Moody's rates KCS Energy notes B3

Moody's Investors Service assigned a B3 rating to KCS Energy, Inc.'s proposed $150 million senior unsecured notes offering and an SGL-2 speculative-grade liquidity rating. The outlook is stable.

Moody's said the ratings are constrained by the company's small scale of its reserve base; high financial leverage, measured on a debt to proved developed (PD) basis; high full cycle costs; very high engineered future development costs required to convert proven undeveloped (PUD) reserves to the producing stage; about 10-13% of total production needed to satisfy its obligations under a volumetric production payment (VPP); and nearly one-third of total production generated from shorter lived Gulf Coast properties.

The ratings are supported by KCS' management team that has turned the company around from bankruptcy in 2001 and has positioned the company for growth; production momentum from a successful 2003 drilling program; a portfolio of drilling prospects that could support a drilling program for at least the next two to three years; successful reduction of leverage over the past three years; and ample liquidity.

The SGL-2 rating is based upon the confluence of high prices and current production trends which appear to generate sufficient cash flow for reinvestment of reserve and production replacement through 2004 and ample availability under the secured revolver, Moody's said. Maintaining the SGL-2 rating will require continued support of high prices and the company's ability to sustain production momentum or demonstrate flexibility in its capital spending program to counter price volatility and possible declines in production.

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