<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) October 17, 1996
KCS ENERGY, INC.
(Exact name of registrant as specified in its charter)
Delaware 1-11698 22-2889587
(State or other (Commission File Number) (IRS Employer
jurisdiction of incorporation) Identification No.)
379 Thornall Street
Edison, New Jersey 08837
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (908) 632-1770
Not applicable
(Former name or former address, if changed since last report)
<PAGE> 2
Item 5. Other Events.
KCS Energy, Inc. (the "Company") has previously announced (see Exhibit
99 to this report) that it entered into a letter of intent on October 17, 1996
to acquire all of the outstanding stock of InterCoast Oil and Gas Company
(formerly Medallion Production Company), GED Energy Services, Inc. and
InterCoast Gas Services Company (collectively referred to as "Medallion"),
indirect wholly-owned subsidiaries of MidAmerican Energy Company, and certain
Section 29 tax credits, for a total purchase price of approximately $221
million. The purchase price is subject to adjustments for oil and gas
property title defects, environmental liabilities and other items.
Consummation of the acquisition is subject to certain customary conditions,
including confirmation of the representations and warranties as of closing and
delivery of various certificates and legal opinions. Although the Company
currently expects that the acquisition will be closed during December 1996,
there can be no assurance that the closing will actually occur by such time or
that the acquisition will be consummated.
Financial statements of Medallion and certain pro forma financial
information reflecting the combined operations of the Company and Medallion are
attached to this report. These statements and the pro forma information are
also reflected in a Registration Statement on Form S-3 that is being filed with
the Securities and Exchange Commission on the date hereof.
1
<PAGE> 3
Item 7. Financial Statements and Exhibits.
(a) Financial statements of business acquired.
2
<PAGE> 4
THE INTERCOAST ENTITIES
COMBINED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
------- ------- ------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue
Gas and oil revenues.............. $37,359 $44,466 $48,109 $22,960 $ 33,757
Natural gas sales revenues........ 16,715 13,700 25,351 4,212 70,549
Gathering system revenues......... -- -- -- -- 319
------- ------- ------- ------- --------
54,074 58,166 73,460 27,172 104,625
------- ------- ------- ------- --------
Operating costs and expenses
Gas and oil operating expenses.... 9,616 15,016 14,552 7,328 8,103
Cost of gas sold.................. 16,216 13,142 24,361 3,963 69,026
Gathering system expenses......... -- -- -- -- 52
Other operating and administrative
expenses....................... 2,268 2,713 2,658 1,230 1,680
Depreciation, depletion and
amortization................... 13,672 18,782 21,705 10,358 13,484
------- ------- ------- ------- --------
41,772 49,653 63,276 22,879 92,345
------- ------- ------- ------- --------
Interest expense.................... -- -- -- -- 620
Income before income taxes.......... 12,302 8,513 10,184 4,293 11,660
Provision for income taxes.......... 5,383 3,202 3,638 1,533 4,667
------- ------- ------- ------- --------
Net income..................... $ 6,919 $ 5,311 $ 6,546 $ 2,760 $ 6,993
======= ======= ======= ======= ========
</TABLE>
The accompanying notes to combined financial statements are an integral part of
these statements.
3
<PAGE> 5
THE INTERCOAST ENTITIES
COMBINED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1994 1995 1996
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets
Cash and cash equivalents................................ $ 5,124 $ 8,323 $ 1,324
Trade accounts receivable................................ 6,586 24,101 32,886
Other.................................................... 2,311 1,383 1,958
-------- -------- ---------
Total current assets............................. 14,021 33,807 36,168
Gas and oil properties, net................................ 141,070 158,597 201,007
Gas gathering system....................................... -- -- 3,000
Other property, net........................................ 754 872 889
Intangible and other assets, net........................... 1,840 3,511 5,359
-------- -------- ---------
Total assets..................................... $157,685 $196,787 $ 246,423
======== ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable......................................... $ 3,104 $ 18,702 $ 26,356
Other current liabilities................................ 993 3,625 3,827
-------- -------- ---------
Total current liabilities........................ 4,097 22,327 30,183
-------- -------- ---------
Accumulated deferred income taxes, net..................... 13,541 25,088 28,344
-------- -------- ---------
Long-term debt due to MidAmerican Capital.................. -- -- 45,240
Stockholders' equity, per accompanying statements
Common stock, InterCoast Oil and Gas Company ($1 par
value, 1,000 shares authorized, issued and
outstanding).......................................... 1 1 1
Common stock, InterCoast Gas Services Company ($1 par
value, 1,000 shares authorized, issued and
outstanding).......................................... 1 1 1
Common stock, GED Energy Services, Inc. ($1 par value, 0,
1,000 and 1,000 shares authorized, issued and
outstanding at December 31, 1994 and 1995 and June 30,
1996)................................................. -- 1 1
Additional paid-in capital............................... 123,802 126,580 112,871
Retained earnings........................................ 16,243 22,789 29,782
-------- -------- ---------
Total stockholders' equity....................... 140,047 149,372 142,656
-------- -------- ---------
Total liabilities and stockholders' equity....... $157,685 $196,787 $ 246,423
======== ======== =========
</TABLE>
The accompanying notes to combined financial statements are an integral part of
these statements.
4
<PAGE> 6
THE INTERCOAST ENTITIES
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------------------------------
INTERCOAST OIL ADDITIONAL COMBINED
AND INTERCOAST GAS GED ENERGY PAID-IN RETAINED STOCKHOLDERS'
GAS COMPANY SERVICES COMPANY SERVICES, INC. CAPITAL EARNINGS EQUITY
-------------- ---------------- -------------- ---------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1992...................... $ 1 $ 1 $ -- $ 57,683 $ 4,013 $ 61,698
Net income.................. -- -- -- -- 6,919 6,919
Contributions from parent... -- -- -- 49,467 -- 49,467
-- -- --
---- ---- ---- --------- ------- ---------
Balance at December 31,
1993...................... 1 1 -- 107,150 10,932 118,084
Net income.................. -- -- -- -- 5,311 5,311
Contributions from parent... -- -- -- 16,652 -- 16,652
---- ---- ---- --------- ------- ---------
Balance at December 31,
1994...................... 1 1 -- 123,802 16,243 140,047
Formation of GED Energy
Services, Inc. ........... -- -- 1 -- -- 1
Net income.................. -- -- -- -- 6,546 6,546
Contributions from parent... -- -- -- 2,778 -- 2,778
---- ---- ---- --------- ------- ---------
Balance at December 31,
1995...................... 1 1 1 126,580 22,789 149,372
Net income (unaudited)...... -- -- -- -- 6,993 6,993
Dividend to parent -- -- --
(unaudited)............... -- -- -- (13,709) -- (13,709)
---- ---- ---- --------- ------- ---------
Balance at June 30, 1996
(unaudited)............... $ 1 $ 1 $ 1 $ 112,871 $ 29,782 $ 142,656
==== ==== ==== ========= ======== =========
</TABLE>
The accompanying notes to combined financial statements are an integral part of
these statements.
