<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 September 30, 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: 11,587,397 shares outstanding as of
October 31, 1996.
<PAGE> 2
KCS ENERGY, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
(Thousands of Dollars) Unaudited 1996 1995 1996 1995
- -------------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue $ 73,560 $ 109,679 $ 316,604 $ 332,274
Operating costs and expenses
Cost of gas sales 46,342 88,322 231,063 264,097
Other operating and administrative 7,140 4,090 19,427 12,950
Depreciation, depletion
and amortization 11,021 10,829 33,933 29,299
- -----------------------------------------------------------------------------------------------------------
Total operating costs
and expenses 64,503 103,241 284,423 306,346
- -----------------------------------------------------------------------------------------------------------
Operating income 9,057 6,438 32,181 25,928
Interest and other income, net 1,618 851 4,850 2,311
Interest expense (4,518) (1,862) (13,858) (4,912)
- -----------------------------------------------------------------------------------------------------------
Income before income taxes 6,157 5,427 23,173 23,327
Federal and state income taxes 2,193 1,341 8,367 7,645
- -----------------------------------------------------------------------------------------------------------
Net income $ 3,964 $ 4,086 $ 14,806 $ 15,682
===========================================================================================================
Earnings per share of common
stock and common stock
equivalents $ 0.33 $ 0.35 $ 1.25 $ 1.33
===========================================================================================================
Average shares of common stock
and common stock equivalents
outstanding 11,985,569 11,763,397 11,886,434 11,766,011
===========================================================================================================
Cash dividends per share $ 0.03 $ 0.03 $ 0.09 $ 0.09
===========================================================================================================
</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>
September 30, December 31,
(Thousands of Dollars) Unaudited 1996 1995
- -------------------------------- --------- ---------
<S> <C> <C>
Assets
- ------
Current assets
Cash and cash equivalents $ 53,597 $ 5,846
Trade accounts receivable, net 39,146 58,052
Receivable from Tennessee Gas -- 56,437
Other current assets 5,939 4,156
- -----------------------------------------------------------------------------
Current assets 98,682 124,491
- -----------------------------------------------------------------------------
Oil and gas properties, full cost
method, net 206,308 204,958
Natural gas transportation systems, net 22,296 22,345
Other property, plant and equipment, net 2,979 2,013
- -----------------------------------------------------------------------------
Property, plant and equipment, net 231,583 229,316
- -----------------------------------------------------------------------------
Investments and other assets 10,887 6,802
- -----------------------------------------------------------------------------
$ 341,152 $ 360,609
=============================================================================
Liabilities and stockholders' equity
- ------------------------------------
Current liabilities
Accounts payable $ 34,680 $ 59,475
Accrued liabilities 7,032 4,926
- -----------------------------------------------------------------------------
Current liabilities 41,712 64,401
- -----------------------------------------------------------------------------
Deferred credits and other liabilities 33,298 29,103
- -----------------------------------------------------------------------------
Long-term debt 149,830 165,529
- -----------------------------------------------------------------------------
Stockholders' equity
Common stock, par value $0.01 per
share - authorized 50,000,000
shares, issued 12,488,120 and
12,379,885, respectively 125 124
Additional paid-in capital 25,997 24,910
Retained earnings 93,578 79,814
Less treasury stock, 900,748 and
892,748 shares, respectively, at cost (3,388) (3,272)
- -----------------------------------------------------------------------------
Total stockholders' equity 116,312 101,576
- -----------------------------------------------------------------------------
$ 341,152 $ 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>
Nine Months Ended
September 30,
----------------------
(Thousands of Dollars) Unaudited 1996 1995
- -------------------------------- --------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 14,806 $ 15,682
Non-cash charges:
Depreciation, depletion and amortization 33,933 29,299
Other non-cash charges and credits, net 5,443 8,756
- -----------------------------------------------------------------------------
54,182 53,737
Net changes in assets and liabilities:
Trade accounts receivable 18,906 (714)
Receivable from Tennessee Gas 56,437 (32,613)
Accounts payable and accrued liabilities (22,689) 6,735
Other, net (1,709) 1,516
- -----------------------------------------------------------------------------
Net cash provided by operating activities 105,127 28,661
- -----------------------------------------------------------------------------
Cash flows from investing activities:
Investment in oil and gas properties (50,552) (52,953)
Proceeds from the sale of oil and
gas properties 16,384 5,524
Other capital expenditures (2,183) (4,502)
- -----------------------------------------------------------------------------
Net cash used in investing activities (36,351) (51,931)
- -----------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from debt 165,145 51,369
Repayments of debt (180,900) (23,574)
Deferred financing costs (5,200) (602)
Dividends paid (1,042) (1,033)
Other, net 972 309
- -----------------------------------------------------------------------------
Net cash provided by (used in) financing activities (21,025) 26,469
- -----------------------------------------------------------------------------
Net increase in cash and cash equivalents 47,751 3,199
Cash and cash equivalents at beginning of period 5,846 988
- -----------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 53,597 $ 4,187
=============================================================================
</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 $10.9 million and $4.4 million for the nine months ended September 30, 1996
and September 30, 1995, respectively. Income tax payments were $4.5 million
during the nine months ended September 30, 1996. No income tax payments were
made during the nine months ended September 30, 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. General
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. Litigation
The Company is currently selling natural gas from certain leases in
the Bob West Field in south Texas to Tennessee Gas Pipeline Company
("Tennessee Gas") under an above-market price, take-or-pay contract
("Tennessee Gas Contract").
