<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, 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)
(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: 14,625,647 shares outstanding as of
April 30, 1997.
<PAGE> 2
KCS ENERGY, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------
(Thousands of Dollars) Unaudited 1997 1996
- ----------------------------------------------------- ------------ ------------
<S> <C> <C>
Oil and gas revenue $39,234 $26,781
Other revenue, net 645 412
- --------------------------------------------------------------------------------------
Total revenue 39,879 27,193
Operating costs and expenses
Production (lifting) costs 8,463 2,265
Other operating and administrative 3,049 1,807
Depreciation, depletion and amortization 14,651 11,286
- --------------------------------------------------------------------------------------
Total operating costs and expenses 26,163 15,358
- --------------------------------------------------------------------------------------
Operating income 13,716 11,835
Interest and other income, net 35 1,591
Interest expense (5,186) (4,050)
- --------------------------------------------------------------------------------------
Income from continuing operations before income taxes 8,565 9,376
Federal and state income taxes 3,161 3,403
- --------------------------------------------------------------------------------------
Income from continuing operations 5,404 5,973
Discontinued operations
Net loss from operations (72) (118)
Net gain on disposition 5,461 --
- --------------------------------------------------------------------------------------
Net income $10,793 $ 5,855
======================================================================================
Earnings per share of common stock
and common stock equivalents:
Continuing operations $ 0.39 $ 0.51
Discontinued operations 0.38 (0.01)
- --------------------------------------------------------------------------------------
$ 0.77 $ 0.50
Average shares of common stock and
and common stock equivalents outstanding 14,030,865 11,788,301
======================================================================================
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, Dec. 31,
(Thousands of Dollars) Unaudited 1997 1996
- -------------------------------- --------- ---------
<S> <C> <C>
Assets
- ------
Current assets
Cash and cash equivalents $ 3,309 $ 5,100
Trade accounts receivable, net 31,850 30,307
Net assets of discontinued operations 857 20,475
Other current assets 4,000 8,392
- --------------------------------------------------------------------------
Current assets 40,016 64,274
- --------------------------------------------------------------------------
Oil and gas properties, full cost
method, net 432,377 415,870
Other property, plant and equipment, net 14,692 14,483
- --------------------------------------------------------------------------
Property, plant and equipment, net 447,069 430,353
- --------------------------------------------------------------------------
Investments and other assets 10,888 11,010
- --------------------------------------------------------------------------
$497,973 $505,637
==========================================================================
Liabilities and stockholders' equity
- ------------------------------------
Current liabilities
Accounts payable $ 21,967 $ 24,144
Accrued liabilities 6,903 15,558
- --------------------------------------------------------------------------
Current liabilities 28,870 39,702
- --------------------------------------------------------------------------
Deferred credits and other liabilities 36,836 29,966
- --------------------------------------------------------------------------
Long-term debt 185,283 310,347
- --------------------------------------------------------------------------
Stockholders' equity
Common stock, par value $0.01 per
share - authorized 50,000,000
shares, issued 15,514,875 and
12,438,235, respectively 155 125
Additional paid-in capital 141,566 30,587
Retained earnings 108,651 98,298
Less treasury stock, 900,478 shares, at cost (3,388) (3,388)
- --------------------------------------------------------------------------
Total stockholders' equity 246,984 125,622
- --------------------------------------------------------------------------
$497,973 $505,637
==========================================================================
</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,
(Thousands of Dollars) Unaudited 1997 1996
- -------------------------------- --------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 10,793 $ 5,855
Non-cash charges (credits):
Depreciation, depletion and amortization 14,740 11,630
Gain on disposition of discontinued operations (5,461) --
Other non-cash charges and credits, net 3,249 3,129
- ---------------------------------------------------------------------------------
23,321 20,614
Net changes in assets and liabilities:
Trade accounts receivable 28,673 (7,982)
Receivable from Tennessee Gas -- (9,310)
Accounts payable and accrued liabilities (39,641) 22
Other, net 4,007 39
- ---------------------------------------------------------------------------------
Net cash provided by operating activities 16,360 3,383
- ---------------------------------------------------------------------------------
Cash flows from investing activities:
Investment in oil and gas properties (31,690) (9,250)
Proceeds from sale of pipeline assets 27,907 --
Proceeds from sale of oil and gas properties 789 718
Other capital expenditures (581) (943)
- ---------------------------------------------------------------------------------
Net cash used in investing activities (3,575) (9,475)
- ---------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from debt 10,705 150,345
Repayments of debt (135,791) (139,200)
Proceeds from issuance of common stock 111,110 306
Deferred financing costs (153) (4,772)
Dividends paid (347) (344)
Other, net (100) (116)
- ---------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (14,576) 6,219
- ---------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (1,791) 127
Cash and cash equivalents at beginning of period 5,100 5,846
- ---------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 3,309 $ 5,973
=================================================================================
</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 $9,967,000 and $2,041,000 for the three months ended March 31, 1997 and
March 31, 1996, 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, 1997.
