------------------------------------------------------------------
Deferred credits and other liabilities 24,343 16,948
- ------------------------------------------------------------------------------------------
Long-term debt 72,000 48,571
- ------------------------------------------------------------------------------------------
Stockholders' equity
Common stock, par value $0.01 per
share - authorized 50,000,000
shares, issued 12,359,511 and
12,324,116, respectively 124 123
Additional paid-in capital 24,056 23,745
Retained earnings 65,760 53,133
Less treasury stock, 892,748 and 890,248 shares,
respectively, at cost (3,272) (3,235)
- ------------------------------------------------------------------------------------------
Total stockholders' equity 86,668 73,766
- ------------------------------------------------------------------------------------------
$233,834 $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>
Six Months Ended
March 31,
(Thousands of Dollars) Unaudited 1995 1994
-------------------------------- ---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $13,314 $12,389
Non-cash charges (credits):
Depreciation, depletion and amortization 16,681 6,595
Other non-cash charges and credits, net 7,547 3,018
- ----------------------------------------------------------------------------------------------
37,542 22,002
Net changes in assets and liabilities:
Trade accounts receivable (36,842) 7,372
Accounts payable and accrued liabilities 10,079 (6,401)
Fuel inventories 972 1,660
Other, net 3,960 1,366
- ----------------------------------------------------------------------------------------------
Net cash provided by operating activities 15,711 25,999
- ----------------------------------------------------------------------------------------------
Cash flows from investing activities:
Investment in oil and gas properties (39,087) (22,747)
Other capital expenditures (1,356) (1,003)
- ----------------------------------------------------------------------------------------------
Net cash used in investing activities (40,443) (23,750)
- ----------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from debt 46,000 11,400
Repayments of debt (23,958) (13,134)
Tax benefit on stock option exercises 95 1,018
Dividends paid (573) (457)
Other, net (262) 226
- ----------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 21,302 (947)
- ----------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (3,430) 1,302
Cash and cash equivalents at beginning of period 5,075 11,348
- ----------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 1,645 $12,650
==============================================================================================
</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 $2,055,000 and $944,000 for the six months ended March 31, 1995
and March 31, 1994, respectively. No income tax payments were made during the
six months ended March 31, 1995, compared with payments of $2,103,000 for the
six months ended March 31, 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 Six Months Ended
March 31, March 31,
(Thousands of Dollars) Unaudited 1995 1994 1995 1994
-------------------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue
-------
Oil and Gas Exploration
and Production $20,764 $12,897 $ 43,711 $ 27,063
Energy Marketing and Services 73,093 69,175 138,230 136,712
Natural Gas Transportation 5,794 4,628 10,880 8,882
Intercompany Sales (3,612) (1,527) (5,476) (2,293)
- ---------------------------------------------------------------------------------------------------
$96,039 $85,173 $187,345 $170,364
===================================================================================================
Operating Income
----------------
Oil and Gas Exploration
and Production $ 9,828 $ 7,804 $ 22,299 $ 17,293
Energy Marketing and Services 416 1,545 430 2,144
Natural Gas Transportation 460 633 731 1,028
- ---------------------------------------------------------------------------------------------------
Total Business Segments 10,704 9,982 23,460 20,465
Corporate Expenses (520) (602) (1,255) (1,383)
- ---------------------------------------------------------------------------------------------------
10,184 9,380 22,205 19,082
Interest and Other Income, net 706 592 814 718
Interest Expense (1,372) (662) (2,496) (1,207)
- ---------------------------------------------------------------------------------------------------
Income Before Income Taxes $ 9,518 $ 9,310 $ 20,523 $ 18,593
===================================================================================================
</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. In addition, it provides that
Tennessee Gas shall take or pay for 85% of the delivery capacity of
wells covered by the contract.
Tennessee Gas filed suit in August 1990, in the 57th District
Court of Bexar County, Texas, against KCS and its co- sellers 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 July, 1992, the Texas District Court upheld the contract
and also awarded KCS approximately $760,000 for legal fees and past
underpayments. In August 1993, the Court of Appeals affirmed the
lower court's decision that all the leases were subject to the
contract, that the price payable by Tennessee Gas under the contract
should be determined in accordance with Section 102(b)(2) of the NGPA
and that KCS had the right to pool the leases, the production from
which would be covered by the contract on a pro rata acreage basis.