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 in the previously disclosed litigation relating to the
Tennessee Gas Contract. In its April 1996 opinion, the Texas Supreme Court
affirmed the Company's position on all issues, stating that the price
payable by Tennessee Gas escalates monthly in accordance with Section
102(b) (2) of the NGPA ($8.53 per MMBtu in September 1996 plus
reimbursement of severance taxes); that KCS has the right to pool the
leases; that Tennessee Gas has no legal or contractual right to question
or determine whether certain leases are no longer committed to the
Tennessee Gas Contract; and that the Tennessee Gas Contract is not an
output contract governed by Section 2.306 of the Texas Uniform Commercial
Code. Tennessee Gas filed a motion requesting another rehearing on June 3,
1996 and on August 16, 1996 the Texas Supreme Court denied Tennessee Gas'
motion. On September 30, 1996 the Company recovered approximately $70
million that Tennessee Gas previously withheld under a series of interim
agreements, which was the balance of the purchase price for production
taken by Tennessee Gas from September 17, 1994 through April 30, 1996,
plus interest as provided for in the Tennessee Gas Contract (the
"Tennessee Gas Receivable"). The terms of the Tennessee Gas Contract, in
accordance with judicial rulings in the case, now govern performance by
each of the parties. Tennessee Gas has been paying the contract price for
gas deliveries subsequent to April 30, 1996.
See Note 7 to Consolidated Financial Statements of the Company's
1995 Annual Report to Stockholders for further information regarding the
Tennessee Gas litigation.
5
<PAGE> 6
KCS ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In a related matter, in April 1995, Tennessee Gas filed suit against
the Company and its co-sellers in District Court in Zapata County, Texas,
seeking a declaratory judgment that no more than 50% of the production
from either of the jointly-owned Guerra "A" or Guerra "B" units is subject
to the Tennessee Gas Contract, and claiming that the sellers are
delivering in excess of such amounts. In another related matter, Tennessee
Gas filed suit in November 1994, claiming that some of the natural gas
taken under the Tennessee Gas Contract had been enriched by the Company,
thereby depriving Tennessee Gas of its contractual right to reject natural
gas that does not comply with contractual quality specifications. Each of
these cases is still pending. The 1994 suit is scheduled for trial on
November 18, 1996.
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
Tennessee Gas Contract. The Company is a co-plaintiff in the first of
these lawsuits that was filed in Dallas, Texas and is a defendant in the
other subsequently filed suits in Zapata County, Texas. The basis of these
declaratory judgment actions is the royalty holders' claim that their
royalty payments should be based on the price paid by Tennessee Gas for
the natural gas purchased by it under the Tennessee Gas 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.
The Company's position has recently been confirmed in the Dallas
suit where the trial judge has granted the co-plaintiff's motion for
summary judgment on this issue. In addition, the trial judge has granted
summary judgment against the royalty owners with respect to their various
counterclaims against the co-plaintiffs as concerns the jointly-owned
Guerra "A" and Guerra "B" units. However, the royalty owners also
counterclaimed against the Company with respect to the Jesus Yzaguirre
unit, asserting that the largest lease contained therein had terminated in
December 1975 and that certain of the royalty owners were entitled to the
Tennessee Gas Contract price because of their execution of certain
division orders in 1992 that allegedly varied the market-value royalty
provision of their lease. The trial judge has not yet ruled on the
parties' motions for summary judgment concerning these issues, although he
has granted the Company's motion for summary judgment that the royalty
holders' leases require that royalties be based upon the market value of
the natural gas at the lease, not the price paid for the natural gas under
the Tennessee Gas Contract.
