<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, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------------- -----------------
Commission file number 1-11698
KCS ENERGY, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-2889587
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
379 Thornall Street, Edison, New Jersey 08837
(Address of principal executive offices) (Zip Code)
(908) 632-1770
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since
last report.)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding twelve months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
(1) X Yes (2) No
------- --------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, $0.01 par value: 11,547,487 shares outstanding as of
April 30, 1996.
<PAGE> 2
KCS ENERGY, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
<TABLE>
<CAPTION>
Three Months Ended
March 31,
(Thousands of Dollars) Unaudited 1996 1995
- -------------------------------- ---- ----
<S> <C> <C>
Revenue $ 146,557 $ 96,039
- -------------------------------------------------------------------------------
Operating costs and expenses
Cost of gas sales 116,391 72,422
Other operating and administrative 6,163 4,311
Depreciation, depletion
and amortization 11,630 9,122
- -------------------------------------------------------------------------------
Total operating costs
and expenses 134,184 85,855
- -------------------------------------------------------------------------------
Operating income 12,373 10,184
Interest and other income, net 1,591 706
Interest expense (4,746) (1,372)
- -------------------------------------------------------------------------------
Income before income taxes 9,218 9,518
Federal and state income taxes 3,363 3,299
- -------------------------------------------------------------------------------
Net income $ 5,855 $ 6,219
================================================================================
Earnings per share of common
stock and common stock
equivalents $ 0.50 $ 0.53
================================================================================
Average shares of common stock
and common stock equivalents
outstanding 11,788,301 11,753,891
================================================================================
Cash dividends per share $ 0.03 $ 0.03
===============================================================================
</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, December 31,
(Thousands of Dollars) Unaudited 1996 1995
- -------------------------------- ---- -----
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 5,973 $ 5,846
Trade accounts receivable, net 66,034 58,052
Receivable from Tennessee Gas 65,747 56,437
Other current assets 4,721 4,156
- --------------------------------------------------------------------------------
Current assets 142,475 124,491
- --------------------------------------------------------------------------------
Oil and gas properties, full cost
method, net 202,310 204,958
Natural gas transportation systems, net 22,302 22,345
Other property, plant and equipment, net 2,578 2,013
- --------------------------------------------------------------------------------
Property, plant and equipment, net 227,190 229,316
- --------------------------------------------------------------------------------
Investments and other assets 10,701 6,802
- --------------------------------------------------------------------------------
$ 380,366 $ 360,609
================================================================================
Liabilities and stockholders' equity
Current liabilities
Accounts payable $ 57,424 $ 59,475
Accrued liabilities 6,999 4,926
- --------------------------------------------------------------------------------
Current liabilities 64,423 64,401
- --------------------------------------------------------------------------------
Deferred credits and other liabilities 31,978 29,103
- --------------------------------------------------------------------------------
Long-term debt 176,689 165,529
- --------------------------------------------------------------------------------
Stockholders' equity
Common stock, par value $0.01 per
share - authorized 50,000,000
shares, issued 12,438,235 and
12,379,885, respectively 124 124
Additional paid-in capital 25,216 24,910
Retained earnings 85,324 79,814
Less treasury stock, 900,478 and
892,748 shares, respectively, at cost (3,388) (3,272)
- --------------------------------------------------------------------------------
Total stockholders' equity 107,276 101,576
- --------------------------------------------------------------------------------
$ 380,366 $ 360,609
================================================================================
</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>
THREE MONTHS ENDED
MARCH 31, ENDED
(THOUSANDS OF DOLLARS) UNAUDITED 1996 1995
- -------------------------------- ---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 5,855 $ 6,219
Non-cash charges (credits):
Depreciation, depletion and amortization 11,630 9,122
Other non-cash charges and credits, net 3,129 4,731
- --------------------------------------------------------------------------------------------------------
20,614 20,072
Net changes in assets and liabilities:
Trade accounts receivable (7,982) (853)
Receivable from Tennessee Gas (9,310) (11,672)
Accounts payable and accrued liabilities 22 144
Other, net 39 3,997
- --------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 3,383 11,688
- --------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Investment in oil and gas properties, net (8,532) (18,697)
Other capital expenditures (943) (1,106)
- --------------------------------------------------------------------------------------------------------
Net cash used in investing activities (9,475) (19,803)
- --------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from debt 150,345 32,569
Repayments of debt (139,200) (23,239)
Deferred financing costs (4,772) (340)
Dividends paid (344) (344)
Other, net 190 126
- --------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 6,219 8,772
- --------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 127 657
Cash and cash equivalents at beginning of period 5,846 988
- --------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 5,973 $ 1,645
========================================================================================================
</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 $2,041,000 and $1,292,000 for the three months ended March 31,
1996 and March 31, 1995, respectively. Income tax payments were $800,000 during
the three months ended March 31, 1996. No income tax payments were made during
the three months ended March 31, 1995.