The Court of Appeals also ruled that the lower court erred in
granting summary judgment that the contract was not an output contract
governed by the Texas Uniform Commercial Code ("Code"). Specifically,
the Court of Appeals ruled that the contract was subject to Section
2.306 of the Code, that new wells could be drilled and production
increased, but that the right of the sellers to increase production is
subject to the good faith and reasonableness provisions of the Code,
an issue that was remanded to the lower court for trial. The Court of
Appeals also set aside the lower court's award to KCS of legal fees
and past underpayments, pending the outcome of the trial on the output
issue.
In June 1994, the Supreme Court of Texas agreed to hear and
decide the output issue raised by KCS in its application for a writ of
error. The Supreme Court of Texas also agreed to hear and decide
certain of the issues which Tennessee Gas raised in its application
for a writ of error involving rulings of the Court of Appeals which
had been decided in favor of KCS. Oral argument before the Texas
Supreme Court was heard on December 13, 1994. The Company is
currently awaiting the decision of the Court.
While KCS believes its position to be strong, and that it has
acted prudently, in good faith and in a reasonable manner under the
contract and should therefore prevail, there can be no assurance as to
the ultimate outcome of this matter. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" of this Form
10-Q for further information regarding the Tennessee Gas contract.
6
<PAGE> 7
KCS ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 no material
development has occurred.
The amount at issue cannot be determined at this time. It is
a function of the amount which Tennessee Gas ultimately pays for gas
that it purchases under the contract. The purchase price to be paid
by Tennessee Gas under the contract is one of the issues presently
before the Supreme Court of Texas (See Note 3).
As of March 31, 1995, the amount of gas taken by Tennessee Gas
attributable to these royalty interests was approximately 1.8 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 $ 7.29 per Mcf, net of severance tax.
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 March 31, 1995 was $6,219,000,
or $0.53 per share, compared to $6,170,000, or $0.52 per share, for the same
period a year ago. For the six months ended March 31, 1995 net income was
$13,314,000, or $1.13 per share, compared to $12,389,000, or $1.05 per share,
last year. The earnings improvement in the current three and six-month periods
was due to increased gas sales and production. The impact of higher Tennessee
Gas contract revenue and increased non-contract gas production was partially
offset by warmer than normal weather conditions and significantly lower energy
prices which had a negative impact on each of the Company's three business
segments. (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).
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 Six Months Ended
March 31, March 31,
(Thousands of Dollars) Unaudited 1995 1994 1995 1994
-------------------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue $20,764 $12,897 $43,711 $27,063
Production costs 1,221 1,370 3,252 2,856
Depreciation, depletion
and amortization 8,827 3,353 16,087 6,052
Other operating expenses 888 370 2,073 862
- -------------------------------------------------------------------------------------------
Operating income $ 9,828 $ 7,804 $22,299 $17,293
===========================================================================================
Oil production (Mbbl) 37 61 93 106
Natural gas production (MMcf):
Tennessee Gas contract 1,536 1,421 3,452 3,063
Non-contract 2,218 832 3,746 1,500
- -------------------------------------------------------------------------------------------
Total gas production 3,754 2,253 7,198 4,563
===========================================================================================
Average sales price (a):
Oil (per bbl) $ 17.08 $ 12.62 $ 16.21 $ 13.94
Gas (per Mcf) (b) 5.61 5.42 5.38 5.63
DD&A as a percent of revenue 42.6% 25.9% 36.8% 22.3%
===========================================================================================
</TABLE>
(a) Includes hedging gains and losses and excludes the effect of the volumetric
production payment program.
(b) Excludes severance tax reimbursements and the effect of gas pricing and
balancing determinations with other interest owners.
8
<PAGE> 9
KCS ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Revenue increased largely from higher overall gas sales and production,
including more volume covered under the Tennessee Gas contract, offset somewhat
by lower average prices on non-contract gas. Contract production increased 8%
to 1.5 Bcf during the three months and 13% to 3.5 Bcf for the six months March
31, 1995 compared to the same periods last year. Average sales prices under the
Tennessee Gas contract, excluding severance tax reimbursements, were $7.73 per
Mcf during the current year three-month period compared to $7.25 for the same
period last year. For the six months ended March 31, 1995, contract prices
averaged $7.70 per Mcf compared to $7.24 for the same period last year.
Non-contract production increased 167 percent to 2.2 Bcf and 150
percent to 3.7 Bcf for the three and six-month periods ended March 31, 1995,
respectively, compared to the same periods a year ago. The increase in
non-contract production includes 1.4 Bcf for the three months and 1.7 Bcf for
the six months ended March 31, 1995 related to the Company's volumetric
production payment program which began in September 1994. Non-contract gas
prices decreased approximately 31% and 29% for the current three and six-month
periods, respectively due largely to warmer than normal weather conditions and
the resultant excess natural gas storage supply and reflect overall market
conditions in North America.
