<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, 1997
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)
(732)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: 29,404,394 shares outstanding as of October 31,
1997.
1
<PAGE> 2
KCS ENERGY, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
<TABLE>
Three Months Ended Nine Months Ended
(Amounts in thousands except September 30, September 30,
per share data) ------------------------ -------------------------
Unaudited 1997 1996 1997 1996
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Oil and gas revenue $ 30,573 $ 25,978 $ 100,396 $ 79,051
Other revenue, net 1,095 68 3,702 377
-------- -------- --------- --------
Total revenue 31,668 26,046 104,098 79,428
Operating costs and expenses
Lease operating expenses 6,771 3,009 20,470 6,582
Production taxes 1,268 554 4,354 1,671
General and administrative expenses 1,964 1,662 7,302 5,411
Depreciation, depletion and amortization 13,921 10,741 42,486 33,128
-------- -------- --------- --------
Total operating costs and expenses 23,924 15,966 74,612 46,792
-------- -------- --------- --------
Operating income 7,744 10,080 29,486 32,636
Interest and other income, net 158 1,610 388 4,820
Interest expense (5,348) (3,471) (15,146) (11,193)
-------- -------- --------- --------
Income from continuing operations 2,554 8,219 14,728 26,263
before income taxes
Federal and state income taxes 975 2,936 5,452 9,483
-------- -------- --------- --------
Income from continuing operations 1,579 5,283 9,276 16,780
Discontinued operations
Net loss from operations -- (1,319) (72) (1,974)
Net gain on disposition -- -- 5,461 --
-------- -------- --------- --------
Net income $ 1,579 $ 3,964 $ 14,665 $ 14,806
======== ======== ========= ========
Earnings per share of common stock and common stock equivalents:
Continuing operations $ 0.05 $ 0.22 $ 0.32 $ 0.70
Discontinued operations -- (0.05) 0.18 (0.08)
-------- -------- --------- --------
$ 0.05 $ 0.17 $ 0.50 $ 0.62
Average shares of common stock and
common stock equivalents outstanding 30,294 23,971 29,449 23,773
======== ======== ========= ========
Cash dividends per share $ 0.020 $ 0.015 $ 0.050 $ 0.045
======== ======== ========= ========
</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>
(Dollars in thousands except September 30, December 31,
per share data) Unaudited 1997 1996
--------- ---------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 3,858 $ 5,100
Trade accounts receivable, net 33,720 30,307
Net assets of discontinued operations 5,110 26,658
Other current assets 7,925 8,392
--------- ---------
Current assets 50,613 70,457
--------- ---------
Oil and gas properties, full cost method, net 540,896 415,870
Other property, plant and equipment, net 14,510 14,483
--------- ---------
Property, plant and equipment, net 555,406 430,353
--------- ---------
Investments and other assets 8,024 11,010
--------- ---------
$ 614,043 $ 511,820
========= =========
Liabilities and stockholders' equity
Current liabilities
Accounts payable $ 32,953 $ 24,144
Accrued liabilities 9,953 15,558
--------- ---------
Current liabilities 42,906 39,702
--------- ---------
Deferred credits and other liabilities 43,424 36,149
--------- ---------
Long-term debt 275,723 310,347
--------- ---------
Stockholders' equity
Common stock, par value $0.01 per
share - authorized 50,000,000
shares, issued 31,198,390 and
24,976,240 respectively 312 249
Additional paid-in capital 143,718 30,463
Retained earnings 111,348 98,298
Less treasury stock, 1,801,496 shares, at cost (3,388) (3,388)
--------- ---------
Total stockholders' equity 251,990 125,622
--------- ---------
$ 614,043 $ 511,820
========= =========
</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,
---------------------------
(Dollars in thousands) Unaudited 1997 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 14,665 $ 14,806
Non-cash charges:
Depreciation, depletion and amortization 42,486 33,933
Gain on disposition of discontinued operations (5,461) --
Other non-cash charges and credits, net 5,901 5,443
--------- ---------
57,591 54,182
Net changes in assets and liabilities:
Trade accounts receivable 58,054 18,906
Receivable from Tennessee Gas -- 56,437
Accounts payable and accrued liabilities (54,579) (22,689)
Other, net 829 (1,709)
--------- ---------
Net cash provided by operating activities 61,895 105,127
--------- ---------
Cash flows from investing activities:
Investment in oil and gas properties (169,773) (50,552)
Proceeds from the sale of pipeline assets 27,907 --
Proceeds from the sale of oil and gas properties 3,800 16,384
Other capital expenditures, net (2,111) (2,183)
--------- ---------
Net cash used in investing activities (140,177) (36,351)
--------- ---------
Cash flows from financing activities:
Proceeds from debt 117,300 165,145
Repayments of debt (151,991) (180,900)
Proceeds from issuance of common stock 113,418 1,088
Deferred financing costs (213) (5,200)
Dividends paid (1,374) (1,042)
Other, net (100) (116)
--------- ---------
Net cash provided by (used in) financing activities 77,040 (21,025)
--------- ---------
Net increase (decrease) in cash and cash equivalents (1,242) 47,751
Cash and cash equivalents at beginning of period 5,100 5,846
--------- ---------
Cash and cash equivalents at end of period $ 3,858 $ 53,597
========= =========
</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 $19,939,000 and $10,901,000 for the nine months ended September 30, 1997
and September 30, 1996 respectively. Income tax payments were $483,000 and
$4,500,000 during the nine months ended September 30, 1997 and September 30,
1996 respectively.