The Company is also a party to various other lawsuits and
governmental proceedings, all arising in the ordinary course of business.
Although the outcome of these proceedings cannot be predicted with
certainty, management does not expect such matters to have a material
adverse effect, either singly or in the aggregate, on the financial
position of the Company.
6
<PAGE> 7
KCS ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. Long-term Debt
On January 25, 1996, the Company completed a private offering of
$150 million senior notes at an interest rate of 11% due January 15, 2003
(the "Senior Notes"). The Senior Notes are noncallable for four years and
are unsecured obligations of the Company. Prior to January 15, 1999, the
Company may use proceeds from a public equity offering to redeem up to $35
million of the Senior Notes. The subsidiaries of the Parent have
guaranteed the Senior Notes on a senior unsecured basis. The proceeds of
approximately $145 million were used to reduce the amounts outstanding
under other credit agreements.
The Senior Notes contain certain restrictive covenants which, among
other things, limit the Company's ability to incur additional
indebtedness, require the repurchase of the Senior Notes upon a change of
control and restrict the aggregate cash dividends paid to 50% of the
Company's cumulative net income during the period beginning October 1,
1995. Additionally, the Master Note Facility, Receivables Facility and VPP
Facility agreements summarized below were amended to permit the borrowers
under the agreements to guarantee the Senior Notes and to remove
restrictions on subsidiary dividends to KCS.
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 Senior 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 Senior Notes except for certain transfer
restrictions and registration rights applicable to the Senior Notes. The
Exchange Notes evidenced the same debt, and were issued under and entitled
to the benefits of the same indenture, as the Senior Notes.
At December 31, 1995, the Company maintained four separate bank
credit facilities to support its operations. The Master Note Facility was
utilized primarily to support the expansion of the Company's exploration
and production and natural gas transportation businesses. The Company's
natural gas marketing subsidiary had two credit facilities, the Receivable
Facility and VPP Facility, which were used primarily for working capital
purposes and to support the acquisition of oil and gas properties through
volumetric production payments. The Company also had a Note Financing
Agreement ("Note Financing") which was used to fund the Company's oil and
gas property acquisitions and for general corporate purposes. The Note
Financing was paid in full with the proceeds of the Senior Notes. In
October 1996, the Company exercised its option to purchase the warrant
issued in connection with the Note Financing.
In July 1996, the Receivable Facility was paid in full and
terminated. On September 25, 1996, the Company consolidated the Master
Note Facility and the VPP Facility to create one revolving credit facility
(the "Credit Facility"), which will mature on September 30, 2000. The
credit facility is secured by the same collateral that was pledged to
secure the Master Note and VPP facilities. The borrowing base under the
Credit Facility is a function of the lender's determination of the value
of the Company's oil and gas reserves, and is currently limited to $75
million under the terms of the Indenture governing the Senior Notes. As of
October 31, 1996, $0.1 million was outstanding under the Credit Facility
and $11.1 million was reserved pursuant to an existing
7
<PAGE> 8
KCS ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
letter of credit. The Credit Facility bears interest at a spread over the
prime rate or LIBOR, determined each quarter based on the Company's
consolidated debt-to-EBITDA ratio.
See Note 4 to Consolidated Financial Statements of the Company's 1995
Annual Report to Stockholders for further information regarding these
credit facilities.
4. Recent Acquisition
On October 17, 1996, the Company signed a letter of intent to
acquire all of the outstanding stock of InterCoast Oil and Gas Company
(formerly Medallion Production Company "Medallion"), GED Energy Services,
Inc. and InterCoast Gas Services Company (collectively referred to as the
"Medallion Acquisition"), indirect wholly-owned subsidiaries of the
MidAmerican Energy Company ("MidAmerican"), and certain Section 29 tax
credits, for a purchase price of approximately $219 million. MidAmerican,
an electric and gas utility, was formed in 1995 as a result of the merger
of Iowa-Illinois Gas and Electric Company and Midwest Resources Inc.