5
<PAGE> 7
THE INTERCOAST ENTITIES
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------- ---------------------
1993 1994 1995 1995 1996
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities
Net income............................. $ 6,919 $ 5,311 $ 6,546 $ 2,760 $ 6,993
Adjustments to reconcile net income to
net cash from operating activities:
Deferred income taxes, net.......... 4,020 2,502 11,547 3,260 3,256
Provision for depreciation,
depletion and amortization........ 13,672 18,782 21,705 10,358 13,484
Change in working capital items:
Accounts receivable............... (2,791) 3,309 (17,515) (2,007) (8,785)
Other current assets.............. 296 (1,032) 928 (415) (575)
Accounts payable.................. 2,869 (2,782) 15,598 2,173 7,654
Other current liabilities......... 1,773 (1,840) 2,632 150 202
-------- -------- -------- -------- --------
Net cash from operating
activities................... 26,758 24,250 41,441 16,279 22,229
-------- -------- -------- -------- --------
Cash flows from investing activities
Investments in:
Gas and oil properties.............. (74,984) (42,849) (40,845) (18,716) (55,904)
Other............................... (460) (26) (2,004) (77) (5,010)
Proceeds from sale of gas and oil
properties........................ 1,495 3,465 1,829 1,829 155
-------- -------- -------- -------- --------
Net cash from investing
activities................... (73,949) (39,410) (41,020) (16,964) (60,759)
-------- -------- -------- -------- --------
Cash flows from financing activities
Borrowings from MidAmerican Capital.... -- -- -- -- 45,240
-------- -------- -------- -------- --------
Contributions from (dividends to)
parent.............................. 49,467 16,652 2,778 1,310 (13,709)
-------- -------- -------- -------- --------
Net cash from financing activities....... 49,467 16,652 2,778 1,310 31,531
-------- -------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents............................ 2,276 1,492 3,199 625 (6,999)
Cash and cash equivalents at beginning of
period................................. 1,356 3,632 5,124 5,124 8,323
-------- -------- -------- -------- --------
Cash and cash equivalents at end of
period................................. $ 3,632 $ 5,124 $ 8,323 $ 5,749 $ 1,324
======== ======== ======== ======== ========
Supplemental cash flow information
Cash paid (received) during the period
for:
Income taxes........................... $ 1,363 $ 700 $ (7,909) $ (1,727) $ 1,411
======== ======== ======== ======== ========
</TABLE>
The accompanying notes to combined financial statements are an integral part of
these statements.
6
<PAGE> 8
THE INTERCOAST ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
Corporate Structure
InterCoast Oil and Gas Company (InterCoast Oil and Gas, formerly Medallion
Production Company), a Delaware corporation, and InterCoast Gas Services
Company, a Delaware corporation, (InterCoast Gas Services -- Delaware) are
wholly-owned subsidiaries of InterCoast Energy Company (InterCoast Energy).
InterCoast Gas Services Company, an Oklahoma corporation, (InterCoast Gas
Services -- Oklahoma) and GED Energy Service, Inc., a Delaware corporation,
(GED) are wholly-owned subsidiaries of InterCoast Gas Services -- Delaware.
InterCoast Energy is a wholly-owned subsidiary of MidAmerican Capital Company
(MidAmerican Capital), which is wholly-owned by MidAmerican Energy Company
(MidAmerican Energy).
InterCoast Oil and Gas is primarily engaged in the acquisition,
development, exploration and production of natural gas and oil. InterCoast Gas
Services -- Oklahoma and GED are primarily engaged in the marketing of natural
gas.
Basis of Presentation
The accompanying financial statements reflect the combined operations of
InterCoast Oil and Gas, InterCoast Gas Services -- Oklahoma and GED
(collectively, the InterCoast Entities). The financial statements are presented
on a combined historical cost basis because the InterCoast Entities are under
common control and because InterCoast Energy and its wholly-owned subsidiary,
InterCoast Gas Services -- Delaware, have signed letters of intent to sell the
stock of the InterCoast Entities to KCS Energy, Inc. (see Note 10).
InterCoast Gas Services -- Delaware formed GED and acquired the assets of
GED Gas Services, L.L.C. effective November 1, 1995. The accompanying combined
financial statements include the results of GED for the period since the date of
such acquisition.
Intercompany and affiliated company accounts and transactions have been
eliminated in the combination. Since there is no parent-subsidiary relationship
between the InterCoast Entities, there is no basis for eliminating the equity
accounts of any of the entities.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period. Actual
results may differ from those estimates.
Gas and Oil Properties
The InterCoast Entities account for their gas and oil properties using the
full cost method of accounting which provides for the capitalization of all
acquisition, exploration and development costs incurred for the purpose of
finding natural gas and oil reserves. The unamortized cost of gas and oil
properties, including estimated future development and abandonment costs, is
amortized using the unit-of-production method based on the ratio of volumes
produced to proved reserves.
Unevaluated properties and associated costs not currently being amortized
and included in gas and oil properties were $1.5 million, $1.6 million and $2.1
million at December 31, 1993, 1994 and 1995, respectively and $3.1 million at
June 30, 1996. Such costs relate to projects which were at such dates undergoing
exploration or development activities or in which the InterCoast Entities intend
to commence such activities in the future. The InterCoast Entities will begin to
amortize these costs when proved reserves are established or impairment is
determined.
7
<PAGE> 9
THE INTERCOAST ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The InterCoast Entities' unamortized costs of gas and oil properties are
limited to the sum of the future net revenues attributable to proved gas and oil
reserves discounted at ten percent plus the cost of any unproved properties. If
the InterCoast Entities' unamortized costs in gas and oil properties exceed this
ceiling amount, a provision for additional depreciation, depletion and
amortization is required. At December 31, 1993, 1994 and 1995 and June 30, 1996,
the InterCoast Entities' unamortized costs of gas and oil properties did not
exceed such ceiling amount.
Proceeds from the sale of gas and oil properties are applied to reduce the
costs in the full cost pool unless the sale involves a significant quantity of
reserves in relation to the cost center, in which case a gain or loss would be
recognized.
The InterCoast Entities conduct certain of their drilling activities
(Programs), on a joint venture basis, together with working interest
participants. The agreements under which these investors participate provide the
InterCoast Entities with certain reversionary interests in the properties in the
Programs and current reimbursement of proportionate amounts of overhead and
seismic costs. Overhead reimbursements are included in the Combined Statements
of Income as a reduction of general and administrative expenses. The amounts of
such reimbursements were $872,000, $1,520,000 and $2,047,000 for the years ended
December 31, 1993, 1994 and 1995, respectively, and were $1,284,000 and
$1,605,000 for the six months ended June 30, 1995 and 1996, respectively.
Production Imbalances
Joint interest owners may take more or less than their ownership interest
of natural gas volumes from jointly owned reservoirs. The InterCoast Entities
follow the sales method of accounting for imbalances, whereby they recognize
revenues based on the actual volumes of gas sold to purchasers. The InterCoast
Entities record a liability if sales of gas volumes in excess of their
entitlements from a jointly owned reservoir exceed their interest in the
remaining estimated gas reserves of such reservoir. Volumetric production is
monitored to minimize imbalances, and such imbalances were not significant at
December 31, 1993, 1994 and 1995 and June 30, 1996.
Amortization of Goodwill
Goodwill was recognized with the acquisition of operating rights, certain
other assets and personnel of Medallion Petroleum, Inc. in 1992 by InterCoast
Oil and Gas and with the acquisition of certain assets and personnel of GED Gas
Services, L.L.C. in 1995 by GED. Goodwill is amortized over the expected period
of benefit of forty years using the straight line method. The unamortized
balance of goodwill included on the Combined Balance Sheets as Intangible and
Other Assets at December 31, 1994 and 1995 and June 30, 1996 is $1,829,000,
$3,486,000 and $3,441,000, respectively.
Long-Lived Assets
In March 1995, the Financial Accounting Standards Board (FASB) issued SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." This statement, which the InterCoast Entities adopted
on January 1, 1996, requires the InterCoast Entities to review long-lived assets
for impairment whenever circumstances indicate that the carrying amount of an
asset may not be recoverable. Adoption of SFAS No. 121 had no impact on the
InterCoast Entities' results of operations or financial position at the time of
adoption.
Stock-Based Compensation Plans
In October 1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based
Compensation" regarding accounting for stock-based compensation plans. This
statement, which is effective for
8
<PAGE> 10
THE INTERCOAST ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
reporting periods beginning January 1, 1996, allows for alternative methods of
adoption. The InterCoast Entities do not expect the accounting provisions or the
alternative disclosure provisions of SFAS No. 123 to have a material impact on
the InterCoast Entities' compensation costs.
Accounting for Commodity Price Risk Management
The InterCoast Entities engage in price risk management activities to
minimize the impact of market fluctuations on assets, liabilities, production or
other contractual commitments. Changes in the market value of these transactions
are deferred until the gain or loss on the underlying item is recognized. See
Note 6 for further discussion of the InterCoast Entities' price risk management
activities.