The accompanying notes to the 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. Discontinued Operations - During the first quarter of 1997, the Board of
Directors approved a plan to discontinue the Company's natural gas
transportation and marketing operations in order to focus on the core oil and
gas exploration and production operations. As of March 31, 1997, the Company
sold its Texas intrastate natural gas pipeline system, together with related
marketing assets and a joint venture gathering system for a net sale price of
$27.9 million and realized an after-tax gain of $5.9 million. During the third
quarter of 1997, the Company sold its natural gas marketing operations for a net
sale price of $0.5 million and realized an after-tax gain of $0.3 million. The
results for the transportation and marketing operations have been classified as
discontinued operations for all periods presented in the Condensed Statements of
Consolidated Income. The assets and liabilities of discontinued operations have
been classified in the Condensed Consolidated Balance Sheets as "Net assets of
discontinued operations". Net assets of the Company's discontinued operations at
September 30, 1997 and December 31, 1996 are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
(Thousands of dollars) 1997 1996
------------- -----------
<S> <C> <C>
Assets
Current Assets
Accounts receivable, net $ 816 $61,632
Other 4,200 2,995
------ -------
Total current assets 5,016 64,627
Net property, plant and equipment 600 17,977
Other noncurrent assets 1,384 1,964
------ -------
Total 7,000 84,568
Liabilities
Current liabilities 1,890 55,701
Noncurrent liabilities -- 2,209
------ -------
Total 1,890 57,910
------ -------
Net assets of discontinued operations $5,110 $26,658
====== =======
</TABLE>
5
<PAGE> 6
KCS ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Summarized results of operations of the discontinued transportation and
marketing operations are as follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------
(Thousands of dollars) 1997 1996
-------- ---------
<S> <C> <C>
Revenues $ 22,015 $ 225,438
Costs and expenses * 22,129 228,528
-------- ---------
Income (loss) before income taxes (114) (3,090)
Provision (benefit) for income taxes (42) (1,116)
-------- ---------
Income (loss) from discontinued operations (72) (1,974)
======== =========
Gain on disposal before income taxes ** 8,668 --
Provision for income taxes 3,207 --
-------- ---------
Net gain on disposal $ 5,461 $ --
======== =========
</TABLE>
* Includes allocated interest expense of $0.1 million and $2.6 million for the
nine-month period ended September 30, 1997 and 1996, respectively.
** 1997 includes $1.1 million provision for estimated losses during the
wind-down period.
Discontinued operations have not been segregated in the Condensed
Statements of Consolidated Cash Flows and, therefore, amounts for certain
captions will not agree with the respective Condensed Statements of Consolidated
Income and Condensed Consolidated Balance Sheets.
3. Legal Proceedings - The Company is a party to three lawsuits
involving the holders of royalty interests on the acreage that was covered by
the Tennessee Gas Contract. The Company is a co-plaintiff in the first of these
lawsuits that was filed in Dallas County, Texas, and is a defendant in two
subsequently filed suits in Zapata County, Texas. On May 30, 1997, one of the
Zapata County suits was dismissed in connection with a partial settlement with
certain of the royalty owners that is discussed below. On October 22, 1997, the
other Zapata County suit was dismissed by the court on its own motion, inasmuch
as the suit had been abated since September 15, 1995 in favor of the
earlier-filed suit in Dallas County.