Medallion's principal assets are 207.4 Bcfe of proved oil and gas
reserves estimated as of June 30, 1996 by an independent reserve engineer,
Ryder Scott Company, consisting of 166.6 Bcf of natural gas (80% of total
proved reserves) and 6.8 MMbbls of oil and condensate. These reserves are
located primarily in the Mid-Continent region encompassing west Texas, the
Texas panhandle, northwest Oklahoma and north Louisiana. Proved developed
reserves account for 88% of Medallion's total proved reserves and the
average life at year-end 1995 was 8.0 years. The Medallion Acquisition
will more than double the Company's reserve base and add substantial
management and technical expertise, particularly in the new Mid-Continent
core area. The Company anticipates that a definitive agreement will be
signed on or about November 14, 1996. Closing of the acquisition is
expected before the end of 1996.
5. Proposed Common Stock Offering
On November 5, 1996, the Company announced it has filed a
registration statement with the Securities and Exchange Commission
concerning the proposed public sale of three million shares of its common
stock. Net proceeds to the Company will be used to repay a portion of the
indebtedness expected to be incurred to finance the Medallion Acquisition.
8
<PAGE> 9
KCS ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
In the past year, several important developments have had and should
continue to have a significant impact on the Company's financial condition and
results of operations. In April 1996, the Texas Supreme Court withdrew its
previous decision in the Tennessee Gas litigation and issued a new decision
favorable to the Company's position. On August 16, 1996, the Texas Supreme Court
denied Tennessee Gas' petition for a rehearing of the Company's case against it
(see Note 2 to Condensed Consolidated Financial Statements) and on September 30,
1996, the Company received the full amount of the Tennessee Gas Receivable
outstanding (approximately $70 million) at that date. The April 1996 decision by
the Texas Supreme Court does not affect the earnings reported herein as the
previously reported earnings already reflect the 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." The Company is redeploying the significant
cash flow from the Bob West Field to invest in drilling and other development
and to pursue other oil and gas acquisitions in its three core operating areas
and the VPP program.
On October 17, 1996, the Company signed a letter of intent for the
purchase of Medallion. The Company anticipates that a definitive agreement will
be signed on or about November 14, 1996. The Company has also made two other
significant acquisitions. In November 1995, the Company acquired substantially
all of the oil and gas assets of Natural Gas Processing Company for a purchase
price of approximately $33 million and in December 1995, the Company acquired
24.6 Bcfe of proved reserves in the northern and southern Niagaran Reef trend
in Michigan for $31 million.
These developments have transformed the Company from an enterprise
dependent upon the Bob West Field and the Tennessee Gas Contract ( including the
outcome of its case against Tennessee Gas) to a more diversified enterprise
focusing on the acquisition and development of oil and gas assets located in
three core operating areas- the Gulf Coast region, the Rocky Mountain region and
the Mid-Continent region and on its VPP Program.
RESULTS OF OPERATIONS - CONSOLIDATED
Net income for the three months ended September 30, 1996 was $4.0 million
or $0.33 per share, compared to $4.1 million or $0.35 per share, for the same
period a year ago. For the nine months ended September 30, 1996, net income was
$14.8 million, or $1.25 per share, compared to $15.7 million or $1.33 per share,
last year. Significantly higher oil and gas production, along with higher oil
and gas prices in the current year periods for non-Tennessee Gas Contract sales
were offset by lower production from properties covered by the Tennessee Gas
Contract, higher interest costs and a higher effective income tax rate.
9
<PAGE> 10
KCS ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS -BUSINESS SEGMENTS
Segment information reflects volumes, revenues and expenses associated
with transactions involving affiliates which are eliminated in consolidation.