Combined Statements of Cash Flows
For purposes of the Combined Balance Sheets and Combined Statements of Cash
Flows, the InterCoast Entities consider all highly liquid debt instruments
purchased with a remaining maturity of three months or less to be cash
equivalents. There were no material non-cash investing or financing activities
in the years ended December 31, 1993, 1994 or 1995 or in the six months ended
June 30, 1995 and 1996.
2. GAS AND OIL PROPERTIES, NET
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 30,
1994 1995 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Gas and oil properties.......................... $186,131 $225,147 $280,896
Accumulated depreciation, depletion and
amortization.................................. (45,061) (66,550) (79,889)
-------- -------- --------
Gas and oil properties, net..................... $141,070 $158,597 $201,007
======== ======== ========
</TABLE>
The provision for depreciation, depletion and amortization of the
InterCoast Entities' gas and oil properties was recorded at the rate of $0.80,
$0.86 and $0.90, per equivalent thousand cubic feet of natural gas production
for the years ended December 31, 1993, 1994 and 1995, respectively, and at the
rate of $0.83 and $0.84 for the six months ended June 30, 1995 and 1996,
respectively.
3. INCOME TAXES
The InterCoast Entities are included in the consolidated federal and, where
appropriate, state income tax returns of MidAmerican Energy. The consolidated
income tax currently payable (or receivable) has been allocated among the
InterCoast Entities and other members of the affiliated income tax reporting
group (Group) based on the respective contributions to the consolidated taxable
income and tax credits of the Group. The InterCoast Entities have received (or
made) payments for the income tax reductions (or increases) contributed to the
Group.
The components of the provision for income taxes are shown below:
<TABLE>
<CAPTION>
1993 1994 1995
------ ------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current -- Federal................................... $1,136 $ 560 $(7,143)
-- State..................................... 227 140 (766)
Deferred -- Federal................................... 3,135 1,772 10,382
-- State..................................... 885 730 1,165
------ ------ ------
Total........................................ $5,383 $3,202 $ 3,638
====== ====== ======
</TABLE>
9
<PAGE> 11
THE INTERCOAST ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the statutory federal income tax rate to the overall
effective income tax rate follows:
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate......................... 35.0% 35.0% 35.0%
State income taxes, net of federal income tax benefit..... 2.0 2.5 2.1
State tax true-ups........................................ 1.7 -- --
Other items, net.......................................... 5.1 0.1 (1.4)
---- ---- ----
Overall effective income tax rate......................... 43.8% 37.6% 35.7%
==== ==== ====
</TABLE>
The components of the net deferred tax liability are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
------- --------
(IN THOUSANDS)
<S> <C> <C>
Accelerated depreciation/depletion methods.................... $(4,271) $(13,940)
Intangible drilling costs..................................... 17,062 38,278
Other......................................................... 750 750
------- --------
Accumulated deferred income taxes............................. $13,541 $ 25,088
======= ========
</TABLE>
4. RELATED PARTY TRANSACTIONS
The InterCoast Entities receive general and administrative services from
InterCoast Energy, MidAmerican Capital and MidAmerican Energy. The costs of such
services received, including overhead costs, are assigned (and billed) to the
InterCoast Entities. Wages and salaries of the corporate staff and personnel of
InterCoast Energy, MidAmerican Capital and MidAmerican Energy are assigned based
upon an estimate of the time spent by staff and personnel benefitting the
InterCoast Entities. The estimate is reviewed and updated annually. Such wages
and salaries are billed to the InterCoast Entities, along with associated
payroll taxes and the costs of benefits. In addition, certain directly assigned
expenses paid by MidAmerican Capital are billed to the InterCoast Entities.
MidAmerican Capital and InterCoast Energy have entered into letters of
credit and financial guarantees on behalf of the InterCoast Entities to support
certain well costs and the natural gas purchases. Letters of credit and
financial guarantees are conditional commitments issued by MidAmerican Capital
InterCoast Energy to guarantee performance to a third party.
The InterCoast Entities have letters of credit totaling $1,914,000 and
$1,103,000 and financial guarantees amounting to $2,750,000 and $0 which were
not reflected on the Combined Balance Sheets as of December 31, 1995 and 1994,
respectively.
The fair value of the letters of credit was $14,000 and $8,000 at December
31, 1995 and 1994, respectively, estimated based on fees currently charged for
similar agreements. The fair value of the financial guarantees is not
determinable based on the specific characteristics of the guarantees.
5. EMPLOYEE BENEFITS
The InterCoast Entities' employees participate in MidAmerican Energy's
noncontributory defined benefit retirement income plan. Benefits under the plan
are based on participants' compensation, years of service and age at retirement.
Funding is based on the actuarially determined costs of the plan and the
requirements of the Internal Revenue Code and the Employee Retirement Income
Security Act.
10
<PAGE> 12
THE INTERCOAST ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1993, 1994 and 1995, the InterCoast Entities have not
been required to contribute to the plan. Pension costs are allocated to the
InterCoast Entities based on participants' compensation. The amount the
InterCoast Entities expensed during 1995, 1994 and 1993 was $12,000, $44,000 and
$0, respectively. The InterCoast Entities' pension accrual included in the
Combined Balance Sheets as Other Current Liabilities was $56,000 at December 31,
1994 and 1995.
6. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Price Risk Management
The InterCoast Entities have entered into swaps, futures and options to
manage risks associated with fluctuations in the price of natural gas production
and marketing activities.
Commodity Price Swaps. Commodity price swap agreements require the
InterCoast Entities to make payments to (or entitle it to receive payments from)
the counterparties based upon the differential between a specified fixed and
variable price. The InterCoast Entities account for these transactions on a
settlement basis and, accordingly, gains or losses are included in gas and oil
revenues in the period in which the underlying natural gas is produced. These
agreements do not impose cash margin requirements on the InterCoast Entities or
provide for collateral to the InterCoast Entities. At December 31, 1995,
InterCoast Oil and Gas was party to commodity price swap agreements covering
approximately 8.0 million MMBtu, 6.3 million MMBtu and 23.2 million MMBtu of
natural gas for the years 1996 and 1997 and for the period 1998 through 2005,
respectively.
Futures and Options Contracts. Natural gas futures require the InterCoast
Entities to buy or sell natural gas at a fixed price. Natural gas options held
to hedge price risk only provide the right, not the requirement, to buy or sell
natural gas at a fixed price. The InterCoast Entities use futures to manage
margins on offsetting fixed-price purchase or sale commitments for physical
quantities of natural gas. The InterCoast Entities use options to limit overall
price risk exposure. Futures contracts mandate initial margin requirements. The
InterCoast Entities maintain such margin accounts and funds in cash any daily
settlement requirements relating to futures contracts.
At December 31, 1995, the InterCoast Entities had futures contracts to
purchase natural gas for approximately 10.1 million MMBtu and to sell natural
gas for approximately 4.9 million MMBtu. The associated unrecognized gain on
futures contracts was $486,000.
Basis Swaps. Basis swap agreements require the InterCoast Entities to make
payments to (or entitle it to receive payments from) the counterparties based
upon the differential between the variable costs associated with the delivery of
natural gas production to specific delivery points and a contractually specified
fixed cost. At December 31, 1995, InterCoast Oil and Gas had basis swap
arrangements relating to a total of approximately 2.1 million MMbtu during 1996.
Credit Risk
Credit risk relates to the risk of loss that the InterCoast Entities would
incur as a result of the nonperformance by counterparties pursuant to the terms
of their contractual obligations. The InterCoast Entities' overall exposure to
credit risk may be affected positively or negatively in that the counterparties
may be similarly affected by changes in economic, regulatory or other
conditions. The InterCoast Entities maintain credit policies with regard to
counterparties that management believes minimize overall credit risk. With
regard to commodity price and basis swaps, these policies include an evaluation
of potential counterparties' financial condition (including credit rating),
collateral agreements under certain circumstances and the use of standardized
agreements. With regard to futures and options contracts, the InterCoast
Entities utilize New York Mercantile Exchange (NYMEX) contracts. Such contracts
are guaranteed by the NYMEX and, accordingly, have nominal credit risk. As a
result, the InterCoast Entities'
11
<PAGE> 13
THE INTERCOAST ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
risk is limited to the initial purchase price of the options and to changes in
the market value of the futures contracts. Accordingly, the InterCoast Entities
do not anticipate any material impact on their financial position or results of
operations as a result of nonperformance by counterparties to the financial
instruments related to natural gas production and marketing activities.