The increase in other costs and expenses was mainly attributable to
the increase in production volume. Depreciation, depletion and amortization
increased due to the higher gas production 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, thereby reducing calculated
future gross revenue and increasing the DD&A rate.
Natural Gas Transportation
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
(Thousands of Dollars) Unaudited 1995 1994 1995 1994
-------------------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue $5,794 $4,628 $10,880 $ 8,882
Cost of gas sales 4,669 3,429 8,854 6,772
- -------------------------------------------------------------------------------------------
Gross Margin 1,125 1,199 2,026 2,110
Depreciation 218 209 437 423
Other operating expenses 447 357 858 659
- -------------------------------------------------------------------------------------------
Operating income $ 460 $ 633 $ 731 $ 1,028
===========================================================================================
Volume (MMcf) 6,198 5,066 11,825 11,144
Gross Margin per Mcf $0.182 $0.237 $0.171 $0.189
===========================================================================================
</TABLE>
The slight decrease in gross margins for the current three and
six-month periods was primarily due to mild weather conditions in Texas during
the winter months. The prior year periods reflected extreme weather conditions
which resulted in higher margins on natural gas sales and transportation to
certain high-priority, weather-sensitive customers. The effects of the current
year weather conditions were mitigated by an increase in volume, albeit at
lower per unit margins, and by the processing of 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.
9
<PAGE> 10
KCS ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
The increase in other operating expenses during the current three and
six-month periods was primarily due to costs associated with the expansion of
the company's gathering systems as well as the timing of routine repairs and
maintenance on the Company's Texas intrastate pipeline.
Energy Marketing and Services
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
(Thousands of Dollars) Unaudited 1995 1994 1995 1994
- -------------------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue $73,093 $69,175 $138,230 $136,712
Cost of gas sales 71,136 66,295 135,080 131,931
- -----------------------------------------------------------------------------------------
Gross Margin 1,957 2,880 3,150 4,781
Other operating expenses 1,541 1,335 2,720 2,637
- -----------------------------------------------------------------------------------------
Operating income $ 416 $ 1,545 $ 430 $ 2,144
=========================================================================================
Volume (MMcf) 47,325 34,365 89,450 70,423
Gross Margin per Mcf $0.041 $0.084 $0.035 $0.068
=========================================================================================
</TABLE>
While the Company recorded its highest volume totals in its history
during the current three and six-month periods, operating income was down
significantly due largely to market conditions. Natural gas sale prices and per
unit gross margins were approximately 30% and 50% lower, respectively, than the
same periods a year ago. Warmer than normal weather conditions in the eastern
half of the U.S., where the Company's major markets are located, coupled with a
high levels of gas supplies, were the major reasons for lower natural gas
prices. During the prior year periods, when extreme 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 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 until the year 2001) during the second quarter.
Interest Expense
Approximately 55% of the current year increase in interest expense was
due to higher average interest rates and approximately 45% was due to higher
average borrowings. Interest rates on the Company's credit facilities fluctuate
based on changes in market interest rates. The increase in borrowings was
largely due to an interim agreement with Tennessee Gas (See "Working Capital").
During the life of this agreement, the Company receives only a partial cash
payment 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
10
<PAGE> 11
KCS ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
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 by Tennessee Gas pursuant to the interim agreement (See "Working
Capital"). In 1994 other income was primarily from amortization of the
balance of deferred gain on the sale of the propane business in 1989.
Liquidity and Capital Resources
Operating cash flow (net income adjusted for non-cash charges) was
$37.5 million for the six months ended March 31, 1995 compared to $22.0 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.
Working Capital
Working capital increased to $26.8 million at March 31, 1995 from $5.6
million at September 30, 1994 due mainly to an increase in the accounts
receivable arising from oil and gas operations. 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, until the earlier of August 1, 1995 or such
time as the Supreme Court of Texas rules on the applications for writ of error
filed by KCS, its co-sellers and Tennessee Gas (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.)
Tennessee Gas also posted a $120 million supersedeas bond to secure its
obligation to pay the differential between the contract price ($7.70 per MMBtu
for sales of gas production during the six months ended March 31, 1994) and the
$3.00 per MMBtu, in the event of a decision favorable to KCS and its co-sellers.