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 Tennessee Gas Litigation
On April 18, 1996 the Texas Supreme Court granted the
petitioners' request for a rehearing, withdrew its August 1, 1995
opinion and issued a new opinion on the previously disclosed
litigation of an above-market-price, take-or-pay gas purchase
agreement ("GPA") with Tennessee Gas Pipeline Company ("TGT"). In its
April 18, 1996 opinion, the Texas Supreme Court affirmed the Company's
position on all issues, stating that the price payable by TGT for the
gas escalates monthly in accordance with Section 102(b)(2) of the
Natural Gas Policy Act, currently $8.32 per MMBtu, plus reimbursement
of severance taxes; that KCS has the right to pool the leases; that
TGT has no legal or contractual right to question or determine whether
certain leases are no longer committed to the GPA; and that the GPA is
not an output contract governed by Section 2.306 of the Texas Uniform
Commercial Code. TGT has until June 3, 1996 to file a motion for
rehearing.
This decision opens the way for the Company's recovery of
approximately $65.7 million that TGT has currently withheld under a
series of interim agreements, which is the balance of the purchase
price for production taken by TGT since September 17, 1994, plus
interest as provided for in the TGT contract. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" - "Liquidity and Capital Resources".
See Note 7 to Consolidated Financial Statements of the
Company's 1995 Annual Report to Stockholders for further information
regarding the TGT litigation.
5
<PAGE> 6
KCS ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In a related matter, in April 1995, TGT filed suit
against the Company and its co-sellers in District Court in Zapata
County, Texas, seeking declaratory judgment that no more than 50% of
the actual production from either of the jointly-owned Guerra "A" or
Guerra "B" units is subject to the TGT contract, and claiming that the
sellers are delivering in excess of such amounts. In another related
matter, TGT filed suit in November 1994, claiming that some of the
natural gas taken under the TGT contract had been enriched by the
Company, thereby depriving TGT of its contractual right to reject
natural gas that does not comply with contractual quality
specifications. Each of these cases is still pending.
Other Legal Proceedings
As previously reported, the Company is a party to three
lawsuits involving the holders of royalty interests on the acreage
covered by the TGT contract. The Company is a co-plaintiff in the first
of these lawsuits that was filed and is a defendant in the other
subsequently filed suits. The basis of these declaratory judgment
actions is the royalty holders' claim that their royalty payments
should be based on the price paid by TGT for the natural gas purchased
by it under the TGT contract. The Company has been paying royalties for
this natural gas based upon the spot market price. Because the leases
have market-value royalty provisions, the Company believes it is in
full compliance under the leases with its royalty holders.
As of March 31, 1996, the amount of gas taken by TGT
attributable to these royalty interests was approximately 3.3 Bcf, for
which royalties have been paid by KCS at the average price of
approximately $1.73 per Mcf, net of severance tax, compared to the
average contract price of approximately $7.54 per Mcf, net of severance
tax. Consequently, the Company faces a maximum liability in this
litigation of approximately $19.2 million.
While the Company believes its defenses are meritorious and
that it should prevail in all of the pending litigation, there can be
no assurance as to the ultimate outcome of these matters.
3. On January 25, 1996, KCS Energy, Inc. completed a Rule 144A
private offering of $150 million 11% senior notes due January 15, 2003
(the "144A Notes"). On May 8, 1996, the Company commenced an offer (the
("Exchange Offer") of up to $150 million senior notes (the "Exchange
Notes") in exchange for the outstanding 144A Notes, pursuant to a
registration statement declared effective by the Securities and
Exchange Commission on May 7. The Exchange Notes are identical in all
material respects to the form and terms of the 144A notes except for
certain transfer restrictions and registration rights applicable to the
144A Notes. The Exchange Notes will evidence the same debt, and will be
issued under and entitled to the benefits of the same indenture, as the
144A Notes.
6
<PAGE> 7
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, 1996 was $5,855,000, or
$0.50 per share, compared to $6,219,000, or $0.53 per share, for the same period
a year ago. Significantly higher non-TGT contract oil and gas production, along
with higher oil and gas prices in the current year period were offset by lower
production from properties covered by the TGT contract, higher non-cash DD&A
charges, higher interest costs and a higher effective income tax rate.
The April 18, 1996 decision by the Texas Supreme Court (see Note 2 to
Condensed Consolidated Financial Statements) does not affect the earnings
reported herein as the earnings already reflect the full contract price. The
decision does however have a significant effect on the Company's liquidity and
capital resources and its ability to implement its strategies for future growth.