7. CONCENTRATION OF CREDIT RISK
Although credit risk is inherent to the foregoing types of financial
instruments and the InterCoast Entities are exposed to losses in the event of
nonperformance by the counterparties, the InterCoast Entities believe that the
aggregate credit risk associated with present swap and hedge arrangements is not
significant due to the nature of the contracts and the counterparties thereto.
The InterCoast Entities' gas and oil production purchasers consist
primarily of independent marketers and major gas pipeline companies. The
InterCoast Entities perform credit evaluations of their customers' financial
condition and obtain credit support if the InterCoast Entities believe it is
warranted. The InterCoast Entities have not experienced any significant losses
from uncollectible accounts.
8. COMMITMENTS AND CONTINGENCIES
The InterCoast Entities are lessees in several agreements to lease office
space at various locations. The lease agreements expire in 1999 through 2001,
with various options for renewal. The following is a schedule by year of
estimated future rent expense on such leases as of December 31, 1995:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1996................................................................... $ 218,000
1997................................................................... 205,000
1998................................................................... 204,000
1999................................................................... 205,000
2000................................................................... 204,000
Thereafter............................................................. 205,000
----------
Total........................................................ $1,241,000
==========
</TABLE>
On June 19, 1996, an action was brought by Nab Nat. Resources, L.L.C.
against several defendants, including InterCoast Oil and Gas, in the Second
Judicial District Court, Claiborne Parish, State of Louisiana, seeking a
declaration of the court that certain leases and a unit agreement had lapsed by
reason of a cessation of production of oil or gas in paying quantities that
allegedly occurred in the mid 1980's. The plaintiff also seeks, among other
things, an accounting of the production of oil, gas and other minerals from the
properties since the alleged lapse of the leases, damages of not less than
$5,000,000 for restoration and clean up of the lands covered by the leases and
certain other damages for trespass and mental anguish. InterCoast Oil and Gas is
in the preliminary stages of investigating the facts on which the lawsuit appear
to be based. Based on InterCoast Oil and Gas' preliminary investigations, the
claim of damages for restoration and clean up of certain lands appears to relate
to properties which the InterCoast Oil and Gas does not own. InterCoast Oil and
Gas currently intends to continue its investigation of the lawsuit and to defend
the action vigorously.
9. SIGNIFICANT ACQUISITION
In April 1996, InterCoast Oil and Gas acquired the interests of Enron Oil &
Gas Company in certain gas and oil properties (the Sawyer Canyon Properties),
associated gas gathering lines and other well equipment located in Texas. The
net purchase price at closing was approximately $53.2 million.
12
<PAGE> 14
THE INTERCOAST ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
InterCoast Oil and Gas concurrently conveyed certain interests in particular
wells to InterCoast Global Management, Inc., a wholly-owned subsidiary of
MidAmerican Capital. InterCoast Oil and Gas retained a production payment on 100
percent of the net proceeds of production from such wells until approximately 80
percent of the estimated proved developed natural gas reserves attributable to
the wells is produced. In consideration, InterCoast Oil and Gas received from
InterCoast Global Management, Inc. $5.6 million in cash and a promissory note in
the amount of $2.3 million, which is payable in 48 monthly installments over
four years and bears interest at the prime rate. The total adjusted purchase
price was $45.2 million. InterCoast Oil and Gas recorded no gain or loss related
to this transaction. The proved reserves associated with the production payment
are included in the InterCoast Entities' estimated net quantities of oil and gas
reserves presented in Note 12.
InterCoast Oil and Gas funded the net purchase price of $45.2 million under
a promissory note due to MidAmerican Capital. This promissory note was due on or
before April 12, 1997, with interest payable quarterly at a floating rate based
on LIBOR plus 55 basis points. The promissory note was repaid in full in July
1996.
The following unaudited pro forma revenues, and net income for the years
ended December 31, 1994 and 1995 and for the three months ended March 31, 1996,
presented below have been prepared assuming the acquisition described above had
been consummated as of January 1, 1994. However, such pro forma information is
not necessarily indicative of what actually would have occurred had the
transaction occurred on such date.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED THREE MONTHS
DECEMBER 31, DECEMBER 31, ENDED MARCH 31,
1994 1995 1996
------------ ------------ ---------------
<S> <C> <C> <C>
Revenues (in thousands)................. $ 80,860 $ 88,138 $ 108,365
Net income (in thousands)............... 9,980 7,866 7,609
</TABLE>
10. SUBSEQUENT EVENT
On October 18, 1996, InterCoast Energy and its wholly-owned subsidiary,
InterCoast Gas Services -- Delaware, signed letters of intent to sell the stock
of the InterCoast Entities to KCS Energy Inc. Under the terms of this letter,
KCS Energy Inc. will pay approximately $214 million in cash and warrants to
acquire 435,000 shares of KCS Energy Inc. common stock at a price of $45 per
share.
11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The combined results of operations by quarter for the years ended December
31, 1994 and 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
1994 QUARTER ENDED
-----------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Total revenues.......................... $ 15,460 $15,459 $ 14,125 $13,122
Income before income taxes.............. $ 2,391 $ 2,930 $ 2,035 $ 1,157
Net income.............................. $ 1,492 $ 1,828 $ 1,269 $ 722
</TABLE>
<TABLE>
<CAPTION>
1995 QUARTER ENDED
-----------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Total revenues.......................... $ 12,990 $14,182 $ 14,012 $32,276
Income before income taxes.............. $ 1,641 $ 2,652 $ 2,201 $ 3,690
Net income.............................. $ 1,055 $ 1,705 $ 1,415 $ 2,371
</TABLE>
13
<PAGE> 15
THE INTERCOAST ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
In the fourth quarter of 1994, the InterCoast Entities experienced a
significant decline in realized gas price causing reductions in gas and oil
revenues and income before income taxes as compared to the prior three quarters
of 1994.
In the fourth quarter of 1995, InterCoast Energy acquired certain assets of
GED Gas Services, L.L.C. The acquisition generated natural gas sales revenues of
$15.4 million in such quarter. Additionally, in the fourth quarter of 1995, the
InterCoast Entities' gas production volumes and realized gas prices increased
resulting in higher gas and oil revenues and income before income taxes as
compared to the prior three quarters of 1995.
12. SUPPLEMENTARY OIL AND GAS DISCLOSURES
Users of the following information should be aware that the process of
estimating quantities of proved and proved developed oil and gas reserves is
very complex, requiring significant subjective decisions in the evaluation of
all available geological, engineering and economic data for each reservoir. The
data for a given reservoir may also change substantially over time as a result
of numerous factors including, but not limited to, additional development
activity, evolving production history and continual reassessment of the
viability of production under varying economic conditions. Consequently,
material revisions to existing reserve estimates occur from time to time.
Although every reasonable effort is made to ensure that reserve estimates
reported represent the most accurate assessment possible, the significance of
the subjective decisions required and variances in available data for various
reservoirs make these estimates generally less precise than other estimates
presented in connection with financial statement disclosures.
Proved reserves are estimated quantities of natural gas, crude oil and
condensate that geological and engineering data demonstrate, with reasonable
certainty, to be recoverable in future years from known reservoirs under
economic and operating conditions existing at the time the estimates were made.
Proved developed reserves are proved reserves that can be expected to be
recovered through wells and equipment in place and under operating methods being
utilized at the time the estimates were made.