The Dallas County action was instituted to obtain a declaratory
judgment that 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 is erroneous. The Company paid royalties for
this natural gas produced from the Guerra "A", Guerra "B" and Jesus Yzaguirre
Units based upon the spot market price. Because its leases have market-value
royalty provisions, the Company believes it is in full compliance under the
leases with its royalty holders. Its position has been confirmed in the Dallas
County suit, where the trial judge has granted KCS and its co-plaintiffs'
motions for summary judgment on this issue. In addition, the Dallas County
trial judge has granted summary judgment against the royalty owners with
respect to their various counterclaims concerning the Company's Jesus Yzaguirre
Unit and the jointly-owned Guerra "A" and Guerra "B" Units. The royalty owners
had
6
<PAGE> 7
KCS ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
also counterclaimed against the Company with respect to the Jesus
Yzaguirre Unit, alleging (i) that the largest lease contained therein had
terminated in December 1975 and (ii) that certain of the royalty owners were
entitled to royalties based upon 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. On May 30, 1997, the Company and
these royalty owners settled the issue of lease termination, and on June 2,
1997, the trial judge signed an order of dismissal with prejudice as to that
issue. On the issue of the effect of the 1992 division orders, the parties filed
renewed motions for summary judgment. On August 12, 1997, the trial judge signed
an order granting the Company's motion and denying the royalty owners' motion.
At a hearing on October 29, 1997, the trial judge entered a final
judgment in favor of the Company based upon the prior separate summary
judgments in favor of the Company's position on the issues and counterclaims
involved in the Jesus Yzaguirre Unit lawsuit.
The royalty owners in the Guerra "A" and Guerra "B" Units have appealed
the trial court's decision to the Fifth District Court of Appeals in Dallas,
Texas, and the royalty owners in the Jesus Yzaguirre Unit have indicated the
trial court's final judgement in that matter will be appealed in due course to
the Fifth District Court of Appeals in Dallas, Texas. While the Company
believes its positions are meritorious and that it should prevail, there can be
no assurance as to the ultimate outcome of these matters.
The Company is also party to various other lawsuits and governmental
proceedings, all arising in the ordinary course of business. Although the
outcome of these lawsuits cannot be predicted with certainty, the Company does
not expect such matters to have a material adverse effect, either singly or in
the aggregate, on the financial position or results of operations of the
Company.
4. In January 1997, the Company completed a public offering of
6,000,000 shares (giving effect to the two-for-one stock split effective June
30, 1997) of its common stock. The net proceeds to the Company of approximately
$110.6 million were used to reduce outstanding indebtedness under its bank
credit facilities.
5. On May 6, 1997, the Company's Board of Directors approved a
two-for-one stock split of its common stock effective June 30, 1997 to
stockholders of record on June 3, 1997. All references in the financial
statements and notes thereto included in this Form 10-Q to the number of common
shares and earnings per share reflect the stock split.
6. In October 1996, the American Institute of Certified Public
Accountants issued Statement of Position 96-1, "Environmental Remediation
Liabilities" (the SOP), which was adopted by the Company in the first quarter of
1997. The SOP provided guidance concerning the recognition, measurement and
disclosure of environmental remediation liabilities. The adoption of the SOP did
not have a material effect on the Company's financial position or results of
operations.
7
<PAGE> 8
KCS ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7. In February, 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" (FAS 128). This
statement simplifies the computation of earnings per share (EPS). Basic EPS
includes no dilution and is computed by dividing income available to common
stockholders by the weighted average number of shares outstanding for the
period. FAS 128 is effective for periods ending after December 15, 1997.