(See "Liquidity and Capital Resources".)
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
March 31,
(Thousands of Dollars) Unaudited 1996 1995
- ------------------------------------------------------------------
<S> <C> <C>
Revenue $26,781 $21,168
Production (lifting) costs 2,265 1,142
DD&A 11,270 8,827
Other operating expenses 1,034 1,018
- ------------------------------------------------------------
Operating income $12,212 $10,181
============================================================
Oil production (Mbbl) 159 37
Natural gas production (MMcf):
Tennessee Gas contract 1,246 2,151
Non-contract 5,211 2,218
- ------------------------------------------------------------
Total gas production 6,457 4,369
============================================================
Average sales price :
Oil (per Bbl) $ 17.89 $ 17.05
Gas (per Mcf) 3.71 4.67
DD&A as a percent of revenue 42.1% 41.7%
============================================================
</TABLE>
7
<PAGE> 8
KCS ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The overall increase in oil and gas production in the 1996 period
compared to the same period in 1995 resulted from newly added properties which
more than offset the natural production decline from the properties covered by
the TGT contract. Sales of gas production under the TGT contract decreased to
1.25 Bcf in the quarter, compared to 2.15 for the same period last year when, in
January, TGT was making up for curtailments earlier in the contract year which
ends each January 31. The reduction also reflects the normal production decines
of the 49 wells drilled to date. Non-TGT contract oil and gas production
accounted for 83% of total production in the 1996 period compared to 53% during
the same period a year ago.
The significant increase in non-TGT contract production and increased
average market prices were offset in part by the lower TGT-contract production
resulting in an overall decrease in average natural gas sale prices from $4.67
to $3.71. Average non-TGT contract gas prices, which benefited from a colder
than normal winter heating season in much of the country, were $2.39 during the
1996 period compared to $1.42 during the same period a year ago and gas sales
prices under the TGT contract, excluding severance tax reimbursements, were
$8.24 compared to $7.73.
The increase in costs and expenses was mainly attributable to the
increase in production volume.
<TABLE>
<CAPTION>
Natural Gas Transportation and Marketing
Three Months Ended
March 31,
(Thousands of Dollars) Unaudited 1996 1995
- ---------------------------------------------------------------------------
<S> <C> <C>
Revenue $120,120 $76,761
Cost of gas sales 116,587 74,162
- --------------------------------------------------------------------------
Gross Margin 3,533 2,599
Depreciation 344 279
Other operating expenses 2,239 1,797
- --------------------------------------------------------------------------
Operating income $ 950 $ 523
==========================================================================
Transportation volume (Bcf) 6.8 6.2
Transportation gross margin per Mcf $ 0.222 $ 0.182
==========================================================================
Marketing volume (Bcf) 43.1 45.9
Marketing gross margin per Mcf $ 0.047 0.032
==========================================================================
</TABLE>
Significantly higher natural gas prices resulted in increased
profitability during the three months ended March 31, 1996, compared to the same
period last year. The price increases were due mainly to colder than normal
weather conditions in the Midwest, Northeast and Southeast, which resulted in
higher natural gas peak demand and lower levels of storage gas inventories.
The 9% increase in transportation volumes and 22% increase in transportation
gross margin per Mcf during the current year period were directly related to the
higher prices and weather conditions.
Average marketing sales prices increased over 50% to approximately
$2.57 per Mcf during the current year three-month period compared to the same
period a year ago. Marketing sales volumes decreased 6% to 43.1 Bcf primarily
due to the Company's decision to concentrate on higher-margin sales.
8
<PAGE> 9
KCS ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In addition, the Company capitalized on significant price volatility during
periods of extreme cold weather, which enhanced gross margins during the current
year three-month period.
Interest and Other Income, net
Interest income accrued on the difference between the full TGT contract
price and the price paid by TGT under interim agreements (see "Liquidity and
Capital Resources") was $1,565,000 during the three months ended March 31, 1996
compared to $422,000 during the same period a year ago.
Interest Expense
Interest expense was $4,746,000 during the three months ended March 31,
1996 compared to $1,372,000 for the three months ended March 31, 1995. The
increase was due to higher average borrowings, along with higher average
interest rates principally from the sale of 11% Senior Notes in January 1996.
The Company did not collect the full contract price from TGT throughout 1995 and
therefore increased its borrowings to expand its oil and gas exploration and
production operations. This included approximately $64 million for the Rocky
Mountain and Michigan acquisitions, completed during the fourth quarter of 1995.