Capitalized costs for oil and gas producing activities consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1993 1994 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Proved properties............................... $146,422 $184,502 $223,088
Unproved properties............................. 1,487 1,629 2,059
Accumulated depletion, depreciation and
amortization.................................. (26,459) (45,061) (66,550)
-------- -------- --------
Net capitalized costs................. $121,450 $141,070 $158,597
======== ======== ========
</TABLE>
Costs incurred for oil and gas property acquisition, exploration and
development activities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1993 1994 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Development......................................... $12,749 $22,000 $34,639
Property acquisitions............................... 59,913 18,705 2,726
Exploration......................................... 2,322 2,144 3,480
------- ------- -------
Net capitalized costs..................... $74,984 $42,849 $40,845
======= ======= =======
</TABLE>
14
<PAGE> 16
THE INTERCOAST ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Estimated Net Quantities of Oil and Gas Reserves--(Unaudited)
The following table sets forth the InterCoast Entities' net proved
reserves, including the changes therein, and proved developed reserves (all
within the United States) at the end of each of the three years in the period
ended December 31, 1995:
<TABLE>
<CAPTION>
NATURAL OIL AND
GAS LIQUIDS TOTAL
(MMCF) (MBBL) (MMCFE)
--------- -------- ---------
<S> <C> <C> <C>
Net proved reserves at December 31, 1992........ 64,806.5 3,111.0 83,472.5
Revisions of previous estimates............... (6,649.3) 441.8 (3,998.5)
Extensions, discoveries and other additions... 14,911.6 288.4 16,642.0
Purchases of reserves in place................ 55,740.1 5,840.3 90,781.9
Production.................................... (12,741.8) (690.8) (16,886.6)
Sales of reserves in place.................... (4,043.7) (35.6) (4,257.3)
--------- -------- ---------
Net proved reserves at December 31, 1993........ 112,023.4 8,955.1 165,754.0
Revisions of previous estimates............... (10,931.0) (1,089.0) (17,465.0)
Extensions, discoveries and other additions... 39,713.5 375.0 41,963.5
Purchases of reserves in place................ 23,804.9 1,489.6 32,742.5
Production.................................... (15,590.9) (1,024.4) (21,737.3)
Sales of reserves in place.................... (408.9) (1,402.5) (8,823.9)
--------- -------- ---------
Net proved reserves at December 31, 1994........ 148,611.0 7,303.8 192,433.8
Revisions of previous estimates............... (22,594.8) 3,265.8 (3,000.0)
Extensions, discoveries and other additions... 24,372.5 514.0 27,456.5
Purchases of reserves in place................ 1,119.2 12.7 1,195.4
Production.................................... (17,835.4) (1,027.9) (24,002.8)
Sales of reserves in place.................... 0.0 (224.4) (1,346.4)
--------- -------- ---------
Net proved reserves at December 31, 1995........ 133,672.5 9,844.0 192,736.5
========= ======== =========
Net proved developed reserves at December 31,
1993.......................................... 100,660.0 8,173.0 149,698.0
at December 31, 1994.......................... 115,099.0 6,717.0 155,401.0
at December 31, 1995.......................... 111,189.0 8,255.0 160,719.0
</TABLE>
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil
and Gas Reserves (Unaudited)
The following information has been developed utilizing procedures
prescribed by Statement of Financial Accounting Standards No. 69 "Disclosures
about Oil and Gas Producing Activities" (SFAS No. 69) and based on natural gas
and crude oil reserve and production volumes estimated, in part by the
InterCoast Entities, but primarily by the InterCoast Entities' independent
reserve engineers, Netherland, Sewell and Associates, Inc. It may be useful for
certain comparative purposes, but should not be solely relied upon in evaluating
the InterCoast Entities or their performance. Further, information contained in
the following table should not be considered as representative of realistic
assessments of future cash flows, nor should the Standardized Measure of
Discounted Future Net Cash Flows be viewed as representative of the current
value of the InterCoast Entities.
The InterCoast Entities believe that the following factors should be taken
into account in reviewing the following information: (1) future costs and
selling prices will probably differ from those required to be used in these
calculations; (2) due to future market conditions and governmental regulations,
actual
15
<PAGE> 17
THE INTERCOAST ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
rates of production achieved in future years may vary significantly from the
rate of production assumed in the calculations; (3) selection of a 10% discount
rate is arbitrary and may not be reasonable as a measure of the relative risk
inherent in realizing future net oil and gas revenues; and (4) future net
revenues may be subject to different rates of income taxation.
Under the Standardized Measure, future cash inflows were estimated by
applying period-end oil and gas prices adjusted for fixed and determinable
escalations to the estimated future production of period-end reserves. As of
December 31, 1995, approximately 37.5 Bcf of gas of the InterCoast Entities'
future production was subject to commodity price swap agreements (see Note 6).
Future cash inflows were reduced by estimated future development, abandonment
and production costs based on period-end costs in order to arrive at future net
cash flow before tax. Future income tax expense has been computed by applying
period-end statutory tax rates to aggregate future pre-tax net cash flows,
reduced by the tax basis of the properties involved and tax carryforwards. Use
of a 10% discount rate is required by SFAS No. 69.
Management does not rely solely upon the following information in making
investment and operating decisions. Such decisions are based upon a wide range
of factors, including estimates of probable as well as possible reserves and
varying price and cost assumptions considered more representative of a range of
possible economic conditions that may be anticipated.
The standardized measure of discounted future net cash flows relating to
proved oil and gas reserves is as follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------------
1993 1994 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Future cash inflows.......................... $ 354,076 $ 369,430 $ 430,282
Future production costs...................... (119,855) (123,914) (155,984)
Future development and abandonment costs..... (13,886) (24,003) (16,078)
--------- --------- ---------
Future net cash flows before income taxes.... 220,335 221,513 258,220
Future income tax expense.................... (50,633) (47,526) (65,314)
10% annual discount for estimating timing of
cash
flows...................................... (51,500) (47,943) (55,982)
--------- --------- ---------
Standardized measure of discounted future net
cash flows................................. $ 118,202 $ 126,044 $ 136,924
========= ========= =========
</TABLE>
16
<PAGE> 18
THE INTERCOAST ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the principal changes in the standardized measure of
discounted future net cash flows applicable to proved oil and gas reserves is as
follows (unaudited):
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------
1993 1994 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Beginning of the period......................... $ 62,177 $118,202 $126,044
-------- -------- --------
Revisions of previous estimates:
Changes in prices and costs..................... (551) (25,715) 8,275
Changes in quantities........................... (3,957) (13,134) (2,627)
Changes in future development costs............. (6,016) (7,323) (2,948)
Previously estimated development costs incurred
during the period............................. 8,951 11,572 17,954
Additions to proved reserves resulting from
extensions and discoveries, less related
cost.......................................... 16,314 31,935 26,998
Sales of reserves in place...................... (2,763) (663) (769)
Purchases of reserves in place.................. 68,074 27,006 2,085
Accretion of discount........................... 7,760 13,771 14,460
Sales of oil and gas, net of production costs... (27,728) (29,129) (32,961)
Net changes in income taxes..................... (4,089) 958 (12,684)
Changes in estimated timing of production
and other..................................... 30 (1,436) (6,903)
-------- -------- --------
Net increase.................................... 56,025 7,842 10,880
-------- -------- --------
End of period................................... $118,202 $126,044 $136,924
======== ======== ========
</TABLE>
17
<PAGE> 19
SAWYER CANYON PROPERTIES
STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
--------------------------------------- ENDED
DECEMBER 31, 1994 DECEMBER 31, 1995 MARCH 31, 1996
----------------- ----------------- --------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUES:
Gas and oil............................ $20,661 $13,084 $3,425
Gathering systems...................... 2,033 1,594 315
------- ------- ------
Total revenues................. 22,694 14,678 3,740
------- ------- ------
DIRECT OPERATING EXPENSES:
Gas and oil operating.................. 2,625 2,953 614
Gathering systems...................... 163 105 31
------- ------- ------
Total expenses................. 2,788 3,058 645
------- ------- ------
Excess of revenues over direct operating
expenses............................... $19,906 $11,620 $3,095
======= ======= ======
</TABLE>
The accompanying notes are an integral part of this financial statement.
18
<PAGE> 20
SAWYER CANYON PROPERTIES
NOTES TO STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
(1) THE SAWYER CANYON PROPERTIES
On March 30, 1996, Enron Oil & Gas Company (EOG) entered into a purchase
and sale agreement (the Agreement) to sell certain gas and oil properties and
related assets and two gathering systems (collectively, the Sawyer Canyon
Properties) to InterCoast Oil and Gas Company (the Company). The purchase price
as of the January 1, 1996 effective date, $55.5 million, was subject to certain
adjustments including the net revenues (as defined in the Agreement) between the
effective date and the closing date. The net purchase price at closing, April
12, 1996, was approximately $53.2 million of which $3.0 million was assigned to
the carrying value of related gathering systems which were transferred to
InterCoast Gas Services Company, an affiliated company. The properties,
predominantly natural gas, and the associated gathering systems are located in
West Texas.