OIL AND GAS EXPLORATION AND PRODUCTION
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
(Thousands of Dollars) Unaudited 1996 1995 1996 1995
- -------------------------------- ------- -------- ------- -------
<S> <C> <C> <C> <C>
Revenue $25,978 $ 20,913 $79,051 $63,425
Production (lifting) costs 3,163 1,952 8,253 4,353
DD&A 10,680 10,551 32,865 28,447
Other operating expenses 1,094 (100) 2,877 1,816
- -------------------------------------------------------------------------------
Operating income $11,041 $ 8,510 $35,056 $28,809
===============================================================================
Oil production (Mbbl) 199 40 547 111
Natural gas production (MMcf):
Tennessee Gas Contract 1,133 1,649 3,576 5,446
Non-contract 5,030 3,046 15,346 7,858
- -------------------------------------------------------------------------------
Total gas production 6,163 4,695 18,922 13,304
===============================================================================
Average sales price:
Oil (per bbl) $ 21.00 $ 17.28 $ 19.72 $ 17.53
Gas (per Mcf) 3.54 4.27 3.61 4.60
DD&A as a percent of revenue 41.1% 50.5% 41.6% 44.9%
===============================================================================
</TABLE>
Oil and gas production increased 49% to 7,357 MMcfe and 59% to 22,204
MMcfe for the three and nine months ended September 30, 1996, respectively,
compared to the same periods a year ago. The current year increases in
production resulted from newly added properties and reflects the Company's
overall growth strategy to increase its percentage of non-Tennessee Gas
Contract production. Non-Tennessee Gas Contract production accounted for 85%
of total production during the 1996 three-month period and 84% for the 1996
nine-month period up from 67% and 61%, respectively, during the 1995 three
and nine-month periods. Sales of gas production under the Tennessee Gas
Contract decreased to 1,133 MMcf in the 1996 quarter, compared to 1,649 MMcf
for the same period last year due mainly to normal production declines of the
50 wells drilled to date. For the nine months ended September 30, 1996 sales
to Tennessee Gas decreased to 3,576 MMcf compared to 5,446 MMcf when
Tennessee Gas took additional deliveries.
Average natural gas prices were $3.54 and $3.61 for the three and nine
months ended September 30, 1996, respectively, compared to $4.27 and $4.60
for the same periods a year ago. These decreases resulted from the decline in
sales under the Tennessee Gas Contract, which more than offset the
significant increase in non-Tennessee Gas Contract
10
<PAGE> 11
KCS ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
production and higher average spot market prices. Average non-Tennessee Gas
Contract gas prices were $2.23 and $2.29 during the 1996 three and nine-month
periods, respectively, compared to $1.60 and $1.56 during the same periods
last year. Gas sale prices under the Tennessee Gas contract, excluding
severance tax reimbursements, were $8.53 and $8.38, respectively, during the
current year three and nine-month periods compared to $7.97 and $7.84 during
the same periods last year.
The increases in costs and expenses were mainly attributable to the
increase in production volume.
NATURAL GAS TRANSPORTATION AND MARKETING
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- -----------------------
(Thousands of Dollars) Unaudited 1996 1995 1996 1995
- -------------------------------- -------- -------- --------- ---------
<S> <C> <C> <C> <C>
Revenue $ 47,727 $ 89,150 $ 238,254 $ 270,557
Cost of gas sales 46,394 88,458 231,343 265,213
- ----------------------------------------------------------------------------------------
Gross margin 1,333 692 6,911 5,344
Depreciation 314 261 1,007 803
Other operating expenses 2,006 2,141 6,183 5,825
- ----------------------------------------------------------------------------------------
Operating income $ (987) $ (1,710) $ (279) $ (1,284)
========================================================================================
Transportation Volume (Bcf) 5.9 7.0 20.1 19.4
Transportation Gross Margin per Mcf $ 0.215 $ 0.127 $ 0.186 $ 0.159
========================================================================================
Marketing Volume (Bcf) 16.1 58.1 87.2 167.1
Marketing Gross Margin per Mcf $ 0.005 $ (0.003) $ 0.036 $ 0.014
========================================================================================
</TABLE>
The marketing operations had an operating loss of $1.4 million for the
three months ended September 30, 1996 compared to $1.9 million for the same
period a year ago. For the nine months ended September 30, 1996 the marketing
operations lost $1.3 million compared to $2.3 million for the same period a
year ago. The significant decline in marketed volumes and revenue during the
1996 periods reflect a strategic shift away from higher volume low margin
"gas trading" activities and toward an emphasis on its core retail customer
base. Coupled with higher natural gas prices in 1996, this resulted in the
increases in gross margin per Mcf of marketing volumes.
The natural gas transportation operations increased its operating
income to $0.4 million for the current year quarter compared to $0.2 million
for the same period a year ago. Operating income from this operation was $1.0
million in each of the nine-month periods ended September 30, 1996 and 1995.
The increases in transportation volumes and gross margin per Mcf were offset
by higher operating and maintenance expenses.
11
<PAGE> 12
KCS ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTEREST AND OTHER INCOME, NET
Interest income accrued on the Tennessee Gas Receivable (see "Liquidity
and Capital Resources") was $1.6 million and $4.7 million for the three
months and nine months ended September 30, 1996, respectively compared to
$0.8 million and $1.9 million during the same periods a year ago.