Liquidity and Capital Resources
Decision of the Supreme Court of Texas
The April 18, 1996 decision by the Texas Supreme Court (see Note 2 to
Condensed Consolidated Financial Statements) will significantly affect the
Company's liquidity and capital resources. The Company anticipates receipt in
the near future of the full amount due from TGT of approximately $65.7 million
(including interest and net of deferred severance taxes and other payables
related to the TGT contract) at March 31, 1996.
As previously reported, the Company has been accruing an accounts
receivable amount (which includes interest as provided for in the contract) due
from TGT that includes the difference between the price that would have been
paid for natural gas pursuant to the terms of the TGT contract and the amount
actually paid for gas taken since September 17, 1994 pursuant to interim
agreements whereby TGT paid $3.00 per MMBtu for all gas purchased from that
date, without prejudice to the Company's claim for the full contract price.
The latest interim agreement terminated on April 30, 1996. Therefore, the
terms of the TGT contract, in accordance with judicial rulings in the case,
now govern performance by each of the parties.
Prior to the April 18, 1996 decision by the Texas Supreme Court, the
Company had restricted its capital spending budget to $70 million for 1996, an
amount which was expected to be funded largely from cash flow and sale of
non-strategic assets. With the favorable decision, KCS plans to increase its
capital expenditure budget and accelerate its acquisition and drilling programs.
9
<PAGE> 10
KCS ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cash Flow From Operating Activities
Net income adjusted for non-cash charges increased to $20.6 million for
the three months ended March 31, 1996 compared to $20.1 during the same period
in 1995. Net cash provided by operating activities was $3.4 million during the
current year three month period compared to $11.7 million. This change reflected
a short-term working capital requirement as of the date of the balance sheet
resulting from the timing of cash receipts and payments.
Capital Expenditures
Capital expenditures for the three months ended March 31, 1996 were
$9.5 million, of which $8.5 million were invested in oil and gas operations.
Capital expenditures were restricted following the two significant acquistions,
completed in the fourth quarter of 1995, until completion of the note offering
in late January 1996. The Company funded its capital expenditures for the
quarter with a mix of internally generated cash and additional borrowings.
Debt Financing
On January 25, 1996, the Company completed the private sale of $150
million principal amount of 11% Senior Notes due 2003. The net proceeds of
approximately $145 million (after deducting expenses of the offering which were
deferred and will be amortized over the term of the note) were utilized to
reduce the outstanding indebtedness under bank credit facilities and to repay a
note sold to a third party. See Note 3 to Condensed Consolidated Financial
Statements in in this Form 10-Q. At March 31, 1996 the Company had $36.6 million
of availability under its existing credit facilities.
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.
10
<PAGE> 11
KCS ENERGY, INC. - FORM 10-Q
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Incorporated by reference from Note 2 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.
On January 25, 1996 the registrant reported the
completion of its Rule 144A private offering of $150,000,000
aggregate principal amount of senior notes due 2003 under Item
5 of Form 8-K.
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, 1996 /S/ HENRY A. JURAND
- ------------ --------------------
Henry A Jurand
Vice President, Chief Financial
Officer and Secretary
11
<PAGE> 1
Exhibit 11
Statement Re Computation of Per Share Earnings
Primary earnings per share were calculated as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
1996 1995
---- ----
In Thousands
Except per share
amounts
<S> <C> <C>
Net income $ 5,855 $ 6,219
===========================================================================================
Average shares of common stock outstanding 11,517 11,466
Add: Net shares assumed to be issued for
dilutive stock options 271 288
- -------------------------------------------------------------------------------------------
Average shares of common stock and common stock
equivalents outstanding 11,788 11,754
===========================================================================================
Earnings per share of common stock and common stock
equivalents $ 0.50 $ 0.53
===========================================================================================
</TABLE>
12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 5973
<SECURITIES> 0
<RECEIVABLES> 131781
<ALLOWANCES> 0
<INVENTORY> 130
<CURRENT-ASSETS> 142475
<PP&E> 331485
<DEPRECIATION> 104295
<TOTAL-ASSETS> 380366
<CURRENT-LIABILITIES> 64423
<BONDS> 0
0
0
<COMMON> 124
<OTHER-SE> 107152
<TOTAL-LIABILITY-AND-EQUITY> 380366
<SALES> 146557
<TOTAL-REVENUES> 146557
<CGS> 116391
<TOTAL-COSTS> 116391
<OTHER-EXPENSES> 17793
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4746
<INCOME-PRETAX> 9218
<INCOME-TAX> 3363
<INCOME-CONTINUING> 5855
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5855
<EPS-PRIMARY> 0.50
<EPS-DILUTED> 0
</TABLE>
