Appendix A

 

KCS ENERGY, INC.

AUDIT COMMITTEE CHARTER

1.                  ORGANIZATION

            The Audit Committee (the “Committee”) of KCS Energy, Inc. (the “Company”) shall consist of three or more directors as determined by the Board of Directors of the Company (the “Board”), each of whom shall be free from any relationship that in the opinion of the Board would interfere with the exercise of independent judgment as a member of the Committee.  Each member of the Committee shall meet the independence requirements of the New York Stock Exchange and the Securities and Exchange Commission (“SEC”).  Each member of the Committee must be financially literate, as interpreted by the Board in its business judgment.  One member of the Committee must have accounting or related financial management expertise, as interpreted by the Board in its business judgment.  One or more members shall be designated as an audit committee financial expert by the Board, as such term is defined by the SEC.

            A Committee member shall not serve on more than three audit committees of publicly-traded companies unless the Board determines that such simultaneous service does not impair the ability of that director to serve on the Committee.    The Board shall disclose any such determination in the Company’s annual proxy statement.

            The members of the Committee shall be nominated by the Nominating and Corporate Governance Committee and elected by the Board at the annual organizational meeting of the Board for a one-year term and may be re-elected for successive terms.  Each member shall serve until such member’s successor is duly elected and qualified or until such member’s earlier resignation or removal. One member of the Committee will be elected by the Board as Chairman and will be responsible for the scheduling of regular and special meetings and the functioning of the Committee.  The Board may, pursuant to the By-laws of the Company, remove a member of the Committee at any time, with or without cause, provided that the Board must, at all times, assure that the Committee will have a Chairman and sufficient members to satisfy the requirements set forth above relating to the number and qualifications of Committee members.

            The Committee shall meet at least quarterly or more frequently as circumstances dictate. Meetings may be in person or by telephone as needed to conduct the business of the Committee.  A majority of the members, but not less than two, will constitute a quorum. The Committee may take action by the unanimous written consent of the members in the absence of a meeting.  The Committee will cause to be kept adequate minutes of all its proceedings. The Chairman of the Committee shall report on any Committee meeting held at the next regularly scheduled Board meeting following the Committee meeting.

2.                  STATEMENT OF PURPOSE AND AUTHORITY

            The Committee shall assist the Board in fulfilling its oversight responsibilities to stockholders with respect to:

·                    the integrity of the financial statements of the Company;

·                    compliance by the Company with legal and regulatory requirements;

·                    the independence, qualifications and performance of the Company’s independent auditor; and

·                    the performance of the Company’s internal audit function. 

            The Committee shall prepare an audit committee report as required to be included in the Company’s annual proxy statement under the rules and regulations of the SEC.

            The Committee is directly responsible for the appointment, compensation, retention and oversight of the work of any registered public accounting firm engaged to prepare or issue an audit report on the financial statements of the Company or performing other audit, review or attest services for the Company, and each such registered public accounting firm shall report directly to the Committee.  If the appointment of the independent auditor is submitted for any ratification by stockholders, the Committee shall be responsible for making the recommendation of the independent auditor.

            The Committee shall have the sole authority to retain special legal, accounting or other consultants to advise the Committee and to approve the fees and other retention terms of these consultants.

            The Committee may request any officer or employee of the Company or the Company’s outside counsel or independent auditor to attend a meeting of the Committee or to meet with any members of, or consultants to, the Committee.  In discharging its oversight role, the Committee is empowered to investigate any matter brought to its attention, with full power to retain outside counsel or other experts and advisors for this purpose or to otherwise carry out its duties.

            The Company shall provide for appropriate funding, as determined by the Committee, for payment of (1) compensation to any registered public accounting firm engaged for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for the Company, (2) compensation to any advisers employed by the Committee as discussed above, and (3) ordinary administrative expenses of the Committee that are necessary or appropriate in carrying out its duties.

3.                  RESPONSIBILITIES AND PROCEDURES

            In fulfilling its responsibilities to the Board and stockholders, the Committee will have certain responsibilities and follow certain procedures, as described below.  The timing and extent of specific steps to be taken within each such procedure is fully within the discretion of the Committee.  Other responsibilities and procedures of the Committee may be required from time to time by applicable law, the rules of the New York Stock Exchange, the SEC, the Company’s By-laws or the Board.

            In fulfilling its responsibilities, the Committee shall:

·        engage the independent auditor to audit the financial statements of the Company, which firm is ultimately accountable to the Committee; 

·        review and approve in advance all audit, audit-related, tax and other services and permissible non-audit services and the fees and other compensation to be paid to the independent auditor for such services.  The Committee delegates to the Chairman the authority to approve in advance all audit, audit-related, tax and other services and  permissible non-audit services to be provided by the independent auditor if presented to the full Committee at the next regularly scheduled meeting;

·        obtain, review and discuss at least annually a written report from the independent auditor detailing (1) any and all relationships between the independent auditor and the Company that bear on the independence of the independent auditor, (2) the internal quality-control procedures of the independent auditor, and (3) any material issues raised by the most recent internal quality-control review, or peer review, of the independent auditor, or by any inquiry or investigation by governmental or professional authorities, within the preceding five years, respecting one or more independent audits carried out by the independent auditor, and any steps taken to deal with any such issues;

·        review with the independent auditor and financial managers of the Company the scope of the proposed audit for the current year;

·        obtain assurance from the independent auditor that Section 10A(b) of the Securities Exchange Act of 1934, as amended, has not been implicated;