INTEREST EXPENSE
Interest expense was $4.5 million for the three months ended September
30, 1996 compared to $1.9 million for the three months ended September 30,
1995. For the nine months ended September 30, 1996 interest expense was $13.9
million compared to $4.9 million. The 1996 increases were 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
contract price from Tennessee Gas throughout 1995 and therefore increased its
borrowings to expand its oil and gas exploration and production operations.
These borrowings 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 favorable decision by the Texas Supreme Court regarding the
Tennessee Gas litigation in April 1996 (see Note 2 to Condensed Consolidated
Financial Statements) significantly affected the Company's liquidity and
capital resources. On August 16, 1996, the Court denied Tennessee Gas'
petition for a rehearing, and on September 30, 1996, the Company received
approximately $70 million, representing past underpayments (including
interest and net of severance taxes and other payables related to the
contract) that had accrued under the contract.
The Company had been accruing an accounts receivable amount ( which
included interest as provided for in the contract) due from Tennessee Gas
that included the difference between the price that would have been paid for
natural gas pursuant to the terms of the Tennessee Gas Contract and the
amount actually paid for natural gas delivered from September 17, 1994
through April 30, 1996 pursuant to interim agreements whereby Tennessee Gas
paid $3.00 per MMBtu for all natural gas purchased during that period.
Tennessee Gas has been paying the contract price for natural gas deliveries
subsequent to April 30, 1996 and is obligated to do so until the contract
terminates in January 1999.
CASH FLOW FROM OPERATING ACTIVITIES
Net income adjusted for noncash charges was $54.2 million for the nine
months ended September 30, 1996 compared to $53.7 during the same period in
1995. Net cash provided by operating activities was $105.1 million during the
current year nine-month period compared to $28.7 million in the prior year
period. This increase resulted primarily from the receipt of the Tennessee
Gas Receivable on September 30, 1996 and, to a lesser extent, the timing of
cash receipts and payments. See Note 2 to Condensed Consolidated Financial
Statements.
12
<PAGE> 13
KCS ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INVESTING ACTIVITIES
Capital expenditures for the nine months ended September 30, 1996 were
$52.7 million, of which $50.6 million were invested in oil and gas
operations. Of that total, $30.2 million was for development drilling, $8.0
million for the purchase of proved reserves under the Company's VPP program
and $12.4 million for lease acquisitions, seismic surveys and exploratory
drilling. The expenditures were financed principally with internally
generated cash and $16.4 million of proceeds from the sale of certain
non-strategic oil and gas properties.
The 1996 capital budget was increased to $100 million in August, after
the Texas Supreme Court denied Tennessee Gas' petition for rehearing of the
Court's April 1996 decision in the Tennessee Gas Contract litigation. The
additional funds were allocated principally for development drilling in the
Rocky Mountain region and for property acquisitions.
On October 17, 1996, the Company signed a letter of intent for the
purchase of Medallion. The Company anticipates that a definitive agreement
will be signed on or about November 14, 1996. The Medallion Acquisition is
anticipated to be funded by a cash payment of $214 million and warrants to
purchase 435,000 shares of Common Stock. The Company expects to finance the
cash portion of the purchase price by using its available cash, borrowings
under the existing Credit Facility and borrowings under a new revolving
credit agreement secured by the oil and gas assets acquired in the Medallion
Acquisition and the capital stock of Medallion. See " Debt Financing." The
net proceeds from the Company's proposed sale of the common stock offering
would be used to reduce the amounts outstanding under these bank credit
facilitates.
Giving affect to the Medallion Acquisition, which is anticipated to
close by year-end 1996, the Company expects to have made gross capital
expenditures of approximately $310 million in 1996. Of that total, $219
million represents the Medallion Acquisition and the remaining $91 million is
for exploration and development drilling on the Company's other properties
and for oil and gas property acquisitions.
DEBT FINANCING
On January 25, 1996, the Company completed the 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 Senior Notes) were
utilized to reduce the outstanding indebtedness under existing bank credit
facilities and to repay a note sold to a third party. Also during 1996, the
Company consolidated its existing bank credit facilities into one Credit
Facility as described below and intends to enter into an additional Revolving
Credit Agreement to fund a portion of the purchase price for the Medallion
Acquisition as described below.