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. 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 and received
approximately $28 million in cash. Management continues pursuing the sale of its
remaining third-party natural gas marketing operations which is expected to be
concluded during 1997. 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 Sheet as "Net assets of discontinued operations". Net
assets of the Company's discontinued operations at March 31, 1997 and December
31, 1996 are as follows:
<TABLE>
<CAPTION>
March 31, Dec. 31,
(Thousands of dollars) 1997 1996
-----------------------------------------------------------
<S> <C> <C>
Assets
Current Assets
Accounts receivable, net $30,817 $61,632
Other 3,101 2,995
------- -------
Total current assets 33,918 64,627
Net property, plant and equipment 126 17,977
Other non-current assets 2,313 1,964
------- -------
Total 36,357 84,568
Liabilities
Current liabilities 35,469 61,884
Non-current liabilities 31 2,209
------- -------
Total 35,500 64,093
------- -------
Net assets of discontinued operations $ 857 $20,475
======= =======
</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>
For the Three Months Ended
March 31,
--------------------------
(Thousands of dollars) 1997 1996
---------------------------------------------------------------------
<S> <C> <C>
Revenues 22,015 114,522
Costs and expenses * 22,129 114,680
---------------------------------------------------------------------
Income (loss) before income taxes (114) (158)
Provision (benefit) for income taxes (42) (40)
---------------------------------------------------------------------
Income (loss) from discontinued operations (72) (118)
=====================================================================
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 $78 and $696 for the first quarter of
1997 and 1996, respectively.
** 1997 includes $1.1 million provision for 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. In January 1997, the Company completed a public offering of 3,000,000 shares
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.
4. 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. The references in the financial statements included in this Form
10-Q to the weighted average number of common shares outstanding and earnings
per share do not reflect the stock split as it has not yet occurred.
5. 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
provides guidance concerning the recognition, measurement and disclosure of
environmental remediation liabilities. The adoption of the SOP did not have a
material effect of the Company's financial position or results of operations.
6. In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per share", which
specifies the computation, presentation and disclosure requirements for earnings
per share. This statement is effective for fiscal years ending after December
15, 1997, ad earlier adoption is not permitted. Adoption of the provisions of
this statement is not expected to have a material effect on reported earnings
per share.
6
<PAGE> 7
KCS ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Results of operations for the three months ended March 31, 1997, as
compared to the same period 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, doubling its oil and
gas production and proved reserves. Another important development was the
termination, as of January 1, 1997, 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
approximately $28 million and decided to dispose of its remaining third-party
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.
Results of Operations
Net income for the three months ended March 31, 1997 was $10.8 million, or
$0.77 per share, compared to $5.9 million, or $0.50 per share, for the same
period a year ago. Income from continuing operations was $5.4 million, or $0.39
per share, compared to $6.0 million, or $0.51 per share last year. Significantly
higher oil and gas production, along with higher oil and gas prices in the
current year period were offset by the impact of the termination of the
Tennessee Gas contract and higher net interest costs.
Income from discontinued operations was $5.4 million, or $0.38 per
share, compared to a loss of $0.1 million, or $0.01 per share. The income from
discontinued operations arose mainly from the gain on the sale of the Texas
intrastate pipeline, net of the estimated costs of terminating the third-party
gas marketing operations.