Concurrent with the closing of the acquisition of the Sawyer Canyon
Properties from EOG, the Company conveyed certain interests in particular wells
to InterCoast Global Management, Inc., a wholly owned subsidiary of MidAmerican
Capital Company, the Company's indirect parent. The Company retained a
production payment on 100 percent of the net proceeds of production of such
wells until approximately 80 percent of the estimated proved developed natural
gas reserves attributable to the wells has been produced. The Company received
from InterCoast Global Management, Inc. $5.6 million in cash and a promissory
note in the amount of $2.3 million, which is payable in 48 monthly installments
over four years and bears interest at the prime rate. The Company recorded no
gain or loss on this transaction.
(2) BASIS OF PRESENTATION
Certain costs, such as depreciation, depletion and amortization, general
and administrative expenses and federal and state income taxes were not
allocated to the above properties because the property interests and related
assets and gathering systems acquired represent only a portion of EOG's business
and the costs incurred by EOG are not necessarily indicative of the costs to be
incurred by the Company. Historical financial information reflecting financial
position, results of operations and cash flows of the Sawyer Canyon Properties
are not presented because the entire acquisition cost was assigned to the gas
and oil property interests and the related gathering systems. Accordingly, the
historical statements of revenues and direct operating expenses have been
presented in lieu of the financial statements required under Rule 3-05 of
Securities and Exchange Commission Regulation S-X.
Revenues and direct operating expenses for the gas and oil properties
included in the accompanying statement represent EOG's interest in the
properties and are presented on the accrual basis of accounting and may not be
representative of future operations. Revenues on the gas and oil properties are
shown net of any applicable severance taxes. Certain of the gas and oil
properties qualify as high-cost natural gas wells and are currently exempt from
Texas severance taxes. Depreciation, depletion and amortization, allocated
general and administrative expenses and federal and state income taxes have been
excluded.
Revenues and direct operating expenses for the two gathering systems are
presented on the accrual basis of accounting and may not be representative of
future operations. Depreciation, depletion and amortization, allocated general
and administrative expenses and federal and state income taxes have been
excluded.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of revenues and direct operating
expenses during the reporting period. Actual results could differ from those
estimates.
19
<PAGE> 21
SAWYER CANYON PROPERTIES
NOTES TO STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES -- (CONTINUED)
(3) RELATED PARTY TRANSACTIONS
Included in gas and oil revenues (excluding severance taxes and gathering
and transportation expenses) for the gas and oil properties is approximately
$21.2 million, $13.0 million and $3.0 million for the years ended December 31,
1994 and 1995, and the three months ended March 31, 1996, respectively, related
to the sale of natural gas and crude oil and condensate volumes to affiliates of
EOG.
Included in revenues for the two gathering systems is approximately $1.8
million, $1.2 million and $0.3 million for the years ended December 31, 1994 and
1995, and the three months ended March 31, 1996, respectively, from the
transportation of natural gas for EOG's production volumes, which are shown as a
reduction in the related gas and oil revenues.
(4) COMMITMENTS AND CONTINGENCIES
Pursuant to the terms of the Agreement, certain claims, litigation, or
disputes pending as of the effective date and certain matters arising in
connection with ownership of the properties or the gathering systems prior to
the effective date are retained by EOG.
(5) SUPPLEMENTAL FINANCIAL INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)
Users of the following information should be aware that the process of
estimating quantities of proved and proved developed oil and gas reserves is
very complex, requiring significant subjective decisions in the evaluation of
all available geological, engineering and economic data for each reservoir. The
data for a given reservoir may also change substantially over time as a result
of numerous factors including, but not limited to, additional development
activity, evolving production history and continual reassessment of the
viability of production under varying economic conditions. Consequently,
material revisions to existing reserve estimates occur from time to time.
Although every reasonable effort is made to ensure that reserve estimates
reported represent the most accurate assessments possible, the significance of
the subjective decisions required and variances in available data for various
reservoirs make these estimates generally less precise than other estimates
presented in connection with financial statement disclosures.
Proved reserves are estimated quantities of natural gas, crude oil and
condensate, that geological and engineering data demonstrate, with reasonable
certainty, to be recoverable in future years from known reservoirs under
economic and operating conditions existing at the time the estimates were made.
Proved developed reserves are proved reserves expected to be recovered
through wells and equipment in place and under operating methods being utilized
at the time the estimates were made.
Estimates of proved and proved developed reserves at December 31, 1993 and
1994 were based on studies performed by the engineering staff of EOG. Estimates
of proved and proved developed reserves at December 31, 1995 are based on
estimates prepared by Netherland, Sewell and Associates, Inc.
20
<PAGE> 22
SAWYER CANYON PROPERTIES
NOTES TO STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES -- (CONTINUED)
Estimated Net Quantities of Oil and Gas Reserves
<TABLE>
<CAPTION>
OIL AND
GAS LIQUIDS
(MMCF) (MBBI)
------- -------
<S> <C> <C>
Net proved reserves at December 31, 1993........................... 79,614 51
Production....................................................... (10,903) (32)
------- ---
Net proved reserves at December 31, 1994........................... 68,711 19
Production....................................................... (8,145) (17)
Revisions of previous estimates and other........................ (2,812) 77
------- ---
Net proved reserves at December 31, 1995........................... 57,754 79
======= ===
Net proved developed reserves
at December 31, 1994............................................. 66,449 40
at December 31, 1995............................................. 55,546 72
</TABLE>
21
<PAGE> 23
SAWYER CANYON PROPERTIES
NOTES TO STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES -- (CONTINUED)
Standardized Measure of Discounted Future Net Cash Flows Relating to Oil and
Gas Properties
The following information has been developed utilizing procedures described
by Statement of Financial Accounting Standards No. 69 "Disclosures About Oil and
Gas Producing Activities" and based on natural gas and crude oil reserve and
production volumes estimated by the engineering staff of Netherland, Sewell and
Associates, Inc. It may be useful for certain comparison purposes, but should
not be solely relied upon in evaluating the oil and gas properties or their
performance. Further, information contained in the following table should not be
considered as representative of realistic assessments of future cash flows, nor
should the Standardized Measure of Discounted Future Net Cash Flows be viewed as
representative of the current value of the oil and gas properties.
The future cash flows presented below are based on sales prices, cost
rates, and statutory income tax rates in existence as of the date of the
projections estimated by Netherland, Sewell and Associates, Inc. It is possible
that material revisions to some estimates of natural gas and crude oil reserves
may occur in the future development and production of the reserves may occur in
periods other than those assumed, and actual prices realized and costs incurred
may vary significantly from those used.
The future cash flows presented by the Company in the future will be based
on the Company's cost structure and timing of future development and production
and accordingly may be significantly different from those of EOG.
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1995
----------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Future cash inflows............................... $ 145,946 $ 133,190
Future production costs........................... (45,659) (43,034)
Future development costs.......................... (1,573) (1,573)
--------- ---------
Future net cash flows............................. 98,714 88,583
Discount to present value at 10% annual rate...... (39,129) (33,171)
--------- ---------
Standardized measure of discounted future net cash
flows relating to proved oil and gas reserves... $ 59,585 $ 55,412
========= =========
</TABLE>
Changes in Standardized Measure of Discounted Future Net Cash Flows
The following table sets forth the changes in the standardized measure of
discounted future net cash flows relating to proved oil and gas reserves for the
years ended December 31, 1994 and 1995:
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1995
----------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Beginning of period............................... $ 70,565 $ 59,585
Accretion of discount............................. 7,056 5,958
Sales of oil and gas, net of production costs..... (18,036) (10,131)
--------- ---------
Net decrease...................................... (10,980) (4,173)
--------- ---------
End of period..................................... $ 59,585 $ 55,412
========= =========
</TABLE>
22
<PAGE> 24
(b) Pro forma financial information.