Pro-forma EPS under the methodology required by FAS 128 is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1997 1996 1997 1996
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Income from continuing operations $ 1,579 $ 5,283 $ 9,276 $16,780
Income (loss) from discontinued operations -- (1,319) 5,389 (1,974)
-------- ------- -------- -------
Net income $ 1,579 $ 3,964 $ 14,665 $14,806
======== ======= ======== =======
Average shares of common stock outstanding 29,377 23,155 28,670 23,094
Pro-forma basic EPS
Continuing operations $ 0.05 $ 0.23 $ 0.32 $ 0.73
Discontinued operations -- (0.06) 0.19 (0.09)
-------- ------- -------- -------
$ 0.05 $ 0.17 $ 0.51 $ 0.64
======== ======= ======== =======
</TABLE>
8
<PAGE> 9
KCS ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Results of operations for the three and nine months ended September 30,
1997, as compared to the same periods a year ago, reflect several important
developments. The Medallion acquisition, which was completed as of December 31,
1996, significantly increased the overall size of the Company, more than
doubling the Company's proved reserves. Another important development was the
January 1, 1997 termination of the Tennessee Gas contract. Prior to its
termination, the Tennessee Gas contract and its above-market-pricing provisions
had a material and positive effect on the Company's gas revenue, income and cash
flow. Also during the first quarter of 1997, the Company sold its principal
natural gas transportation asset, the Texas intrastate pipeline, for a net sale
price of $27.9 million and realized an after-tax gain of $5.9 million. In
addition, the Company sold its gas marketing operations. Accordingly, the
Condensed Statements of Consolidated Income and Condensed Consolidated Balance
Sheets have been restated to reflect the natural gas transportation and
marketing operations as discontinued operations. See Notes 2 and 9 to
Consolidated Financial Statements in the Company's 1996 Annual Report to
Stockholders for more information on the Medallion acquisition and the Tennessee
Gas contract, respectively. See Note 2 to Condensed Consolidated Financial
Statements in this Form 10-Q for further information regarding the discontinued
operations.
The Company completed a two-for-one stock split effective June 30,
1997, and all per share data herein has been adjusted to reflect such split.
The following discussion focuses on material changes in results of
operations for the three and nine months ended September 30, 1997, compared to
the three and nine months ended September 30, 1996, and in financial condition
since December 31, 1996.
Results of Operations
Net income for the three months ended September 30, 1997 was $1.6
million, or $0.05 per share, compared to $4.0 million, or $0.17 per share last
year. Significantly higher oil and gas production was more than offset by the
impact of the termination of the Tennessee Gas contract and higher net interest
costs. The 1996 quarter included a loss of $1.3 million, or $0.05 per share from
discontinued operations.
Net income for the nine months ended September 30, 1997 was $14.7
million, or $0.50 per share, compared to $14.8 million, or $0.62 per share for
the nine months ended September 30, 1996. Income from continuing operations was
$9.3 million, or $0.32 per share, compared to $16.8 million, or $0.70 per share.
Significantly higher oil and gas production during 1997 was more than offset by
the impact of the termination of the Tennessee Gas contract and higher net
interest costs. In addition, current year earnings per share reflects the effect
of six million additional shares of common stock outstanding following the
January 1997 public equity offering. The current nine-month period included $5.4
million or $0.18 per share, from discontinued operations, principally from the
gain on sale of the Texas intrastate pipeline system.
9
<PAGE> 10
KCS ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Revenue
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ----------------------
1997 1996 1997 1996
------- ------- -------- -------
<S> <C> <C> <C> <C>
Production:
Oil (Mbbl) 413 199 1,295 547
Liquids (Mbbl) 30 -- 101 --
Gas (MMcf) 10,647 6,163 32,806 18,922
Total (MMcfe) 13,308 7,356 41,180 22,204
Average Price:
Oil (per bbl) $ 17.46 $ 21.00 $ 18.92 $ 19.72
Liquids (per bbl) 9.39 -- 11.05 --
Gas (per Mcf) 2.17 3.54 2.28 3.61
Total (per Mcfe) 2.30 3.53 2.44 3.56
Revenue:
Oil $ 7,212 $ 4,168 $ 24,501 $10,779
Liquids 286 -- 1,113 --
Gas 23,075 21,810 74,782 68,272
------- ------- -------- -------
Total $30,573 $25,978 $100,396 $79,051
</TABLE>
Oil and Gas Production. The Company's oil and gas production during the
third quarter of 1997 increased 81% to 13.3 Bcfe, compared to 7.4 Bcfe during
the third quarter of 1996. Production for the first nine months of 1997
increased 85% to 41.2 Bcfe, compared to 22.2 Bcfe produced during the first nine
months of 1996. Oil and liquids production increased 123% to 443,000 barrels
during the third quarter of 1997 and 155% to 1,396,000 barrels during the first
nine months of 1997. Gas production increased 73% to 10.6 Bcf during the third
quarter of 1997 and 73% to 32.8 Bcf during the first nine months of 1997. The
production increases were primarily as a result of the Medallion acquisition.
Gas revenue. For the three months ended September 30, 1997, gas revenue
increased $1.3 million to $23.1 million, compared to the same period a year ago,
as the increased production more than offset the lower average realized prices.
