<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, 1998
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: 29,456,714 shares outstanding as of April
30, 1998.
1
<PAGE> 2
KCS ENERGY, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
(Amounts in thousands except ------------------------
per share data) Unaudited 1998 1997
- ----------------------------------------- ---------- ----------
<S> <C> <C>
Oil and gas revenue $ 29,706 $ 39,234
Other revenue, net 1,603 645
- -------------------------------------------------------------------------------
Total revenue 31,309 39,879
Operating costs and expenses
Lease operating expenses 7,276 6,689
Production taxes 1,050 1,774
General and administrative expenses 2,599 3,049
Depreciation, depletion and amortization 12,828 14,651
- -------------------------------------------------------------------------------
Total operating costs and expenses 23,753 26,163
- -------------------------------------------------------------------------------
Operating income 7,556 13,716
Interest and other income, net 98 35
Interest expense (7,877) (5,186)
- -------------------------------------------------------------------------------
Income (loss) from continuing operations (223) 8,565
before income taxes
Federal and state income taxes (benefit) (83) 3,161
- -------------------------------------------------------------------------------
Income (loss) from continuing operations (140) 5,404
Discontinued operations
Net loss from operations - (72)
Net gain on disposition - 5,461
- -------------------------------------------------------------------------------
Net income (loss) $ (140) $ 10,793
===============================================================================
Basic and diluted earnings per share of common stock
Continuing operations $ (0.00) $ 0.20
Discontinued operations -- 0.19
- -------------------------------------------------------------------------------
$ (0.00) $ 0.39
===============================================================================
Basic average shares outstanding 29,441 27,340
===============================================================================
</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 March 31, December 31,
per share data) Unaudited 1998 1997
- -------------------------------------------------- --------- ------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 3,926 $ 4,802
Trade accounts receivable, net 35,895 40,115
Other current assets 6,844 6,752
- -------------------------------------------------------------------------------
Current assets 46,665 51,669
- -------------------------------------------------------------------------------
Oil and gas properties, full cost method, net 448,358 403,754
Other property, plant and equipment, net 23,068 22,579
- -------------------------------------------------------------------------------
Property, plant and equipment, net 471,426 426,333
- -------------------------------------------------------------------------------
Deferred taxes and other assets 27,408 24,412
- -------------------------------------------------------------------------------
$ 545,499 $ 502,414
===============================================================================
Liabilities and stockholders' equity
Current liabilities
Accounts payable $ 29,818 $ 39,500
Accrued liabilities 15,305 24,524
- -------------------------------------------------------------------------------
Current liabilities 45,123 64,024
- -------------------------------------------------------------------------------
Deferred credits and other liabilities 875 875
- -------------------------------------------------------------------------------
Long-term debt 354,568 292,445
- -------------------------------------------------------------------------------
Stockholders' equity
Common stock, par value $0.01 per
share - authorized 50,000,000
shares, issued 31,255,290 and
31,229,890, respectively 312 312
Additional paid-in capital 144,138 144,135
Retained earnings 3,871 4,011
Less treasury stock, 1,801,496 shares, at cost (3,388) (3,388)
- -------------------------------------------------------------------------------
Total stockholders' equity 144,933 145,070
- -------------------------------------------------------------------------------
$ 545,499 $ 502,414
===============================================================================
</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,
-------------------------
(Dollars in thousands) Unaudited 1998 1997
- ------------------------------------------------------ ---------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (140) $ 10,793
Non-cash charges (credits):
Depreciation, depletion and amortization 12,828 14,740
Gain on sale of discontinued operations - (5,461)
Other non-cash charges and credits, net 572 3,249
- --------------------------------------------------------------------------------
13,260 23,321
Net changes in assets and liabilities:
Trade accounts receivable 4,220 28,673
Accounts payable and accrued liabilities (18,901) (39,641)
Other, net 496 4,007
- --------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (925) 16,360
- --------------------------------------------------------------------------------
Cash flows from investing activities:
Investment in oil and gas properties (61,577) (31,690)
Proceeds from the sale of pipeline assets - 27,907
Proceeds from the sale of oil and gas properties 4,699 789
Other capital expenditures, net (1,043) (581)
- --------------------------------------------------------------------------------
Net cash used in investing activities (57,921) (3,575)
- --------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from debt 183,500 10,705
Repayments of debt (121,400) (135,791)
Proceeds from issuance of common stock 3 111,110
Deferred financing costs (3,544) (153)
Other, net (589) (447)
- --------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 57,970 (14,576)
- --------------------------------------------------------------------------------
Net (decrease) in cash and cash equivalents (876) (1,791)
Cash and cash equivalents at beginning of period 4,802 5,100
- --------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 3,926 $ 3,309
================================================================================
</TABLE>
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. During the first quarter of 1997, the Board of Directors approved a plan to
discontinue the Company's natural gas transportation and third-party gas
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, realizing proceeds of approximately $28
million and an after-tax gain of $5.5 million. Accordingly, the results of the
transportation and marketing operations have been classified as discontinued
operations in 1997. By December 31, 1997, all assets of the discontinued
operations were disposed of.