·        meet to review and discuss with management and the independent auditor the Company’s annual audited financial statements and quarterly financial statements, including reviewing the specific disclosures under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” to be included or incorporated by reference in the Company’s annual and quarterly reports;

·        review significant financial reporting issues and judgments highlighted by management and the independent auditor.  Inquire whether the independent auditor is satisfied with the disclosure and content of the financial statements to be presented to the stockholders.  Review any major issues identified by the independent auditor regarding accounting and auditing principles and estimates, or any changes therein;

·        review the effects of regulatory and accounting initiatives, as well as any off-balance sheet structures, on the financial statements of the Company;

·        review analyses prepared by management and/or the independent auditor setting forth significant financial reporting issues and judgments made in connection with the preparation of the financial statements, including analyses of the effects of alternative GAAP methods on the financial statements;

·        Review with management, and discuss with the independent auditor: (a) the annual report of management affirming management’s responsibility for establishing and maintaining internal control over financial reporting and assessing the effectiveness of the internal control structure over financial reporting and (b) the independent auditors’ report on, and attestation of, management’s report when those reports are required by Securities and Exchange Commission rules;

·        discuss and review the Company’s earnings press releases, including the type and presentation of information to be included therein, as well as financial information and earnings guidance provided to analysts and rating agencies.  The Committee may address this information generally and is not required to address in advance each earnings release or instance when guidance is provided;

·        following completion of the annual audit, review with management and the independent auditor any significant problems or difficulties encountered during the course of the audit, including any restrictions on the scope of work or on access to requested information and any significant disagreements with management, and management’s response.  This review should also include discussion of the responsibilities, budget and staffing of the Company’s internal audit function;

·        review any significant disagreements identified by management or the independent auditor in connection with the preparation of the financial statements;

·        review with the independent auditor and with financial and accounting personnel, the adequacy and effectiveness of the accounting and financial controls of the Company, and elicit any recommendations for the improvement of internal controls.  Particular emphasis should be given to the adequacy of the internal controls to expose any payments, transactions, or procedures that might be deemed illegal or otherwise improper.  Review any special audit steps adopted in light of material control deficiencies;

·        meet separately, periodically, with the internal auditors (or other personnel responsible for the internal audit function) and with the independent auditor without members of management present.  Among the items to be discussed in this meeting are the independent auditors’ evaluation of the competency of the Company’s financial and accounting personnel, and the level of cooperation that the independent auditor received during the course of the audit;

·        meet separately, periodically, with management to discuss any matters that management or the Committee believes should be discussed privately with the Committee;

·        evaluate the qualifications, performance and independence of the independent auditor and, if so determined by the Committee, terminate the engagement of the independent auditor.  This evaluation shall include the review and evaluation of the lead partner of the independent auditor.  In making this evaluation, the Committee shall take into account the opinions of management and the Company’s internal auditors (or other personnel responsible for the internal audit function);

·        determine that rotation requirements for lead audit partners of the independent auditor have been satisfied and consider whether there should be regular rotation of the audit firm itself in order to assure continuing auditor independence;

·        set clear hiring policies for employees or former employees of the independent auditor;

·        review a summary of the programs and policies of the Company designed to monitor compliance with applicable laws and regulations;

·        establish procedures for (1) the receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting controls or auditing matters and (2) the confidential, anonymous submission by employees of the issuer of concerns regarding questionable accounting or auditing matters;

·        establish procedures for reporting violations of the Company’s Code of Conduct, Code of Business Conduct and Ethics for Directors, Officers and Employees and the Code of Ethics for Senior Financial Officers and monitoring accountability for such Codes;

·        review a summary of the procedures established by the Company that monitor the compliance by the Company with its credit agreement and indenture covenants and restrictions;

·        discuss guidelines and policies with respect to risk assessment and risk management.  Inquire of the Company’s chief financial officer, the internal auditor, and the independent auditor about significant financial risks or exposures and assess the steps management has taken to monitor, minimize and control such risk or exposures to the Company;

·        oversee and review the Company’s internal audit function;

·        discuss any exceptions identified by the independent auditor resulting from its review of the Company’s quarterly reports on Form 10-Q;

·        review policies and procedures with respect to transactions between the Company and officers and directors, or affiliates of officers and directors, or transactions that are not a normal part of the Company’s business;

·        review with the Chief Financial Officer and the Controller and the independent auditor at least annually the Company’s critical accounting policies;

·        review and reassess the adequacy of this charter annually and recommend any proposed changes to the Board for approval;

·        conduct an annual performance evaluation of its performance;

·        report periodically to the full Board regarding its actions and recommendations and review with the full Board any issues regarding the quality or integrity of the Company’s financial statements, the Company’s compliance with legal or regulatory requirements, the qualifications, performance and independence of the independent auditors or the performance of the internal audit function; and

·        prepare the report required to be included in the Company’s annual proxy statement under the rules of the SEC.

            Although the Committee has certain responsibilities and powers, as set forth in this charter, it is not the duty of the Committee to plan or conduct audits or to determine that the Company’s financial statements are complete and accurate and are in accordance with generally accepted accounting principles.  This is the responsibility of management and the independent auditor.  Nor is it the duty of the Committee to assure compliance with laws and regulations or the Company’s internal codes and policies.  The Committee shall be entitled to rely on management and the independent auditor in fulfilling its oversight and other responsibilities under this charter.