Production gains in the 1997 quarter added $9.7 million of revenue. This
increase was largely offset by the termination of the Tennessee Gas Contract,
which provided $8.2 million in premium over corresponding spot market prices in
the 1996 three-month period. Average realized prices for gas production not
covered by the Tennessee Gas contract were $2.17 per Mcf, compared to $2.23 per
Mcf.
For the nine months ended September 30, 1997, gas revenues increased
$6.5 million to $74.8 million. Production gains added $31.9 million of gas
revenue during the 1997 period. This increase was largely offset by the
termination of the Tennessee Gas Contract, which provided $25.7 million in
premium over corresponding spot market prices in the 1996 nine-month period.
Average realized
10
<PAGE> 11
KCS ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
prices for gas not covered by the Tennessee Gas contract were $2.28 and $2.29
per Mcf, in the 1997 and 1996 nine-month periods, respectively.
Oil and liquids revenue. Oil and liquids revenue during the third
quarter of 1997 increased $3.3 million to $7.5 million. Production gains added
$4.0 million, which was partially offset by a $0.7 million reduction due to
lower average oil prices during the third quarter of 1997, compared to the same
period a year ago.
For the nine months ended September 30, 1997, oil and liquids revenue
increased $14.8 million to $25.6 million. Production gains added $15.3 million
of oil and liquids revenue, partially offset by lower average realized prices.
Other revenue, net
Other revenue includes certain marketing and gathering revenues
incidental to the Company's oil and gas exploration and production operations.
The increases in 1997 are primarily the result of the Medallion acquisition. The
1997 nine-month total includes $1.3 million from the settlement of a gas sales
contract dispute during the second quarter.
Lease operating expenses
As a result of the substantial increase in oil and gas production,
lease operating expenses increased $3.8 million to $6.8 million, during the
third quarter of 1997, compared to the same period in 1996. Virtually all of
this increase was related to the properties acquired as part of the Medallion
acquisition.
For the nine months ended September 30, 1997, lease operating expenses
increased $13.9 million to $20.5 million, compared to the same period a year
ago, primarily due to oil and gas production increases. Approximately $12.3
million of the increase was related to the Medallion properties, with the
remainder of the increase primarily due to the expanded operations in the Rocky
Mountain region, especially in the Manderson Field.
Production taxes
Production taxes, which are generally based on a fixed percentage of
revenue, increased 129% to $1.3 million during the third quarter and 161% to
$4.4 million during the first nine months of 1997, compared to the same periods
in 1996. In addition to the effect of higher oil and gas revenue during the 1997
three and nine-month periods, a larger percentage of that revenue was subject to
severance taxes, as a result of the termination of the Tennessee Gas Contract
which provided for reimbursement to KCS of severance taxes on gas production
covered under that contract.
General and administrative expenses
General and administrative expenses increased $0.3 million to
$2.0 million during the third quarter and $1.9 million to $7.3 million for the
first nine months of 1997. These increases were primarily the result of the
overall growth of the Company, including expansion in the Mid-Continent region
as a result of the Medallion acquisition and expanded VPP operations.
11
<PAGE> 12
KCS ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Depreciation, depletion and amortization
The Company provides for depreciation, depletion and amortization
("DD&A") on its oil and gas properties using the future gross revenue method
based on recoverable reserves valued at current prices. During the three months
ended September 30, 1997, DD&A on the Company's oil and gas properties increased
$2.7 million, of which $2.0 million was attributable to increased production
with the remainder due to an increase in the DD&A accrual rate.
For the nine months ended September 30, 1997, DD&A on the Company's oil
and gas properties increased $8.1 million over the same period in 1996.
Production gains increased DD&A by $8.7 million, partially offset by a $0.6
million reduction attributable to a decline in the DD&A rate. In addition,
depreciation on assets other than oil and gas properties increased $1.3 million
primarily due to the expansion of the Company's operations in the Mid-Continent
and Rocky Mountain regions.
Interest and Other Income, Net
Interest and other income was lower during the three and nine-month
periods ended September 30, 1997, compared to the same periods in 1996,
primarily due to the absence of interest income on outstanding receivables
related to the Tennessee Gas litigation. The outstanding receivables plus
interest were paid by Tennessee Gas on September 30, 1996.
Interest Expense
Interest expense increased $1.9 million to $5.3 million during the
third quarter and $4.0 million to $15.1 million for the nine months ended
September 30, 1997, as compared to the same periods a year ago. Higher average
borrowings in 1997 due to the expansion of the Company's oil and gas operations,
(including the Medallion acquisition, the VPP program and the development of the
Manderson Field) were offset in part by lower average interest rates during the
current year periods.