Credit Facility
At December 31, 1995, the Company maintained four separate bank credit
facilities to support its operations. The Master Note Facility was utilized
primarily to support the expansion of the Company's exploration and
production and natural gas transportation
13
<PAGE> 14
KCS ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
businesses. The Company's natural gas marketing subsidiary had two credit
facilities, the Receivable Facility and the VPP Facility, which were used
primarily for working capital purposes and to support the acquisition of oil
and gas properties through volumetric production payments. The Company also
had a Note Financing Agreement ("Note Financing") which was used to fund the
Company's oil and gas property acquisitions and for general corporate
purposes. In October 1996, the Company exercised its option to purchase the
warrant issued in connection with the Note Financing. The Note Financing was
paid in full with the proceeds of the Senior Notes.
In July 1996, the Receivable Facility was paid in full and terminated.
On September 25, 1996, the Company consolidated the Master Note Facility and
the VPP Facility to create one revolving credit facility ( the "Credit
Facility"), which will mature on September 30, 2000. The Credit Facility is
secured by the same collateral that was pledged to secure the Master Note and
VPP facilities. The borrowing base under the Credit Facility is a function of
the lender's determination of the value of the Company's oil and gas
reserves, and as of October 31, 1996, was limited to $75 million under the
terms of the Indenture governing the Senior Notes. The Credit Facility bears
interest at a spread over the prime rate or LIBOR, determined each quarter
based on the Company's consolidated debt-to-EBITDA ratio. As of October 31,
1996, $0.1 million was outstanding under the Credit Facility and $11.1
million was reserved pursuant to existing letters of credit.
Revolving Credit Agreement for Medallion Acquisition
Simultaneously with the consummation of the Medallion Acquisition,
the Company expects to enter into a new revolving credit agreement ("
Revolving Credit Agreement") with a group of banks. Of the Revolving Credit
Agreement's $150 million initial borrowing base, $45 million will be
structured as a term loan with a maturity of April 1, 1998 and the remaining
$105 million revolving loan will mature on September 30, 2000. The Company
anticipates that, immediately following the Medallion Acquisition, $140
million will be outstanding under the Revolving Credit Agreement.
The Company expects that obligations under the Revolving Credit
Agreement will be secured by substantially all of the oil and gas assets of
Medallion and a pledge of Medallion's capital stock. The Revolving Credit
Agreement will permit the Company to borrow at interest rates based upon the
banks' prime rate or LIBOR. The applicable spread over the prime rate or LIBOR
will be determined each quarter based on the Company's consolidated
debt-to-EBITDA ratio.
14
<PAGE> 15
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.
There were no reports on Form 8-K filed during the three
months ended September 30, 1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KCS ENERGY, INC.
November 12, 1996 /S/ HENRY A. JURAND
- ----------------- -------------------
Henry A. Jurand
Vice President, Chief Financial
Officer and Secretary
15
<PAGE> 1
Exhibit 11
Statement Re Computation of Per Share Earnings
Primary earnings per share were calculated as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1996 1995 1996 1995
------- ------- ------- -------
In Thousands
Except per share amounts
<S> <C> <C> <C> <C>
Net income $ 3,964 $ 4,086 $14,806 $15,682
Average shares of common stock outstanding 11,578 11,486 11,547 11,477
Add: Net shares assumed to be issued for
dulitive stock options 408 277 339 289
- --------------------------------------------------------------------------------------
Average shares of common stock and common
stock equivalents outstanding 11,986 11,763 11,886 11,766
======================================================================================
Earnings per share of common stock and
common stock equivalents $ 0.33 $ 0.35 $ 1.25 $ 1.33
======================================================================================
</TABLE>
16
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 53,597
<SECURITIES> 0
<RECEIVABLES> 40,004
<ALLOWANCES> 858
<INVENTORY> 884
<CURRENT-ASSETS> 98,682
<PP&E> 358,360
<DEPRECIATION> 126,777
<TOTAL-ASSETS> 341,152
<CURRENT-LIABILITIES> 41,712
<BONDS> 149,830
0
0
<COMMON> 125
<OTHER-SE> 116,187
<TOTAL-LIABILITY-AND-EQUITY> 341,152
<SALES> 316,604
<TOTAL-REVENUES> 316,604
<CGS> 231,063
<TOTAL-COSTS> 231,063
<OTHER-EXPENSES> 53,360
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,858
<INCOME-PRETAX> 23,173
<INCOME-TAX> 8,367
<INCOME-CONTINUING> 14,806
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,806
<EPS-PRIMARY> 1.25
<EPS-DILUTED> 1.25
</TABLE>