Summarized results of operations of the discontinued transportation and
marketing operations are as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------
(Thousands of dollars) 1997
------------
<S> <C>
Revenues $ 22,015
Costs and expenses * 22,129
------------
Loss before income taxes (114)
Benefit for income taxes (42)
------------
Loss from discontinued operations (72)
============
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.
** 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
Operations and Condensed Consolidated Balance Sheets.
5
<PAGE> 6
KCS ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. Supplemental cash flow information. 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 $9,956,000 and $9,967,000 for the three
months ended March 31, 1998 and March 31, 1997, respectively. No income tax
payments were made during the three months ended March 31, 1998 or March 31,
1997.
4. In January 1998, the Company completed a public offering of $125 million
senior subordinated notes at an interest rate of 8.875% due January 15, 2008.
The net proceeds of approximately $121 million were used to pay down borrowings
under the Company's bank credit facilities.
5. Basic earnings per share were computed by dividing net income by the average
number of common shares outstanding during the quarter as required by FASB
Statement No. 128, "Earnings per Share" ("SFAS 128"). Diluted earnings per share
have been computed by dividing net income by the average number of common shares
outstanding plus the incremental shares that would have been outstanding
assuming the exercise of stock options and stock warrants as applicable. A
reconciliation of shares used for basic earnings per share and those used for
diluted earnings per share is as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------
1998 1997
------------- ------------
(amounts in thousands)
<S> <C> <C>
Average common stock outstanding 29,441 27,340
Average common stock equivalents 382 469
------------- ------------
Average common stock and common
stock equivalents outstanding 29,823 27,809
============= ============
</TABLE>
6
<PAGE> 7
KCS ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The following discussion focuses on material changes in results of
operations for the three months ended March 31, 1998, compared to the three
months ended March 31, 1997, and in financial condition since December 31, 1997.
All references in the following discussion related to earnings per share relate
to the Company's basic earnings per share.
Results of Operations
Net loss for the three months ended March 31, 1998 was $0.1 million, or
$0.00 per share, compared to income from continuing operations of $5.4 million,
or $0.20 per share, for the same period last year. The prior year three-month
period also included net income of $5.4 million, or $0.19 per share, from
discontinued operations. Significantly lower oil and gas prices and higher
interest costs were the primary reasons for the decline in earnings from
continuing operations.
Revenue
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
Production:
Oil (Mbbl) 368 455
Liquids (Mbbl) 21 43
Gas (MMcf) 11,325 11,239
Total (MMcfe) 13,659 14,227
Average Price:
Oil (per bbl) $ 13.23 $ 21.21
Liquids (per bbl) 8.95 12.44
Gas (per Mcf) 2.18 2.59
Total (per Mcfe) 2.18 2.76
Revenue:
Oil $ 4,875 $ 9,651
Liquids 186 529
Gas 24,645 29,054
---------- ----------
Total $ 29,706 $ 39,234
========== ==========
</TABLE>
7
<PAGE> 8
KCS ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Gas revenue. For the three months ended March 31, 1998, gas revenue
decreased $4.4 million to $24.6 million due to 16% lower gas prices, partially
offset by a one percent increase in gas production.
Oil and liquids revenue. For the three months ended March 31, 1998, oil
and liquids revenue was $5.1 million, compared to $10.2 million during the 1997
period. Of this decrease, $3.8 million was attributable to lower oil and liquids
prices, with the remainder due to lower oil and liquids production.
Prices for oil and gas are subject to wide fluctuations in response to
relatively minor changes in the supply of and demand for oil and gas, market
uncertainty and a variety of additional factors that are beyond the Company's
control. These factors include political conditions in the Middle East and
elsewhere, domestic and foreign supply of oil and gas, the level of consumer
demand, weather conditions and overall economic conditions.
Other revenue, net
The increase in other revenue during the 1998 three-month period was
primarily due to a $1.1 million severance tax refund.
Lease operating expenses
Lease operating expenses during the three months ended March 31, 1998
increased 9% to $7.3 million, compared to $6.7 million during the same period
last year. This increase was primarily attributable to higher costs associated
with certain of the Company's Mid-Continent and Rocky Mountain properties.