23
<PAGE> 25
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information is derived from the
historical financial statements of KCS Energy, Inc. and the statements of the
InterCoast Entities (Medallion) and the Sawyer Canyon Properties included
elsewhere in this report.
The unaudited Pro Forma Statement of Consolidated Income for the year ended
December 31, 1995 reflects (i) the Company's Rocky Mountain Acquisition and
Michigan Acquisition, (ii) the sale of the Senior Notes, (iii) the Medallion
Acquisition (which includes Medallion's acquisition of the Sawyer Canyon
Properties in April 1996) and (iv) the sale of the Common Stock to be offered
pursuant to a Registration Statement on Form S-3 being filed on the same date
as this report and the application of the estimated net proceeds therefrom as
if each transaction had occurred on January 1, 1995.
The unaudited Pro Forma Statement of Consolidated Income for the six months
ended June 30, 1996 reflects the Medallion Acquisition (which includes
Medallion's acquisition of the Sawyer Canyon Properties in April 1996) and the
sale of the Common Stock and the application of the estimated net proceeds
therefrom as if each transaction had occurred on January 1, 1995.
The unaudited Pro Forma Consolidated Balance Sheet as of June 30, 1996
reflects (i) the Medallion Acquisition, (ii) the Company's receipt of $69.7
million from Tennessee Gas, representing the Tennessee Gas Receivable at that
date and (iii) the sale of the Common Stock and the application of the
estimated net proceeds therefrom as if each transaction had occurred on June
30, 1996.
The unaudited pro forma financial data should be read in conjunction with
the notes thereto and the Consolidated Financial Statements of the Company
(including the notes thereto) previously filed with the Securities and Exchange
Commission. The unaudited pro forma financial data does not purport to be
indicative of the financial position or results of operations that would
actually have occurred if the transactions described had occurred as presented
in such statements or that may he obtained in the future. In addition, future
results may vary significantly from the results reflected in such statements due
to normal crude oil and gas production declines, changes in prices received for
crude oil and gas, future acquisitions and dispositions of reserves, changes in
estimates of reserves and of the future net revenues therefrom and other
factors.
24
<PAGE> 26
KCS ENERGY, INC.
PRO FORMA STATEMENT OF CONSOLIDATED INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995
(UNAUDITED, DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
KCS
ACQUISITIONS
AND NOTE KCS MEDALLION
KCS OFFERING PRO FORMA MEDALLION MEDALLION PRO FORMA
HISTORICAL ADJUSTMENTS COMBINED HISTORICAL ACQUISITIONS COMBINED
----------- ------------ ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenue........................ $ 449,965 $ 15,035 (a) $ 465,000 $ 73,460 $ 72,881(a) $ 146,341
Operating costs and expenses...
Cost of natural gas sales..... 356,186 -- 356,186 24,361 57,216(a) 81,577
Other operating and
administrative expenses..... 18,669 4,769 (a) 23,438 17,210 4,024(a) 21,234
Depreciation, depletion and
amortization................ 39,209 5,207 (b) 44,416 21,705 -- 21,705
----------- ---------- --------- ---------- ----------- ---------
Operating costs and expenses.. 414,064 9,976 424,040 63,276 61,240 124,516
----------- ---------- --------- ---------- ----------- ---------
Operating income............ 35,901 5,059 40,960 10,184 11,641 21,825
Interest and other income,
net........................... 3,713 -- 3,713 -- -- --
Interest expense............... (7,732) (11,108)(c) (18,840) -- -- --
----------- ---------- --------- ---------- ----------- ---------
Income before income taxes
(benefit)..................... 31,882 (6,049) 25,833 10,184 11,641 21,825
Federal and state income taxes
(benefit)..................... 10,576 (2,117)(e) 8,459 3,638 4,074(e) 7,712
----------- ---------- --------- ---------- ----------- ---------
Net income (loss)......... $ 21,306 $ (3,932) $ 17,374 $ 6,546 $ 7,567 $ 14,113
=========== ========== ========= ========== =========== =========
Earnings per share............. $ 1.81
===========
Average shares outstanding..... 11,760,701
===========
<CAPTION>
ACQUISITION
AND OTHER PRO FORMA
ADJUSTMENTS AS ADJUSTED
------------ ------------
<S> <C> <C>
Revenue........................ $ -- $ 611,341
Operating costs and expenses... --
Cost of natural gas sales..... -- 437,763
Other operating and
administrative expenses..... -- 44,672
Depreciation, depletion and
amortization................ 611 (b) 66,732
---------- ----------
Operating costs and expenses.. 611 549,167
---------- ----------
Operating income............ (611) 62,174
Interest and other income,
net........................... -- 3,713
Interest expense............... (5,461)(d) (24,301)
---------- ----------
Income before income taxes
(benefit)..................... (6,072) 41,586
Federal and state income taxes
(benefit)..................... (2,125)(e) 14,046
---------- ----------
Net income (loss)......... $ (3,947) $ 27,540
========== ==========
Earnings per share............. $ 1.87
==========
Average shares outstanding..... 14,760,701
==========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Consolidated Financial Statements.
25
<PAGE> 27
KCS ENERGY, INC.
PRO FORMA STATEMENT OF CONSOLIDATED INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(UNAUDITED, DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MEDALLION ACQUISITION
KCS MEDALLION SAWYER CANYON PRO FORMA AND OTHER PRO FORMA
HISTORICAL HISTORICAL PROPERTIES(f) COMBINED ADJUSTMENTS AS ADJUSTED
----------- ----------- ---------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenue........................ $ 243,044 $ 104,625 $ 3,740 $ 108,365 $ -- $ 351,409
Operating costs and expenses:
Cost of natural gas sales.... 184,721 69,026 -- 69,026 -- 253,747
Other operating and
administrative expenses.... 12,287 9,835 645 10,480 -- 22,767
Depreciation, depletion and
amortization............... 22,912 13,484 -- 13,484 418 (g) 36,814
----------- ----------- ----------- ----------- ----------- -----------
Operating costs and
expenses................... 219,920 92,345 645 92,990 418 313,328
----------- ----------- ----------- ----------- ----------- -----------
Operating income........... 23,124 12,280 3,095 15,375 (418) 38,081
Interest and other income,
net.......................... 3,232 -- -- -- -- 3,232
Interest expense............... (9,340) (620) -- (620) (2,159)(h) (12,119)
----------- ----------- ----------- ----------- ----------- -----------
Income before income taxes
(benefit).................... 17,016 11,660 3,095 14,755 (2,577) 29,194
Federal and state income taxes
(benefit).................... 6,174 4,667 1,083(i) 5,750 (902)(i) 11,022
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)..... $ 10,842 $ 6,993 $ 2,012 $ 9,005 $ (1,675) $ 18,172
=========== =========== =========== =========== =========== ===========
Earnings per share............. $ 0.92 $ 1.22
=========== ===========
Average shares outstanding..... 11,841,533 14,841,533
=========== ===========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Consolidated Financial Statements.