Oil and gas revenue
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1997 1996
------ ------
<S> <C> <C>
Production
Oil (Mbbl) 455 159
Liquids (Mbbl) 43 --
Gas (MMcf) 11,239 6,457
Total (MMcfe) 14,225 7,411
Average Price
Oil (per bbl) $ 21.21 $ 17.89
Liquids (per bbl) 12.44 --
Gas (per MMcf) 2.59 3.71
Total (Per MMcfe) 2.76 3.61
Revenue
Oil $ 9,651 $ 2,840
Liquids 529 --
Gas 29,054 23,941
------- -------
Total $39,234 $26,781
======= =======
</TABLE>
7
<PAGE> 8
KCS ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Largely due to higher oil and gas production, oil and gas revenue
increased $12.5 million to $39.2 million for the three months ended March 31,
1997, compared to the same period last year. Oil and liquids production
increased 213% to 498,000 barrels while gas production increased 74% to 11.2
Bcf. Offsetting the benefits of higher production, average realized gas prices
declined by 30% to $2.59 per Mcf, compared to $3.71 per Mcf last year due to the
termination of the Tennessee Gas contract, while average realized oil prices
increased 19% to $21.21 per barrel.
Gas revenue increased $5.1 million for the three months ended March 31,
1997, compared to the same period in the prior year. Higher production,
primarily as a result of the Medallion acquisition, added $12.3 million to
revenue. The termination of the Tennessee Gas contract as of January 1, 1997
reduced revenue by $8.5 million and offset the benefit of otherwise higher
average realized gas prices of $2.59 per Mcf, compared to $2.39 per Mcf last
year. The increase in the average realized price for gas not covered by the
Tennessee Gas contract added $1.3 million to revenue.
Oil and liquids revenue increased $7.3 million during the 1997 three-month
period, compared to the same period a year ago. Higher production, primarily due
to the Medallion acquisition and expanded operations in the Rocky Mountains
added $6.8 million to revenue. The increase in average realized oil price added
$0.5 million to oil revenue.
Production (lifting) costs
The $6.2 million increase in production (lifting) costs during the current
year three-month period was principally due to the higher level of oil and gas
production and the Company's expanded operations in the Rocky Mountain region,
particularly in the Manderson Field. Contributing also to the increase were
production taxes, which are generally based on a fixed percentage of revenue. In
prior periods, the Tennessee Gas contract provided for reimbursement of
production taxes for production under the contract. Therefore, since the
Company's oil and gas revenue, excluding the Tennessee Gas contract premium of
$8.5 million, was approximately $21.0 million or 115% higher than a year ago,
production taxes increased accordingly.
Other operating and administrative expenses
Other operating and administrative expenses increased $1.2 million to $3.0
million during the three months ended March 31, 1997, compared to the same
period last year, primarily as a result of the Medallion acquisition and the
Company's significant growth in the Rocky Mountain region.
Depreciation, depletion and amortization
The Company provides for depreciation, depletion and amortization ("DD&A")
using the future gross revenue method based on recoverable reserves valued at
current prices. During the three months ended March 31, 1997, DD&A increased
$3.4 million largely due to higher oil and gas production offset by the impact
of a decline in the DD&A accrual rate. The decline in the rate, from 42% to 37%
of oil and gas revenue, reflects the higher year-end 1996 oil and gas prices,
compared to year-end 1995 prices.
Interest and Other Income, net
The $1.6 million of interest and other income in the 1996 three-month
period was primarily from interest income accruals on outstanding receivables
related to the Tennessee Gas litigation. The outstanding receivables plus
interest were paid by Tennessee Gas on September 30, 1996.
8
<PAGE> 9
KCS ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Interest Expense
Interest expense was $5.2 million during the three months ended March 31,
1997 compared to $4.1 for the three months ended March 31, 1996. This increase
resulted from higher average borrowings, partially offset by lower average
interest rates during the current year period. Average borrowings for the three
months ended March 31, 1997 were $245.7 million, compared to $174.7 million for
the same period last year. The higher average borrowings in 1997 reflect the
expansion of the Company's oil and gas operations including the Medallion
acquisition which was initially funded with borrowings under the Company's bank
credit facilities. Proceeds from the January 1997 three million share common
stock offering of approximately $110.6 million were used to pay down a portion
of those borrowings. The interest rates on borrowings outstanding during the
1997 three-month period averaged 9.78% compared to 10.19% for the same period a
year ago.