Production taxes
Production taxes, which are generally based on a percentage of revenue,
decreased $0.7 million to $1.1 million during the first quarter of 1998,
compared to the same period a year ago.
General and administrative expenses
For the three-month period ended March 31, 1998, general and
administrative expenses decreased $0.4 million to $2.6 million compared to the
same period in 1997, largely as a result of lower incentive compensation
expense.
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
March 31, 1998, DD&A on the Company's oil and gas properties decreased $1.8
million due primarily to lower oil and gas revenue, partially offset by an
increase in the DD&A rate to 41% of revenue in the current year three-month
period, compared to 37% during the same period a year ago. The increase in the
rate reflects lower year-end 1997 oil and gas prices, compared to year-end
1996 prices.
8
<PAGE> 9
KCS ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Interest expense
Interest expense increased $2.7 million to $7.9 million during the first
quarter of 1998, compared to the same period last year. This increase reflects
higher average borrowings during the 1998 period due to the expansion of the
Company's oil and gas operations.
Liquidity and Capital Resources
Cash flow from operating activities
Net income adjusted for non-cash charges decreased $10.0 million to $13.3
million for the three months ended March 31, 1998, compared to $23.3 million
during the same period in 1997 mainly due to lower oil and gas prices. Net cash
used by operating activities was $0.9 million during the current year
three-month period, compared to cash provided of $16.4 million for the three
months ended March 31, 1997. In addition to the effect of lower prices, the 1998
three-month period was impacted by the timing of cash receipts and payments.
Investing activities
Capital expenditures for the three months ended March 31, 1998 were $61.6
million of which $23.0 million was for development drilling, $34.4 million for
the acquisition of proved reserves under the Company's VPP program and $4.2
million was for lease acquisitions, seismic surveys and exploratory drilling.
The Company has established, for 1998, a capital expenditure budget of
$160 million, consisting of $75 million for development drilling, $20 million
for exploration, $55 million for VPP transactions and $10 million for working
interest acquisitions and other. The program is expected to be funded by cash
flow from operations, the sale of non-strategic assets and borrowings under the
Company's bank credit facilities.
Financing Activities
On January 15, 1998, the Company completed a public offering of $125
million senior subordinated notes at an interest rate of 8.875% due January 15,
2008. The net proceeds of approximately $121 million were used to pay down
borrowings under the Company's bank credit facilities.
Forward-Looking Statements
The information discussed in this Form 10-Q includes "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act"), and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). All statements other than statements
of historical facts included herein regarding planned capital expenditures, the
Company's financial position and future operations, are forward-looking
statements. Although the Company believes that the expectations reflected in
such forward-looking statements are reasonable, they do involve certain
assumptions, risks and uncertainties, and the Company can give no assurance that
such expectations will prove to have been correct. The Company's actual results
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors,
9
<PAGE> 10
KCS ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
including the timing and success of the Company's drilling activities, the
volatility of prices and supply and demand for oil and gas, the numerous
uncertainties inherent in estimating quantities of oil and gas reserves and
actual future production rates and associated costs, the usual hazards
associated with the oil and gas industry (including blowouts, cratering, pipe
failure, spills, explosions and other unforeseen hazards), and increases in
regulatory requirements.
All forward-looking statements attributable to the Company or persons
acting on its behalf are expressly qualified in their entirety by such factors.
10
<PAGE> 11
KCS ENERGY, INC. - FORM 10-Q
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is made to Item 3, Legal Proceedings, in the Company's Annual
Report on Form 10-K/A for the year ended December 31, 1997.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
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 March 31, 1998.
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, 1998 /S/ PAUL S. SAMETT
--------------------------------------
Paul S. Samett
Senior Vice President and
Chief Financial Officer
May 12, 1998 /S/ FREDERICK DWYER
--------------------------------------
Frederick Dwyer
Vice President and Controller
11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 3,926
<SECURITIES> 0
<RECEIVABLES> 35,961
<ALLOWANCES> 66
<INVENTORY> 1,730
<CURRENT-ASSETS> 46,665
<PP&E> 844,538
<DEPRECIATION> 373,112
<TOTAL-ASSETS> 545,499
<CURRENT-LIABILITIES> 45,123
<BONDS> 0
312
0
<COMMON> 0
<OTHER-SE> 144,621
<TOTAL-LIABILITY-AND-EQUITY> 545,499
<SALES> 31,309
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 23,753
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,877
<INCOME-PRETAX> (223)
<INCOME-TAX> (83)
<INCOME-CONTINUING> (140)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (140)
<EPS-PRIMARY> (0.00)
<EPS-DILUTED> (0.00)
</TABLE>