Liquidity and Capital Resources
Cash Flow From Operating Activities
Net income adjusted for non-cash charges increased to $57.6 million for
the nine months ended September 30, 1997, compared to $54.2 during the same
period in 1996. The increase reflects cash flow from the properties acquired as
part of the Medallion acquisition, which more than offset the impact of the
termination of the Tennessee Gas contract ($25.7 million). Net cash provided by
operating activities was $61.9 million during the current year nine-month
period, compared to $105.1 million for the nine months ended September 30, 1996.
The 1996 period reflected the receipt of approximately $70 million from
Tennessee Gas on September 30, 1996 for past underpayments and interest pursuant
to the Tennessee Gas Contract. The reduction in trade accounts receivable ($58.1
million) and in accounts payable and accrued liabilities ($54.6 million) were
largely related to the discontinuance of the natural gas transportation and
marketing operations.
Investing Activities
Capital expenditures for the nine months ended September 30, 1997 were
$171.9 million of which $91.2 million was for development drilling, including
$10.8 million for Manderson Field infrastructure, $45.6 million for the
acquisition of proved reserves under the Company's VPP program and $33.0 million
was for lease acquisitions, seismic surveys and exploratory drilling.
12
<PAGE> 13
KCS ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As of March 31, 1997, the Company completed the sale of its principal
natural gas transportation asset for a net sale price of $27.9 million, the
proceeds of which were used to pay down debt under its bank credit facilities.
The 1997 capital budget was initially set at $160 million and was
subsequently increased to $210 million in order to further the Company's
expansion in the Rocky Mountain region and for additional funding for the VPP
program. The Company has tentatively set the 1998 capital budget at $183
million including $95 million for development drilling, $30 million for
exploration and $55 million for reserve aquistion including $45 million under
the VPP program. The Company believes that internally generated cash, sales of
certain non-strategic assets, including the Texas intrastate pipeline, and
additional borrowings under its bank credit facilities are sufficient to fund
its capital program.
Financing Activities
In January 1997, the Company completed a public offering of 6,000,000
shares (giving effect to the two-for-one stock split effective June 30, 1997) of
common stock. The net proceeds to the Company of approximately $110.6 million
were used to reduce outstanding indebtedness under its bank credit facilities.
13
<PAGE> 14
KCS ENERGY, INC. - FORM 10-Q
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Incorporated by reference from Note 3 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, 1997.
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, 1997 /S/ HENRY A. JURAND
--------------------------------
Henry A. Jurand
Senior Vice President, Chief Financial
Officer and Secretary
14
<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,
----------------------- -----------------------
(Amounts in thousands except per share amounts) 1997 1996 1997 1996
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Net income:
Continuing operations $ 1,579 $ 5,283 $ 9,276 $16,780
Discontinued operations -- (1,319) 5,389 (1,974)
-------- ------- -------- -------
$ 1,579 $ 3,964 $ 14,665 $14,806
======== ======= ======== =======
Average shares of common stock outstanding 29,377 23,155 28,670 23,094
Add: Net shares assumed to be issued for
dilutive stock options 917 816 779 679
-------- ------- -------- -------
Average shares of common stock and common
stock equivalents outstanding 30,294 23,971 29,449 23,773
======== ======= ======== =======
Earning per common share:
Continuing operations $ 0.05 $ 0.22 $ 0.32 $ 0.70
Discontinued operations -- (0.05) 0.18 (0.08)
-------- ------- -------- -------
$ 0.05 $ 0.17 $ 0.50 $ 0.62
======== ======= ======== =======
</TABLE>
15
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 3,858
<SECURITIES> 0
<RECEIVABLES> 33,915
<ALLOWANCES> 195
<INVENTORY> 1,688
<CURRENT-ASSETS> 50,613
<PP&E> 732,346
<DEPRECIATION> 176,940
<TOTAL-ASSETS> 614,043
<CURRENT-LIABILITIES> 42,906
<BONDS> 0
0
0
<COMMON> 312
<OTHER-SE> 251,678
<TOTAL-LIABILITY-AND-EQUITY> 614,043
<SALES> 104,098
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 74,612
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,146
<INCOME-PRETAX> 14,728
<INCOME-TAX> 5,452
<INCOME-CONTINUING> 9,276
<DISCONTINUED> 5,389
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,665
<EPS-PRIMARY> 0.50
<EPS-DILUTED> 0
</TABLE>