26
<PAGE> 28
KCS ENERGY, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1996
(UNAUDITED, DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
OFFERING
KCS MEDALLION ACQUISITION PRO FORMA AND OTHER PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED ADJUSTMENTS AS ADJUSTED
---------- ---------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......... $ 2,608 $ 1,324 $ -- $ 3,932 $ -- $ 3,932
Trade accounts receivable, net.... 52,878 32,886 -- 85,764 -- 85,764
Receivable from Tennessee Gas..... 69,709 -- -- 69,709 (69,709)(m) --
Fuel inventories.................. 771 -- -- 771 -- 771
Other current assets.............. 3,658 1,958 -- 5,616 -- 5,616
--------- --------- --------- --------- --------- ---------
Current assets.................. 129,624 36,168 -- 165,792 (69,709) 96,083
Property, plant and equipment, net:
Oil and gas properties, net....... 193,296 201,007 3,929 (j) 398,232 -- 398,232
Natural gas transportation
systems, net.................... 22,425 3,000 2,000 (j) 27,425 -- 27,425
Other property, plant and
equipment....................... 2,755 889 (389)(j) 3,255 -- 3,255
--------- --------- --------- --------- --------- ---------
Property, plant and equipment,
net........................... 218,476 204,896 5,540 428,912 -- 428,912
--------- --------- --------- --------- --------- ---------
Investments and other assets........ 11,060 5,359 (1,159)(j) 15,260 -- 15,260
--------- --------- --------- --------- --------- ---------
$ 359,160 $ 246,423 $ 4,381 $ 609,964 $ (69,709) $ 540,255
========= ========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................. $ 34,936 $ 26,356 $ -- $ 61,292 $ -- $ 61,292
Accrued liabilities............... 10,853 3,827 -- 14,680 -- 14,680
--------- --------- --------- --------- --------- ---------
Current liabilities............. 45,789 30,183 -- 75,972 -- 75,972
Deferred credits and other
liabilities....................... 31,549 28,344 (28,344)(j) 31,549 -- 31,549
Long-term debt...................... 169,509 45,240 168,760 (k) 383,509 (191,968)(m)(n) 191,541
Stockholders' equity:
Preferred stock................... -- -- -- -- -- --
Common stock...................... 125 3 (3)(j) 125 30 (n) 155
Additional paid-in capital........ 25,612 112,871 (106,250)(j)(l) 32,233 122,229 (n) 154,462
Retained earnings................. 89,964 29,782 (29,782)(j) 89,964 -- 89,964
Less treasury stock............... (3,388) -- -- (3,388) -- (3,388)
--------- --------- --------- --------- --------- ---------
Total stockholders'
equity................... 112,313 142,656 (136,035) 118,934 122,259 241,193
--------- --------- --------- --------- --------- ---------
$ 359,160 $ 246,423 $ 4,381 $ 609,964 $ (69,709) $ 540,255
========= ========= ========= ========= ========= =========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Consolidated Financial Statements.
27
<PAGE> 29
KCS ENERGY, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
The accompanying pro forma financial statements have been prepared to
reflect certain adjustments to the historical consolidated financial statements
of the Company.
Unaudited Pro Forma Statement of Consolidated Income for the Year Ended
December 31, 1995:
(a) Adjustments to reflect revenues, cost of sales and other operating
expenses from January 1, 1995, until the dates of the Rocky Mountain
Acquisition and the Michigan Acquisition by the Company, the Sawyer Canyon
Properties and other acquisitions of Medallion, and the Medallion
Acquisition by the Company.
(b) Adjustments to reflect depreciation, depletion and amortization
expense calculated using the future gross revenue method applied to the
adjusted basis of the acquired properties and entities using the purchase
method of accounting.
(c) Adjustment to reflect additional interest expense calculated,
assuming the Company's As Adjusted debt balance at December 31, 1995
($170,529), was outstanding for the entire year, including amortization of
deferred financing cost.
(d) Adjustment to reflect incremental interest expense under the Bank
Credit Facilities ($13,445) to fund the $214,000 cash payment for the
Medallion Acquisition, and to reflect the interest expense savings ($7,984)
a result of the application of the estimated net proceeds of $122,259 from
the Offerings.
(e) Adjustments to the provision for income taxes related to the above
adjustments.
Unaudited Pro Forma Statement of Consolidated Income for the Six Months ended
June 30, 1996:
(f) Reflects results of operations for the Sawyer Canyon Properties
for the three months ended March 31, 1996, prior to their acquisition by
Medallion on April 1, 1996.
(g) Adjustment to reflect depreciation, depletion and amortization
expense calculated using the future gross revenue method applied to the
adjusted basis of the Medallion Acquisition using the purchase method of
accounting.
(h) Adjustment to reflect incremental interest expense under the Bank
Credit Facilities ($6,723) to fund the $214,000 cash payment for the
Medallion Acquisition, and to reflect the interest expense savings ($4,002)
as a result of the application of the estimated net proceeds of $122,259
from the Offerings.
(i) Adjustment to the provision for income taxes related to the above
adjustments.
Unaudited Pro Forma Consolidated Balance Sheet as of June 30, 1996:
(j) Adjustment to (i) eliminate the historical basis of certain assets
and liabilities of Medallion and (ii) reflect the adjusted basis of these
items using the purchase method of accounting. (See detail of the purchase
price and related allocation to assets and liabilities in the table below.)
(k) Adjustment to reflect the elimination of the historical debt of
Medallion of $45,240 and additional debt under the Bank Credit Facilities
of $214,000 for the Medallion Acquisition.
(l) Adjustment to reflect warrants to purchase 435,000 shares of
Common Stock granted in connection with the Medallion Acquisition presented
at estimated fair value ($6,621).
(m) Adjustment to reflect the September 30, 1996 receipt of the
Tennessee Gas Receivable balance as of June 30, 1996, as if received on
that date, and utilized to reduce long-term debt.
(n) Adjustment to reflect the application of the estimated net
proceeds of $122,259 from the Offerings (approximately $129,375 in gross
proceeds net of $7,116 in estimated underwriting discount and expenses) to
reduce long-term debt.
The following table summarizes elements of the Medallion Acquisition, which was
accounted for as a purchase transaction of Medallion by the Company as
described in these notes:
<TABLE>
<S> <C>
Consideration:
Cash paid to seller...................................................... $ 214,000
Common stock warrants.................................................... 6,621
Liabilities Assumed:
Current liabilities...................................................... 30,183
Assets Acquired:
Current assets........................................................... (36,168)
Other assets............................................................. (4,200)
--------
$ 210,436
========
</TABLE>
28
<PAGE> 30
(c) Exhibits.
Exhibit No. Exhibits
- ----------- --------
99 Press released dated October 17, 1996.
SIGNATURE
Pursuant to the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
Dated: November 5, 1996 KCS ENERGY, INC.
(Registrant)
/s/ HENRY A. JURAND
--------------------------------------
(Signature)
Henry A. Jurand
Vice President, Chief Financial Officer
and Secretary
29
<PAGE> 31
INDEX TO EXHIBITS
Exhibit No. Exhibits
- ----------- --------
99 Press release dated October 17, 1996.
<PAGE> 1
EXHIBIT 99
FOR IMMEDIATE RELEASE
- ---------------------
October 17, 1996
KCS ENERGY, INC. SIGNS LETTER OF INTENT TO ACQUIRE THE OIL AND GAS
OPERATIONS OF MIDAMERICAN ENERGY COMPANY
ACQUISITION MORE THAN DOUBLES KCS, OIL AND GAS PRODUCTION
AND PROVED RESERVES
HOUSTON, TX, OCTOBER 17, 1996 -- KCS Energy, Inc. (NYSE:KCS) today announced it
has signed a letter of intent to purchase InterCoast Oil and Gas Company
(formerly known as Medallion Production Company -- "Medallion"), the Tulsa,
Oklahoma-based oil and gas exploration and production subsidiary and two gas
marketing subsidiaries of MidAmerican Energy Company, for $174 million in cash,
a $40 million short-term note and 610,000 warrants on KCS common stock. The
warrants have a four-year term and an exercise price of $45 per share. The
principal assets involved in the acquisition are proved reserves of
approximately 220 Bcfe, of which approximately 80% are natural gas and 80% are
proved developed, from 2,051 gross (667 net) wells. Approximately 70% of the
reserves are from Medallion operated wells. The reserves are located
principally in Texas, Louisiana and Oklahoma. It is estimated that
approximately 15 Bcf of the gas qualifies for Section 29 tax credits.
During September 1996, production from these properties averaged
approximately 3,500 barrels of oil and natural gas liquids and 64,000 Mcf of
gas per day. In addition to the proved oil and gas reserves, the acquisition
includes approximately 22,000 gross (17,000 net) undeveloped acres, a 37-mile
Texas gathering system, 45% interest in a Montana gathering system and two
natural gas marketing subsidiaries which averaged sales volume of approximately
210,000 Mcf per day during September 1996.
KCS Energy, Inc. President and Chief Executive Officer James W.
Christmas stated, "The acquisition broadens and further diversifies our oil and
gas resource base, increasing our average daily production and proved reserves
by more than 100%. Just as important, it adds
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