Liquidity and Capital Resources
Cash Flow From Operating Activities
Net income adjusted for non-cash charges increased to $23.3 million for
the three months ended March 31, 1997, compared to $20.6 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 and its above-market pricing provisions. Net cash
provided by operating activities was $16.4 million during the current year three
month period, compared to $3.4 million for the three months ended March 31,
1996. The prior year period reflected a short-term working capital requirement
resulting from the timing of cash receipts and payments. The cash flow impacts
in the current period of reductions in trade accounts receivable ($28.7 million)
and in accounts payable and accrued liabilities ($39.6 million) are largely
related to the discontinuance of the marketing operations.
Investing Activities
Capital expenditures for the three months ended March 31, 1997 were $32.2
million. Of that total, $23.6 million was for development drilling, $5.5 million
was for lease acquisitions, seismic surveys and exploratory drilling and $2.6
million for the purchase of proved reserves. As of March 31, 1997, the Company
completed the sale of its principal pipeline asset for a net purchase price of
$27.9 million, the proceeds of which were used to pay down bank debt.
Capital spending for 1997 has initially been budgeted at $160 million. Of
that total, $70 million has initially been allocated to development drilling,
$25 million for exploration and $65 million for oil and gas property
acquisitions, including reserves acquired under the Company's VPP program. The
Company believes that internally generated cash, sales of certain non-strategic
assets, e.g., the pipeline sale, and borrowings under its bank credit facilities
will be sufficient to fund its 1997 capital budget.
Financing Activities
In January 1997, the Company completed a public offering of 3,000,000
shares 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.
Equity Availability
KCS has 5 million authorized but unissued shares of preferred stock and,
following the June 1997 two-for-one stock split, will have over 20.7 million
shares of common stock available for future equity financing.
9
<PAGE> 10
KCS ENERGY, INC. - FORM 10-Q
PART II - OTHER INFORMATION
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 9, 1997 the registrant reported, under Item 2
of Form 8K/A2, that it had completed a significant acquisition of
assets.
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 12, 1997 /s/ HENRY A. JURAND
- ------------ --------------------
Henry A. Jurand
Senior Vice President, Chief Financial
Officer and Secretary
10
<PAGE> 11
EXHIBIT INDEX
-------------
Exhibit 11 - Statement re computation of per share earnings.
Exhibit 27 - Financial Data Schedule.
<PAGE> 1
Exhibit 11
Statement Re Computation of Per Share Earnings
Primary earnings per share were calculated as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1997 1996
------- --------
In Thousands
Except per share
amounts
<S> <C> <C>
Net Income:
Continuing operations $ 5,404 $ 5,973
Discontinued operations 5,389 (118)
- ----------------------------------------------------------------------
$10,793 $ 5,855
======================================================================
Average shares of common stock outstanding 13,670 11,517
Add: Net shares assumed to be issued for
dilutive stock options 361 271
- ----------------------------------------------------------------------
Average shares of common stock and common stock
equivalents outstanding 14,031 11,788
======================================================================
Earnings per common share:
Continuing operations $ 0.39 $ 0.51
Discontinued operations $ 0.38 $ (0.01)
- ----------------------------------------------------------------------
$ 0.77 $ 0.50
======================================================================
</TABLE>
11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 3,309
<SECURITIES> 0
<RECEIVABLES> 31,915
<ALLOWANCES> 65
<INVENTORY> 1,513
<CURRENT-ASSETS> 40,016
<PP&E> 596,559
<DEPRECIATION> 149,490
<TOTAL-ASSETS> 497,973
<CURRENT-LIABILITIES> 28,870
<BONDS> 0
0
0
<COMMON> 155
<OTHER-SE> 246,829
<TOTAL-LIABILITY-AND-EQUITY> 497,973
<SALES> 39,879
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 26,163
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,186
<INCOME-PRETAX> 8,565
<INCOME-TAX> 3,161
<INCOME-CONTINUING> 5,404
<DISCONTINUED> 5,389
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,793
<EPS-PRIMARY> 0.77
<EPS-DILUTED> 0.77
</TABLE>