That differential is included in accounts receivable. Working Capital was also
affected by the timing of cash receipts and cash payments inherent in the high
volume activity of the Company's energy marketing and services business.
Capital Expenditures
Capital expenditures for the six months ended March 31, 1995 were
$40.4 million, of which $39.1 million were invested in oil and gas operations,
including $17.8 million attributable to the purchase of gas reserves under the
Company's volumetric production payment program. The other $21.3 million
invested during the six-month period in oil and gas operations was expended
largely to conduct exploratory and development drilling. The Company funded its
capital expenditures for the quarter 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
11
<PAGE> 12
KCS ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
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 initial borrowing base was set at $10
million and will be reviewed at least semi-annually. 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 March 31, 1995 $7.0 million was
outstanding under this facility.
The Company's natural gas marketing subsidiary entered into a second
new $25 million 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 $25 million credit commitment or a percentage of eligible accounts
receivable, as defined in the agreement. The borrowing base, or actual
availability, was $22 million at March 31, 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 March 31, 1995, $18
million was outstanding under this facility.
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
March 31, 1995, the Company had utilized $50.5 million of the availability
under the facility, $39.4 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.
Tennessee Gas Litigation
At March 31, 1995, the Company had recorded cumulative revenue of
$109.3 million for newly discovered gas sold under the Tennessee Gas contract,
of which approximately 72% is attributable to the contract's contested,
above-market pricing provisions. While the Company has been successful to date
in defending the contract and expects ultimately to prevail, an adverse outcome
to the litigation could require the Company to reverse some or all of this
incremental revenue and repay Tennessee Gas. 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 cash 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.
12
<PAGE> 13
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 March 31, 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.
May 10, 1995 /S/ HENRY A. JURAND
----------------------------
Henry A Jurand
Vice President, Treasurer
and Secretary
(Principal Financial Officer)
13
<PAGE> 14
EXHIBIT INDEX
-------------
Exhibit
No. Description
- ------- -----------
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 Six Months
Ended Ended
March 31, March 31,
-----------------------------------------------
1995 1994 1995 1994
---- ---- ---- ----
In Thousands
Except per share amounts
<S> <C> <C> <C> <C>
Net income $ 6,219 $ 6,170 $13,314 $12,389
===================================================================================================
Average shares of common stock outstanding 11,466 11,508 11,452 11,456
Add: Net shares assumed to be issued for
dilutive stock options 288 349 295 389
- ---------------------------------------------------------------------------------------------------
Average shares of common stock and
common stock equivalents outstanding 11,754 11,857 11,747 11,845
===================================================================================================
Earnings per share of common stock and
common stock equivalents $0.53 $0.52 $1.13 $1.05
===================================================================================================
</TABLE>
Fully diluted earnings per share were calculated as follows:
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
March 31, March 31,
---------------------------------------------
1995 1994 1995 1994
---- ---- ---- ----
In Thousands
Except per share amounts
<S> <C> <C> <C> <C>
Net income $ 6,219 $ 6,170 $13,314 $12,389
===================================================================================================
Average shares of common stock outstanding 11,466 11,508 11,452 11,456
Add: Net shares assumed to be issued for
dilutive stock options 291 349 297 389
- ---------------------------------------------------------------------------------------------------
Average shares of common stock and
common stock equivalents outstanding
assuming full dilution 11,757 11,857 11,749 11,845
===================================================================================================
Earnings per share of common stock and
common stock equivalents assuming full
dilution $0.53 $0.52 $1.13 $1.05
===================================================================================================
</TABLE>
14
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-START> OCT-1-1994
<PERIOD-END> MAR-31-1995
<CASH> 1,645
<SECURITIES> 0
<RECEIVABLES> 72,697
<ALLOWANCES> 223
<INVENTORY> 1,355
<CURRENT-ASSETS> 77,630
<PP&E> 216,205
<DEPRECIATION> 62,708
<TOTAL-ASSETS> 233,834
<CURRENT-LIABILITIES> 50,823
<BONDS> 0
<COMMON> 124
0
0
<OTHER-SE> 86,544
<TOTAL-LIABILITY-AND-EQUITY> 233,834
<SALES> 187,345
<TOTAL-REVENUES> 187,345
<CGS> 138,925
<TOTAL-COSTS> 138,925
<OTHER-EXPENSES> 26,215
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,496
<INCOME-PRETAX> 20,523
<INCOME-TAX> 7,209
<INCOME-CONTINUING> 13,314
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,314
<EPS-PRIMARY> 1.13
<EPS-DILUTED> 1.13
</TABLE>
